- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- 24-2109 (4th Circuit, Feb 11,2026) Published
- Tag(s):
-
- Ruling:
- In a split decision, a panel of the United States Court of Appeals found that the Chapter 11 bankruptcy of a solvent entity created by the "Texas Two Step" was not a per se bad faith filing and that, applying Fourth Circuit precedent, the bankruptcy court properly denied asbestos claimants relief from the automatic stay so that they could pursue their claims against the debtor outside of bankruptcy court. In a lengthy dissent, Circuit Judge King criticized the Texas Two Step as per se bad faith by "subverting the Bankruptcy Code to evade asebestos-related civil tort liability…."
- Procedural context:
- Two persons and the estate of a deceased person brought motions for relief from the automatic stay so that they could pursue their asbestos-related claims in state court. The bankruptcy court denied the motion, and the district court affirmed.
The movants timely appealed to the United States Court of Appeals for the Fourth Circuit.
- Facts:
- From the 1930s through the 1990s, CertainTeed Corporation manufactured and sold products that contained asbestos. As asbestos claims became more common, CertainTeed's asbestos claim liability increased from $10 million per year in the 1990s to more than $80 million per year since 2002. In addition, CertainTeed was paying an additional $20-$30 million per year in legal expenses. From 2002 through 2019, CertainTeed paid $1.5 billion to address asbestos claims.
CertainTeed elected to split into two companies, using the "Texas Two Step" statute (Tex. Bus. Orgs. Code Ann. § 1.002(A)(55)). Under this procedure, a corporation allocates its assets and liabilities between two newly formed corporations (a "divisional merger") and then ceases to exist.
CertainTeed assigned all of its asbestos liabilities to DBMP, LLC, which subsequently filed a Chapter 11 petition to take advantage of the asbestos provisions of 11 U.S.C. § 524(g). CertainTeed also assigned DBMP $25 million in cash (i.e., less than a year's expected asbestos claim expenses) and all the equity in CertainTeed's siding and trim business, Millwork & Panel, which had anticipated earnings before taxes of $16 million in 2020 and an estimated fair market value of $150 million (a valuation ratio that strikes this author as being on the high side). CertainTeed assigned all remaining assets and liabilities to a new entity, also called CertainTeed ("New CertainTeed"). At the same time, DBMP and New CertainTeed entered into an uncapped funding agreement that required New CertainTeed to satisfy all of DBMP's asbestos liabilities and DBMP's bankruptcy costs.
Upon completion of the Texas Two Step, DBMP filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Western District of North Carolina.
The bankruptcy court entered a preliminary injunction that prohibited claimants from bringing asbestos claims against New CertainTeed, its affiliates, and old CertainTeed's distributors. The bankruptcy court also appointed an Official Committee of Asbestos Personal Injury Claimants and the Future Claimants' Representative (the "Committee"), and the Committee moved to lift the automatic stay and objected to the preliminary objection.
After a five-day evidentiary hearing, the bankruptcy court entered a 79-page opinion denying the motion to lift the automatic stay and continuing the preliminary injunction while DBMP's bankruptcy case proceeded. In reaching its decision, the bankruptcy court relied on and applied In re Robbins, 964 F.2d 342 (4th Cir. 1992).
More than three years later, in April 2024, the appellants ("but three of the tens of thousands who filed asbestos-related tort claims against Old CertainTeed and/or its various subsidiaries, predecessors, successors, or related companies") filed motions with the bankruptcy court asking the court to lift the automatic stay so that the appellants could pursue their claims outside of the bankruptcy court.
The appellants asserted that the DBMP bankrupcy case, as a result of the Texas Two Step, was filed in subjective bad faith because the debtor and its predecssor, Old CertainTeed, intended to "deny Claimants the right to prosecute their claims in state court [and] delaying their potential recover[ies]."
The bankruptcy court denied the appellants' motion, noting that granting a motion for relief from stay would effectively result in a dismissal of the DBMP bankruptcy case. The bankruptcy court also noted that the appellants had failed to provide any evidence of DBMP's bad faith.
- Judge(s):
- NIEMEYER, KING, and HARRIS, Circuit Judges
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