Fri 07/23/2021 18:00 PM
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Judge John Dorsey dramatically reduced the pool of $213 billion in private Acthar antitrust claims asserted in the Mallinckrodt bankruptcy cases at a hearing today, disallowing about $203 billion of such claims filed against debtors other than litigation defendants Mallinckrodt ARD and Mallinckrodt plc. The judge sustained the debtors’ omnibus objection to the “unsubstantiated” claims, concluding that the proofs of claim “fail to state any claim whatsoever” against the nondefendant debtors. Judge Dorsey rejected arguments from the ad hoc Acthar claimants group led by the city of Rockford, Ill., as well as from Acthar insurance claimants Attestor and Humana that they included sufficient factual support in their proofs of claim.

Significantly, Judge Dorsey dismissed the claims against the nondefendant debtors with prejudice, rejecting the private Acthar claimants’ argument that they should be granted leave to amend their proofs of claim. The judge said that the private Acthar claims against nondefendant debtors were “filed with a complete disregard for whether any claims actually existed against those entities and in some cases with actual knowledge” that the claims were not substantiated. The Acthar claimants then later sought discovery in the hope of substantiating those claims, and “the strategy was obvious,” according to the judge: disrupt Mallinckrodt’s plan confirmation process and gain leverage against the debtors. “Those actions constitute bad faith,” Judge Dorsey stated.

Judge Dorsey said that if the Acthar claimants had followed proper procedures, they would have sought Rule 2004 discovery on whether claims existed against debtors aside from plc and ARD prior to filing their proofs of claim. As for whether the Acthar claimants should be permitted to amend their claims, the judge said that “any amendment at this point would in fact be a new claim” because the proofs of claim currently have no factual support for claims against the nondefendant debtors. The Acthar claimants have not established “excusable neglect” that would justify the filing of a late claim at this point in the case, Judge Dorsey concluded.

The judge signaled early on in the proceedings that he found the non-ARD and plc claims asserted by the Acthar claimants lacking. The bulk of the hearing was devoted to oral arguments on the matter; although an evidentiary hearing had been scheduled, Judge Dorsey directed the parties to present arguments only on whether the private Acthar claimants’ proofs of claim were sufficient to establish claims against the nondefendant debtors against which they were filed, and if the answer was no, whether the court should dismiss those claims or grant leave to amend them.

At the outset of the hearing, Judge Dorsey said that by filing “blanket proofs of claim” against a vast array of debtors without support, the Acthar claimants effectively took the view that “we think we have claims but we aren’t sure.” Judge Dorsey asked why the Acthar claimants did not take discovery to substantiate their claims before the bar date. “I’ve got a huge problem with that. I think it’s bad faith,” he commented, before adding, “My view is, all these claims should be dismissed.”

Arik Preis of Akin Gump, counsel for the official opioid claimants committee, or OCC, also provided a brief summary of the OCC’s preliminary findings in its investigation of the 12 participants under the key employee incentive plan. Preis said, “We believe some of the documents raise concerns regarding some, but not nearly all, of the KEIP participants” relating to the marketing and sale of opioid products, as well as the monitoring of suspicious orders. For instance, the OCC said it believes that some of the individuals may have improperly incentivized sales representatives, he commented. The OCC’s next steps are to determine whether grounds exist to claw back certain KEIP payments and whether the releases of the KEIP participants under the debtors’ plan are appropriate, Preis concluded.

George Klidonas of Latham & Watkins, for the debtors, called the OCC’s preliminary findings “generally misguided.” The findings concern a “small subset” of the KEIP participants, about three people, regarding alleged marketing and monitoring practices, he noted. Klidonas added that the OCC’s concerns relate to documents from 2011 to 2015 when the company sold branded pain products, which were FDA-approved and which the debtors believe “never made up more than 0.5% of opioid pain products.”

Moreover, many of these documents were produced in prepetition litigation, the debtors have defended against similar claims in the past, and the opioid settlement embodied in the plan resolves all such claims, Klidonas argued. The debtors view the OCC’s preliminary findings as a “veiled attempt” to challenge the opioid settlement, but it would be “unproductive” to address the arguments today, and the debtors will respond at the appropriate time, Klidonas added.

