Profitable companies are dodging asbestos lawsuits. A North Carolina court has helped them

Billion-dollar companies are using Charlotte, North Carolina’s bankruptcy court to dodge lawsuits from thousands of people who were sickened by asbestos, families and their lawyers say.

Using a controversial legal maneuver called the Texas Two-Step, three major corporations created subsidiaries that then filed for bankruptcy in the federal court in Charlotte.

Two of the three corporations aren’t headquartered in North Carolina. All are profitable.

Despite that, the strategy has stalled thousands of lawsuits – including more than 80 filed in North Carolina – that seek compensation for illnesses caused by asbestos, plaintiffs’ lawyers say.

“Charlotte, North Carolina has somehow become the most important jurisdiction in asbestos litigation nationally,” said Jon Ruckdeschel, a Maryland trial lawyer who represents about 10 of the asbestos victims.

North Carolina Attorney General Josh Stein and 23 other state attorneys general contend companies should not be allowed to use the Texas Two-Step to put lawsuits on hold. Plaintiffs’ lawyers argue that the move is fraudulent. U.S. senators from both major parties have railed against it, too.

Attorneys for the companies – Georgia-Pacific, Trane Technologies and CertainTeed – declined to respond to questions from the Charlotte Observer. But in court filings they argue that their strategy is legal, and that it provides a fair and efficient way to resolve claims.

It’s now up to the Fourth Circuit Court of Appeals – and possibly the U.S. Supreme Court – to rule whether any part of the practice is unconstitutional.

‘Companies need to be held accountable’Held up by legal challenges, appellate reviews and other complications, the three bankruptcy cases have been pending in Charlotte’s bankruptcy court for years. During that time, hundreds of people have died from asbestos-related illnesses while waiting for justice, plaintiffs’ lawyers say.

Ed Chapman was among them.

Longevity ran in Chapman’s family. His father, grandfather and great grandfather all lived to age 99, and Chapman had been looking forward to a long retirement, filled with fishing and time with family.

That was not to be. In 2020, he died from mesothelioma, an aggressive cancer that is usually caused by exposure to asbestos, according to the CDC. He was 75.

As the owner of a drywall company, Chapman for years used a joint compound made by Georgia-Pacific that contained asbestos, his daughter said.

After his 2018 diagnosis, he filed suit, hoping to hold the multibillion-dollar company accountable. But he never got the chance. His lawsuit – like thousands of others – was put on hold because a Georgia-Pacific subsidiary filed for bankruptcy in Charlotte.

“It made him angry,” said Lori Knapp, Chapman’s daughter. “He just didn’t understand how a company the size of Georgia-Pacific could file for bankruptcy when they are clearly not a bankrupt company.”

Chapman’s final months were agonizing, Knapp said. He was wracked by horrible coughing fits, and by pain in his chest and lungs that was so severe he asked hospice workers if they could “just give him a shot and make him go to sleep and never wake up,” said Knapp, who helped care for her dad in Florida as he was dying.

In September 2023, Knapp traveled from her home in Greeneville, Tennessee, to Washington, D.C., to tell her father’s story to a U.S. Senate committee that was examining the manipulation of the bankruptcy system by large companies, including Georgia-Pacific.

“I was a little reluctant, because I’m no public speaker,” said Knapp, a retired property manager.

But after talking with her husband, she decided it needed to be done. Otherwise, she said, many more may die before they get their day in court.

“It needs to be brought to light,” she said. “And companies need to be held accountable.”

How the Texas Two-Step works

The maneuver is called “the Texas Two-Step” because companies that employ it take advantage of a Texas law that allows corporations to move their corporate charters to Texas and then split into two.

After Georgia-Pacific, Trane and CertainTeed were split up, one company in each case received virtually all of the assets, while the other was saddled with all of the asbestos liabilities, court records show.

The asset-rich companies continued business as usual. In 2021 and 2022 alone, Georgia-Pacific paid nearly $4 billion in dividends to parent company Koch Industries, which is owned by the Koch family – primarily by billionaire Charles Koch, one of the wealthiest people in the world.

