Texas Two-Step at the Supreme Court: 21 State AGs Back Asbestos Claimants in Herlihy v. DBMP

A bipartisan coalition of 21 state attorneys general asked the U.S. Supreme Court on Oct. 23, 2026 to hear Herlihy v. DBMP, LLC, No. 26-394, and reverse a Fourth Circuit decision holding that CertainTeed's Texas Two-Step bankruptcy was not filed in bad faith. The brief puts the states squarely behind mesothelioma claimants who have been barred from suing in state court for more than six years, and it gives the Texas Two-Step Supreme Court fight its most prominent institutional backing since the justices turned away the related Bestwall case on June 1, 2026.

The filing does not decide anything on its own. The Court has not yet said whether it will take the case, and a grant of certiorari remains a long shot in any term. But a multistate brief at the petition stage is one of the few signals that reliably raises the odds of review, and this one lands on a petition that frames the question more narrowly, and more cleanly, than the Bestwall petitions that failed. For asbestos plaintiffs' firms, mass tort defendants weighing a divisional merger, and anyone tracking whether solvent companies can use Chapter 11 to channel tort claims, the next few months on the No. 26-394 docket matter.

What did the state attorneys general ask the Supreme Court in Herlihy v. DBMP?

The coalition asked the Court to grant the claimants' petition and reverse the Fourth Circuit's holding that DBMP's use of the Texas Two-Step was not a bad-faith use of the bankruptcy process to avoid asbestos claims. According to the California Attorney General's announcement, the states describe the maneuver as one in which a solvent company creates a shell entity under Texas corporate law, loads it with the company's tort liabilities while keeping the assets and profits elsewhere, and then places the shell into bankruptcy.

California Attorney General Rob Bonta's office announced the brief as the work of a "bipartisan coalition of 21 attorneys general." Law360's report on the filing, published the evening of Oct. 23, counted the signatories as attorneys general for 20 states and the District of Columbia; the two descriptions are consistent once the District's attorney general is counted among the 21. The release and Law360's summary both frame the states' interest in sovereign terms: the brief argues that the Fourth Circuit's approach undermines the states' ability to enforce their own laws, because the automatic stay that accompanies a Two-Step filing halts state-court tort litigation and can sweep in claims the states themselves care about.

That framing matters. State attorneys general are not asbestos creditors in DBMP's case. Their argument is structural: if a profitable company can isolate tort liability in a new entity, file that entity in bankruptcy, and freeze every pending state-court case for years without ever showing financial distress, then state tort law, state consumer protection law and state courts lose their ordinary role in resolving mass injury claims. The coalition is asking the justices to treat that as a problem of federal bankruptcy law with consequences for federalism, not merely as a dispute between one debtor and its creditors.

Which states joined the Texas Two-Step amicus brief?

The public announcement identifies California as a member of a 21-attorney-general coalition, and Law360 describes it as 20 states plus the District of Columbia. The full roster of signatories appears on the brief itself on the Supreme Court's docket for No. 26-394. The coalition is described as bipartisan, which mirrors the January 2024 multistate brief in the Bestwall case, when North Carolina's attorney general helped lead a similar group urging review of the Fourth Circuit's Two-Step rulings.

What is the Texas Two-Step bankruptcy?

The Texas Two-Step is a two-stage restructuring used by companies facing mass tort liability. In step one, the company uses the Texas divisional merger statute to split into two new entities. One entity, often called the "good co," receives the operating business and most of the assets. The other, the "bad co," receives the tort liabilities. Texas law provides that, except as otherwise arranged by law or contract, an entity created in a divisional merger is not liable for the obligations allocated to the other. In step two, the bad co moves to a friendly venue and files Chapter 11, triggering the automatic stay under 11 U.S.C. § 362, which halts every pending lawsuit against it.

