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Intro: Hello and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policy holders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist.

Andy: Welcome to another episode of the Insured Success podcast. This is Andy Muha, a member of Reed Smith's insurance recovery group in Pittsburgh. And I'm joined today by my colleague Luke Sizemore, also of Pittsburgh, and from our firm's restructuring and insolvency group. Thanks for being here, Luke.

Luke: Of course, Andy. I'm happy to be here.

Andy: Luke and I are here to discuss an issue that intersects our two practices, insurance recovery and restructuring and insolvency. That is how to develop a permanent solution for the challenge of mass tort litigation. And I think the best way to start would be to talk briefly about the dimensions of the challenge. Mass tort litigation has been a part of the American legal scene for several decades. The term mass torts generally refers to claims for bodily injury arising from exposure to a product or continuously repeated conditions or behavior. Often, they involve a latency element, the period after the conduct that caused the injury, but before the injury manifests itself. And because of that latency period, mass torts typically pose the specter of an unknown number of future claimants. Bodily injury claims for asbestos exposure are the prototypical mass tort, but they also include claims for injury caused by talc, opioid painkillers, silica, defective medical products, and even institutional sexual abuse. Litigation of mass tort claims is expensive. Mass tort claims are typically filed in state courts, which are becoming more unpredictable and more plaintiff-friendly by the day. Claims are often filed in a variety of jurisdictions, and coordination of the defense efforts spread across multiple states adds expense and complexity. Historically, mass tort defendants have sought to cover the costs of both defending mass tort claims and paying for settlements or judgments on those claims by relying on liability insurance, whether in primary, umbrella, or excess policies. But many defendants face a troubling reality. If the mass tort claims at issue continue to be asserted indefinitely, the cost of defending and resolving those claims may exceed the limits of available insurance. That risk often is compounded by the fact that insurers themselves actively seek ways of evading coverage obligations that the policyholder defendant believes to be unassailable. Companies with healthy operating businesses may nevertheless find themselves beset by mass tort claims arising from long-since discontinued operations or from business units that were acquired recently or distantly. And despite a healthy operating business, mass tort problems can cast a pall over the company's overall prospects for growth. And they may be an impediment to strategic mergers, acquisitions, or other types of business combinations that the company may wish to explore. Given that it's typically impossible for a company to predict when the mass tort claims against it may come to a natural ending point, it can be difficult for mass tort defendants to make long-range plans that account for those mass tort liabilities in a realistic and reliable way. So, is it possible to find a permanent solution for mass tort claims in a way that puts a final stop to the financial blood loss those claims so often cause? The answer is yes, at least in some situations. And perhaps more importantly, companies that are willing to invest in long-term planning to resolve mass tort claims can maximize both the number of options that may be available to them and to enhance the potential effectiveness of those options. And Luke, why don't you talk about some of those options?

