Bankruptcy Abuse

The Most Egregious Cases

In 2022, Johnson and Johnson tried to block lawsuits from 40,000 cancer patients by spinning off its talcum powder business into a separate entity whose sole purpose was to file for bankruptcy, leaving the "good J&J" intact for shareholders who would prefer not having their precious dividends cut. As a result of this controversial legal maneuver, "a $2 billion trust will be created, compared to $25 billion if Johnson & Johnson had declared bankruptcy" (as quoted on Wikipedia). J&J's gain is the cancer patients' loss!

In early 2023, the courts threw cold water on the scheme. But the decision is bound to be appealed to a higher court. Several large companies are following the case with a keen interest for their own legal maneuvers:

Other companies, including industrial conglomerate 3M and lumber giant Georgia Pacific, are trying similar tactics, which begin by shifting billions of dollars in legal claims into small subsidiaries that file Chapter 11 bankruptcy cases. The lawsuits are then put on hold while victims are pushed to negotiate a deal to end all current and future claims at once.

Source: Bloomberg

See Also: https://www.bloomberg.com/news/articles/2022-09-01/3m-should-be-blocked-from-health-care-spinoff-new-suit-argues 

Caesars Entertainment's management unilaterally removed a "parent guarantee" on one of its main subsidiaries' bonds in order to shield profitable assets from the unprofitable ones. Ultimately, an independent examiner called it what it was, fraudulent conveyance. But by then (about 5 years later), the parties were ready to settle all claims, leaving a pair of hedge funds with equity in the surviving company (a very rare occurrence in bankruptcy). The series of complex financial engineering moves is chronicled in the book 'The Caesars Palace Coup'1.

Patriot Coal was a company created by Peabody Energy, allowing the latter to dump its legacy pension and medical benefit liabilities into a new company, even if that new entity had little or no chance at survival. As expected, Patriot Coal filed for Chapter 11 (actually, it filed for bankruptcy not once but twice). The practice of leaving environmental cleanup to an empty shell of a company is longstanding practice in the coal industry, because federal law rightly imposes environmental cleanup costs once a mine is decommissioned (e.g. contaminated water, a missing mountain top, an open pit with a limited capacity for irrigation and prone to erosion, etc...).

The Dynegy 2012 bankruptcy offers another case study in bankruptcy abuse: "The examiner found that Dynegy Holdings was already bankrupt at the time the sale took place, and therefore constituted a breach of fiduciary duty by the Dynegy Holdings board of directors." (as quoted on Wikipedia).

Eddie Lampert's gutting of Sears prior to bankruptcy was epic in its brazenness. Over several years, he bled the company dry by selling whatever assets the company had left. The series of transactions was initially profitable for shareholders (through special dividends and free shares from new spinoffs), but the shenanigans were a blatant ploy to leave Sears' liabilities for someone else to pick up. Sure enough, the U.S. taxpayer (or depending on how you look at it, U.S. retirees in other pension funds) were left to pay the more than $1 billion missing from Sears' pension fund, by way of the Pension Benefit Guaranty Corp. (coincidently, then U.S. Treasury Secretary – overseeing the PBGC – Steven Mnuchin was a close personal friend of Eddie Lampert and a former Sears board member).

Sources

1: Indap Sujeet and Max Frumes. The Caesars Palace Coup: How a Billionaire Brawl Over the Famous Casino Exposed the Power and Greed of Wall Street, 2020. [B185]