Court: U.S. Court of Appeals for the Fourth Circuit
On appeal, the Fourth Circuit affirmed a bankruptcy court’s denial of a motion to dismiss for lack of subject matter jurisdiction.
Founded in 1927, Georgia-Pacific LLC is a multibillion-dollar corporation that operates primarily in the pulp and paper industry. In 1965, Georgia-Pacific bought and then merged with Bestwall Gypsum Co., which manufactured wallboard, joint-compound products and industrial plasters.
But with its assets came liabilities, including the asbestos claims against it, which plagued Georgia-Pacific for decades. As of 2017, Bestwall faced around 64,000 pending asbestos claims, with tens of thousands more anticipated through at least 2050. So, Georgia-Pacific sought to deal with these asbestos claims through a divisional merger under Texas’ Organizations Code § 1.002(55)(A) (the statutory vehicle for the divisional merger).
Implementing this strategy, Georgia-Pacific on July 31, 2017, split into two entities – Georgia-Pacific and Bestwall. Bestwall received, among other things, all contracts of the old Georgia-Pacific related to its asbestos-related litigation and similar liabilities, from this divisional merger. On November 2, 2017, Bestwall petitioned for relief under Chapter 11 of the Bankruptcy Code in the Western District of North Carolina. The Official Committee of Asbestos Claimants (Committee) – formed after Bestwall filed bankruptcy to represent the interests of individuals with personal injury claims for exposure to asbestos manufactured by Bestwall – moved to dismiss the bankruptcy case by primarily arguing it was filed in bad faith because Bestwall wasn’t really bankrupt. The bankruptcy court denied the Committee’s motion to dismiss. Several years later, the Committee moved to dismiss again, this time for lack of subject-matter jurisdiction. The bankruptcy court ultimately denied the Committee’s motion to dismiss for lack of subject-matter jurisdiction. The Committee’s appeal followed, arguing primarily the bankruptcy code was not intended to permit a company – (that could pay its debts and obligations) – to seek bankruptcy protection and, as such, cannot confer subject matter jurisdiction for this matter.
The Constitution grants Article III judicial power over all cases arising under the laws of the United States. See Royal Canin U. S. A., Inc. v. Wullschleger, 604 U.S. 22, 26 (2025) (“‘Arising under’ jurisdiction—more often known as federal-question jurisdiction—enables federal courts to decide cases founded on federal law.”). The Bankruptcy Code is a law of the United States. Bestwall petitioned to reorganize under Chapter 11 of the Code. So, that petition is a case arising under the laws of the United States. However, Bankruptcy Courts are not immune to questions of subject-matter jurisdiction. Still, that jurisdiction is determined by statute. Here, the Bankruptcy Code is a law of the United States. Bestwall petitioned to reorganize under Chapter 11 of the Code. So, that petition is a case arising under the laws of the United States. 28 U.S.C. § 1334 vests district courts with “original and exclusive jurisdiction of all cases under title 11 . . . or arising in or related to cases under title 11.” 28 U.S.C. § 1334(a)-(b). “Whether a bankruptcy court may exercise subject-matter jurisdiction over a proceeding is determined by reference to 28 U.S.C. § 1334.” Valley Historic Ltd. P’ship v. Bank of N.Y., 486 F.3d 831, 839 n.3 (4th Cir. 2007); see In re Kirkland, 600 F.3d 310, 315 (4th Cir. 2010) (“[S]ubject matter jurisdiction is determined by § 1334.”). “Only Congress may determine a lower federal court’s subject-matter jurisdiction.” Kontrick v. Ryan, 540 U.S. 443, 452 (2004). Granted, § 1334 must remain within constitutional limits. See Kline v. Burke Constr. Co., 260 U.S. 226, 234 (1922).
In view of the above, the Fourth Circuit noted the In Re LTL Management matter, which was determined by the Third Circuit, was persuasive in addressing the Committee’s arguments. See In re LTL Management, 64 F.4th 84 (3d Cir. 2023).
In this case, the Third Circuit determined that LTL – the company formed to own and resolve Johnson & Johnson’s talc liabilities – was not in financial distress. Id. at 106-10. The Third Circuit ultimately dismissed LTL’s bankruptcy petition as a bad a faith filing. Id. Importantly, though, the Third Circuit determined it had jurisdiction of the appeal under 28 U.S.C. § 158(d)(2)(A) and that the bankruptcy court had jurisdiction under § 157(a) and § 1334(a). See id. at 99. It said nothing about the Constitution or its bearing on subject-matter jurisdiction over bankruptcies. Id.
Consequently, the Fourth Circuit maintained the federal courts have subject-matter jurisdiction over bankruptcy cases filed by debtors who may be able to pay their obligations. Id. The Fourth Circuit therefore affirmed the opinion of the bankruptcy court in denying the Committee’s motion to dismiss for lack of subject matter jurisdiction.
Read the full decision here.