The structure is usually paired with a funding agreement under which the good co promises to pay the bad co's tort liabilities and bankruptcy costs. Debtors argue that the funding agreement means claimants lose nothing, because the full value of the original company still stands behind the claims. The end goal is a plan under 11 U.S.C. § 524(g), the asbestos-specific provision that lets a debtor fund a Section 524(g) Trust and obtain a channeling injunction that sends present and future asbestos claims to the trust instead of the tort system. Section 524(g) requires, among other things, that at least 75 percent of voting asbestos claimants approve the plan.

Critics, including the claimants and the state coalition, argue the structure gives a solvent company the Bankruptcy Code's most powerful tools without the financial distress that justifies them. Supporters counter that a § 524(g) trust can pay claimants more efficiently and more equitably than decades of individual state-court trials, and that Congress wrote § 524(g) without an insolvency test.

How the CertainTeed Two-Step created DBMP

DBMP LLC is the asbestos-liability vehicle created from CertainTeed, the North American building products subsidiary of France's Saint-Gobain. CertainTeed and its predecessors made asbestos-containing building products over roughly six decades, according to the California announcement, and the Herlihy claimants allege their mesothelioma was caused by those products.

The record described in the Fourth Circuit opinion and the petition sets out the mechanics of the 2019 restructuring:

Element of the restructuring	Where it went
Old CertainTeed's legal existence	Dissolved in the divisional merger
Approximately 97% of Old CertainTeed's assets	New CertainTeed (operating company)
All of Old CertainTeed's asbestos liabilities	DBMP LLC
Cash	$25 million to DBMP
Operating business	Equity of the Millwork & Panel siding and trim business to DBMP
Support for DBMP's liabilities	Uncapped funding agreement from New CertainTeed, covering asbestos liabilities and, in bankruptcy, Chapter 11 costs and a § 524(g) trust
Bankruptcy venue	U.S. Bankruptcy Court for the Western District of North Carolina, Case No. 20-30080

Under the funding agreement, New CertainTeed's obligation to pay administrative expenses and DBMP's indemnification obligations is triggered only to the extent cash distributions from Millwork & Panel are insufficient. DBMP is a wholly owned subsidiary of CertainTeed LLC.

DBMP joined a cluster of Two-Step asbestos cases in the same district. Georgia-Pacific's Bestwall LLC filed there in 2017, and Trane Technologies' Aldrich Pump LLC and Murray Boiler LLC filed there in 2020 (Case Nos. 20-30608 and 20-30609). Commentators have long noted that the Western District of North Carolina became the venue of choice because Fourth Circuit law makes bad-faith dismissal difficult. A separate fight over the restructuring itself continues in DBMP's bankruptcy: the asbestos claimants' committee and the future claimants' representative have pursued a fraudulent transfer adversary proceeding (Adv. Proc. No. 22-03000) arguing that DBMP received no real value from the funding agreement, and Bankruptcy Judge Ashley A. Edwards has had cross-motions on that question before her.

What did the Fourth Circuit decide in Herlihy v. DBMP?

The Fourth Circuit held on Feb. 11, 2026, by a 2-1 vote, that the bankruptcy court did not abuse its discretion when it refused to lift the automatic stay so the Herlihy and Bergrud claimants could try their mesothelioma cases in state court. The decision is reported as Herlihy v. DBMP, LLC, 167 F.4th 142 (4th Cir. 2026).

The procedural path was short and narrow:

• April 2024: The Bergrud Estate and the Herlihys moved for limited relief from the automatic stay to pursue their asbestos suits in state court, arguing DBMP's Chapter 11 was filed in bad faith.
• May 2024: The bankruptcy court denied the motions in a ruling from the bench.
• Oct. 28, 2024: The U.S. District Court affirmed, finding no abuse of discretion.
• Feb. 11, 2026: The Fourth Circuit affirmed in a published opinion by Judge Paul V. Niemeyer, joined by Judge Pamela Harris, over a dissent by Judge Robert B. King.