At the close of today’s hearing, Judge Dorsey told the parties that he will consider Attestor and Humana’s motion for substantive consolidation on the first day of the confirmation proceedings, which are slated to begin on Sept. 21.

Attestor noted in a statement on Thursday, July 22, that it recently purchased Acthar-related claims from CVS Pharmacy. “CVS purchased more than two billion dollars’ worth of Acthar directly from Mallinckrodt and/or its exclusive distributor and agent CuraScript during the relevant period, including approximately $138 million purchased from the Petition Date until April 22, 2021,” the statement said.

“Unsubstantiated” Claim Objection Arguments

Debtors’ counsel Christopher Harris of Latham & Watkins urged the court to dismiss the Acthar claimants’ proofs of claim against entities other than ARD and plc with prejudice. The proofs of claim contain “zero facts asserted against each of the nondefendant debtors” even though the claimants were required to allege facts sufficient to support a claim against each specific debtor, he said.

The Attestor claimants suggested in their briefs that the Humana and OptumRX proofs of claim referred to “every debtor,” but this is just “impermissible group pleading,” Harris said. He added that the Acthar plaintiffs’ other response on this topic was to point to complaints attached to their proofs of claim referencing “unnamed conspirators.” This language is just a “conclusory allegation” that doesn’t establish the prima facie validity of the claims, he argued. Harris also pressed for disallowance of the claims with prejudice, saying that no “excusable neglect” would justify claim amendment at this time.

Benjamin McCallen of Willkie Farr & Gallagher, for Acthar insurance claimants Humana and Attestor, asserted that a notice pleading standard applies to the proofs of claim. The insurance claimants gave “fair notice of the allegation” in their proofs of claim, and the debtors cannot show otherwise, he argued. McCallen asserted that Attestor and Humana have never argued that the nondefendant debtors were liable merely because of their affiliation with the wider enterprise that engaged in anticompetitive conduct. However, many of the nondefendant entities benefited from the Acthar gel revenues, he noted.

McCallen argued that the debtors could not simply point to their organizational structure, a “structure that is used for tax efficiencies,” to defend against the private Acthar claims. He also said that Attestor and Humana are not challenging the opioid settlement by pursuing their claims, and they are “not in any way attempting to gum up the works on the generics side of the business” in the bankruptcy. McCallen said that the Acthar insurance claimants were trying to gain ground in “effectively an intercreditor dispute on the Specialty Brands side between us, other Acthar claimants and noteholders on who gets value” under the debtors’ “pot plan.”

Donald Haviland of Haviland Hughes, for the ad hoc Acthar group, rejected the argument that his clients filed “prophylactic proofs of claim,” saying that they “specifically demarcated the debtors that were involved in Acthar.” He argued that the ad hoc group members properly filed claims against several debtor entities to reflect the division of various Acthar-related functions across different debtors. Haviland also stressed that the complaints attached to the proofs of claim had survived motions to dismiss in several of the underlying suits, and they met the appropriate notice standards, he argued.

When Judge Dorsey asked why the ad hoc Acthar group did not pursue Rule 2004 discovery before filing their proofs of claim, Haviland answered, “We’ve been denied it.” The ad hoc Acthar group sought Rule 2004 discovery, and the debtors told the group to work with the UCC, according to Haviland. Judge Dorsey responded that if the debtors had indeed blocked the Acthar claimants’ discovery efforts, the court should have been notified. The judge declared that it was “never, ever, ever” the case that the ad hoc Acthar group sought Rule 2004 discovery and was denied by the court, so “don’t put this on me, Mr. Haviland.”

Haviland maintained, “The debtors have stonewalled us repeatedly.” Having engaged in “machinations” to divide up the Acthar-related functions among various entities, the debtors are now using their corporate structure to evade the Acthar claims, he argued. Haviland pointed out that the official committee of unsecured creditors’ reservation of rights also took the view that the ad hoc Acthar group’s claims “do implicate entities” other than Mallinckrodt ARD and Mallinckrodt plc, particularly those that hold Acthar intellectual property and that directed Mallinckrodt’s anticompetitive behavior.

As described above, Judge Dorsey ultimately sided with the debtors, disallowing the “unsubstantiated” claims with prejudice.
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