SCOTUS declines to take up case of alleged exploitation of bankruptcy laws to avoid liability

 May 15, 2024

A major corporate conglomerate, Georgia-Pacific, is facing potentially tens of thousands of lawsuits that stem from claims it uses asbestos in its products, but has so far avoided liability with a legal manuever involving a subsidiary and bankruptcy court.

A small group of U.S. senators and nearly half the nations' attorneys general urged the Supreme Court to intervene to hold the company accountable, but the high court declined to do so on Monday, Reuters reported.

That decision leaves in place an appellate court's ruling that essentially placed all of the lawsuits on hold while the massive corporation's subsidiary, known as Bestwall, continues to work through the bankruptcy process.

Avoiding liability through a subsidiary's bankruptcy

According to Reuters, Georgia-Pacific stands broadly accused of using cancer-causing asbestos in its multitude of manufacturing materials, such as drywall and adhesives, and tens of thousands of lawsuits have been filed against the company by alleged victims who claim to have been sickened by those materials.

In a dubious legal strategy known as the "Texas two-step," in part because it takes advantage of a particular Texas law, Georgia-Pacific spun off all of its asbestos-related liabilities into a newly-created subsidiary named Bestwall in 2017, only for that fledgling company to then almost immediately file for bankruptcy in North Carolina.

Unfortunately for the alleged victims and their estimated 64,000 lawsuits aimed at Georgia-Pacific, a North Carolina bankruptcy court ruled that the lawsuits must be placed on hold while Bestwall reorganizes itself and settles its legal disputes through the bankruptcy process -- a ruling that was affirmed and upheld by the 4th Circuit Court of Appeals in December 2023.

Senators, state attorneys general urge Supreme Court to take up the case

Reuters reported separately in January that a small number of U.S. senators and two dozen state attorneys general, mostly Democrats, objected to Georgia-Pacific's legal strategy and the court decisions that upheld it and called upon the U.S. Supreme Court to intervene in the matter.

Senate Judiciary Committee Chair Dick Durbin (D-IL), joined by Sens. Sheldon Whitehouse (D-RI) and Josh Hawley (R-MO), filed an amicus brief with the Supreme Court in January that demanded accountability for the giant corporation, which itself is not bankrupt, that appeared to be skirting its liabilities by exploiting the bankruptcy process of its subsidiary to protect itself.

"The bankruptcy system was not designed to provide solvent non-debtors with the option to simply decline to be held liable for alleged wrongdoing, but that is precisely what the Fourth Circuit’s decision countenances," the senators wrote in their brief. "That was not what Congress intended, and it is not a result that this Court should permit."

"Bestwall’s successful attempt to enjoin hundreds of thousands of legal claims against Georgia-Pacific exemplifies both the benefit of the Texas Two-Step to tortfeasors and the cost of the maneuver to the American people -- and to the integrity of the bankruptcy system itself," the brief continued.

The senators added, "Through its unprincipled, atextual interpretation of the Code’s provisions, Bestwall has created a legal stratagem that radically expands the authority of bankruptcy courts and makes a mockery of congressional intent."

Certiorari denied ... for now

Yet, on Monday, without providing any commentary or explanation, the Supreme Court revealed in an Orders List that it had declined to grant certiorari in the case known as Bestwall LLC v. Official Committee of Asbestos Claimants, meaning the issue will not be addressed by the justices ... at least in its current form and for the foreseeable future.

Reuters reported that Michael Shepard, an attorney who represents the cancer victims in the case, said of the decision, "The issue of whether a fully solvent company can use the bankruptcy courts to renegotiate its liabilities is something that the Supreme Court will ultimately have to weigh in on."

The attorney added that people shouldn't misread the rejection as evidence that the high court doesn't want to get involved in the matter, but rather suggested that the court was waiting for a better time to intervene, perhaps after the bankruptcy process had played out further.

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