The liability-laden companies then registered in North Carolina and filed for bankruptcy in Charlotte. Filing for bankruptcy allows companies to halt most lawsuits filed against them. And in the case of the three Texas Two-Step companies, the Charlotte judges, citing a federal appeals court precedent, agreed to provide an unusual break – extending that legal protection to the parent corporations as well.

Why Charlotte? One reason is that prior rulings have sent the message that the court here is receptive to the arguments of companies that file for bankruptcy, Duke University bankruptcy law professor Jonathan Seymour said.

Another reason: The Fourth Circuit Court of Appeals, which covers the Carolinas and hears appeals from the Charlotte bankruptcy court, has established a legal precedent that judges say has made it difficult to dismiss bankruptcy cases.

Lawyers prosper, victims die as cases run onOnce prized for its fire-resistant and insulating properties, asbestos was for years put into many products, from roofing shingles to brake pads and electrical panels. Though the use of asbestos has drastically declined in recent decades, small amounts of it can still be found in some products.

By the 1960s, medical research had linked asbestos exposure to fatal diseases such as mesothelioma and asbestosis, a lung disease resulting from inhalation of asbestos particles. Asbestos has become the largest source of job-related cancer since then, accounting for at least 107,000 deaths each year, according to the World Health Organization.

Hundreds of thousands of people in the U.S. have filed lawsuits and compensation claims for asbestos-related injuries since the 1960s, when the first claims were filed. The litigation has cost companies billions, according to the Rand Institute for Civil Justice. And it has prompted some companies – including Georgia-Pacific, Trane and CertainTeed – to search for new ways to manage claims, court records show.

In 2017, Georgia-Pacific became the first of the three companies to employ the Texas Two-Step. Its newly created subsidiary, Bestwall, filed for bankruptcy in Charlotte, a move that froze the lawsuits Georgia-Pacific was facing. The subsidiaries for Trane and CertainTeed – Aldrich Pump, Murray Boiler and DBMP – did the same in 2020.

Judges in Charlotte have repeatedly refused to dismiss the bankruptcy cases. In their written decisions, they’ve cited a 1989 ruling by the Fourth Circuit Court of Appeals, which covers the Carolinas, Maryland, Virginia and West Virginia. The so-called Carolin Standard, which emerged from that ruling, makes it extremely difficult for plaintiffs to get bankruptcy cases dismissed.

In other judicial districts, plaintiffs have persuaded courts to dismiss bankruptcy cases by showing that the companies weren’t in financial distress, records show. In the Fourth Circuit, however, judges have found that a company can be profitable and still file for bankruptcy.

“It is the place that has the lowest threshold to meet in terms of showing your eligibility to file for bankruptcy,” said Seymour, the Duke professor.

U.S. bankruptcy judges Laura Beyer and Craig Whitley, the two judges who preside over the court in Charlotte, declined to talk with an Observer reporter about the asbestos cases because they are still pending.

Both Beyer and Whitley have asked the appeals court to review questions surrounding the cases. Whitley has granted motions requested by Trane and CertainTeed, but has raised concerns about their corporate restructuring.

In a December 2023 ruling, Whitley acknowledged the lack of progress in the asbestos cases and said that it will be up to a higher court to determine the propriety of the Texas Two-Step.

“These cases are simply spinning round and about, to the growing frustration of all,” wrote Whitley, who recently announced plans to retire from the bench.

As those cases spin, companies that have filed for bankruptcy in Charlotte’s federal courthouse are shelling out hundreds of millions to their own lawyers and to attorneys for the creditors. More than $550 million has been paid to lawyers and other professionals involved in the three Charlotte bankruptcy cases so far, court records show.

“Everyone – shareholders, all other creditors, bankruptcy lawyers – is getting paid, except the sick people,” said Clay Thompson, one of the plaintiffs’ lawyers.

‘They need to pay’

Peter “Lanny” Bergrud used to stress to his four kids that they needed to be accountable for their actions.

“If you messed up, you owned it. You fixed it,” said Amy DeMaio, one of his daughters. “That was instilled in us as kids. We instill that into our children.”

