Fourth Circuit Confirms No Financial-Distress Prerequisite for Bankruptcy Court Jurisdiction: En Banc Rehearing Denied in Bestwall (Texas Two‑Step Context)

Fourth Circuit Confirms No Financial-Distress Prerequisite for Bankruptcy Court Jurisdiction: En Banc Rehearing Denied in Bestwall (Texas Two‑Step Context)

Introduction

In Bestwall LLC v. Official Committee of Asbestos Claimants of Bestwall, the U.S. Court of Appeals for the Fourth Circuit denied rehearing en banc of a published panel decision holding that a debtor’s financial condition is irrelevant to subject-matter jurisdiction in a bankruptcy “case under Title 11.” The denial leaves intact the panel’s rule that Article III judicial power and 28 U.S.C. § 1334 confer jurisdiction over bankruptcy cases without a constitutional threshold of “financial distress,” even where a Texas Two-Step divisional merger and a funding agreement render the debtor solvent in practical terms.

The dispute arises from Georgia-Pacific’s use of a Texas divisional merger to isolate asbestos liabilities in a new entity, Bestwall LLC, coupled with a funding agreement backed by “New Georgia-Pacific.” Bestwall filed Chapter 11 in the Western District of North Carolina in 2017, triggering the automatic stay and a preliminary injunction extending stay protections to the non-debtor parent, thereby halting thousands of asbestos tort suits. The Official Committee of Asbestos Claimants challenged the bankruptcy court’s subject-matter jurisdiction, arguing that the Constitution’s Bankruptcy Clause permits bankruptcy only for truly bankrupt (i.e., financially distressed) debtors.

By an 8–6 vote, the Fourth Circuit declined en banc review. Judge King authored a vigorous dissent from denial, asserting the panel’s approach conflicts with Article I, the Nation’s bankruptcy history and tradition, and the Seventh Amendment. The denial cements, as circuit law, the panel’s jurisdictional holding—an especially consequential development for mass-tort restructurings leveraging the Texas Two-Step within the Fourth Circuit.

Summary of the Opinion

The court’s order denies the appellant Committee’s petition for rehearing en banc. A poll of active, non-disqualified judges did not yield a majority in favor of rehearing. Judges King, Gregory, Wynn, Thacker, Benjamin, and Berner voted to grant rehearing; Chief Judge Diaz and Judges Wilkinson, Niemeyer, Agee, Harris, Quattlebaum, Rushing, and Heytens voted to deny; Judge Richardson did not participate. Judge King issued a published dissent from the denial.

The effect of the denial is to preserve the panel’s published ruling (Bestwall LLC v. Official Committee of Asbestos Claimants of Bestwall, LLC, 148 F.4th 233 (4th Cir. 2025)), which held that:

  • The debtor’s financial condition may matter for various Bankruptcy Code tests (e.g., dismissal for cause or good faith), but it is irrelevant to subject-matter jurisdiction.
  • Article III extends judicial power to all cases arising under federal law; 28 U.S.C. § 1334(a) gives district courts original and exclusive jurisdiction over cases “under title 11.”
  • Thus, once a case is filed under Title 11, the bankruptcy court (through referral) has subject-matter jurisdiction; the Constitution does not impose a preliminary financial-distress requirement to unlock that jurisdiction.

Judge King’s dissent argues the opposite: that the Bankruptcy Clause’s original meaning limits “bankruptcies” to the honest but unfortunate debtor who is financially distressed (insolvent or unable to pay), and that the panel’s approach unconstitutionally expands bankruptcy to solvent companies employing strategic devices (like the Texas Two-Step) to manage tort liabilities and halt jury trials through the automatic stay and injunctions.

