TALC CANCER | 2026-10-06

The “Texas Two-Step” and the Talc Bankruptcies: What the LTL Strategy Means for California Mesothelioma and Ovarian Cancer Claimants

A solvent company can try to resolve tens of thousands of injury claims in bankruptcy without going bankrupt itself — by splitting off its liabilities into a new entity and sending that entity to Chapter 11. Courts have pushed back hard on the maneuver. California talc claimants need to understand how it works, how the automatic stay can pause their cases, and why it has repeatedly been challenged.

For decades, people who developed mesothelioma or ovarian cancer after exposure to talc products have pursued their claims in the civil courts, where a jury can hear the evidence and award damages. In recent years, a corporate maneuver has threatened to redirect those claims out of the courtroom and

The civil justice system and the bankruptcy system handle mass injury claims very differently. In court, each claimant can press an individual case toward trial. In bankruptcy, claims are frozen, consolidated, valued collectively, and often resolved through a trust that pays claims on a schedule. The Texas two-step is a strategy for moving talc litigation from the first system into the second, and understanding it is essential for any claimant whose case could be swept up.

What the “Texas Two-Step” Actually Is

The strategy takes its name from a two-part sequence built on Texas corporate law. In the first step, a company undergoes a divisional merger under the Texas Business Organizations Code, a statute that allows a business to split into two or more entities and allocate its assets and liabilities between them. The company places its talc and asbestos liabilities — along with a funding arrangement intended to pay those liabilities — into a newly created entity, while the valuable operating business is allocated to a separate entity that does not carry the tort liabilities.

In the second step, the newly created liability-holding entity files for Chapter 11 bankruptcy. Because the mass tort claims now sit with that entity, the bankruptcy filing triggers a freeze on all of the related litigation and sets up a process to resolve every present and future claim in one forum. The operating business, which was never placed into bankruptcy, continues to run. The entity used in the most prominent version of this strategy became widely known as LTL Management.

The Automatic Stay: Why Your Case Can Suddenly Stop

The feature that makes the second step so powerful is the automatic stay under 11 U.S.C. § 362. The moment a Chapter 11 petition is filed, the stay halts the continuation of lawsuits against the debtor. For talc claimants with cases pending or set for trial, that means an abrupt freeze: proceedings against the bankrupt entity cannot move forward without relief from the bankruptcy court.

A central fight in these cases has been whether the stay reaches beyond the bankrupt entity to protect non-debtor affiliates — in particular, the solvent parent company that engineered the split and remains out of bankruptcy. Debtors have sought to extend the stay or to obtain injunctions pausing claims against those affiliates too, arguing that letting the suits proceed would undermine the bankruptcy. Claimants have resisted, arguing that a solvent, non-bankrupt company should not enjoy the protections of a bankruptcy it never entered. The scope of that protection has been contested at every turn.

Section 524(g) and the Asbestos Trust Model

The destination of a successful two-step is typically a trust. The Bankruptcy Code’s Section 524(g) was enacted to deal with asbestos liabilities: it allows a reorganization to establish a trust that assumes the debtor’s asbestos liabilities and to enter a channeling injunction that directs all present and future asbestos claims to the trust rather than the courts. In exchange for funding the trust, the debtor — and, in defined circumstances, certain related parties — obtain protection from direct litigation.

The § 524(g) model can work fairly when a genuinely distressed company funds a trust adequately and claimants receive a transparent, sufficiently funded recovery mechanism. The controversy with the two-step is different: critics argue that a solvent enterprise is using the trust mechanism not because it is in financial distress, but to cap and manage liabilities it could otherwise pay, while shielding a healthy operating business. Whether talc claims — which include ovarian cancer claims, not only asbestos-related mesothelioma — fit within the asbestos-focused § 524(g) framework has itself been a point of dispute.

Why Courts Have Pushed Back: The Good-Faith Requirement

Chapter 11 is available only to debtors that file in good faith, and a bankruptcy court may dismiss a case “for cause” under 11 U.S.C. § 1112(b), including where the petition was not filed in good faith. The pivotal question in the LTL litigation became whether an entity created to hold liabilities, and backed by a funding arrangement from a solvent parent, was in the kind of financial distress that legitimately warrants bankruptcy.

