What does it mean to be “bankrupt?”  The Fourth Circuit recently held oral arguments to determine this question in Bestwall, LLC v. The Official Committee of Asbestos Claimants.[1]  There, the Asbestos Claimants asserted that the United States Bankruptcy Court for the Western District of North Carolina (the “Bankruptcy Court”) lacks jurisdiction over Bestwall, because Bestwall is not “bankrupt” as defined by the United States Constitution.

In 2017, to deal with mass tort liabilities arising from asbestos-related products, Georgia-Pacific LLC used Texas law to split itself into two entities.  One of these entities, Bestwall, contained all of the mass-tort asbestos liabilities, and the other, also called Georgia-Pacific LLC (“New GP”), contained the assets of Georgia-Pacific without any of the asbestos liabilities.  Immediately after, Bestwall filed its petition in the Bankruptcy Court.[2]  New GP entered into a funding agreement with Bestwall to fund its Chapter 11 case and establish a trust to handle all asbestos liabilities.

The Asbestos Claimants moved to dismiss the case, arguing that Bestwall filed in bad faith because Bestwall did not have sufficient financial distress.[3]  The Bankruptcy Court ruled against the Asbestos Claimants[4], and, in 2023, the District Court for the Western District of North Carolina, finally denied their motion for leave to appeal.  

In 2023, the Asbestos Claimants brought their third motion to dismiss[5], arguing, in part, that the Bankruptcy Court lacked subject matter jurisdiction over the Bestwall bankruptcies.[6]  The argument relies on Article 1, Section 8 of the Constitution, which grants Congress the ability to “establish . . . uniform Laws on the subject of Bankruptcies.”  The argument also relies on 28 U.S.C. 1334(a), titled “Bankruptcy Cases and Proceedings,” which grants federal courts “original and exclusive jurisdiction of all cases under title 11.” The Asbestos Claimants argue that the ratifiers of the Constitution would understand “bankruptcies” to mean someone who would be unwilling or unable to pay their debts, and since Bestwall could pay its debts, it was not a bankrupt debtor and therefore lacked jurisdiction to proceed with its bankruptcy case. 

In opposition, Bestwall argued[7] that no court has ever held that the Constitution places a financial distress requirement to be a bankrupt debtor, and that solvent debtors frequently seek the protection of Bankruptcy.  Bestwall further argues that bankruptcy eligibility is a separate and distinct question from jurisdiction.  Therefore, since the Asbestos Claimants’ motion is not a jurisdictional question, which can be raised at any time during the case, the Bankruptcy Court should rely on equitable principles to deny the motion to dismiss because they slept on their rights.

The Bankruptcy Court began its ruling[8] by highlighting the lack of any definitive answer of how the Constitution defines “bankruptcy” in case law or in legislative history.  However, the Bankruptcy Court stated that a jurisdictional requirement for being a bankrupt debtor would be at odds with the goal of having debtors commence their case early.  Lastly, the Bankruptcy Court stated that there are other ways for a court to police a solvent debtors’ abuse of bankruptcy, such as a bankruptcy court’s ability to dismiss a bankruptcy filing for lack of good faith.  While the Bankruptcy Court denied the Asbestos Claimants’ motion to dismiss, it did certify the Asbestos Claimants’ direct appeal to the Fourth Circuit.

 A three-judge Fourth Circuit panel held oral arguments in May.[9]  The Asbestos Claimants spent a substantial portion of their oral arguments asserting that Bestwall’s use of bankruptcy threatens state judicial systems by allowing corporations to federalize all state issues.  If a debtor could file for bankruptcy despite the ability to pay debts, counsel argued, then nothing could stop non-distressed corporations from using the powers of bankruptcy to deal with all legal questions normally left to state jurisdiction.  This, they claimed, would be like fish swallowing the ocean.  In counterargument, Bestwall highlighted the plain language of section 1334, which imbues federal courts with jurisdiction of “all cases under title 11,” regardless of a debtor’s financial distress.  

The Fourth Circuit panel seemed to focus on the novel nature of the Asbestos Claimants’ jurisdictional argument as well as the implications of a favorable holding.  A notable exchange is below:

Asbestos Claimants Counsel: “The limitation of the bankruptcy clause has to go to a non-paying debtor.”

Fourth Circuit: “What is the absolute best case that says this? I haven’t seen anything since 1788 that adopts your position.”

Asbestos Claimants Counsel: “Your honor—I can’t find anything where a debtor agrees to pay liabilities now and in the general future—this has never come up in 230 years.”

Fourth Circuit: “We’re ploughing a new furrow—is that right?”

Asbestos Claimants Counsel: “I fully acknowledge this is a novel argument.”

This case exemplifies the malleability of bankruptcy, and how creative counsel can potentially receive not only a great result for their clients, but also receive a holding that fundamentally changes bankruptcy practice.  This seemingly longshot argument appears to have been made by counsel after running out of other avenues for the relief desired. The bankruptcy case has continued for over seven years and the Asbestos Claimants have already lost on two motions to dismiss—with one containing similar, but non-jurisdictional arguments.  Regardless of the outcome, the Fourth Circuit now has a chance to plough a new furrow in bankruptcy law left untouched since the ratification of the Constitution. 

[1] No. 24-1493 (4th Cir. 2024).

[2] In re Bestwall, LLC, No. 17-31795 (Bankr. W.D.N.C. Nov. 2, 2017).

[3] Id. at Dkt. No. 495.

[4] In re Bestwall, LLC, 605 B.R. 43 (Bankr. W.D.N.C. 2019).

[5] The Asbestos Claimants second motion to dismiss alleged Bestwall failed to prosecute its case, and it was denied. 

[6] In re Bestwall, LLC, No. 17-31795, at Dkt. No. 2925.

[7] Id. at Dkt. No. 2973.

[8] In re Bestwall, LLC, 658 B.R. 348 (Bankr. W.D.N.C. 2023).

[9] In re Bestwall, LLC, No. 24-1493 (4th Cir. 2024), May 8, 2025, found at https://www.courtlistener.com/audio/98858/bestwall-llc-v-official-committee-of-asbestos/