What Happens to a Securities Class Action when the Defendant Company Files for Bankruptcy Protection

Class action lawsuits can be pretty involved cases, and some of them can take years to resolve. It gets even more complicated when there is more money involved, not necessarily because those cases are more important. Usually they bring in more heavy-hitters on the litigation teams, and this can escalate the legal arguments exponentially. For law students, these can be some of the most fascinating cases, and for others, they are simply bewildering. Looking at something like bankruptcy, and how that affects a securities class action, can lead to some interesting legal questions.

First, a securities class action is one where there is an accusation of some kind of gross misconduct on the part of an individual or corporation, where large amounts of money have been misused. Generally, there are investments involved, and money is used inappropriately. An example of this would be a company who uses their workers’ pensions for their own investment purposes, then lose the investments, and hence lose the pension that the workers have already earned. In these cases, the class action is begun to get this money back, because it is what is legally, and morally, the workers’ money to begin with.

That example works, but may not be the most interesting, because there is clearly a right and wrong side in the case. More often, the class action will reveal more ambiguities on both sides as the case goes on. There are, as one might imagine, many instances where the one being sued will declare bankruptcy, and file for bankruptcy protection. The law is clear on most of these matters, but very good lawyers can find ways of making it more complex and nuanced. Usually bankruptcy in these cases make any further action impossible, but there are many loopholes. One option, and a very good one, is to start making claims against individuals once the corporation has declared bankruptcy, and that begins another cycle of more legal proceedings.

This entry was posted on Wednesday, April 7th, 2010 at 1:41 pm and is filed under Corporate, Legal. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.


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