See also: Bill Rochelle, Funding Agreement in a Texas Two-Step Can Be Value to Counter a Fraudulent Transfer, Rochelle's Daily Wire, American Bankruptcy Institute, including commentary by Professor Bruce A. Markell. (ABI membership required.)
Summary:
In yet another decision arising from the now nearly seven-year-old DBMP Texas Two-Step bankruptcy, Judge Ashley Austin Edwards denied the Asbestos Claimants Committee's and Future Claimants Representative's motion for partial summary judgment seeking a determination that the Funding Agreement created as part of CertainTeed's restructuring could not constitute "value" under 11 U.S.C. § 548(d)(2)(A) or comparable state fraudulent transfer statutes, including N.C.G.S. § 39-23.3(a).
The decision does not establish that DBMP received reasonably equivalent value, or even that the Funding Agreement necessarily constitutes value. Instead, the Court held that whether the agreement is an enforceable commercial obligation or an excluded "unperformed promise to furnish support" requires further factual development.
The Texas Two-Step
CertainTeed, a subsidiary of the French Saint-Gobain group, manufactured asbestos-containing products and faced hundreds of thousands of personal injury claims. Before bankruptcy, it had spent approximately $2 billion defending and resolving asbestos litigation, with more than 60,000 lawsuits still pending when DBMP filed Chapter 11 in January 2020.
In October 2019, CertainTeed implemented a Texas divisional merger, separating its assets and liabilities between two successor entities:
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New CertainTeed received approximately 97% of the original company's assets, valued at roughly $2.8 billion, and continued the operating business.
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DBMP received all asbestos liabilities, approximately $25 million in cash, an operating subsidiary known as Millwork & Panel, and the Funding Agreement obligating New CertainTeed to provide additional funding for asbestos liabilities and a potential § 524(g) trust.
As Bill Rochelle explains in Rochelle's Daily Wire, the essential issue is whether an unsecured promise from the asset-rich successor company can constitute value sufficient to defeat a constructive fraudulent transfer claim arising from the restructuring.
The claimants argued that the Funding Agreement was excluded from the statutory definition of value because § 548(d)(2)(A) provides that value does not include an unperformed promise to furnish support to the debtor or a relative.
No payment was required or made under the agreement when the restructuring occurred, and the agreement was unsecured. New CertainTeed subsequently honored funding requests, including $64.5 million reported by February 2021, principally for bankruptcy administrative expenses.
An Unperformed Promise Is Not Necessarily Without Value
Judge Edwards undertook an unusually extensive historical examination of fraudulent transfer law, tracing its development from English common law through the Bankruptcy Code and the Uniform Fraudulent Transfer Act.
As Rochelle observes, portions of this historical analysis may well find their way into bankruptcy law casebooks.
The Court concluded that the exclusion for an unperformed promise of support is a legal term of art informed by more than two centuries of common law. Historically, these cases frequently involved debtors transferring assets to relatives in exchange for future maintenance or support.
But the Court rejected both parties' categorical interpretations.
The exclusion is not limited exclusively to familial support arrangements, as the Defendants argued. Nor does every commercial promise of future performance fall within the exclusion, as the claimants' argument might suggest.
Instead, relevant considerations include the promise's enforceability, assignability, likelihood of performance, present economic value, and capacity to provide the debtor with a direct or indirect benefit.
An enforceable executory promise may constitute value even when payment or performance is delayed.
Conversely, an agreement's characterization as an enforceable contractual right does not automatically prevent application of the statutory exclusion.
The Court also recognized that the state statutes, unlike § 548(d)(2)(A), expressly address promises made outside the ordinary course of the promisor's business.
The Funding Agreement Remains Questionable
Judge Edwards identified several potential weaknesses in the Funding Agreement:
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It was negotiated among affiliated entities rather than through arm's-length bargaining.
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It was unsecured and dependent on New CertainTeed's continued financial ability to perform.
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DBMP could not assign its rights without New CertainTeed's consent.
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Enforcement depended on DBMP's management, whose interests substantially overlapped with those of the entities responsible for funding.
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Its practical enforceability could depend on whether a confirmable § 524(g) plan ultimately emerged.
The parties' later stipulation that the agreement was enforceable was relevant but not dispositive. Nor did earlier judicial statements concerning its enforceability conclusively establish its value for fraudulent transfer purposes.
Nevertheless, the agreement had been partially performed, and New CertainTeed's interest in securing a successful reorganization provided some practical assurance that its obligations would be honored.
