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Companies are increasingly using a legal strategy that prevents future lawsuits

ARI SHAPIRO, HOST:

Now we're going to hear about a controversial legal strategy that's becoming more common around the country. It has a dry-sounding name, but it's having massive consequences in high-profile bankruptcy cases ranging from the Boy Scouts to Purdue Pharma to USA Gymnastics. NPR's Tim Mak and Sacha Pfeiffer explain.

TIM MAK, BYLINE: The phrase third-party release sounds bland even within the arcane world of bankruptcy law. But behind those releases are tens of thousands of angry people who feel like they've been denied justice.

NAN GOLDIN: First of all, bankruptcy is the most boring thing in the world, and people do tune out immediately. But people need to get interested in the fact that the perpetrators of these crimes are getting away without any consequences.

SACHA PFEIFFER, BYLINE: That's Nan Goldin. She's a prominent American photographer who got addicted to OxyContin following a wrist injury, so she became a crusader against Purdue Pharma and its owners, the Sackler family. Purdue Pharma pleaded guilty twice to criminal wrongdoing, but the Sacklers have never been charged and say they did nothing wrong. Still, Goldin is incensed that Purdue Pharma's bankruptcy settlement proposed using third-party releases to shield the Sacklers from lawsuits.

GOLDIN: It makes me sick. It really - it hurts me emotionally. I become enraged, the fact that this is happening.

MAK: A third-party release protects entities connected to the larger bankruptcy from being sued. They could be people or other companies or groups. Here's Georgetown University law professor Adam Levitin.

ADAM LEVITIN: This is a feature you only see with very large business bankruptcies. If I were to file for a bankruptcy, my sibling's student loans don't get discharged or something.

MAK: But with a third-party release, the clean slate is extended to more than the group filing for bankruptcy.

LEVITIN: So if I was an opioid victim, I might have a claim against Purdue, and I might also have a claim against the Sacklers. But can the Sacklers piggyback on Purdue and wipe out their liability to me through Purdue's bankruptcy without the Sacklers themselves having to go through the bankruptcy process?

PFEIFFER: They can if they have a third-party release. Several organizations in bankruptcy have used this legal tool, including USA Gymnastics, Harvey Weinstein's company and Dow Corning. Many victims say this is extremely unfair.

SCOTT COATS: I think most laypeople like me, when we think of bankruptcy, we think of people or companies that don't have enough money and potentially won't have enough money to pay their bills. And that's not what's happening here.

MAK: Scott Coats is one of more than 80,000 people who have filed lawsuits against the Boy Scouts of America for claims of childhood sexual abuse. To protect itself, the Boy Scouts filed for bankruptcy.

PFEIFFER: The plan proposed by the Boy Scouts includes - you probably guessed it - third-party releases. Mike Finnegan is a lawyer representing people with claims against the Boy Scouts.

MIKE FINNEGAN: So for the Boy Scouts, what that means is Boy Scout National filed bankruptcy, and all of their local councils, all 250-plus local councils, get a free pass. They get swept in at the end, and they get wiped clean.

MAK: That's even though most of the alleged sexual abuse happened at the local council level by the local troop leaders. And it means the local councils would be protected from lawsuits, even though they hold billions of dollars in assets.

PFEIFFER: Third-party releases could also protect the local Boy Scout councils from turning over documents that detail how much they knew about individual abusers. That includes the man who allegedly sexually molested Scott Coats.

COATS: It means that those files will never become public. I will never, ever be able to access that file through any legal means unless the Boy Scouts, through the goodness of their hearts, decide to send it to me. And that's extraordinarily frustrating.

MAK: You might be wondering why third-party releases exist at all. They originated in the 1980s for a specific, large-scale legal problem - asbestos lawsuits.

PFEIFFER: There were so many of them nationwide, with so many businesses and insurance companies at legal risk, that third-party releases were authorized by Congress as a special protection to speed up the process.

MAK: Illinois Democratic Congressman Raja Krishnamoorthi is co-sponsoring legislation that would prohibit this practice. He says companies are abusing the bankruptcy code to avoid accountability.

PFEIFFER: He also says third-party releases are preventing victims from getting adequate compensation.

RAJA KRISHNAMOORTHI: Basically, these releases are being rammed down the victims' throats. And especially in the Sackler situation, it's just obscene what the bankruptcy court allowed to have happen.

MAK: This tactic had been flying under the radar in small-scale bankruptcies for years. But Krishnamoorthi said now that it's stirring controversy in recent, highly publicized cases, it's time to put an end to it

KRISHNAMOORTHI: If we don't act, this particular maneuver is going to mushroom across the landscape, and you'll just see a lot more entities start using it in perhaps even more perverse or bizarre ways than we've seen it used so far.

PFEIFFER: For now, people like Scott Coats and Nan Goldin are waiting to find out if third-party releases will allow people they view as criminals to get away scot-free.

MAK: I'm Tim Mak.

PFEIFFER: And I'm Sacha Pfeiffer, NPR News.

(SOUNDBITE OF SEBASTIAN KAMAE'S "WAYSIDE") Transcript provided by NPR, Copyright NPR.

Sacha Pfeiffer is a correspondent for NPR's Investigations team and an occasional guest host for some of NPR's national shows.
Tim Mak
Tim Mak is NPR's Washington Investigative Correspondent, focused on political enterprise journalism.