This article will survey the structural, strategic, and tactical ways by which a major corporate defendant may successfully manage its way through the particularly American corporate challenge of being targeted by the plaintiffs' bar in mass tort filings. I have spent most of my professional career trying to answer this question. Over the last 22 years, my company, KCIC, has focused on providing services to corporations in managing mass-tort liabilities and maximizing their related insurance assets.

There are three paths that a defendant company may pursue when faced with mass tort filings: restructuring and sale to a third party; bankruptcy solutions; some version of the status quo. I discuss each at length below.

But first, there are 17 best practices that every defendant should follow, irrespective of the path they eventually decide to take. This list lays important groundwork before the subsequent discussion about the paths forward. In a future companion article, I will explain the rationale behind each step.

Before Choosing a Path: Steps Every Mass Tort Defendant Should Take

1. Create a database of all complaints served on the company and relevant details of their resolution.
2. Research and document all factual defenses and corporate records that may be asserted in litigation.
3. Comprehensively search for all relevant general liability insurance policies and engage with insurance archaeology specialists, if needed.
4. Put all insurers on notice unless they clearly attach too high in coverage to be implicated.
5. Research and engage national counsel.
6. Research and engage trial counsel.
7. Keep copies of all correspondence and loss runs from insurers.
8. Engage coverage counsel.
9. Use technology to triage cases and ensure the most dangerous receive immediate attention.
10. Consider appointing a single settlement principal.
11. Develop a set of reporting in real time to manage the docket.
12. Evaluate administrative agreements with plaintiffs' firms.
13. Evaluate alternative fixed fee arrangements with defense counsel.
14. Strategically commence coverage litigation, if needed, to bring insurers onto the risk.
15. Model choice of law alternatives in insurance allocation scenarios.
16. Identify all affected or potentially affected subsidiaries and split each into two corporations: an operating company and a legacy liability and insurance company.
17. Bring all legacy liability subsidiaries under a common parent.

Path #1: Restructuring and Sale to a Third Party

Step 17 above brings all legacy liability and relevant insurance assets under a common parent. Many defendant corporations have arranged the sale of that common parent to an independent third party. With a certain amount of sign-off, especially from independent auditors, the defendant company may now be “disaffiliated” from its former legacy liabilities and related insurance assets. In other words, the company will now be clean and untainted by the legacy mass tort liabilities. It sounds too good to be true, but several major defendant companies have successfully executed such transactions. Typically, publicly traded corporations experience a significant uptick in their stock price that may exceed the sales consideration paid to the third party.

What could go wrong? A lot can go wrong. This type of restructuring and sale requires solid execution and experienced professionals to do it successfully. The sale price requires careful evaluation. Typically, the sales price will be negative — the seller will pay the buyer to purchase the holding company of the legacy liability-tainted subsidiaries. But it depends. Some companies leave additional non-insurance assets in the legacy companies, and in some cases the sales price may not be negative. Further, the sales price and capitalization of the sold entities needs to be sufficient, with a margin for error, and supported by actuarial opinions, auditor sign offs, solvency opinions, etc. to demonstrate in good faith that the entities have sufficient assets to pay pending and projected future claims. Going with the cheapest sales option may well be shortsighted. This is a time when boards of directors need wise counsel, because the auction process that often accompanies the transactions sets up an expectation that cheapest is best.

Another significant consideration is the experience of the counterparty. Do they know what they are doing? A lot can go wrong with the management of mass tort litigation. You want a steady hand and real industry experience in your counterparty — not one that will radically alter the litigation strategy without good reason.

The creditworthiness of the counterparty is another consideration. Do they have a strong balance sheet or the ability to call on other sources of capital? What if the actuarial assumptions were wrong, or a bad verdict shifted the size of the liability? Can the counterparty absorb bad news financially?

Finally, does the counterparty have the horsepower to manage the daunting logistics of hundreds or thousands of complaints each year and perhaps Olympic-level complexity in insurance litigation or billing? Simply continuing with the existing providers of these services may make sense, or new providers with more established track records may be the preferred option. Come what may, the logistical challenges will last for years into the future.

Why would a counterparty ever want to deliberately take on a stream of mass tort liability when most sane companies only run away from it? I had similar questions back in 2007 when the Berkshire Hathaway subsidiary, National Indemnity Company, took on the liabilities of Equitas, the runoff vehicle for Lloyds of London syndicates. It is no longer considered controversial and an intrinsic part of the Berkshire Hathaway business model to use such transactions as a source of cheap capital for its investment business.

There appear to be three types of counterparties, and their motivations are primarily one of the following:

• Cash as cheap capital. As Warren Buffet has frequently explained, getting a slug of cash to invest in private equity operations, while running off liabilities slowly, is attractive.
• Service fees. Not every counterparty can make private equity investments. They may find an attractive return in taking out agreed fee income for managing the run-off of the liabilities.
• Recapitalize and exit. Some counterparties find that the economics allow them in due course to upstream capital from the acquired entities, then sell the holding company and subsidiaries to another counterparty with its own motivations.