The majority treated the case as an application of the Fourth Circuit's stay-relief framework under In re Robbins and reviewed only for abuse of discretion. It concluded that DBMP filed its Chapter 11 petition for a legitimate purpose, pursuing a § 524(g) plan for which it qualified, and that the claimants offered no evidence of bad faith. It rejected the argument that DBMP's lack of financial distress, or the use of the Two-Step structure by itself, demonstrated bad faith. And it read § 524(g) as contemplating Chapter 11 for asbestos liabilities without a strict insolvency requirement.

The majority also flagged what it was not deciding. It noted that it did not have before it a motion to dismiss DBMP's petition, and it did not rule on the legality of the pre-bankruptcy divisional merger. Commentary on the opinion describes its practical effect as a two-part test for bad-faith stay relief in § 524(g) cases that requires both subjective bad faith and objective futility, a demanding combination for claimants.

Judge King's lengthy dissent took the opposite view, arguing that the Two-Step was bad faith as a matter of law and that the bankruptcy court misapplied precedent. Press coverage of the dissent reported his warning that the circuit had become a "safe haven" for wealthy corporations seeking to avoid asbestos tort liability. One summary of the opinion noted that the majority did not engage the dissent's arguments directly.

The question the claimants put to the justices

The asbestos claimants filed their petition for certiorari on Sept. 17, 2026, after obtaining an extension through Application No. 26A66, which was docketed in July. The question presented, as reported by HarrisMartin from the petition, is whether a "debtor's pursuit of bankruptcy as part of a Texas Two-Step scheme lack[s] good faith, such that 'cause' exists to lift the automatic stay under 11 U.S.C. § 362(d)."

Mealey's reported that the petition asks the Court to "protect the integrity of the bankruptcy system" and to "safeguard claimants' constitutional rights to seek redress in the nation's civil justice system." Coverage of the petition reports that the claimants argue the Fourth Circuit's approach cannot be squared with the Third Circuit's rejection of Johnson & Johnson's Two-Step and that the arrangement serves no legitimate reorganization purpose.

The petition has now drawn at least two amicus briefs in support. On Oct. 13, 2026, a group of bankruptcy law professors filed a brief, with David R. Kuney as counsel of record, challenging the Fourth Circuit's treatment of DBMP's filing as presumptively legitimate under § 524(g). The state coalition followed on Oct. 23.

Is there a circuit split on the Texas Two-Step?

The claimants and their amici say yes, and the comparison is the core of the cert pitch. The Third Circuit and the Fourth Circuit have handled solvent Two-Step debtors in sharply different ways:

Issue	Third Circuit: In re LTL Management (Jan. 30, 2023)	Fourth Circuit: Herlihy v. DBMP (Feb. 11, 2026) and Bestwall
Debtor	J&J's talc subsidiary, LTL Management LLC	CertainTeed's asbestos subsidiary, DBMP LLC; Georgia-Pacific's Bestwall LLC
Procedural posture	Motion to dismiss the Chapter 11 case for bad faith under § 1112(b)	Motion for stay relief under § 362(d) (DBMP); motion to dismiss and jurisdiction (Bestwall)
Role of financial distress	Required: a debtor not in immediate financial distress cannot show a valid bankruptcy purpose	Not required: solvency alone does not show bad faith, and § 524(g) has no strict insolvency test
Value of the funding agreement	Counted against the debtor; it showed LTL could pay claims outside bankruptcy	Treated as consistent with a legitimate § 524(g) reorganization
Result	Case ordered dismissed	Stay remains; claimants stay out of state court

Defenders of the Fourth Circuit's rulings have a ready answer: the procedural postures differ. LTL was a dismissal case under § 1112(b), while Herlihy is a stay-relief case reviewed for abuse of discretion, and Bestwall's opposition to certiorari stressed that the Fourth Circuit had resolved only threshold questions. The Court may see the DBMP petition as a better vehicle precisely because it presents the good-faith question directly, or it may see the stay-relief posture as one more reason to wait.

Did the Supreme Court already reject a Texas Two-Step case?

