Liability Detour: Litigating Against Bankruptcy as Strategy

Katya Valasek:

When thousands of people sue a company over a defective product, that company sometimes tries to move the fight out of the courtroom and into bankruptcy court. The idea is to create a new company, load it with the liability, and file for bankruptcy, limiting what plaintiffs can recover and taking the matter away from a jury. Adam Silverstein is a complex litigator and a partner at a midsize firm in New York. He represents the plaintiffs trying to stop that from happening.

Adam, most people hear bankruptcy and think of a company that's run out of money, but that's not what's happening in the cases you work on. What does bankruptcy court offer a company like those involved in your cases that a regular courtroom does not?

Adam Silverstein:

So, first, you have to understand the situation that these companies are in. It's a company that has created a product that is alleged to have caused harm to hundreds, oftentimes thousands, and in some cases, tens of thousands or even hundreds of thousands of people. And they are faced with lawsuits across the country.

The sheer volume of them is both expensive and very time-consuming and requires a lot of resources of the company. What the bankruptcy option has offered these companies is the ability to, one, pause all of those lawsuits and, two, bring them all within one jurisdiction, one court, the bankruptcy court, in order for them to be resolved and adjudicated in that one forum. And so, for companies facing this problem, and I say it's a problem of their own making because of the product that they created, they are enjoying the respite of all of this litigation and the possibility of resolving it all at once in one forum.

Katya Valasek:

And they lose the jury trial component, right? The matter is going to be decided by a single bankruptcy judge. What does that change?

Adam Silverstein:

That is an incredible benefit to these companies. The jury system is a wonderful system, but it also at times leads to results that not both parties are always satisfied with. And in a number of these cases, there have been very significant verdicts awarding claimants who were alleged to have been injured by some product a substantial amount of money, and then sometimes punitive damages on top of that.

The bankruptcy court does not now become the arbiter of these cases. It's not that these companies are now able to have the trials in bankruptcy in front of the bankruptcy court. Instead, there are a number of tools in bankruptcy that are sort of designed to get to a resolution of all of these claims, foregoing the trial process altogether.

It's sort of an alternative dispute resolution mechanism as perceived and utilized by these companies using this mass tort bankruptcy strategy. And that's where the problem lies, because bankruptcy court really wasn't designed and isn't really for that purpose. And that then leads to some of the fights that my firm and I have gotten into.

Katya Valasek:

So, we're going to dive into more of what you do in a second, but I want to start by talking about how you got here. You didn't start your career doing this kind of work. You were a complex commercial litigator for a very long time.

How did you end up in mass tort bankruptcy?

Adam Silverstein:

I would say like all lawyers who are eager to use their skills, I was open to opportunity. And this opportunity presented itself when my partner, Melanie Cyganowski, who was a retired bankruptcy judge, had been contacted through a referral by another retired bankruptcy judge about some plaintiff's law firms that had been leading the charge in litigation against Johnson & Johnson regarding its talcum powder. The allegation had been that the talcum powder was causing ovarian cancer in women.

And these plaintiff's lawyers were concerned that Johnson & Johnson was going to be filing a bankruptcy that would have an impact on their cases. And my partner knew that she would need one of her litigation partners involved. And when she reached out to me, both of us said to each other, well, what do we really know about Johnson & Johnson and talcum powder and these mass tort bankruptcies?

And to say that we were on the early stages of the learning curve would be an understatement.

Katya Valasek:

So how did you begin to bring yourself up to speed on J&J and talcum powder and the issues that were going to be addressed in that case?

Adam Silverstein:

So, learning about Johnson & Johnson and the allegations about talcum powder, that's the easy part. That's where the internet is extraordinarily helpful. It's very easy to find information about these allegations and what had been happening in the lawsuits.

The harder part was getting up to speed on this nuanced area of law involving mass tort bankruptcies and getting the confidence in that area so that when you are speaking to your clients, you can give them meaningful advice about what they're going to be facing.

Katya Valasek:

How do you handle that balance point of expressing confidence to your clients and wanting them to find confidence with you while being honest in your conversations that there may be things that you don't have answers to yet? How do you balance that tension?

Adam Silverstein:

It's not easy. We always want to give clients confidence that they're in the right hands. At the same time, if they're not in the right hands, you have to be honest about that.

In situations where you may not know as much as you need to know, but you're confident that you will, then there's this terrible expression, fake it till you make it, which is not literal when it applies to being a lawyer because you really can't fake it. But there's something to that where you have to speak confidently, but use appropriate hedges to make sure that your client understands that the advice you're giving is preliminary, that it's subject to further review and understanding. And so, it's a hard balance, and it takes experience to know how to really pull it off.

If you're full of too much bravado and you don't have the know-how, you can get exposed very quickly. And that really would not be good.

