Georgia-Pacific LLC can avoid tort lawsuits tied to certain products while its affiliate, Bestwall LLC, seeks to resolve those claims in bankruptcy, the Fourth Circuit ruled.
The US Bankruptcy Court for the Western District of North Carolina, which is overseeing Bestwall’s Chapter 11 case, had “related to” jurisdiction to issue a preliminary injunction to pause asbestos claimants’ lawsuits against Georgia-Pacific, the US Court of Appeals for the Fourth Circuit said in a ruling Tuesday.
“These bankruptcy procedures promote the equitable, streamlined, and timely resolution of claims in one central place compared to the state tort system, which can and has caused delays in getting payment for legitimate claimants,” Judge Steven Agee wrote in the opinion, which affirmed a bankruptcy court and a district court.
The decision upholds a key element of the so-called Texas Two-Step, in which a company places legal claims against it in a separate unit and files bankruptcy for that unit. The idea is to obtain bankruptcy benefits without subjecting the entire company to bankruptcy.
In 2017, a pulp-and-paper maker called Georgia-Pacific LLC conducted a restructuring by creating two units — one bearing the same name and another called Bestwall. The old Georgia-Pacific’s liabilities and assets were divided between the two units, as subsidiaries under Georgia-Pacific Holdings LLC. Bestwall soon filed Chapter 11.
Asbestos claimants argued that the bankruptcy court lacked jurisdiction to issue the protections for Georgia-Pacific, which didn’t file for bankruptcy.
But allowing asbestos suits against Georgia-Pacific to proceed would be detrimental to Bestwall’s bankruptcy proceedings, the appellate court said.
“The possible effect on the Bestwall bankruptcy estate of litigating thousands of identical claims in state court is sufficient to confer ‘related to’ jurisdiction,” the Fourth Circuit said.
If Georgia-Pacific were found liable for asbestos claims in state court, “that could reduce the claimants’ recovery on those claims in the bankruptcy proceeding,” a three-judge panel from the court said in a 2-1 ruling.
But in a dissent, Judge Robert King criticized Georgia-Pacific’s Texas Two-Step maneuver.
“I would squarely reject Georgia-Pacific’s use of its 2017 restructuring — little more than a corporate shell game — to artificially invoke the jurisdiction of the bankruptcy court and obtain shelter from its substantial asbestos liabilities without ever having to file for bankruptcy,” King wrote.
The case is Bestwall LLC v. Official Committee of Asbestos Claimants, 4th Cir., No. 22-1127, 6/20/23.
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