Some changes in the law are better late than never.
In 1978, Congress passed the Bankruptcy Reform Act, which created Chapter 11 of the U.S. Bankruptcy Code. In short, Chapter 11 of the Federal Bankruptcy Code system was designed for those honest businesses who fell on hard times. It gave them a new day. The law allows a company to continue its day-to-day operations through the reorganization process and ultimately protects the business from the weight of its creditors.
In the past four decades, class action defendants, and their lawyers, have reaped the most benefits. The protections Congress intended have been morphed into the greatest legal shield for bad actors and negligent institutions. They have worn a clear path in their repeated sprint to the U.S. Bankruptcy Court. Most notably, they include: Purdue Pharma, Boy Scouts of America, USA Gymnastics, and the Catholic Church.
Why should the debtor be given federal statutory protection from legitimate legal claims based on the debtors’ very failure to protect victims who are simply seeking justice? Who should our federal bankruptcy laws serve? It appears some of our United States Supreme Court Justices may be asking similar questions.
Earlier this month the U.S. Supreme Court temporarily blocked the Purdue Pharma settlement because of a provision that protected the wealthy Sackler family, owners of Purdue Pharma, from personal liability in their callously deceptive business and marketing practices. Practices that fueled the fire of the devastating opioid epidemic. They have become the most notorious legal drug dealers in our history.
The CDC reports that approximately 645,000 people died of opioid overdose from 1999 to 2021. The deaths came in three waves, the first in the 1990s, with the dramatic rise in the availability of prescription opioids. The second and third waves were linked to heroin and fentanyl use, the cheaper and more deadly substitutes for those grappling with Oxycodone addiction.
But there is another epidemic. The numbers are also staggering, and the victims are our children. Approximately 13.5% of all children will be sexually assaulted, raped, or sodomized before their eighteenth birthday.
Chapter 11 doesn’t just protect businesses from the weight of numerous claims by judgment creditors; it also protects their business secrets, many of which pose a serious danger to the public.
Chapter 11 effectively protects bad actors. When a business files for Chapter 11 bankruptcy, the very act of filing immediately triggers an “automatic stay,” which stops nearly all actions and proceedings against the debtor and its property. Victims never get discovery because their claims are stayed. And ultimately, they get pennies on the dollar.
A negligent company should not be allowed to run and ultimately hide in the legal folds of the Federal Bankruptcy Code. Congress surely never intended for Chapter 11 of the U.S. Bankruptcy Code to become a safe haven for greed-driven professional drug dealers and child sexual predators.
Presently 34 Catholic organizations, Boy Scouts of America, and USA Gymnastics have raced to the loving arms of the federal bankruptcy courts to seek protection for their abysmal and repeated failures to protect innocent children from a great risk of harm.
In the case of the epidemic of child sexual abuse, we can see the mass migration to the federal bankruptcy courts. It starts with the guidance of national experts and brave survivors testifying publicly. State legislatures are listening and wisely passing child protection laws that allow victims to have their day in court, often after their attorneys general release shocking grand jury reports. Victims then have the right to file claims, thereby exposing dangerous sexual predators and institutional coverup while holding wrongdoers accountable under the law. Moving so close to the long ride home to justice.
A roadblock and detour appear on the road. Defendants file for bankruptcy under the guise of insolvency (which, by the way, is not required in Chapter 11). Victims’ legal claims are stayed. There is little discovery. Blanket protective orders are issued, concealing sexual predators and crimes against children. The public is kept in the dark. Victims have little voice and receive pennies on the dollar.
Institutions and bankruptcy lawyers win. Victims, children, and the public lose.
Although the delay in the Sackler settlement has drawbacks, and I understand Massachusetts Governor Maura Healey’s objections, the Court is correct to suspend the settlement there. A review of the provision that shields the Sackler family from personal liability is clearly in the interests of justice. And for Congress, opportunity knocks. Few American families, including my own, have been untouched by either epidemic. Common good legislative amendments are owed to all, especially victims of the opioid and child sexual abuse epidemics.
This moment of pause and review by the Court creates the perfect occasion for our congressional leaders to pass legislation that corrects the misuse and abuse of Chapter 11. Congress, too, must commence its own review, and act now, not later.