In In re LTL Management, LLC, the United States Court of Appeals for the Third Circuit dismissed the bankruptcy, concluding that the entity was not in financial distress — in large part because of the funding backstop it had from its solvent corporate family — and therefore had not filed in good faith. A renewed filing met a similar fate. Those decisions established an important principle: the two-step does not automatically buy access to the bankruptcy system, and a court will look hard at whether the debtor faced real financial distress rather than merely seeking a litigation advantage. The saga has continued to evolve through further proposed resolutions and claimant votes, and claimants should treat the current posture as a moving target to be checked, not assumed.

What This Means for California Claimants

For a California resident with a talc-related mesothelioma or ovarian cancer claim, a two-step bankruptcy can have several practical effects:

• Your case may be paused. The automatic stay can freeze a pending suit against the filing entity, delaying a trial date that may matter a great deal to a seriously ill plaintiff.
• Your recovery mechanism may change. If a trust is ultimately approved, claims may be channeled to it and paid on the trust’s terms and schedule rather than through a jury verdict.
• Timing can be critical. For claimants with aggressive disease, delay is itself a harm, which is one reason claimants’ representatives have fought stays and pushed for prompt resolution.
• The outcome is not settled. Because courts have repeatedly scrutinized these filings, the path any particular claim takes depends on rulings that have shifted over time.

Claimants should not assume their rights are extinguished by a bankruptcy filing, nor that the civil courts are permanently closed to them. The strategy has faced sustained legal resistance, and the preservation of claims — including the evidence and causation proof that support them — remains essential. The underlying liability theories, including California’s approach to market-share liability and the standards for punitive damages under Civil Code § 3294, continue to matter regardless of the forum in which a claim is ultimately resolved.

Protecting a Claim While the Bankruptcy Plays Out

When a two-step bankruptcy is in the picture, protecting a claim means acting on several fronts: preserving medical and exposure evidence while witnesses and records are available; monitoring the bankruptcy docket and any deadlines a court sets for filing claims or voting on a plan; asserting rights against any non-debtor defendants not protected by a stay; and being prepared to return to the civil courts if a bankruptcy is dismissed. A claim that is well documented and actively managed is far better positioned, whether it is ultimately resolved by verdict, settlement, or trust.

The Divisional Merger Mechanic, in Detail

The first step depends on a specific feature of Texas corporate law. A divisional merger under the Texas Business Organizations Code lets a single entity divide into two or more entities and allocate its assets and liabilities among them, without the transaction being treated as a conventional assignment or transfer. The dividing company designates, in a plan of merger, which assets and which liabilities go to each resulting entity. A company pursuing the two-step uses this mechanism to separate the business that generates value from the liabilities it wants to resolve in bankruptcy.

To address the obvious concern that this leaves the liability entity without resources, these transactions typically include a funding agreement: a commitment by the solvent side of the family to fund the liability entity’s obligations, at least up to some amount. That funding backstop became a double-edged sword in the litigation. It was meant to show claimants would be paid, but it also became powerful evidence that the liability entity was not in genuine financial distress — because it had a solvent backer standing behind it — which is exactly what doomed the good-faith case for bankruptcy.

A Strategy Used Beyond One Company

The two-step is not unique to a single manufacturer. Several companies facing large asbestos liabilities have used divisional mergers to create a liability subsidiary that then filed Chapter 11 — entities associated with Georgia-Pacific, with building-products manufacturers, and with industrial-equipment makers have pursued versions of the strategy. The pattern is consistent: a solvent enterprise separates its legacy tort exposure into a new entity and seeks to resolve present and future claims through a bankruptcy trust and channeling injunction, while the operating business stays out of bankruptcy.

The spread of the strategy is why the legal questions matter well beyond any one case. If courts broadly accepted the maneuver, it could become the default way for solvent companies to handle mass tort liability, moving large categories of injury claims out of the civil courts as a matter of routine. That prospect is precisely what has drawn sustained scrutiny from judges, claimants’ advocates, and commentators, and why the good-faith and financial-distress requirements have taken center stage.

Where the Law May Be Heading

The contested nature of the two-step has generated proposals for reform and continued appellate attention. Some have urged legislation to limit the ability of solvent companies to use divisional mergers as a gateway to bankruptcy, or to tighten the good-faith and financial-distress standards for filing. Courts, meanwhile, continue to test individual filings against those standards, and a company rebuffed in one attempt may restructure and try again, or pivot to a negotiated resolution and a claimant vote on a proposed plan. For claimants, the key takeaway is that the law here is unsettled and moving: no claimant should assume either that a two-step will succeed in cutting off their rights or that it will inevitably fail. The right course is to preserve the claim, follow the proceedings closely, and get advice tailored to the current posture rather than to any single past ruling.

