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January 24, 2023 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) and the Official Committee of Opioid Claimants (the “OCC,” and with the Committee, the "Official Committees") have filed a motion [Docket No. 1243] that would grant "the Official Committees derivative standing to commence and prosecute certain claims on behalf of the Debtors’ estates, and (ii) granting the Official Committees exclusive authority to settle such claims on behalf of the Debtors’ estates."
As detailed below, those claims would look to make augment recoveries for creditors holding general unsecured and opioid-related claims, with four seprate claims looking collectively to pursue: (I) $670.0mn sitting in U.S. deposit accounts, (ii) $350.0mn sitting in non-U.S. deposit accounts, (iii) valuable equity interests, including equity held in by non-Debtor affiliates in India responsible for roughly half of the Debtors' business (by certain metrics), (iv) potentially $billions related to "uptiering" (ie exchanging unsecured notes for secured notes) of notes in 2019 and 2020 that amounted to "both constructive and actual fraudulent transactions," and (iv) looking to really catch the Debtors' attention, $95.0mn of management compensation ("ill-gotten gains") made in "in full recognition of their financial distress and impending bankruptcy filing" that should thus be treated as as fraudulent and/or preferential transactions.
In arguing that the Court should order what the Debtors have otherwise refused to do, ie grant grant them standing to prosecute claims for the benefit of their respective constituencies, the Official Committees notes the Debtors' "day-one capitulations" to first and second lien lenders (the 'Prepetition Secured Parties') who are the proposed purchasers of the Debtors' assets in a section 363 auction/sale process. A process, the Special Committees argue, which will result in the Debtors selling the proceeds of any chapter 5 avoidance actions (and/or the claims themselves) to certain of the Prepetition Secured Parties… "including avoidance actions against the Debtors’ current management which the lenders have agreed to immediately release upon closing of the sale."
The Official Committees' motion provides: "Strong estate claims exist against both the secured creditors and the officers and directors in this case—claims with significant value for unsecured creditors and opioid claimants. Rather than capture that value by pursuing (or even preserving) these claims, the Debtors have not only agreed to release each of them as part of their proposed sale transaction, but stipulated to vastly overbroad (and factually unsupported) descriptions of the secured creditors’ collateral, as well. These releases and stipulations were given in the absence of a robust investigation by the Company, and effectively in exchange for either insufficient consideration (in the case of opioid unsecured creditors) or no consideration at all (in the case of non-opioid unsecured creditors).
In the face of these day-one capitulations, the Official Committees requested that the Debtors grant them standing to prosecute these claims for the benefit of their respective constituencies. To date, however, the Debtors have refused to consent to such standing, much less offer any meaningful substantive response to the merits of the contemplated claims."
Since their appointment, the Official Committees have been investigating the existence and scope of liens on the Debtors’ property and avoidable transactions involving the Debtors, their management, and the Prepetition Secured Parties. Those investigations have uncovered numerous valuable estate claims. But, notwithstanding the dismal (or non-existent) recoveries currently offered to unsecured creditors and the many opioid claimants in this case, the Debtors have affirmatively chosen not to pursue these claims because, among other reasons, (i) they already stipulated to an expansive definition of the collateral and liens securing certain prepetition debt as part of the final order approving the Debtors’ use of cash collateral (the 'Cash Collateral Order') [Dkt. No. 535], and (ii) they intend to sell the proceeds of any chapter 5 avoidance action (and/or the claims themselves) to certain of the Prepetition Secured Parties in a contemplated sale under section 363 (including avoidance actions against the Debtors’ current management which the lenders have agreed to immediately release upon closing of the sale). This is, thus, a classic situation in which the Official Committees are the independent fiduciaries best- situated to act for the Debtors’ estates.
Deposit Account Claim/Complaint.
The Official Committees are looking for standing to pursue four complaints (the form of each attached to the motion), with the first relating to what it argues is $670.0mn deposited in the Debtors' U.S. deposit accounts; with these accounts not, contrary to the view of the Debtors, subject to perfected liens. The Official Committees point to the lack of deposit account control agreements, or "DACAs." as demonstrating that the Debtors that the liens were not perfected (a view the Debtors contest).
The Official Committees standing motion provides: "The first set of claims the Official Committees seek to bring involve the Debtors’ various U.S. deposit accounts (the 'Deposit Accounts'), valued at approximately $670 million as of the Petition Date—and which were not subject to perfected liens….Perfection of a lien on a deposit account is typically accomplished through control—most often through execution of deposit account control agreements, or 'DACAs'—but it is undisputed that the Prepetition Secured Parties did not have such control here. Though obtaining DACAs would have been exceptionally simple given that the vast majority of the Deposit Accounts reside at the same bank, no one did so, leaving the Deposit Accounts unperfected, with their value therefore available to unsecured creditors. Indeed, far from an oversight or fluke, the secured creditors agreed to a contractual provision relieving the Debtors of any obligation to provide DACAs, putting the Prepetition Secured Parties on notice of the obvious risk that these accounts remained unperfected and not subject to their lien.
