A Corporate Poisoner Two-Steps Out Of Its Toxic Liability

Heard of the Texas two-step? Read below to learn how giant corporations like Koch Industries are using the maneuver to skirt responsibility for their toxic practices.

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The United States Supreme Court just handed the oil and gas conglomerate Koch Industries — and its subsidiary, Georgia-Pacific, a paper and building material manufacturer — a major victory when it allowed the company to avoid paying damages to people who claim they were poisoned by the company’s products.

Georgia-Pacific has faced tens of thousands of legal claims from people who unknowingly suffered asbestos exposure from building materials the company sold in the 1960s and 1970s and have since faced serious health issues. And for the last seven years, the company has used a novel legal maneuver to evade those claims, leaving victims and their families in limbo.

In 2017, Georgia-Pacific invented the so-called Texas two-step, a legal scheme to skirt liability for consumer harms like widespread asbestos exposures or the opioid crisis. That year the company quietly reincorporated itself in Texas and used a Texas law to split itself into two entities. One, the new Georgia-Pacific, received almost all of the company’s assets and carried on business as usual as a multibillion-dollar company.

The other company — Bestwall, LLC — was saddled with all of Georgia-Pacific’s asbestos liabilities, which included tens of thousands of legal claims from people who lost loved ones to deadly asbestos-related cancers like mesothelioma, and people who were sick themselves. Bestwall then promptly filed for bankruptcy, trapping these legal claims in bankruptcy court.

In the time since, victims have seen little movement on their claims. Earlier this month, the Supreme Court declined to take up the Georgia-Pacific case, letting a lower-court ruling in Georgia-Pacific’s favor stand. The decision will give the company more time to avoid paying up for its asbestos poisoning, attorneys working with asbestos victims say.

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“The Koch brothers are getting billions of dollars from Georgia-Pacific while this is pending,” said Michael Shepard, a Boston-based attorney who represents victims of asbestos poisoning seeking damages, including in the Georgia-Pacific case. “Victims are getting zero dollars. It benefits Georgia-Pacific the longer this takes.”

Georgia-Pacific and its Koch parent company are just one of several companies that are trying the two-step bankruptcy tactic. Sequestering the claims in bankruptcy court, which offers companies protections that the civil court system does not, allows otherwise thriving companies to offload their liability and avoid compensating victims. Other companies following suit include Trane Technologies and Saint-Gobain, two major manufacturing companies that both have asbestos liabilities, as well as Johnson & Johnson, a pharmaceutical company whose talc products, including its baby powder, contained asbestos for decades.

The Supreme Court’s decision in the Georgia-Pacific case comes at a critical moment for this legal strategy, as the courts decide whether to greenlight the Texas two-step and let companies continue to use it to escape liability.

“The courts are split as to whether this is going to be allowed,” said Joanne Doroshow, the executive director of the Center for Justice and Democracy, a legal group that advocates for consumers and victims seeking damages in court from companies like Georgia-Pacific.

The Supreme Court is expected to soon issue a ruling in Harrington v. Purdue Pharma, a case involving Purdue Pharma, the company whose aggressive marketing of OxyContin and other narcotics accelerated the opioid epidemic. Purdue filed for bankruptcy in 2019 and has used bankruptcy court to shield its owners, the Sackler family, from any personal liability for the harms of the opioid crisis. The court’s decision in that case will have ramifications on Georgia-Pacific and the Texas two-step.

“A Win For Georgia-Pacific”

Beginning in 1965, Georgia-Pacific manufactured drywall and other building materials that contained asbestos due to its strength and heat resistance, despite the mounting evidence at the time that the substance was a dangerous carcinogen. Over the years, drywall workers and consumers renovating their homes were exposed to dangerous levels of asbestos when they used the materials. The company removed asbestos from its products in 1977, only after the U.S. Consumer Product Safety Commission announced a federal ban on the material.

By the early 2000s, Georgia-Pacific was facing $1 billion in claims of damages from asbestos exposure and paying out settlements to victims. These payouts stopped when the company pioneered the Texas two-step in 2017, and spun its liabilities off into Bestwall. By that time, the company had settled more than 400,000 claims, worth nearly $3 billion in total.