Katya Valasek:

My understanding is that when J&J took this approach, this was a relatively novel approach. Did your clients know that they were sort of stepping into new territory as this case moved forward?

Adam Silverstein:

No, I don't think anybody really appreciated what this was going to be. There had been some examples of this strategy that the Jones Day firm is reputed to have created. It's called the Texas Two-Step.

But the Two-Step was a relatively new innovation, and there had really not been any significant rulings on it when Johnson & Johnson had filed. And so, everybody was dealing with this for the first time. How significant it was going to end up being, nobody really knew.

But, you don't have time to think about that. You just are dealing with this whirlwind of a company has filed for bankruptcy, and now all of the sudden the table is turned over and you're dealing with everything that happens in a bankruptcy case. All of it is sort of emergency relief from day one.

Katya Valasek:

So, let's dive into what it looks like to do this work once you're actually in it. What are you doing day to day?

Adam Silverstein:

It depends on the day. But in the beginning of the case, there's this incredible disadvantage to the creditors in these mass tort bankruptcies. In most bankruptcies where there's a melting ice cube company, the creditors know that there's problems.

Bankruptcy is usually not a surprise. It's not a strategy. The company files for bankruptcy because it really is in financial distress.

When it's done as a strategy to try to resolve these lawsuits, when it's going to happen, if it's going to happen, where it's going to happen, none of that is really known except the company knows. The company has been planning this. In the case of the Johnson & Johnson bankruptcy, it was planning it for the better part of a year.

And so, Johnson & Johnson was fully prepared for everything for the first day, the second day. The first several weeks were all mapped out. But for the individuals who were involved in the lawsuits and their lawyers, they didn't know what was to be, when it was going to be and what it was going to look like.

So, when the bankruptcy happens, it's a whirlwind for the creditors in these circumstances that are caught by surprise. And it's a very aggressive and tight schedule. You're dealing with evidentiary hearings with practically no notice and witnesses having to take the stand and no depositions having been done beforehand.

And it's a completely different environment. And so, what you're doing on any given day, a lot of times you don't even know until that day.

Katya Valasek:

And it sounds like that whirlwind is a mix of both being in court and writing motions. Does that shift based on how far in you are?

Adam Silverstein:

In the very earliest stages, it's a tornado of everything you can imagine doing as a lawyer. You're in court. Sometimes you're taking weekend depositions.

You're writing motion papers. You're preparing for a hearing the next day. All of this can be happening at the same time.

It's not specific to mass door bankruptcies. It can happen in other cases as well. But eventually, after you get past the very earliest stages of the bankruptcy, it does settle more into a rhythm and there is more of an order to it.

But those first few weeks can be something that lawyers can go their entire life without ever really experiencing. And when they do, it's a shock to the system.

Katya Valasek:

So what kind of motions and briefs are you filing? Is your core argument that this company doesn't belong in bankruptcy, or is it more complicated than that?

Adam Silverstein:

Well, you have that. But keep in mind, you have a company that's now in bankruptcy. And so the bankruptcy has a rhythm.

The first day, the bankruptcy court wants to know, are there employees? How are the employees going to get paid? How are vendors going to get paid?

Is there outstanding litigation against the company? What's going to happen there? Does that need to be paused?

Is there any financing that needs to be put in place to allow the company to operate in bankruptcy? Depending on the circumstances of the bankruptcy, some of these things may be irrelevant. In a case where you have a Texas two-step where you're just putting the liabilities into bankruptcy, there aren't employees.

You don't have to worry about that. You don't have lines of credit that you're dealing with. Everything becomes this referendum on, well, there's really no need for this because this isn't a real bankruptcy.

It's a contrived bankruptcy. And so then even the most typically mundane of issues about hiring employees or paying bills, everything becomes a more complex fight over this fundamental issue of, is this really a proper use of the bankruptcy or not?

Katya Valasek:

So, another piece of the work that you do that I imagine can be complicating at times is that you're not working these cases alone. You're coordinating with other plaintiff firms and sometimes working alongside appellate specialists. How does that collaboration work?

Adam Silverstein:

It's so essential to be able to do the collaboration. And there are so many egos involved in what we do. And egos are important because we all have to have healthy egos to be good at what we do.

Sometimes those egos are hard when you have so many of them and there are so many good and talented lawyers with big egos. There are circumstances where it can be hard to navigate all of that. My favorite cases are the ones where everybody is able to just check their ego, put it to the side and work for this common goal of getting what's best for the clients.

But it is so critical to, one, be able to work with co-counsel in representing the plaintiff's counsel in who are representing the individuals in the bankruptcies, to work with the plaintiff's counsel to explain everything that's going on, to not be so self-assured that you understand everything about the cases that they're working on and all facts and circumstances that are important to them that need to get communicated to us. There are lawyers as well, so we need to partner with the plaintiff's lawyers who are our clients.

