It is a controversial corporate legal strategy that critics call the Texas Two-Step. For nearly nine years, it has left tens of thousands of asbestos claims tied up in bankruptcy court. Right now, the epicenter of one of the nation's most closely watched battles over that strategy is playing out in North Carolina.
A corporate split and an instant freeze
In 2017, manufacturing giant Georgia-Pacific reorganized under Texas law and split its assets and liabilities between two new companies. One became the new Georgia-Pacific, retaining most of the company's operations and assets. The other became Bestwall LLC, which took on Georgia-Pacific's asbestos liabilities.
Three months later, Bestwall filed for Chapter 11 bankruptcy in the Western District of North Carolina. At the time, Bestwall faced about 64,000 pending asbestos claims, according to a federal appeals court ruling.
The bankruptcy triggered an automatic stay, and the bankruptcy court later extended protection to Georgia-Pacific and other related companies. That has prevented asbestos lawsuits against Georgia-Pacific from moving forward in the ordinary tort system.
Attorney Jon Ruckdeschel represents asbestos plaintiffs and says the strategy was designed to use bankruptcy to gain leverage over people pursuing injury claims.
"The Texas two-step is an improper attempt to use the bankruptcy courts as leverage to effectuate tort reform without going to Congress or the state legislatures. That's been tried repeatedly by asbestos companies and Congress has repeatedly rejected those attempts," Ruckdeschel says.
Ruckdeschel says the corporate restructuring separated Georgia-Pacific's asbestos liabilities from the bulk of its operating assets.
"We're going to use this obscure Texas statute to split a company that's financially robust, massively profitable, in no distress at all, to split it into two new companies, one of which takes all the asbestos liabilities. An ephemeral amount of assets and a contract with the other company and the other company gets everything else, all the good stuff, all the assets, all the profit streams, everything, but now they're cleansed of their asbestos liabilities."
The fight over court oversight
The Fourth Circuit Court of Appeals upheld the bankruptcy court's jurisdiction over Bestwall's case last year. The appeals court said a debtor's financial condition does not determine whether a bankruptcy court has subject-matter jurisdiction. But the dispute over how the bankruptcy should proceed remains.
Ruckdeschel says the bankruptcy protection has kept his clients from pursuing their cases in the tort system.
"They put the bad company into bankruptcy, something called the automatic stay takes effect, which freezes litigation against a company that files for bankruptcy. And then they use that leverage of your rights are frozen indefinitely. And in Bestwall, it's now been over nine years that every dying American with asbestos disease that Georgia Pacific contributed to has had their rights frozen."
Georgia-Pacific and Bestwall have defended the bankruptcy strategy as a way to resolve asbestos claims through a centralized process. The companies are now seeking a settlement of the long-running bankruptcy.
This summer, the U.S. Supreme Court declined to hear an appeal challenging the Fourth Circuit's decision allowing the Bestwall bankruptcy to continue. Then, on August 20th, U.S. Bankruptcy Judge Laura Beyer rejected a request from asbestos claimants to appoint an independent trustee to take over the case. The judge said appointing a trustee was not in the interests of creditors and noted progress in settlement discussions.
Ruckdeschel disagrees with that decision.
"The bankruptcy court denied our motion last week and said that Georgia-Pacific and Bestwall are making significant progress towards resolution of this case, and so she doesn't find it in the interests of claimants to have an independent trustee come in. I find this very challenging. I mean, one of the arguments that we made to the bankruptcy court was, how does a trustee impair them from trying to continue these negotiations? It doesn't. It just means they're going to be overseen by an independent party instead of a debtor in possession that's admitted it won't do what it's required to do."
The bankruptcy court's August 20 ruling came as the parties continued settlement discussions. Bestwall and Georgia-Pacific say they have reached agreements in principle with a number of major law firms representing asbestos claimants. But no final settlement trust has been approved by the court.
The human cost: Ed Chapman's story
For claimants, the passage of time is especially significant because mesothelioma is an aggressive cancer associated with asbestos exposure. Lori Knapp’s father, Ed Chapman, was exposed to and poisoned by Georgia-Pacific products. He was a construction worker and was exposed to asbestos during projects, including the teardowns of drywall and ceilings.
In 2019, Knapp said her dad went to his physician for a routine checkup.
