Attorney General Bonta to Supreme Court: Healthy, Solvent Corporations Should Not Exploit Bankruptcy to Avoid Liability

OAKLAND — Attorney General Rob Bonta today joined a multistate amicus brief urging the U.S. Supreme Court to review a bankruptcy court’s decision permitting a Texas company to exploit an elaborate, unfair bankruptcy loophole enabling otherwise healthy corporations to avoid financial liability without ever declaring bankruptcy themselves. The brief, filed in Bestwall LLC v. Official Committee of Asbestos Claimants, asks the Supreme Court to scrutinize a bankruptcy court’s decision to enter a preliminary injunction barring all injury litigation against a solvent entity that was created as part of a scheme known as the “Texas Two-Step,” a reference to a procedure under Texas law that allows for a company to divide itself into two entities. In the Texas Two-Step, one of the two entities is assigned the solvent corporation’s financial liability, and then files for bankruptcy. Left in place, the Texas Two-Step has the potential to undermine states’ critical role in protecting consumers.

“When a company harms consumers, it should face the consequence. Bankruptcy should not be exploited to absolve solvent corporations of accountability for harm they inflict on people,” said Attorney General Bonta. “Corporations are trying to use the Texas Two-Step scheme as a way to shield their profits from legitimate tort claims and avoid reckoning with the law. This is wrong. States must be able to enforce consumer protection laws, victims must have their day in court, and loopholes like this must be closed.” 

Solvent corporations seek to use the Texas Two-Step scheme to access the Bankruptcy Code’s coercive, nonconsensual tools — including injunctions against tort claims filed in state court — while remaining free from the burdens of bankruptcy-court oversight. Bestwall LLC v. Official Committee of Asbestos Claimants involves the bankruptcy of Bestwall LLC, a company created to take on the asbestos-related liability of Georgia-Pacific. Georgia-Pacific faced over 60,000 personal injury lawsuits based on the sale of paper, packaging, and building products laden with asbestos.

If allowed to stand, the lower court ruling has the potential to limit corporate liability for violating the law and would likely lead to more frequent use of the Texas Two-Step scheme, including to obtain injunctions potentially barring states’ litigation against financially viable companies. Courts could halt litigation against solvent corporate affiliates for years, all the while shielding billions in assets from creditors and forcing victims to accept pennies on the dollar for their claims. If the Supreme Court reviews the case, reversal could put an end to a critical element of the Texas Two-Step by stripping bankruptcy courts of jurisdiction to enjoin civil claims against solvent afflicted corporations that never filed bankruptcy.

Last September, Attorney General Bonta filed a letter with the Supreme Court in a case arising from Purdue Pharma’s attempted bankruptcy reorganization plan, which at the time, shielded the Sacklers from all private, opioid-related civil lawsuits. In the letter Attorney General Bonta noted that California and other states had consistently argued that key aspects of Purdue Pharma’s bankruptcy plan were not authorized by the Bankruptcy Code. 

In filing the brief, Attorney General Bonta joins the attorneys general of North Carolina, Arizona, Colorado, Connecticut, Delaware, Illinois, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Nevada, New Jersey, New Mexico, New York, North Dakota, Oregon, Pennsylvania, Rhode Island, South Dakota, Vermont, Washington, Wisconsin, and the District of Columbia.

A copy of the amicus brief can be found here.