Luke: Sure. Thanks, Andy. Strategies to permanently resolve mass tort liabilities generally center around a few central steps. The first step is confining the liability to a specific entity, to the extent that's possible. The second step is identifying and marshaling assets designated to pay claims, such as proceeds from a sale of company assets, proceeds from settlements with parent or affiliate entities, insurance proceeds, and even future distributions and dividends. And the third step is effectuating a hard stop on the claims themselves. Now, there are a number of potential options for achieving that third step, the hard stop on claims. They include several options under the bankruptcy code, ranging from a Chapter 11 reorganization to a Chapter 7 liquidation, as well as dissolution under state law. And I'll briefly touch upon each of these options at a high level. As you might expect, there are nuances with respect to these strategies that we won't delve into today. To start, the gold standard when it comes to resolving mass tort liabilities and bankruptcy is a Chapter 11 reorganization utilizing the tools provided by Section 5-24G of the Bankruptcy Code. Section 5-24G of the Bankruptcy Code establishes a specific process for permanently resolving all current and future asbestos-related personal injury and wrongful death claims. First, this process requires the appointment of a legal representative or holders of future mass tort claims. Those are the claims that have not yet been asserted, but may be asserted in the future based on past conduct. And the purpose of that appointment is to ensure that the interests of those future claimants are represented throughout the bankruptcy process. Second, the 5-24G process requires the debtor to propose a Chapter 11 plan of reorganization that has the support of more than 75% of the current claimants that actually vote on that plan of reorganization. That plan is going to require the establishment and capitalization by the debtor of a settlement trust, and that settlement trust will resolve and pay mass tort claims into the future. If the debtor can satisfy those and other procedural hurdles, all present and future mass tort claims against the debtor and certain related entities that contribute to the trust will be permanently channeled to that trust, and the debtor will be permitted to reorganize and emerge from bankruptcy with continuing business operations free from the bankruptcy mass tort overhang. Now, this strategy is likely to be more expensive and may take longer than any of the other strategies we'll discuss today. But again, the result is the highest level of protection to debtors and related parties. And although Section 5-24G was drafted only to apply to asbestos claims, bankruptcy courts have approved Section 5-24G-style resolutions for non-asbestos claims by invoking a bankruptcy court's general equitable powers. The second strategy to put a hard stop on claims is a more traditional Chapter 11 reorganization that doesn't resort to the processes set out in Section 5-24G. As I just mentioned, Section 5-24G is designed specifically to allow debtors to address potential future tort claims to the appointment of a future claimant's representative. In the event that the mass tort at issue, however, is isolated to a known set of individuals with current claims, and the debtor is reasonably confident that there are no future claims, a more traditional Chapter 11 reorganization plan is possible. That is chapter 11 case without the appointment of a future claimant's representative and the need to specifically follow the dictates of section 5-24G of the bankruptcy code such a plan would involve the creation of a separate class of tort claimants the creation of a pool of funds or other assets from which the tort claims could be compensated and the establishment of procedures by which tort claims would be settled or otherwise liquidated assuming that the reorganization plan is approved by the requisite majority of creditors, but not the 75% that's required by Section 5-24G of the Bankruptcy Code, the pre-petition tort claims would be discharged under the plan. And what would remain would only be the reorganized debtor's obligations to pay settled or liquidated claims pursuant to the terms of the plan of reorganization. And unlike in a liquidation case, which we'll discuss next, the debtor's business should be able to continue operating post-bankruptcy. That takes us to the third option for putting a hard stop on asbestos claims, and that's a Chapter 11 liquidation case. Although Chapter 11 of the Bankruptcy Code normally is thought of as the reorganization chapter, a company also may liquidate in Chapter 11. A liquidating Chapter 11 case normally involves a bankruptcy sale of any remaining operating assets, followed by the creation of a liquidating settlement trust established through confirmation of a Chapter 11 plan to resolve all current tort claims. But this process does not help with future claims. Once the bankruptcy process is complete, however, the debtor will be left as a judgment-proof entity that can dissolve under state law. And as a result, any future claimants would be left without a viable legal entity to pursue. Throughout this process, and unlike in a Chapter 7 liquidation case, which we'll discuss next, the debtor will retain control of its assets and the bankruptcy process. This process offers a path to permanently resolving derivative claims against a debtor's parent and affiliate entities to a court-approved settlement, but it also requires mass tort claimants to vote on a Chapter 11 plan. Obtaining creditors' votes in favor of a plan can require significant time and effort, which can increase the cost of liquidating a Chapter 11 case. The fourth option for putting a hard stop on claims is a Chapter 7 liquidation case. This strategy will result in the complete liquidation of the debtor and the termination of its corporate existence. Although that is the same result as a Chapter 11 liquidation case, the Chapter 7 option is often seen as less desirable because the process is not controlled by the debtor, but rather by an independent court-appointed trustee that may seek to pursue derivative claims such as bail-piercing and fraudulent transfer actions against the debtor's parent or affiliates. Although those claims can be settled as part of the Chapter 7 proceeding, the central role of the trustee in this context, plus the lack of a discharge of debts at the end of the Chapter 7 proceeding, makes this option relatively less attractive. Fifth and finally, a debtor facing mass tort liabilities could dissolve under applicable state law. Dissolution statutes vary from state to state, and within each state for different types of business entities. But many of these statutes do include a bar of repose of any claims not filed within a certain time after the entity dissolves. And so the aim of this strategy is to dissolve the entity with the liability, and then take advantage of the statute of repose to cut off all remaining claims. Our Mass Tort Resolution Practice team at Reed Smith has assisted clients with implementing strategies involving dissolution, liquidating Chapter 11 cases, Section 5-24G model Chapter 11 cases, and traditional Chapter 11 reorganization cases. And in every one of these engagements, we've been able to leverage not only the firm's experience in restructuring and reorganization, but also its insurance recovery practice. Because as Andy will discuss next, insurance is intrinsically intertwined with resolving mass tort liabilities. Andy?

