Bestwall: Does Chapter 11 Require Financial Distress?

A petition for Supreme Court review in the Bestwall case asks whether debtors must be in financial distress to file for Chapter 11.  The petition and opinion under review raise significant questions about the bankruptcy courts’ powers.

The Bestwall case stems from the asbestos manufacturer Georgia-Pacific.  In 2017, Georgia-Pacific carried out the now-familiar “Texas two-step” to stop mounting asbestos lawsuits across the country.  Georgia-Pacific split into two companies – one holding asbestos liabilities and the other holding operating assets.  Bestwall, the company holding asbestos liabilities, then filed for bankruptcy. 

A committee of asbestos claimants moved to dismiss.  They argued that “cause” existed under Section 1112(b) because Bestwall, which was not in financial distress, had filed for bankruptcy in bad faith.  But the bankruptcy court denied that motion, holding that Bestwall filed in good faith because it sought a plan for asbestos debtors under Section 524(g). 

The committee then later moved to dismiss for lack of subject-matter jurisdiction.  The committee noted that the bankruptcy court’s jurisdiction arose from Article I’s grant of federal power to establish “uniform Laws on the subject of Bankruptcies” and argued that Bestwall was not “bankrupt” under the founding-era understanding of that term.

The bankruptcy court denied the jurisdictional motion, and the Fourth Circuit affirmed.  The Court of Appeals reasoned that Congress granted subject-matter jurisdiction for all cases arising under Chapter 11.  But Judge King dissented, arguing that, when the Constitution was ratified, “bankruptcy” was available only to persons who were unable or unwilling to pay their debts.  He thus argued that Article I does not allow “bankruptcy as a mechanism for strategic liability management by solvent entities.” 

In its petition, the committee argues that there is a circuit split over when debtors may file for Chapter 11.  In the Johnson & Johnson bankruptcy, the Third Circuit held that a debtor files in bad faith, warranting dismissal under Section 1112(b), if it is not in financial distress.  The committee also argues that five other circuits forbid bankruptcy filings by debtors who can pay their debts as they come due. 

The committee’s petition will likely come up for review in April or May 2026.  One potential hurdle will be whether Bestwall presents a good vehicle.  The committee’s appeal to the Fourth Circuit covered only the jurisdictional issue, not whether lack of financial distress is “cause” for dismissal.  But the issue is sure to squarely present itself to the Court in future cases.

For example, in another recent asbestos opinion, DBMP, the Fourth Circuit held that lack of financial distress is not “cause” to lift the stay under Section 362(b).  The Fourth Circuit acknowledged that “cause” for lifting the stay and “cause” for dismissal under Section 1112(b) are the same, creating a direct conflict with the Third Circuit’s Johnson & Johnson decision.  In addition, the Fourth Circuit held in DBMP that debtors can show good faith merely by seeking a remedy the Code offers, such as a Section 524(g) plan.  The Johnson & Johnson bankruptcy court reached the same conclusion, but the Third Circuit rejected it.

This issue has consequences well beyond mass-tort bankruptcies.  Debtors often use Chapter 11’s remedies to gain tactical advantages, for example by channeling litigation to a favorable venue, gaining leverage over holdout creditors, or staying claims against non-debtors.  If Chapter 11 requires financial distress, then creditors may have a powerful weapon to resist those tactics where the debtor is otherwise financially healthy.   Creditors and practitioners should watch this issue as the courts hash out just what powers bankruptcy courts have over solvent debtors.

Justin Ellis is a partner of MoloLamken LLP in New York. He tries cases and argues appeals in complex business disputes, with particular focus on bankruptcy, distressed debt, and structured finance litigation.

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