Opioid epidemic swarms the US court system with bankruptcy wave on the horizon - Special Report

03 July 2019

As the opioid epidemic continues across the US, multiple drug companies, pharmaceutical distributors and other businesses are finding themselves the target of thousands of lawsuits, in federal and state courts, seeking to hold them financially responsible for fueling the crisis. In this Special Report, the Debtwire court and legal analyst teams sketch a roadmap of the ongoing proceedings and outline key issues that will drive the process and ultimately define outcomes. Stay tuned for continuing coverage, fleshing out the key court fights across the country, the driving legal issues and the resulting bankruptcies to come.

 

This month brought the first major bankruptcy case related to opioid litigation, when Insys Therapeutics filed for Chapter 11 protection on the heels of a USD 235m settlement with the federal government and the criminal convictions of former company executives. By many accounts, Insys will not be the only company to enter bankruptcy in the face of opioid-related liabilities. Purdue Pharma LP is preparing a Chapter 11 filing to help it deal with billions of dollars in potential damages tied to the marketing of its blockbuster painkiller, Oxycontin.  Insys and Purdue are just two of several companies named as defendants in a slew of litigation related to the spread of opioids in the US. Other drug manufacturers, such as Johnson & JohnsonEndo International PLCAllergan PLCTeva Pharmaceutical Industries Ltd., and Mallinckrodt PLC, are named defendants in a multitude of actions that have been consolidated into a sweeping multidistrict litigation (MDL) pending in federal court in Cleveland, Ohio.

 

Overall, the onslaught of legal proceedings stemming from the opioid epidemic include a wide range of claims, but can be bucketed into four key categories: (i) federal government investigations and related qui tam whistleblower lawsuits; (ii) state attorneys general actions; (iii) municipality and Native American tribe cases; and (iv) criminal actions.

 

Federal government enforcement actions

 

So far, the US Department of Justice has already made public its pursuit of civil False Claims Act litigation against Insys, and it’s easy to envision similar cases proceeding against other defendants before the wave of opioid lawsuits ends. If the Insys cases serve as a model, it’s likely that the federal government will intervene in qui tam, or “whistleblower” actions launched by individuals on behalf of the federal government. The Insys whistleblower cases alleged violations of the False Claims Act based on accusations that the opioid manufacturer engaged in deceptive marketing and paid kickbacks to increase the rate of subscriptions for its fentanyl spray. Those actions, according to the Justice Department, resulted in fraudulent reimbursements from the federal Medicare program and the government’s TRICARE health program for military members and their families. Ultimately, Insys agreed to pay USD 195m to resolve the False Claims Act litigation, according to a Justice Department announcement in June. At the same time, Insys resolved a criminal investigation of similar allegations by paying a USD 2m fine and forfeiting another USD 28m.

 

Multidistrict litigation

 

The MDL includes over 1,400 separate cases brought largely by municipal and county governments, along with Native American tribes. In addition to those mentioned above, other defendants in these cases include pharmaceutical distributors, such as AmerisourceBergen Drug Corp.McKesson Corp. and Cardinal Health Inc., and retail pharmacies like CVS Health Corp.Walgreen Co., and Walmart Stores Inc. The MDL revolves around the central argument that the manufacturers, distributors and retail pharmacies contributed to the rise of opioid addiction. This was accomplished, according to the complaints, by manufacturers underplaying the addiction risks of opioid painkillers through various marketing efforts, industry associations and the funding of research studies and distributors failing to detect, and act on, suspicious opioid prescriptions. Taken together, the suits lay blame on different participants in the manufacture and supply chain for contributing to widespread use of the powerful painkillers, which in turn exacerbated the addiction epidemic. The MDL remains pending in the US District Court for the Northern District of Ohio, and the presiding judge has scheduled a bellwether trial—an initial case to help determine the scope of liability that faces various defendants—to begin on 21 October. Meanwhile, plaintiffs lawyers involved in the case recently announced a proposal to create a coordinated “negotiating class” that would attempt to reach a global settlement that would resolve the claims of cities and counties nationwide.

 

Attorneys general actions

 

Attorneys general across the US have lodged their own separate state courts actions against many of these same companies. At least 48 US states, plus the District of Columbia and Puerto Rico, have launched actions, primarily in their respective state courts. Michigan’s AG has also announced an intention to file a lawsuit, and is currently seeking bids from outside law firms to handle the litigation, while Nebraska appears to be the only state that has not brought its own suit. The causes of action in the state AG cases tend to run parallel to those asserted in the MDL, and often include public nuisance, unjust enrichment and negligence claims against opioid manufacturers, distributors and pharmacies. Several attorneys general have also alleged that various opioid-related defendants should be held liable under state deceptive trade practices or consumer fraud laws, state racketeering laws, and under civil conspiracy theories.

