By Dietrich Knauth

June 1 (Reuters) - The U.S. Supreme Court on Monday declined to take up a case involving the so-called "Texas two-step," a bankruptcy tactic which allows companies to pause lawsuits against them by creating a shell company to absorb legal liabilities.

The dispute stemmed from cancer victims’ opposition to a bankruptcy filed by Georgia-Pacific LLC KCHINP.UL unit Bestwall, which has been in Chapter 11 since 2017, after a corporate spinoff made Bestwall responsible for all of the conglomerate’s asbestos-related liabilities.

At the time of the bankruptcy filing, Georgia-Pacific faced 64,000 lawsuits alleging that the company's drywall, wallboard, plaster and other construction materials contained asbestos and caused cancer.

Attorneys for Bestwall, Georgia-Pacific and attorneys for the cancer victims did not immediately respond to requests for comment.

The Supreme Court had previously denied a petition to review the case in 2024.

In their latest petition to the high court, cancer victims argued that Bestwall was abusing U.S. bankruptcy law to prevent them from trying their cases in other courts, without offering any real path to settling the cases in bankruptcy. They were appealing a 2025 ruling from the 4th U.S. Circuit Court of Appeals that rejected their effort to have the bankruptcy dismissed.

Bestwall said in its response filed with the Supreme Court that bankruptcy is the fastest way to reach a fair and comprehensive settlement with all asbestos plaintiffs. Bestwall blamed the plaintiffs for the delay, saying they would rather spend time and resources opposing the bankruptcy than negotiating a settlement.

The petition was supported by seven amicus briefs from 11 law professors, three U.S. senators and others who argued that the Supreme Court should curb wealthy companies' ability to take advantage of U.S. bankruptcy laws.

Bestwall was the first in a line of controversial bankruptcy cases that employed a strategy that became known as the Texas two-step.

The cancer victims’ petition argued that bankruptcy should not be used to shield a wealthy company like Georgia-Pacific, a massive industrial conglomerate known for paper products like Brawny paper towels, Angel Soft toilet paper and Dixie cups.

Georgia-Pacific is worth tens of billions of dollars, and it has paid billions in dividends to shareholders since Bestwall entered bankruptcy, according to the petition.

The cancer victims’ attorneys said that the case has remained in bankruptcy due to a flaw in the 4th Circuit’s interpretation of “bad faith” in bankruptcy cases.

Unlike other appeals courts, the 4th Circuit does not consider whether a bankrupt company could pay its debts, and it dismisses cases for "bad faith" only when a bankruptcy case demonstrates "objective futility," according to the petition.

The Supreme Court, as is its custom, did not explain its reasoning for rejecting the Bestwall appeal.

The case is Official Committee of Asbestos Claimants of Bestwall LLC v. Bestwall, U.S. Supreme Court, No. 25-1013

For the asbestos claimants: David Frederick of Kellogg, Hansen, Todd, Figel & Frederick, P.L.L.C.

For Bestwall: Noel Francisco of Jones Day

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