Lawmakers Target the Bankruptcy Tactic That Dodges Mass Tort Liability: 3 Reforms in 2026

Key facts: the bankruptcy tactic and the reforms

• Texas Two-Step: A divisive merger under Texas law splits a company and routes its liabilities into a unit that then files Chapter 11 [4].
• June 27, 2024: The Supreme Court decided Harrington v. Purdue Pharma 5-4 [1].
• Nondebtor releases barred: Chapter 11 plans cannot release claims against non-bankrupt parties without consent [1].
• Asbestos exception preserved: The ruling specifically protected the Section 524(g) asbestos trust framework [1][3].
• Nondebtor Release Prohibition Act: Reintroduced in the 118th Congress (2023–24) to bar improper nondebtor releases.
• 2026 bill: The bipartisan Consumer Protection and Corporate Accountability in Bankruptcy Act was reintroduced in April 2026 [2].
• Bad-faith presumption: The bill would presume a Texas Two-Step filing was made in bad faith [2].
• 60+ trusts: More than 60 active asbestos trusts continue paying mesothelioma claims [13].
• J&J: Johnson & Johnson is the most prominent user of the tactic, in its talc litigation [5].
• Victims protected: The reforms strengthen victims' right to sue without weakening asbestos trusts [3].

What is the "Texas Two-Step" bankruptcy tactic?

The Texas Two-Step is how a solvent corporation uses bankruptcy without being bankrupt. It exploits a Texas law allowing a "divisive merger," in which a company splits into two entities, assigns all of its lawsuit liabilities to one of them, and puts only that liability-loaded shell into Chapter 11 [4]. The profitable parent keeps operating while the bankruptcy freezes every lawsuit against it.

The maneuver matters because mass tort victims — including mesothelioma claimants — suddenly find their cases halted, not because the defendant ran out of money, but because it chose a courthouse it could control. Johnson & Johnson became the highest-profile user, routing tens of thousands of talc claims into a created subsidiary [5].

Bankruptcy was built for the genuinely insolvent. When a company worth tens of billions uses it to cap what it pays injured people, critics across the political spectrum call it an abuse — and that bipartisan frustration is what is now driving reform. Our breakdown of the J&J Texas Two-Step and its three failed attempts traces how courts have already pushed back.

How did the Supreme Court's Purdue Pharma ruling change the rules?

On June 27, 2024, the Supreme Court decided Harrington v. Purdue Pharma and shut down one of the most powerful tools in the corporate bankruptcy playbook [1]. In a 5-4 opinion by Justice Gorsuch, the Court held that the Bankruptcy Code does not authorize a Chapter 11 plan to release claims against non-debtors — parties who never filed for bankruptcy — without the claimants' consent [1].

The case arose from Purdue Pharma's opioid bankruptcy, where the Sackler family sought to extinguish all current and future opioid claims against themselves without filing for bankruptcy personally, in exchange for a financial contribution [1]. The Court rejected that structure, reasoning that the Bankruptcy Code's catchall provision does not stretch to wiping out claims against people who are not the bankrupt debtor.

Here is the part that matters most for asbestos victims: the Court specifically preserved the exception Congress wrote for asbestos cases [1]. The decision did not disturb Section 524(g), the statute that authorizes asbestos bankruptcy trusts. The ruling closed an abuse while leaving the legitimate asbestos trust system standing.

"The Two-Step was always a magic trick — a company tells the court it's broke while it's making billions next door. What the Supreme Court did in Purdue was pull back the curtain on a piece of that trick. It said you can't use someone else's bankruptcy to erase claims against people who never filed. That's a victory for every injured person who was about to lose their day in court."

— Paul Danziger, Founding Partner, Danziger & De Llano

What are lawmakers doing to stop the tactic?

Congress has been working the problem from several directions, and the effort is unusually bipartisan. The first track is the Nondebtor Release Prohibition Act, introduced in 2021 and reintroduced in the 118th Congress (2023–24). It would write the Purdue principle directly into the Bankruptcy Code, barring courts from releasing claims against non-bankrupt parties.

The second track aims squarely at the Texas Two-Step itself. A 2024 Senate effort, the Ending Corporate Bankruptcy Abuse Act, opened this front [16], and its central idea carried into the current bill: instruct courts to presume a Texas Two-Step filing was made in bad faith, making such cases far easier to dismiss [2].

In April 2026, a bipartisan group reintroduced the effort as the Consumer Protection and Corporate Accountability in Bankruptcy Act of 2026, led by Senators Sheldon Whitehouse and Josh Hawley, Senator Dick Durbin, and Representatives Emilia Sykes and Lance Gooden [2]. The bill would create a bad-faith presumption for Texas Two-Step filings and prohibit courts from staying litigation against a debtor's non-bankrupt affiliates when the debtor used the maneuver within the prior four years [2].

"When Sheldon Whitehouse and Josh Hawley put their names on the same bill, something real is happening. Corporate liability-dodging is one of the few things the left and the right agree is a problem. For asbestos families, that bipartisan momentum is what gives these reforms staying power."

— Paul Danziger, Founding Partner, Danziger & De Llano

Do these reforms threaten asbestos trust funds?

