“Arising-Under Jurisdiction” Extends to Solvent Debtors:
Bestwall LLC v. Official Committee of Asbestos Claimants
and the Constitutional Scope of Bankruptcy Court Authority

Introduction

In Bestwall LLC v. Official Committee of Asbestos Claimants, the United States Court of Appeals for the Fourth Circuit resolved a question that has hovered over modern mass-tort restructurings: Does a federal court possess subject-matter jurisdiction over a voluntary Chapter 11 petition filed by a debtor that is not financially insolvent? By answering “yes,” the court cemented what this commentary calls the “Bestwall Rule” – that the Article III grant of jurisdiction over “all Cases, in Law and Equity, arising under … the Laws of the United States” is sufficient, standing alone, to confer jurisdiction over any petition invoking the Bankruptcy Code, irrespective of the debtor’s solvency.

The dispute grew out of Georgia-Pacific’s now-famous “Texas Two-Step” maneuver, which placed billions of dollars in asbestos liabilities into a new entity, Bestwall LLC, and then sent that entity to Chapter 11 armed with a funding agreement ensuring it could pay whatever was ultimately required. The Official Committee of Asbestos Claimants (the “Committee”) sought dismissal, contending that the Constitution’s Bankruptcy Clause limits federal jurisdiction to insolvent debtors. The bankruptcy court rejected the argument; the district court certified a direct appeal; and the Fourth Circuit, in a divided, published opinion, affirmed.

Summary of the Judgment

• Holding: Federal courts have subject-matter jurisdiction under 28 U.S.C. § 1334(a) over Chapter 11 petitions filed by solvent debtors because such petitions “arise under the laws of the United States.” Whether the debtor is insolvent (or in “financial distress”) is a merits question, not a jurisdictional prerequisite.
• Disposition: The Fourth Circuit affirmed the bankruptcy court’s order denying the Committee’s motion to dismiss for lack of subject-matter jurisdiction.
• Opinions:
  • Majority by Judge Quattlebaum (joined by Judge Agee).
  • Concurring opinion by Judge Agee, emphasizing practical consequences and criticizing the dissent’s historical analysis.
  • Dissent by Judge King, arguing the Constitution restricts bankruptcy jurisdiction to truly insolvent debtors and condemning the Texas Two-Step as an abuse of process.

Analysis

3.1 Precedents Cited and Their Influence

• Royal Canin U.S.A. v. Wullschleger, 604 U.S. 22 (2025) – Reinforced the breadth of “arising-under” jurisdiction, forming the backbone of the majority’s constitutional syllogism.
• 28 U.S.C. § 1334 line of cases (Valley Historic; Kirkland) – Establish subject-matter jurisdiction in bankruptcy by statutory reference; the majority treats § 1334 as constitutionally sound.
• Commerce-Clause cases (United States v. Lopez, Vermont Agency v. Stevens) – Used by the majority to illustrate that challenges to congressional power typically go to merits, not jurisdiction.
• Debtor-eligibility cases (In re Zarnel, Trusted Net Media, Hamilton Creek) – Other circuits have characterized eligibility requirements in § 109 as non-jurisdictional; the court adopts similar reasoning here.
• In re LTL Management, 64 F.4th 84 (3d Cir. 2023) – Third Circuit dismissed a Texas Two-Step case for bad faith, not for lack of jurisdiction; the Fourth Circuit leans on that distinction.
• Reid v. Covert, 354 U.S. 1 (1957) – Dissent’s anchor for constitutional limits on specialized tribunals; majority distinguishes it as personal-jurisdiction oriented.

