Ever heard of the Texas Two-Step? It’s not a honky tonk dance but rather a controversial legal maneuver, one that attorneys argue is allowing billion-dollar companies to use a Charlotte bankruptcy court to dodge lawsuits.
Reporter Ames Alexander wrote about it for the Charlotte Observer and he joins me now.
Marshall Terry: OK. Ames, so you write this strategy has stalled thousands of lawsuits including more than 80 in North Carolina. Give us some background here. Who are the companies being sued and what do the plaintiffs want?
Ames Alexander: Yeah, the companies are Georgia-Pacific, Trane (Technologies) and CertainTeed. And they've been sued by thousands of people all across the country. Those folks alleged that they were sickened by the asbestos that the companies’ products once contained. And the players want to be able to have their day in court against these companies, but their efforts to do that have been stymied by the companies' use of Charlotte's bankruptcy court, and by their use of this Texas Two-Step maneuver.
The lawyers for those plaintiffs argue that this is dirty pool. All three of these companies are quite profitable, and the plaintiffs’ lawyers say they shouldn't be given the legal protection the companies can get when they file for bankruptcy.
Terry: One of the plaintiffs here is the family of Ed Chapman. What's his story exactly?
Alexander: Mr. Chapman owned a drywall company and for many years he used a Georgia-Pacific joint compound that contained asbestos. His daughter told me in 2018 he was diagnosed with mesothelioma, that's a very aggressive cancer that's usually caused by exposure through asbestos. He filed a lawsuit against Georgia-Pacific, but because of the company's legal maneuver — and this involved a bankruptcy filing by a newly created subsidiary — his lawsuit was put on hold. He died from mesothelioma in 2020, before his lawsuit was ever litigated.
Terry: Let’s go back to that Texas Two-Step strategy. How does it work? Do the companies have to set aside any money to pay these claims? And what does Texas have to do with it?
Alexander: Sure. It's called the Texas Two-Step because companies that employ it take advantage of a Texas law that allows corporations to move their corporate charters to Texas and then split into two.
After Georgia-Pacific, Trane and CertainTeed were split up, one company in each case received virtually all of the assets and those companies continued business as usual, and then the other companies in each case were settled with all of the asbestos liabilities — the lawsuits, in other words. And then they filed those subsidiaries for bankruptcy in the federal court in Charlotte, and they've gotten the judges’ permission to shield themselves from all these asbestos lawsuits for as long as these cases are in bankruptcy court. And that's seven years and counting, in the case of Georgia-Pacific and four years and counting for these other two companies.
Now the parent companies have offered to fund trusts so that their subsidiaries can settle all of these asbestos claims. Still, Judge Whitley, one of the bankruptcy judges here in Charlotte, has noted that it is far from guaranteed that the parent companies will ultimately pay out.
Terry: Why Charlotte in all of this?
Alexander: You raised a good question. Two of these three companies aren't even headquartered in North Carolina. But legal experts I've talked to say there are a couple of reasons why Charlotte's become an attractive place for these companies to file for bankruptcy.
One reason is that prior rulings here have sent the message that the judges here are receptive to the arguments of companies that file for bankruptcy. Another reason has to do with the Fourth Circuit Court of Appeals, which covers the Carolinas. And that court has established a legal precedent that judges say has made it very difficult to dismiss bankruptcy cases.
Terry: So you mentioned attorneys representing the plaintiffs a moment ago. They say this strategy is fraudulent. What’s their argument?
Alexander: They say bankruptcy court should be for companies that are financially distressed. These three companies aren’t. [They] not only have a lot of assets, they're all quite profitable and the lawyers argue that the companies have the financial wherewithal to pay all of the plaintiffs in full. The lawyers for the plaintiffs also argue that the corporations are getting the benefits of bankruptcy without the burdens, such as the damage that's typically done to a company's reputation and credit rating.
Terry: And the defense for the companies? What do they say?
Alexander: Attorneys for the companies declined to talk with me, but in court filings, they argue that their strategy is legal and that it provides a fair and efficient way to resolve claims. They've contended that this approach is necessary to manage the overwhelming number of asbestos claims they're facing. And they say they're trying to set up a structured environment where claims can be resolved systematically.
Terry: Is there any effort to ban companies from using the Texas Two-Step maneuver?
Alexander: Yes, North Carolina Attorney General Josh Stein, along with 23 other state attorneys general, filed a brief with the U.S. Supreme Court in January, arguing that the Texas Two-Step threatens the power of states to enforce laws against corporate wrongdoers. And three U.S. senators — two Democrats, one Republican — have filed a separate brief making very similar arguments. Later this year, the Fourth Circuit Court of Appeals is scheduled to hear arguments from the two sides about whether all of this is constitutional. Depending on how that goes, it's possible this could go all the way up to the U.S. Supreme Court.
