Companies are using bankruptcy courts to thwart lawsuits :

More and more wealthy companies and individuals, accused of wrongdoing, are turning to bankruptcy courts to block lawsuits — a practice that’s raising alarms with the U.S. Justice Department.



A MARTINEZ, HOST:

One of the richest companies in the world, Johnson & Johnson, is using a controversial legal strategy in bankruptcy court to block tens of thousands of lawsuits filed by women with cancer. The women believe asbestos in Johnson’s baby powder made them sick, a claim that J&J denies. NPR has found that this case is not unique. More and more wealthy corporations and individuals accused of wrongdoing are using bankruptcy courts to shield themselves from lawsuits. Let’s bring on NPR’s Brian Mann. Brian, you reported on how J&J’s bankruptcy maneuver affected one woman, Hanna Wilt. Remind us of her story.

BRIAN MANN, BYLINE: Sure, A. Hanna Wilt is one of these women who sued J&J, claiming asbestos in Johnson’s baby powder gave her a terrible form of cancer called mesothelioma. J&J denies any wrongdoing, says their product was safe. And normally, this is the kind of disagreement that a lawsuit like Hanna Wilt’s would settle, you know? Did J&J do anything wrong here or not? Instead, J&J used this bankruptcy maneuver to freeze all of these thousands of lawsuits, including hers. And when I spoke to Hanna Wilt, she was outraged.

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HANNA WILT: What I see is, who can play the game best? Big corporations trying to work the system in a way that they don’t have to take full responsibility is not something new.

MANN: And Hanna Wilt died in February at age 27 while her case was still tangled up in this legal maneuver. I should say, we asked J&J repeatedly for an interview about this, and they declined.

MARTINEZ: Brian, how is this allowed to happen? I mean, how can companies use bankruptcy court if they’re not bankrupt?

MANN: You know, it’s a little bit complicated, A. But let me walk you through it. Let’s say your valuable, profitable company has been accused of doing something really bad. So you’re facing a tsunami of lawsuits. What you might do is spin off a subsidiary and then push all those lawsuits, all that legal and financial risk, onto the balance sheet of the new firm. Then you shove that other firm into bankruptcy. And as a final step, you offer to help pay that other company’s creditors as part of some kind of bankruptcy settlement. It’s important to note that not everyone can follow this path. To get a bankruptcy court to agree to this kind of legal maneuver, you probably have to pay a lot of money, maybe billions of dollars. And then in return, you get something big. You get a clean legal slate, immunity from future lawsuits. And critics say this amounts to a kind of pay-to-play system of justice for the very wealthy. Most of us obviously can’t use it because we’re not rich enough to pay for these big settlements.

MARTINEZ: OK. So Johnson & Johnson used this kind of bankruptcy maneuver. Are there any other examples?

MANN: Yeah. NPR found these bankruptcy maneuvers are shaping some of the biggest court fights in the country over the past few years. Members of the Sackler family, who own Purdue Pharma, aren’t themselves bankrupt. They’re very wealthy. But they’ve offered to pay $6 billion as part of a bankruptcy deal. And in exchange, they would get full protection from lawsuits linked to OxyContin and the opioid epidemic. In another big case, the U.S. Olympic and Paralympic Committee – and also another case, the Boy Scouts, they aren’t bankrupt. They have lots of assets. But they used bankruptcy strategies similar to these to block lawsuits linked to child sexual assault.

MARTINEZ: But why are bankruptcy judges allowing this?

MANN: Yeah. This is fascinating, A. In some parts of the U.S., these bankruptcy maneuvers aren’t even legal. There’s a kind of patchwork of law on this. But it turns out bankruptcy rules allow people and companies to kind of pick their bankruptcy courts. It’s called venue shopping. And so what these companies have found is that there is a relatively small group of bankruptcy judges who will allow and even encourage this strategy. Judge Michael Kaplan, who’s overseeing the J&J bankruptcy, laid out the argument in a recent ruling that, sometimes, bankruptcy courts like his are the best place to tackle complicated legal cases, again, even when the cases don’t actually involve bankrupt companies.

MARTINEZ: Is there anyone at all trying to rein all of this in?

MANN: Yeah. There are two appeals court cases right now, A, that are challenging these bankruptcy maneuvers, one brought by the Justice Department, which has a bankruptcy watchdog agency. They think this may all be unconstitutional. I also spoke about this with Lindsey Simon, who teaches bankruptcy law at the University of Georgia. She thinks it’s possible courts will eventually stop rich companies and individuals from doing this at all.

LINDSEY SIMON: I think if you really look closely at what the bankruptcy code allows, it’s not altogether clear that this is permitted. And so I do think there’s a realistic chance that at some point, a court will say it’s not allowed.

MANN: Members of Congress are also considering legislation to limit the power of bankruptcy courts to cut these deals. No bills, though, appear to be close to passage. So the bottom line, A, is that for now, the gates to this kind of practice are wide open. Until something changes, everyone I talked to expects to see more and more wealthy companies and individuals going this route, turning to bankruptcy courts when they’re accused of wrongdoing, without ever being forced to actually file for bankruptcy.

MARTINEZ: That’s NPR’s Brian Mann. Brian, thanks.

MANN: Thank you.

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