Relevant Documents:OpinionPress Release
A month after the close of a hotly contested trial, Judge John Dorsey confirmed Mallinckrodt’s fourth amended plan
in an opinion released on Thursday night, Feb. 3. The decision is a victory for the Mallinckrodt debtors and other plan supporters, who defended the plan against a volley of objections
challenging its compliance with the confirmation requirements set out in section 1129 of the Bankruptcy Code. Judge Dorsey overrules all plan objections other than the U.S. Trustee’s objection to the scope of the exculpation provision - specifically, its inclusion of parties other than estate fiduciaries and its retroactive application back to the prepetition period. The judge directs the debtors to modify this provision and submit a revised proposed confirmation order for his signature.In a press release on Thursday evening, Mallinckrodt said that it expects to emerge from chapter 11 in the “first half of 2022.”
The company also states that in the coming days, it intends to commence Irish examinership proceedings, which are required to implement certain Irish law aspects of the reorganization and allow the debtors to exit bankruptcy.
Crucially, Judge Dorsey concludes that the plan satisfies cramdown requirements and does not unfairly discriminate against Acthar insurance claimants Attestor and Humana. The court sides with the debtors’ view that Class 6(a) Acthar claimants are “receiving far greater recoveries under the Plan than they would otherwise be entitled to in comparison to baseline recoveries to those classes under the absolute priority rule”
(emphasis added). The judge rejects Attestor and Humana’s argument that Acthar claimants have been unfairly cut out of recoveries being provided to other Class 6 unsecured creditor subclasses.
The opinion also reaffirms the viability of third-party releases in the Third Circuit after the U.S. Trustee attempted to defeat the releases in Mallinckrodt’s plan by citing the Southern District of New York’s recent Purdue
decision. Judge Dorsey acknowledges that the Purdue
court and the Eastern District of Virginia in Ascena
came to contrary conclusions, but he emphasizes, “I am applying the law of the Third Circuit which has recognized that bankruptcy courts do have statutory and constitutional authority to approve a plan of reorganization that contains non-consensual third-party releases, albeit, only in extraordinary cases.”
Judge Dorsey approves both the nonconsensual third-party release of opioid claims and the third-party release of non-opioid claims, finding that the latter is consensual in light of the opt-out mechanism. In considering the opioid release, the judge rejects the “thoughtful arguments regarding jurisdiction and authority for the releases made by the UST on behalf of all claimants,” emphasizing that “only one single creditor out of hundreds of thousands actually objected to these releases.” In context,
the opinion continues, “To apply a blanket prohibition on non-consensual releases in this case would simply not make sense
On the third-party release of non-opioid claims, Judge Dorsey also recognizes that his ruling “conflicts with those of some of my colleagues” on the Delaware bankruptcy bench. Those other judges “have suggested that consensual releases obtained through an opt out process may never be appropriate,” he observes, a reference to Emerge Energy
and Washington Mutual
. However, the judge highlights that neither of those cases involve mass tort bankruptcies like this one, observing “although the Third Circuit has not explicitly commented on the propriety of non-debtor releases in these circumstances, it has suggested that if they are appropriate anywhere, it would be in a mass tort case like this one
” and citing the Third Circuit’s Continental
decision (emphasis added).
Moreover, Thursday’s opinion rejects the challenges to the debtors’ settlements
with the official committee of opioid claimants and the official committee of unsecured creditors embodied in the plan. In particular, the court finds that the OCC settlement satisfies the requirements of Bankruptcy Rule 9019. Judge Dorsey also credits the debtors’ view that the settlements, the third-party releases and the plan rise and fall together: the settlements are not viable without the releases and without the settlements, the plan “falls apart and Debtors would be forced to sell off the company in pieces.”
The plan objectors included Acthar insurance claimants Attestor and Humana, royalty claimants Sanofi and the Glenridge principals, the U.S. Trustee, the U.S. Securities and Exchange Commission, Rhode Island, the Canadian Elevator Industry Pension Trust Fund, pro se
equityholder Darrel Edelman
and pro se
4.75% legacy notes holder Daniel Koppenhafer
Judge Dorsey took confirmation under advisement on Jan. 6 after the parties presented closing arguments
, which followed several weeks of trial.