No — and for mesothelioma victims, this is the headline. Every one of these reforms is aimed at bankruptcy abuse, not at the asbestos trust system that pays many asbestos claims.

The asbestos trusts exist because of Section 524(g), a provision Congress added to the Bankruptcy Code specifically to resolve asbestos liability in an orderly way [3]. It lets a genuinely bankrupt asbestos company channel its liabilities into a trust that compensates current and future victims. That framework is the model of how bankruptcy is supposed to work for mass torts — the opposite of the Texas Two-Step.

The Supreme Court's Purdue ruling left Section 524(g) explicitly untouched, and the reform bills target nondebtor releases and divisive mergers, not legitimate asbestos trusts [1][3]. More than 60 active asbestos trusts continue to review and pay mesothelioma trust fund claims today [13]. If anything, closing the abuse protects the credibility of the bankruptcy tools that asbestos victims rely on.

"I want mesothelioma families to hear this clearly: none of this puts your trust claim at risk. Section 524(g) — the asbestos trust law — was carved out and protected every step of the way. The reforms go after companies gaming the system, not the trusts that pay the people that system was built for."

— Paul Danziger, Founding Partner, Danziger & De Llano

Why does this matter for mesothelioma victims?

Asbestos remains a serious public-health problem, which is why the accountability question is not academic. Occupational asbestos exposure continues to drive disease in the United States, with one analysis finding the burden of occupational asbestos exposure rose over recent decades even as use declined [7]. Mesothelioma's long latency means people are still being diagnosed today from exposures decades ago [8].

When a corporation freezes those victims' lawsuits through a manufactured bankruptcy, the human cost is direct: a patient with a 12-to-21-month median survival can wait years for a resolution that may not arrive in time [9]. Closing the escape hatch means cases move forward while victims are still alive to see them.

The reforms also preserve the dual-track recovery that makes asbestos cases work — the ability to sue solvent defendants in court while filing against established trusts. Workers in high-exposure histories often have claims against multiple defendants and multiple trusts at once, and protecting the courtroom path keeps that combination whole.

What compensation options do mesothelioma victims have now?

The legal changes strengthen victims' position without adding hurdles. Compensation generally comes from the same sources, now on firmer footing.

The first is litigation against solvent defendants — the manufacturers, suppliers, and premises owners responsible for the exposure. The Purdue ruling and the reform bills make it harder for those defendants to escape into a controlled bankruptcy [1][2]. The second is the asbestos trust system: companies that went genuinely bankrupt funded asbestos trust funds under Section 524(g), and those trusts pay qualifying claims directly [13].

Most mesothelioma victims were exposed from more than one source over a working life, so a careful history often supports claims against several defendants and trusts at once. Strategic legal teams such as the asbestos attorneys at mesotheliomaattorney.com build cases that pursue every available source in parallel. Victims can also find a mesothelioma attorney by state to begin.

Deadlines run from the date of diagnosis in most states, and they are unforgiving once missed. A free case assessment can map which defendants and trusts apply to a specific exposure history before any deadline expires.

Where does the law leave mass tort victims now?

The direction is clear and, for victims, encouraging. The Supreme Court has closed the nondebtor-release device, lawmakers from both parties are pressing to outlaw the Texas Two-Step outright, and the asbestos trust system that compensates mesothelioma victims has been protected at every turn [1][2][3]. The escape hatch is narrowing while the legitimate recovery paths stay open. For a family facing a mesothelioma diagnosis, the takeaway is that the system is moving toward accountability — and the steps to claim compensation are available right now.

References

1. [1] Harrington v. Purdue Pharma L.P., No. 23-124 (U.S. June 27, 2024) — Supreme Court of the United States
2. [2] Bipartisan Legislation to End the 'Texas Two-Step' (Consumer Protection and Corporate Accountability in Bankruptcy Act of 2026) — U.S. Senate
3. [3] 11 U.S.C. § 524 — Effect of discharge (including Section 524(g) asbestos trusts) — Cornell Law School Legal Information Institute
4. [4] Texas Business Organizations Code, Chapter 10 — Mergers, Interest Exchanges, and Conversions — Texas Legislature
5. [5] Pending MDLs (MDL 2738 Johnson & Johnson Talcum Powder) — U.S. Judicial Panel on Multidistrict Litigation
6. [6] U.S. Trustee Program — U.S. Department of Justice
7. [7] Assessing trends and burden of occupational exposure to asbestos in the United States — BMC Public Health (2024)
8. [8] Asbestos Exposure and Cancer Risk Fact Sheet — National Cancer Institute
9. [9] Malignant Mesothelioma — Patient Information — National Cancer Institute
10. [10] EPA Actions to Protect the Public from Exposure to Asbestos — U.S. Environmental Protection Agency
11. [11] Toxicological Profile for Asbestos — Agency for Toxic Substances and Disease Registry
12. [12] SEER Cancer Statistics — Mesothelioma — National Cancer Institute SEER Program
13. [13] Section 524(g) Bankruptcy Trusts — WikiMesothelioma
14. [14] Asbestos Trust Funds — WikiMesothelioma
15. [15] Mesothelioma — WikiMesothelioma
16. [16] Ending Corporate Bankruptcy Abuse Act of 2024 — Texas Two-Step Bill One-Pager — U.S. Senate