Mallinckrodt Judge Asks Whether Opioid Legal Shield Is Fair

(Bloomberg) -- The judge overseeing the reorganization of opioid maker Mallinckrodt Plc questioned the fairness of a plan to protect executives and others from future lawsuits, echoing the dispute that upended Purdue Pharma's effort to settle its own highly charged opioid bankruptcy case.

Under Mallinckrodt's $5.45 billion settlement plan, officers and directors could not be sued in most cases for their alleged role in America's opioid epidemic. During a virtual court hearing on the proposal Thursday, U.S. Bankruptcy Judge John Dorsey asked how the legal protections would affect creditors who may want to keep suing Mallinckrodt.

The company has argued that the provisions should be approved because the reorganization plan would fall apart without the protections, known as third-party releases. A federal judge in New York rejected similar measures in Purdue's reorganization, a legal finding that, if not overturned on appeal, would blow up the drug maker's plan to end its multibillion-dollar bankruptcy and compensate victims.

Fairness Issue

“It's not just an issue of necessity, it's a question of fairness,” Dorsey said, referring to Mallinckrodt's creditors who would be forced to give up their right to sue. “How is it fair to them? What does it give to them?”

The company and critics spent three days in a virtual courtroom this week arguing about whether Dorsey should approve the reorganization plan. The judge, based in Wilmington, Delaware, said he would rule as soon as possible. He didn't say how he was leaning and his questions mostly involved arcane points of bankruptcy law.

Should Dorsey approve the plan, the company would then file a restructuring case in Ireland in order to implement some of the features of the U.S. Chapter 11 bankruptcy plan.

Most creditors have backed the company's reorganization plan, including the legal releases. A handful have attacked Mallinckrodt's proposal, in part because it would strip creditors of the right to sue certain people and entities that are not in bankruptcy, but had a role in Mallinckropt's operations.

Trust Fund

Like Purdue, Mallinckrodt has proposed a trust fund to compensate public agencies and others who claim they were harmed by the addictive painkillers that flooded America and caused a spike in overdose deaths. Mallinckrodt disputes those accusations, but filed bankruptcy in part to find a way to resolve the claims, company attorney Christopher Harris said in court on Thursday.

Mallinckrodt's reorganization is built on settlements with all key debtholders, including the official committee of unsecured creditors, Harris said. Without the legal releases, some of those deals would fall apart and with them, the reorganization plan, Harris told Dorsey.

“These releases are essential to our reorganization,” Harris said.

And unlike Purdue, the legal releases don't apply to acts of fraud and gross negligence, Harris argued. That means people may still be able to sue, but would have a much harder time winning. In some cases, creditors could keep their right to sue by sending the company an “opt out” notice.

Purdue Precedent

The U.S. Trustee, an arm of the Department of Justice, argued the releases are not allowed under the bankruptcy code. That was the conclusion of U.S. District Judge Colleen McMahon, who reviewed and rejected Purdue's plan.

Federal law “protects litigants from being forced into settlements” against their will, Jane Leamy, an attorney with the U.S. Trustee, said in court earlier this week.

By the time it filed bankruptcy in 2020, Mallinckrodt faced about 3,000 lawsuits and investigations in all 50 states related to its sale of opioids and other drugs, according to court papers. The company also faced antitrust claims related to one of its most important product, Acthar Gel.

The company would resolve those claims and also set up trust funds to distribute $1.7 billion to compensate governments and opioid victims, according to court papers. Once it exits bankruptcy, Mallinckrodt will be worth about $5.5 billion, company advisers estimated.

The case is Mallinckrodt Plc, 20-12522, U.S. Bankruptcy Court for the District of Delaware (Wilmington). To view the docket on Bloomberg Law, click here.