The Fourth Circuit Court decision allowing Georgia-Pacific to avoid a lawsuit alleging certain asbestos-related claims adds to the ongoing debate over the controversial legal strategy of some financially sound companies to use bankruptcy to settle class tort debts Fuel.
The Court of Appeals last week found that a North Carolina bankruptcy court had jurisdiction to protect pulp maker Georgia-Pacific LLC from litigation while its subsidiary Bestwall LLC filed for bankruptcy. Georgia-Pacific formed Bestwall in 2017 to pool and resolve claims that its asbestos-containing products caused cancer.
The June 20 ruling by the U.S. Circuit Court of Appeals for the Fourth Circuit joins a growing body of opinion on the legality of tactics that direct mass claims for damages at a subsidiary or associated company and cause it to file for bankruptcy in order to to limit damage. It’s a narrow-ranged decision that focuses primarily on jurisdiction, but it’s still a much-needed victory for companies eyeing the Texas Two-Step strategy, after two losses in other courts .
In January, the Third Circuit dismissed a Johnson & Johnson unit’s Chapter 11 case on the grounds that the unit was not in financial distress. Earlier this month, an Indiana bankruptcy court made a similar ruling, ruling that a 3M Co. entity’s Chapter 11 case should be dismissed. Similar issues were raised as in the Bestwall case, although technically the 3M case is not a two-tier case.
Still, proponents of the Texas Two-Step should be cautious and view the Fourth Circuit’s decision as a significant turn in their favor, attorneys said.
The courts that have reviewed cases from J&J, 3M and Georgia-Pacific have focused on different elements of the companies’ strategies. The cases are not suitable for a direct comparison, they said.
“Broadly speaking, these are conflicting opinions,” said Ashley Keller, attorney at Keller Postman LLC. Keller is representing plaintiffs suing 3M subsidiary Aearo Technologies LLC over its combat earbuds.
Jurisdiction Oriented
The Fourth Circuit acknowledged that Georgia-Pacific and J&J pursued similar restructuring strategies as part of a Texas Two-Step. However, the Court of Appeal said that the main issue in the Bestwall case mainly concerned jurisdictional issues.
Mesothelioma plaintiffs in the Bestwall case argued that because the company was not in bankruptcy, the bankruptcy court had no authority to grant Georgia-Pacific legal protection—in this case, an injunction.
The Fourth Circuit disagreed. “The potential impact on Bestwall’s bankruptcy estate if thousands of identical claims are heard in a state court is sufficient to confer jurisdiction on ‘related to,'” the court said.
The Fourth Circuit’s Opinion contains more than one page distinguishing its decision from that of the Third Circuit.
But the Bestwall decision is still central to the two-pronged strategy, said Andy Birchfield, plaintiff attorney at Beasley Allen.
“The restraining order is at the heart of the Texas Two-Step,” he said.
The narrowness of the Fourth Circuit’s ruling would not prevent other companies seeking to pursue Texas Two-Step from using the ruling as guidance for litigation strategy, some attorneys said.
“The jurisdiction of the Fourth Circuit is, I think, more favorable to the companies that want to do that,” said Carl Tobias, law professor at the University of Richmond.
critical dissent
But Judge Robert King’s sharply worded dissent was “more in tune with recent national developments,” Tobias said.
Johnson & Johnson’s ruling shows that the Texas Two-Step and similar strategies are not “guaranteed to run smoothly,” King wrote.
The judge also referred to an amicus brief that argued that the bankruptcy of 3M subsidiary Aearo, which was filed over claims by veterans who claim their combat earbuds caused hearing loss, rigged the bankruptcy code.
“But in recent years, large and solvent corporations have managed to circumvent this debtor-centric goal and gain protection from large claims for damages without having to file for bankruptcy themselves,” King wrote. “It is precisely this type of manipulation of the bankruptcy law – and by extension, the Article I bankruptcy courts – that lies at the heart of this important appeal.”
King’s dissenting opinion may ultimately prove to be the dominant theory, Tobias said.
“I think Judge King might have the edge,” he said.
For now, however, the ruling makes the Fourth Circuit a more attractive venue for Two-Step companies, he said.
The decision comes at a time when the debate over the Texas Two-Step process is burgeoning. Some feel it offers a more efficient option than the traditional court tort system for companies that are financially healthy but are struggling with massive tort liability claims. Opponents say it improperly exploits legal tools designed for what the bankruptcy law calls an “honest but unfortunate debtor.”
“There’s just some longstanding tenets of bankruptcy law that are being turned on their head by the manipulation of the process,” said Barbara Houser, former chief judge of the U.S. Bankruptcy Court in the Northern District of Texas, who currently serves as the chief mediator in high-profile bankruptcies.
A circuit split?
The Aearo case has already been cleared for direct appeal to the Seventh Circuit. If the Seventh Circuit takes up the case and rules in Aearo’s favour, it could split the circuit with the Third Circuit.
That could put the issue on the Supreme Court’s radar, Keller said.
In the long run, the increasing attention being paid to the Texas Two-Step isn’t good news for its proponents, said Samir Parikh, a professor of bankruptcy law at Lewis & Clark.
“It was a clever idea and it worked as long as it stayed under the radar,” Parikh said. “Now that it’s off the radar, you can see it’s falling apart.”
The case is in Re: Bestwall, 4th Cir., No. 22-1127, 06/20/23.
