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Bankruptcy reform debate targets bad corporate actors, popular judges

4 minute read

A pharmacist holds a bottle OxyContin made by Purdue Pharma at a pharmacy in Provo, Utah. REUTERS/George Frey

  • House and Senate Democrats introduce bill aimed at non-bankrupt insiders like Sacklers
  • Former Olympic gymnast says bankruptcy law barred her suit over Nassar abuse

(Reuters) - Lawmakers heard arguments on Wednesday in favor of amending laws to limit protections for non-bankrupt individuals through a company's bankruptcy, a move prompted by concerns that members of the wealthy Sackler family who own Purdue Pharma LP may avoid accountability for their role in promoting opioid sales.

The hearing before the U.S. House of Representatives' Judiciary’s Subcommittee on Antitrust, Commercial and Administrative Law came as Senator Elizabeth Warren, a Democrat from Massachusetts, along with Democratic Senators Dick Durbin of Illinois and Richard Blumenthal of Connecticut, as well as Democratic U.S. Representatives Jerry Nadler and Carolyn Maloney, both of New York, announced legislation in the House and Senate aimed at reforming certain areas of bankruptcy law.

The Nondebtor Release Prohibition Act of 2021 would prohibit litigation shields for owners or insiders of bankrupt companies. Though not included in the legislation, Wednesday's hearing also focused on potential reforms to limit the ability of bankrupt companies to select judges they think will be favorable to them.

The issue of so-called third-party or non-debtor releases, has been a hot topic in Purdue's Chapter 11 case. Connecticut Attorney General William Tong, among others, said during Wednesday’s hearing that legislation is needed to prevent cases like Purdue’s, where Sackler family members are set to receive releases of lawsuits over their role in the national opioid epidemic in exchange for $4.5 billion. The money is being put toward trusts that will distribute the funds to states for opioid abatement programs and to people and entities that brought opioid-related lawsuits.

Tong is one of a handful of remaining state attorneys general opposing the Purdue deal.

Tasha Schwikert Moser, a former Olympic gymnast who was among those sexually abused by former USA Gymnastics doctor Larry Nassar, testified during Wednesday’s hearing against third-party releases as well. Schwikert Moser, now an attorney at Munck Wilson Mandala, said that through the USA Gymnastics’ bankruptcy, which began in 2018 to deal with hundreds of lawsuits related to Nassar's abuse, she was prevented from suing the U.S. Olympic Committee for its failure to protect her from Nassar, even though the committee itself was not in bankruptcy.

“Why should the Olympic Committee get a discharge of liability the Olympic Committee has directly to me?” Schwikert Moser asked.

Lawmakers also heard from bankruptcy experts about the ability of lawyers for large companies to select the judge they feel will provide the best results for them. Adam Levitin, a professor at Georgetown University Law Center, said during the hearing that bankruptcy attorneys often feel a duty to their clients to get their Chapter 11 cases in front of the judge they think will most favorable.

“When debtors are looking for a judge, they don’t want a judge who’s a great judge. They want a judge who is great for them,” he said.

Bankruptcies should be randomly assigned to judges within a district without regard to which division they sit in, Levitin argued. Doing so would effectively get rid of a loophole that has allowed many large companies to file their cases before U.S. Bankruptcy Judge Robert Drain, who for a long time was the only judge in the Southern District of New York to sit in the White Plains division rather than the Manhattan division.

While most committee members who spoke during Wednesday's hearing supported bankruptcy law reform, U.S. Representative Greg Steube, a Republican from Florida, urged Congress to avoid "knee-jerk" reactions to "a handful" of bankruptcies.

David Skeel, a professor at the University of Pennsylvania Law School, warned lawmakers that reforms could have unforeseen effects. He highlighted 2005 changes bankruptcy law aimed at reducing retention bonuses for executives that he says have not worked well “in practice.” In recent years, some companies have turned to paying such bonuses shortly before they file for bankruptcy to avoid the scrutiny of the bankruptcy court.

Read more:

15 more U.S. states reach settlement in OxyContin maker Purdue bankruptcy

Lawmakers debate bill to amend bankruptcy laws protecting Purdue owners

Maria Chutchian reports on corporate bankruptcies and restructurings. She can be reached at maria.chutchian@thomsonreuters.com.

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