Preventing the Latest Texas Two-Step by Koch Industries on Cancer Liability

A recent legal decision in a case involving Johnson & Johnson (J&J) may ultimately impact the massive profits Koch Industries and its Georgia-Pacific subsidiary have been raking in while sidestepping asbestos liability claims. At the end of January, a federal appeals court ruled that J&J could not shield itself from pending lawsuits arising from exposure to its now off-the-market baby powder by transferring them to a new subsidiary and then declaring that company bankrupt.

Koch Industries was the first conglomerate to use the bankruptcy maneuver—known as “the Texas two-step”—in 2017. It involves a “divisive merger,” allowed under Texas law, in which a company splits in two in order to transfer all of its liability claims to a subsidiary that then declares Chapter 11 bankruptcy while the parent company retains all corporate assets and profits.

In the J&J case, a three-judge federal appeals court panel in Philadelphia sided with the plaintiffs—cancer victims who argued that J&J had established a subsidiary called LTL Management with the specific intent of limiting liability payments that would be made due to the parent company’s harmful product. “The ruling means J&J will most likely need to defend itself against claims that tainted talc in its baby powder causes cancer,” according to Bloomberg Law.

A similar lawsuit has been pending in a North Carolina bankruptcy court due to Georgia-Pacific’s Texas two-step transfer of thousands of asbestos claims to its subsidiary, Bestwall, Inc., six years ago.

On Feb. 17, in the wake of the J&J decision, a Georgia-Pacific mesothelioma victim filed a motion with the North Carolina court to dismiss the company’s bankruptcy claim, noting that since Georgia-Pacific paid $2.5 billion in dividends to its parent company Koch Industries last year, the company is clearly not in financial distress. Even in bankruptcy, Bestwall itself has continued to generate more than $5 billion in profits for its parent companies, Georgia-Pacific and Koch Industries.

“The courts are going to look at the full circumstances” behind Georgia-Pacific’s move to shift its claims to a subsidiary and then declare that subsidiary bankrupt, explains John Seligman, a personal injury lawyer in Coral Gables, Florida who has dealt with defendant companies that threaten bankruptcy. “The courts will determine if this is an arms-length transaction, or [whether] the subsidiary [was] created just for the purpose of reducing the total liability.”

“Plaintiffs’ lawyers have called the two-step a fraud in court actions seeking dismissals or other remedies,” according to a 2022 Reuters investigation. “They argue the subsidiaries are essentially corporate shells, with no purpose beyond aiding their parent companies in abusing the bankruptcy system to escape accountability for wrongdoing.”

Mounting Costs of Mounting Claims

When Koch Industries bought Georgia-Pacific in 2005, the company already faced almost $1 billion in liability claims arising from a hazardous product it hadn’t manufactured in three decades.

The claims—more than 64,000 of them by 2017—are from individuals who developed mesothelioma, an aggressive type of lung cancer caused by exposure to asbestos in the plaster, joint compound, and other products Georgia-Pacific manufactured for years—until the 1970s. Even though the dangers of asbestos had been known for well over a century, the industry initially worked very hard to hide all evidence of harm to those exposed to it. And given the long latency period, with symptoms generally not surfacing until 10–50 years after exposure, the claims didn’t start mounting until the early 2000s.

Now, roughly 3,000 people in the U.S. are diagnosed with mesothelioma every year, and two-thirds of them die within 6–12 months. Victims include public servants, veterans, firefighters, and teachers who were exposed to asbestos in public schools.

As the claims began to mount, Georgia-Pacific paid selected scientists $6 million to conduct studies to disprove that asbestos causes mesothelioma. According to the Center for Public Integrity, it was a flawed attempt to “rewrite history,” as Linda Reinstein, co-founder of the Asbestos Disease Awareness Organization, put it. “Georgia-Pacific funded junk science in an attempt to contest the known facts about asbestos and negate its culpability in this manmade disaster.”

Despite the attempt to use these suspect studies in defending itself against litigation, by 2017 Georgia-Pacific was paying approximately $160 million a year in asbestos-related settlements and legal fees. So it did the Texas two-step, creating Bestwall as a subsidiary that filed for Chapter 11 bankruptcy less than 100 days later. Once a company with outstanding claims goes into bankruptcy, it sets up a trust fund to cover existing claims but is then protected from new lawsuits once it emerges from bankruptcy.

Misuse of Bankruptcy Protections

In the J&J ruling, the appeals court judges point out that the purpose of bankruptcy protections is to assist a “putative debtor in financial distress.” Since LTL clearly isn’t hurting financially, they opted to “dismiss its petition (for bankruptcy).”

Although the decision is not binding in the Georgia-Pacific case, the message—that bankruptcy was never meant as a panacea for profitable companies to shirk liability claims—may influence the judges overseeing the Bestwall bankruptcy. As a private company, Koch Industries does not reveal its profits, but its 2022 revenue was $125 billion.

“The Texas two-step mires victims in protracted proceedings, robbing them of precious time,” noted Senator Sheldon Whitehouse (D-RI) during a Senate Judiciary subcommittee hearing last year. “Asbestos victims can die of mesothelioma and other types of cancers before their claims are heard. That is a blot on our legal system.”

Koch continues to challenge asbestos claims in other ways. Koch Industries is a major funder of the American Legislative Exchange Council (ALEC) and serves on the corporate pay-to-play group’s private enterprise advisory council. One of ALEC’s model bills, the Asbestos Claims Transparency Act, forces victims to take legal action against bankrupt companies that produced asbestos decades ago as opposed to companies still in business.

For those with serious claims, the problem is that many companies involved in making asbestos or asbestos-related products have sought bankruptcy protection and are now in trusts. These trusts are more difficult to sue, their assets are harder to determine, and, as Whitehouse points out, the victims often die before their cases are heard. The bill also limits the amount of time victims have to file a case after diagnosis, even though it takes more time to prepare a suit against a bankrupt company.

In 2018, Missouri state representative and ALEC member Bruce DeGroot (R) introduced the model asbestos bill in the Missouri House, where it passed on a party-line vote but was then not taken up by the Senate. A similar bill was introduced in Nebraska’s single-chamber legislature in January of this year.