"The doctor kidded with him, and he says, 'I don't even know why you come for your annual physicals. You're the healthiest person I have, patient-wise.' And they laughed about it and then went about taking an X-ray of his lungs and doing everything else and a spot appeared."
Of his ten-man crew, at least three men, including Chapman, eventually developed mesothelioma. At the same time Chapman’s wife was battling pancreatic cancer, he began treatment for the lung cancer – a battle that would see his weight plummet from 180 pounds to 121 pounds when he died 18 months later, shortly after his wife’s death.
Uncovering internal corporate strategy
During the legal process, internal Georgia-Pacific documents from 1971 were uncovered. These papers revealed that the company anticipated its drywall products would make workers sick and lead to lawsuits. The documents detailed a corporate strategy to shift blame onto the independent contractors themselves for failing to use proper protection, rather than pulling the dangerous formulas from shelves.
Chapman – like thousands of others – fought for compensation by filing a mesothelioma claim – which remains stuck in limbo.
"My dad was a law abiding citizen and he believed in our judicial system and he wanted to have his day in court. He wanted to share his case with his peers, a jury of 12. He wanted to share with them what Georgia Pacific has done to thousands of people, and Georgia Pacific took the cowardly way and filed this bogus bankruptcy under a company that they created just so that they could get away with not being held accountable for what they had done."
Lori has continued to fight for justice since her father's death, because she said Georgia-Pacific should be forced to compensate the people its products sickened and killed.
"It's wrong. They need to be held accountable. They've got the money. They're not a bankrupt company. They never were a bankrupt company. And my beef isn't with the best wall. My beef is with Georgia Pacific. They're the ones that did this. And for them to try to sneak their way out through a fake company and then filed their bankruptcy and now apparently wanting to reorganize it and start all over. It's just, it's wrong. It's just wrong."
A race against the biological clock
Ruckdeschel says many of the people involved when the case began have died.
"All of the members that were appointed initially have died. All of my clients have died. The expected life for somebody diagnosed with mesothelioma is somewhere between 12 to 24 months for most people. Now we have had some marginal advances with immunotherapy and now we are seeing people live three or even five years, but it's rare. And nobody survives this disease."
"If Georgia Pacific drags their feet long enough, which is exactly what they're doing, all of their victims will be dead."
Medical research shows survival varies considerably among mesothelioma patients, depending on factors including the type and stage of the cancer and treatment. But the underlying disease remains serious and often fatal.
Meanwhile, the bankruptcy court continues to consider how the asbestos claims could ultimately be resolved.
Competing plans and financial disputes
The plaintiffs' side has proposed a plan that would allow claimants to choose between an administrative settlement through a trust or pursuing the value of their claims through the tort system. Ruckdeschel says that proposal would preserve the value of the funding available to pay claims.
"We submitted a plan that we're going to ask the court to allow us to get the creditors to vote on that preserves the full value of the $27 or $30 billion funding agreement that gives everybody the right to either accept an administrative settlement in the context of a bankruptcy trust or to liquidate their claim against the trust in the tort system and collect 100 cents on the dollar to in fact honor the responsibilities that these companies have to the people they sicken."
Clay Thompson is another attorney representing mesothelioma victims. He says the issue is ultimately about whether a financially strong company should be able to use bankruptcy protections to resolve its asbestos liabilities.
"Georgia Pacific clearly can pay all of its asbestos victims. Since its two-step 10 years ago, it has paid all of its other creditors. All the creditors that they did not poison to death, Georgia Pacific has been paying in regular course."
Thompson also points to payments made by Georgia-Pacific to its parent company and the costs of the bankruptcy itself.
"They've taken over $7 billion and given it to Koch Industries, who is their parent. And the bankruptcy professionals in Bestwall alone have been paid half a billion dollars during the pendency of this bankruptcy."
Those figures are disputed points raised by the claimants' attorneys, rather than findings by the court.
The question of future payouts
The companies, meanwhile, maintain that the bankruptcy provides a structured way to resolve thousands of asbestos claims. And for now, the bankruptcy process remains in place.
The court is continuing to oversee settlement negotiations, while the dispute over the use of bankruptcy protections for asbestos liabilities continues to move through the legal system.
For claimants who have waited years for their cases to move forward, the central question remains whether the bankruptcy process will ultimately produce a settlement, or whether they will get another opportunity to pursue their claims in the traditional tort system.
Ruckdeschel says the fight isn't over.