So she found it offensive when a bankruptcy filing shielded CertainTeed from asbestos-related lawsuits that had been filed by her father and thousands of others. The company has estimated annual revenue of about $750 million, according to Growjo.com.

“For them to be able to file bankruptcy and not be held accountable?” DeMaio said. “That’s insane to me. I think it’s wrong.”

An Air Force veteran and father of four, Bergrud spent most of his working life in construction, laying sewer pipes for new housing developments in Washington state. For about 20 years, ending in the early 1990s, he worked with asbestos-containing sewer pipes manufactured by CertainTeed, DeMaio said.

That, she believes, is what led to his painful death years later.

After Bergrud was diagnosed with mesothelioma in February 2019, doctors told him he was already too sick to survive surgery or chemotherapy. DeMaio had to watch her once-active father gasp for air in his final weeks. On April 21, 2019, he died at the age of 77.

“Watching a loved one go through that is devastating,” she said. “I’ve been through a lot in my life. That was the worst thing.”

DeMaio knows no amount of money will bring her father back. But she believes CertainTeed should not be allowed to use Charlotte’s bankruptcy court to shield itself from liability.

“Somehow, some way, they need to pay for their actions,” she said.

Fair solution? Or easy way out?

Greg Gordon, a partner in the Jones Day firm who has been representing the three companies, wouldn’t comment for this story. Neither would officials for Georgia-Pacific. Officials for CertainTeed and Trane didn’t respond to requests for comment.

In court papers, however, company lawyers contend that their strategy is fair to all. They’ve noted that the companies have offered to fund trusts so that their subsidiaries can settle bankruptcy claims.

Still, Judge Whitley has noted that it is far from guaranteed that the parent companies will ultimately pay out.

“The Funding Agreements are not secured, they are not enforceable by creditors, and they cannot be assigned without written consent,” the judge wrote in his December ruling on the Trane case.

Lawyers for plaintiffs argue that the corporations are getting the benefits of bankruptcy without the burdens, such as the damage that is typically done to a company’s reputation and credit rating.

“The bankruptcy system is for bankrupt companies,” Ruckdeschel said. “Not a menu choice for the ultra wealthy who are looking to avoid state juries.”

Said Thompson: “These are multibillionaires that can pay everybody in full. They don’t need help, they don’t need bankruptcy relief. And they’re using the time and attention of the bankruptcy courts in North Carolina that should be going to the needs of people in North Carolina who actually need bankruptcy help.”

The plaintiffs’ lawyers who are seeking an end to the Texas Two-Step have some powerful allies.

North Carolina Attorney General Stein, joined by 23 other state attorneys general, filed a brief with the U.S. Supreme Court in January, arguing that the Texas Two-Step threatens the power of states to enforce laws against corporate wrongdoers.

The maneuver has resulted in delays that have been devastating to some North Carolinians, according to Nazneen Ahmed, a spokesperson for the state Attorney General’s office.

“Wealthy companies using the Texas Two-Step have little incentive to promptly resolve claims against them for their misconduct that harmed North Carolinians because they no longer face the threat of having to go to trial,” Ahmed said in an emailed statement to The Observer.

U.S. senators from both parties – Democrats Dick Durbin and Sheldon Whitehouse and Republican Josh Hawley – filed a separate brief in February, contending that the strategy “radically expands the authority of bankruptcy courts and makes a mockery of congressional intent.”

What’s ahead

Lawyers on both sides are awaiting further guidance from higher courts.

Later this year, the Fourth Circuit Court of Appeals in Richmond, Virginia, is expected to review constitutional questions raised in the case of the Georgia-Pacific subsidiary that filed for bankruptcy protection in North Carolina. Depending on what happens there, the case could ultimately go to the U.S. Supreme Court.

In his December ruling on the Trane case, Judge Whitley raised questions about the legality of the Texas Two-Step. Using an “artificially created” subsidiary to provide bankruptcy relief to a prosperous parent company is “on the far reaches of the Congressional bankruptcy power, if within it at all,” he said.

“A higher court than this will ultimately determine which side is correct,” he said.