InstitutionalDUAL-USE

Strategic Bankruptcy

What it is

Using bankruptcy proceedings to shed liabilities, silence creditors, and restructure an organization to avoid accountability for past harms.

How it works

Bankruptcy was designed to give honest debtors a fresh start. Strategic bankruptcy exploits this system to shield assets while discharging obligations to victims. Companies can separate profitable operations from liabilities, set up trusts with inadequate funding, and emerge from bankruptcy profitable but judgment-proof.

Real-world examples

  • •Purdue Pharma using bankruptcy to resolve opioid lawsuits while the Sackler family retained billions.
  • •Asbestos companies creating subsidiary entities to absorb liabilities while protecting parent company assets.
  • •Organizations declaring bankruptcy to void union contracts and shed pension obligations.

Historical case studies

Johnson & Johnson and the "Texas two-step"

2021–2023US Court of Appeals

Facing tens of thousands of claims that its talc-based baby powder caused cancer, Johnson & Johnson used a Texas statute to split its consumer subsidiary in two, assigned the talc liabilities to a new company, LTL Management, and had LTL file for bankruptcy two days later, which halted the lawsuits against it. In January 2023 the Third Circuit ordered the case dismissed, holding that LTL, backed by a funding agreement worth up to $61.5 billion from its parent, was not in financial distress and that the bankruptcy had therefore not been filed in good faith. Later attempts to use the same route were also rejected by the courts. The company denies that its talc products cause cancer.

Source →

Harrington v. Purdue Pharma

2024US Supreme Court

Purdue Pharma filed for bankruptcy in 2019 under the weight of thousands of opioid lawsuits. Its owners, members of the Sackler family, who had withdrawn roughly $11 billion from the company in the preceding decade, did not file themselves, but the reorganization plan would have released them from all present and future opioid claims in return for a contribution of up to $6 billion. The Supreme Court held five to four that the bankruptcy code does not allow a court to extinguish claims against non-debtors without the claimants' consent. The family had sought the central benefit of bankruptcy without putting its own assets before the court.

Source →

Ethical guidelines

Where the line is

Bankruptcy to reorganize a genuinely failing business is what the law exists for. It becomes manipulation when solvent entities use it to escape accountability to victims, workers, or creditors while preserving value for insiders.

  • ●Bankruptcy should not be available as a tool to escape accountability for deliberate harm.
  • ●Victims of corporate misconduct should not bear the cost of strategic corporate restructuring.
  • ●Courts should scrutinize asset transfers made in anticipation of liability.

How to defend against it

  • ►Track corporate restructuring that separates profitable operations from liability-holding entities — this may indicate strategic bankruptcy planning.
  • ►Support legislation that prevents bankruptcy discharge of certain categories of harm claims.
  • ►Creditor committees and victim advocacy groups are essential voices in bankruptcy proceedings.

References

  1. Delaney, K. J. (1992). Strategic Bankruptcy: How Corporations and Creditors Use Chapter 11 to Their Advantage. University of California Press
    The sociological study that named the practice and supplies the entry's claim: case studies (including Manville's asbestos filing) show solvent corporations using Chapter 11 as a strategic tool to cap tort liabilities and escape obligations rather than as a remedy for insolvency.
  2. LoPucki, L. M. (2005). Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts. University of Michigan Press
    The entry's claim that the system can be gamed to shed liabilities while preserving the enterprise: LoPucki documents how large debtors shop for favourable bankruptcy venues and how competing courts accommodate them, weakening protection for creditors and claimants.
Last reviewed
Suggest a correction

Detect Strategic Bankruptcy in any text

Paste any message, email, or article into our free Manipulation Detector to see if Strategic Bankruptcy or other techniques are being used on you.

Try the Detector FreeCreate Free Account