By Adi Marcovich Gross (Postdoctoral Fellow, Wharton Initiative on Financial Policy and Regulation; JSD Candidate, Columbia Law School)
The MeToo Movement has sparked a deluge of sexual misconduct-related lawsuits against corporations, prompting a number of entities, including The Weinstein Company, Boy Scouts of America, and USA Gymnastics, to seek bankruptcy protection. In my article, “Morally Bankrupt: Bankruptcy Law, Corporate Responsibility, and Sexual Misconduct,” I examine how corporations embroiled in such litigation use bankruptcy mechanisms strategically, as well as the social repercussions of such maneuvers. I argue that the way sexual misconduct claims are treated in bankruptcy directly harms existing victims and may undermine efforts to prevent future misconduct.
Specifically, although bankruptcy offers a collective forum to address victims’ claims, its coercive nature can infringe upon victims’ rights in fundamental ways. It can deprive victims of their day in court, shorten the timeframe to pursue legal action, and force them into what I characterize as a “shadow dispute resolution system.” Bankruptcy proceedings may also limit the compensation available to victims and potentially absolve perpetrators and other defendants through third-party releases.
Moreover, thanks to the absolute priority rule and third-party releases, secured lenders, managers, and other parties can be shielded from potential losses or liability. These mechanisms, in essence, externalize the cost of sexual misconduct for such parties, thereby reducing the economic incentives for monitoring.
To address these issues, I advocate in the article for prioritizing sexual misconduct claims in bankruptcy proceedings and restricting non-consensual third-party releases. These proposed reforms are intended to redistribute the costs of sexual misconduct to managers, lenders, and insurers as a way to incentivize them to enforce compliance and incorporate sexual misconduct risks into their financial and policy decisions, including loan covenants and pricing terms.
By reimagining the connection between bankruptcy law and corporate responsibility, there is potential not only to provide justice for victims of sexual misconduct but also to promote corporate practices that are aligned with social values. The insights presented in my article extend to a wider range of Environmental, Social, and Governance (ESG) considerations, illuminating how the development and operation of bankruptcy law might, intentionally or unintentionally, affect corporate misbehavior and resource allocation.
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