A U.S. bankruptcy judge has decided that two subsidiaries of Trane Technologies, Aldrich Pump and Murray Boiler, can continue their bankruptcy proceedings, dismissing asbestos plaintiffs' claims that the companies are not actually facing "financial distress."
This decision underscores the ongoing viability of the "Texas Two-step," a contentious legal strategy where solvent companies transfer their legal liabilities to subsidiary entities, which then seek bankruptcy protection. This approach was scrutinized following notable setbacks in 2023 involving Johnson & Johnson and 3M.
A lawyer representing mesothelioma victims in similar cases expressed disappointment, pointing out that this ruling did not align with the 3rd U.S. Circuit Court of Appeals' decision in the J&J case. The appellate court had determined that bankruptcy protection should not apply to firms not experiencing immediate "financial distress."
The attorney criticized the misuse of bankruptcy, arguing it should be reserved for those truly in financial trouble, not for wealthy corporations aiming to minimize payouts to cancer victims.
U.S. Bankruptcy Judge of North Carolina, however, ruled that the bankruptcies of Aldrich Pump and Murray Boiler wouldn't be dismissed. His decision was influenced by the 4th Circuit precedent, which necessitates a demonstration of "objective futility" for dismissing bankruptcy cases on the grounds of bad faith.
The judge found that these bankruptcies weren't objectively futile, as they could potentially lead to a settlement resolving around 90,000 asbestos-related lawsuits. These cases allege that the companies, through their sales of heating and air conditioning systems, exposed customers to asbestos.
Despite acknowledging that the two companies might not be in "financial distress," given their parent companies' $16 billion combined annual revenue since filing for bankruptcy, the judge noted that this requirement isn't explicitly stated in the U.S. Bankruptcy Code. He recognized the intuitive appeal of this "financial distress" criterion but ruled that it isn't a formal legal requirement.
The judge's remarks highlighted the controversial nature of using a subsidiary for bankruptcy protection to benefit a financially stable parent company, calling for higher courts to clarify the legal standing of "Texas Two-step" bankruptcies.
Aldrich Pump and Murray Boiler initiated their bankruptcy proceedings in 2020 after inheriting liabilities from their predecessor entities, Trane Technologies and Ingersoll-Rand Company.