Andy: That's right, Luke. As we mentioned earlier, mass tort defendants traditionally have relied heavily on liability insurance to fund the defense and resolution of mass tort claims in the tort system. And one of the greatest concerns posed to many mass tort defendants by their mass tort litigation challenges, especially where the the mass tort at issue is anticipated to give rise to an undetermined and unpredictable number of claims into the future, is the possibility that the claims the defendant faces now and will face in the future ultimately might outlast whatever insurance the defendant has for those claims, whether as a result of the exhaustion of coverage limits or due to risks of insurers prevailing in disputes over whether they have to provide coverage for those mass tort claims. As such, insurance is almost always a significant factor, if not the most significant factor, in an analysis of how a defendant should try and deal best with its mass tort claims. The importance of insurance recoveries in these kinds of situations is probably obvious. Insurance recoveries are usually the chief source of funding for a defendant's strategy to permanently resolve its mass tort claims. And to one extent or another, each of the strategies that Luke discussed just a minute ago offer potential benefits for the insurers that may incentivize them to be willing partners in the policyholder's quest to achieve permanent resolution of those claims. For example, Section 5-24G model bankruptcy cases offer the highest level of protection not only to the debtor policyholders themselves, but to participating insurers as well. Section 5-24G of the Bankruptcy Code expressly provides that the channeling injunction issued for current and future claims can be extended to protect a debtor's insurers. Insurers most insurers view this protection as being more extensive than an injunction the insurer could receive by repurchasing insurance rights from its debtor insured through a bankruptcy court approved settlement which i'll discuss in more detail in a moment for that reason insurers may be willing to pay more for the protection they receive in a section 5-24G model case than in other types of bankruptcy cases. Non-section 5-24G model liquidating bankruptcy proceedings, that is a Chapter 7 case or a liquidating Chapter 11 case, offer the promise of an effective end to claims though without a permanent channeling injunction. This positions an insurer to better assess its total potential exposure for coverage of those claims and then to reach an agreement that liquidates and resolves that coverage exposure fully and finally. Possibly even more attractive to the insurer is the ability to buy back the insurance it issued to the insured, subject to the approval of the bankruptcy court. Under the bankruptcy court's provisions governing sales of property of the bankruptcy estate, which would include the insured's insurance rights, the court order approving that kind of agreement can include an injunction that protects the settling insurer from any claim that any party can make against the settled policies. In this way, the insurer can get its own finality with respect to the policies at issue. And I want to note that these benefits are also available in traditional Chapter 11 cases for situations involving a finite number of tort claims, as Luke described before. In the context of a corporate dissolution, the effect of the legal bar of repose against mass tort claims will mean that once the bar takes effect, no new claims can be asserted against the defendant insured. And as in the context of a liquidating bankruptcy proceeding, this will enable an insurer to more easily and accurately quantify its exposure to coverage for claims the insured would make for those underlying mass tort claims. And that, in turn, will give the insurer confidence that its own exposure for coverage obligations will have a definite endpoint. And this may encourage the insurer to support the insured through its dissolution process, such as by agreeing to a coverage-in-place agreement to fund the defense and resolution costs for all non-barred claims, or by agreeing to a policy buyback settlement that is priced according to the exposure that is limited now by the legal bar of repose. Because the bar alleviates uncertainty about the number, duration, and cost of future claims, an insurer may be more willing to cooperate with its insured in reaching an endpoint for both itself and its insured. Once again, our Reed Smith Insurance Recovery Attorneys have been active in recovering insurance to facilitate permanent mass tort solutions for a host of clients over the years. Not only do we know the issues, we know the insurer counsel who very often are involved in many of these cases. Our experience has been seen by clients as a significant value add to their process of effectuating a permanent solution to their mass tort issues.

Luke: Andy, I think it's important to note for our listeners that the strategies we've discussed today aren't necessarily a good fit for every mass tort defendant. The feasibility and attractiveness of these strategies depend on a host of factors that are specific to each defendant, and those factors must be evaluated before a defendant adopts and implements any particular strategy.

Andy: That's a good point, Luke. And I think it's equally important to note that defendants themselves can take actions that could make one or more of these strategies more feasible and more attractive. But this is truly only if the entity begins evaluating and planning before the number or severity of the mass tort claims at issue become overwhelming, and well before the entity finds itself running short of insurance or other assets to pay for the defense and resolution of those claims. For example, in some cases, advanced corporate restructuring may be needed to isolate the irrelevant liabilities and assets within one part of the corporate organizational chart without creating or enhancing risks of extended liability on theories like veil piercing and fraudulent or voidable transfers. In other cases, corporate families that are seeking to expand through acquisitions may need some guidance on structural issues where the target may be bringing along mass tort liability exposure so that the risks from that exposure can be contained for potential resolution after the acquisition is complete.

Luke: I agree, Andy. There's a lot to think about when it comes to a company facing these liabilities. And in light of all of this, I think one thing should be clear. Timing is really of the essence. Companies that begin thinking about these issues earlier rather than later will find themselves with more options, which are more attractive and feasible. By contrast, those who wait too long, such as until the number of pending claims is rising while their insurance for those claims is nearing an end, will have fewer uniformly less attractive options and will be forced to choose the least worst one.

Andy: That's right, Luke. And I think if one were to look for a single takeaway from our discussion today, it would be this. For any company with mass tort issues, issues the message is don't wait until tomorrow to start thinking about how to permanently resolve those claims start working on that problem today. So with that i want to thank all of our listeners for joining us and i want to encourage them if anyone has any questions about mass tort claims, challenges and potential permanent resolutions for those challenges to please contact Luke or I and we would be happy to discuss that with you. For the Insured Success Podcast, this is Andy Muha and Luke Sizemore. Thanks for listening.

Outro: Insured success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcast, Google Podcast and reedsmith.com. To learn more about Reed Smith's insurance recovery group please contact insuredsuccess@reedsmith.com.

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.

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