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Business Restructuring Attorneys Share Insight Into Texas Two-Step in Law360

Practices: Business Restructuring, Appellate & Supreme Court, Litigation

In a Law360 article, business restructuring partner Ryan Dahl and associate Jeramy Webb analyzed the U.S. Court of Appeals for the Third Circuit’s ruling in In re: LTL Management LLC.

In LTL, the Third Circuit affirmatively dismissed the so-called Texas two-step, by which a solvent corporation had tried to cabin potentially billions of dollars of mass tort liability through an internal corporate restructuring. In that ruling, the Third Circuit determined that a corporate bankruptcy requires the debtor to have some degree of financial distress, and a funding arrangement by which the putative debtor's corporate parent agreed to, in effect, fund the debtor's liquidated tort liability eliminated the possibility of any such financial distress.

The authors noted that the ruling disrupts the recent practice of separating a legacy company's productive business from its historic liabilities and then subjecting only the entity housing those liabilities, with the aid of a funding agreement, to the bankruptcy process. At least in the Third Circuit, this structure will face significant challenges.

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