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Businesses Are Using A Rare Bankruptcy Technique To Avoid Paying Injury Verdicts


If you file an injury lawsuit, and you win, there is an expectation you will get the amount that is awarded to you. That is, unless the Defendant files for bankruptcy. Then, you may never get paid.

You may say, “but I sued a really large company—they’re not going to file for bankruptcy, just to get rid of my judgment.” That may be true—but that is actually changing, with a new technique that companies are using to try to avoid paying personal injury lawsuits.

The Texas Two-Step

The technique is being used by medical company Johnson & Johnson, which was sued for damages caused by their talcum powder. The Plaintiffs were awarded millions of dollars—but still, that’s a drop in the bucket compared to the company’s total net worth.

But the company is now trying a new technique called a “Texas two-step” because what it is doing is only legal right now in Texas and Delaware. Here’s how the technique works.

The company first starts a break-off, or subsidiary company, related to it, but that new company is still a separate legal entity. The company then transfers the liabilities to the subsidiary company, but no assets. That subsidiary company now owes millions of dollars, but owns no money or assets to satisfy those judgments.

That means that the company can file for bankruptcy, and discharge the personal injury judgments, without losing any assets—all the assets are in the parent company, which is separate, and which did not file for bankruptcy.

If the bankruptcy is granted, the personal injury judgments are wiped out, but the parent company lives on, doing business as usual.

Is the Process Even Legal?

In most states, this would be a fraudulent transfer—an attempt to simply hide or shield assets by transferring them away. But in Texas and Delaware, this is legal. What remains to be seen though is if it is legal and allowable under federal bankruptcy law, a question that remains unanswered.

Naturally, the companies deny they are trying to avoid paying judgments, but experts are concerned that if federal bankruptcy does allow this to happen, you could have a number of companies simply starting subsidiaries, and routinely moving personal injury judgments entered against them, into those companies for discharge. The end result could be even relatively minor personal injury judgments could be at risk of being wiped out in bankruptcy.

Judgments are Easy to Discharge

If a Defendant files for bankruptcy, the personal injury judgment is the lowest priority claim, meaning it gets wiped out first, and easiest.

Even if bankruptcy were not actually declared, many businesses, sued for personal injury lawsuits could end up threatening bankruptcy in order to coerce injury victims to settle their cases.

Call the Knoxville personal injury attorneys at Fox Willis Burnette, PLLC, today if you are injured in any kind of accident, to learn about your rights.

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