Takata mulling bankruptcy, meaning victims would get little compensation
The company at the centre of the automotive air bag scandal is rumoured to be seeking a deal that would sell its assets to competitor Key Safety Systems Inc., which will expect to be held "free and clear" of past liabilities
Risk & Compliance
Technology / IIoT
Takata Corp. and its U.S. operations are likely to seek bankruptcy protection by the end of June in a deal that would sell its assets to competitor Key Safety Systems Inc., a person briefed on the talks said. The person didn’t want to be identified because discussions are in progress.
The price Key will pay is unknown, but much of it likely will go toward paying a $1 billion U.S. criminal settlement. Most of the settlement money will go to automakers as restitution for recall costs.
Key is expected to buy Takata’s assets “free and clear” of past liabilities, and lawyers say there won’t be enough money to give victims what they would have received if they were suing a healthy company.
So far the faulty inflators have killed 11 people in the U.S. and 16 worldwide. Over 180 people have been injured. The problem touched off the biggest recall in U.S. automotive history, involving 19 automakers, 42 million vehicles and up to 69 million inflators. About 100 million inflators have been recalled worldwide.
Some victims have serious facial injuries from metal shrapnel and would win large verdicts if Takata were financially strong, lawyers say. Kevin Dean, a South Carolina lawyer who has 25 cases pending against Takata, said one of his clients, a 26-year-old man, will never be able to smile due to nerve damage.
“It destroys people’s faces. It’s just a horrible injury,” said Kent Emison, a Missouri, lawyer whose firm is considering a lawsuit against Takata and others on behalf of a woman whose trachea was punctured by shrapnel.
Takata’s troubles stem from use of the explosive chemical ammonium nitrate in the inflators to deploy air bags in a crash. The chemical can deteriorate when exposed to hot and humid air and burn too fast, blowing apart a metal canister and spewing out metal fragments.
In February, Takata pleaded guilty to fraud and agreed to the $1 billion settlement. Lawyers acknowledged in court that the company would have to be sold to fund the settlement. Automakers would get $850 million in restitution for recall costs and a $25 million fine would be paid to the government. Takata already has paid $125 million into a fund for victims.
“Takata intends to try to use our bankruptcy laws to escape responsibility for the injured and the families of the dead,” said Bradford Child, a Los Angeles lawyer who represents the family of a woman killed by a ruptured inflator.
In a statement last week, Takata maintained the possibility of keeping the company in operation. A committee set up to explore restructuring has made a recommendation with Key as a suitor, but Takata’s board hasn’t decided on it.
Douglas Baird, a bankruptcy law professor at the University of Chicago, said he expects Key will get Takata’s assets without liability for past claims. Without this provision, no suitor would buy the company.
“It’s in the interests of all these victims that you have this free and clear sale,” he said. “The alternative is to liquidate the assets and sell them for kindling wood.”
Lawyers are unhappy that automakers will get $850 million while relatively little goes to victims. Emison and others say $125 million will go quickly, estimating that victims will get 5 to 10 cents on the dollar of what they would have received from a financially strong company. A court-appointed special master will come up with an allocation formula.
If Key pays more than $1 billion for the company, victims could get more. A similar pool set up by General Motors paid out nearly $600 million to settle 399 death and injury claims due to ignition switches that could shut off cars without warning.
Law firms also are suing automakers, but some lawyers say it will be hard to get money there because Takata has admitted that it concealed the problem. Dean says there’s evidence that automakers knew Takata inflators were defective yet continued to use them, but automakers say they were deceived by Takata and shouldn’t be liable.
At the end of April, only 22 per cent of the 69 million recalled inflators in the U.S. had been replaced under the recalls, leaving almost 54 million on the roads, according to the National Highway Traffic Safety Administration website. This means more inflators will likely explode and more people will be hurt in the future, Emison said.
Key could be liable for future claims depending a lot on state laws that govern liability for successor companies, Baird said. But Dean said he thinks Key will structure the deal so it doesn’t face any liability.
Key, with U.S. operations headquartered in suburban Detroit, is now owned by Ningbo Joyson Electronic Corp. of China. The maker of inflators, seat belts and crash sensors would not comment on Takata’s bankruptcy.