U.S. Supreme Court declines case over Texas two-step bankruptcy tactic

The Supreme Court’s refusal to review the Bestwall “Texas two-step” case leaves a controversial mass‑tort bankruptcy tactic intact for now, but without a nationwide green light or clear limiting principles. For creditors and consumer advocates, it extends uncertainty around how far solvent companies can go in using divisional mergers and Chapter 11 to cabin legacy liabilities.

What The Court Did – And Didn’t – Do

On June 1, 2026, the U.S. Supreme Court denied certiorari in Committee of Asbestos Claimants of Bestwall LLC v. Bestwall LLC, a case that squarely implicated the legality of the “Texas two-step” in the asbestos context. Bestwall, an affiliate created in a corporate restructuring of Georgia‑Pacific, has been in Chapter 11 since 2017 after being saddled with the parent’s asbestos liabilities.

The Fourth Circuit had previously upheld federal jurisdiction over Bestwall’s Chapter 11 case, holding that a bankruptcy petition “arises under” federal law even when the debtor is solvent and the filing is challenged as bad faith. By declining review, the Supreme Court left that jurisdictional ruling in place but did not endorse the underlying restructuring maneuver or resolve whether such cases should ultimately be dismissed for lack of good faith.

Texas Two‑Step 101

The “Texas two‑step” fuses Texas divisional‑merger law with federal Chapter 11 to manage mass‑tort exposure while preserving the operating business. In step one, a company uses Texas law to divide into two entities—one holding most of the operating assets and another holding the mass‑tort liabilities.

In step two, the liability‑laden entity files Chapter 11, triggering the automatic stay and centralizing claims in bankruptcy court, often with efforts to extend stay protections or third‑party releases to the non‑debtor parent and affiliates. Critics call it “bankruptcy without bankruptcy” for the real enterprise: a solvent parent gets the benefits of Chapter 11’s liability‑resolution tools without subjecting its operating assets or equity to the usual oversight and creditor voting dynamics.

How Bestwall Fits Into The Landscape

Bestwall is one of the archetypal two‑step asbestos cases, alongside high‑profile efforts by Johnson & Johnson and others. Georgia‑Pacific conducted a divisional merger that assigned asbestos liabilities to Bestwall, leaving the main business in a separate entity, and then placed Bestwall into Chapter 11 in North Carolina.

A divided Fourth Circuit panel rejected asbestos claimants’ argument that the Constitution’s Bankruptcy Clause requires insolvency as a prerequisite to federal jurisdiction. The majority concluded that questions about a debtor’s financial distress go to issues like good‑faith filing or plan confirmation—not to whether federal courts can hear the case at all. Judge King dissented, grounding his view in historical understandings of bankruptcy as a remedy for financial failure rather than a strategic litigation-management tool for solvent enterprises.

The asbestos committee petitioned the Supreme Court to review that decision, contending that Bestwall was exploiting bankruptcy to halt jury trials across the country without offering a meaningful path to timely compensation. The Supreme Court’s silent denial leaves that critique unresolved and sends the fight back to the bankruptcy and circuit courts.

Interaction With The J&J / LTL Line Of Cases

The Court’s move comes against the backdrop of the Third Circuit’s high‑visibility rejection of Johnson & Johnson’s LTL Management bankruptcy filings, which used a Texas two‑step structure to corral talc claims. In LTL, the Third Circuit found that the debtor was not in “financial distress” given a robust funding agreement from J&J, and held that lack of distress meant the petition was not filed in good faith under Chapter 11.

Those rulings did not condemn the Texas two‑step per se; instead, they imposed a financial‑distress screen and emphasized traditional good‑faith standards. J&J has since attempted additional iterations of its talc strategy, including a later filing via a new entity in Texas, underscoring how aggressively large corporates are testing the boundaries of mass‑tort bankruptcy. The Supreme Court has, so far, declined to intervene directly in those maneuvers as well.

Legislative Attention: The Ending Corporate Bankruptcy Abuse Act

Congress has taken notice of the Texas two‑step, even if the Supreme Court has not yet squarely ruled on it. In July 2024, a bipartisan group in Congress introduced the Ending Corporate Bankruptcy Abuse Act of 2024, aimed at curbing divisional‑merger tactics in mass‑tort cases.

