The Restructuring Report

Case of the Century?

A recent split decision by a panel of the Fourth Circuit in the Bestwall case, on a motion to dismiss, resulted in three separate written opinions addressing whether bankruptcy courts have subject matter jurisdiction over a case filed by a “solvent debtor.” The majority determined not to dismiss the case. Bestwall is a Chapter 11 asbestos case under Section 524(g) of the Bankruptcy Code. The other opinions go deep into bankruptcy history and introduce “originalism” into the debate. The case may be compared and contrasted with the LTL case in which the Third Circuit decision did dismiss a 524(g) case on the basis that the case was not filed in good faith because the debtor was not in “financial distress.” We addressed the LTL case in a prior edition of this Restructuring Report and in an article Katherine Nixon and I recently authored for the Norton Annual Survey of Bankruptcy Law 2025 edition called “Too Solvent to Be in Bankruptcy?”

Although the precise question addressed in the recent Bestwall decision is not the same question addressed in LTL, the factual and procedural circumstances are extremely similar.

Bestwall arose from the numerous asbestos personal injury cases filed against Georgia Pacific. LTL arose out of similar lawsuits against Johnson & Johnson. Each used a “Texas two-step” (or divisive merger) to separate the “good company” from the “bad company.” Newly formed Bestwall, the corporate debtor in the Chapter 11 case, had the asbestos liability and some significant assets. In 2017, it filed its Chapter 11 in the Western District of North Carolina (which is not surprising because the Fourth Circuit has the strictest standard against dismissal of bankruptcy cases). LTL was the bad company, split off from Johnson & Johnson. In 2021 LTL also filed its Chapter 11 case in the Fourth Circuit but, in a crucial event in that case, the district court judge determined that venue was not appropriate in North Carolina and transferred the case to New Jersey, which is in the Third Circuit.

Back to Bestwall in the Fourth Circuit, at the beginning of the case, the bankruptcy judge issued a temporary injunction against ongoing asbestos litigation and denied a creditors committee motion to dismiss the case. That motion was based on numerous arguments around good faith, including an attack on the Texas two-step utilized in forming Bestwall and an argument that bankruptcy is not available to solvent Debtors. The bankruptcy court denied the motion to dismiss and leave to appeal was denied by the Court of Appeals.

In New Jersey, LTL survived a motion to dismiss brought by the creditors committee. That denial of the motion to dismiss was directly appealed to the Third Circuit. There, a panel dismissed the case as not filed in good faith. That court, overruling both factual and legal findings by the Bankruptcy Court, found that LTL was not in sufficient financial distress. Notably, the Third Circuit did not base its decision on the Texas two-step and pointedly declined to decide whether that procedure would constitute a lack of good faith.

In the recent Bestwall case, the (extremely aggressive) creditors committee tried again, this time arguing for dismissal based on a lack of subject matter jurisdiction. The motion was denied by the bankruptcy court and a direct appeal to the Fourth Circuit followed.

So, in the motion at hand, the creditors committee argued that the language in the Constitution that confers on Congress the exclusive right “to establish uniform Laws on the subject of Bankruptcies throughout the United States” could not confer on the court’s jurisdiction on a kind of case that was not within the meaning of the “founding era understanding of the word.” The term “bankruptcy” at the founding did not include those able to pay their debts. The statutory authorization in 28 U.S.C. 1334 can only go as far as the Constitution allows.

The main opinion authored by Judge Arthur Marvin Quattlebaum did not directly address that historical argument. He rejected the assertion that the bankruptcy court lacked subject matter jurisdiction. The Constitution grants Article III judicial power over all cases arising under the laws of the United States. The Bankruptcy Code is a law of the United States. Bestwall petitioned under Chapter 11 of the Bankruptcy Code. Therefore, the courts have subject matter jurisdiction over the case. The Committee had already had an opportunity to argue that solvent debtors are not entitled to bankruptcy protection. It lost that motion. The Committee may have the chance to renew the argument at plan confirmation. If it loses again, it may have an appealable order.

The other two opinions did address the Committee’s historical argument. They are best understood by addressing the dissenting option by Judge Ronald B. King first. His opinion essentially adopted many of the arguments of those who oppose the use of Chapter 11 for mass tort cases. He describes the Texas two-step as a corporate slight at hand “manufactured in a corporate boardroom” to protect a healthy company and to delay the exercise of the right to jury trial of victims who are suffering and dying in the meantime. The human cost cannot be overstated. “Congress’s broad grant of jurisdiction under 28 U.S.C. § 1334 cannot override the Constitution’s more limited delegation of power under the Bankruptcy Clause.” “‘History and tradition,’ not ‘Congress’s say-so,’ inform the scope of the Bankruptcy Clause . . .” Judge King extensively traced bankruptcy laws in English and colonial history explaining that throughout remedies were contingent in insolvency.

Judge George Steven Agee concurred with Judge Quattlebaum’s opinion, making that the opinion of the court. He wrote primarily to address the dissent. He discussed Supreme Court cases supporting the point that the power of congress under the Bankruptcy Clause “is not to be limited by the English or colonial law in force when the constitution was adopted.” “The nature of this power and the extent of it can best be fixed by the gradual process of historical and judicial inclusion and exclusion.”

In a more recent case, the Supreme Court reiterated that bankruptcy is difficult to define and includes “nothing less than the subject of the relations between [a] debtor and his creditors.” It will be worth the time for all of the readers to read all of the opinions as they address this important issue.

But these opinions likely will not be the last word. No plan has yet been submitted for confirmation and the issue of “good faith” based on the level of financial distress, the use of the Texas two-step, and perhaps even constitutional issues could yet be raised in later objections to a plan of confirmation.

These three reported opinions are discussed in three separate daily messages from Bill Rochelle in his regular column in the ABI Daily Wire on August 7, 2025 (paywall), August 8, 2025 (paywall) and August 11, 2025 (paywall). Several comments posted on the ABI website to his articles are interesting. In one, Professor David Kuney, who teaches bankruptcy law at Georgetown offered that “This may be the case of the Century.” Presumably he offered that because these cases address most directly the broadest challenge to the permissible scope of bankruptcy legislation and practice.