A relatively new and controversial legal tactic is being used by debtors facing mass tort liability using an obscure Texas law that allows a business organization to perform a divisive merger. In a divisive merger, a legacy entity divides itself into two or more new entities and allocates its assets and liabilities—with a larger portion of assets being placed into one entity and the mass tort liabilities and a smaller portion of assets being placed in one or more of the other entities.
The second step is to cause the entity with the mass tort liabilities to voluntarily file a Chapter 11 bankruptcy case, seeking to discharge those liabilities.
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