By Dan Levine and Mike Spector
(Reuters) - Industrial conglomerate Koch Industries received nearly $2.5 billion in dividend payments last year from its Georgia-Pacific unit, which had spun off a subsidiary that took on its liability from asbestos litigation and then filed bankruptcy to limit lawsuit payouts, according to documents filed in a U.S. bankruptcy court in North Carolina.
Koch unit Georgia-Pacific used a corporate bankruptcy maneuver known as the Texas two-step, forming a new Texas subsidiary, Bestwall, that took on the company's asbestos liability. Bestwall declared bankruptcy about three months after its founding. The latest court documents, filed on Wednesday, provide new detail about how Koch has benefited from the case.
Georgia-Pacific faced thousands of lawsuits over the years accusing executives of concealing knowledge about the dangers of asbestos in its building products. In 2017, Georgia-Pacific became the first company to execute a Texas two-step.
Several major companies, including Johnson & Johnson (NYSE:JNJ) and 3M Co, have turned to the bankruptcy courts in an attempt to manage their mass tort liabilities, a practice Reuters detailed last year. Plaintiff attorneys have called the cases an improper manipulation of the bankruptcy system, while the companies say the Chapter 11 filings are aimed at compensating claimants fairly and equitably. All the bankruptcies are pending.
U.S. bankruptcy law requires that creditors must be fully repaid before shareholders. Equity investors, with limited exception, are almost always wiped out in Chapter 11 cases. However, most of Georgia-Pacific’s assets went to another newly created entity, called New Georgia-Pacific, which did not file for bankruptcy and has continued paying dividends to Koch Industries, court filings show.
New Georgia Pacific paid four quarterly dividends to Koch Industries in fiscal year 2022 totaling $481 million, plus a one-time special dividend of $2 billion, the court filing shows. Koch has received more than $5 billion since Bestwall filed for bankruptcy in 2017.
Representatives for New Georgia-Pacific and Koch Industries did not immediately respond to a request for comment on Thursday.
During a September 2020 hearing in the Bestwall case, a lawyer representing asbestos claimants argued Georgia-Pacific would not have been able to pay Koch dividends had it filed for bankruptcy itself, instead of the newly created Bestwall subsidiary. Plaintiff lawyers have called the practice unjust in court filings.
Koch's chairman, Charles Koch, and his late brother David Koch have been prominent Republican political donors and supported an array of pro-business lobbying efforts, including those seeking to limit damage awards in injury lawsuits. By the time Bestwall filed for bankruptcy, Georgia-Pacific was paying up to about $200 million a year to defend or settle the cases, the company has said in court filings.
New Georgia-Pacific's shareholder equity is forecast to be about $27.8 billion after accounting for the Koch dividends, according to the Wednesday court filing.