Bestwall Appeal Offers Glimpse at Asbestos Bankruptcies’ Future

An appeal between a Georgia-Pacific LLC asbestos liability-holding unit and junior creditors offers another stab at success for companies using bankruptcy to address longstanding tort litigation, after a series of failed attempts.

Bestwall LLC will defend the validity of its bankruptcy to the US Court of Appeals for the Fourth Circuit on Thursday against cancer patients alleging they were exposed to asbestos in Georgia-Pacific’s paper and building materials products, who argue the Chapter 11 case is improper because the parent company is solvent.

The tactic of using a shell company to offload tort liabilities in bankruptcy has been controversial for years, especially in asbestos cases.

The strategy collapsed most recently in Houston, where a judge dismissed a Johnson & Johnson subsidiary’s bankruptcy, finding that the process of collecting votes from talc claimants was flawed. The consumer products and pharmaceutical giant previously failed two other times to use a subsidiary bankruptcy to offload talc claims on the grounds that it wasn’t financially distressed.

Now, Bestwall is working to avoid the same fate.

“Most of the time there should be no need for the court to dismiss,” Brigham Young University law professor Brook Gotberg said, noting “there is very little statutory authority justifying a court’s decision to dismiss on the basis of” the company’s solvency. Bankruptcy code provisions can help creditors protect their interests, she added.

Bestwall, a special purpose shell company laden with thousands of product liability lawsuits, has spent nearly eight years trying to settle that litigation. Claimants who say they got mesothelioma and other types of cancer from the company’s products lost their motion to dismiss Bestwall’s Chapter 11 in 2024, prompting the appeal.

Two Trane Technologies Plc units are also fighting motions from asbestos claimants to dismiss their combined bankruptcy case at the Fourth Circuit.

They, like Bestwall, were created through a divisional merger and filed for Chapter 11 in the US Bankruptcy Court for the Western District of North Carolina, which has helped shape the Texas Two-Step, a legal strategy that parks a company’s liabilities in a subsidiary and keeps them separate from its assets.

Fourth Circuit precedent has created a “permissive” use of bankruptcy tools for financially healthy companies, said Melissa Jacoby, a University of North Carolina law professor.

Bestwall’s case “is an opportunity to correct this course to ensure that bankruptcy does not unduly interfere with the operation of otherwise applicable legal and constitutional principles,” Jacoby said.

‘Log Jam’

The crux of the tort claimants’ argument is that Bestwall isn’t distressed because its parent is financially strong. Georgia-Pacific paid about $1.84 billion in dividends last year to its own parent, Koch Inc., according to court filings.

The disclosure, made in Bestwall’s bankruptcy in January, highlighted what the claimants say is the discrepancy between Bestwall’s claims of financial strain and how much money Georgia-Pacific is using to pay shareholders while tens of thousands of asbestos exposure claims remain unsettled.

Academics and legal professionals said the Fourth Circuit’s views on the jurisdictional and constitutional arguments will be important to watch. Observers should also pay attention to whether the panel of judges is “persuaded by arguments that the Code presupposes the possibility of solvent debtors,” Gotberg said.

The Fourth Circuit generally doesn’t announce which judges are on a panel until the morning of an argument.

Bestwall has support from Trane Technologies and a future claimants’ representative for one of its units’ asbestos cases, as well as the US Department of Commerce. All three filed briefs arguing the claimants’ committee’s position undermines asbestos bankruptcies by seeking a constitutional limitation on Congress’s bankruptcy authority.

However, Clay Thompson, a mesothelioma trial lawyer at Maune Raichle Hartley French & Mudd, said courts tend to avoid constitutional questions and “rule on non-constitutional grounds.”

The hope is that the Fourth Circuit “will cut that inexcusable log jam and state the obvious—bankruptcy is not a tool for the ultra-wealthy to force renegotiation of debts they can pay in full and without distress,” said Jonathan Ruckdeschel, an Ellicott City, Md.-based mesothelioma lawyer.

‘Serious Questions’

Even if Bestwall isn’t dismissed on appeal, the company won’t necessarily be on the path toward a successful Two-Step, but it would show other corporations that divisional mergers may be used in bankruptcy.

“The risk of these cases is that if massively profitable companies in no financial distress are allowed to use the bankruptcy code to manipulate their state law liabilities, then the bankruptcy courts become the most powerful courts in the country,” Thompson said.

The US Bankruptcy Court for the Southern District of Texas in March found the scope of protection against liability offered in the bankruptcy statute that governs asbestos cases was narrower than J&J’s bankrupt Red River Talc unit claimed.

The Texas court said that the more than 700 entities that Red River included as protected parties weren’t permitted under the bankruptcy code. The Red River plan proposed an litigation injunction against several retailers and Kenvue—a former J&J company—but the judge overseeing the case said those entities didn’t qualify as protected parties.

If the Fourth Circuit doesn’t dismiss Bestwall, “there are serious questions about whether this case can make it over the finish line of a confirmable plan given the objective to protect the entire corporate family against all asbestos claims without claimants’ consent,” Jacoby said.

Bestwall previously defeated an appeal at the Fourth Circuit of an injunction barring asbestos plaintiffs from litigating against Georgia-Pacific and other nonbankrupt affiliates.

The US Supreme Court declined last year to review whether Georgia-Pacific can use Bestwall’s bankruptcy to shield itself from litigation.

Robinson & Cole LLP, Kellogg, Hansen, Todd, Figel & Frederick PLLC, and Hamilton Stephens Steel & Martin PLLC represent the Bestwall committee. Robinson, Bradshaw & Hinson PA and Jones Day represent Bestwall.

The case is In re Bestwall LLC, 4th Cir., No. 24-01493, oral arguments 5/8/25.