Mallinckrodt: legal rejig may slash $1.1bn from opioid victims’ trust

Mallinckrodt was supposed to be the best-practice “mass tort” bankruptcy case. It has not worked out that way. Instead a trust charged with helping victims of America’s drugs epidemic could end up $1.1bn worse off.

Purdue Pharma, Johnson & Johnson and 3M made deft use of quirks in the US’s Chapter 11 bankruptcy process. This kept members of the founding family — the Sacklers in the case of drugs company Purdue — or the company out of court. Instead, a subsidiary figured as the means to pay off victims of alleged product liability. 

The bankruptcy process won legal releases at its conclusion for everyone across both the bankrupt and non-bankrupt entities. That trick is now for the US Supreme Court to review.

No such shell game for Mallinckrodt, a producer of opioids that filed for bankruptcy in 2020. It re-emerged in the summer of 2022 with $1.725bn in payments earmarked for an opioid trust to help victims of America’s drugs crisis. 

Now the business is in the bankruptcy court again. The opioid trust is set to take a 60 per cent haircut after Mallinckrodt reorganised its excessive debt.

Experts are obsessed with theory behind the bankruptcy process. The Mallinckrodt debacle shows that execution matters too.

Payments to the opioid trust — which is in charge of disbursements to governments and individual victims — totalled $450mn last year. Now, the trust is set to get a final $250mn payment and a long-shot sliver of equity in the rejigged Mallinckrodt.

The company has $3.5bn in total debts with lenders and bondholders expected to become owners. The 2022 deal gave those hedge funds and institutional investors priority over the opioid trust. Mallinckrodt’s prospects are poor enough that its reset enterprise value is just $3bn.

The trust has agreed to the latest terms. Perhaps that was the risk implicit in the $1.725bn commitment. Legal releases for executives featured in the first deal will probably be a condition of the new restructuring.  

A sceptic would say that big companies and savvy creditors are finding legal means of short changing unsophisticated victims of corporate wrongdoing. A more nuanced view is that compensation is not just a question of ethics. Corporate valuations and capital structures are also involved.

But whichever way you look at it, the hopes of some of the US’s most vulnerable people are being crushed.