The appellate issues are so important and these cases we have brought on appellate specialists. And so, then that's an entirely different dynamic as well, working with the appellate lawyers to make sure they understand everything that happened and why at the bankruptcy court level.

Katya Valasek:

Have you changed how you approach this collaboration since you first got thrust into this whirlwind with the J&J case?

Adam Silverstein:

Yes. Let me give you the dynamic that is at play here. So, when the company files for bankruptcy, if it's a Chapter 11, which is a reorganization of a company, then in all Chapter 11 bankruptcies, there are fiduciaries for the creditors who are appointed.

And one of the fiduciaries for the creditor is what's called an official committee of creditors. And this official committee of creditors is supposed to act on behalf of all of the creditors in weighing in on issues that come up during the case, taking the lead on motions to dismiss, all of the important motions the creditors committee plays a fundamental role. And counsel for the creditors committee is paid for through the bankruptcy estate.

It's a very potentially lucrative engagement to be representing a committee, taking on one of the biggest companies in the world paid for by that very same company. And so, there is a lot of positioning of law firms looking to get that position of representing the official creditors committee. And so you have all of these lawyers jockeying for a position of prominence moving forward in the bankruptcy.

But first and foremost, above everything else is putting aside who gets hired as counsel for what committee and who's appointed to the committee. The most important thing is what's best for the clients. What's best for these individuals who are now facing this process that they never expected to be in.

And if that means taking a second seat or a third seat or never speaking at all, if that's what's best, then that's what has to be done.

Katya Valasek:

One of the things you had to do early in the Johnson and Johnson case was figure out why they filed in the Western district of North Carolina. The company they created had existed there for only about two days before the filing. So how did you suss that out?

Adam Silverstein:

There's some forensic work involved in figuring out what the path was to get from Johnson and Johnson or its subsidiary Johnson and Johnson Consumer Inc. to this company that nobody had ever heard of LTL Management LLC that had filed for bankruptcy in the Western district of North Carolina. So, the real forensic work and the real studying is involved in trying to figure out how you got from point A to point B.

Why they chose North Carolina wasn't that much of a mystery in that that's where these other cases that Jones Day had filed. They had already tried this model in North Carolina and it was working in the sense that the bankruptcies were proceeding, all the lawsuits across the country against those other companies had stopped. But how they ended up getting from Johnson and Johnson to this company that nobody had heard of, that then reorganized in North Carolina two days earlier, what the different steps were in that process and over what period of time, that was only through the course of discovering the bankruptcy were we able to figure all of that out.

Katya Valasek:

You moved the case out of the court that Johnson and Johnson picked and into one in New Jersey. Why did you pick New Jersey?

Adam Silverstein:

Why we picked New Jersey was really the opposite of why Johnson and Johnson picked North Carolina. The law in the fourth circuit on the fundamental issues of whether the bankruptcy filing of a company, in this case, LTL, is sufficient to stop lawsuits against that bankrupt company's affiliates, in this case, Johnson and Johnson, is different in the fourth circuit than it is in the third circuit. So, a lot of the choices that were made both in deciding to file in the Western District of North Carolina and then to move it to New Jersey were based on legal principles.

However, there's a big difference, which is Johnson and Johnson is based in New Jersey. So, the legal considerations were on both sides of it. But New Jersey is where the case should have been all along.

The irony is that after we moved it to New Jersey, the bankruptcy court in New Jersey found that the case properly belonged in bankruptcy. And it wasn't until we got to the appellate court that it ultimately reversed it and applied the law that we thought should have been applied at the outset by the bankruptcy court. And it was a little bit longer journey than we anticipated, but, it did play out the way we had hoped in having what we thought was the right legal standard applied, and then ultimately having the case thrown out because it wasn't a proper use of the bankruptcy system.

Katya Valasek:

I was having some flashbacks of first year civil procedure as you were giving that answer. So, Johnson and Johnson tried this three times. First, they created LTL Management.

Then LTL Management II. Then a third company called Red River Talc. Each time, some plaintiffs’ firms that had fought the previous filings were persuaded to go along to the next one.

What's it like when the people you've been working with, the people who've been on your side, start switching?

Adam Silverstein:

You've hit all of the really challenging, difficult things that we face. It's not easy when law firms that you, one, represented in the case of certain of the law firms that went from being opposed to the bankruptcy to now supporting the last bankruptcy attempt by Johnson and Johnson in what was called Red River. It's a difficult challenge because on one hand, they are adverse to you in that they support the bankruptcy and you oppose it.

