[1] Notably, in a Texas two-step bankruptcy the parent company still maintains control over the spin-off by appointing its board and executives.
[4] The final goal of a company doing a Texas two-step is to get the court to approve a bankruptcy plan that includes a third-party release for the parent.
[1] Third-party releases are controversial in their own right, but are explicitly allowed in asbestos-related bankruptcies, and have been used successfully in non-asbestos cases.
[4] In 2017, Koch Industries-owned Georgia-Pacific spun off its liabilities from paper and building products that contained asbestos into a new entity called Bestwall through a Texas divisive merger.
[4] In 2019, Saint-Gobain similarly spun off liabilities from building products produced by its North American subsidiary CertainTeed that contained asbestos into DBMP, which had no operations.
[1][3] In 2020, Trane Technologies followed the same pattern and spun off its asbestos-related liabilities into Aldrich Pump and Murray Boiler, both of which declared bankruptcy seven weeks later in North Carolina.
However, this issue has never been fully litigated, and courts could conclude that a Texas divisive merger meets the definition of a transfer regardless of the language in the law.
[1] Second, scholars also note that the larger hurdle to creditors may actually be the cost and delay of litigating a fraudulent transfer claim.
[1] This increases the cost to creditors of litigating the transfer even more, and, together with the uncertainty about whether a Texas divisive merger constitutes a transfer in the first place, could result in creditors accepting a discounted settlement offer (which would guarantee payment and avoid the risks and costs of lengthy litigation).