A New Twist to Texas Two-Step Bankruptcies

In this latest trend, private equity companies buy asbestos shell companies flush with cash, resolve the claims, and pocket the difference.

To get rid of their asbestos liabilities, industrial manufacturers create a subsidiary company onto which they offload their asbestos-related assets. The manufacturer will also add a large pool of cash to their subsidiary, ranging from hundreds of millions to even billions of dollars. A private equity company will then acquire the subsidiary company and its asbestos liabilities, making it responsible for any asbestos claims.

After taking over a manufacturer’s asbestos liability, private equity investors aim to gradually resolve each claim through litigation, settlement or by successfully resisting it, all the while working to spend less than the pool of money received from the manufacturer. That and high investment returns allow private equity firms to turn a hefty profit. The longer companies can hold onto the cash, the more interest it can accumulate in the market.

Down the road, private equity firms may also try to use legal maneuvers like the “Texas two-step” to avoid paying claims, leaving future asbestos victims without any immediate recourse for their medical expenses.

These two items seem unrelated, but in fact, they have had a close relationship over the years, beginning in the 1980s.

First, let’s discuss asbestos exposure. Once thought to be limited to a few industrial workers, mostly construction workers, asbestos exposure is much more widespread. The list of potential victims includes not only construction workers but also:

• Military Veterans: A 1967 fire aboard the USS Forrestal prompted the Navy to overuse asbestos for more than a decade. Until 1980, ships of every shape and size were stuffed with asbestos from bow to stern. The exposure risk didn’t end in 1980, as many of these ships remained in service for decades.
• Indirect Occupational Victims: Once they become airborne, asbestos fibers float. They often float into workplace common areas, like parking lots and cafeterias. So, many white collar and other office workers at asbestos mines and other hotspots, who believed they were safe, were regularly exposed to asbestos.
• Ambient (Environmental) Victims: For many years, asbestos workers unintentionally carried toxic fibers home, mostly on their clothes and hair. These fibers then infect friends and family members. Lately, natural and man-made disasters are more of an ambient exposure threat. 9/11 is a good example. The toxic cloud that blanketed much of New York city was laced with up to 400 tons of asbestos.

These victims are at risk for several forms of cancer, such as pleural mesothelioma and peritoneal mesothelioma. PlM is a rare and aggressive form of lung cancer. PtM is a form of abdominal cancer.

As liability lawsuits mounted, many private companies filed bankruptcy, hoping to take the easy way out. Federal judges allowed these bankruptcies if the companies transferred assets into large victim compensation funds. More on that below.

The Texas Two-Step is a new development in the asbestos exposure bankruptcy saga. It is connected to talc-asbestos cases, which are another new development in the saga.

Talc mines and asbestos mines are often intermingled. For decades, Johnson & Johnson knew its talcum powder was laced with asbestos fibers, but it did nothing about the problem. As liability lawsuits mounted, the pharmaceutical giant transferred its talc business to a shell company, LTL Management, which then filed bankruptcy.

A federal appeals court struck down the Texas Two-Step, but the Supreme Court has yet to rule on this issue.

When asbestos companies declared bankruptcy, they transferred billions of dollars into victim compensation funds. Today, decades later, these funds still contain over $30 billion.

If a bankrupt company was legally responsible for asbestos exposure, and if that company contributed to a VCF, an asbestos exposure lawyer can file a claim and obtain compensation for victims. This compensation normally includes money for economic losses, such as medical bills, and noneconomic losses, such as pain and suffering.

Usually, bankruptcy VCF claims are the fastest and easiest way for a nationwide asbestos lawyer to obtain this compensation. No adverse lawyer challenges the victim’s evidence.

However, these claims are sometimes difficult to resolve. Since there is no court case, the fund administrator does not have a duty to negotiate in good faith, and there is no looming trial date to motivate the fund administrator to settle the matter.

Mesothelioma victims need and deserve significant compensation. For a confidential consultation with an experienced nationwide mesothelioma lawyer, contact the Throneberry Law Group. Virtual, home, and hospital visits are available.