In re New Eng. Compounding Pharmacy, Inc.
| Decision Date | 15 January 2016 |
| Docket Number | Case No. 12–19882–HJB |
| Citation | 544 B.R. 724 |
| Parties | In re: New England Compounding Pharmacy, Inc., Debtor |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
Daniel C. Cohn, Robert A. White, Murtha, Cullina, Richter & Pinney, Keri Linnea Wintle, Duane Morris LLP, Boston, MA, for Debtor.
Before the Court is the "First and Final Application of Paul D. Moore, in His Capacity as Chapter 11 Trustee of New England Compounding Pharmacy, Inc., for Final Allowance of Commission and Reimbursement of Expenses" (the "Fee Application") filed by Paul D. Moore, the Chapter 11 trustee (the "Trustee") of the debtor, New England Compounding Pharmacy, Inc. ("NECC"). The Fee Application, as voluntarily reduced, requests compensation in the total amount of $3,750,000.00—a sum less than the maximum commission set by § 326 of the United States Bankruptcy Code,1 but greater than the so-called "lodestar amount" (equal to the number of hours the Trustee spent in the case multiplied by his hourly rate). No objections were raised to allowance of the lodestar amount ($1,135,754.85) or reimbursement for expenses ($416.52), and the Court allowed payment of those amounts by Order dated December 30, 2015. But objections have been raised to the payment of additional compensation beyond the fees already allowed. Accordingly, this Court must determine whether the Trustee is entitled to payment of the $2,614,245.15 balance of his request.
What follows are the Court's findings of fact and conclusions of law. However, two caveats are in order. Given the inordinate complexity of this case, the following narrative is necessarily summary in nature, as the Court has endeavored to walk the fine line between presenting important factual detail while also preserving the reader's patience. Additional details on the history and travel of this case can be found in the excellent memoranda written by District Court Judges F. Dennis Saylor and Rya W. Zobel and Magistrate Judge Jennifer C. Boal in the related multi-district litigation proceeding (the "MDL Proceeding") pending in the United States District Court for the District of Massachusetts (the "District Court"), case number 1:13–md–2419–RWZ.2
More importantly, the Court must acknowledge that this Memorandum does not do justice to the enormous contributions (including exercises of judicious restraint) that players other than the Trustee have made throughout the pendency of the bankruptcy case and the MDL Proceeding—members of the unsecured creditors' committee (the "Creditors' Committee"), counsel to the Creditors' Committee, the Plaintiffs' Steering Committee (the "PSC")3 , the United States trustee for Region 1 (the "UST"), NECC's creditors—particularly the tort victims and their attorneys—and various third-party, nondebtor defendants. It is obvious to the Court that the efforts in this case truly did require "a village." But the issues before the Court today revolve primarily around the Trustee and his role in these proceedings, and so today, it is his story that largely will be told.
In September 2012, reports suggesting a brewing national tragedy began to surface from several states; a number of patients who had received injections of a compounded drug—preservative-free methylprednisolone
acetate ("MPA")—had been diagnosed with a rare form of fungal meningitis that resulted in horrific suffering and, in some cases, death. And in the following weeks, it became clear that the number of victims was growing at an alarming rate.
By the end of September, the source of the contaminated MPA had been identified as the debtor NECC, located in Framingham, Massachusetts. NECC issued a voluntary recall of three suspect lots of MPA on September 26, 2012. By then, however, approximately 14,000 doses of potentially contaminated MPA
had been administered to patients at hospitals, clinics, and doctors' offices across the country. Within a month after the reports of the fungal meningitis outbreak began receiving national attention, the scope of the damage had skyrocketed. In the last "official" count, the Centers for Disease Control and Prevention (the "CDC") reported that 750 individuals were ill and 64 patients had died as a result of being injected with contaminated compounds (the "Outbreak").4
By October 2012, after NECC's central role in this grave situation was identified, NECC had voluntarily surrendered its pharmacy license, ceased operations, laid off all of its employees, and recalled all of its products. NECC pharmacists have been temporarily barred from practicing pharmacology pending the outcome of proceedings to determine whether their licenses should be permanently revoked, and 14 individuals have been criminally indicted in connection with the Outbreak.