During the confirmation hearing, the debtors announced that they were in “productive discussions” to resolve a longstanding dispute with the ad hoc Acthar group, previously one of the debtors’ most vocal plan objectors. Debtors’ counsel said that Mallinckrodt is in discussions with Express Scripts affiliate CuraScript over continuing their exclusive Acthar gel distribution agreement without the debtors seeking antitrust findings in their related adversary proceeding
, “while not taking on” prepetition indemnity obligations under the contract. The Acthar plaintiffs have asserted billions of dollars of antitrust liabilities arising out of the Mallinckrodt-Express Scripts relationship.
As discussed in further detail below, Judge Dorsey’s 103-page opinion overrules confirmation objections related to:
Section 1122 - Classification of Claims
- Improper classification;
- The plan’s settlement, release, exculpation, and injunction provisions pursuant to section 1123(b) of the Bankruptcy Code;
- Good faith;
- The best interests of creditors test;
- Plan feasibility;
- Cramdown and unfair discrimination;
- A substantive consolidation argument advanced by Sanofi; and
- A constructive trust theory presented by the Glenridge principals.
Judge Dorsey rejects the improper classification arguments presented by Sanofi, the Glenridge principals and pro se
Although Sanofi argued that the plan improperly classifies its royalty-related claims as Class 6(f) other general unsecured claims instead of Class 7 trade claims, the court finds that the debtors have a “legitimate business reason” for classifying Sanofi’s claims separately from trade claims. That is, Class 7 claimants are those who will have a future relationship with the debtors, providing goods and services for Mallinckrodt’s continued operations, but the debtors do not wish to continue their relationship with Sanofi “because the agreements impose a burden on Debtors.” Sanofi “does not fit within Debtors’ definition of a trade creditor,” Judge Dorsey writes.
The court similarly overrules the Glenridge principals’ objection to being classified in Class 6(f) other general unsecured claims, which shares a distribution pool with Class 6(e) environmental claims. The judge agrees with the debtors’ argument that they had “good reasons to adopt the classification scheme they did – namely to maximize the likelihood of settlement with creditors in one or more of the subclasses” of unsecured creditors. The decision concludes that the Glenridge principals have not pointed to any evidence that the debtors’ classification of GUC claims was “done for any improper purpose.”
The court also rejects Koppenhafer’s view that the 4.75% unsecured notes should be included in the same class as the guaranteed unsecured notes because they have equal rights and priority. The opinion emphasizes that the 4.75% notes are issued by MIFSA and guaranteed only by the parent company, PLC; the guaranteed unsecured notes, also issued by MIFSA and guaranteed by PLC, are also guaranteed by 60 other debtor entities including the ones that own Mallinckrodt’s IP and most other operating assets. There are also “different structuring rights in the relevant debt documents that show a distinct difference between the two notes,” justifying the separate classification.Section 1123(b) and the Opioid Settlement
Section 1123(b) of the Bankruptcy Code “provides a debtor with flexibility to include provisions in a plan of reorganization that are not required by the Code but are deemed necessary to effectuate a fair and reasonable reorganization,” the judge writes. Mallinckrodt’s plan contains several of these discretionary provisions, with a few - the settlement, release, exculpation and injunction provisions - drawing objections.
First, Judge Dorsey addresses the UST’s objection to the settlement of opioid claims incorporated into the plan. The UST argued that the plan impermissibly seeks the approval of the release of opioid claims under Bankruptcy Rule 9019, which is “not the appropriate mechanism” for doing so, the opinion notes. Judge Dorsey says he agrees that Bankruptcy Rule 9019 is not the correct standard for assessing the opioid release, but “that is not the standard I am applying here.” Instead, the judge says that he evaluates the releases under the standards set out in the Third Circuit’s Continental
opinions. Nevertheless, the opioid settlement (which includes the releases) does satisfy the Rule 9019 standard, Judge Dorsey concludes, while finding that the releases themselves comply with section 1123(b) and thus the objection is overruled.
The court also finds that the opioid settlement satisfies the test for approval of bankruptcy settlements under the Third Circuit’s 1996 Martin
opinion, against pro se
objectors who argued that the settlement “(1) is too costly, causing there to be nothing left for equity holders; and (2) was entered into unnecessarily because Debtors have good defenses to the underlying claims.”
Judge Dorsey applies the Martin
factors to the facts of the case, emphasizing that although the debtors believed they could successfully defend some opioid suits, “it was unlikely that they would win all of them, and because the damages claimed in each case were so high, the loss of even a few would quickly impact Debtors’ operations.” According to the court, “[w]hen all of these factors are taken into consideration, it is clear that Debtors’ probability of success with respect to all of the opioid lawsuits was very low.”
