Georgia-Pacific unit's "two-step" bankruptcy survives dismissal, again

By Dietrich Knauth

NEW YORK, Feb 22 (Reuters) - A U.S. judge has ruled that a Georgia-Pacific subsidiary can remain in bankruptcy, rejecting plaintiffs' latest effort to dismiss its Chapter 11, which would allow them to resume their lawsuits alleging that asbestos in the company's products caused their cancer.

Chief Bankruptcy Judge Laura Beyer in Charlotte, North Carolina, on Wednesday ruled that the U.S. Constitution does not require a company to be in "financial distress" when it files for bankruptcy. The Constitution authorizes Congress to pass "uniform laws on the subject of bankruptcies" without defining any limit to that power, wrote Beyer, who has rejected earlier efforts to dismiss the bankruptcy of Georgia-Pacific unit Bestwall LLC.

Georgia-Pacific did not immediately respond to a request for comment.

Beyer's ruling rejected what she called a "novel" argument that the case should be dismissed because the U.S. Constitution does not give bankruptcy courts any jurisdiction over wealthy companies.

Beyer acknowledged that "the Founding Fathers might be surprised" to see a well-funded company like Bestwall in bankruptcy but said their "presumed astonishment" does not mean that her court cannot oversee Bestwall's bankruptcy.

"The question of whether the Debtor should be able to access the bankruptcy system is different than the question of whether the Constitution bars it," Beyer wrote.

Georgia-Pacific, a unit of industrial conglomerate Koch Industries, pioneered the legal strategy known as the "Texas two-step" in 2017, spinning off its asbestos liabilities into a newly created subsidiary, Bestwall, which then filed for bankruptcy in North Carolina. At the time of the filing, the company faced 64,000 asbestos lawsuits.

The attorneys general of 24 states and three U.S. Senators have urged the U.S. Supreme Court to reconsider a ruling rejecting an earlier bid to dismiss the bankruptcy, and stop well-off companies like Georgia-Pacific from using bankrupt shell companies to sidestep lawsuits. The Supreme Court has not yet decided whether it will take the case.

The 4th U.S. Circuit Court of Appeals, which includes North Carolina, has continued to allow "Texas two-step" cases to remain in bankruptcy, even after other courts moved to curb the practice in cases filed by subsidiaries of Johnson & Johnson and 3M.

The latest efforts to dismiss the Bestwall case were filed by a court-appointed committee that represents asbestos plaintiffs and by Wilson Buckingham, an individual plaintiff, who sued Georgia-Pacific after being diagnosed with mesothelioma, a rare form of cancer, in 2020.

Georgia-Pacific produces a wide range of consumer products, including Quilted Northern bath tissue, Brawny paper towels, and Dixie cups. The lawsuits largely allege that Georgia-Pacific's plaster and drywall products exposed consumers and workers to asbestos.

Before Bestwall's bankruptcy filing, Georgia-Pacific and Bestwall spent $2.9 billion defending more than 430,000 asbestos-related personal injury lawsuits over 40 years, according to Bestwall's court filings.

The case is Bestwall LLC, U.S. Bankruptcy Court for the Western District of North Carolina, No. 17-31795.

For Bestwall: Gregory Gordon, Dan Prieto and Noel Francisco of Jones Day

For Bestwall's future claims representative and official committee of asbestos claimants: Natalie Ramsey of Robinson & Cole; Glenn Thompson of Hamilton Stephens Steele + Martin; Edwin Harron of Young Conaway Stargatt & Taylor, among others

For Buckingham: Jon Ruckdeschel of Ruckdeschel Law Firm

Read more:

Senators, states ask US Supreme Court to curb 'two-step' bankruptcy abuse

Corporate lawsuit dodge imperiled after court rejects J&J bankruptcy tactic

Cancer patient asks court to end Georgia-Pacific asbestos bankruptcy

(Reporting by Dietrich Knauth)

((Dietrich.Knauth@thomsonreuters.com;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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