Private equity entities have been major players in this space, as have insurance companies that focus on running off insurance books of business. I have also seen entities created with trusted senior executives who manage the runoff as a part-time gig in retirement.

The critical point for the original defendant company is that the transaction must operate smoothly up through the statute of limitations, typically six years. If the acquirer puts the entities into bankruptcy for reasons of incompetence, greed, or whatever — or if plaintiffs do not get paid their verdicts or negotiated settlements — arguments may be presented to the court that a fraudulent conveyance has occurred. The whole, carefully constructed transaction grinds to a halt. In a worst-case scenario, the seller — having so carefully restructured and executed a transaction — may be back on the hook for the same tort-system liabilities. This is why getting good advice and choosing counterparties diligently is imperative.

The bottom line is that these arrangements have a track record of success. They can be expensive to execute, but I expect to see more of them in the future. For plaintiffs and insurers, it is business as usual. For the seller, it is peace of mind and a likely stock price jump. For the acquirer, it is capital, fees, and perhaps a profitable future sale. The many downsides of bankruptcy, which I next address, are completely avoided, and the seller gets effectively the same relief as would be provided by a channeling injunction in bankruptcy.

Path #2: Bankruptcy Solutions

Many companies have been driven to the bankruptcy courts because of the enormity of their mass tort liabilities relative to their insurance assets — often combined with incalcitrance from their insurance carriers.

But the profile of a corporation seeking bankruptcy relief is not always that of a company whose liabilities exceed its assets or whose cash has run out. Plenty of demonstrably solvent corporations have sought bankruptcy protection for particular mass-tort tainted subsidiaries.

Pre-packaged bankruptcies were all the rage 20-plus years ago. In such arrangements, the parties of interest, plaintiffs, debtor, insurers, etc. would pre-negotiate a plan of reorganization before filing and be in and out of bankruptcy, potentially, in months. There were a few successes, such as J.T. Thorpe Co. back in 2002, and then the insurance industry got extremely antsy. There were a few disastrous attempts that stayed in bankruptcy for years with multiple plans of reorganization, and then the “pre-pack” fell out of favor for a long time.

For a defendant company, sitting for years in bankruptcy may not be a bad thing. True, fees charged by the armies of professional advisors can be astronomical. But once incurred, they can be contained. And every day in bankruptcy is a day not in the tort system — not paying a defense counsel network, settlements, and sometimes verdicts.

I would not be surprised if there were some additional pre-packaged bankruptcies. However, given the obvious advantages of the restructuring alternatives I have described, I don’t know why a profitable manufacturing company with a mass tort taint would opt for bankruptcy relief at all.

The downsides of bankruptcy are compelling:

• The armies of professionals charge top dollar with minimal oversight from the U.S. Trustee.
• There is a high risk that the debtor will lose control of the Plan of Reorganization.
• Plaintiffs will extract maximum value.
• Cash funding of 524(g) trusts will likely sit in municipal bonds at anemic returns.
• Every 524(g) trust pays cents on the dollar; more than 60% of the trusts currently pay 20 cents on the dollar or less.
• Many plaintiffs without the evidence to get a result in the tort system receive payments from trusts, and the sickest plaintiffs, as a result, often receive far less than in the tort system.

Overall, bankruptcy has often been a poor choice for both profitable companies with a legacy liability taint and plaintiffs.

Path #3: Business As Usual

Maybe the status quo with a few targeted changes is not so bad. I still recommend step 17 for most companies, just to preserve options. That step may be enough because some corporations do just fine in the tort system and adopt to the full the best practices outlined above.

By way of analogy, just as peace and security for a nation may be founded in a strong military, so a trial team ready to go anytime, anyplace, with defenses worked up and witnesses at the ready, is the best way to ensure reasonable settlement values. I am also a proponent of an early warning system for particularly dangerous cases based on the settlement history of the defendant. Insurers may be doing the heavy lifting as primary carriers by managing the defense, but every defendant should be preparing for the day when the primary coverage exhausts and the defense reverts to the defendant. That is why a well-ordered claims database independently maintained by the defendant is essential.

Certainly, I recommend the deployment of advanced technology to manage the risks and reporting in real time; the ability to bring bankrupt companies into evidence as co-defendants; and the ability to benchmark settlement values, anonymously, with other similarly situated defendants. Historically, defendant companies have not collaborated much. But there is plenty of opportunity to partner.

Over 12,000 corporations were named as defendants in asbestos litigation in 2023.  While no defendant really wins in the utterly dysfunctional U.S. Tort System, there are those that do better than others by doing everything right. As a result, they manage their profile and cash flow within acceptable parameters. 

Such are my thoughts looking back on 40 years of professional life. I expect mainly more of the same for the foreseeable future.