The opinion also stresses that the opioid settlement “was the product of extensive negotiations, is supported by roughly 97% of voting opioid creditors, and is on the low end of the range of similar opioid settlements reached by other pharmaceutical companies.”Opioid Releases
Next, Judge Dorsey takes up the nonconsensual release of opioid claims under the plan, which were challenged by the UST and Rhode Island as “vastly overbroad, releasing persons and entities that did not contribute anything of value to the reorganization.” The UST also asserted that the bankruptcy court lacks authority to approve the releases and that approving them would be a violation of opioid claimants’ due process rights. However, Judge Dorsey finds that because the opioid releases are “integral to the success” of Mallinckrodt’s plan, he has the jurisdictional authority to approve them as both “fair and reasonable.”
Judge Dorsey says that the Third Circuit’s 2019 Millennium
opinion made clear that bankruptcy courts have the authority to approve plans of reorganization that contain non-consensual third-party releases and related injunctions when such releases are “both necessary and fair.” The ruling states that the debtors offered “extensive evidence” during the confirmation hearing to show that the releases were necessary to their reorganization.
The judge also remarks that the decision to approve the opioid releases “is not one that I make lightly, and it is informed by several considerations.” First, he stresses the “extraordinary nature of this case” and the fact that the debtors were sued in over three thousand cases in connection with their role in the opioid crisis by both governmental and private plaintiffs. The settlement of those claims will remove an “existential threat to Debtors’ business while at the same time ensuring that Opioid Claimants receive recoveries far in excess of what they could obtain through continued litigation,” writes the judge. The opinion adds that this is particularly true since the opioid claims “are only one of several potentially massive litigation liabilities faced” by the debtors.
The court also underscores the urgency of the health crisis, calling this a “notorious and sensitive case because it involves opioids at the height of a national opioid epidemic.” The nature of the claims covered by the release - personal injury claims arising out of the use of opioid medications - “makes time of the essence,” says Judge Dorsey. He adds that while the parties could spend “decades litigating who is right and who is liable for what, the need for funds to manage and abate this crisis is real and immediate.” The confluence of these factors here makes this case “exactly the type of extraordinary case the Third Circuit alluded to in Continental
, where nonconsensual releases might be appropriate.”
Judge Dorsey also calls the opioid releases “a fair result for opioid claimants.” He states that the settlement was negotiated at arm’s length with a large group of sophisticated parties and that the releases are being given for “substantial” consideration in the form of a “well-funded trust to which opioid claimants can turn for potential compensation.”
The opinion also describes the opioid releases as necessary to the reorganization because the released parties are “entities and individuals … involved to such a degree with Debtors’ business that a suit against them is likely to be a drain on Debtors in some respect
” (emphasis added). The alternative to the opioid settlement is “protracted and expensive litigation, which would not help the victims of the opioid crisis” but would instead generate litigation costs that would “drastically reduce the funds available to opioid creditors,” the ruling says.
Judge Dorsey also writes, “these releases are not only necessary and fair, but overwhelmingly supported by the creditor body. And while ‘nearly consensual’ is certainly not sufficient under the law, it does provide some reassurance that this is the right result.” As noted above, Judge Dorsey reasons that applying a “blanket prohibition” on nonconsensual opioid releases in a case where only Rhode Island objects to them out of hundreds of thousands of creditors “would simply not make sense.”
On this point, the opinion says that the single objecting creditor, Rhode Island, has a claim against the debtors’ CEO, Mark Trudeau, “that the record shows is likely worth at most, $1 million.” Although Rhode Island argues that the court should reject the opioid release because it is not receiving consideration for its claims directly from Trudeau, Judge Dorsey continues, “the result of doing so would be absurd. If I were to sustain Rhode Island’s objection, it would certainly be a case of the tail wagging the dog
” (emphasis added).
Judge Dorsey concludes, “Excepting one creditor in the manner Rhode Island proposes would effectively enable a single creditor with a relatively small claim to hold up a $5 billion bankruptcy; a result that surely cannot be what the law intends.” On the contrary, the use of nonconsensual nondebtor releases in this case “seems to be precisely the situation envisioned by Section 105(a)”
of the Bankruptcy Code, says the ruling (emphasis added).
