Michael Herlihy, et al. v. DBMP, LLC

This case concerns the “Texas Two-Step,” an increasingly familiar maneuver by which a profitable, nondistressed enterprise seeks the benefits of bankruptcy for its tort liabilities without bearing any of bankruptcy’s burdens. Using an arcane procedure found in the corporate laws of a few states (including Texas), the profitable enterprise undergoes a “divisional merger” to divide itself in two. It keeps the bulk of its assets for one company and assigns its tort liability to the other, which it creates solely for the purpose of segregating its liabilities in bankruptcy. The asset-rich version of the company then continues business as usual, while the liability-laden shell enters bankruptcy as planned. Upon filing for bankruptcy, the purported debtor wins an automatic stay and seeks to enjoin litigation against the enterprise as a whole. If successful, the scheme removes thousands of plaintiffs from the civil justice system and, for asbestos plaintiffs in particular, channels them to a trust from which they cannot opt out. The question presented is: Does a debtor’s pursuit of bankruptcy as part of a Texas Two-Step scheme lack good faith, such that “cause” exists to lift the automatic stay under 11 U.S.C. § 362(d)?