Yes, twice, both times in the Bestwall bankruptcy, and neither denial decided the merits. On May 13, 2024, the Court denied two petitions (Nos. 23-675 and 23-702) challenging the bankruptcy court's injunction shielding Georgia-Pacific and other nondebtor affiliates from asbestos suits. That round drew the January 2024 multistate brief led in part by North Carolina.

On June 1, 2026, the Court denied the asbestos claimants' committee's petition in No. 25-1013, which challenged the Fourth Circuit's ruling that federal courts had jurisdiction over Bestwall's case and asked whether a debtor with a conceded ability to pay all its liabilities can invoke bankruptcy protection. That petition had attracted amicus support from Sens. Dick Durbin, Sheldon Whitehouse and Josh Hawley, the American Association for Justice and Public Justice, among others. A denial of certiorari carries no precedential weight, and it left the Bestwall case pending in the bankruptcy court. Reporting in spring 2026, relayed by claimant-side outlets, said Georgia-Pacific was preparing a new bankruptcy approach to resolve its asbestos claims, though no new petition had been confirmed on a public docket at that time.

The Herlihy petition differs in two ways that its supporters will stress. It presents the good-faith question without the jurisdictional overlay that complicated Bestwall's 2026 petition, and it now comes with a multistate coalition behind it at the petition stage rather than only members of Congress and public-interest groups.

Texas Two-Step Supreme Court timeline

Date	Event
2017	Georgia-Pacific's Bestwall LLC files Chapter 11 in the Western District of North Carolina after a Texas divisional merger
2019–2020	CertainTeed's divisional merger creates DBMP, which files Chapter 11 (Case No. 20-30080)
2020	Trane's Aldrich Pump and Murray Boiler file in the same district
Oct. 14, 2021	J&J's LTL Management files in North Carolina; the case is later sent to New Jersey
Jan. 30, 2023	Third Circuit orders LTL's first case dismissed for lack of financial distress
May 13, 2024	Supreme Court denies Bestwall injunction petitions
May 2024	Bankruptcy court denies Herlihy and Bergrud stay-relief motions
Oct. 28, 2024	District court affirms
March 31, 2025	Judge Christopher Lopez (S.D. Tex.) dismisses J&J's Red River Talc case, which had proposed a $9 billion trust for more than 90,000 claims
Feb. 11, 2026	Fourth Circuit affirms in Herlihy v. DBMP, 2-1
June 1, 2026	Supreme Court denies the Bestwall petition, No. 25-1013
Sept. 17, 2026	Herlihy claimants file petition for certiorari, No. 26-394
Oct. 13, 2026	Bankruptcy law professors file amicus brief supporting review
Oct. 23, 2026	21 attorneys general file amicus brief supporting review

When will the Supreme Court decide whether to hear Herlihy v. DBMP?

No conference date had been publicly reported as of Oct. 24, 2026. Under the Court's rules, DBMP may file a brief in opposition or waive a response; if it waives, the Court can still call for one, which is common when a petition draws significant amicus support. The petition is typically distributed for a conference after the response and any reply are filed. On that ordinary schedule, a decision on whether to grant review would most likely come in the winter of the October 2026 Term. If the Court grants, briefing and argument could follow in spring 2027, or the case could roll into the following term depending on timing.

Nothing about the petition changes the status quo in DBMP's bankruptcy. The automatic stay remains in force, and asbestos claims against DBMP remain frozen, unless and until the Supreme Court grants review and reverses or the bankruptcy court lifts the stay on some other ground.

Political pressure beyond the Court

The amicus brief is one front in a broader campaign. Bloomberg Law reported in April 2026 that lawmakers had again introduced legislation targeting the Two-Step, which would direct courts to find such filings were made in bad faith and make it easier to dismiss them. The bipartisan senators who filed in Bestwall have pressed the same theme. J&J, meanwhile, abandoned bankruptcy as its talc strategy after the Red River dismissal and on July 27, 2026 announced a $5.5 billion proposal to settle roughly 76,000 ovarian cancer claims outside Chapter 11, conditioned on high participation. That shift is part of why the remaining live Two-Step fights are concentrated in the asbestos cases pending in North Carolina.

