Thousands
of users of a company’s
products started filing lawsuits against the company regarding product quality. To address the
litigation liability, the company
undertook a “Texas two-step” transaction, in which a parent company uses a
Texas “divisional merger” statute to create a new subsidiary to hold a portion
of the corporate family’s tort liabilities. This type of “divisional
merger” allows the new subsidiary to resolve the separated liabilities through
a bankruptcy filing while the rest of the corporate family remains outside of
bankruptcy. The company
filed two previous “Texas two-step” bankruptcy cases in an effort to resolve
these liabilities. Both prior cases were dismissed as bad-faith filings.