The Court therefore determined that further evidence was necessary.
Importantly, Judge Edwards also recognized that without the Funding Agreement, DBMP's remaining assets could not plausibly equal its asbestos liabilities. Consequently, if the agreement ultimately is excluded from value, the absence of reasonably equivalent value could be established without first determining the precise amount of the asbestos claims.
The motion for partial summary judgment was denied, leaving the constructive fraudulent transfer claims unresolved.
Previous DBMP Decisions and Continuing Appellate Litigation
This decision is only the latest in a lengthy series of rulings from the Bankruptcy Court, District Court, and Fourth Circuit addressing the consequences of DBMP's Texas Two-Step. Several have previously been discussed on North Carolina Bankruptcy Expert.
Bankruptcy Court — Initial Stay and Injunction Decisions (2021):
The Bankruptcy Court initially extended bankruptcy protections to related nondebtor entities while expressing substantial concerns that asbestos claimants had lost direct access to Old CertainTeed's operating assets and instead became dependent on DBMP's willingness and ability to enforce the Funding Agreement.
District Court — Herlihy v. DBMP (2024):
In W.D.N.C.: Herlihy v. DBMP — Relief from the Automatic Stay Requires Both Bad Faith and Objective Futility, I discussed Judge Kenneth Bell's affirmance of the Bankruptcy Court's refusal to lift the automatic stay for individual asbestos claimants.
Fourth Circuit — Herlihy v. DBMP (2026):
In 4th Cir.: Herlihy v. DBMP — Fourth Circuit Upholds Stay in DBMP Texas Two-Step Asbestos Bankruptcy, I discussed the Fourth Circuit's divided February 11, 2026, decision affirming the refusal to lift the automatic stay.
Judge Niemeyer's majority opinion, joined by Judge Harris, allowed DBMP to continue pursuing a § 524(g) resolution, while Judge King dissented, criticizing the use of bankruptcy protection by financially healthy corporate enterprises to prevent injured claimants from pursuing jury trials.
U.S. Supreme Court — Petition for Certiorari (September 17, 2026):
As Rochelle reports, on the very same day Judge Edwards issued the present decision, asbestos claimants filed a petition for certiorari in Herlihy v. DBMP LLC, No. 26-394.
The petition asks the Supreme Court to determine whether using bankruptcy as part of a Texas Two-Step restructuring lacks good faith such that cause exists to lift the automatic stay under § 362(d).
This presents a distinct but closely related question from that addressed by Judge Edwards. The certiorari petition challenges the continued availability of bankruptcy protection, while the fraudulent transfer litigation challenges the economic validity of the restructuring itself.
The petition also brings into focus the differences between the Fourth Circuit's treatment of DBMP and the Third Circuit's decisions rejecting the use of bankruptcy by Johnson & Johnson's LTL Management without sufficient financial distress.
As of this writing, the petition remains pending.
Bankruptcy Court — Privilege and Discovery Disputes (2026):
The related adversary proceedings have also produced extensive attorney-client privilege litigation concerning the planning and implementation of the restructuring.
In Bankr. W.D.N.C.: DBMP Gets Stay Pending Appeal on Privilege Waiver Ruling, I discussed Judge Edwards' decision to protect potentially privileged documents while appellate review was sought.
In Bankr. W.D.N.C.: Official Committee v. DBMP III — Clarification of Prior Orders and Rejection of Preclusive Effect Arguments, I discussed the Court's clarification that earlier preliminary injunction findings were not formally preclusive in subsequent litigation.
District Court — Denial of Interlocutory Appeal (2026):
In W.D.N.C.: DBMP v. Official Committee — No Interlocutory Appeal of Privilege Ruling; Six Years Into the Texas Two-Step, Discovery Must Move Forward, I discussed the District Court's refusal to permit another interlocutory appeal, emphasizing the lengthy delay already associated with DBMP's bankruptcy and the need to proceed toward adjudication.
Commentary:
The central significance of Judge Edwards' opinion is not that the Funding Agreement has been found sufficient to defeat the fraudulent transfer claims. It has not. Rather, the ruling allows the Funding Agreement to remain potentially valid consideration, despite being an unsecured promise by an affiliated company to provide future funding.
Professor Bruce A. Markell of Northwestern University, commenting on the opinion for Rochelle's Daily Wire, offers an important criticism.
