Another wrinkle has developed in the ever-changing landscape of bankrupt defendants within the asbestos and talc litigations. The 4^th Circuit U.S. Court of Appeals affirmed a lower court decision earlier this month that allows Bestwall LLC to continue with their bankruptcy.[1] Through this decision, the 4^th Circuit has allowed a Texas Two-Step bankruptcy to continue forward. This is significant, as other jurisdictions have curbed similar attempts to allow such bankruptcies to move forward.

By way of background, Bestwall was formed as a subsidiary of Georgia-Pacific as a part of a Texas Two-Step, which has become a controversial corporate maneuver in which a parent company creates a subsidiary that then files for bankruptcy. The subsidiary takes on the liability for lawsuits, shielding the parent company from same. The parent company backs the funding for the newly formed subsidiary as it goes through the bankruptcy process.

The 4^th Circuit issued a split decision, with the majority stating that the U.S. courts have jurisdiction to address bankruptcy cases. This includes cases when the debtor may not meet the traditional definition of bankrupt. The 4^th Circuit determined that bankruptcy courts have jurisdiction over “solvent debtors”, and that the financial condition of the debtor is not the only consideration that must be considered in a bankruptcy. The majority stated that the policy reasons advanced both for and against insolvent debtors’ ability to file for bankruptcy protections should be left for Congress and not the courts. The dissent argued that the majority has opened the door for other companies to file for bankruptcy to avoid lawsuits, rather than the traditional purpose of giving honest debtors a chance for a fresh start.

Conversely, the 3^rd Circuit Count of Appeals came to a different conclusion in a similar case regarding Johnson & Johnson’s attempt to use the Texas Two-Step bankruptcy process.[2] The 3^rd Circuit focused on the lack of financial distress as the reasoning for determining that the bankruptcy was not proper. Johnson & Johnson has since attempted multiple times to refile for bankruptcy without success.

This decision creates a clear circuit split between the 3^rd Circuit and 4^th Circuit. It is now likely that the matter of Texas Two-Step bankruptcies could find itself in front of the U.S. Supreme Court. A Supreme Court decision would create shockwaves through the mass tort justice system, as it could redefine the opinions that defendants have when faced with mass litigation.

[1] Bestwall LLC v. Official Committee of Asbestos Claimants, No. 22-1127 (4th Cir. 2023).

[2] In re: LTL Management, LLC, No. Nos. 22-2004, 22-2003, 22-2005, 22-2006, 22-2007, 22-2008, 22-2009, 22-2010, 22-2011 (3d Cir. Jan. 30, 2023)