 

Some of the state AG actions have already resulted in settlements, including West Virginia’s cases against pharmaceutical distributors AmerisourceBergen, Cardinal Health and McKesson, which the state accused of failing to detect suspicious opioid prescriptions. AmerisourceBergen paid USD 16m to settle, while Cardinal Health settled for USD 20m and McKesson, the most recent to settle with West Virginia, paid USD 37m. Oklahoma’s suit against several manufacturer defendants has also prompted settlements, as Purdue agreed in March to pay the state USD 270m and Teva agreed to pay USD 85m. A bench trial in that litigation has been ongoing since late May, with Johnson & Johnson as the only defendant that has not settled.

 

Other litigation

 

Yet these allegations mark only a portion of the claims some companies tied up in opioid litigation may end up facing as litigation evolves. Insys, for example, disclosed in its Chapter 11 case that it faces litigation that falls into at least eight difference categories. In addition to the four key categories we identified above, Insys said it has faced municipal litigation that is separate from the MDL, private insurer cases, personal injury claims and securities fraud litigation.

 

The chart below lays out the four key types of opioid litigation and provides a representative case for each category, along with the companies named as defendants and the causes of action they face.

 

 

Potential bankruptcy filings in response to opioid litigation
 

Financially sound companies faced with an onslaught of litigation like the opioid manufacturers and distributers often seek the refuge of a bankruptcy filing. Companies like Johns Manville and Dow Corning and, more recently, PG&E, the Weinstein Company, and Imerys Talc America have demonstrated that a bankruptcy case provides not only a temporary breathing spell, but also, a singular forum for the orderly and systematic resolution of claims asserted in the myriad litigation proceedings pending in multiple courts. So far, Insys is the only opioid related bankruptcy case within Debtwire’s coverage footprint (more than USD 10m in funded debt). However, according to the Debtwire financial analyst team, companies like Purdue Pharma are also on the horizon for near-term filings.

 

New rules of the road post Chapter 11 filing
 

Chapter 11 is a unique mechanism that offers various tools that enable companies, and their creditors, to address overwhelming litigation in a comprehensive way, while avoiding the “race to the courthouse.” The formation of specialized committees, a claims estimation process, the automatic stay, and court-approved releases, injunctions, and discharges are among the most powerful tools that facilitate an expedited resolution of outstanding issues in a way that is not possible outside of bankruptcy.

 

Specialized committees
 

The Bankruptcy Code requires the US Trustee to appoint a committee of general unsecured creditors in each chapter 11 case. The unsecured creditors committee (the UCC) is comprised of unsecured creditors who often hold the largest unsecured claims against the debtor. The UCC’s goal is to maximize the value of the debtor’s assets that are available for distribution to unsecured creditors.
 

The UCC consults and negotiates with the debtor and other creditor groups, investigates the acts, conduct, assets, liabilities and financial condition of debtor, the operation of debtor's business and the desirability of the continuance of such a business. The UCC also participates in the formulation of a Chapter 11 plan and advises its constituents of its determination as to any plan formulated by the debtor and its advisors. Thus, UCCs play an important role in overseeing a debtor’s reorganization by acting as a watchdog and as a party with a significant seat at the negotiation table. The UCC typically retains attorneys, financial advisors, and other professionals, whose reasonable fees and expenses are paid for by the debtor.
 

In Chapter 11 cases filed by companies facing liability from exposure to massive civil litigation, additional, more focused, committees, similar to a UCC, are formed with the approval of the court. Such committees typically include a tort claimants committee, a future claimants committee and, when it appears that there will be sufficient funds remaining for distributions on equity interests, an equity committee. These committees function in the same way as the UCC and enjoy the same rights and benefits. Ad hoc committees, on the other hand, do not benefit from the payment of their professionals’ fees and expenses. Given the outstanding tort claims against the various opioid manufacturers, we expect to see the UCC and at least a tort claims committee, if not also a future claimants committee, playing an instrumental role in the opioid-related bankruptcy cases.

 

Claims estimation and reserved funds
 

Litigation can take years before the amount of all claims are fixed on a final basis. The fees and uncertainty that plague corporate defendants during this time can often be avoided by a bankruptcy filing. The Bankruptcy Code requires that if the fixing or liquidation of a contingent or unliquidated claim would unduly delay the administration of a case, such claim “shall be estimated for purpose of allowance.”[1]  The estimation of claims serves dual purposes: it avoids the need to await resolution of multiple lawsuits to determine issues of liability or amounts owing by means of anticipating and estimating the likely outcome of the actions (while minimizing associated litigation expenses) and promotes a fair distribution to creditors through a realistic assessment of uncertain claims.[2] 
 

In Chapter 11 cases that involve unliquidated claims, the debtor’s plan often provides that a specified amount of funds will be reserved in escrow for the benefit of holders of disputed claims until the claim amounts have been determined or otherwise settled by the parties. UCCs, tort claimants committees, future claimants committees and other beneficiaries of the reserve amounts heavily negotiate with the debtors over both estimation and reserve amounts, with reserve amounts typically being set by the value ascribed to various categories of claims, in the aggregate, through estimation. Whereas beneficiaries of reserve accounts argue that their claims should be given a higher estimation and that a correspondingly higher amount of funds should be set aside for payment of these claims, the debtor’s other creditors argue that the estimation and reserve amounts are too high, in hopes of reserving a larger portion of a debtor’s assets for payment of their own claims.

