In a plea to the U.S. Supreme Court, three senators and 24 state attorneys general are calling for an end to the use of bankrupt shell companies by prosperous entities like Georgia-Pacific to evade lawsuits. Senators Dick Durbin, Sheldon Whitehouse, and Josh Hawley presented an amicus brief, challenging a June 2023 decision by the 4th U.S. Circuit Court of Appeals. This decision halted numerous asbestos-related lawsuits against Georgia-Pacific, alleging their products caused cancer, while its subsidiary, Bestwall, remained in bankruptcy.
The senators denounced Bestwall’s legal tactic as a manipulation that excessively empowers bankruptcy courts, undermining the intent of Congress. Simultaneously, attorneys general from 24 states and Washington, D.C., filed a separate amicus brief, decrying the decision as a form of bankruptcy “abuse,” asserting that it compromises states’ authority to enforce their laws for the protection of their citizens.
At the center of the controversy is Georgia-Pacific, a Koch Industries unit, which initiated the “Texas two-step” strategy in 2017. This involved spinning off asbestos liabilities into a new subsidiary, Bestwall, which subsequently filed for bankruptcy in North Carolina. The move, considered by many as a loophole, aimed to shield Georgia-Pacific’s assets from lawsuits without the parent company having to declare bankruptcy.
The amicus briefs argue that Georgia-Pacific, a multi-billion-dollar entity, is exploiting the U.S. bankruptcy system to shield itself from the consequences of its products. The legal strategy prevents affected individuals and states from pursuing lawsuits, enabling the company to safeguard its assets without filing for bankruptcy directly.
Despite Georgia-Pacific’s silence on the matter, the Supreme Court has not yet ruled on the “Texas two-step.” Currently, the court is reviewing the extent to which bankruptcy courts can protect non-bankrupt company owners, exemplified by an appeal related to Purdue Pharma’s bankruptcy plan. Whether the court will take up the Georgia-Pacific case remains uncertain.
North Carolina, a favored venue for such two-step cases following Bestwall’s bankruptcy filing, seeks to discourage similar actions by potential copycats. The state, as indicated in its brief, aims to prevent the creation of shell companies within its borders for the purpose of filing “abusive” bankruptcies.
North Carolina Attorney General Josh Stein emphasized the need to hold wealthy companies accountable, stating, “Wealthy companies that engage in wrongdoing should not be able to get off the hook by cheating the legal system.”
In contrast to other courts that have dismissed similar bankruptcies, North Carolina’s bankruptcy judges have not rejected Texas-two step cases. Attorneys representing asbestos victims petitioned the Supreme Court, expressing concern that the 4th Circuit’s decision would grant bankruptcy courts excessive power to halt litigation against non-bankrupt companies.
In the divided 4th Circuit’s June 2023 decision, the majority attributed the litigation pause to plaintiffs’ lawyers refusing to settle claims, while a dissenting opinion accused Georgia-Pacific and Bestwall of orchestrating a “corporate shell game” to evade lawsuits.
The case awaits the Supreme Court’s decision under the title Official Committee of Asbestos Claimants v. Bestwall LLC (U.S. Supreme Court, No. 23-675). The outcome will likely have far-reaching implications for the use of bankruptcy maneuvers by companies seeking legal protection.