The judge states that the opioid releases satisfy the Continental
requirements and should be approved.Due Process
Judge Dorsey rejects the UST’s argument that the nonconsensual opioid release violates the Due Process Clause in the U.S. Constitution. The UST argued that the notice that was provided was insufficient because the plan’s “impenetrable” release provisions did not “clearly convey the required information regarding the rights that are being extinguished,” the opinion explains.
However, Judge Dorsey emphasizes that because no bar date was set for opioid claims, the debtors undertook a “broad opioid noticing program” to reach both known and unknown opioid claimants. A witness from Prime Clerk testified that the notice provided to opioid claimants “reached about 91% of all adults in the United States and about 82% of all Canadian adults with an average frequency of six times,” the opinion continues, and the evidence regarding the opioid noticing program is uncontroverted.
The judge says he appreciates the UST’s “concern that individual opioid claimants might not understand the dense language” of the opioid release, but “concerns about whether due process has been met are ameliorated in several ways.” The ruling notes that the debtors’ “extensive” noticing program encouraged potential claimants to file proofs of claim. Judge Dorsey also points out that the interests of opioid claimants were being overseen by the OCC. In addition, he states that the plan’s channeling of opioid claims to opioid trusts “will give all opioid claimants the opportunity to recover on their claims. Because no bar date was set, this would include any future claimants or claimants who did not receive notice.”
Moreover, those potential future claimants are represented by the future claims representative, who also supports plan confirmation, the opinion observes. Finally, the UST’s objection to the propriety of the opioid releases “ensured that I had the opportunity to consider the interests of any creditors who may not have received or understood the proposed releases.” The court concludes that the notice provided to opioid claimants meets constitutional requirements for due process.Release of Non-Opioid Claims
Next, the court turns to the third-party release of non-opioid claims under Article IX.C of the plan, noting that the definition of released parties is “extensive” and the releases are “quite broad,” covering any actions arising out of the debtors’ business (other than claims held by opioid claimants), the debtors’ restructuring efforts and the purchase, sale or rescission of any security or indebtedness of the debtors prior to the effective date. However, certain claims, including those for actual fraud, gross negligence or intentional misconduct, are carved out.
Judge Dorsey ultimately overrules the objections lodged by the UST, the SEC and the Canadian Elevator Industry Pension Trust Fund. The Pension Trust Fund lacks standing to object to the third-party releases because it has opted out and is therefore not bound by them, he states. The court also rebuffs the UST’s and SEC’s arguments that the opt-out procedure for shareholders and general unsecured creditors does not result in consensual releases “because it releases claims held by shareholders deemed to reject the plan and by unsecured creditors who are unimpaired or who did not return a ballot with the opt out box checked or otherwise submit an opt out form.”
Judge Dorsey acknowledges, “The use of the opt out mechanism as a valid means of obtaining consent is not without controversy.” He adds, “Many courts are divided on the issue, including this one,” before emphasizing that courts make a “fact specific” determination regarding when an opt-out can be evidence of consent.
The opinion states, “There can be no debate over the proposition that a bankruptcy court can approve a plan that includes third-party releases”
(emphasis added). The judge continues, “The question is, what constitutes consent and can consent be inferred from failure to respond to a notice including an opt out? In other words, can consent be inferred from silence or more accurately, the failure to act?”
In stark contrast to the recent Ascena
opinion, Judge Dorsey answers the question in the affirmative, citing to “ample evidence in the record that the releasing parties were sent notices in a variety of ways that explained in no uncertain terms that action was required to preserve claims.” The opinion says, “As this Court has previously stated, shareholders and creditors have an obligation to read their mail
” (emphasis added).
All in all, Judge Dorsey says that the plan contained “well-known” third-party releases of non-opioid claims and interested parties had “countless opportunities to object and yet only one did.” He ultimately concludes that the third-party releases are consensual, saying that Judge Kevin Gross reached a similar conclusion in Insys
, the first mass tort bankruptcy involving opioids.
As noted above, Judge Dorsey says that although the Third Circuit has not explicitly commented on the issue, it has suggested that if third-party releases are appropriate anywhere, it would be in a mass tort case, which “makes sense” in light of the “sheer volume and complexity of the issues.” The judge adds, “Bankruptcy policy often requires flexibility rather than adherence to a strict inflexible model because the goal is to get the debtors through to the other side
” (emphasis added).