Analysis

Precedents and Authorities Cited

The dissent canvasses constitutional text, Founding-era sources, early bankruptcy statutes, and modern decisions:

  • Bestwall LLC v. Official Committee of Asbestos Claimants of Bestwall, LLC, 148 F.4th 233 (4th Cir. 2025) (panel decision). The controlling decision (left intact) states that financial condition is irrelevant to bankruptcy subject-matter jurisdiction because Article III covers cases arising under federal law and § 1334(a) grants jurisdiction over cases under Title 11.
  • In re Bestwall, 658 B.R. 348 (Bankr. W.D.N.C. 2024). Cited for Bestwall’s admission that a funding agreement with New Georgia-Pacific ensures the debtor can satisfy asbestos liabilities—i.e., no financial distress as a practical matter.
  • Founding-era and historical sources:
    • Continental Illinois Nat’l Bank & Trust Co. v. Chicago, Rock Island & Pac. Ry. Co., 294 U.S. 648, 670–71 (1935) (bankruptcy’s “primary purposes” include relief for the honest but unfortunate debtor; early acts presumed insolvency).
    • Grogan v. Garner, 498 U.S. 279, 286–87 (1991) (similar “honest but unfortunate debtor” formulation).
    • International Shoe Co. v. Pinkus, 278 U.S. 261, 265 (1929) (Bankruptcy Clause did not redefine bankruptcy; uniform national bankruptcy law).
    • The Federalist No. 42 (Madison) (need for uniformity in insolvency/bankruptcy laws).
    • Founding-era dictionaries (Johnson, Sheridan, Perry, Ash) defining “bankruptcy/bankrupt” as insolvency or inability to pay.
  • Originalist method/interpretive scaffolding:
    • Kennedy v. Bremerton Sch. Dist., 597 U.S. 507, 535–36 (2022) (history and tradition as guides).
    • TransUnion LLC v. Ramirez, 594 U.S. 413, 424–26 (2021) (history/tradition as constraints).
    • FDA v. Alliance for Hippocratic Medicine, 602 U.S. 367, 378 (2024) and Altman v. City of High Point, 330 F.3d 194, 200 (4th Cir. 2003) (begin with constitutional text).
    • South Carolina v. United States, 199 U.S. 437, 448 (1905) (Constitution’s meaning fixed at adoption).
    • D.C. v. Heller, 554 U.S. 570, 605 (2008); Ariz. State Legislature v. AIRC, 576 U.S. 787, 813–14 (2015) (use of historical dictionaries to ascertain original meaning).
  • Scope of the Bankruptcy Clause:
    • Central Va. Community College v. Katz, 546 U.S. 356, 373 (2006) (discussing early U.S. bankruptcy law and the Act of 1800).
    • United States v. Rahimi, 602 U.S. 680 (2024) (tradition-consistency framing invoked by the dissent).
  • Jurisdictional allocation:
    • 28 U.S.C. § 1334(a) (district courts have original and exclusive jurisdiction of cases under Title 11).
    • Bowles v. Russell, 551 U.S. 205, 212 (2007) (Congress defines federal court jurisdiction within constitutional bounds).
    • Trump v. CASA, Inc., 145 S. Ct. 2540, 2551 (2025) (as quoted by the dissent: statutory authority “is not freewheeling”).
  • Policy cautions:
    • Furness v. Lilienfield, 35 B.R. 1006, 1009 (D. Md. 1983) (warning against abuse of Chapter 11 to evade litigation and obligations).
    • Truck Insurance Exchange v. Kaiser Gypsum Co., 602 U.S. 268, 272 (2024) (Bankruptcy offers a fresh start to those in financial distress, a touchstone the dissent invokes to argue Bestwall’s case falls outside the Clause).

The panel’s reasoning (as summarized in the dissent and the order) rests primarily on constitutional structure and the jurisdictional statute: Article III “arising under” power plus § 1334(a) suffice; the debtor’s solvency or financial condition does not bear on subject-matter jurisdiction.

Legal Reasoning

Panel’s jurisdictional rule (now controlling in the Fourth Circuit):

  • Article III extends federal judicial power to “all Cases, in Law and Equity, arising under” federal law. A bankruptcy case filed under Title 11 is a federal-law case.
  • 28 U.S.C. § 1334(a) confers original and exclusive jurisdiction on district courts over “all cases under title 11.” The statute does not impose a debtor-insolvency requirement as a jurisdictional threshold.
  • While a debtor’s financial condition may be relevant to other Code inquiries (e.g., dismissal for cause, the good-faith requirement for Chapter 11 filings), it is not a prerequisite for jurisdiction. In other words, eligibility, good faith, and plan-confirmation standards are gatekeeping merits inquiries—not jurisdictional prerequisites.

