Legal Scholars Think The Texas Two Step Amounts to Forum Shopping And Is Frowned Upon In The Legal Community
Texas has some of the most lenient bankruptcy laws in the nation making it a target for profitable companies seeking to shelter their assets
Tuesday, March 21, 2023 - Johnson & Johnson attempted to use the contentious Texas two-step bankruptcy process to benefit from the state's favorable bankruptcy laws and put a halt to 38,000 pending talcum powder cancer lawsuits. In this strategy, a business file for bankruptcy protection in Texas and then promptly moves its case to a state with more benevolent bankruptcy regulations. Johnson & Johnson chose North Carolina for its first attempt to shelter the parent company from their talcum powder cancer claims and then decided on New Jersey as a more appropriate bankruptcy forum. The bankruptcy plan is frequently criticized for enabling businesses to shop around for the best bankruptcy rules. A business might benefit from Texas' forgiving bankruptcy laws, which offer better protection for corporate assets and facilitate simpler restructuring, by filing there.
"The Texas two-step allows companies to cherry-pick the most debtor-friendly laws, rather than adhering to the bankruptcy code that is supposed to provide uniform rules across the country" claims David Skeel, a bankruptcy expert at the University of Pennsylvania Law School. Skeel contends that this behavior compromises the predictability and fairness of the bankruptcy system, which is meant to give creditors and debtors an equal playing field. The Texas two-step bankruptcy plan has also come under fire for potentially harming creditors who might not be informed of the company's plans to move the case to another state. As a result, creditors may be less protected and have fewer options for getting their money back. "the Texas two-step is a way for companies to take advantage of the bankruptcy system, and it can hurt creditors who are left with fewer options for recovering their debts." says Mark Roe, a bankruptcy expert at Harvard Law School.
The Texas two-step bankruptcy plan can also be criticized for engaging in forum shopping, which is typically disapproved of in the legal world, in addition to the issues previously listed. Companies may be able to select a court that is more understanding of their interests or more skilled at handling particular sorts of bankruptcies by moving their case to another state. The integrity of the bankruptcy system as a whole may be compromised and inconsistent results may result from this. According to Scott Pryor, a professor of law at Regent University School of Law, "the idea of forum shopping is that you are shopping for a friendly court. The problem with that is that bankruptcy laws are supposed to be uniform throughout the country. So, if you are looking for a more lenient standard, that is not really in keeping with the whole idea of uniformity ."Some governments have taken action to stop this practice by passing legislation requiring a firm to have a significant relationship with the state before it can file for bankruptcy there. States like Delaware and New York have taken this step. The Bankruptcy Reform Act of 2005 also contained clauses intended to prevent forum shopping and advance greater uniformity in the bankruptcy system. The Texas two-step bankruptcy plan is infamous for abusing the bankruptcy process. Law professionals have condemned this approach for enabling businesses to shop around for the most advantageous bankruptcy laws, favoring debtors over creditors, and eroding the fairness and predictability of the bankruptcy system.