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2025 brought remarkable clarity—and continuing controversy—to mass tort bankruptcies in the Fourth Circuit.
The Court decided two landmark opinions on asbestos channeling injunctions and Section 524(g) trusts (Kaiser Gypsum and Bestwall), while all other circuits combined issued only one decision involving a Section 524(g) trust. The Circuit also reinforced fundamental principles about good faith and remedies in Chapter 13 in Sugar v. Burnett. Together, these decisions sketch the boundaries of the bankruptcy courts' power to resolve mass tort liabilities and underscore that good faith remains central to confirmation and remedies.
Kaiser Gypsum: A Blueprint for Section 524(g) Plans
Kaiser Gypsum provides the definitive roadmap for how the Fourth Circuit expects bankruptcy courts to review plans that include Section 524(g) trusts: start with the statute's text, then apply a practical, equitable lens to ensure the plan works for present and future claimants.
Kaiser Gypsum and Hanson Permanente Cement faced over 38,000 asbestos lawsuits. Their Chapter 11 plan proposed a Section 524(g) trust funded primarily by the debtors' rights to non-eroding primary insurance coverage from Truck Insurance Exchange—coverage with no aggregate limit, only a $500,000 per-claim cap. The plan also included a $49 million contribution from the parent company and a $1 million secured note from the debtors.
The plan's novel feature was its treatment of insured versus uninsured claims. Insured claims (the vast majority) would continue in the tort system with the reorganized debtors as nominal defendants. The trust would pay deductibles, and Truck's policy would cover judgments up to the policy limit. Uninsured claims would go directly to the trust through an administrative process requiring detailed anti-fraud disclosures and authorizations.
Truck objected, arguing the plan lacked anti-fraud measures for insured claims and failed to satisfy Section 524(g)'s requirements. One hundred percent of asbestos claimants voted to approve the plan. Truck stood alone in opposition.
Key Statutory Rulings
The Fourth Circuit rejected Truck's challenges and affirmed confirmation:
Assumption of Liabilities: The Court looked past labels to function. Even though insured claims would proceed in the tort system, the trust effectively “assumed” liabilities because it received the debtors' rights to non-eroding primary coverage and would pay deductibles. Function trumped form.
Funding Requirement: The Fourth Circuit rejected Truck's argument that the statute requires “evergreen” debtor payments to the trust in perpetuity. The $1 million secured note met the statute's text, which requires only that the trust be funded “in whole or in part” by debtor securities and debtor obligations to make future payments. The Court refused to graft a perpetual-payment requirement onto the statute. Moreover, the trust didn't need evergreen debtor payments because Truck's non-aggregate, per-claim primary coverage provided the real evergreen funding source.
Trust “Ownership” of Voting Shares: The trust held a pledge of 100% of the reorganized debtors' equity securing the note and could foreclose upon default. That contingency satisfied the statute's requirement that the trust “be entitled to own” a majority of voting shares “if specified contingencies occur.”
Equitable Necessity: The court affirmed that channeling was necessary to ensure equitable treatment of present and future claimants, especially given the risk of uninsured punitive damages that could dissipate assets and skew recoveries over time.
Good Faith Under Section 1129(a)(3)
Truck challenged the plan as proposed in bad faith. The Fourth Circuit affirmed the bankruptcy court's good-faith finding under a totality-of-the-circumstances analysis, emphasizing that the plan resulted from extensive arm's-length negotiations, had unanimous claimant support, and maximized value for creditors—the core objectives of Chapter 11.
Critically, the court held that good faith does not require giving an insurer more rights than those in its existing policy. Truck's dissatisfaction with the lack of anti-fraud measures for insured claims did not constitute bad faith. The court noted that bankruptcy courts routinely allow claimants to pursue insured claims in the tort system and that adversarial and discovery processes provide adequate protection against fraud.
Truck offered no concrete evidence of fraud—no examples of claimants filing duplicate claims, no instances where it had been denied discovery from other Section 524(g) trusts. Speculation about future fraud cannot support a bad-faith finding.
Circuit Judge Marvin Quattlebaum voted to affirm the bankruptcy court's good-faith analysis, but wrote separately, underscoring the broad discretion that the code grants to bankruptcy courts. Judge Quattlebaum said the claimant representatives' and Kaiser's arguments in response to Truck's criticisms made him “queasy” and that the information Truck sought was so basic that it would necessarily be asked for—and provided—in discovery in the tort system. Even so, he voted to affirm specifically because the good faith is a factual finding, and the standard of review is “clear error.”
Bestwall: Jurisdiction Exists, But the Fight Moves to Confirmation
Bestwall addressed whether federal courts have subject-matter jurisdiction over a Chapter 11 petition by a solvent debtor. The Fourth Circuit answered yes—but the controversy is far from over.
