How a bankruptcy innovation halted sick plaintiffs’ lawsuits

Attorney Greg Gordon sat before a packed hotel ballroom of bankruptcy lawyers who had come to hear him hold court on his pioneering strategy for companies seeking to dodge billion-dollar lawsuits: the “Texas two-step.”

The tactic has made the Jones Day partner a polarizing figure. It involves splitting a company in two, dumping the legal liability into one of the entities, and then putting that new firm into bankruptcy. Companies love it. Plaintiffs’ attorneys hate it. Judges so far seem split on it.

Gordon, grinning at his audience, made a bold claim about his maneuver, which he contends benefits both companies and plaintiffs. The two-step, he said, is “the greatest innovation in the history of bankruptcy.”

The remark prompted laughter at the April bankruptcy conference in Washington. But the two-step is no joke: Gordon’s innovation could radically reshape corporate liability law, legal scholars say, by allowing companies to easily divert any lawsuits against them into bankruptcy court – without filing for bankruptcy themselves.

Gordon has executed the maneuver for four major companies since 2017: Georgia-Pacific, Saint-Gobain, Trane Technologies and Johnson & Johnson. Each faced tens of thousands of lawsuits alleging their products caused cancer and potentially billions of dollars in liability.

And all got the suits suspended by following Gordon’s two-step playbook: First, create a subsidiary to take on liability for the cases. Second, have that subsidiary quickly file for protection under Chapter 11 of the U.S. bankruptcy code – converting the plaintiffs into creditors and forcing them to seek settlements in bankruptcy court.

The upshot for the parent companies: all the benefits of bankruptcy protection with none of the usual financial and reputational wreckage.

Gordon and all four companies he has represented said in statements to Reuters or in court filings that the two-step is legally proper and the fairest way to compensate claimants. Otherwise, they argue, plaintiffs take their chances in trial courts, with a few getting unreasonably large jury awards but many getting nothing. At the conference, Gordon called the two-step process “fair to everyone,” and a superior alternative to the broken system for mass tort claims.

Plaintiffs’ lawyers have called the two-step a fraud in court actions seeking dismissals or other remedies. 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.

Those arguments are now gaining traction in the bankruptcy case involving Saint-Gobain. The French construction-products giant used the tactic to shield its North American business from billions of dollars in potential liability for asbestos-related cancers. Lawyers for plaintiff-creditors in the Saint-Gobain case have seized on the testimony of a whistleblower – a company attorney who helped plan the bankruptcy.

The whistleblower, Amiel Gross, alleges Saint-Gobain fired him in 2020 in retaliation for sounding an internal alarm about an unrelated health hazard: alleged contamination of drinking water by Saint-Gobain. He became a key figure in the asbestos plaintiffs’ bankruptcy case when their lawyers deposed Gross last year about the planning and purpose of the Chapter 11 maneuver.

Gross testified that Saint-Gobain repeatedly misrepresented its intent in creating the subsidiary that eventually filed for bankruptcy, calling executives’ testimony and other statements “misleading” and “not truthful.” U.S. Bankruptcy Judge Craig Whitley followed Gross’s testimony last August with factual findings that included his own blistering critique of the executives’ statements as “contrary to the evidence,” saying the company’s story “strains credibility.”

The Texas two-step is the “greatest innovation in the history of bankruptcy.”

Saint-Gobain’s story closely mirrors the one told by executives at the three other companies to counter plaintiffs’ allegations. Accused of contriving a fraudulent bankruptcy as a liability shield, executives of three of the parent companies denied in depositions and filings that they ever directed the subsidiaries to file bankruptcy at all. All four parent firms said their newly created subsidiaries’ boards had decided independently to authorize their Chapter 11 filings, and only did so as a last resort to fairly compensate plaintiffs, after considering other options.

A Reuters examination of court records, deposition testimony and internal company documents casts doubt on these claims, which are central to the companies’ arguments for the legitimacy of the Texas two-step. The records, including Gross’s previously unreported deposition testimony, provide the most detailed account to date of the secretive planning that underpins the revolutionary bankruptcy strategy that experts say could upend U.S. product-liability law.

