March 12, 2020 – Privately-held Rochester Drug Cooperative, Inc. (“RDC” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Western District of New York, lead case number 20-20230. The Debtor, a wholesale regional drug cooperative, is represented by Stephen A. Donato of Bond, Schoeneck & King, PLLC. Further board-authorized engagements include (i) Huron Consulting Services LLC as financial advisor and (ii) Epiq as claims agent.
The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $100.0mn and $500.0mn. The Kinney Declaration (defined below) notes as to assets and liabilities: "As of the Petition Date, the Debtor estimates that its assets are valued at approximately $70,000,000, including accounts receivable totaling approximately $50,000,000…the Debtor owes its Secured Lenders approximately $32,300,000, owes the United States $10,000,000 under the DPA, and has unsecured creditors asserting claims totaling approximately $71,800,000." Except in respect of the DPA, this amount does not include any liability in respect of numerous, ongoing, opioid-related lawsuits.
Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) [name 1] ($), (ii) [name 2] ($) and (iii) [name 3] ($).
The Debtor's annual revenue for the 2019 fiscal year was $1.49bn, and its annual revenue is projected to decline to approximately $790.0mn for the current fiscal year ending on March 31, 2020.
Goals of the Chapter 11 Filing
Absent chapter 11 relief, the Debtor projects that it will not have sufficient cash flow to continue its operations over the long term. The Debtor has concluded that the best option to protect the value of its assets is to effect an organized wind-down of the operations in Chapter 11. During this process, the Debtor will also continue the orderly collection of its outstanding accounts receivable in a further effort to generate funds for the benefit of its creditors.
Events Leading to the Chapter 11 Filing
In January, the Debtor announced it would no longer distribute "controlled pharmaceuticals," stating that "the ever-increasing expenses associated with the legal and regulatory compliance for this segment of drugs are simply not sustainable,” and adding that the decision was "unrelated" to still unresolved April 2019 criminal charges brough against former executives or ongoing litigation. "This was a business based decision, not a litigation based decision” a company spokesperson commented. The two, however, are largely intertwined. The decision to stop selling controlled substances may indeed have related to the need to cut overheads by a company whose annual revenues had declined by $600.0mn; but that decline was itself inexorably linked to a drop off in the sale of opioids following investigations, litigation and arrests.
In a declaration in support of the Chapter 11 filing (the “Kinney Declaration”), John T. Kinney, the Debtor's Interim Chief Executive Officer and Chief Financial Officer, detailed the events leading to the Debtor's Chapter 11 filing. The Kinney Declaration states: The Debtor's annual revenue for the 2019 fiscal year was $1.49bn, and its annual revenue is projected to decline to approximately $790.0mn for the current fiscal year ending on March 31, 2020….During the past several months, the Debtor's deteriorating liquidity situation has prevented it from making timely payments to vendors and it has had to forgo rebates and other discounts which have typically generated at least two-thirds of the Debtor's gross profit.
Further impacting the Debtor's liquidity was the decision by the Debtor's insurer, Hiscox Insurance Company, Inc. ('Hiscox'), to disclaim coverage under the Debtor's liability policy such that the Debtor has been required to self-fund its attorneys' fees and defense costs in the Pending Actions (defined below). To date, the Debtor has incurred attorneys' fees and costs aggregating over $1,620,000 in defense of these actions. The Debtor has filed a lawsuit against Hiscox regarding the coverage….
In addition to the foregoing, the Debtor's maximum revolving commitment under its Credit Agreement with the Secured Parties…was reduced on May 31, 2019 and September 9, 20 I9 as the Debtor's declining financial performance triggered numerous defaults under the Credit Agreement. The liquidity available to the Debtor on a weekly basis under the Credit Agreement was determined by a borrowing base calculation based upon certain percentages of eligible accounts receivable and inventory. The amount of availability expanded or contracted depending upon the receivables and inventory reported in the Debtor's weekly borrowing base certificate.
Since December 16, 2019, the Debtor has been unable to purchase sufficient levels of inventory using its existing liquidity, further exacerbating the declining sales and a loss of customers. The reduced sales have resulted in a lower amount of accounts receivable, which further reduced the eligible borrowing base. The declining availability caused by the reduced borrowing base further impacted the Debtor's ability to operate its business."
In recent years, the Debtor has been involved in numerous lawsuits relating to its sale of opioids and other controlled substances. These include:
- 2015 SDNY Civil Enforcement Action. Filed and simultaneously settled civil enforcement action against the Debtor based upon the Debtor's failure to electronically report certain drug sale activity to the Drug Enforcement Administration ("DEA"). Through a consent decree entered on July 8, 2016, the Debtor settled the action by paying a civil penalty o $360k.
- 2019 SDNY Criminal and Civil Enforcement Actions. Actions stemming from the Debtor’s opioid sales ultimately leading to an April 2019 Deferred Prosecution Agreement ("DPA") pursuant to which, inter alia, the Debtor (i) consented to the filing of a three-count criminal Information against it, (ii) stipulated to a Statement of Facts containing admissions regarding its past conduct and (iii) agreed to forfeit the sum of $20.0mn to the United States (the "Stipulated Forfeiture Amount "). Half of the $20.0mn was paid in an initial installment with the Debtor agreeing to make 5 subsequent annual payments of $2.0mn. On February 27, 2020, the U.S. Attorney served the Debtor with a default notice under the U.S. Civil Settlement based on the Debtor's failure to make the February 1, 2020 installment of the Stipulated Forfeiture Amount.