Although he finds that the third-party releases are appropriate, the judge also comments, “to be absolutely clear, any creditor that claims they did not receive notice of their right to opt out will have the opportunity to seek relief from the Court to exercise their rights.”Exculpation
Judge Dorsey sustains
the UST’s objection to the plan’s exculpation provision as overly broad. The UST argued that the provision is inconsistent with controlling case law because it is not limited to estate fiduciaries, as it includes the reorganized debtors and indenture trustees, and because it extends temporally back to the prepetition period. The court agrees, rejecting the debtors’ argument that the indenture trustees are only being exculpated in their capacity as distribution agents and that the scope of the exculpation is “targeted and has no effect on liability that is determined to have resulted from actual fraud, gross negligence, or willful misconduct.”
The UST correctly argues the exculpation is “temporally overbroad in that it improperly sweeps in prepetition conduct” and “would allow one to be exculpated for conduct that occurred prepetition, which exceeds the bounds of what the Code allows,” says the ruling. The judge explains that the exculpation of estate fiduciaries is a function of section 1103(c) of the Bankruptcy Code, which in turn relates to the powers and duties of committees appointed pursuant to section 1102 - which occurs only once the bankruptcy estate has been created by the filing of a bankruptcy petition and “therefore only extends to conduct that occurs between the Petition Date and the effective date.” As a result, the part of the exculpation applying to prepetition conduct must be stricken, says the opinion.
For the same reason, Judge Dorsey agrees with the UST that the inclusion of the reorganized debtor and distribution agents in the exculpation is improper, since neither the reorganized debtor nor the distribution agents have any role in the bankruptcy prior to the effective date. That is, “[t]he reorganized debtor does not even exist until the effective date, and the indenture trustees will not distribute anything until after the effective date, meaning they cannot act as distribution agents prior to that time.”
The exculpation’s inclusion of these parties is inappropriate and must be removed, the court concludes. However, in a footnote, Judge Dorsey adds, “It may, however, be proper for the reorganized debtor and the distribution agents to be included in an exculpation clause contained in the final decree.”Section 1129(a)(3) - Good Faith
Judge Dorsey overrules objections lodged by Sanofi, pro se
equityholder Edelman and several other pro se
shareholders that the plan was not proposed in good faith.
The court refuses to credit Sanofi’s argument that the debtors “intentionally tried to prevent Sanofi from voting on the Plan because although Sanofi holds claims valued in the millions of dollars, Debtors sent Sanofi a ballot in the amount of only $1.00.” The judge agrees with the debtors that Sanofi’s unliquidated claim vote was set at $1 vote consistent with the requirements set forth in the disclosure statement order. On this point, Judge Dorsey emphasizes that Sanofi never objected to the notice informing it that its claim was included among the “one dollar contingent, unliquidated, and disputed claims.” He says there is “absolutely no evidence” that the debtors intended to suppress Sanofi’s vote.
Against Edelman and the pro se
shareholders’ argument that the plan was proposed solely to benefit guaranteed unsecured noteholders and management, the judge states that “[h]aving considered the totality of the circumstances surrounding Debtors’ proposal of the Plan, I conclude that it was proposed in good faith.”Section 1129(a)(7) - Best Interests of Creditors
The court rules against the Glenridge principals, Rhode Island and Sanofi in their arguments that the plan does not satisfy the best interests of creditors standard.
Although the Glenridge principals argue that the debtors’ liquidation analysis is “based on overly conservative assumptions and does not accurately assess creditors’ recovery in a liquidation scenario,” the Glenridge principals did not offer any evidence to contradict the evidence offered by the debtors, says the decision.
The opinion then turns to Rhode Island’s assertion that the liquidation analysis does not account for the fact that claims held by Rhode Island that are being released by the plan would survive in a chapter 7 liquidation. The debtors never assigned any value to Rhode Island’s claims, the objection argued. However, Judge Dorsey agrees with the debtors that it makes “no difference” whether the liquidation analysis assigns a value to Rhode Island’s claims or not. Even if a value were assigned to the claims, Rhode Island would “still recover less in a hypothetical liquidation than they do under the Plan because its ability to recover from Debtors would be limited by both the availability of funds and by the number of other claims against Debtors that would cause the funds to be diluted.”
The decision explains that under the plan, Rhode Island should receive approximately $5 million, which is .45% of the total funds available to states and municipalities. Under the liquidation analysis, “where there is, at most, $54 million available to opioid creditors, Rhode Island’s share would only be a few hundred thousand dollars.” If Rhode Island recovered under a $200 million D&O policy as well, “its share would only be approximately $900,000.” The combined recoveries would therefore amount to far less than the $5 million Rhode Island is projected to receive under the plan, the court reasons. In addition, although Rhode Island “disagrees with this conclusion, it has not put any evidence into the record that would support a different one.”
