DBMP Asbestos Claimants Ask Supreme Court to Review Texas 2-Step Stay Ruling, Say Fourth Circuit Has Become ‘Haven’ for Tortfeasors

Relevant Document:
Petition

On Sept. 17, three DBMP asbestos claimants petitioned the U.S. Supreme Court to review a Fourth Circuit decision upholding the denial of their motion for relief from the automatic stay. The claimants say that the court’s rejection of their bid to litigate their asbestos claims in the tort system outside DBMP’s “Texas two-step” chapter 11 case has made the Fourth Circuit a “safe haven” for “ultra-wealthy corporations seeking to evade asbestos-related civil tort liability under the guise of the Bankruptcy Code.”

The petitioners present the following question to the Supreme Court: “Does a debtor’s pursuit of bankruptcy as part of a Texas Two-Step scheme lack good faith, such that ‘cause’ exists to lift the automatic stay under” section 362(d) of the Bankruptcy Code?

The petition is the latest step in DBMP asbestos claimants’ campaign against the Texas two-step strategy, where a solvent enterprise uses a Texas state law “divisional merger” to separate assets and liabilities before placing the entity assigned tort liabilities in chapter 11. The claimants say the Texas two-step’s goal is to deny tort victims their day in court by using the automatic stay to pause tort litigation in state and federal courts and channeling those tort claims to a trust established under section 524(g) of the Bankruptcy Code.

The claimants ask the Supreme Court to take their case and clarify the stay relief standard in Texas two-step cases, and thereby “protect the integrity of the bankruptcy system” and “safeguard claimants’ constitutional rights to seek redress in the nation’s civil justice system.”

CertainTeed Corp., an affiliate of Compagnie de Saint-Gobain, used a Texas divisional merger in fall 2019 to split into CertainTeed LLC, or New CertainTeed, and DBMP. New CertainTeed retained the bulk of CertainTeed’s operating assets and non-asbestos liabilities, while DBMP inherited CertainTeed’s asbestos liabilities from six decades of manufacturing building products containing asbestos.

DBMP then filed chapter 11 in 2020 in the Western District of North Carolina, a common venue for Texas two-step cases including Bestwall, Aldrich Pump and the first Johnson & Johnson/LTL Management cosmetic talc case.

In February, the Fourth Circuit affirmed Bankruptcy Judge J. Craig Whitley’s May 2024 denial of the petitioners’ motion to lift the stay and sue DBMP and CertainTeed in the tort system. Writing for a divided three-judge panel, Circuit Judge Paul V. Niemeyer found that DBMP’s bankruptcy filing to address asbestos liabilities through a section 524(g) trust was a valid use of the Bankruptcy Code.

The judge emphasized that section 524(g) allows debtors facing asbestos liabilities to impose nonconsensual nondebtor releases on dissenting claimants without violating the U.S. Supreme Court’s Purdue Pharma ruling. It was “irrelevant” that CertainTeed was a “profitable, non-distressed company,” Judge Niemeyer wrote, finding that DBMP was “legitimately seeking to invoke the § 524(g) process,” which the panel held was not bad faith.

The petitioners disagree, saying the Fourth Circuit has created a “direct split” with the Third Circuit, which dismissed the first LTL Management case as a bad-faith chapter 11 filing after finding that LTL lacked financial distress in light of its financial backing from Johnson & Johnson. In contrast, Charlotte bankruptcy judges have denied motions to dismiss the DBMP, Bestwall and Aldrich Pump cases under the Fourth Circuit standard. In June, the Supreme Court denied Bestwall claimants’ request for review of the Fourth Circuit decision denying their motion to dismiss the case.

The DBMP claimants argue that in a Texas two-step, a “non-distressed debtor enters Chapter 11 only after manipulating its corporate form for the sole purpose of avoiding the burdens and guardrails that Chapter 11 would otherwise impose” – bad faith that constitutes “cause” to lift the automatic stay, according to the petition.

This case presents the Supreme Court with an “ideal opportunity to address a growing form of bankruptcy abuse,” according to the petition. The claimants argue that the Third and Fourth Circuits have now reached “opposite conclusions on whether a non-distressed company acts in good faith when it uses the Texas Two-Step to segregate its unwanted liability in bankruptcy.”

The petitioners insist that the Fourth Circuit decision additionally conflicts with rulings from the First, Fifth, Eighth and Eleventh Circuits that treat lack of financial distress as a sign of bad faith.

In light of the conflict between the circuits, only the Supreme Court can “correct course on this exceptionally important issue,” according to the petition. The claimants also emphasize that the automatic stay has put their claims on hold while the parties litigated whether the cases should be dismissed. They argue that it is important to resolve what constitutes “cause” for automatic stay relief so that asbestos claims are not left in “limbo” while larger challenges to the Texas two-step case play out.