No one wants to pay for Takata’s future victims.

Takata Air Bags Could Injure Drivers for Years to Come—and No One May Be Liable to Help the Victims

Takata Air Bags Could Injure Drivers for Years to Come—and No One May Be Liable to Help the Victims

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Commentary about business and finance.
Aug. 11 2017 12:18 PM

Who Will Pay for Takata’s Future Victims?

Millions of the company’s dangerous air bags are still out there—and carmakers are using its bankruptcy to limit their liability.

Takata Air Bag
Deployed Takata air bags in a 2007 Dodge Charger in Detroit in 2015.

Rebecca Cook/Reuters

So far, exploding air bags made by the Japanese auto supplier Takata have been linked to 18 deaths and 180 injuries worldwide. For its failures, the company has been besieged by lawsuits, a global recall, and finally bankruptcy. But odds are there will be more harm. A lot more.

For now, those future victims are potentiality burrowed away in one figure: 69 million. That’s Takata’s own estimate of how many flawed or questionable air bags are still in cars on the road, or on the market, as of July. Somewhere within that best guess are the lives that will be changed, or ended, because of malfunctioning air bags that use the same chemical compound the Taliban uses to make some of its roadside bombs.

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But Takata and the carmakers that used the bags have structured the company’s bankruptcy to fend off liability for their actions—arguing that it’s necessary to salvage the disaster. In the end, it may leave future victims with no one to hold liable.

For years, Takata used ammonium nitrate to deploy its air bags because it was cheaper than what its rivals used, despite evidence it was volatile and could sometimes turn an air bag’s metal inflater into a mass of flying shrapnel. (Takata still uses an altered version of the compound in some of its replacement bags, with the approval of U.S. regulators.) As injuries mounted, Takata covered up the problem, and U.S. regulators lurched into overseeing a confusing, chaotic recall—the largest in U.S. auto history. When Takata filed for bankruptcy to deal with its vast liabilities in June, more than half of the recalled air bags had not yet been replaced.

Several states and dozens of families have sued Takata and some carmakers over deaths or injuries caused by metal shrapnel from their cars’ air bag inflaters exploding, either in collisions or by deploying on their own. Those families are represented in Takata’s bankruptcy—in a formal committee of creditors who are injury victims.

So what happens to those faceless victims-to-be?

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As part of its criminal settlement with the U.S. Department of Justice, Takata has agreed to pay $125 million to injury victims, both current and future. That won’t be enough for the losses to come. The injuries people have sustained in these cases so far range from quadriplegia to loss of sight, hearing, and speech. And insiders are expecting many, many more. “It seems to be generally accepted there will be billions of dollars in claims,” the U.S. trustee in the case wrote in a recent court filing. 

A Chinese competitor, Key Safety Systems, says it plans to pay $1.6 billion for the healthy parts of Takata’s business, which make seat belts and child seats. It is leaving behind the air bag inflater business that caused all the wreckage. That sounds like a lot of money. But if the sale goes through, most of that will likely go to the carmakers that have paid for much of the recalls and to the lawyers and advisers to the bankruptcy. It won’t leave much for victims.

The Chinese buyers won’t be responsible; why would they buy unless they were free and clear of those liabilities? And after the bankruptcy, there won’t be any Takata left for victims to appeal to.

Who’s left?

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The only realistic source of payment for those future victims, in financial terms, is the carmakers. They’re the ones that installed the bad airbags. And there’s significant evidence some of them knew about the flaws and ignored them, because Takata’s air bags were cheaper. But the carmakers have positioned themselves to control Takata’s bankruptcy by persuading the disgraced supplier to let them finance the process with money they already owe Takata for air bags Takata gave them on credit. If they pull it off, it’s a brilliant plan—for them, at least.

Robert Rasmussen, a professor of bankruptcy law at the University of Southern California, said it’s a novel approach to funding a recall that will last several years at the least. “It’s good if you believe what Takata says,” he said, “and I have no reason not to.” Takata says it would cost far more to borrow the money from banks. In theory, that savings would go to creditors. 

But any savings would come at a huge price for everyone other than the carmakers.

In exchange for funding the bankruptcy, the carmakers want the bankruptcy version of superpowers. And they want to use them to fend off and limit their own liability for the Takata disaster. In other words, the carmakers want to use the powerful tools in bankruptcy law for themselves, even though they are not in bankruptcy.

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Here’s some of what they’re pushing the judge to approve, according to court documents and interviews. 

First, they want the bankruptcy equivalent of a force field to protect them from the consumer and personal injury lawsuits that have been filed against both Takata and them. That powerful bankruptcy protection is normally given only to debtors, like Takata.

But carmakers argued in court this week that they, as lenders, should get that protection as well—to make the bankruptcy work. Lawyers for the injury victims called that argument “the first salvo by (the carmakers) to coopt the bankruptcy of the supplier to their own advantage.”

Next, the carmakers want the legal protections that go to lenders that loan to bankrupt firms. That would mean securing, or guaranteeing, the money they give Takata with Takata’s remaining assets. And that would give them a lot of control over how Takata’s money can be spent.

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Next, they want to use that control, in part, to harness their liability for Takata’s deadly air bags. According to lawyers in the case, the carmakers want to set up a trust for paying victims’ claims, funnel all the claims to that trust, and bar victims from suing them elsewhere. 

It’s a model derived from the Johns Manville Corp. over asbestos—the first mass tort case to go into bankruptcy. But the purpose of the Manville trust was to keep a bankrupt business alive. Here, the carmakers that want the trust are not in bankruptcy. 

Another condition carmakers want as lenders: to bar the injury victims from using any money from the bankruptcy to sue them, no matter how liable the carmakers turn out to be in Takata’s fraud. And they want a strict limit on how much money Takata’s victims can spend from their official bankruptcy funds to even investigate how much carmakers knew about Takata’s fraud and when they knew it. “It’s a fact of life in many cases —where the lender wants to make it difficult and risky for the creditors to sue or challenge the lender,” said William Weintraub, a partner at Goodwin Procter and a bankruptcy expert.

Here, the lender may be co-liable in wrongdoing that has led to an unknown amount of damage.

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Lawyers for the dead and injured and for the states are fighting the carmakers’ push for power; it’s for the bankruptcy judge to decide the extent of their control over the case. 

Where does this all leave those future victims? It’s certain the judge will name an advocate to speak on their behalf. There may even be a separate fund created for them. But for how much? For how many? History suggests that future victims never get compensated as well as known victims.

“The dynamics are: When you have actual breathing people with actual breathing claims, they tend to get compensated today,” Rasmussen said. The others get less, “because they’re not there.”

And now, those unknowns could also be bargaining against another living, breathing group—the carmakers, imbued with bankruptcy superpowers.

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Libby Lewis is a writer based near Washington. Her work on bankruptcy grew from a fellowship with the Edmond J. Safra Center for Ethics at Harvard.