Next, Judge Dorsey addresses Sanofi’s argument that it would receive a greater recovery in a chapter 7 liquidation because a chapter 7 trustee would be required to sell the asset purchase agreement subject to Sanofi’s royalty payments. The judge says that this argument was “mooted… by my ruling
on Sanofi’s Motion seeking an order determining that Debtors could not reject or discharge their obligations under the APA,” which held that Sanofi did not retain any property interest the Acthar intellectual property when it sold those assets to Questcor.
The court also states that nothing in the record supports Sanofi’s argument that the present factor value or the liquidation discount used in the debtors’ liquidation analysis was improper. While Sanofi intended to present evidence in support of its position regarding the best interests test through its own expert, that evidence was excluded, the opinion notes.
The record reflects that no creditor will recover more in a liquidation than under the plan, Judge Dorsey concludes.Section 1129(a)(11) - Feasibility
The court overrules the Glenridge principals’ objection on plan feasibility, which asserted that the plan does not provide an estimate of relevant administrative claims and that the debtors did not provide evidence of “sufficient cash on hand, the sources and uses of such cash, and the amount of cash that will be used to fund administrative claims on the Effective Date.” In response, the debtors pointed to the testimony of their CRO Eisenberg on these topics. Judge Dorsey says that he finds Eisenberg a persuasive and credible witness.Section 1129(b)(1) - Cramdown and Unfair Discrimination
The opinion concludes that the plan satisfies the “cramdown” requirements set out in section 1129(b)(1), which requires that the plan “does not discriminate unfairly and is fair and equitable with respect to each class of claims or interests that is impaired under and has not accepted the [P]lan.” The court specifically rejects the unfair discrimination arguments advanced by: the Acthar insurance claimants, which hold claims in Class 6(a); Koppenhafer, a pro se
holder of 4.75% notes in Class 6(g), and Sanofi, which holds claims in Class 6(f) - all subclasses that rejected the plan.
Judge Dorsey writes that he “appreciate[s]” the pro se
shareholders’ view that the plan improperly benefits the guaranteed unsecured noteholders while discriminating against them, but this argument is “misplaced.” The guaranteed unsecured notes receiving the majority of equity in the reorganized debtors is a “function of the absolute priority rule,” with the pro se
shareholders not being entitled to a recovery because not all creditors are being paid in full under the plan, says the ruling.
Next, the court considers the AICs’ and Koppenhofer’s assertion that the plan unfairly discriminates against them because opioid claims in Classes 8 and 9, as well as Class 5 guaranteed unsecured noteholders, are receiving greater recoveries than Class 6. Sanofi similarly argues that it is unfair for Class 6(f) to receive lower recoveries than Class 7 trade creditors.
Judge Dorsey ultimately finds that the plan does not discriminate unfairly against any of the dissenting classes “because they are all receiving a recovery under the Plan that exceeds what they would otherwise be entitled to.” The dissenting classes would receive much less if not for a “gift” from Class 5, says the decision.
The Third Circuit instructs that when deciding whether a plan discriminates unfairly, a bankruptcy court should “start by adding up all proposed plan distributions from the debtor’s estate and divide by the number of creditors sharing the same priority,” and the resulting pro rata baseline “can then be compared to what happens if the plan is implemented,” the opinion observes. The judge notes that this analysis becomes more complicated in a case like this one, “where there are more than 60 debtor entities with a complex financial structure, creditors that have claims against different debtor entities, and there is no substantive consolidation.”
Judge Dorsey also takes a “digression” in the opinion to explain the Class 5 “gift.” That is, Class 5, the guaranteed unsecured noteholders, “has an Entitled Recovery of $1.37 billion, which is an 89% recovery on its claims, because the notes held by the claimants in that Class are guaranteed by almost every one of the 60 entities in Debtors’ corporate structure.” In contrast, general unsecured creditors in Class 6 have a larger estimated claim amount - $5.5 billion in claims as compared to Class 5’s $1.54 billion - but most of the claims within Class 6 are only held at one or two debtor entities and as a result, most subclasses within Class 6 are not entitled to any recovery. To avoid litigation with constituents in the other unsecured classes and facilitate settlements, the holders of Class 5 claims agreed to reallocate or “gift” $228.5 million of their entitled recovery to Class 6 and Class 7, the opinion states.