3.2 Court’s Legal Reasoning

1. Article III Baseline. A bankruptcy petition “arises under” federal law because it invokes Title 11. That is enough for Article III.
2. Statutory Confirmation. 28 U.S.C. § 1334(a) grants district courts “original and exclusive jurisdiction of all cases under title 11.” Through § 157, district courts may refer such cases to bankruptcy courts. No constitutional infirmity exists in this delegation.
3. Eligibility v. Jurisdiction. Whether a debtor should be in bankruptcy (e.g., insolvency, good faith, financial distress) is governed by substantive provisions and equitable doctrines (bad-faith dismissal, plan confirmation standards) – but those are not prerequisites to the court’s power to hear the case.
4. Analogy to Commerce Clause. If Congress exceeds its Commerce-Clause power, the statute is invalid, yet the court still has jurisdiction to decide that question; so too with the Bankruptcy Clause.
5. Rejection of Historical Limit. The majority declines to import an insolvency requirement from colonial or English bankruptcy practice, citing the progressive “liberalization” of access to bankruptcy in statutory history.

3.3 Impact on Bankruptcy Practice and Mass-Tort Restructuring

• Jurisdictional Certainty. Litigants can no longer argue that solvency alone deprives bankruptcy courts of jurisdiction in the Fourth Circuit; similar arguments in other circuits will face steep headwinds.
• Cementing the Texas Two-Step Path. While the decision does not bless the maneuver on the merits, it removes a threshold obstacle, signalling that challenges must be framed as bad-faith or plan-confirmation disputes rather than jurisdictional strikes.
• Forum Competition. The ruling may amplify the trend of solvent defendants using divisional mergers or other strategies to funnel mass-tort exposure into Chapter 11 proceedings, particularly within the Fourth Circuit (North Carolina, Virginia, Maryland, South Carolina, West Virginia).
• Legislative Pressure. Congress may face renewed calls to amend 11 U.S.C. § 109 or to curtail divisional-merger filings, as the constitutional back-stop has proven porous.
• Intra-Circuit Tension. The strong dissent provides a roadmap for Supreme Court review by grounding its objections in originalist constitutional analysis. Future petitioners may seek certiorari to resolve the circuit split (if another circuit goes the other way) or to clarify the Bankruptcy Clause’s scope.

Complex Concepts Simplified

Subject-Matter Jurisdiction

The court’s legal authority to hear a particular kind of case. Without it, any judgment is void.

Article III “Arising-Under” Clause

Gives federal courts power over any case that turns on federal law. A bankruptcy petition necessarily relies on the federal Bankruptcy Code, so it “arises under” federal law.

Bankruptcy Clause (U.S. Const. art. I, § 8, cl. 4)

Authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.” The dissent argues this clause implicitly limits bankruptcy to insolvent debtors; the majority rejects that view.

Texas Two-Step

A divisional merger under Texas Business Organizations Code § 1.002(55)(A) that splits a company into two entities: one holding most assets, the other holding targeted liabilities. The liability entity then files for bankruptcy.

11 U.S.C. § 524(g) Asbestos Trust

A statutory mechanism allowing a debtor to channel current and future asbestos claims into a trust funded under a confirmed plan, while obtaining a broad injunction shielding the debtor and related parties from litigation.

Bad-Faith Dismissal (Carolin Doctrine)

Fourth Circuit standard requiring proof that reorganization is both objectively futile and subjectively improper before dismissing or converting a Chapter 11 case.

Conclusion

Bestwall establishes a clear, bright-line rule within the Fourth Circuit: if a petition invokes Title 11, the federal courts have jurisdiction, no matter the debtor’s balance sheet. Challenges to a solvent debtor’s use of Chapter 11 must proceed on statutory or equitable grounds (bad faith, plan feasibility, confirmation standards) rather than jurisdictional grounds.

The decision thus strengthens the strategic hand of corporate defendants employing divisional-merger or other liability-segregation tactics, while leaving open significant policy questions about fairness to tort claimants. Judge King’s dissent, steeped in historical analysis, signals that the constitutional debate is far from settled and may invite further appellate or legislative refinement.

“The Constitution grants Article III judicial power over all cases arising under the laws of the United States. The Bankruptcy Code is a law of the United States.” — Judge Quattlebaum

Whether the “Bestwall Rule” survives potential Supreme Court review or sparks congressional intervention, it has already reshaped the landscape of mass-tort bankruptcies by confirming that solvency is not a jurisdictional barrier in federal bankruptcy courts.