By: Donald L Swanson
There is a bias in these United States against using bankruptcy laws to resolve mass tort cases, including asbestos cases and asbestos-like cases.
Such bias is unfounded because of:
- the Bankruptcy Clause in the U.S. Constitution, which authorizes Congress to create federal bankruptcy laws;
- the existence of the U.S. Bankruptcy Code, which provides a central forum for resolving debt-based problems among competing claimants; and
- the explicit provision in § 524(g) of the Bankruptcy Code for addressing mass tort claims involving asbestos.
But there are court rulings, from time to time, that buck the bias. One such opinion is Herlihy v. DBMP, LLC, Case No. 24-2109 (4th Cir.; decided February 11, 2026). What follows is a summary of the Herlihy v. DBMP opinion.
Facts
From the 1930s to the 1990s, a Corporation manufactures and sells building products containing asbestos.
In the 1970s, Corporation begins facing hundreds of thousands of claims for asbestosis and mesothelioma injuries caused by it’s asbestos products.
In the 1990s, Corporation spends less than $10 million per year resolving asbestos-related claims. But since 2002, Corporation is spending an average of $80 million per year resolving such claims, plus an additional $20 to $30 million per year in legal defense costs.
In total from 2002 until 2019, Corporation spent $2 billion in defending and resolving more than 300,000 asbestos lawsuits and paid $1.5 billion of that sum out of pocket after exhausting its insurance coverage.
As of 2019, Corporation still faces 60,000 pending asbestos-related claims in courts nationwide, with projections of additional lawsuits being filed for “decades to come.”
The § 524(g) Process
In the fall of 2019, Corporation decides to utilize the § 524(g) reorganization provision of the Bankruptcy Code—which provision is designed to manage and resolve ongoing and future asbestos-related claims in circumstances that Corporation faces.
The § 524(g) procedure involves collecting all pending and future claims in a bankruptcy court and establishing a trust to pay the future claims on a basis equal to the pending claims.
As the House Report for the § 524(g) legislation explains, “The asbestos trust/injunction mechanism established in the bill is available for use by any asbestos company facing a similarly overwhelming liability” as was faced by Johns-Manville in the 1980s. Such circumstances are similar to what Corporation is facing in 2019.
Texas Two-Step
To engage the process, Corporation splits itself into two companies under Texas corporation law — which is curiously referred to as a “divisional merger” — by forming two new entities (Debtor and New Operating Co.). Corporation then assigns Corporation’s liabilities to Debtor and assigns Corporations assets to New Operating Co. Additionally, New Operating Co. enters into an uncapped funding agreement that obligates New Operating Co. to satisfy all the asbestos-related liabilities and bankruptcy costs, including the cost of resolving asbestos-related claims through a trust under 11 U.S.C. § 524(g).
Under such agreement, none of Corporation’s assets are protected from liability to pay the asbestos claims, but such claims are isolated so they could be managed under a § 524(g) plan.
Then, Debtor files a Chapter 11 reorganization petition to utilize the § 524(g) process.
Lawyers in these types of proceedings often, and pejoratively, refer to the divisional merger and bankruptcy filing as the “Texas Two-Step,” referring to a common country western dance involving two quick steps and two slow.
Stay and Injunction
A result of the Chapter 11 bankruptcy filing is that all asbestos-related tort claims against Debtor are automatically stayed under § 362(a). Additionally, the Bankruptcy Court enters a preliminary injunction prohibiting claimants from pursuing asbestos claims against New Operating Co.
First Motion for Relief—2021
In the Bankruptcy, the Official Committee of Personal Injury Claimants moves to lift the stay to permit all asbestos claims against Debtor to be prosecuted before judges and juries in the traditional state tort system and to be paid from corporate assets as would any tort judgment.
The Bankruptcy Court conducts a trial on the Committee’s motion and then issues a thorough 79-page opinion on August 10, 2021:
- denying the Committee’s motion;
- issuing an order recognizing that the asbestos claims against Debtor, including those formerly against Corporation, are subject to the automatic stay of § 362(a)(1) and/or § 105; and
- ordering that the preliminary injunction prohibiting claimants from bringing asbestos-related claims against Corporation be maintained while the reorganization case proceeds.
In denying the Committee’s stay relief motion, the Bankruptcy Court considers and applies the factors identified In re Robbins, 964 F.2d 342 (4th Cir. 1992), finding that lifting the stay would:
- prejudice Debtor’s estate by depleting estate resources and causing irreparable harm to the reorganization effort;
- “negatively impact judicial resources by dumping more than 70,000 asbestos cases back into the tort system”; and
- “contravene Congress’ clear purpose of establishing a ‘mechanism to resolve . . . asbestos liabilities in a single forum’ through 11 U.S.C. § 524(g).”
The Bankruptcy Court also approves a process for estimating Debtor’s aggregate liability and orders the parties to mediate a possible resolution of the Chapter 11 case.
Second Motion for Relief—2024
Several years later, in April 2024, three asbestos Claimants file motions to lift the stay in order to prosecute their asbestos suits against Debtor in state courts.
One of the three claimants worked for decades for a saw sharpening company, where he regularly breathed in asbestos while sharpening saw blades used in Corporation’s cement pipe plant. This claimant is diagnosed with mesothelioma in 2023.
Another of the three claimants worked for decades in the construction industry and regularly cut, beveled, and drilled Corporation’s asbestos-infused cement pipe. This claimant succumbs to mesothelioma in 2019.
In their motions to lift stay, the three claimants contend that Debtor filed its bankruptcy in bad faith, arguing that the Texas Two-Step constitutes subjective bad faith because (even though Debtor and New Operating Co. are “wealthy and fabricated debtors, [who] boast the ability to pay all claims in full”) they are using Chapter 11 not to reorganize but to deny claimants the right to prosecute their claims in state court, thus delaying their potential recovery.
On May 28, 2024, the Bankruptcy Court denies the three Claimants’ motions to lift stay, incorporating its findings and conclusions from the earlier rejection of the Committee’s motion to lift stay.
Even so, the Bankruptcy Court considers anew each of the Robbins factors—again finding that lifting the stay would prejudice debtor’s estate, reduce judicial economy by flooding the tort system with asbestos cases, and “imperil” the ability of the Bankruptcy Court to “treat consistently and fairly all similarly situated claimants in a 524(g) plan.”
The Bankruptcy Court further finds that lifting the automatic stay would be a de facto dismissal of the bankruptcy and concludes that Claimants failed to present any evidence that Debtor had filed in bad faith.
Rulings on Appeals
On appeal, the District Court affirms, and the three Claimants appeal to the Fourth Circuit Court of Appeals.
The Fourth Circuit affirms, finding that “the bankruptcy court did not abuse its discretion” in “refusing to lift the automatic stay” or in finding that:
- Debtor “filed its Chapter 11 petition with the legitimate purpose of pursuing a § 524(g) plan”;
- Debtor “qualified for such a reorganization”; and
- “plaintiffs failed to present any evidence that [Debtor] had acted in bad faith.”
The Fourth Circuit’s opinion is currently before the U.S. Supreme Court on a petition for writ of certiorari.
Conclusion
It’s refreshing to see a U.S. Circuit Court of Appeals opinion that:
- resists the unfounded bias in these United States against using bankruptcy to resolve mass tort liability problems—especially in a § 524(g) asbestos context; and
- looks behind the “Texas Two-Step” pejorative to determine whether such actions might actually be part of a value-maximizing effort for paying mass tort claims.
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