Relevant Documents:US Sale Objection / Motion to Appoint TrusteeUST Sale Objection
The U.S. government stated its opposition to the Endo International debtors’
credit-bid sale of their assets to first lien creditor acquisition entity Tensor Ltd. in an objection filed today and moved for appointment of a chapter 11 trustee. The Office of the U.S. Trustee lodged a similar sale objection.
Like
earlier objections by Canadian government and public school district opioid claimants, the federal government (on behalf of the Internal Revenue Service, Department of Justice, Department of Health and Human Services and Department of Veterans Affairs) and the UST argue the sale and related settlements and releases would improperly funnel distributions to favored opioid claimants and unsecured creditors over governmental priority claims in violation of the absolute priority rule and constitutes an impermissible
sub rosa plan that cannot be confirmed under section 1129 of the Bankruptcy Code.
The U.S. government asserts $3.5 billion in priority tax claims (previously $2.3 billion) and $516.7 million in general unsecured tax claims, and is one of a few holdouts opposing the first lien credit-bid sale following a
settlement between the debtors, the
official committee of unsecured creditors, the
official opioid claimants committee, or the OCC, the
ad hoc crossover group and the
non-RSA first lien group. Following the committee settlement,
mediation with the holdout parties, including the DoJ, continued, leading to a
settlement with the court-appointed future opioid and mesh tort claimant representative.
The mediation is
set to expire on Aug. 4 at 4 p.m. ET, while the sale hearing will commence earlier that day, Aug. 4, at 11 a.m. ET.
The U.S. objection outlines the federal government’s claims as follows:
- IRS claims: $3.5 billion in priority tax claims and $516.7 million in general unsecured claims relating to income tax liabilities for 2006 to 2013 and 2016.
- DoJ claims:
- Claims relating to a pending criminal investigation into the marketing of opioid drugs; if convicted, certain debtors would be liable for a criminal fine of approximately $2.12 billion, forfeiture of approximately $589 million and restitution in an uncertain amount.
- Claims related to a pending civil fraud investigation into the submission of false claims to federal healthcare programs. The DOJ states that the government suffered damages of approximately $232 million; if found liable, certain debtors would be liable for statutory treble damages and other penalties under the False Claims Act.
- HHS claims: The Center for Medicare and Medicaid Services, or CMS, has filed a $1.2 billion claim relating to secondary payment obligations under Medicare. CMS also asserts a $33.8 million claim relating to the company’s transvaginal mesh and ranitidine products. The Indian Health Service and the Veteran’s Administration have also filed unliquidated proofs of claim to recover unquantified costs for providing treatment.
The federal government’s objection calls the sale “plainly unlawful” because it entails a settlement that violates the absolute priority rule by skipping administrative and priority creditors and paying opioid claimants and unsecured creditors. This priority-altering settlement taints the sale, the government says, given the debtors “admit” that they are pursuing the sale in lieu of a plan process that would otherwise require the debtors to satisfy IRS and other priority claims in full prior to making distributions to general unsecured creditors.
According to the government, federal agencies and other unsecured creditors have been “singled out” to receive nothing “while other junior or co-equal creditors will receive hundreds of millions of dollars of compensation for their prepetition claims.”
The debtors “candidly admit” that the “business purpose” for their pursuit of a sale - as opposed to a plan - “is to avoid paying the priority and potential administrative tax claims that Congress has dictated must be satisfied to confirm such a plan, and to discharge fraud debts that Congress has deemed nondischargeable,” the government continues. Evasion of statutory mandates for a chapter 11 plan is not a “good business purpose” for a section 363 sale, according to the objection.
The federal government argues that the sale and related creditor-skipping distributions are clearly foreclosed by the Supreme Court’s 2017 decision in
Jevic Holding Corp., which confirmed that the priority rules of the code cannot be circumvented by an “end run” via a section 363 sale.
According to the government, the debtors cannot circumvent
Jevic by relying on the “gifting” of distributions by secured creditors to preferred junior classes to avoid paying priority claims. Otherwise, the objection states, “purchasers could make side-deals with any number of objecting creditors and entirely ignore the priority scheme.”
The UST distinguishes prior “gifting” distributions, including those in the
Chrysler case, explaining that in the present case “creditors are not contributing new value to a new entity, but rather will be paid with estate assets on account of their pre-petition claims.” Second Circuit law, the UST adds, clearly prohibits gifting “unless every intermediate class consents.”
In addition to the improper alteration of creditor priorities, the federal government says the sale would improperly resolve potential challenges to the liens of prepetition secured creditors by the UCC and OCC as provided for in the
final cash collateral order. The UCC and OCC’s
standing motion, which is in abeyance pursuant to the settlement, seeks to challenge or avoid creditor liens on approximately $670 million held in the company’s
bank accounts potentially free from the security interests of approximately $6 billion in first lien loan and note claims.
Additionally, the motion requests a declaration that
substantial estate assets are unencumbered, avoidance and recovery of $95 million in prepetition bonuses paid to insiders and avoidance of obligations incurred via three debt transactions executed by the debtors between 2019 and 2021.
These claims, the federal government argues, should not be resolved outside the context of a formal settlement motion or the plan confirmation process. The sale and related settlements would “enhance the recoveries of only select unsecured creditors” in exchange for abandoning the potential causes of action in the standing motion that “were to be brought for the benefit of
all creditors of the estate,” the U.S. asserts.
Since any recoveries from these claims would be limited to the UCC and OCC’s “narrow constituencies,” the government contends that any ruling on the sale should be deferred, and the court should appoint a chapter 11 trustee to investigate and potentially prosecute any lien avoidance claims on behalf of all creditors. The federal government says a trustee is necessary because the official committees have “violated the fiduciary duty they owe to
all unsecured creditors, including the United States,” and “replicated the same conflict of interest they accused the Debtors of holding.”
The debtors’ management are also conflicted by the proposed release of avoidance actions relating to prepetition executive compensation, leaving “no disinterested actor other than a court-appointed trustee who can act on behalf of the estate to pursue its rights against the lienholders,” the government says. Alternatively, the objection asks that the government be allowed to bring its own challenges to the liens and potentially equitably subordinate the prepetition lines to the agency claims.
Finally, the federal government criticizes the sale as a
sub rosa plan and an improper attempt to “curtail the Government’s postsale rights to pursue claims against third parties.” According to the objection, the proposed sale order includes “impermissible injunctions and third-party releases” that would bar “‘all persons and entities,’ including the Government, from bringing any claim arising prior to or on the Closing Date, connected to the Debtors or any of the relevant transactions during or before these bankruptcy cases, against the Buyer and other persons or entities.”
The sale order would also foreclose the government from asserting rights to set-off, subrogation or recoupment against the purchaser and related parties, the objection says.
These injunctive provisions of the sale order are contrary to the doctrine of sovereign immunity and the Anti-Injunction Act, which foreclose “any injunctive bar to claims of the United States and the IRS in particular,” the government states. The objection also explains the release of the government’s non-tax claims is also barred by provisions of the Medicare Act.
Since the sale goes beyond selling the debtors’ business and includes significant components that can only be accomplished through a plan - dictating distributions, providing for improper releases and enjoining actions against the purchaser and creditor trusts - the sale constitutes an impermissible
sub rosa plan and cannot be approved, the federal government concludes. Even if put forward as a plan, the parameters of “this shadow plan” would fail the Bankruptcy Code’s confirmation requirements.
The hearing on the government’s motion to appoint a trustee is set for Aug. 4 at 11 a.m. ET, along with the sale hearing.