Summary:
The Fourth Circuit has again weighed in on the now-familiar “Texas Two-Step” asbestos bankruptcy strategy—and once again sided with the debtor.
In , the court affirmed the denial of a motion by several asbestos claimants to lift the automatic stay in the Chapter 11 case of DBMP, LLC, the entity created when building-products manufacturer CertainTeed split its asbestos liabilities into a new subsidiary that then filed bankruptcy in the Western District of North Carolina. The panel majority, in an opinion by Judge Niemeyer, concluded that the bankruptcy court properly applied the Fourth Circuit’s longstanding Robbins factors and that the claimants had not shown the filing was made in bad faith.
Judge King dissented vigorously, warning that the Fourth Circuit risks becoming a “safe haven” for wealthy corporations using bankruptcy to avoid jury trials in mass-tort litigation.
The Backdrop: A Classic “Texas Two-Step”
The case arises from CertainTeed’s effort to resolve massive asbestos liabilities using a strategy increasingly seen in mass-tort bankruptcies.
Facing tens of thousands of asbestos claims and billions in defense and settlement costs, CertainTeed executed a Texas divisional merger in 2019. The maneuver split the company into two entities:
- New CertainTeed, holding most assets and operations
- DBMP, assigned the asbestos liabilities
DBMP received some assets and, more importantly, an uncapped funding agreement obligating the parent enterprise to fund asbestos liabilities and bankruptcy costs. DBMP then filed Chapter 11 to pursue a §524(g) asbestos trust, a special bankruptcy mechanism designed to resolve both present and future asbestos claims.
The filing automatically stayed roughly 60,000 asbestos lawsuits nationwide.
The Claimants’ Motion
The appellants—two mesothelioma plaintiffs and the estate of another victim—sought limited relief from the automatic stay so they could proceed with their state-court tort suits.
Their central argument:
DBMP’s bankruptcy was filed in bad faith because the enterprise was solvent and capable of paying claims outside bankruptcy. According to the claimants, the bankruptcy existed only to delay litigation and force settlement negotiations.
The Fourth Circuit’s Holding
The Fourth Circuit affirmed the denial of stay relief.
1. Robbins Still Governs Stay Relief
The court applied the familiar In re Robbins balancing test for lifting the automatic stay:
- Whether the dispute primarily involves state law
- Whether lifting the stay promotes judicial economy
- Whether the estate can be protected while litigation proceeds elsewhere
The bankruptcy court concluded—and the Fourth Circuit agreed—that lifting the stay would:
- Flood courts with asbestos cases
- Undermine efforts to treat claimants consistently
- Potentially destroy the Chapter 11 case
Thus, the Robbins factors weighed strongly against relief.
2. Bad Faith Could Justify Stay Relief—But Wasn’t Shown
Importantly, the Fourth Circuit acknowledged that bad faith can constitute “cause” under §362(d).
But the court held that the claimants failed to show either:
- Subjective bad faith, or
- Objective futility of the reorganization.
DBMP, the court said, was pursuing exactly what Congress designed §524(g) to address: companies facing decades of asbestos claims seeking to centralize and equitably resolve them through a trust.
3. Solvency Is Not Disqualifying
The majority also rejected the claimants’ central premise—that a solvent company cannot use Chapter 11.
Section 524(g) contains no insolvency requirement, and Congress specifically envisioned solvent companies using bankruptcy to manage long-tail asbestos liability and ensure fair treatment of future claimants.
The Dissent: Bankruptcy as Corporate Escape Hatch
Judge King’s dissent pulls no punches.
He describes the Texas Two-Step strategy as a “corporate sleight-of-hand” designed to dump asbestos liabilities into a shell company and force victims into bankruptcy proceedings rather than jury trials.
In his view:
- DBMP was never financially distressed.
- The bankruptcy was engineered entirely by lawyers under a project code-named “Project Horizon.”
- The maneuver deprived thousands of claimants of their constitutional right to a jury trial.
King warns that the Fourth Circuit’s jurisprudence risks turning the circuit into a haven for mass-tort defendants seeking bankruptcy protection without financial distress.
Commentary
From a bankruptcy-policy perspective, Herlihy continues a clear trend: the Fourth Circuit remains receptive to large-scale mass-tort restructurings.
The decision does three important things.
1. It reinforces the circuit’s tolerance for Texas Two-Step bankruptcies
Although the panel emphasized that the legality of the divisional merger itself was not before it, the practical result is the same: the strategy remains viable so long as the debtor can plausibly pursue a §524(g) plan.
This follows earlier decisions involving Bestwall, another Western District of North Carolina asbestos bankruptcy.
2. It narrows the path for claimants seeking stay relief
The court effectively signals that individual plaintiffs will rarely succeed in lifting the stay in a mass-tort bankruptcy.
Allowing even a handful of cases to proceed, the court reasoned, would quickly lead to “hundreds, if not thousands” of similar requests and could unravel the entire bankruptcy process.
3. It highlights a growing policy divide
The dissent reflects a broader national debate:
- Proponents say §524(g) trusts produce faster, fairer compensation for all claimants—including those who have not yet developed disease.
- Critics argue the strategy strips victims of jury trials and allows profitable companies to manage liability on their own terms.
Until Congress intervenes—or the Supreme Court takes a more aggressive stance—the Fourth Circuit appears comfortable allowing these reorganizations to proceed.
✅ Bottom line:
For now, the Western District of North Carolina remains a favorable venue for asbestos-related Chapter 11 cases. Unless a challenger can prove both subjective bad faith and objective futility, courts in this circuit are unlikely to lift the automatic stay and send claims back to the tort system.
Blog comments