Bankruptcy used to be something that companies fought to avoid. To go bankrupt was an admission of failure, a badge of shame. But in recent decades, bankruptcy has become something that companies, and the people profiting off them, have embraced with open arms. While it may seem counterintuitive, the explanation behind this shift is simple business strategy. Bankruptcy offers companies facing costly legal liability an escape hatch that puts them beyond the reach of lawsuits. Like a corrupt phoenix rising from the ashes, bankruptcy lets companies emerge from their own scandalous misconduct unscathed. It’s obvious that companies and the people who run them win in this system, but who loses? And what exactly have they lost?
Dominique Huett is one of the 100 women who has accused Harvey Weinstein of sexual misconduct. She alleges that Weinstein sexually assaulted her during a business meeting in 2010. When woman after woman came forward with similar accounts seven years later, Huett and others sued the Weinstein Company for negligence. In response, the Weinstein Company declared bankruptcy. Huett had planned to sue the Weinstein Company board of directors for their complicity in Weinstein’s serial misconduct. U.S. Bankruptcy Judge Mary Walrath, however, granted the board members lifetime immunity from all lawsuits related to Weinstein. The decision felt like a “gut punch,” Huett told Reuters. “They, essentially, got away with it,” she said.
The Weinstein Company’s bankruptcy is part of a pervasive and deeply troubling trend. Twenty-nine Catholic dioceses have declared bankruptcy in response to child sex abuse lawsuits. U.S.A Gymnastics filed for bankruptcy in 2018 after gymnasts sued the organization for failing to protect them from Larry Nassar’s sexual abuse. Boy Scouts of America, confronted with hundreds of sex abuse lawsuits from thousands of alleged victims, declared bankruptcy in 2020. Pharmaceutical giants Purdue Pharma and Mallinckrodt filed for bankruptcy in 2019 and 2020, respectively, in the face of a wave of lawsuits for fueling the opioid epidemic. And most recently, Johnson & Johnson created a subsidiary to hold all the legal liability arising from its talc baby powder—which allegedly causes ovarian cancer—just so the subsidiary could declare bankruptcy three days later.
Like a corrupt phoenix rising from the ashes, bankruptcy lets companies emerge from their own scandalous misconduct unscathed.
Each of these bankruptcies brought litigation to a screeching halt. In their wake, powerful institutions and those who run them became effectively untouchable. Meanwhile, the people who suffered profound harm at the hands of these institutions suddenly found themselves without recourse.
Bankruptcy has become a powerful weapon in the arsenal of corporate defendants, empowering them to terminate lawsuits and grant their affiliates lifetime civil immunity. As the rich and powerful become increasingly brazen in their attempts to employ bankruptcy to circumvent litigation and limit their liability, they insist that bankruptcy is actually in the best interests of those they’ve harmed. This false and insidious narrative is a smoke screen that obscures the erosion of victims’ access to justice.