Markell acknowledges the Court's extensive treatment of the historical exclusion for promises of support but questions its transformation of that doctrine into a test focused on the uncertainty of future value. Historically, courts sometimes avoided transfers notwithstanding recognition that the promises had genuine economic value.
More importantly, Markell argues that the ruling creates a procedural advantage for companies employing the Texas Two-Step. By treating unsecured, nonassignable, affiliate-controlled funding obligations as potentially sufficient consideration requiring factual development, courts may permit these restructurings to survive early dispositive motions and continue through years of litigation.
As Markell succinctly concludes:
Planned two-steps gain a template; pending debtors gain leverage.
That criticism deserves serious consideration.
First, the difference between enforceable contractual rights and actual creditor protection cannot be overlooked. Before the restructuring, asbestos claimants had access to the same substantial operating assets available to CertainTeed's other unsecured creditors. Afterward, they had claims against DBMP, whose principal source of additional recovery was a contractual promise requiring enforcement against an affiliate controlled within the same corporate structure.
Even if that promise ultimately proves enforceable, it is hardly self-evident that creditors received equivalent protection.
Second, procedural delay may itself be one of the most significant practical benefits of the Texas Two-Step. The claimants must challenge not only the bankruptcy filing and continuation of the automatic stay, but also the restructuring, the sufficiency of its consideration, the rights and obligations under the Funding Agreement, and potentially years of valuation and estimation disputes.
Each issue may be legally distinct and deserving of careful adjudication. Cumulatively, however, they can create an extraordinary obstacle to timely creditor recovery.
This is particularly troubling where the affected creditors include individuals suffering from mesothelioma and other asbestos-related diseases. Their injuries and life expectancies make delay fundamentally different from delay in an ordinary commercial dispute.
Third, Markell's criticism identifies an important problem with treating litigation over the Funding Agreement as economically neutral. If a corporation can transfer substantially all of its operating assets away from tort liabilities while substituting an affiliate's conditional promise to pay, the costs and consequences of litigating the promise's adequacy fall disproportionately on creditors.
Even if those creditors ultimately prevail, the delay may have achieved significant practical benefits for the corporate enterprise.
That does not mean Judge Edwards necessarily erred in denying summary judgment. Her conclusion that the statutory exclusion cannot automatically encompass every commercial promise of future performance has considerable force. Commercial transactions routinely depend on executory obligations, and a categorical rule treating all such promises as valueless would have consequences far beyond Texas Two-Step restructurings.
Nonetheless, the Court's analysis also demonstrates the difficulty of applying traditional fraudulent transfer doctrine to a restructuring specifically designed to exchange direct access to corporate assets for a promise of future funding.
Fourth, the consumer bankruptcy implications should not be ignored. Chapter 7 trustees and Chapter 13 debtors regularly confront prepetition transfers involving family members, affiliated businesses, promises of future assistance, and transactions involving less than contemporaneous cash consideration. This opinion provides an extensive discussion of the distinction between enforceable executory consideration and an excluded promise of future support under § 548 and comparable state law, including North Carolina's Uniform Voidable Transactions Act.
But consumer debtors ordinarily do not have the resources to litigate these distinctions for years. Nor can they generally isolate liabilities in a newly created entity while retaining most assets in an operating affiliate outside bankruptcy.
There remains a striking disparity between the opportunities available to sophisticated corporate debtors and those available to individuals seeking relief from far smaller debts.
Finally, the Supreme Court petition may ultimately prove more consequential than the present fraudulent transfer decision. If the Supreme Court takes Herlihy, it could address the threshold question of whether a financially healthy enterprise may employ bankruptcy protections through a Texas Two-Step for the purpose of resolving mass-tort liabilities.
Meanwhile, Judge Edwards' ruling permits litigation over the Funding Agreement to continue, with the separate asbestos claims estimation hearing currently scheduled for no earlier than September 2028.
There is certainly a legitimate role for § 524(g) trusts in equitably compensating present and future asbestos claimants. But the Texas Two-Step raises the fundamental question of whether that mechanism should be available to a corporate enterprise that deliberately segregates its tort liabilities from substantially all of its operating assets.
As Professor Markell recognizes, the question is not merely whether the Funding Agreement might ultimately have value. It is whether allowing that promise to remain sufficient to defeat early adjudication gives the companies employing the Texas Two-Step an advantage simply through the passage of time.
Nearly seven years after DBMP filed bankruptcy, that remains an increasingly difficult concern to dismiss.
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