Judge King’s dissent (constitutional and historical attack on jurisdiction):

  • Text, history, and tradition at the Founding show “bankruptcies” meant relief for debtors who were financially broken—insolvent or unable to pay. Founding-era dictionaries uniformly define “bankruptcy” in terms of insolvency. Early U.S. bankruptcy statutes presumed insolvency and centered on commercial debtors.
  • Thus, the Bankruptcy Clause’s grant of power to Congress to enact “uniform Laws on the subject of Bankruptcies” is limited by that original public meaning. Congress may not authorize bankruptcy relief for solvent entities as a strategic litigation device without financial distress; doing so exceeds Article I power and cannot be laundered through § 1334’s jurisdictional grant.
  • By allowing a solvent entity created through a Texas Two-Step to invoke the automatic stay and extend injunctions to a non-debtor parent, the panel’s approach, according to the dissent, reconfigures the civil justice system, delays tort claimants’ Seventh Amendment jury trials, and disrupts federalism values by halting state-court tort proceedings—despite no genuine need for bankruptcy’s collective process.
  • The dissent emphasizes the human toll of delay: according to its account, in the eight years since the petition, approximately 25,000 asbestos claimants (including 10,000 with mesothelioma) died without their cases proceeding, while an estimated 56,000 active plaintiffs remain stayed.

Doctrinal tension highlighted by the denial:

  • The heart of the dispute is whether “financial distress” is a constitutional prerequisite to the very category of cases that can be “bankruptcies” (as the dissent argues), or whether distress is a non-jurisdictional consideration policed by the Code’s dismissal, good-faith, and confirmation standards (as the panel holds).
  • The panel’s approach aligns with a modern understanding that Congress can define the scope of bankruptcy relief broadly, with courts using statutory tools (e.g., dismissal for bad faith) to weed out abusive filings. The dissent urges a more stringent originalist constraint on Congress’s Bankruptcy Clause power itself.

Impact

Immediate effect within the Fourth Circuit:

  • The panel’s rule—no financial-distress threshold for subject-matter jurisdiction—stands as binding circuit precedent. Bankruptcy courts in the Fourth Circuit remain empowered to adjudicate Texas Two-Step filings by solvent debtors, with objections to financial condition routed through non-jurisdictional doctrines (e.g., motions to dismiss for lack of good faith or for cause).
  • Mass-tort debtors (and non-debtor affiliates) operating in the Western District of North Carolina—including entities like DBMP LLC, Aldrich Pump LLC, and Murray Boiler LLC referenced by the dissent—may take comfort from the jurisdictional clarity, though they still must satisfy distinct statutory and equitable requirements to maintain cases, obtain injunctions, and confirm plans.

Tactical consequences for litigants:

  • For debtors and affiliates: The jurisdictional door remains open. The automatic stay and preliminary injunctions extending to non-debtors remain available tools, subject to the usual standards.
  • For tort claimants and committees: The most promising avenues to challenge Texas Two-Step cases in the Fourth Circuit will continue to be:
    • Dismissal for lack of good faith or “cause” under the Code;
    • Objections to extensions of the stay to non-debtors;
    • Strict scrutiny of any third-party releases or channeling injunctions at plan confirmation;
    • Expedited case management to reduce prejudice from delay.

National landscape and potential Supreme Court review:

  • The dissent frames a constitutional theory that, if adopted, would reorient mass-tort bankruptcy practice by making “financial distress” a jurisdictional gatekeeper. That view emphasizes the Bankruptcy Clause’s original public meaning and raises Seventh Amendment and federalism concerns about stays and non-debtor protections.
  • Other circuits have grappled with Texas Two-Step filings primarily through statutory good-faith and feasibility analyses, rather than constitutional jurisdictional limits. The Fourth Circuit’s decision thus does not obviously create a classic circuit split—but the dissent’s constitutional argument and the high stakes in mass-tort practice may attract certiorari interest.