Disputed Assets Claim/Complaint.
Moving on from the U.S. Deposit Accounts to other assets it belives are unencumbered and potentially available to unsecured creditors, the Official Committees points to what it believes are $350.0mn of deposit accounts outside the United States, as well as "valuable equity interests, commercial tort claims, and more—all of which should inure to the benefit of general unsecured creditors." Notable amongst allegedly valuable equity interests is the equity that the Debtors hold in "certain non-Debtor Indian affiliates," with those affiliates not only employing roughly half of the Debtors' workforce but responsible for generating "half of the Debtors’ generics revenue."
The Official Committees standing motion provides: "In addition to the U.S. Deposit Accounts, numerous other Debtor assets are either unencumbered or are subject to avoidable liens. These assets include the remainder of the Debtors’ deposit accounts outside the United States (in excess of $350 million), valuable equity interests, commercial tort claims, and more—all of which should inure to the benefit of general unsecured creditors, including opioid claimants (and/or be paid for as part of any sale the Debtors or their first lien lenders hope to accomplish in these chapter 11 cases). Some of these assets are undisputedly unencumbered, having been confirmed as such by the Debtors themselves; other categories of assets are plainly unencumbered under any plausible reading of the relevant documents. Yet, notwithstanding the opportunity to narrow the issues in dispute, the Debtors have refused to stipulate to the unencumbered nature of these assets, forcing the Official Committees to expend the time and resources of seeking declaratory judgments confirming what should be obvious to all.
Among the undisputed unencumbered assets are the Debtors’ equity interests in certain non-Debtor Indian affiliates (the 'Indian Affiliates') that appear to represent a significant (and growing) portion of Endo’s operations. The Indian Affiliates employ roughly half of the Debtors’ workforce, and they collectively perform a substantial portion of Endo’s manufacturing and research. Approximately half of the Debtors’ generics revenue today is attributable to products manufactured by the Indian entities, with the Debtors intending to transition manufacturing of their generics and sterile injectables business to India over the next three years. Suffice it to say that not only declaring such valuable assets to be unencumbered—but also determining their actual value in advance of the sale hearing (so that they can be bid for with cash)—will bear significantly on recoveries for unsecured creditors."
Prepaid Compensation Claim/Complaint.
The Official Committees' standing motion continues as to what it alleges is $95.0mn of management compensation that it characterized as made in "in full recognition of their financial distress and impending bankruptcy filing "and should thus be treated as as fraudulent and/or preferential transactions."
"In addition to the Challenges to the secured lenders’ liens and claims in these cases, the Official Committees have identified certain fraudulent and/or preferential transactions involving the Debtors and/or the Prepetition Secured Parties. Among them are a series of transactions in which the Debtors—in full recognition of their financial distress and impending bankruptcy filing—'prepaid' their management roughly $95 million in future compensation. Two-thirds of the amount of these prepaid bonuses was paid in November 2021 and the rest within the month before these bankruptcy cases were filed (the “Prepaid Compensation”); nearly $55 million of these bonus payments were made to just four employees. The granting of the Prepaid Compensation was a preference and a fraudulent transfer, and the board members that approved it breached their fiduciary duties in doing so. Perhaps recognizing their management and directors’ exposure as a result of these pre-bankruptcy transactions designed to circumvent the contours of the Bankruptcy Code, the Debtors specifically negotiated for a full release of their management and directors in connection with the sale transaction structured with the first lien lenders. Thus, not only are unsecured creditors and opioid claimants clearly entitled to see the claims prosecuted and management’s ill-gotten gains returned, but it is entirely appropriate for the Official Committees to be granted standing to pursue such claims."
Secured Debt Claim/Complaint.
The Debtors motion continues as to three significant debt transactions it characerizes as "both constructive and actual fraudulent transactions," namely the "uptiering" (by exchanging unsecured notes for secured notes) of "billions of dollars of unsecured debt" with the impact of uptiering this debt putting potential recovery as to assets now securing that debt out of reach of "unsecured creditors and opioid claimants." Elevating the pecking order of notes that had been unsecured made all more egregious by the fact that the new notes had a market value "much higher than the market value of the old notes."
The standing motion contiues: "The Official Committees also investigated three significant debt transactions that were undertaken at a time when the relevant Debtors were plainly insolvent. Specifically, in June 2020 and March 2019, certain Debtors “uptiered” billions of dollars of unsecured debt into new, secured debt (the “Uptiers”). In both cases, those Debtors refinanced old unsecured notes with new secured notes. But in both cases, the market value of the new notes was much higher than the market value of the old notes that the transactions retired. The Official Committees’ investigation further shows that these Uptiers were not just economically unsound, they were intended to hinder the ability of unsecured creditors and opioid claimants to recover in an increasingly inevitable bankruptcy. In these ways, the Uptiers were both constructive and actual fraudulent transactions, and the secured obligations should be avoided. The Official Committees are also proposing to challenge the 2021 refinancing as a separate constructively fraudulent transaction.
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