Koch Industries’ Texas two-step bankruptcy move challenged

Lawyers have filed a motion to dismiss the Chapter 11 filing of a unit of Koch Industries in a test case that could help determine the future of controversial bankruptcy schemes deployed by companies to handle personal injury claims.

The motion to the bankruptcy court in the Western Division of North Carolina alleges the Chapter 11 filing by Bestwall — a unit of Koch’s building materials subsidiary Georgia Pacific — was made in “bad faith” because the company was not in financial distress.

The motion late on Friday alleges that Georgia Pacific has distributed $5.38bn in dividends to Koch Industries since the bankruptcy petition was filed in 2017, enriching the debtor’s equity holders while thousands of asbestos claimants remain uncompensated.

Bestwall, Georgia Pacific and Koch Industries have engaged in a “years long strategy of delay”, which has deprived victims of their rights to fair resolution in the tort system, it claims.

The motion to dismiss the bankruptcy filing by Bestwall was filed on behalf of Wilson Buckingham and his wife, Angelika Weiss, who allege Buckingham contracted mesothelioma, a type of cancer linked to asbestos, due to exposure to products made by Georgia Pacific.

Koch Industries did not respond to a request for comment.

Georgia Pacific was the first company to use a contentious legal manoeuvre called the “Texas two-step” to manage billions of dollars of legal claims from people alleging its products containing asbestos caused their cancer. The scheme enabled the company to divide itself into two separate businesses before placing one of them, Bestwall, which contained all the asbestos claims, into bankruptcy.

Johnson & Johnson, Trane Technologies and a US unit of France-based Saint-Gobain took the same path as Georgia Pacific and deployed the “Texas two-step”, which was devised by law firm Jones Day.

The companies argue the mass tort system is broken, poses a grave financial risk to companies and is no longer an efficient forum to deliver justice to victims. Settlements can be reached more equitably and quickly by managing the cases in bankruptcy courts, they say, rather than in front of juries.

Tort lawyers reject this. They argue that bankruptcy schemes deployed by solvent corporations are an abuse of bankruptcy courts and deny wronged people their right to trial by jury. Far from hastening a settlement, they argue, the bankruptcy process puts the tort cases on hold, thus removing an incentive for companies to come to the table to negotiate a settlement.

The motion to dismiss Bestwall’s bankruptcy follows a landmark ruling issued last month by the Third US Circuit Court of Appeal, which dismissed the bankruptcy of LTL, a subsidiary of J&J, on the grounds that it was not in financial distress.

The Bestwall motion cites the J&J ruling, saying it makes clear that financial distress is the first inquiry made before a company receives the benefits of bankruptcy. Recent case law in the Fourth Circuit Court of Appeals also supports this position, it claims.

Carl Tobias, professor of law at University of Richmond, said different courts around the country were clearly now more receptive to the plaintiff’s arguments in these bankruptcy cases.

“All of that appears to be headed in the same direction to find that you can’t enter bankruptcy to avoid tort claims — and there is a threshold requirement that a company must be in distress to do so.”