In a significant ruling that could reshape how corporations manage mass tort liabilities, the U.S. Court of Appeals for the Fourth Circuit has affirmed that federal bankruptcy courts have subject-matter jurisdiction over cases filed by solvent debtors, including those created through controversial corporate restructuring maneuvers.
The 2-1 decision in Bestwall LLC v. The Official Committee of Asbestos Claimants upholds a bankruptcy court's denial of a motion to dismiss the Chapter 11 case of Bestwall LLC, a company created through a "Texas two-step" divisional merger designed to isolate Georgia-Pacific's asbestos liabilities.
"The Constitution grants Article III judicial power over all cases arising under the laws of the United States. The Bankruptcy Code is a law of the United States. So, petitions for relief under the Bankruptcy Code—even those filed by solvent debtors—arise under the laws of the United States," wrote Judge Quattlebaum in the majority opinion, joined by Judge Agee.
The ruling maintains the status quo for Bestwall's bankruptcy proceedings, which have been ongoing since November 2017. The case has far-reaching implications for thousands of asbestos victims whose tort claims against Georgia-Pacific remain frozen during the bankruptcy process.
At the heart of the case is whether companies with sufficient assets to pay their debts can access bankruptcy protection, particularly when created through corporate restructuring specifically designed to handle mass tort liabilities.
In 2017, Georgia-Pacific—a multibillion-dollar paper products company—split into two entities through a Texas divisional merger. The "new" Georgia-Pacific retained most of the company's $28.3 billion in assets, while Bestwall inherited all asbestos-related liabilities along with approximately $32 million in cash, certain real estate, and a subsidiary valued at about $145 million.
Crucially, Bestwall also received a funding agreement from Georgia-Pacific that guaranteed payment for Bestwall's expenses and any potential asbestos trust obligations required by a confirmed reorganization plan.
The Official Committee of Asbestos Claimants argued that the bankruptcy court lacked subject-matter jurisdiction because Bestwall was not "actually bankrupt" according to founding-era understandings of bankruptcy. The Committee maintained that the Constitution's Bankruptcy Clause, which empowers Congress to establish "uniform Laws on the subject of Bankruptcies," inherently limits bankruptcy protections to debtors in financial distress.
The Fourth Circuit rejected this argument, drawing a distinction between constitutional challenges to Congressional power and questions of subject-matter jurisdiction.
"What the Committee's argument really does is convert a challenge to the Bankruptcy Code's constitutionality into a jurisdictional question," wrote Judge Quattlebaum. "But that can't be right. Following the Committee's logic, challenges to Congress's Commerce Clause power ought to be about jurisdiction too. But they aren't."
Judge Agee wrote a concurring opinion emphasizing that the dissent's interpretation would invalidate numerous bankruptcy proceedings beyond the "Texas two-step" context, noting that "since 2020, over one million Chapter 11 and Chapter 13 bankruptcy cases have been filed" that would be "unconstitutional and therefore void" under the dissent's view.
In a forceful dissent, Judge King characterized the ruling as approving "a legal maneuver that fundamentally departs from the central purpose of our Nation's bankruptcy system." He argued that bankruptcy was historically meant for "honest but unfortunate" debtors actually unable to pay their debts, not solvent corporations seeking to evade tort liability.
"Bestwall entered bankruptcy not because it was financially distressed, but because its parent corporation, Georgia-Pacific, sought to evade tort liability for harm caused by decades of manufacturing and selling dangerous products containing asbestos," Judge King wrote.
The dissent noted the human cost of the bankruptcy delay: approximately 25,000 claimants have died during the seven years since Bestwall filed for bankruptcy, including about 10,000 from mesothelioma, "a harrowing disease that is nearly always fatal within 18 months to two years of diagnosis."
The case stems from Georgia-Pacific's decades-long asbestos litigation. From 2014 to 2017 alone, the company paid $558 million in defense and indemnity costs. At the time of the bankruptcy filing, Bestwall faced around 64,000 pending asbestos claims, with tens of thousands more anticipated through at least 2050.
The ruling provides legal support for the increasingly common "Texas two-step" strategy, where companies use Texas' divisional merger statute to isolate tort liabilities in a newly created entity that then files for bankruptcy protection.
The case will now return to the bankruptcy court in the Western District of North Carolina (Case No. 17-31795), where proceedings toward a potential reorganization plan and creation of a Section 524(g) asbestos trust can continue. Bestwall was represented by Jones Day and Robinson, Bradshaw & Hinson, while the Committee was represented by Kellogg, Hansen, Todd, Figel & Frederick and other firms.
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