Policy signal:

  • The 8–6 division (with a detailed dissent spotlighting human and federalism costs) will likely intensify legislative and rulemaking conversations about Texas Two-Step restructurings, non-debtor protections, and temporal safeguards for rapidly deteriorating tort claimants.

Complex Concepts Simplified

  • Subject-matter jurisdiction (bankruptcy): The legal authority of a federal court to hear a bankruptcy case. Under 28 U.S.C. § 1334(a), district courts have original and exclusive jurisdiction over “all cases under title 11.” Bankruptcy courts exercise that jurisdiction by referral.
  • Article I vs. Article III: Article I gives Congress power to enact “uniform Laws on the subject of Bankruptcies.” Article III defines federal judicial power (including over cases arising under federal law). The panel view: a petition under Title 11 creates an Article III “arising under” case; § 1334 provides jurisdiction. The dissent: the Bankruptcy Clause limits the very category of what can be a “bankruptcy,” requiring financial distress at the threshold.
  • Texas Two-Step: A corporate restructuring using Texas’s divisional merger statute to split a company into two: one “BadCo” with legacy liabilities (here, Bestwall) and another “GoodCo” with most assets (New Georgia-Pacific). BadCo then files Chapter 11, often backed by a funding agreement from GoodCo, while GoodCo seeks protection via injunctions that extend the automatic stay.
  • Funding agreement: A contract by which a non-debtor affiliate commits to fund the debtor’s liabilities or reorganization. In Bestwall, the dissent notes Bestwall’s concession that a funding agreement backed by billions ensures ability to pay.
  • Automatic stay and extended injunctions: On filing, 11 U.S.C. § 362(a) stays litigation against the debtor. Courts sometimes issue preliminary injunctions extending protection to non-debtors (like parents or affiliates) if necessary to the reorganization. The dissent criticizes this as shielding a solvent non-debtor (New Georgia-Pacific) from tort suits without the burdens of bankruptcy.
  • Good-faith filing vs. jurisdiction: Many challenges to mass-tort bankruptcies argue the filing was not in “good faith” (a statutory/ equitable requirement) and should be dismissed for cause. The panel clarifies that such challenges go to case administration and dismissal—not to the court’s power to hear the case in the first place.
  • “Honest but unfortunate” debtor: A traditional description (from Supreme Court cases) of bankruptcy’s core beneficiary—someone in genuine financial distress needing a fresh start or collective process. The dissent says this concept reflects the constitutional boundary of “Bankruptcies,” not just policy rhetoric.

Conclusion

The Fourth Circuit’s denial of rehearing en banc in Bestwall solidifies an important jurisdictional principle: a debtor’s financial condition is not a constitutional or statutory prerequisite to bankruptcy court subject-matter jurisdiction in a “case under Title 11.” Challenges to Texas Two-Step filings in the Fourth Circuit will accordingly continue to turn on non-jurisdictional doctrines—good-faith filing, cause for dismissal, standards for extending automatic-stay protections to non-debtors, and plan confirmation requirements—rather than on the court’s power to adjudicate the case.

Judge King’s dissent, however, stakes out a comprehensive originalist critique of modern mass-tort bankruptcies. By rooting the Bankruptcy Clause in Founding-era understandings of insolvency and the “honest but unfortunate” debtor, the dissent argues the panel’s approach exceeds Article I, disrupts federalism, delays jury trials, and enables solvent entities to leverage bankruptcy’s stays and injunctions without bearing bankruptcy’s burdens. The dissent’s detailed historical and policy critique will likely reverberate in future litigation and legislative debates, even as the controlling law in the Fourth Circuit remains the panel’s jurisdictional rule.

Key takeaway: Within the Fourth Circuit, there is no constitutional financial-distress threshold for bankruptcy court jurisdiction. The most effective constraints on Texas Two-Step cases will continue to be statutory and equitable tools internal to the Bankruptcy Code and confirmation process, unless and until the Supreme Court or Congress recalibrates the constitutional boundary the dissent seeks to enforce.

Case Details

Year: 2025
Court: Court of Appeals for the Fourth Circuit

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