Bad Faith Stay Relief in § 524(g) Cases Requires Both Subjective Bad Faith and Objective Futility

I. Introduction

This appeal arises from DBMP, LLC’s Chapter 11 bankruptcy, which automatically stayed thousands of asbestos personal-injury suits under 11 U.S.C. § 362(a) and was reinforced by a bankruptcy-court preliminary injunction extending protections to related non-debtors. Michael and Ann Herlihy and the Estate of Peter L. Bergrud (collectively, the “Claimants”) sought individualized relief from the automatic stay under 11 U.S.C. § 362(d) so they could proceed with their state-court tort actions in Washington and California.

The Claimants’ central theory was that DBMP’s petition was filed “in bad faith” because the corporate group was allegedly solvent and capable of paying claims in full, and because the restructuring resembled a “Texas Two-Step” divisional-merger strategy designed to route asbestos litigation into bankruptcy and away from jury trials. The bankruptcy court denied stay relief, and the district court affirmed.

The Fourth Circuit framed the appeal narrowly: it would review only whether the bankruptcy court abused its discretion in denying relief from the automatic stay. The panel expressly declined to decide (i) whether the Chapter 11 case should be dismissed, (ii) whether the Texas Two-Step is lawful, or (iii) whether Congress constitutionally could enact § 524(g) without an insolvency requirement.

II. Summary of the Opinion

The Fourth Circuit affirmed the denial of stay relief. It held that the bankruptcy court properly applied the circuit’s controlling stay-relief framework from In re Robbins, 964 F.2d 342 (4th Cir. 1992). The panel further held that “bad faith” can constitute “cause” to lift the stay, but that in the Fourth Circuit the movant must satisfy a stringent two-part test drawn from Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir. 1989) and In re Premier Automotive Servs., 492 F.3d 274 (4th Cir. 2007): the movant must show both subjective bad faith and objective futility.

On this record, the court found no abuse of discretion in the bankruptcy court’s conclusion that DBMP pursued a legitimate reorganization objective: a § 524(g) asbestos plan for addressing massive present and future asbestos liabilities. The court rejected the argument that solvency (or being “non-distressed”) is, by itself, evidence of bad faith, emphasizing that § 524(g) does not impose an insolvency requirement.

III. Analysis

A. Precedents Cited

• In re Robbins, 964 F.2d 342 (4th Cir. 1992)
  The cornerstone precedent for evaluating “cause” to lift the automatic stay under § 362(d) in the Fourth Circuit. Robbins requires balancing prejudice to the estate against hardship to the stay-relief movant and identifies three guideposts: (1) whether the dispute is purely state law; (2) judicial economy/interference with the bankruptcy; and (3) whether the estate can be protected by channeling enforcement back through the bankruptcy court. The panel treated Robbins as controlling and approved the bankruptcy court’s application.
• In re Lee, 461 F. App'x 227 (4th Cir. 2012) and In re McCullough, 495 B.R. 692 (W.D.N.C. 2013)
  Cited as examples of lower courts applying Robbins to evaluate whether a bankruptcy court abused its discretion in stay-relief decisions, reinforcing Robbins’ entrenched role in the circuit.
• Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir. 1989) and In re Premier Automotive Servs., 492 F.3d 274 (4th Cir. 2007)
  These cases supply the Fourth Circuit’s “good faith” architecture. In Carolin, in the context of dismissal “for cause,” the court articulated the requirement of both subjective bad faith and objective futility. Premier reiterated that two-prong structure. The panel imported that framework to the “bad faith as cause” theory in the stay-relief context, aligning the implied good-faith requirement across the Code.
• In re Albany Partners, Ltd., 749 F.2d 670 (11th Cir. 1984)
  Cited via Carolin to support the general proposition that bankruptcy relief is equitable and conditioned on good-faith use of the system.
• Truck Insurance Exchange v. Kaiser Gypsum Co., 602 U.S. 268 (2024) and Kane v. Johns-Manville Corp., 843 F.2d 636 (2d Cir. 1988)
  These authorities anchor the majority’s view that § 524(g) was designed precisely to centralize and equitably manage massive present/future asbestos claims and protect reorganization from “crippling lawsuits.” The panel used Truck Insurance to rebut the “futility” narrative and to validate the statutory fit of DBMP’s objectives.
• T.H.E. Ins. Co. v. Davis, 54 F.4th 805 (4th Cir. 2022)
  Cited for the abuse-of-discretion framework: absent clear error of fact or legal error, denial of stay relief stands.
• Dissent-cited authorities (not adopted by the majority as governing, but important for the doctrinal conflict):
  Raleigh v. Ill. Dep't of Rev., 530 U.S. 15 (2000); Law v. Siegel, 571 U.S. 415 (2014); N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513 (1984); Hecht Co. v. Bowles, 321 U.S. 321 (1944); Pepper v. Litton, 308 U.S. 295 (1939); Furness v. Lilienfield, 35 B.R. 1006 (D. Md. 1983); In re Laguna Assocs. Ltd. P'ship, 30 F.3d 734 (6th Cir. 1994); In re Arnold, 806 F.2d 937 (9th Cir. 1986); In re Little Creek Dev. Co., 779 F.2d 1068 (5th Cir. 1986). The dissent relied on these to argue that bad faith alone constitutes “cause” for stay relief and to emphasize bankruptcy’s equitable limits.

