Official Committee of Asbestos Claimants of Bestwall LLC v. Bestwall LLC (In re Bestwall LLC)
Official Committee of Asbestos Claimants of Bestwall LLC v. Bestwall LLC (In re Bestwall LLC), 24-1493 (4th Cir. Oct. 30, 2025) Speculation among bankruptcy lawyers nationwide is whether this case result in US Supreme Court granting a petition for certiorari on whether a solvent corporation can file bankruptcy, or whether only an insolvent corporation can file bankruptcy:
By a vote of 8/6, the Fourth Circuit denied rehearing en banc on the question of whether federal courts only have subject matter jurisdiction over insolvent debtors.
Over a dissent, the Fourth Circuit held on August 1 that the bankruptcy court has subject matter jurisdiction under 28 U.S.C. § 1334(a) to entertain a bankruptcy reorganization of a solvent company.
Circuit Judge Robert Bruce King dissented vigorously but “respectfully” in August, believing that the Bankruptcy Clause in Article I of the Constitution only permits bankruptcies by insolvent entities or those that cannot or will not pay their debts as they mature.
The official asbestos claimants’ committee filed a petition for rehearing en banc. By a vote of 8/6, the Fourth Circuit denied the rehearing petition on October 30. Circuit Judge King “regrettably” but “respectfully” dissented. None of the other five circuit judges who voted for rehearing joined Judge King’s dissent.
Judge King’s dissent merits reading in full text at first opportunity. At times, his language is remarkable.
‘Manufactured Sham Bankruptcy’
As we explained when reporting the August 1 opinion, the debtor, Bestwall, was created by a Texas divisional merger. Asbestos liability went to Bestwall, while the solvent parent, Georgia-Pacific, took most of the assets and gave Bestwall an undertaking to pay the expenses of Bestwall’s chapter 11 case and to fund an asbestos trust to be created under a plan confirmed in accord with Section 524(g). In re Bestwall LLC, 71 F.4th 168 (4th Cir. 2023). To read ABI’s reports on the majority decision, the dissent and the concurrence, click here, here and here.
Dissenting from the denial of rehearing and believing that the bankruptcy court had no subject matter jurisdiction over a solvent debtor, Judge King called the divisional merger “a novel and provocative corporate sleight-of-hand maneuver” that created Bestwall, a debtor “not at all . . . in distress.” He said that the “sacred right of the . . . Bestwall asbestos claimants to pursue justice through the tort system of America’s civil courts . . . has been placed on hold by a solvent profitable enterprise called Bestwall, acting through a manufactured sham bankruptcy.” [Emphasis added.]
According to Judge King, the chapter 11 case was designed to “extract more favorable settlement terms from their suffering and dying victims through litigation delay.” He described the effect as follows:
[A] financially-healthy and fully-solvent corporation (that is, [the Georgia-Pacific parent]) has placed its asbestos-related tort liabilities involving thousands of American workers behind the firewall of bankruptcy protection. Yet critically, [the Georgia Pacific parent] is not undergoing the scrutiny, transparency, and risk that a Chapter 11 bankruptcy petition should entail.
Here’s how Judge King characterized the result sought by debtor Bestwall and its parent:
Such an obscene — and . . . unconstitutional — result is far from the fundamental proposition that “[b]ankruptcy offers individuals and businesses in financial distress a fresh start to reorganize, discharge their debts, and maximize the property available to creditors.” See Truck Ins. Co. v. Kaiser Gypsum Co., Inc., 602 U.S. 268, 272 (2024). [Emphasis added.]
A Cert Petition?
This writer presumes there will be a petition for certiorari, bolstered by the 8/6 split in the Fourth Circuit on rehearing en banc. This writer doubts there will be a grant of certiorari, because there is no circuit split. Furthermore, granting certiorari and dismissing the case based on an Article I constitutional violation would engender a crisis equal to that resulting from Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), and its proclamation that the bankruptcy court’s jurisdiction was unconstitutional.
If the equivalent of insolvency were required before federal courts could have subject matter jurisdiction for a case under any chapter of title 11, solvency would become a threshold issue in many cases, perhaps requiring appraisals of individual and corporate debtors’ assets, a time-consuming and expensive process. Reorganization might not be available for solvent entities that need time to cure defaults but have illiquid equities in their assets.
We will not delve into Judge King’s discussion of the merits, except to say that his view of the history and tradition of Article I leads him to believe that the definition of “bankruptcy” today must be the same as it was in 1789 and that bankruptcy should be “available only to a debtor who [is] truly and actually bankrupt — that is, a financially distressed debtor unable or unwilling to pay its debts.”
Judge King’s views prompt consideration of the issues that could arise from originalist constitutional theory in the bankruptcy sphere. If the Supreme Court were to adopt an originalist interpretation of the word “bankruptcy,” there could be problems in bankruptcy beyond subject matter jurisdiction. We might see challenges to substantive provisions of the Bankruptcy Code based on the idea that the relief accorded to debtors in the eighteenth century should limit the relief available today.
Eventually, originalist thinking about bankruptcy might require a constitutional amendment before we have bankruptcy and reorganization laws as functional as they are today.
We urge reading Judge King’s dissent, because he likely is not the only judge or scholar to hold the same opinion.
Observations
The Fourth Circuit became a haven for large company bankruptcies given the circuit’s unique standard governing dismissal for a bad faith filing. In the Fourth Circuit, creditors are required to prove both subjective and objective bad faith to dismiss a chapter 11 case. In part, the Bestwall reorganization has persisted for eight years, since dismissal for bad faith was not available.
This writer is seeing a pattern in circuit courts regarding large company bankruptcies that stretch the rubber band. Note the Third Circuit’s dismissal in LTL Management – Johnson & Johnson based on the lack of “financial distress,” as well as the Fifth Circuit’s narrowing of the doctrine of equitable mootness and its aversion to “lender-on-lender violence,” as shown in Serta Simmons. Similarly, the Fifth Circuit narrowed exculpations and releases and trimmed the power of bankruptcy courts in two Highland Capital decisions. And let’s not forget Purdue, where the Supreme Court knocked down nonconsensual, nondebtor releases that had been used widely around the country for decades.
Were it before the Third Circuit, the Philadelphia-based appeals court could have dismissed the Bestwall reorganization for lack of financial distress. With the same recourse not available, the Fourth Circuit found itself in a box, with several of the circuit judges showing antipathy for the reorganization but finding themselves procedurally unable to dismiss the case without sitting en banc and setting aside circuit precedent governing bad faith dismissals.
The doctrine of equitable mootness and the inability to appeal interlocutory decisions restricts the capacity of circuit courts to reach pivotal issues emerging in bankruptcy courts, sometimes for decades. This writer believes we are now seeing some Article III judges question bankruptcy’s legitimacy in providing relief for large companies facing mass tort liability.
It would be best if Congress were to deal with mass torts generally in a manner similar to asbestos bankruptcies under Section 524(g). Were there another statute to salvage big companies without infringing on the rights of consumers and tort victims, creative lawyers would not be so tempted to stretch bankruptcy to the breaking point.
Courts endeavor to find a statutory basis for reaching a result before turning to constitutional issues. The Fourth Circuit might consider revising its definition of bad faith to permit disposition of cases like Bestwall without creating a revolution in constitutional thinking about bankruptcy.