Behind the bankruptcy tactic shielding corporate executives from accountabilityPlay
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How do corporate executives shield themselves from accountability — even when it comes from actions they personally undertook?
These days, they often turn to bankruptcy court, and use a tactic called a non-debtor release.
These releases give corporate leadership, executives and board members, immunity from lawsuits related to the bankruptcy case for life.
Non-debtor releases have been used by the Sackler family regarding oxycontin cases, and even Harvey Weinstein, who's been found guilty of sexual misconduct.
They're not the only ones.
"We reviewed more than 600 bankruptcy cases over the course of a decade, and we found that judges approved non-debtor releases in 90% of the cases," reporter Mike Spector says.
And the releases were approved by judges even when claimants didn't want them.
Today, On Point: Big money, big companies, and bankruptcy shields.
Mike Spector, U.S. corporate crisis correspondent at Reuters. Lead author of the Reuters investigation How corporate chiefs dodge lawsuits over sexual abuse and deadly products. (@mike_d_spector)
Clifford White III, attorney. Former director of the U.S. Trustee Office, known as the watchdog of the bankruptcy system. Managing director for bankruptcy compliance at American Infosource, a financial technology company that provides services to major financial institutions.
Dominique Huett, an actress whose lawsuit against The Weinstein Company was halted by liability releases. (@Dominiquehuett)
Interview Highlights: Non-Debtor Release 101
What are non-debtor releases?
Mike Spector: "They're called non-debtor releases because they shield non-debtors. When a company or an organization files for bankruptcy, they're known as a debtor. They owe money to creditors. Those who are associated with them, so say the members of the board of directors of the Weinstein Company, they have not filed for bankruptcy. They're non-debtors, but they're able to sort of piggyback on that bankruptcy case. And not only does the debtor, the Weinstein Company, get a release in exchange for the settlement and the judge approving a bankruptcy plan, but so do these non-debtor members of the board."
How corporate executives get involved in these bankruptcy cases
Mike Spector: "It gets into complicated legal minutia, but essentially they're what's known as related parties. And the way that judges typically approve these things is by looking to a section of the bankruptcy code that allows them to do what's necessary for a bankruptcy reorganization. In this case, it was a plan of liquidation in the Weinstein case for it to succeed.
"And there's controversy about whether they should be allowed to do that. But the rationale is these boards of directors gave up about $10 million of money to pay for their legal fees from insurance policies that they were entitled to. And because they did that, and the insurers kicked in money for this $17 million settlement that was reached. They would not do that if they still would be sued after the bankruptcy was completed. So hence, in exchange for that money, they get a non-debtor release, and they can't be sued again."
Who's actually paying in these cases? Is it the insurance companies?
Mike Spector: "Yes. So taking the Weinstein case as an example, since we're talking a lot about that, what happened there is the insurers agreed to kick in some money to the bankruptcy state of the Weinstein Company that would help fund this settlement for survivors. And it was about $17 million at the end of the day for roughly 50 women who filed claims in the bankruptcy court.
"But an insurance company doesn't want to do that if those survivors are just going to turn around after the bankruptcy and sue them to try to get damages out of their pockets again. And they also wouldn't do it if they had to follow the letter of their policy in detail and pay these boards, these members of the boards of directors. So, the combination of all of that and that money getting kicked in is what allowed them, in part, to get these releases."
A history of why non-debtor releases exists in the first place
Mike Spector: "The short answer is asbestos. So, in the 1980s, Johns-Manville filed for bankruptcy, overwhelmed with asbestos lawsuits. And as they went through that reorganization, it was determined that they faced this uncertain future where lawsuit after lawsuit after lawsuit would keep getting filed. And there was a latency period with the cancer linked to asbestos known as mesothelioma. So people, decades after exposure would get sick and they'd file a lawsuit. So insurance companies contributed hundreds of millions of dollars to settle all of that litigation. But one key was also to settle all future litigation.
"So just create a trust, put a bunch of money in it and say, Hey, maybe you haven't even discovered you're sick yet. Maybe you haven't filed a lawsuit yet. But if you wake up ten years from now and you get a diagnosis and you file a lawsuit, Well, wait, now you can't file a lawsuit, but you can get some compensation. Go to this trust. And in exchange for that, the insurers got non-debtor releases. They didn't file for bankruptcy themselves, but they were a related party in the Johns-Manville bankruptcy.
"So they got shielded from all future litigation and everybody was steered to a trust. But then what happened is everybody started using it for other purposes. Congress in 1994 amended the bankruptcy code, changed it to provide that non-debtor releases could be used in asbestos cases. But as we've seen in the Winston case, and you mentioned earlier the Purdue Pharma case with OxyContin and wealthy members of the Sackler family who owned that pharmaceutical company, non-debtor releases are now being used in context that they weren't originally envisioned to be used for."
You looked at more than 600 cases over the past decade. In 600 bankruptcy cases, you found non-debtor releases in 90% of them. Did that surprise you?
Mike Spector: "It didn't surprise me a lot, actually, because what sparked this investigation was our coverage of the Purdue Pharma case. And I've covered bankruptcy for a long time, and I've come across these releases in cases before, and they're usually in the context of the debtor under bankruptcy protection, getting a release as part of their reorganization plan. And that's a pretty kind of regular practice. But then you would see some related parties, too, also getting these shields, getting these non-debtor releases. So I thought to myself that if we looked at a bunch of cases, we'd probably see them a lot. And of course, we did.
"And not every bankruptcy is a Purdue Pharma or a Weinstein Company. ... There are a lot of routine bankruptcies where these non-debtor releases get handed out to shield directors and executives and other related parties from what might be allegedly frivolous litigation or lawsuits about how the restructuring was handled or how money was handled. They would get handed out all the time.
"And what's happened now is because they're so common and judges are so willing to grant them, that corporations are taking advantage. So, we separately examined 29 bankruptcies that involved mass tort litigation, tons of lawsuits, and we found non-debtor releases in all of them. And more than a million claimants either are signing their rights away with non-debtor releases or facing that prospect as the bankruptcy process goes on."
This program aired on December 15, 2022.