One approach is to simply address issues as they arise, in a "whack-a-mole" kind of exercise, where issues are taken on one at a time through impromptu changes in course or litigation strategies, typically only after the costs of the current approach become unmanageable.

But with an increasingly sophisticated plaintiff bar and litigation funders providing easily accessible and economically attractive funding, litigation has become more prevalent, more costly, and less likely to succeed, with more and more products being asserted as causing tort liability. This isn’t just a trend – this is the new reality.

We’ve also seen large companies attempt to go on the offense – hiving off troubled operations through the "Texas Two-Step" that utilizes the Texas “divisive merger” statute to carve out certain isolated liabilities and a corresponding set of assets, then file the company holding the isolated liabilities for bankruptcy in an attempt to channel litigation claims into a single proceeding and put an end to litigation against the parent company. So far, that strategy has not resulted in a confirmed bankruptcy plan and, in fact, several of these two-step or similar efforts have resulted in dismissed bankruptcy cases and a reversion to the tort system. Thus, it would seem that taking drastic offensive actions – such as the Texas Two-Step – only after problems have become unwieldy is not a panacea for dealing with mass tort liabilities.

Similarly, waiting until things get so bad that a company must resort to a "free fall" bankruptcy doesn’t seem like the right answer. Sure, claims are stayed by the protections of the automatic stay and can be channeled through a chapter 11 plan of reorganization, but this means filing bankruptcy for the entire company, which is costly, time-consuming, and can be brand-damaging, not to mention likely to decimate company stock. It is, therefore, understandable that companies would like to avoid subjecting their entire business to bankruptcy.

So what is left to do, other than to remain diligent on regulatory matters and litigate where necessary? The short answer is to get your corporate house in order. It’s what some are calling "structural optimization" – reorganizing internally to try and predict future problems through reallocation of assets and liabilities, done in a way that anticipates and protects against later challenges by creditors. 

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Authored by Christopher Donoho and John Beck.

Originally published by Westlaw.