Just a little pocket change

Earlier this month, the debtors filed a motion to enforce the sale order and APA against MedImpact, who had agreed to purchase the Elixir assets for $575m in total consideration. A dispute arose over a working capital adjustment, and the calculation thereunder. Relying on a multitude of factors, including the time and liquidity pressures placing critical constraints on procedures and timetables in the case, as well as the overall situation and circumstances in which the APA was negotiated and finalized, the court ruled that MedImpact was responsible for covering the shortfall.

As is typical for APA’s, the contract provided for purchase price adjustments to account for post-signing and post-closing changes in working capital in order to preserve the economics of a transaction. However, in this case, the judge found that MedImpact was taking advantage of its right to make post-closing adjustments to change the net working capital figure from a negative $192m to a positive $84m — a $276m swing that was achieved by backing out many disputed liability types from the calculation of net working capital. This large of an adjustment, nearly 35% of the value flowing to the bankruptcy estate, is “shocking” and “absurd,” according to the judge.

Judge Kaplan also found that in order for MedImpact’s suggested interpretation of the APA to be correct, the court have to accept either that the debtors entered into the APA knowing it would be responsible for over $225m that the company did not and could not account for in its plan, thus destroying a chance for a successful reorganization, or it entered into the APA hoping to pull a fast one and sneak $225m in liabilities onto MedImpact’s balance sheet without anyone noticing

Got to keep on moving

Later at the same hearing, the court addressed an emergency motion from certain of the debtors’ insurance companies that were seeking to have the confirmation hearing adjourned.

The judge denied the motion to adjourn, but attempted to reassure the insurers that the court would not confirm a plan if the debtor could not establish all of the requirements under section 1129 of the Bankruptcy Code, with a sufficient factual record to support the court’s findings.

The insurers have outstanding objections to the proposed plan, particularly with provisions that the insurers allege alter their insurance contracts with the debtors. The insurers have argued that the plan is “patently unconfirmable,” and that the plan seeks findings from the court with respect to the amount of the debtors’ legal liability for opioid claims in an attempt to box in the insurers in any future coverage litigation, among other objections.

Along with the substantive objections, the insurers also complain that necessary documents are still not filed, or if they have been filed, are still in draft form and subject to material amendments, including documents in the plan supplement that relate to the proposed litigation trusts that will be assigned the opioid claims for resolution.

In addition to the insurer objections, the State of Maryland has also lodged an objection to confirmation, as well as commencing an adversary proceeding against Rite Aid. Maryland argues that the plan has not been proposed or pursued in good faith, and that the debtors’ procedural and substantive efforts have prejudiced creditors by making them unable to defend their interests, including the failure to provide adequate notice of plan terms.

Maryland also argues that reorganization is not warranted if a debtor is continuing to behave unlawfully. Maryland’s adversary proceeding is the result of the state’s ongoing investigation of Rite Aid’s sales and marketing processes that allegedly have revealed that the company is still making false representations that it is compliant and that it is not safeguarding customers in the filling of prescriptions.

The confirmation hearing begins on 27 June at 10am ET and is scheduled to continue to 28 June.

Want to get market wraps, news and in-depth analysis ahead of the competition? Request a trial of the 9fin platform below.