As drafted, the Act would instruct courts to presume bad faith when a bankruptcy case clearly involves a Texas two‑step, shifting the evidentiary burden to corporate debtors. It would also bar extension of the automatic stay to non‑debtor affiliates in such situations, preventing a solvent parent from shielding itself just by bankrupting an affiliate. The bill was reintroduced in December 2024 but has not advanced, leaving practitioners to navigate an evolving, judge‑made framework rather than a clear statutory rule.

Implications For Creditors And Mass‑Tort Claimants

For tort creditors—many of them individual consumers or cancer patients in asbestos and talc cases—the immediate impact is continued procedural limbo. The automatic stay in cases like Bestwall keeps jury trials on hold while negotiations over trust structures, estimation proceedings, and plan terms drag on.

Absent Supreme Court guidance, mass‑tort claimants must wage expensive, case‑by‑case battles on issues such as:

• Whether the debtor is in sufficient “financial distress” to justify Chapter 11 at all

• Whether divisional mergers and funding agreements constitute bad‑faith manipulation of the bankruptcy system

• How to value future claims and structure trusts in a way that is fair across cohorts

Those fights consume resources that would otherwise flow to victims and lengthen timelines to recovery—particularly acute for older asbestos claimants or seriously ill talc plaintiffs.

Implications For Corporate Debtors And Their Lenders

For corporates and their capital providers, the Court’s denial is a mixed signal. On one hand, the absence of a Supreme Court rebuke allows companies to keep exploring Texas two‑step structures, especially in jurisdictions perceived as more receptive to mass‑tort reorganizations.

On the other hand, strong appellate decisions like the Third Circuit’s in LTL show that courts will scrutinize financial distress and good faith, particularly when a debtor is backed by massive funding agreements or operates in tandem with a solvent parent. The result is a patchwork risk profile: sponsors and lenders must model not only bankruptcy outcomes, but also the likelihood that a petition will be dismissed outright, sending claims back into the tort system.

Why This Matters To The Credit & Collection Ecosystem

Although Texas two‑step cases are rooted in mass‑tort exposures, they have broader implications for credit and collections. First, they test the boundaries of what counts as a legitimate Chapter 11 filing, potentially influencing how courts treat filings by solvent but highly leveraged borrowers trying to manage litigation or regulatory exposure, including in financial services.

Second, the outcomes shape expectations around recoveries for unsecured creditor classes, including trade creditors, contract counterparties, and in some cases consumer claimants with financial harm claims. If divisional restructurings become normalized, creditors may react with tighter covenants, higher pricing, or contractual protections addressing pre‑petition asset shuffling and affiliate funding obligations.

Practical Considerations For Collection Professionals

For collection agencies, debt buyers, and servicers working around large‑cap mass‑tort debtors or their affiliates, several operational themes emerge:

• Monitoring venue and circuit law: Outcomes in the Third and Fourth Circuits already diverge in emphasis, and forum choice is central in two‑step strategies.

• Updating risk and recovery models: Protracted Chapter 11 proceedings with contested good‑faith issues can materially slow recoveries and increase legal costs.

• Contract drafting and diligence: Lenders and trade creditors may push for representations about divisional mergers, affiliate funding agreements, and the allocation of legacy liabilities, particularly in industries with known mass‑tort exposure.

Collections stakeholders tied into consumer‑facing portfolios (e.g., medical receivables linked to mass‑tort defendants) should also anticipate ongoing uncertainty around timing and ultimate recovery, and plan communication strategies that reflect long, complex court timelines.

What To Watch Next

With the Supreme Court staying on the sidelines, several pressure points will drive the next phase of the Texas two‑step story.

• Further appellate decisions: Additional circuit‑level rulings on financial distress, good faith, and permissibility of third‑party releases will either intensify or reduce the current split in approaches.

• Renewed legislative action: The fate of the Ending Corporate Bankruptcy Abuse Act—or successor bills—will determine whether Congress imposes an explicit bad‑faith presumption or limits on extending stays to non‑debtors.

• Evolving market practice: Law firms and restructuring advisors continue to refine two‑step structures; creditor pushback, pricing changes, and covenant evolution will reveal how the market is internalizing these legal uncertainties.

For now, the Supreme Court’s refusal to take Bestwall confirms only one thing: the Texas two‑step will keep dancing across the bankruptcy landscape, and it will be up to lower courts, Congress, and market participants to decide whether this maneuver becomes an accepted part of the mass‑tort toolkit or is gradually reined in as an abuse of the system.