There is also a broader public debate worth understanding, because it shapes how judges approach these cases. Supporters of the two-step argue that a bankruptcy trust can deliver more predictable, equitable, and durable compensation to present and future claimants than a decades-long march of individual trials, in which early claimants may recover large verdicts while later claimants find the defendant depleted. Critics respond that the strategy lets financially healthy companies cap liabilities they could fully pay, strips claimants of their right to a jury, and forces gravely ill people into a slow administrative process. Both views contain truth, and the tension between them is exactly why the good-faith and financial-distress requirements have become the battleground: they are the doctrinal tools through which courts decide whether a particular filing is a legitimate use of bankruptcy or an abuse of it. For a California claimant, the practical point is that the outcome is genuinely uncertain and worth monitoring, because where the law lands will determine whether the courtroom or a trust is the ultimate forum for the claim.

California claimants have some particular considerations as well. California courts have long been an active venue for asbestos and talc litigation, with procedures that allow trial preference for gravely ill plaintiffs so their cases can be heard quickly. A bankruptcy stay can interrupt that expedited path, which is one reason the timing fights matter so much here. California also recognizes robust liability theories and damages rules that can make a civil verdict substantial, so the difference between resolving a claim in a California courtroom and resolving it through an out-of-state bankruptcy trust can be significant for the claimant. None of this changes the federal bankruptcy framework, but it explains why California claimants and their counsel have strong reasons to resist unwarranted stays, to preserve the option of a prompt California trial where one is available, and to participate actively in any bankruptcy proceeding that could redirect their claims.

Frequently Asked Questions

What is the Texas two-step?

It is a strategy in which a solvent company uses a Texas divisional-merger statute to split into two entities, placing its talc and asbestos liabilities into a new entity, and then puts only that entity into Chapter 11 bankruptcy. The aim is to resolve all claims through a bankruptcy trust while the operating business stays out of bankruptcy.

Can a healthy company really use bankruptcy this way?

That is exactly the contested question. Chapter 11 requires a good-faith filing, and courts may dismiss a case that was not filed in good faith. In the LTL litigation, the Third Circuit dismissed the bankruptcy because the filing entity was not in genuine financial distress, given the funding support from its solvent corporate family.

What is the automatic stay and how does it affect my case?

Under 11 U.S.C. § 362, filing a bankruptcy petition automatically halts litigation against the debtor. If the entity holding the talc liabilities files, your pending case against it can be frozen, and resuming it requires relief from the bankruptcy court. Whether the freeze also protects the solvent parent has been heavily litigated.

What is a Section 524(g) trust?

Section 524(g) of the Bankruptcy Code allows a reorganization to set up a trust that assumes asbestos liabilities and to channel present and future asbestos claims to that trust through a court injunction, instead of to the courts. Whether talc claims fit this asbestos-focused framework has been disputed.

Will I still be able to recover if a trust is created?

Possibly, but through the trust’s process rather than a jury verdict. A trust pays approved claims according to its own criteria and schedule, and the amount and timing can differ substantially from what a civil case might yield. The terms of any trust are a central focus of the litigation.

Does a bankruptcy filing end my claim?

No. A filing can pause and redirect your claim, but it does not automatically extinguish it. If a bankruptcy is dismissed — as happened in the LTL cases — claims can return to the civil courts, which is why preserving evidence and monitoring deadlines is so important.

Why does timing matter so much for talc claimants?

Because many claimants are seriously ill, and delay can mean a plaintiff does not live to see a resolution. That urgency is a major reason claimants’ representatives have fought stays and pressed for prompt handling of these cases.

What should I do if a company connected to my claim files bankruptcy?

Preserve your medical and exposure evidence, watch the bankruptcy docket for claim-filing and voting deadlines, assert your rights against any defendants not shielded by a stay, and get advice promptly. An attorney can position your claim to be ready whether it is resolved by verdict, settlement, or trust.

Speak With a California Talc and Asbestos Attorney

A bankruptcy maneuver should not quietly cost you the value of a serious injury claim. Trembach Law Firm represents California talc and asbestos claimants, tracks the bankruptcy strategies that can affect their cases, and protects clients’ rights in and out of the civil courts. To discuss your diagnosis and your options, call (213) 645-2246 for a free, confidential consultation.

Contact Trembach Law Firm at (818) 514-7680 for a confidential consultation.

Trembach Law Firm | 27001 Agoura Road, Suite 350, Calabasas, CA 91301