Each of the four companies launched confidential internal projects – complete with codenames – to plan their two-step bankruptcies for months, according to court records and two people familiar with the matter. Saint-Gobain dubbed its effort “Project Horizon.” Georgia-Pacific, Trane and Johnson & Johnson called their projects Blue, Omega and Plato, respectively. Gordon and the companies he represented didn’t respond to questions about why they planned their two-step bankruptcies in secret.

After creating subsidiaries using a unique Texas law, all four parent companies immediately moved the new firms to North Carolina, where bankruptcy precedents favor companies. (J&J’s case was later transferred to New Jersey). All four subsidiaries declared bankruptcy within about three months of being created. The one created by J&J filed Chapter 11 in less than three days.

Each subsidiary started with fewer than 10 employees, all on loan from the parent company, according to court filings, along with a mountain of lawsuits they couldn’t afford to settle. All the new firms have relatively few assets. The companies avoiding bankruptcy promise to eventually give the subsidiaries enough money to compensate plaintiffs – in exchange for an agreement by plaintiffs to sign away their right to sue the parent in trial courts.

Gross, the Saint-Gobain whistleblower, testified that contrary to their sworn statements, the French company’s lawyers and executives knew from the start of Project Horizon that the resulting subsidiary would seek Chapter 11 protection. And the purpose was clear: to stop the financial bleeding from lawsuits while avoiding all the downsides of a traditional bankruptcy – to “have your cake and eat it, too,” as Gross put it in his deposition.

Saint-Gobain did not answer detailed questions about its two-step bankruptcy case. But in a statement, it said the strategy was aimed at “permanently and equitably resolving all current and future asbestos-related claims through the creation of a trust to efficiently process and pay those claims.” Gross’s claims of being wrongfully terminated were without merit, the company said.

Judge Whitley is also overseeing the bankruptcy proceedings involving Trane Technologies, which declined to comment for this report.

In an August ruling in that case, the judge noted the remarkable similarities among the three Texas two-steps underway at the time in questioning those companies’ claims that they never preordained their subsidiaries’ bankruptcies.

“It is no coincidence that this exact fact pattern and the same alleged ‘options’ are found” in preceding cases, the judge wrote, noting the companies “have been represented by the same law firm.”

The maneuver has become a lucrative specialty for Jones Day.
So far, it has billed the four companies for more than $70 million in fees.

Plaintiffs ‘better off’

Gordon’s maneuver is called a Texas two-step because the companies use that state’s “divisional merger” law to split the legally imperiled company into two new firms: One to absorb the liability, the other to continue with business as usual.

None of Gordon’s four two-step Chapter 11 filings have received final approval from a bankruptcy judge, but all have succeeded in giving the companies leverage in settlement talks with plaintiffs by suspending their lawsuits, some legal experts say. J&J faced a hail of litigation alleging the company’s iconic Baby Powder and other talc products sickened people. The three other firms faced litigation over asbestos exposure linked to their construction products.

Although the judge in the Saint-Gobain case expressed deep skepticism of the tactic, the judge overseeing the Johnson & Johnson measure explicitly endorsed it. U.S. Bankruptcy Judge Michael Kaplan rejected the plaintiffs’ motion to dismiss the J&J subsidiary’s bankruptcy in February, finding “nothing inherently unlawful” about the two-step. Plaintiffs appealed the ruling.

Bankruptcy proceedings, Kaplan said, are a “preferred approach to best serve the interests of injured tort claimants and their families,” suggesting that “maybe the gates indeed should be opened” to imitators of Gordon.

One potential imitator was a fellow panelist of Gordon’s at the April conference. Jeffrey Gleit, of ArentFox Schiff LLP, said he had initially considered the strategy a fraudulent transfer intended to put corporate assets beyond the reach of plaintiff-creditors. Now he’s coming around to Gordon’s view – and considering the tactic for a client.

“My thoughts on it have evolved,” Gleit said during the panel discussion.

In an interview, he said the two-step can be legitimate if the healthy company adequately finances the subsidiary to compensate plaintiffs.

Companies have often turned to traditional bankruptcies when their finances are overwhelmed by lawsuits over defective products. But they have strong incentives to avoid it: Bankruptcies come at the cost of damage to reputations, credit ratings and relationships with suppliers, customers and employees. Gordon’s strategy offers a way out of those consequences while preserving the benefit of potentially lower legal costs and payouts to plaintiffs. The companies also avoid the reputational and financial fallout from jury verdicts that find wrongdoing and levy damages.

