The Bankruptcy Refuge: How to Reward the Criminals

Article excerpt

Two and a half billion dollars sounds like a lot of money to most people, but not to the thousands of women and their families who sued the A.H. Robins Company. To many of them, no sum can compensate for the infertility, infection, hysterectomies and death caused by the pharmaceutical firm's Dalkon Shield intrauterine device. Yet, unless a U.S. Court of Appeals rules against that financial settlement in the coming weeks, the paltry payoff will stand -and the U.S. Bankruptcy Code will be one step closer to becoming the shelter of choice for corporate criminals.

Robins is protected by a loophole in the bankruptcy law. Since 1978, when Congress rewrote that law, a company has not been required to prove its insolvency through lengthy legal discovery proceedings when it files for bankruptcy, which Robins did in August 1985. Instead, the mere possibility of insolvency became enough to protect corporations ftom creditors and collection agencies. This key change in Chapter 11 of the code meant that long-term contracts could be canceled and debts and litigation against a firm frozen. Meanwhile, company executives could meet with creditors to work out a payment plan.

An unforeseen result was that profitable companies turned to bankruptcy court to minimize claims against them. One giant company that used this ploy was the JohnsManville Corporation, which was sued by thousands of workers sickened after exposure to asbestos. Another was Robins; last July its creditors voted to accept a reorganization that includes a $2.47 billion trust fund for the 195,000 women who filed claims of injury by the Dalkon Shield. Despite their continuing fury at the company, 95 percent of the 140,000 plaintiffs who voted said yes to the plan, because it seemed the best deal they were likely to get.

The Dalkon settlement, if the plaintiffs' appeal is turned down, will allow shareholders and executives of the familycontrolled company to make off with a hefty profit ftom the recent sale of Robins to American Home Products. The deal also protects them from future liability claims. In the interim, thousands of seriously injured women, who already have waited years for recompense, may have to sit out several more before they see a dime from the trust. Nor is it at all certain that the fund will provide enough to cover their claims.

Although mass tort cases-claims of injury by large groups of people -have become increasingly common, the phenomenon was not considered when the bankruptcy laws were overhauled in the late 1970s. Instead, Congress focused on keeping troubled companies afloat and protecting commercial creditors such as banks and suppliers. The legislators wanted to help firms avoid liquidation, which rarely provides the cash generated by a functioning enterprise.

The bankruptcy process begins when a company files a court petition claiming it cannot pay its debts. The company then receives protection from its creditors, including those suing it, who must be listed. The court notifies the creditors, who vote on the final reorganization (repayment) plan as proposed by the company and approved by the judge.

In the Robins case, several Dalkon Shield victims won multimillion- dollar punitive damage awards in the months before the company filed for bankruptcy. Lawyers for the plaintiffs showed that company officials knew soon after the shield went on the market in 1971 that the locater string, a cable-like bundle of fibers, sucked bacteria into the uterus and fallopian tubes, causing dangerous infections. But the firm did not stop selling the shield in the United States until 1974 and did not recall it until ten years later, when it offered to pay doctors to remove the device.

At the prebankruptcy trials, Robins took a hard line, casting aspersions on the sex practices of the women who had suffered infections, implying that they were responsible for their own medical problems. …