More than a year ago, it was announced that victims of opioid manufacturer Mallinckrodt would receive $1.7 billion in compensation through 2028.
At the time, the company emerged from Chapter 11 bankruptcy protection and proudly claimed to be the first opioid manufacturer to successfully use the court process to restructure and compensate victims.
By August of this year, it was back in bankruptcy court. Settlement payments for opioid victims will be slashed by just over $1 billion on Wednesday if a U.S. federal judge approves a bankruptcy plan that hands ownership of Mallinckrodt to a group of distressed-debt hedge funds and other asset managers.
Now, those harmed by generic painkillers will only receive a final $250 million in payments before the Irish-registered company permanently eliminates its liability.
The Mallinckrodt case is just the latest to highlight flaws in a poorly designed system for handling so-called mass tort cases, in which many victims are harmed by similarly dangerous products.
“The bankruptcy system leaves victims with only a fraction of the compensation they would be entitled to outside of bankruptcy,” said attorney Joseph Steinfeld, who represents thousands of Mallinckrodt opioid victims.
“Worse, creditors with higher priority have no real power to object when they can squeeze their recovery to almost nothing.”
In three recent cases, appeals courts have questioned whether specific tools of U.S. bankruptcy ultimately trample the rights of victims who object to negotiated agreements.
Purdue Pharma, the Sackler company that makes the powerful drug OxyContin, is trying to use a $6 billion bankruptcy settlement to protect family members from future conflicts with Litigation related to the U.S. opioid crisis. In August, the Supreme Court put the settlement on hold.
Johnson & Johnson’s two attempts to use the system to protect claims by consumers who claimed its talc caused cancer were rejected by bankruptcy courts.
3M sought to use Chapter 11 proceedings to contain damage allegedly caused by defective military earplugs, ultimately agreeing to a $6 billion settlement with 250,000 veterans outside bankruptcy court after a federal judge rejected its plan.
The Mallinckrodt case shows that victims of multi-year settlements with companies in bankruptcy plans can end up losing money.
Many bankruptcy attorneys believe that the Chapter 11 process provides victims with more certainty, allows claims to be settled quickly, and avoids trial draws where juries can award large damages to some claimants while awarding nothing to others.
But after Mallinckrodt emerged from Chapter 11 protection in June 2022, it almost immediately proved unable to meet its settlement obligations and other debts. Worse-than-expected sales and rapidly rising interest rates, which have sent the cost of servicing floating-rate loans soaring, are to blame.
Melissa Jacoby, a law professor at the University of North Carolina, said, “The Mallinckrodt case is a particularly poignant example that the record of mass tort bankruptcies is not what restructuring lawyers often claim. serious”.
The compromise agreement to be approved on Wednesday will eliminate the value of Mallinckrodt’s public equity. Its senior lenders and bondholders will take over the company at an enterprise value of $3 billion, roughly half its 2022 bankruptcy valuation.
A lawyer for the trust told the court in September that the reduction in payments to a trust representing opioid victims was “particularly horrific,” but he also said it was part of a compromise quickly reached between creditors over the summer. The best outcome that can be negotiated.
In June, lenders and bondholders told the drugmaker not to remit $200 million owed to the opioid trust because financial creditors have higher claims secured by the company’s collateral. In contrast, trust payments are unsecured and junior.
One large senior lender told the Financial Times that it ended up being a good deal given the opioid trust’s unsecured status and the extent to which the company’s value evaporated during the bankruptcy.
Senior lenders and bondholders received back the equivalent of 81 cents to 95 cents on the dollar for their stake in the reorganized Mallinckrodt, according to court documents. Second-priority secured creditors received just 11 cents on the dollar: a deeper discount than the lower-ranked Opioid Trust Fund.
A representative for the Opioid Trust, who was not authorized to speak publicly, acknowledged the outcome could be worse. Mallinckrodt’s management urged senior lenders and bondholders to allow a final $250 million in financial concessions to the trust fund.
“The only reason we have $250 million is because the company did something right to some extent,” the representative said.
But even though the Opioid Trust will now receive only a fraction of the original settlement following the company’s latest financial woes, some important features of the original bankruptcy remain ironclad.
Under the terms of a previous reorganization, the company and its management received permanent legal immunity, preventing them from being sued for any alleged wrongdoing. All current and future opioid claimants of Mallinckrodt were forced to accept the deal proposed through the court-supervised bankruptcy process.
Representatives for the Opioid Trust said one option for the trust could be to file fraud charges in bankruptcy court over the failed 2022 plan. But the move was deemed too costly and risky.
“Learned lesson. Don’t accept more than eight years of unsecured payment streams in a highly leveraged company. Get cash upfront when possible,” the representative said.
Svlook
