The Battle Over Bankruptcy Abuse Is Heating Up: How the Fourth Circuit Let Georgia-Pacific Off the Hook—and Why the Supreme Court May Soon Step In

If you want a case study in how American corporations are gaming the legal system to avoid accountability, look no further than Bestwall LLC v. Official Committee of Asbestos Claimants. In an August 1, 2025 decision, the Fourth Circuit Court of Appeals sided with Georgia-Pacific in its bid to use bankruptcy—not because it was insolvent—but to shield itself from tens of thousands of asbestos lawsuits.

This ruling is more than a procedural dispute. It’s a significant point in a high-stakes national debate over whether wealthy companies can use a loophole known as the Texas Two-Step to sidestep civil liability. And in a striking split among the federal courts, the Third Circuit has already said no—setting the stage for a likely showdown in the U.S. Supreme Court.

The Fourth Circuit Backs a Solvent Corporate Debtor

Let’s be clear: Bestwall was not a real bankruptcy. Bestwall is a shell company created by Georgia-Pacific solely to absorb its asbestos liabilities. Georgia-Pacific remains a multibillion-dollar corporation, flush with cash, and it agreed to fund Bestwall’s bankruptcy and asbestos trust through a carefully crafted “Funding Agreement.”

In other words, the company could pay its debts—but chose not to. Instead, it used the Texas Two-Step:

1. Divide the company into two entities;

2. Dump the liabilities (in this case, 64,000+ asbestos claims) into a new entity;

3. File that entity for Chapter 11;

4. Freeze all litigation using the bankruptcy stay.

The Fourth Circuit held that federal courts have jurisdiction to hear bankruptcy cases even when the debtor is not financially distressed. The majority reasoned that the Constitution gives Congress broad power over bankruptcy and that the Bankruptcy Code doesn’t require insolvency for a valid Chapter 11 filing.

But in a fierce dissent, Judge Robert King warned that the court had endorsed a “corporate sleight-of-hand maneuver” that mocks the very purpose of the bankruptcy system: helping the “honest but unfortunate debtor”—not powerful corporations with billions in reserve. He argued that the Constitution’s Bankruptcy Clause was never intended to protect solvent companies from tort liability and that the court had failed to respect that limit .

The Third Circuit Saw It Differently in the Johnson & Johnson Case

Compare this with the In re LTL Management LLC decision from the Third Circuit in 2023. There, Johnson & Johnson tried the same maneuver—splitting itself into two companies and placing its talc liabilities into a subsidiary that filed for bankruptcy.

But the Third Circuit wasn’t buying it.

In a unanimous opinion, the court held that financial distress is a requirement for Chapter 11 eligibility. Because LTL (the J&J subsidiary) had access to a $61 billion funding backstop from its parent, it wasn’t in true distress. Its bankruptcy filing, the court ruled, was not made in good faith and had to be dismissed.

The Third Circuit’s message was clear: bankruptcy is for the broke—not the well-lawyered.

A Brewing Constitutional Crisis—and a Supreme Court Showdown Ahead?

The Bestwall case and other cases are now on a collision course.

On one side, you have the Fourth Circuit allowing a solvent debtor to stay in bankruptcy. On the other, the Third Circuit says financial distress is a minimum requirement. These aren’t small differences. They reflect opposing constitutional interpretations of what bankruptcy is, what it’s for, and how far Congress can go under Article I.

This split creates precisely the kind of circuit conflict the U.S. Supreme Court looks for when deciding whether to intervene. And with thousands of asbestos victims—and now talc claimants—caught in legal limbo, the stakes could not be higher.

Will the Court side with corporate defendants trying to dodge liability in bankruptcy court? Or will it reaffirm that bankruptcy is not a tool for the rich to game the system?

Why It Matters

Since Georgia-Pacific filed the Bestwall bankruptcy in 2017, over 25,000 asbestos victims have died waiting for justice. None of their claims have moved forward. And if the Fourth Circuit’s decision stands, it could embolden other major companies facing mass tort liability to follow the same path: dump their debts into a shell company, file for bankruptcy, and walk away unscathed.

The courts must not allow this. Judge King’s dissent makes a compelling case rooted in history, fairness, and constitutional fidelity. “Bankruptcy,” he wrote, “was never meant to be a legal shield for solvent corporations seeking to escape liability.”

Final Thoughts: Time to Watch the Supreme Court

The question is no longer academic. The Supreme Court may soon have to decide: Can Congress authorize bankruptcy protection for companies that are not bankrupt in any meaningful sense? Or must the courts—and the Constitution—draw the line?

One thing is certain: the future of mass tort justice, and the integrity of our bankruptcy system, hangs in the balance.