B. Legal Reasoning

1. The Robbins balance controls routine stay relief.
The court emphasized that the automatic stay is fundamental to bankruptcy’s core purposes: preserving the estate and enabling orderly reorganization. Applying Robbins, the bankruptcy court found (and the Fourth Circuit accepted) that lifting the stay for even a few claimants would: (i) prejudice the estate and reorganization by depleting resources and destabilizing the centralized process; (ii) undermine judicial economy by pushing claims back into widely dispersed tort litigation; and (iii) imperil consistent treatment of similarly situated present and future claimants in a § 524(g) framework. The majority accepted the bankruptcy court’s prediction that stay relief could effectively unravel the case by triggering a flood of similar motions.

2. Bad faith is available in theory, but demanding in proof.
While acknowledging Robbins did not address bad faith, the panel held that bankruptcy relief is equitable and implicitly requires good faith. Thus, lack of good faith can support stay relief. But to prevent “bad faith” from swallowing statutory design, the court adopted the circuit’s established two-prong limitation: a movant must show both (i) subjective bad faith (misuse of Chapter 11 rather than pursuit of its intended objectives) and (ii) objective futility (no reasonable prospect of achieving bankruptcy’s statutory aims).

3. Solvency/non-distress is not per se bad faith under § 524(g).
The Claimants’ principal “bad faith” theme was that DBMP (and the broader enterprise) could pay claims in full. The majority held this does not establish bad faith, because § 524(g) does not require “insolvency” and Congress identified asbestos as presenting a distinctive, latency-driven form of distress and uncertainty. For the majority, DBMP’s massive and long-tail asbestos liabilities made it a paradigmatic candidate for the centralized, future-claimant-protective mechanism Congress created.

4. Objective futility was not shown, reinforced by Supreme Court asbestos-bankruptcy explanations.
The court leaned on Truck Insurance Exchange v. Kaiser Gypsum Co. to underscore that Congress built § 524(g) to channel present and future asbestos claims to a trust and to protect reorganization from destabilizing litigation pressure. That statutory validation, together with the record’s scale of claims and the ongoing progress toward estimation/mediation, supported the bankruptcy court’s finding of a reasonable possibility of success.

5. The majority’s “scope discipline.”
The opinion repeatedly distinguishes between a stay-relief appeal and a dismissal challenge. The panel treated arguments about the Texas Two-Step’s propriety, and broader constitutional critiques of non-insolvency asbestos bankruptcies, as outside the appeal’s posture. The immediate question was not whether the case should exist, but whether the bankruptcy court abused discretion in keeping the stay in place while the § 524(g) process proceeds.

C. Impact

• Elevates the threshold for “bad faith” stay relief in the Fourth Circuit.
  The most consequential feature is the explicit endorsement that bad faith can be “cause” under § 362(d), coupled with the requirement that the movant satisfy the Carolin/Premier two-prong test (subjective bad faith + objective futility). This narrows the practical availability of stay relief based on alleged “Texas Two-Step” dynamics where the debtor can plausibly pursue a § 524(g) outcome.
• Confirms that solvency alone does not defeat a § 524(g)-aimed stay.
  The opinion rejects the notion that being “non-distressed” is dispositive. Future litigants in the circuit should expect courts to focus less on balance-sheet solvency and more on whether the case fits § 524(g)’s “substantial future demands” logic and has a plausible path to a trust-based plan.
• Reinforces centralized administration and future-claimant parity as decisive equities.
  The majority treats consistent treatment of present and future asbestos claimants as a major reason to maintain the stay, signaling that individualized tort liquidations will often be viewed as disruptive to the § 524(g) architecture.
• Highlights an intra-circuit fault line.
  The dissent frames the same conduct as systematic abuse and reads § 362(d) (and Raleigh v. Ill. Dep't of Rev.) as supporting stay relief for bad faith without importing dismissal-style futility hurdles. The stark divide suggests ongoing doctrinal and policy contestation, especially in mass-tort restructuring cases.

IV. Complex Concepts Simplified

• Automatic stay (11 U.S.C. § 362(a)): An immediate freeze of most lawsuits and collection efforts against the debtor once a bankruptcy petition is filed. It prevents a “race to the courthouse” and preserves a centralized forum.
• Relief from stay (“for cause”) (11 U.S.C. § 362(d)): A creditor may ask the bankruptcy court to lift or modify the freeze. Because “cause” is open-ended, courts apply balancing tests and equitable considerations.
• § 524(g) asbestos channeling injunction and trust: A specialized Chapter 11 mechanism allowing a debtor facing large asbestos liabilities to create a trust that pays current and future claims, while an injunction channels asbestos suits to that trust rather than continuing in tort courts.
• “Texas Two-Step” divisional merger: A state-law restructuring technique (here, under Texas law) used to allocate liabilities and assets among successor entities, sometimes followed by a bankruptcy filing by the liability-bearing entity.
• Subjective bad faith vs. objective futility: Under the majority’s framework, it is not enough to show the debtor’s allegedly improper motive (subjective bad faith); the movant must also show the bankruptcy cannot realistically achieve bankruptcy’s intended statutory aims (objective futility).

V. Conclusion

Michael Herlihy v. DBMP, LLC cements a Fourth Circuit approach that is simultaneously permissive of “bad faith” as a theory for stay relief and restrictive in its application: a creditor must clear both subjective and objective hurdles, and mere solvency or the availability of nonbankruptcy payment does not itself establish bad faith where the debtor is plausibly pursuing a § 524(g) asbestos reorganization.

The opinion’s practical effect is to preserve centralized asbestos resolution in bankruptcy (including future-claimant parity) against creditor efforts to return to dispersed state-court liquidations, while leaving open—at least procedurally—separate battles over dismissal, divisional-merger legitimacy, and broader constitutional limits.