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Mallinckrodt was expected to set a positive precedent as a “mass tort” bankruptcy case, but it has turned out to be a disappointment. Instead, the trust responsible for assisting victims of the US opioid epidemic is facing a potential loss of $1.1bn.
Companies like Purdue Pharma, Johnson & Johnson, and 3M successfully navigated the quirks of the US Chapter 11 bankruptcy process, allowing them to avoid court through the use of subsidiaries to compensate victims. The Supreme Court will now review this legal maneuver.
Mallinckrodt, a producer of opioids, filed for bankruptcy in 2020 and emerged in 2022 with $1.725bn allocated for an opioid trust. However, it is now back in bankruptcy court, and the trust is expected to receive only 60% of the initial amount due to Mallinckrodt’s reorganization and debt reduction.
The execution of the bankruptcy process is just as important as the theory behind it, as demonstrated by the Mallinckrodt case.
Last year, the opioid trust received $450mn in payments, but now it is set to receive a final $250mn payment and a small portion of the revamped Mallinckrodt’s equity. The company has $3.5bn in total debts, and lenders and bondholders will take ownership, prioritizing them over the trust. Mallinckrodt’s prospects are dim, with a reset enterprise value of only $3bn.
The trust has agreed to the new terms, possibly due to the risks associated with the initial $1.725bn commitment. Executives’ legal releases from the first deal are likely to be a condition of the new restructuring.
Some argue that large corporations and savvy creditors are using legal tactics to shortchange vulnerable victims of corporate wrongdoing. However, a more nuanced perspective recognizes that compensation involves considerations of corporate valuations and capital structures.
Regardless of the interpretation, it is evident that the aspirations of some of the US’s most vulnerable individuals are being devastated.
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