debtor's motion to dismiss chapter 11 case

(“Old Consumer”) was a unit of Johnson & Johnson which sold, among other products, Johnson’s Baby Powder. Among other things, (i) a subsidiary created using the Texas two-step could still file bankruptcy in good faith if it suffered financial distress, and (ii) certain courts outside of the Third Circuit do not “financial distress” to find that the debtor’s bankruptcy petition was filed in good faith.

While the decision serves as an impediment to any future debtors’ ability to continue to utilize the “Texas two-step” strategy in bankruptcy, it does not completely foreclose the use of Texas two-step chapter 11 bankruptcies. Only a putative debtor in financial distress can do so. What counts to access the Bankruptcy Code’s safe harbor is to meet its intended purposes.

The Court explained: “Good intentions-such as to protect the J&J brand or comprehensively resolve litigation-do not suffice alone. In issuing its decision, the Third Circuit held that LTL did not file its chapter 11 in good faith because the company was not in financial distress (a requirement which is not expressly included in the Bankruptcy Code).

The Third Circuit recently reversed a decision from the bankruptcy court and dismissed the chapter 11 bankruptcy filing of LTL Management, LLC (“LTL”), a Johnson & Johnson subsidiary created through the use of the “Texas two-step” maneuver, intended to isolate Johnson & Johnson’s talc related tort liabilities.

Debtor's motion to dismiss chapter 11 case