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How do corporate executives protect themselves from accountability—even for actions they personally took?
These days, they often go to the bankruptcy court and employ a tactic called non-debtor release.
These clearances provide directors, officers and directors with lifetime immunity from claims related to the bankruptcy.
Non-debtor discharges have been used by the Sackler family in relation to Oxycontin cases and even Harvey Weinstein, who was found guilty of sexual misconduct.
You are not the only ones.
“We’ve reviewed more than 600 bankruptcy cases over the course of a decade and found that in 90% of the cases, the judges approved the release of non-debtors,” says reporter Mike Spector.
And the releases were approved by judges, even when the applicants didn’t want them.
Today, To the point: Big money, big companies and bankruptcy protection.
Guests
Mike Spector, US corporate crisis correspondent for Reuters. Lead author of the Reuters study How CEOs dodge sex abuse and lethal product lawsuits. (@mike_d_spector)
Clifford White III, Lawyer. Former director of the US Trustee Office, known as the watchdog of the bankruptcy system. Managing Director of Bankruptcy Compliance at American Infosource, a financial technology company that provides services to large financial institutions.
Also featured
Dominique Hutt, an actress whose lawsuit against The Weinstein Company was dropped by disclaimers. (@Dominiquehuett)
Interview Highlights: Non-Debtor Release 101
What are Non-Debtor Releases?
Mike Spector: “They are called non-debtor releases because they shield non-debtors. When a company or organization files for bankruptcy, they are referred to as debtors. You owe money to creditors. Those associated with them, members of the Weinstein Company board of directors, say they have not filed for bankruptcy. You are not a debtor, but you can piggyback this bankruptcy case. And not only are the debtors, the Weinstein Company, getting their release in exchange for the settlement and the judge’s approval of a bankruptcy plan, but so are these non-debtor directors.”
How corporate leaders get involved in these insolvency cases
Mike Spector: “It comes down to complicated legal details, but essentially these are so-called related parties. And the way judges usually approve these things is by looking at a section of the bankruptcy law that allows them to do what’s required for a bankruptcy reorganization. In this case, it was a liquidation plan in the Weinstein case that made it work.
“And there is controversy about whether they should be allowed to do that. But the rationale is that these executives gave up about $10 million in money to pay their legal fees from insurance policies to which they were entitled. And because they did, and the insurers threw in money for that $17 million settlement that was reached. They wouldn’t do that if they were still being sued after the bankruptcy was completed. Therefore, in exchange for that money, they get a non-debtor release and you can’t be sued again.”
Who actually pays in these cases? Is it the insurance companies?
Mike Spector: “Yes. Taking the Weinstein case as an example, since we talk a lot about what happened there, the insurers agreed to put some money into the Weinstein Company’s bankruptcy state that would help fund that settlement for the survivors And it was, at the end of the day, about $17 million for about 50 women making claims in bankruptcy court.
“But an insurance company doesn’t want that if these survivors just turn around after bankruptcy and sue them to try to get damages out of their pockets again. And they wouldn’t do it either if they had to follow the wording of their policies to the last detail and pay those boards, those members of the boards. So the combination of all of that and the money that’s been coming in has partially allowed them to get those clearances.
A story about why non-debtor exemptions exist in the first place
Mike Spector: “The short answer is asbestos. So, overwhelmed by asbestos lawsuits, Johns-Manville filed for bankruptcy in the 1980s. And as they went through this reorganization, it was decided that they were going to face this uncertain future where lawsuit after lawsuit would continue and there was a latent period in the asbestos-related cancer known as mesothelioma. So, decades after exposure, people got sick and filed a lawsuit. So insurance companies contributed hundreds of millions of dollars to settle all of this. But one key was also settling any future litigation.
“So you just set up a trust, put a bunch of money in it and say, ‘Hey, maybe you haven’t even realized you’re sick. Maybe you haven’t filed a lawsuit yet. But if you wake up in ten years Now you get a diagnosis and you file a lawsuit Well wait, now you can’t file a lawsuit but you can get compensation Go to this trust And in exchange for that the insurers got non-debtors indemnifications you have not filed for bankruptcy themselves, but were a related party to the Johns-Manville bankruptcy.
“So they were protected from any future litigation and each was directed to a trust. But then everyone started using it for other purposes. Congress changed the bankruptcy law in 1994, changed it to provide that non-debtor releases could be used. But as we saw in the Winston case and you saw the Purdue Pharma case earlier with OxyContin and wealthy Sackler family members who owned that pharmaceutical company , have mentioned, releases of non-debtors are now being used in connection with these were not originally intended.”
They’ve looked at more than 600 cases over the past ten years. In 600 insolvency cases, you found non-debtor exemptions in 90% of them. Did that surprise you?
Mike Spector: “Actually, it didn’t surprise me too much because what triggered this investigation was our coverage of the Purdue Pharma case. And I’ve covered bankruptcies for a long time, and I’ve come across these publications in cases before, and they’re usually on bankruptcy protection related to the debtor and get an exemption as part of their recovery plan. And that’s a fairly common practice. But then you would also see that some related parties also get these shields. These releases from non-debtors. So I figured if we looked at a few cases, we’d probably see them a lot. And of course we did.
“And not every bankruptcy is a Purdue Pharma or Weinstein company. … There are many routine bankruptcies where these indemnities are handed out by non-debtors to protect directors and officers and other related parties from allegedly frivolous litigation or lawsuits about how the reorganization was handled or how money was handled.
“And what has happened now is because they are so common and judges are so willing to grant them that companies are taking advantage. So we separately examined 29 bankruptcies that involved mass tort litigation and tons of lawsuits, and we found a non-debtor release in all of them. And more than a million claimants are either signing their rights with non-debtor indemnities or face the prospect as bankruptcy proceedings continue.