The judge stresses that Class 6 and 7 “do far better” under the plan with that “gift.” Specifically, “Class 7’s recovery goes from 1% to 100% (just over $41 million). Class 6 recoveries go from zero to 4% and allows for all Class 6 subclasses to receive some recovery, where only three of the seven subclasses were otherwise entitled to anything.” Going subclass by subclass, the opinion notes that the gift from Class 5 “provides recoveries to Class 6(a) of slightly over $34 million, Class 6(g) of nearly $57 million, and takes recoveries to Classes 6(e) and 6(f) from under $22 million to slightly over $52 million.”
Judge Dorsey agrees with Mallinckrodt that under all the waterfall scenarios outlined in their papers, “the dissenting classes here recover far more under the Plan than they are entitled to under the baseline and therefore no rebuttable presumption of unfair discrimination arises as to Class 6 when compared to the other classes.” Against the AICs and Koppenhafer, the court also finds that any unfair discrimination that could arise from the UCC and OCC settlements “is rebutted by the increased recoveries to all classes of creditors that results from the Debtors retaining the ability to continue as a going concern while making payments to the Opioid Trust over time.”
Similarly, Sanofi’s argument that it suffers unfair discrimination because Class 7 trade creditors are receiving a 100% recovery while Class 6(f) receives less also fails, writes the judge. “Sanofi’s argument that Debtors cannot rely on Nuverra
and Genesis Health
because the gift is coming from Debtors, not Class 5 is plainly contradicted by the record,” says the opinion. Moreover, any presumption of unfair discrimination tied to the disparity between plan distributions to Classes 6 and 7 is “rebutted by the fact that Class 6’s distribution is no less
than the de minimus
distribution to which it is entitled in the first place.”
In a variation on this theme, in response to the AICs’ arguments, the court emphasizes, “[u]nder either the UCC Allocation or a pro rata distribution of the Class 5 gift, Class 6(a) is receiving a distribution whereas otherwise it would recover nothing. … As the Nuverra court recognized, the fact that another out of the money unsecured creditor class is doing better is irrelevant
” (emphasis added).Section 1129(b)(2) - Absolute Priority Rule
Next, the court addresses Sanofi’s argument that the plan’s distribution scheme violates the absolute priority rule. Sanofi asserted that the plan “provides for an equity roll up from MPIL to MIFSA (an obligor on the 4.75% Unsecured Notes) without first providing payment in full to MPIL’s creditors, including Sanofi.” Sanofi also argued that Class 6(g) 4.75% unsecured noteholders will receive an improper $57 million payment based on this equity distribution from MPIL to MIFSA while Sanofi will only receive “pennies on the dollar” for its claims.
Judge Dorsey concludes that as the debtors have argued, the plan does not provide for any equity distribution to MIFSA, and instead, holders of Class 5 claims are making a gift directly to Class 6(g). The court says that the debtors’ waterfall scenarios “show that MPIL is not providing any recovery to MIFSA” and that the gift from Class 5 is “not dependent on any recoveries from MPIL” in violation of the absolute priority rule.Substantive Consolidation
Although Sanofi contended that the plan cannot be confirmed because the plan improperly consolidates the debtors’ estates without meeting the requirements for substantive consolidation set by the Third Circuit, the debtors argued that Sanofi’s view was “simply untrue.” The debtors cited witness testimony on this point explaining that the debtors’ liquidation analysis and waterfall analysis were done on a debtor-by-debtor basis, the court explains.
“I agree,” says Judge Dorsey, saying that Sanofi presented no evidence on the substantive consolidation issue.Constructive Trust
The court overrules the Glenridge principals’ objection that because they assert a claim for the imposition of a constructive trust in an adversary proceeding
against the debtors, their claims must be separately classified and the debtors must reserve funds to satisfy those claims. Judge Dorsey reiterates that in his Nov. 4, 2021 bench ruling
, he held that the royalty agreement between the debtors and the Glenridge principals transferred all of the Glenridge principals’ rights and interests in Acthar to the debtors. “Accordingly, Glenridge has no property interest in Acthar, as would be required to impose a constructive trust.”Section 1123(a) - Equal Treatment of Class 13 Claimholders
Judge Dorsey rejects the Canadian Elevator Industry Pension Trust Fund’s argument that the plan fails to comply with section 1123(a) of the Bankruptcy Code, which requires that a plan “provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment…”
The opinion notes that the claims of the Pension Trust, the court-appointed lead plaintiff in the New Jersey district court Strougo
securities class action, were classified among Class 13 subordinated claims. Other claimholders in Class 13 are plaintiffs in the Shenk
securities class action. The debtors have entered a settlement
with the Shenk
plaintiffs that would resolve their claims in exchange for a payment of $65.7 million to be paid from the proceeds of D&O policies held by individual defendants, but no settlement has been reached with respect in the Strougo
action, Judge Dorsey points out.
