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Fourth Circuit: Subject-Matter Jurisdiction In Bankruptcy Depends On Statute, Not Debtor Solvency
Over the last several years, companies plagued with massive toxic tort liabilities have attempted to utilize a statutory process known as the “Texas Two Step,” created under Texas’ Business Organizations Code Section 1.002(55)(A), to effectively divide into two separate legal entities, one of which contains most of the healthy, profitable operations and the other assumes the legacy liabilities while being funded with what some argue are insufficient assets. In 2017, Georgia Pacific faced approximately 64,000 asbestos claims. To address the problem, it effectuated a divisional merger under the Texas statute and split into two separate entities, with Bestwall LLC assuming responsibility for the personal injury claims. In connection with the merger, the new entity entered into a funding agreement with Bestwall to fund its Chapter 11 case and establish a trust to handle asbestos liabilities.
From the start, the Chapter 11 case was subject to challenge. The asbestos claimants committee (the committee) moved to dismiss arguing that the filing was in bad faith given the company was not financially distressed. The bankruptcy court, however, rejected the committee’s contentions, finding that using Chapter 11 to establish an asbestos trust under Section 524(g) of the Bankruptcy Code constitutes a valid reorganization purpose, even for a solvent debtor. The U.S. District Court for the Western District of North Carolina later denied the request for leave to appeal. After the bad faith avenue was foreclosed, the committee filed another motion to dismiss similarly arguing that because the debtor was not in financial distress, the bankruptcy court lacked subject matter jurisdiction. The bankruptcy court rejected that argument and the U.S. Court of Appeals for the Fourth Circuit’s most recent ruling on appeal affirmed. See, Bestwall v. Official Committee of Asbestos Claimants, No. 24-1493, 2025 U.S. App. LEXIS 19370 (4th Cir. Aug. 1, 2025).
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