 

Automatic stay
 

The automatic stay is one of the primary benefits of initiating a bankruptcy case--particularly when a company files due to overwhelming litigation--as the stay halts litigation and collection actions against the filing company in favor of a centralized claims resolution process (often involving claims estimation) overseen by the Bankruptcy Court. However, the stay is subject to a number of exceptions, and the “police power” carveout, which exempts from the automatic stay actions brought by a government or regulatory agency to enforce its police or regulatory powers, will be at the forefront of disputes in the opioid related bankruptcy cases.
 

As we have seen already in Insys’ Chapter 11 case, this exception will play a major role in deciding, in large part, not only whether certain of the pending opioid litigation will be exempt from the stay, and thus allowed to continue during a company’s bankruptcy, but also, whether the state court litigation may be removed to a federal court. As we will discuss in our follow-up article, even if a bankruptcy court rules that a given action is not stayed because it falls within the police powers exception, the court may nevertheless rely on its equitable powers under section 105(a) of the Bankruptcy Code to enjoin the litigation, where warranted. Further, in actions with multiple defendants, it is possible for a non-bankruptcy action to be stayed only with respect to the bankrupt company, but permit it to continue against the other defendants.

 

Claims that may not be discharged in bankruptcy
 

While the automatic stay is typically the most coveted consequence of a bankruptcy filing, a discharge is, by far, the impetus behind most filings. As a general matter, the confirmation of a plan results in the discharge of a reorganizing debtor’s prepetition debts.[3] To facilitate various public policy mandates and ensure that honest debtors do not abuse the bankruptcy process, various categories of prepetition debt may not be discharged. In light of the pending actions involving claims based on the False Claims Act, we expect certain plaintiffs to argue that their claims are not dischargeable under section 1141(d)(6). Under this section of the Bankruptcy Code, the confirmation of a plan does not discharge a corporate debtor from a debt owed to a person as the result of an action filed under the False Claims Act or any similar state statute.[4] 

 

Third-party releases and injunctions
 

Although only reorganizing debtors (and not their shareholders, non-debtor affiliates or insurers) are entitled to a discharge of claims that arose before the bankruptcy filing, most confirmed Chapter 11 plans contain releases and injunctions protecting these non-debtor parties. While Debtwire’s legal analyst team has recently covered the extent to which various bankruptcy court judges diverge on the extent to which third-party releases and non-debtor injunctions should be contained in a confirmable plan, given the liabilities faced by the opioid companies’ executives and officers, as well as companies’ insurers (including criminal liabilities and fraud-based liabilities) we expect these issues to take on a new twist in the opioid bankruptcy cases to come.

 

Bankruptcy wave and related analysis to come

 

While the opioid crisis has been hitting communities hard for years, an onslaught on the bankruptcy courts is still on the horizon. The rulings and potential settlements stemming from the multitude of opioid related litigations will ultimately be the determining factors as to whether companies will ultimately escape or shoulder liability, and as to whether the bankruptcy process will be needed to give those potentially liable the hope of surviving the aftermath. In a series of articles to follow, the Debtwire legal analyst team will address the extent to which these issues may arise in bankruptcy cases commenced by opioid manufacturers and distributors.
 

by Sara Tapinekis and Scott Flaherty

 

Prior to joining Debtwire, Sara was a law clerk to two judges in the United States Bankruptcy Court, S.D.N.Y. and practiced in the Financial Restructuring Group at Clifford Chance, where she represented financial institutions (as secured and unsecured creditors, defendants in adversary proceedings, and participants in DIP financings) in high-profile restructurings. She also represented foreign representatives in Chapter 15 cross-border cases.

 

Scott Flaherty is a member of Debtwire’s court reporting team.
 

[1] See 11 U.S.C. § 502(c).
[2] See In re Enron Corp., No. 01-16034, 2006 WL 544463, at *4 (Bankr. S.D.N.Y. Jan. 17, 2006) (citing O'Neill v. Continental Airlines, Inc. (In re Continental Airlines), 981 F.2d 1450, 1461 (5th Cir.1993)).
[3] See 11 U.S.C. § 1141(d)(1)(A).
[4] See 11 U.S.C. § 1141(d)(6)(A).