4th Cir.: In re Bestwall LLC- Solvent Debtor in Allowed in Bankruptcy

Summary:

In this published decision, the Fourth Circuit affirmed the bankruptcy court’s denial of a motion to dismiss the Chapter 11 case of Bestwall LLC—a corporate entity created by Georgia-Pacific in a divisional merger (the so-called “Texas Two-Step”) to isolate and manage its asbestos liabilities. The Official Committee of Asbestos Claimants argued that federal courts lacked constitutional subject-matter jurisdiction because Bestwall was solvent and thus not “bankrupt” within the meaning of the Bankruptcy Clause.

Writing for the majority, Judge Quattlebaum held that petitions filed under the Bankruptcy Code—even by solvent debtors—arise under federal law and are therefore within the constitutional and statutory jurisdiction of the federal courts. The panel emphasized that insolvency is not a jurisdictional requirement, even if it may be relevant at other procedural junctures, such as plan confirmation or bad faith dismissal. The court also rejected the idea that “financial distress” must exist for jurisdiction to lie, noting that the Bankruptcy Code itself does not define or require such a threshold.

Commentary:

Although Bestwall emerges from the asbestos litigation arena and involves corporate restructuring strategies unlikely to affect most consumer debtors directly, its implications for bankruptcy access are far-reaching. The decision affirms what consumer practitioners have long understood: insolvency is not a prerequisite to seeking relief under the Bankruptcy Code.

Indeed, consumer debtors are routinely “solvent” when filing Chapter 13—especially those with significant home equity (amplified by rising property values) or retirement savings fully protected by exemptions. Similarly, Chapter 7 debtors may also be solvent on paper but lack liquidity to satisfy ongoing obligations or address litigation. Courts, trustees, and creditors typically deal with such circumstances through the best-interest-of-creditors test, the means test, or §707(b) motions—not by questioning the court’s jurisdiction.

Unfortunately, the Bestwall majority missed an opportunity to contextualize Chapter 11 practice within the broader statutory framework of the Bankruptcy Code, including Chapters 7 and 13. This myopic focus on corporate and historical interpretations of the Bankruptcy Clause—as if bankruptcy were an exclusively commercial or eighteenth-century device—ignores the Code’s unified structure and the lived reality of consumer practice. Recognizing that balance-sheet solvency does not equate to financial feasibility, especially in the face of foreclosure, garnishment, or litigation, would have grounded the Fourth Circuit’s reasoning in the modern and practical operation of bankruptcy law.

Just as corporate reorganizations like Bestwall’s may serve non-insolvency purposes (e.g., global claim resolution), so too do consumer cases often serve goals like saving a home, repaying taxes, or halting collection abuse. Courts evaluating corporate bankruptcy eligibility—particularly in the context of strategic filings like the Texas Two-Step—would benefit from comparing those cases to the standardized, transparent, and judicially accepted treatment of technically solvent consumer debtors in Chapter 13.

Had the Fourth Circuit acknowledged this broader perspective, it could have offered a more complete constitutional and statutory analysis, and perhaps tempered concerns about “abuse” of bankruptcy protections by reminding critics that bankruptcy is not—and never has been—limited to the destitute. It is a tool of orderly debt resolution, whether the debtor is a Fortune 500 offshoot or a wage earner with two kids and a mortgage.

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