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Circuit Court Affirms Automatic Stay as to Georgia-Pacific’s Asbestos Lawsuits

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Court: United States Court of Appeals for the Fourth Circuit

In 1965, Georgia-Pacific LLC (Old GP) merged with Bestwall Gypsum Company, a manufacturer of asbestos-containing products. In 2017, Georgia-Pacific LLC underwent a divisional merger under Texas law. As a result, Old GP ceased to exist, and its assets and liabilities were divided between two new entities as wholly owned subsidiaries of Georgia-Pacific Holdings LLC: Bestwall LLC (Bestwall) and Georgia-Pacific LLC (New GP).

In accordance with this merger, Bestwall became solely responsible for all asbestos-related liabilities. Following the restructuring, Bestwall filed a voluntary petition for chapter 11 bankruptcy in the Western District of North Carolina. Upon Bestwall filing for bankruptcy, New GP’s indemnification obligations included the costs of administering the bankruptcy and the costs of funding an asbestos trust. 

At the time it filed for bankruptcy, Bestwall also filed an adversary proceeding seeking a preliminary injunction to enjoin any asbestos-related claims against New GP — (which was still named as a defendant in asbestos lawsuits despite Bestwall taking sole responsibility for asbestos claims) — or alternatively, for a declaration that the automatic stay as to Bestwall also applied to new claims against GP.

Bestwall asserted that its requested relief was necessary, as asbestos claimants would proceed against New GP for the same claims already in the Bestwall bankruptcy proceeding, thus rendering the bankruptcy futile. The bankruptcy court agreed, determining that it had “related to” subject matter jurisdiction under 28 U.S.C. § 1334(b) to enjoin the claims against New GP. The bankruptcy court also concluded that Bestwall, itself, met the requirements for the entry of a preliminary injunction because it had a realistic possibility of reorganization. Subsequently, the Official Committee of Asbestos Claimant Representatives appealed to the United States District Court for the Western District of North Carolina, which affirmed the judgments of the Bankruptcy Court. The claimant representatives then appealed to the Fourth Circuit.

As a preliminary matter on appeal, Bestwall argued that the District Court erred in finding that the claimant representatives had appellate standing. The Circuit Court noted that the test for standing to appeal a bankruptcy court’s order is whether the party is a “person aggrieved” by the order. Here, the Circuit Court found that the District Court properly determined that the claimant representatives had standing to appeal as the group represents parties who may become claimants during the pendency of the injunction and would thereby be enjoined from pursuing their as-yet-unfiled claims against New GP.

Turning to the claimant representatives’ arguments on appeal, they first argued that the bankruptcy court lacked “related to” jurisdiction to enter the preliminary injunction. Under 28 U.S.C. § 1334(b), a bankruptcy court has jurisdiction over civil proceedings “arising in or related to cases under Title 11.”  Courts generally follow a broad test for “related to” jurisdiction, following Pacer, Inc. v. Higgins (the “Pacor Test”), which held that a civil proceeding is “related to” a bankruptcy case if “the outcome of that proceeding could conceivable have any effect on the estate being administered in bankruptcy.” Using the Pacor Test, the Circuit Court agreed with the District Court’s determination that the bankruptcy court had “related to” jurisdiction to enjoin the claims against New GP. The Circuit Court emphasized that the conclusion was based on the specific circumstances of the instant matter, which included the involvement of thousands of identical claims against New GP and Bestwall, and the fact that the claims against New GP are, or could be, pending in many state courts around the country.

In addition, the claimant representatives argued that the bankruptcy court lacked jurisdiction to enjoin asbestos litigation against New GP because Old GP attempted to improperly manufacture jurisdiction, which prevents the court from exercising “related to” jurisdiction. The Circuit Court disagreed, noting that without the restructuring, asbestos claims could have remained with Old GP. Moreover, in that scenario, if Old GP had filed for bankruptcy, the bankruptcy court would have jurisdiction over those claims as it did over the same claims here. Thus, the instant matter differs from situations involving sham transactions solely for the creation of otherwise unobtainable jurisdiction. Relatedly, the Circuit Court noted that if the claimants asserted that they were adversely affected monetarily by the ongoing bankruptcy, then the time and place to raise that concern was at plan conformation, not via a jurisdictional challenge going to the merits of reorganization.

Lastly, the claimant representatives argued that even if the bankruptcy court properly exercised jurisdiction over the claims against New GP, the bankruptcy court should not have granted the preliminary injunction because (1) it engaged in the wrong legal inquiry by focusing on the likelihood of reorganization rather than on the likelihood of the court confirming a plan that included a permanent injunction, and (2) it applied the wrong standard by focusing on the realistic possibility of reorganization instead of requiring a clear showing of successful reorganization. The Circuit Court disagreed with both points. First, the court noted that in order to grant a preliminary injunction, courts must evaluate whether the plaintiff is likely to succeed on the merits. In a Chapter 11 bankruptcy, the focus is not on resolving a particular dispute but rather a debtor’s rehabilitation and reorganization; thus, the District Court appropriately considered Bestwall’s realistic likelihood of successfully reorganizing. The court further noted that in the context of a preliminary injunction, a “clear showing” standard is inappropriate before the plan-confirmation stage, as the debtor would have to provide significant evidence that it would be able to reorganize before the entry of a preliminary injunction necessary to make such a reorganization possible.

For these reasons, the Circuit Court affirmed the District Court’s finding that the bankruptcy court had jurisdiction to issue the preliminary injunction declaring an automatic stay in asbestos lawsuits as to Bestwall and New GP and applied the correct standard in doing so.

Read the full decision here.