Supreme Court declines to hear two-step bankruptcy case that drew Senate attention

The U.S. Supreme Court on Monday declined to review the Texas two-step bankruptcy of a Georgia-Pacific company, leaving in place a legal shield to sidestep lawsuits that has drawn criticism from some U.S. Senators and state attorneys general.

The Supreme Court's decision preserves a North Carolina bankruptcy court order that prevents cancer victims from suing materials manufacturer Georgia-Pacific while its subsidiary, Bestwall, remains in bankruptcy.

Tens of thousands of lawsuits have alleged that Georgia-Pacific products, including drywall adhesive and other construction materials, contained asbestos and caused cancer, which Georgia-Pacific denies.

Attorneys representing cancer victims appealed the bankruptcy court order that paused litigation against Bestwall's parent company, arguing that they should be allowed to sue Georgia-Pacific, which was not bankrupt. The 4th U.S. Circuit Court of Appeals upheld the bankruptcy court's order in June 2023, ruling that the lawsuits should be stopped in order to allow Bestwall a chance to reorganize and settle the lawsuits through its bankruptcy.

The plaintiffs' lawyers petitioned the Supreme Court for review in December 2023, after the 4th Circuit denied their request for a hearing by the full court.

"The issue of whether a fully solvent company can use the bankruptcy courts to renegotiate its liabilities is something that the Supreme Court will ultimately have to weigh in on," said Michael Shepard, an attorney representing cancer victims in the case.

The petition's rejection should not be taken as a sign that the court would be reluctant to address the Texas two-step when the time is right, he added.

Georgia-Pacific, a unit of industrial conglomerate Koch Industries, declined to comment.

TWO-STEP

The Bestwall case was held up as an example of bankruptcy abuse by a mostly Democratic group of three U.S. senators and 24 state attorneys general, who urged the court to take up the appeal and stop well-off companies like Georgia-Pacific from using bankrupt shell entities as a way to sidestep lawsuits.

Georgia-Pacific in 2017 pioneered the legal strategy, known as the Texas two-step because it uses Texas "divisional merger" law, to spin off its asbestos liabilities into a newly created subsidiary, Bestwall, which then filed for bankruptcy in North Carolina. At the time of the filing, the company faced 64,000 asbestos lawsuits.

The senators and state attorneys generals argued in amicus briefs that Georgia-Pacific, a company worth tens of billions of dollars, is abusing the U.S. bankruptcy system by using it to shield its assets from people who have been harmed by its products by preventing their lawsuits from moving forward, without having to file for bankruptcy itself.

Georgia-Pacific and other companies that have deployed the maneuver have argued that bankruptcy is a more equitable and efficient way to compensate victims in mass tort cases.

The 4th Circuit, where the strategy was first employed, has repeatedly declined to dismiss Texas two-step bankruptcies, while courts in the 3rd Circuit and 7th Circuit have ruled that the subsidiaries of wealthy companies were not eligible for bankruptcy protection. No Texas two-step bankruptcy has yet resulted in a final settlement.

The Supreme Court is already considering how far bankruptcy courts can go to protect non-bankrupt company owners in an appeal of Purdue Pharma's bankruptcy plan.

The court heard arguments in December on whether a bankruptcy court has the power to stop lawsuits against Purdue's owners, members of the wealthy Sackler family, as part of a settlement of litigation alleging the company fueled the U.S. opioid epidemic through its marketing of the painkiller OxyContin.

Purdue has pleaded guilty to charges related to its opioid marketing, while its owners have expressed regret but denied wrongdoing.

The case is Official Committee of Asbestos Claimants v. Bestwall LLC, U.S. Supreme Court, No. 23-675.

For the asbestos plaintiffs committee: David Frederick of Kellogg, Hansen, Todd, Figel & Frederick; and Natalie Ramsey of Robinson+Cole

For Bestwall: Noel Francisco of Jones Day

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