- New York Action. On October 6, 2017, over fifty New York counties, towns and municipalities commenced an action in Suffolk County Supreme Court against seventeen pharmaceutical manufacturers, eleven pharmaceutical distributors (including the Debtor) and four individuals (collectively, the "State Court Defendants") to recover damages related to the State Court Defendants' manufacture and sale of opioid medications to residents of New York State (the "New York Action"). On August 14, 2018, the State of New York commenced a separate action against the State Court Defendants in Suffolk County Supreme Court seeking regulatory/injunctive relief and claims for monetary damages incurred on behalf of the State of New York.
- Federal Multi-District Litigation. The Debtor has also been named a defendant in numerous cases consolidated within the federal multi-district National Prescription Opiate Litigation pending in the United States District Court for the Northern District of Ohio (the "Ohio MDL"). The actions consolidated into the Ohio MDL were commenced by counties, municipalities and Native American nations against numerous pharmaceutical manufacturers, distributors and store chains involved in the sale and distribution of opioid products. The cases filed against the Debtor are stayed at present as earlier-tracked cases proceed.
- Doud Litigation. On April 6, 2018, the Debtor's former CEO, Laurence F. Doud, III ("Doud") commenced an action in the United States District Court for the Western District of New York against the Debtor alleging wrongful termination and against the Debtor's former CEO alleging defamation. The Debtor filed counterclaims against Mr. Doud, and Mr. Doud filed third-party claims against the Debtor's individual board members and the board as an entity. Following the board's motion to dismiss the third-party claims against it as an entity, Mr. Doud voluntarily dismissed those third-party claims. On July 12, 2019, upon the motion of the U.S. Attorney's Office for the Southern District of New York, the Court entered an Order staying this case until the resolution of the criminal case against Mr. Doud.
- Hiscox Litigation. Based on the admissions made by the Debtor in the DPA, the Debtor's liability insurer, Hiscox, declined to provide the Debtor with coverage or to fund the defense costs related to the New York Action, the Ohio MDL, and the various individual wrongful death and personal injury actions. As a result, the Debtor has self-funded all its attorneys' fees and defense costs from operations.
- Fuller Litigation. On April 27, 2019, the plaintiffs in the case Deborah Fuller as Administrator of the Estate of Sarah Fuller v. Jnsys Therapeutics, Inc. et al., pending in U.S. District Court for the District of New Jersey, filed a motion seeking leave to file an amended complaint adding the Debtor as a defendant in this wrongful death action. On July 16, 2019, the Court granted the plaintiffs' motion to add the Debtor as a defendant, without prejudice to the Debtor filing a motion to dismiss. The Debtor filed a motion to dismiss on August 7, 2019, which remains pending
- Individual Personal Injury Actions. The Debtor is named as a defendant, along with several other defendants, in six separate actions alleging wrongful death or personal injury involving individuals' opioid use that are currently pending in New Hampshire and Rhode Island. Finally, the Debtor is also named as a defendant in an action commenced in the New York Supreme Court, Bronx County by a plaintiff alleging a theory of liability for the Debtor based on respondeat superior. The Complaint alleges personal injuries stemming from an automobile accident caused by a former employee of the Debtor.
Prepetition Capital Structure
The Debtor's prepetition capital structure includes a senior secured credit facility provided by Manufacturers & Traders Trust Company ("M&T Bank") that consists of a revolving credit facility governed by a borrowing base formula in the original principal amount of $170.0mn and a $5.0mn term loan. As a result of the Debtor's financial condition, multiple financial covenant defaults under the Credit Agreement were triggered in March 2019. Since April 2019, the Debtor's principal balance due in respect of this credit agreement has reduced been from $146.0mn to $32.3mn. The credit facility is secured by liens on substantially all of the Debtor's assets.
About the Debtor
The Debtor is an independently owned New York cooperative corporation formed in 1905 and incorporated in 1948 with a principal office and place of business located at 50 Jet View Drive, Rochester, New York 14624. The Debtor's principal business is to warehouse, merchandise, and then distribute, on a cooperative basis, drugs, pharmaceutical supplies, medical equipment and other merchandise commonly sold in drug stores, pharmacies, health and beauty stores, and durable medical equipment businesses. It is a wholesale regional drug cooperative that operates as both a buying cooperative and a traditional drug distribution company created for the purpose of helping independent pharmacies compete in the current healthcare environment. The Debtor recently ranked as the sixth largest pharmaceutical distributor in the United States and is owned and directed by approximately 307 stockholding independent pharmacists and pharmacies.
The Debtor distributes branded and generic drugs, health and beauty products, and home health care products to a ten-state northeast regional market composed of New York, Pennsylvania, New Jersey, Ohio, Connecticut, Massachusetts, Vermont, New Hampshire, Rhode Island and Maine. Approximately 70% of the Debtor's total revenues come from New York State, with approximately 38% of that revenue coming from Downstate New York's metropolitan market. The Debtor owns two distribution facilities, one located in Rochester, New York (the "Rochester Facility") and the other in Fairfield, New Jersey (the "Fairfield Facility"), from which it serviced approximately 1,400 active customers, including community retail pharmacies, long-term care pharmacies, and home health care stores. The Debtor is in the process of consolidating its operations at the Rochester Facility. The Debtor currently employs approximately 75 employees at the Rochester Facility and approximately 75 employees at the Fairfield Facility. All the Debtor's employees are non-union employees.
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