“Every single one of the victims who hasn’t gotten a nickel would already have their case through the court system by now if Georgia-Pacific hadn’t used the Texas two-step to go into bankruptcy court,” said Shepard, the attorney for asbestos victims.

After Bestwall filed for bankruptcy, a federal bankruptcy judge halted tens of thousands of claims pending against Georgia-Pacific, ruling that the claims had to stay in bankruptcy court and could only move against the Bestwall shell company created by the Texas two-step, not the original company. 

Last June, the Court of Appeals for the Fourth Circuit affirmed that decision and allowed the injunction to stay in place, keeping the victims in bankruptcy court. Such an injunction is critical to the Texas two-step — without it, the newly created companies would both face the claims.

Georgia-Pacific’s asbestos victims appealed the Fourth Circuit’s ruling to the Supreme Court. The high court could have intervened and struck down the injunction, forcing Georgia-Pacific to once again face asbestos claims from victims. But the court declined to look at the issue.

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Laura Coordes, a law professor at Arizona State University who co-authored an amicus brief in the ongoing Purdue case, wrote in an email to The Lever that the Supreme Court’s decision to decline the case indicated the court “is taking a wait-and-see approach for now.”

“It is, however, a win for Georgia-Pacific, because it looks like Bestwall will continue to go forward in bankruptcy and Georgia-Pacific won’t be sued by cancer victims while that happens,” she continued.

Shepard said he was not surprised by the Supreme Court’s decision. He anticipated that the court was instead planning to use the Purdue case to weigh in on these issues, which could have major ramifications for Georgia-Pacific.

Purdue Pharma did not use the Texas two-step maneuver to split into two — but like Georgia-Pacific, the company is using bankruptcy court to shield its owners from liability. If the Supreme Court rules against Purdue and the Sacklers, it could also be a blow to Georgia-Pacific.

But while the justices appeared torn when the case was heard in December, it’s difficult to predict which side they will ultimately favor.

“My hope is that a sane appellate court judge will look at the totality of what is going on here and say, ‘That is neither the purpose of the bankruptcy courts nor a proper use of the bankruptcy courts,’ and throw it all out,” Shepard said.

Until then, victims of asbestos exposure and their families are still waiting for justice.

“Quick To Give Companies A Break”

As the courts deliberate, corporate America is lobbying to support the use of the Texas two-step by Georgia-Pacific and others. The U.S. Chamber of Commerce — the biggest lobbying group in the country — intervened to submit amicus briefs in both the Georgia-Pacific case and the ongoing Purdue case, pushing the courts to allow the companies to use bankruptcy court to limit their liability.

The Chamber of Commerce is joined in its support for the Texas two-step by the American Tort Reform Association, which Doroshow described as “basically a front group for major corporations in America that want to take liability away from everyday people and protect corporations from being sued when they commit wrongdoing.”

The group has fought for decades to limit the damages companies must pay out when they knowingly expose people to dangerous chemicals or engage in other harmful practices. And it has thrown its support behind Purdue Pharma, Johnson & Johnson, and other companies that have fled to bankruptcy court to avoid paying out claims to victims.

The U.S. Chamber of Commerce spends tens of millions of dollars a year lobbying lawmakers, reporting spending $23.4 million in just the first quarter of 2024. 

Meanwhile, Shepard emphasized, “There’s no lobbying group for widows, for people who have lost loved ones to opioid addiction or asbestos.” 

In their amicus briefs and statements on the issue, both groups often claim that keeping claims in bankruptcy court is better for the victims — allowing for a more “efficient” resolution for victims, as the Chamber of Commerce wrote in an amicus brief before the Fourth Circuit in the Georgia-Pacific case.

Shepard called those claims “insulting.”

“It’s a complete fiction that’s authored by the companies that caused these harms in the first place,” he said. 

Still, he worried that the courts were often swayed by powerful business interest groups like the Chamber of Commerce. “I’m concerned that courts are quick to give companies a break when it comes to victims and tort liability,” he said.

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