What it means for asbestos claimants and mass tort counsel

For mesothelioma claimants and their counsel. Mesothelioma claimants often have short life expectancies after diagnosis, which is why the Herlihy and Bergrud motions sought only limited relief to try individual cases. The petition is the most direct path to a ruling that solvency plus a Two-Step is bad faith per se. Until then, counsel with CertainTeed-exposure clients should expect the stay to hold, keep claims documented for any eventual trust distribution procedures, and watch for whether the Court calls for a response.

For companies weighing a divisional merger. The Fourth Circuit remains the most hospitable forum for a solvent Two-Step debtor, but the combination of the LTL line in the Third Circuit, the Red River dismissal in the Southern District of Texas, repeated legislative proposals and now a multistate coalition raises the cost and uncertainty of the strategy. A grant in Herlihy would put every pending North Carolina Two-Step case in limbo; a denial would leave the Fourth Circuit's framework in place but would not stop the next petition.

For state enforcers. The brief signals that attorneys general view Two-Step stays as an intrusion on state law enforcement and state courts. Expect the same coalition to appear in future Two-Step and nondebtor-release fights, building on the Court's 2024 decision in Harrington v. Purdue Pharma, which rejected nonconsensual third-party releases outside § 524(g).

For defendants and insurers in other mass torts. Because § 524(g) applies only to asbestos, the Two-Step's channeling-injunction endgame is limited to asbestos debtors. But the good-faith question in Herlihy is general. A ruling that financial distress is a precondition to Chapter 11 good faith would affect any mass tort defendant considering bankruptcy as a resolution tool, including talc, PFAS and product liability defendants who might otherwise look to a Global Settlement or a Settlement Matrix outside court.

For plaintiffs' firms and funders. Cases frozen in a Two-Step bankruptcy are slow to resolve and hard to value. Firms carrying asbestos inventories against Two-Step debtors, and any Third-Party Litigation Funding behind them, should treat the Supreme Court's decision on No. 26-394 as a key valuation event.

Frequently asked questions

What is the Texas Two-Step bankruptcy?

It is a restructuring in which a company facing mass tort claims uses the Texas divisional merger statute to move those liabilities into a new entity and then puts only that entity into Chapter 11, while the operating business and most assets stay outside bankruptcy.

What did the state attorneys general ask the Supreme Court to do?

On Oct. 23, 2026, a bipartisan group of 21 attorneys general asked the Court to grant certiorari in Herlihy v. DBMP, No. 26-394, and reverse the Fourth Circuit's holding that DBMP's Texas Two-Step bankruptcy was not filed in bad faith.

What did the Fourth Circuit decide in Herlihy v. DBMP?

On Feb. 11, 2026, a 2-1 panel held that the bankruptcy court did not abuse its discretion in refusing to lift the automatic stay, because DBMP filed for a legitimate § 524(g) purpose and neither its solvency nor the Two-Step structure alone showed bad faith.

Is there a circuit split on the Texas Two-Step?

The petitioners say so: the Third Circuit in In re LTL Management required immediate financial distress for a good-faith filing and ordered J&J's case dismissed, while the Fourth Circuit has allowed solvent Two-Step debtors to remain in Chapter 11. Respondents argue the different procedural postures mean there is no true conflict.

Has the Supreme Court ruled on the Texas Two-Step before?

No. It denied review in the Bestwall case on May 13, 2024 and again on June 1, 2026, and a denial of certiorari decides nothing on the merits.

Does the petition let asbestos claimants sue CertainTeed now?

No. The automatic stay in DBMP's Chapter 11 remains in effect while the petition is pending, and it would change only if the Supreme Court grants review and rules for the claimants or the bankruptcy court lifts the stay.