By Dietrich Knauth
(Reuters) - Georgia-Pacific can avoid litigating tens of thousands of asbestos lawsuits while its subsidiary Bestwall remains in bankruptcy, an appeals court ruled Tuesday.
In a 2-1 decision, the 4th U.S. Circuit Court of Appeals ruled that extending bankruptcy's so-called "automatic stay" to protect Georgia-Pacific, which is not bankrupt, would give Bestwall a better chance to reorganize in bankruptcy.
Circuit Judge Steven Agee, writing for the 4th Circuit majority, largely blamed plaintiffs' lawyers for the fact that the "temporary" litigation pause had been extended for years, saying that they had "relentlessly attempted to circumvent the bankruptcy proceeding" rather than settling their asbestos claims in Bestwall's bankruptcy.
In a dissenting opinion, Circuit Judge Robert King said the bankruptcy court should not have stopped litigation against Georgia-Pacific, which is one of the world's largest manufacturing firms and which is fully capable of defending itself against lawsuits outside of bankruptcy.
Bestwall's bankruptcy filing was "little more than a corporate shell game" meant to protect Georgia-Pacific from lawsuits without subjecting the entire company to the oversight of a bankruptcy court, King wrote.
A Georgia Pacific spokesman declined to comment on Tuesday.
The bankruptcy case began in 2017, when Georgia-Pacific, a unit of industrial conglomerate Koch Industries, spun off its liabilities for asbestos litigation into Bestwall, its newly created subsidiary, which then filed for bankruptcy. At the time of the filing, the companies faced 64,000 asbestos lawsuits, many of them alleging that their plaster construction products contained asbestos and caused cancer.
The controversial maneuver, known as a Texas two-step, has been used by other companies, including Johnson & Johnson (NYSE:JNJ), which have attempted to address their mass tort liabilities through the bankruptcy of a subsidiary.
Some of the companies that emulated Georgia-Pacific's bankruptcy strategy have suffered setbacks in recent court rulings. Subsidiaries of Johnson & Johnson and 3M were tossed out of bankruptcy earlier this year when courts found that the companies were not in the type of financial distress that would entitle them to bankruptcy protection. 3M's subsidiary is appealing the dismissal of its bankruptcy case, and J&J's subsidiary has filed for bankruptcy a second time.
Plaintiffs' lawyers have seized on those court rulings to ask the North Carolina bankruptcy court overseeing Bestwall's Chapter 11 proceedings to dismiss it. U.S. Bankruptcy Judge Laura Beyer has not yet ruled on that motion.
Clay Thompson, an attorney who represents plaintiffs in the Bestwall bankruptcy, said that he believed that the plaintiffs would prevail in the broader battle over whether Bestwall should remain in bankruptcy.
"We are disappointed with the ruling but the larger issue, not yet addressed, is whether a fully solvent billionaire, like Georgia-Pacific, can derive all the benefits of bankruptcy while taking on none of the burdens," Thompson said.
Georgia-Pacific produces a wide range of well-known paper-based household goods, including Quilted Northern bath tissue, Brawny paper towels, and Dixie cups.
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 In re: Bestwall LLC, U.S. Court of Appeals for the 4th Circuit, Nos. 22-1127 and 22-1135
For Bestwall: Noel Francisco of Jones Day
For Bestwall's future claims representative and official committee of asbestos claimants: Natalie Ramsey of Robinson & Cole; and Edwin Harron of Young Conaway Stargatt & Taylor
Read more:
How a bankruptcy ‘innovation’ halted thousands of lawsuits from sick plaintiffs
Corporate lawsuit dodge imperiled after court rejects J&J bankruptcy tactic
Cancer patient asks court to end Georgia-Pacific asbestos bankruptcy