Relevant Document:Hearing Agenda
Judge Laura Beyer said she will issue a bench ruling on July 28 on motions to dismiss Bestwall’s Texas two-step case by the
official asbestos claimant committee, or ACC, and
two individual claimants, after hearing arguments today.
Today’s arguments centered on the ACC’s novel argument for dismissal, which focuses on the Bankruptcy Clause of the U.S. Constitution as the basis for dismissal rather than the Bankruptcy Code’s dismissal statute, section 1112. According to the ACC, the Bankruptcy Clause - which empowers Congress to make “uniform laws on the subject of Bankruptcies” - implicitly requires financial distress, and therefore bankruptcy courts lack subject matter jurisdiction over financially healthy companies.
Bestwall’s counsel argued today that there is “no such thing” as “constitutional subject matter jurisdiction” and that the movants are really attempting to repackage their arguments for bad-faith dismissal that the court rejected in 2019, when it denied the ACC’s first motion to dismiss the case. In that decision, Judge Beyer found that under the Fourth Circuit standard for dismissal, the committee failed to show that Bestwall’s attempt to reorganize is “objectively futile.”
The two individual movants argue for dismissal under section 1112 as a bad-faith filing, urging Judge Beyer to re-evaluate the debtor’s good faith on the basis of changed circumstances since 2019. Counsel for the individual claimants made opening arguments at a
hearing on March 15. Judge Beyer adjourned that hearing after the ACC announced mid-hearing its intent to file its own dismissal motion raising some of the same arguments as the individual claimants.
Natalie Ramsey of Robinson & Cole argued the ACC’s motion to dismiss today. Ramsey asserted that the motion to dismiss - the committee’s third in the case thus far - provides a “unique and distinct” basis for dismissal: that the bankruptcy court lacks “constitutional subject matter jurisdiction” over a financially healthy company such as Bestwall. This is a meaningful distinction from the prior motions, which challenged the debtor’s financial distress and good faith under Bankruptcy Code section 1112, said Ramsey, although she conceded that the present motion also addresses those issues in addition to subject matter jurisdiction.
In support of the ACC’s argument that the Bankruptcy Clause implicitly requires financial distress for bankruptcy jurisdiction, Ramsey walked the court through the history of bankruptcy legislation. She asserted that the “historical and colloquial” understanding of bankruptcy has been “uniform throughout time” in assuming a debtor’s inability to pay debts and/or some element of economic distress.
Ramsey argued that the court does not need to define financial distress or draw a “bright line” in order to hold that the Bestwall is constitutionally barred from seeking chapter 11 relief. Instead, the court needs only to decide that Bestwall comes “nowhere near that line” with its access to $27.8 billion from Georgia-Pacific under the funding agreement, which amount the debtor has asserted is sufficient to pay all asbestos liabilities in full. Ramsey similarly asserted that, contrary to the debtor’s assertion in its
objection, the ACC is not advocating for an insolvency requirement to be eligible for chapter 11 relief.
Ramsey also argued that the Fourth Circuit’s “objective futility” test for bad-faith filings in its 1989
Carolin decision assumed a financially troubled debtor and was not designed to allow a financially healthy company such as Bestwall to “take advantage” of chapter 11.
Consistent with the ACC’s
reply, Ramsey argued that subject matter jurisdiction can be raised at any time during a case and therefore cannot be waived or barred as untimely, as Bestwall argues. Ramsey’s argument prompted Judge Beyer to ask all parties for their view on the nature of a bankruptcy court’s responsibility to evaluate whether a debtor is in financial distress.
Ramsey responded that financial distress is a “gating” question to be decided as of the petition date, but that the court could nonetheless grant the ACC’s motion to dismiss without reaching that question. Greg Gordon of Jones Day for Bestwall answered that the only relevant time for measuring financial distress is as of the petition date. Jonathan Ruckdeschel of the Ruckdeschel Law Firm, counsel for the individual movants, took a different position, arguing that a bankruptcy court has an ongoing obligation to evaluate financial distress but need address it only when it “becomes apparent” that financial distress is lacking, which he contended is the case here.
Ramsey also argued against the debtor’s contention that the ACC’s
pending appeal from the court’s 2019 denial of the ACC’s first dismissal motion divests the bankruptcy court of jurisdiction to consider the current motion, responding that the appellate divestiture rule does not apply to interlocutory appeals.
The ACC’s motion for leave to appeal the 2019 decision is currently pending before the district court, after the Fourth Circuit declined to hear the appeal directly. Bestwall has taken the position in the district court proceedings that the court’s order denying dismissal is interlocutory, said Ramsey, arguing that the bankruptcy court has therefore not “lost jurisdiction” to hear the present motion to dismiss, even though it is “different” from the prior motion.
Judge Beyer explained at the beginning of the hearing that she recently learned that the district court handling the ACC’s appeal has not acted on the ACC’s motion for leave to file the appeal because of an “administrative error” that caused the court to overlook the matter. The judge said that she has been in touch with the district court clerk and has been assured the court intends to act on the motion “in relatively short order.”
Gordon, for Bestwall, maintained that the ACC is framing its argument as jurisdictional only in order to avoid Bestwall’s position that the motion is untimely - either by virtue of waiver, laches or law of the case. Both sets of movants are really asking the court to reconsider its 2019 ruling, in which it already found the debtor to be in financial distress, Gordon argued.
The Bankruptcy Clause has no express requirement for financial distress, Gordon highlighted. If it did, then either section 1334 of Title 28 (the bankruptcy jurisdiction statute) or Bankruptcy Code section 109 (governing debtor eligibility) would be unconstitutional because neither requires financial distress, he argued, adding that the ACC has not challenged the constitutionality of either provision.
Arguing that the Bankruptcy Code’s eligibility requirements are not jurisdictional, Gordon likened the ACC’s argument to one rejected by the U.S. Supreme Court in its April 19
opinion in the
Sears case that section 363(m) good-faith protections for purchasers are not jurisdictional and therefore can be waived.
Regarding the appellate divestiture rule and the pending appeal from the court’s 2019 decision, Gordon took issue with the ACC’s argument that the rule does not apply to interlocutory appeals. He also contended that, in any case, the question of whether the decision was interlocutory and/or appealable has yet to be decided by the district court.
Gordon concluded that even if the court does reach the merits of either motion to dismiss, the movants have failed to make a showing that the court should reach a different conclusion under
Carolin, contending that Judge Beyer’s 2019 ruling was correctly decided.
Jonathan Ruckdeschel of the Ruckdeschel Law Firm, counsel for the individual movants, reiterated his arguments from the March 15 hearing that “massive” profits since 2019 for Bestwall affiliate Georgia-Pacific - which committed to backstop Bestwall’s asbestos liabilities under the funding agreement - warrants a fresh look at Bestwall’s financial distress. He also argued that the court should look to Georgia-Pacific’s, and therefore Bestwall’s, financial capacity to satisfy asbestos liabilities and not just the extent of the liabilities themselves, in line with the the U.S. Court of Appeals for the Third Circuit’s Jan. 30
decision dismissing the LTL Management/Johnson & Johnson two-step case.