The Pension Trust argued that the plan violates section 1123(a)(4) because it authorizes a settlement with one subset of Class 13 claim holders, the Shenk
plaintiffs, while depriving the Strougo
plaintiffs of the same opportunity to recover on their claims, the ruling observes. That is, “if the Shenk Settlement is not approved, the plaintiffs in the Shenk Action will not be granting any third-party releases, without regard to whether they submit an Opt-Out Form. This is the very opportunity that the Strougo Plaintiffs are being denied under the Plan.”
However, Judge Dorsey agrees with the debtors that the Pension Trust lacks standing to object on behalf of the putative class in the Strougo
action because the purported class proof of claim was filed without the bankruptcy court’s permission and the putative class was not certified prepetition. Moreover, even if the Pension Trust could act for the benefit of the putative class even on a provisional basis, its argument fails because the consideration for the Shenk
settlement “is being paid from the proceeds of D&O policies, which are not property of the Debtors,” the opinion finds. The plan treats all Class 13 claimholders equally and section 1123(a)(4) “simply does not apply,” says Judge Dorsey.
Even if the provision applied, it would be satisfied because it “only requires that creditors in the same class have the same opportunity to recover. It does not mean that all the recoveries received by the creditors in the same class must be exactly the same,” the opinion continues. Here, “both the Shenk
Plaintiffs and the Strougo
Plaintiffs had the same opportunity to opt out” of the third-party releases, the court states.Non-Estate Professionals’ Fees
The opinion overrules the UST’s objection to the payment of attorneys’ fees for certain non-estate professionals. The UST argued the fee provisions cannot be approved because section 503 of the Bankruptcy Code provides the “sole source” of authority to pay postpetition professional fees on an administrative basis. Judge Dorsey agrees with the debtors’ assertion that the payment of non-estate professional fees is authorized by other provisions of the Code, including sections 363(b), 365, 1123(b)(6), 1129(a)(4) and Bankruptcy Rule 9019.Section 1129(a)(4) - Payment of Indenture Trustee Fees
Judge Dorsey also authorizes the payment of indenture trustee fees under the plan over the objection of the UST. He finds that the indenture trustee fees satisfy section 503 of the Bankruptcy Code because their payment is “integral to the plan” and the indenture trustees have made a “substantial contribution” to the bankruptcy case.Section 1129(a)(5) - Identifying Board Members and Disclosing Their Compensation
Against the Glenridge principals’ argument that the plan fails to identify each member of the reorganized board and the nature of compensation for insiders, the judge points out that the debtors have identified the proposed board members in multiple filings. The opinion also notes that the compensation of directors and officers was disclosed in an SEC filing.Pro Se Objections
Finally, Judge Dorsey overrules certain objections from pro se
- Pro se equityholder Edelman’s argument that the opioid settlement cannot be approved because he has objected to the opioid claims and that objection must be resolved before the settlement can be approved;
- Pro se shareholders’ and pro se 4.75% legacy notes holder Koppenhafer’s argument that the management incentive plan is “an unwarranted attempt to benefit management and key employees who are responsible for the bankruptcy filing”; and
- Koppenhafer’s assertion that the RSA parties’ interests should be subordinated to the interests of the 4.75% noteholders because the RSA parties are non-statutory insiders.
Judge Dorsey writes that he is not required to resolve Edelman’s claim objection before approving the opioid settlement because “such a requirement would undermine the important policy of promoting settlements in bankruptcies as it would require parties to litigate the very issues the settlement seeks to resolve.”
As for the MIP, the court agrees with the debtors that it was proposed in good faith and is “customary for similarly situated companies.” The judge also remarks that the MIP will “maximize the enterprise value of the Reorganized Debtors by aligning the post-emergence interests of the MIP Participants and the Reorganized Debtors.”
Judge Dorsey also remarks that the RSA parties are “not insiders because they negotiated at arm’s length with Debtors and nothing in the record would suggest otherwise.”