Bestwall was created through a Texas divisional merger – the colloquial “Texas Two Step.” Georgia-Pacific, Bestwall's parent company, created Bestwall for the purpose of addressing its outstanding asbestos liabilities. As a result of the maneuver, GP's asbestos liabilities went to Bestwall, while GP retained most of its operating assets. GP also agreed to fund Bestwall's bankruptcy and any Section 524(g) trust. The asbestos claimants' committee challenged jurisdiction, arguing that the Bankruptcy Code only permits bankruptcies by insolvent entities.
The Majority's Ruling
The Fourth Circuit held that subject-matter jurisdiction exists regardless of solvency. Bankruptcy cases “arise under” federal law, and 28 U.S.C. § 1334 vests jurisdiction. Neither Article III nor Section 1334 makes financial distress jurisdictional. Challenges to whether a debtor should be in bankruptcy—including attacks on “solvent debtor” filings or Texas Two-Step restructurings—go to eligibility, good faith, and plan confirmation, not jurisdiction.
The Blistering Dissent and What Comes Next
Circuit Judge Robert King dissented vigorously, calling the divisional merger “a novel and provocative corporate sleight-of-hand maneuver” that created a “manufactured sham bankruptcy” designed to “extract more favorable settlement terms from their suffering and dying victims through litigation delay.”
The asbestos claimants' committee sought rehearing en banc. By an 8-6 vote, the Fourth Circuit denied rehearing. Judge King dissented again, arguing that allowing “a financially-healthy and fully-solvent corporation” to place tort liabilities “behind the firewall of bankruptcy protection” without “the scrutiny, transparency, and risk that a Chapter 11 bankruptcy petition should entail” produces an “obscene—and…unconstitutional—result.”
Practical Implications
A petition for certiorari seems likely given the 8-6 split. But for now, Bestwall signals that bankruptcy courts have jurisdiction over cases filed by debtors with access to substantial funding. Opponents should concentrate on confirmation records: equitable necessity, scope of injunctions, claim treatment, voting, funding sufficiency, and good faith. The case underscores judicial concern about bankruptcy's use for mass tort liability. The Fourth Circuit found itself constrained by its bad-faith dismissal standard requiring proof of both subjective and objective bad faith. Texas Two-Step cases will proceed, but plan proponents must carry their burden on good faith and statutory compliance at confirmation.
Sugar v. Burnett: Good Faith, Code Violations, and Remedies
Sugar reinforces that good faith requires totality-of-the-circumstances analysis and that advice of counsel matters when courts select remedies for plan violations.
Christine Sugar filed Chapter 13 bankruptcy. Her confirmed plan required compliance with a local rule prohibiting sale of non-exempt property over $10,000 without court approval. When her attorney advised her that her residence was fully exempt and she could sell without court approval, she did so. The bankruptcy court found she violated the local rule, dismissed her case, imposed a five-year refiling bar, and sanctioned her attorney $15,000.
The Fourth Circuit affirmed the violation but vacated the dismissal and five-year bar. North Carolina's homestead exemption is dollar-limited, not property-in-kind. The exemption allowed Sugar to exempt up to $35,000 of equity—not the entire residence. The local rule applied to the non-exempt value.
But the Court held that the bankruptcy court failed to consider Sugar's reliance on counsel's advice as part of the totality-of-the-circumstances inquiry into whether “cause” existed to dismiss under Section 1307(c). Dismissal is a harsh remedy reserved for “atypical” and “extraordinary” cases. Courts must consider whether lesser remedies would suffice and must weigh the debtor's intent, context, and reliance on counsel.
The Court affirmed sanctions against Sugar's attorney, who had over twenty years of bankruptcy experience and had previously litigated—and lost—the same arguments before the same judge. He advised Sugar to violate the rule despite the United States Supreme Court's decision in Taggart v. Lorenzen, which adopted an objective “no fair ground of doubt” standard for civil contempt. The Fourth Circuit notes that there was clear authority to the contrary of counsel's advice.
Practical Lessons
Sugar establishes that dismissal requires explanation. Courts must weigh intent, context, alternatives, and reliance on counsel before imposing dismissal and must explain why lesser remedies would not suffice. While advice of counsel is not a defense to finding a violation, it is part of the totality-of-the-circumstances analysis when determining cause for dismissal and selecting sanctions. Attorneys who willfully disregard controlling authority will face sanctions, and Taggart‘s “no fair ground of doubt” standard applies in Chapter 13.
Conclusion
The Fourth Circuit's 2025 decisions confirm that bankruptcy courts must follow the Bankruptcy Code as written, assess Section 524(g) plans by how they function, preserve jurisdiction over mass tort reorganizations, and tailor remedies to the totality of circumstances with good faith at the core.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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