Opioid Master Disbursement Trust II Wins Key Opening Victory in Covidien Litigation

NEW YORK, Jan. 19, 2024 /PRNewswire/ -- On January 18, 2024, the Opioid Master Disbursement Trust II ("MDT II") won a key, opening victory in its case against Covidien Unlimited Company, Mallinckrodt's former parent, and three of its subsidiaries ("Covidien"), surviving a substantive motion to dismiss that had been filed by the defendants that sought to dismiss all of MDT II's claims against the defendants.

In MDT II's complaint, and with respect to Covidien's 2013 spinoff of Mallinckrodt, MDT II asserted causes of action for intentional and constructive fraudulent transfers, as well as claims for breach of fiduciary duty as a promoter; reimbursement, indemnification, or contribution; equitable subordination; equitable disallowance; and disallowance under the Bankruptcy Code.

In his ruling, the Hon. John T. Dorsey held that MDT II had pled facts sufficiently plausible to find that the transfers made in connection with the spinoff were actually fraudulent. Judge Dorsey held that MDT II had alleged facts sufficient to find that numerous "badges of fraud" were present in Covidien's actions during the spinoff of Mallinckrodt, including, among others: (1) the threat of opioid liability was a motivating factor in Covidien's decision to spinoff Mallinckrodt; (2) pre-spinoff Mallinckrodt was stripped of cash, saddled with new debt, then left to face impending opioid liability; (3) Mallinckrodt was insolvent at the time of the spinoff; and (4) Covidien ensured it would retain control over Mallinckrodt after the spinoff.

On the effect these actions would have on Mallinckrodt's creditors, Judge Dorsey wrote:

"Here, I find that it is reasonable to conclude that the hindrance of Debtors' creditors was substantially certain to occur following the Spinoff, considering the totality of the circumstances... at the very same time that the opioid epidemic was at its peak, when the company's competitors and customers were being sued and fined, and when Mallinckrodt itself was the target of investigations, Covidien was both increasing Mallinckrodt's potential opioid liability by doubling down on sales and marketing strategies that it knew were problematic while at the same time siphoning off the profits from these increased sales, increasing Mallinckrodt's debt, and extricating itself from liability before the inevitable day of reckoning was upon them. That these actions would hinder, delay, or defraud Mallinckrodt's creditors can come as no surprise."

Judge Dorsey also ruled in MDT II's favor by denying the defendants' motion to dismiss MDT II's claims for reimbursement, indemnification, contribution, equitable subordination, and disallowance pursuant to Sections 502(d) and 502(e) of the Bankruptcy Code. Judge Dorsey dismissed MDT II's claims for constructive fraudulent transfer, breach of fiduciary duty as a promoter, and equitable disallowance.

This crucial ruling brings MDT II, and by extension, its beneficiaries impacted by the opioid crisis (e.g., states, cities, counties, tribes, personal injury victims), one step closer to achieving its efforts to procure meaningful recoveries from Covidien to be used for opioid abatement and victim compensation. It is expected that full merits discovery will now commence as to the many claims asserted by MDT II that the Court sustained in its decision.

A copy of the opinion can be found here.

SOURCE The Trustees of the Opioid Master Disbursement Trust II (the "Opioid MDT II")