But on the other hand, you need to recognize that all of these plaintiffs’ firms are doing ultimately what they think is best for their individual clients and people can have reasonable disagreements over what is best. By the time of the third bankruptcy, Johnson and Johnson had put a significant amount of money on the table in the bankruptcy in a way that was materially different from the first bankruptcy.

So, you could understand why some firms were opposed to the bankruptcy because they still believe that this was a violation of the Seventh Amendment jury rights of their clients. They wanted to have the choice of how to resolve this and other law firms saying, you know, our clients are sick, and some of them have died, and this has been going on for a long time, and now there's this opportunity to bring closure to it and this isn't perfect, but there's a lot of money on the table, and we think we should do it. And so, it's just, again, one of those things with experience.

You know, nobody teaches you in law school how to be adverse to some law firm that you were previously representing on issues that are related to all of that. But you figure it out, and you be respectful, and you stay focused on the issues rather than on the personalities.

Katya Valasek:

Johnson and Johnson isn't the only company that's tried this. When you move from one of these cases to the next, how transferable is the work that you've already done? Can you reuse significant chunks of your briefs, or does each one start from scratch?

Adam Silverstein:

It's a combination because it's not cookie cutter. It's not that you can use a lot of the briefs that you did in Johnson and Johnson and apply it to, for example, a case involving 3M and Combat Earplugs, which was another big bankruptcy that we defeated in Indiana. The law was different in the Seventh Circuit than it was in the Third Circuit and in the Fourth Circuit.

So, you're dealing with a lot of the same issues, but the facts are somewhat different and also, the law varies from jurisdiction to jurisdiction. That doesn't mean, though, that you're starting from scratch.

I mean, obviously, what you've learned and rulings in one circuit can be persuasive in another circuit. And so, it provides a really important and helpful foundation. And I think what's so critical is not to come in with a playbook, but rather to be really attuned to what the facts and circumstances are of that particular bankruptcy, even if you know it's really similar to the strategy that Johnson and Johnson applied.

So, you have to have that balance of working off of the foundation, but always being keyed in on what's happening in your particular case and none of them are exactly the same.

Katya Valasek:

When we were preparing for this interview, you mentioned that there's a pause on these types of litigation currently. Even though the companies aren't trying this approach right now, you think the incentives haven't gone away. Can you explain what that is?

Adam Silverstein:

We're trying to stay one step ahead of the law firms who advise these companies on using the bankruptcy system to resolve their mass torts. That's not always easy. The pause, I think, is clear.

Johnson and Johnson now has resolved all of its mass tort liabilities associated with talcum powder, and it did so without the need for bankruptcy whatsoever. So after filing for bankruptcy three times, telling the world that the only way that they could possibly resolve these talcum powder lawsuits was in a bankruptcy, they resolve them now or in the process of resolving them outside of bankruptcy through the multi-district litigation system. What comes next is anyone's guess.

Katya Valasek:

You've said that mass tort bankruptcy is about 80 percent of your practice today, though you also do secured creditor work. If there's a pause and it continues, are you going to shift back to secured creditor work full-time?

Adam Silverstein:

You know, there's the expression that we lawyers have of going where the work is. And so part of me hopes, as much as I enjoy professionally the mass tort bankruptcy work, I hope that I don't see one again. I hope that there's not any need to try to get a mass tort bankruptcy case dismissed.

And if that's the case, then of course I'll go back to the practice that I enjoyed very much before I was introduced to the first Johnson & Johnson bankruptcy.

But if these cases continue to get filed, we continue to think about them. We continue to plan for the what-ifs that could happen. And we'll be ready if another bankruptcy, you know, mass tort bankruptcies of the sort are filed. But in the meanwhile, I'm happy that I'm part of a law firm that has a diverse practice and we represent lots of kinds of clients, and I'm glad that I'm able to do other kinds of work as well.

Katya Valasek:

You spent your first five years at Paul Weiss doing complex commercial litigation. Then you went to a smaller firm with less pay for lifestyle reasons. With your pivot to these mass tort bankruptcy cases, did you get pushed back into working those difficult hours that you were trying to step away from?

Adam Silverstein:

Yes. The lifestyle choice I made leaving big law was then reversed in coming to the law firm that I've been at for the past 15 years. It hasn't just been related to mass tort bankruptcy.

Our secured creditor work also is very demanding and requires long hours. And lifestyle and money and exciting work, all of those are choices that we have to balance.

I'm really happy with the choices that I've made at the different points of my life that I've made them. And I'm very happy with where I am right now, even though the lifestyle isn't necessarily great.

But thankfully, it is really interesting. It is really fulfilling. You are, at the end of the day, representing all of these individuals who just want to have the choice in how they resolve the lawsuits that they brought. And so, it is important as well.