Some bankruptcy experts say the practice sets a dangerous precedent. Jared Ellias, a professor at the University of California Hastings College of the Law, said the practice invites companies to contrive Chapter 11 filings to limit victim compensation. He recalled the settlement of more than $20 billion that followed oil major BP’s Deepwater Horizon spill in the Gulf of Mexico.

“Now, if you have an oil spill, maybe the next thing you do is a Texas two-step,” said Ellias, who filed a brief with other bankruptcy experts supporting plaintiffs’ request to dismiss the J&J subsidiary’s Chapter 11 filing.

Congressional Democrats have proposed legislation that would severely restrict a company’s ability to pursue the two-step strategy.

Gordon, at the April conference, pitched his two-step as a better option than trial courts for both companies and plaintiffs. “The tort system doesn’t work for mass tort claims,” Gordon said. “It just doesn’t.”

Gordon said companies are often settling cases quickly just to avoid the legal costs of going to trial. The Johnson & Johnson talc lawsuits presented the worst scenario for both the company and the plaintiffs, he said. Nearly 40,000 lawsuits were filed in five years – a rate expected to continue for a half century, Gordon said.

“What do you do about that, as a company, no matter how big you are?” Gordon asked.

The situation was also “awful” for plaintiffs, he said. Many got nothing, Gordon said, but a lucky few hit the “lottery,” including 22 plaintiffs who won a judgment for $4.69 billion. An appeals court later reduced the award to $2.1 billion, but the U.S. Supreme Court declined to hear J&J’s bid to reverse the verdict.

In a statement, J&J said the court overseeing its subsidiary’s Chapter 11 filing “correctly found” its actions appropriate. The subsidiary’s creation and subsequent bankruptcy filing “were done in the right way, for the right reasons, and in the best interests of all parties,” J&J said.

J&J said it continues to stand behind Johnson’s Baby Powder, “which is safe, does not contain asbestos and does not cause cancer.”

“The tort system doesn’t work for mass tort claims. It just doesn’t.”

Some legal experts agree that bankruptcy proceedings can offer plaintiffs more equitable compensation than trial courts. The process is overseen by one judge. In addition, plaintiffs get a say in the amount of compensation because, as creditors, they can block approval of a company’s reorganization plan that contains the settlement agreement. In asbestos-related Chapter 11 filings, 75% of creditors must approve a reorganization plan, a higher threshold than in most bankruptcies.

Voting down a company settlement offer, however, means plaintiffs continue to go unpaid in bankruptcy – and unable to pursue their cases individually in trial courts.

In a Texas two-step bankruptcy, Gordon said, the company can negotiate reasonable settlements with all plaintiffs. He rejected the criticism that his strategy aims primarily to restrict plaintiff compensation, saying the only limit is the financial reserves of the healthy company funding the bankrupt subsidiary.

“None of these companies sought to avoid its liability; to the contrary, each is seeking to resolve the entirety of it,” Gordon said in his statement to Reuters. “Bankruptcy offers the only forum where mass tort liability can be fully resolved.”

Georgia-Pacific and Johnson & Johnson have offered to give their subsidiaries $1 billion and $2 billion, respectively, to be put in trusts to settle all claims; neither offer has been accepted by plaintiff-creditors. The Saint-Gobain and Trane subsidiaries have yet to make public settlement offers.

At the conference, Gordon said the two-step leaves most plaintiffs “better off.”

Many plaintiffs, along with their relatives and attorneys, beg to differ.

One plaintiff was William Germont, who filed one of the more than 60,000 lawsuits that were pending before the bankruptcy against Saint-Gobain’s North American building-product business, CertainTeed. Five days before Saint-Gobain’s subsidiary filed for Chapter 11, Germont died at 84, after suffering for more than three years from lung disease, according to court records.

His lungs showed “numerous asbestos bodies” and a mesothelioma mass, according to a plaintiff’s medical expert report filed in court. Germont testified that he was routinely exposed to the carcinogenic material while working as a machine operator at a CertainTeed pipe factory near Philadelphia in the 1960s. In a deposition shortly before he died, a company lawyer questioned Germont about his health and lifestyle, including a history of smoking.

