US Supreme Court Asked To Review Bestwall’s Texas Two-Step

The so-called Texas Two‑Step is a restructuring strategy that uses Texas state divisional‑merger law to separate a company’s operating business from certain legacy liabilities, often those involving mass tort claims. The core business continues in the operating entity while the other entity pursues a Chapter 11 bankruptcy to centralize and resolve the tort claims or other liabilities.

The Supreme Court is being asked to address whether a concededly solvent debtor can properly invoke bankruptcy protection in a case that implicates this Texas Two-Step strategy. The Justices are expected to consider that petition during their regularly scheduled conference on May 28 and could take action on the petition as early as June 1. The Court’s response will draw close attention from companies managing mass tort exposure, creditors, and the restructuring community more broadly.

Background of the dispute

Bestwall LLC traces its origins to Georgia‑Pacific, the well-known building and paper products manufacturer. Because of its historical operations, Georgia-Pacific has faced tens of thousands of asbestos‑related personal injury claims over the past several decades. In 2017, Georgia‑Pacific implemented a divisional merger under Texas state law, separating its asbestos liabilities into a newly created entity — Bestwall — while the bulk of the operating business and assets were moved to the “new GP.” Following that corporate partition, Bestwall filed for Chapter 11 protection in the US District Court for the Western District of North Carolina, seeking to resolve current and future asbestos claims through the bankruptcy process.

An Official Committee of Asbestos Claimants has been active in opposing the case. Over the course of the proceedings, the committee has raised repeated challenges to Bestwall’s resort to Chapter 11, including arguments that the filing was undertaken in bad faith, that Bestwall was not financially distressed and that the bankruptcy court lacked jurisdiction over the case.

In August 2025, a divided panel of the US Court of Appeals for the Fourth Circuit rejected one of the committee’s challenges, holding that a petition filed under the Bankruptcy Code is a case “arising under” federal law for purposes of Article III and federal question jurisdiction, regardless of whether the debtor is insolvent or unable to pay its debts. The majority emphasized that nothing in the US Constitution’s Bankruptcy Clause imposes an insolvency requirement as a prerequisite to federal jurisdiction. Questions about a debtor’s financial condition, the court observed, may be relevant at other stages of a Chapter 11 case — such as plan confirmation or dismissal for bad faith — but they do not deprive federal courts of jurisdiction. Judge King dissented. He would have held that the Constitution’s grant of authority to enact “uniform Laws on the subject of Bankruptcies” carries an implicit limitation rooted in historical understandings of bankruptcy as a remedy for financial failure. After the panel decision, the court declined 8-6 to rehear the case en banc.

The pending certiorari petition

The petitioning asbestos claimants have asked the Supreme Court to review the Fourth Circuit’s decision, making several arguments in support of certiorari. They argue that the case presents an important constitutional question about the reach of Congress’s bankruptcy power, with significant practical consequences for mass tort claimants. According to the petition, the Fourth Circuit’s approach permits the use of bankruptcy by solvent enterprises in ways that upset traditional debtor‑creditor balances and insulate non‑debtors from tort liability.

Bestwall, in opposition, contends that the decision below fits within existing precedent and — at least with respect to the narrow jurisdictional question presented in the most recent appeal — does not implicate any circuit split. Bestwall emphasizes that the Fourth Circuit majority expressly declined to pass judgment on the Texas Two‑Step as a restructuring technique and resolved only a threshold jurisdictional issue. It further responds that the petition’s merits arguments miss the mark in the asbestos context given that Congress specifically authorized debtors to channel asbestos claims through the bankruptcy process in 11 U.S.C. § 524(g).

The certiorari petition has attracted substantial amicus support, including from a bipartisan group of senators. That same group has also recently proposed legislation that seeks to prevent the Texas Two-Step by, among other things, creating a presumption of bad faith under 11 U.S.C. § 1112 that would subject Chapter 11 petitions following divisional mergers to dismissal and prohibit any stays or injunctions against solvent parents or affiliates. 

Takeaways

Regardless of whether the Supreme Court grants review, the petition underscores the continuing judicial attention directed at the boundaries of the bankruptcy system, particularly in cases involving mass tort liabilities and complex corporate restructurings. Questions about when Chapter 11 is available and how broadly federal jurisdiction extends remain front of mind.

HSF Kramer’s appellate and bankruptcy practices are closely monitoring the certiorari proceedings and will keep clients apprised of significant developments. The firm has extensive experience in disputes implicating the scope of the bankruptcy process, including matters that have shaped the modern understanding of bankruptcy jurisdiction and authority. As the Supreme Court considers whether to weigh in, stakeholders should continue to watch this case as a potential inflection point in the evolving law of complex reorganizations.

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