Summary:
Georgia-Pacific Holdings acquired Bestwall Gypsum Company in 1965, but as a result of decades-long asbestos litigation on July 31, 2017, Georgia-Pacific underwent a corporate restructuring, through a "divisional merger" under Texas law by which the old Georgia-Pacific ceased to exist and two new entities were created. (Called the "Texas Two-Step.") These were the new Georgia-Pacific and Bestwall, LLC. Bestwall received certain assets and liabilities, most importantly the liability under the asbestos litigation. Georgia-Pacific did agree to indemnify Bestwall for losses relating to that litigation. Tied to that indemnification was also a secondment agreement by which certain Georgia-Pacific employees with institutional knowledge of the litigation were assigned to work for Bestwall.
Bestwall filed for Chapter 11 bankruptcy protection on November 2, 2017, and immediately sought injunctive relief against the asbestos litigants to extend the automatic stay to protect Georgia-Pacific, which the bankruptcy court granted pursuant to 11 U.S.C. §105.
The asbestos litigants sought leave to appeal, with the district court agreeing that the injunctive relief was a final appealable order and that the asbestos litigants had standing for that appeal.
The district court upheld the subject matter jurisdiction by the bankruptcy court as "related to" under 28 U.S.C. § 1334, as failing to provide the injunctive relief could conceivably affect the bankruptcy estate in the following ways:
(1) The purpose of section 524(g) and the Chapter 11 reorganization was to address in one forum all potential asbestos claims;
(2) It would distract Bestwall's personnel and impair the ability to reorganize if key personnel would be responsible for the defense of lawsuits against Georgia-Pacific; and
(3) The indemnity obligations of Bestwall to Georgia-Pacific of would make judgments against Georgia-Pacific tantamount to judgments against Bestwall, depleting assets available to fund a section 524(g) trust.
The district court held that this preliminary injunction was not an abuse of discretion by the bankruptcy court as the standard for such is:
(1) likelihood of success on the merits;
(2) irreparable harm in the absence of an injunction;
(3) the balance of equities; and
(4) whether an injunction is in the public interest.
Commentary:
The argument that Georgia-Pacific should itself instead file bankruptcy is obviously exactly what Georgia-Pacific does not want to do. Instead through this Texas Two-Step, it is able to shield its assets and perhaps as importantly protect its reputation. In the consumer context, this raises the question of whether individuals should be able to similarly divisively merge and create a new corporation holding all of their liabilities, sparing themselves and their credit score from the negative impacts of bankruptcy. That is, of course, ridiculous, since in America corporations are allowed all of the benefits and protections that individuals have, but the converse is never true.
The earlier decision by the district court regarding discovery is available at In re Bestwall, L.L.C- Discovery Order is not Final Appealable Order
For a copy of the opinion, please see:
Blog comments