His wife, Theresa Germont, said the news that the bankruptcy maneuver would halt the lawsuit was hard to take, just days after her husband’s funeral.

“I was so upset, after I saw what my husband went through,” she said. “Why is this happening? There’s no reason for it.”

Neither Gordon nor Saint-Gobain responded to questions about Germont’s case.

Gordon joined Cleveland-based Jones Day in the 1980s. From the firm’s Dallas office, the career bankruptcy lawyer has spent more than three decades representing companies facing asbestos litigation and environmental liabilities in cases that generally avoided the kind of high-profile controversy the Texas two-steps have engendered. Gordon also handled a notable case in the retail sector, the 2015 restructuring of RadioShack.

Gordon launched his first Texas two-step in 2017 on behalf of a longtime, controversial Jones Day client: Koch Industries. The company’s chairman, Charles Koch, and his late brother David Koch have been prominent Republican political donors and supported an array of pro-business lobbying efforts, including those seeking to limit damage awards in injury lawsuits.

One Koch company, Georgia-Pacific, faced thousands of lawsuits accusing company executives of concealing knowledge about the dangers of asbestos in its building products. A New York state appeals court in 2013 found Georgia-Pacific sponsored “supposedly objective scientific studies” that supported the company’s defense and falsely stated that the company did not influence the research. In fact, the company participated in designing some studies and its lawyers reviewed the research before publication, the court found.

Georgia-Pacific formed a new Texas company, Bestwall, that took on all the asbestos liability and declared bankruptcy about three months after its founding. Most of its assets went to another newly created entity, called New Georgia-Pacific. U.S. Bankruptcy Judge Laura Beyer has rejected plaintiffs’ attempts to dismiss the bankruptcy.

The “new” Georgia-Pacific created in the divisional merger has meanwhile paid nearly $3 billion in dividends to Koch Industries that it likely could not have paid if it filed bankruptcy itself. That’s triple the amount Bestwall has offered to plaintiffs to settle all the cases.

Gordon’s early success with Georgia-Pacific caught the attention of lawyers at Saint-Gobain. But they didn’t count on Amiel Gross.

Gross, the whistleblower in the Saint-Gobain case, is the only corporate insider in the two-step bankruptcies to directly contradict his colleagues’ testimony about a company’s confidential planning process.

Saint-Gobain had been fighting lawsuits since the 1970s from consumers and workers over asbestos in the piping and roofing products of its North American business, CertainTeed. The company said it stopped selling asbestos pipe in 1993.

Initially, the company did not face a flood of litigation, as plaintiffs’ lawyers primarily focused on firms whose businesses were more concentrated in asbestos products, such as insulation. But CertainTeed and other companies selling products containing asbestos became prime targets in the early 2000s because of an earlier bankruptcy innovation by one of the biggest companies inundated by the lawsuits.

Johns Manville in 1988 created a new kind of bankruptcy trust – one that would handle all future asbestos claims, in addition to current lawsuits. Other major asbestos-product manufacturers followed suit after Congress codified the practice for firms facing asbestos liabilities in 1994.

The companies argued the trusts were an essential tool to manage an ever-expanding torrent of torts, many of which they regarded as dubious. Plaintiffs’ lawyers called the practice an abuse of the system, alleging the underfunded trusts shortchanged the sick and dying, paying many a fraction of their claims’ value.

As more major asbestos-products firms filed for bankruptcy, and the money in their trusts ran short, plaintiffs lawyers started targeting a wider set of companies, including Saint-Gobain’s CertainTeed. Since 2002, the firm
has spent about $2 billion on legal fees, judgments and settlements in more than 300,000 cases, court records show.

In Gordon’s two-step, Saint-Gobain’s bankrupt subsidiary would ultimately create a trust that, like Manville’s, would absorb all future claims. The key difference: The company accused of sickening workers never has to declare bankruptcy.

French views towards bankruptcy are rooted in the European history of debtors’ prisons and public shaming, said Henri Chriqui, a longtime administrator of corporate bankruptcies in France. He noted the French word for bankruptcy, “faillite,” also means “failure.”

