COURT: Mallinckrodt makes second request to reimburse RSA parties’ professional fees, avoid RSA termination, after striking out on first attempt

Mallinckrodt (MNK) has filed its second motion to reimburse certain creditors’ professional fees and expenses.  In its second motion, MNK requests permission to assume reimbursement agreements that it entered into before its bankruptcy filing with certain creditor groups that signed on to the company’s restructuring support agreement (RSA).  Under the agreements, MNK agreed to reimburse the reasonable professional fees and expenses of the following RSA parties: (i) the ad hoc committee of governmental claimants (consisting of the plaintiffs’ executive committee appointed in the opioid multi-district litigation and seven states) and the additional 43 states and territories who are signatories to the RSA, (ii) the multi-state governmental entities group and (iii) the ad hoc unsecured noteholder group.  According to MNK, the RSA parties would be entitled to terminate the RSA if the bankruptcy court refuses to grant the motion.

 

 

MNK first sought bankruptcy court permission on 16 November to reimburse the RSA parties’ professional fees and expenses.  In that motion, which was met with heavy opposition from MNK’s ad hoc group of first lien lenders and the Office of the US Trustee, MNK sought permission to enter into the reimbursement agreements under section 363(b) of the Bankruptcy Code, which permits a debtor to enter into transactions that are outside of the ordinary course of its business upon receiving bankruptcy court approval. To satisfy the requirements of section 363(b), a debtor must show that a sound business purpose justifies the transaction at issue.

 

On 14 December, Judge John Dorsey of the US Bankruptcy Court for the District of Delaware sustained the objections of the US Trustee and the ad hoc first lien lender group and denied the motion, without prejudice to MNK’s right to make a request to assume the reimbursement agreements under section 365 of the Bankruptcy Code, which authorizes a debtor to assume prepetition contracts.  In its second motion, filed on 30 December, MNK seeks bankruptcy court permission to assume the reimbursement agreements under Bankruptcy Code section 365, and to enter into the agreements pursuant to section 363(b) of the Bankruptcy Code. 

 

Although debtors are required to pay the professional fees and expenses of committees that have been granted official status in a case, such as unsecured creditors committees, ad hoc committees are not entitled to reimbursement of their professional fees and expenses.  An ad hoc committee that seeks reimbursement of its professional fees and expenses must request bankruptcy court approval under section 503(b) of the Bankruptcy Code and demonstrate that it has made a substantial contribution to the case.  In Delaware, where MNK’s bankruptcy case is pending, this means that an ad hoc committee must show that its services directly and materially contributed to the debtor’s reorganization.

 

MNK argues that the court should approve the agreements on several grounds, including that the RSA parties were instrumental in bringing about the agreements set forth in the RSA and that their cooperation in the case, going forward, is essential. “[T]hose professionals need certainty that they will be compensated for their work before undertaking the intensive multi-week effort necessary to effectively mediate allocation issues,” the company said in its motion. Absent the relief requested herein, they will not have that certainty, and the debtors, in turn, will bear a substantial risk that the governmental RSA parties, without the support of their advisors, decline to participate in the allocation mediation (rendering it pointless) and/or terminate the RSA, as is their right if no order authorizing reimbursement of their fees and expenses is entered in these cases.”  MNK argues that finalizing a reimbursement deal is critical as the parties work to negotiate opioid settlement allocation issues.

 

MNK’s ad hoc group of first lien lenders likely will oppose the second motion, as reimbursement of the fees would significantly decrease the amount of MNK’s assets otherwise available for distribution, as the reimbursed fees would be paid during the case.  In opposing the motion, the first lien lender group likely would argue that the ad hoc groups must, like all other creditors that have not been granted official committee status, bear their own expenses because they are advocating for their particular interests (as opposed to general creditor interests) and do not owe fiduciary duties to any creditors.  Other arguments in opposition to the motion would include that:

 

  • reimbursement of the fees and expenses of the groups is not in the best interests of MNK and its estate;
  • the entry into the agreements was not based on a reasonable business judgment; and
  • the RSA parties must show that they have made a substantial contribution that is equivalent to the amount of fees and expenses for which reimbursement is sought.
 

 

 

Judge Dorsey has scheduled a 14 January hearing to consider the motion.

 

The RSA is backed by holders of 84% of the company’s notes, 50 states and territories, and an executive committee representing the interests of thousands of plaintiffs in multidistrict litigation proceeding in Ohio. The RSA sets up a plan that would have Mallinckrodt pay USD 1.6bn over seven years and provide 19.99% of its equity to settle opioid lawsuits.

 

Elsewhere in the case, MNK recently filed a motion to enter into a new collective bargaining agreement (CBA) with 300 unionized employees. A hearing on that motion is set for 14 January.

 

by Sara Tapinekis and Pat Holohan