Patients and their loved ones understandably sought recompense for the harm caused by NECC's contaminated products, and swiftly began initiating lawsuits against NECC and other potentially liable third parties throughout several states.5 Given the number of those lawsuits, the Judicial Panel for Multidistrict Litigation subsequently joined the pending federal cases in the MDL Proceeding before the District Court (now the "MDL Court").
In response to this avalanche of legal action, on December 21, 2012, NECC filed a voluntary petition under Chapter 11 of the Bankruptcy Code. At the time of filing, NECC, which was no longer operating, had only $1.3 million in its coffers—clearly a paltry sum in comparison to the enormous liability it was facing. Indeed, that amount was unlikely to fully compensate even the professionals tasked with navigating the embroiled NECC through the bankruptcy process. In short, the prospect of any meaningful recovery from NECC for the hundreds or thousands injured was bleak.
Shortly after filing, and before the appointment of the Trustee, the Creditors' Committee commenced an adversary proceeding (the "Adversary Proceeding") against NECC's individual shareholders (Barry J. Cadden, Lisa Conigliaro Cadden, Gregory Conigliaro, and Carla Conigliaro) (the "Shareholders") and affiliated entities also owned and controlled by NECC's Shareholders (Ameridose LLC, GDC Properties Management, LLC, and Medical Sales Management, Inc.) (the "Affiliated Insiders") (together, the "Insiders").6 Through the Adversary Proceeding, the plaintiff Creditors' Committee (eventually substituted by the Trustee) sought recovery of millions of dollars from the Insiders on account of alleged fraudulent transfers, preferential transfers, and breaches of fiduciary duty. While the Adversary Proceeding provided some hope for the recovery of funds to augment the bankruptcy estate's minimal cash reserves, it was clear from the outset that the litigation would be hotly contested and would consume vast estate resources over the months, or even years, that the litigation was likely to drag.
Approximately one month after the bankruptcy case filing, the UST moved for the appointment of a Chapter 11 trustee, to which the debtor acceded. On January 25, 2013, this Court approved the UST's appointment of Paul D. Moore as Chapter 11 trustee.7 The Trustee's initial task was to make the critical decision of which trajectory the case should take. Given foreboding of the bankruptcy estate's likely administrative insolvency, would the best course of action be to quickly liquidate NECC's existing assets (of which there were few), either through the Chapter 11 process or conversion to Chapter 7, leaving NECC's victims to seek recovery against third parties through the MDL proceeding or lawsuits in other forums? Or should the Trustee pursue a more complicated strategy of attempting to provide a greater and more equitable recovery for NECC's victims through the Chapter 11 process? True, the pending Adversary Proceeding against the Insiders had some potential for bringing additional moneys into NECC's bankruptcy estate, but the prospects for a successful outcome in that proceeding were far from certain and would most certainly result in substantial litigation expenses. And while NECC did carry some insurance, its insurers were adamant that certain policy exceptions applied and they threatened to deny all coverage in connection with the Outbreak.
Ultimately, the Trustee determined, unlikely though it appeared at the outset, that he could chart a course using the Chapter 11 proceedings that would lead to a meaningful recovery for the victims. With an eye toward other mass tort bankruptcies, the Trustee decided that the best hope for an equitable recovery for victims lay in attempting to create a pool of funds for ratable distribution by reaching settlements not only with NECC and its Insiders and insurers, but also with third-party defendants. In consideration for their contributions, however, any third-party contributors would certainly demand that their potential civil liability on account of the Outbreak be released and further litigation against them permanently enjoined.
While such a strategy has been successful in other mass tort cases, those courts which have approved the release of nondebtor third parties from liability have required truly exceptional factual circumstances and have set forth a series of stringent legal requirements.8 In addition, the NECC bankruptcy case posed several difficulties not present to the same degree in other cases where releases had been granted in exchange for contributions from third parties. Here, the debtor was no longer operating and would be unable to make ongoing contributions to any fund established for victims; full payment of all creditor claims was unlikely even with substantial contributions from other parties; NECC's insurers appeared to have plausible defenses against covering damages related to the Outbreak; and the potential liability of third parties was...
To continue reading
Request your trial