In August of that year, Saint-Gobain lawyers, including Gross, gathered at a boardroom table inside the construction giant’s offices in suburban Philadelphia to hash out details of the plan. Gordon sat across from them with other Jones Day lawyers, according to the testimony of Gross, who attended. At around this time, company lawyers started drawing up the bankruptcy papers for a subsidiary that didn’t yet exist, Gross said.

It became clear in that meeting, he said, that the skeptical French executives were being “socialized” to the idea of this particular kind of bankruptcy. Gordon was a key emissary in convincing the Paris leadership, Gross testified.

Executives created the subsidiary in October 2019, calling it DBMP. That same month, Gross traveled to Charleston, South Carolina, where a senior Saint-Gobain lawyer led a presentation on the “official company story” surrounding Project Horizon, Gross testified. One key talking point the lawyer advised: The subsidiary was not created to file bankruptcy, but rather to create flexibility for handling the asbestos litigation, with bankruptcy being only one option.

The subsidiary’s skeletal staff comprised five people on secondments from the parent company, Judge Whitley found. Gross, the whistleblower, was one of them. Just one of the employees worked full-time: a chief legal officer.

The staff essentially functioned as an “in-house legal team” for a company with no other workers or operations, Whitley later found. Three months after DBMP’s founding, the subsidiary’s board voted to file for bankruptcy.

In October 2020, as the bankruptcy case moved forward, Saint-Gobain fired Gross. The lawyer said in a complaint filed with the Occupational Safety and Health Administration (OSHA) alleging he had been sacked for expressing his concerns that the company may have contaminated drinking water with chemicals.

Saint-Gobain faces litigation alleging water contamination by facilities in the northeastern United States, and has settled some of the cases. Gross unsuccessfully pushed executives to probe and rule out water contamination from other sites that may have used the same chemicals.

The company said it fired Gross for different reasons. Saint-Gobain terminated the lawyer shortly after telling him he was under investigation for insubordination and questioning him about disparaging words he allegedly used regarding a colleague, according to his OSHA complaint.

Saint-Gobain later told media outlets that Gross violated the company’s harassment prevention policy, without elaborating, an assertion Gross called false in legal papers filed with regulators. Gross’s OSHA complaint is still pending.

Executives at Saint-Gobain and its subsidiary had earlier stated that the parent company had not preordained the bankruptcy. Gross said those claims were “misleading” and “not truthful.” Gross also called “inaccurate” the testimony of Mark Rayfield, Saint-Gobain’s North American CEO, who had asserted that Project Horizon aimed only to provide “flexibility and optionality” to reduce the burden of asbestos litigation. Gross also testified that the bankruptcy filing required approval of the company’s French leadership, contradicting Rayfield’s statement that Paris executives had no role in authorizing it.

DBMP, in a court filing, disputed Gross’s account and called his testimony “nothing more than the miscellaneous musings of a dismissed former employee based largely on what he claims to have understood or surmised, rather than what he observed.”

The decision to put the newly formed company into bankruptcy, the judge wrote, was made long before the subsidiary existed. Whitley said the subsidiary’s structure made the intent clear: “That DBMP was created with no employees and no operations reflects its single purpose,” the judge wrote, as a “vessel designed to ferry … asbestos liabilities into bankruptcy.”

Whether Whitley’s findings have any consequences for Saint-Gobain remains to be seen. The judge has allowed plaintiff-creditors’ attorneys to pursue company documents and question additional witnesses under oath in an attempt to corroborate Gross’s testimony.

Those inquiries are part of multiple legal actions creditors launched in August and January to attack the company’s maneuver. One asks Whitley to include all of Saint-Gobain’s North American assets in the subsidiary’s bankruptcy, which would defeat the point of its Texas two-step. In that scenario, asbestos plaintiff-creditors could make direct claims on the business they sued in the first place, just as if it had filed bankruptcy itself.

Plaintiffs have also asked the judge to declare the bankruptcy maneuver a fraud, which could result in a separate award of damages to the plaintiffs, in addition to any money they might collect from illness-related claims. Lawyers for Saint-Gobain’s subsidiary argued for dismissal of the fraud case in a court filing, saying there was “nothing improper or illegal” about the Texas two-step.