NJ among states seeking Supreme Court review of controversial bankruptcy tactic

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A bipartisan group of 25 attorneys general, including New Jersey’s Matthew Platkin, is urging the United States Supreme Court to stop well-off companies from using bankrupt shell companies to resolve lawsuits.

In a Jan. 22 amicus brief, the AGs asks for the reversal of a June 2023 ruling from the 4th U.S. Circuit Court of Appeals that allowed pulp-and-paper maker Georgia-Pacific to avoid litigating tens of thousands of asbestos lawsuits while the company’s subsidiary, Bestwall, remains in bankruptcy.

The 2-1 decision upheld a key element of a controversial legal tactic known as the Texas two-step, in which a corporation spins off liabilities into a newly created subsidiary and then files that unit for bankruptcy.

Georgia-Pacific, one of the world’s largest manufacturing firms, pioneered the strategy in 2017, which paused 64,000 lawsuits claiming the company’s plaster construction products contained cancer-causing asbestos.

In the brief, the AGs contend that Georgia-Pacific is abusing the U.S. bankruptcy system, using it to shield assets from people who have been harmed by preventing lawsuits from moving forward without subjecting the entire company to bankruptcy.

“Wealthy companies that engage in wrongdoing should not be able to get off the hook by cheating the legal system,” North Carolina Attorney General Josh Stein, who is leading the effort, said in a press release. “We ask that the Supreme Court take up this case and put an end to this abusive practice.”

A separate brief filed the same day by U.S. Sens. Dick Durbin , D-Ill.; Josh Hawley, R-Mo.; and Sheldon Whitehouse, D- R.I., made a similar request of the court, saying, “Bestwall has created a legal stratagem that radically expands the authority of bankruptcy courts and makes a mockery of congressional intent.”

Attorneys representing asbestos victims suing Georgia-Pacific also petitioned the Supreme Court last month, saying the 4th Circuit’s decision would give bankruptcy courts “virtually boundless power to halt litigation against non-bankrupt companies.”

Tossing the two-step

Unlike North Carolina, courts in other states have tossed Texas two-step bankruptcies, including New Brunswick-based health conglomerate Johnson & Johnson’s.

In July 2023, Judge Michael Kaplan in Trenton nixed J&J’s second attempt to resolve its talc liabilities via bankruptcy. Kaplan ruled LTL Management, a subsidiary created to handle the talc claims, is not eligible for Chapter 11 because the company is not in financial distress. The move returned 50,000 cases back to the civil tort system.

LTL’s first bankruptcy filing was dismissed in January 2023 by a Third Circuit Court of Appeals panel in Philadelphia. The ruling found that neither J&J nor its subsidiary was in dire financial straits. Three months later, LTL tried to do the Texas two-step again, filing a second time for Chapter 11 and proposing an $8.9 billion settlement to resolve current and future claims.

Since then, Johnson & Johnson – which maintains that its products are safe – has settled a few of the tens of thousands of lawsuits claiming its talc-based baby powder causes cancer.

J&J also continues to mull a third bankruptcy filing to resolve the more than 50,000 talc claims it faces. Worldwide Vice President for Litigation Erik Haas told shareholders during the compay’s third quarter earnings call in October 2023 it is “pursuing a consensual resolution of the talc claims through another bankruptcy,” while continuing to “vigorously defend itself” in the remaining cases.