Tomer D. Elkayam
Loyola University Chicago School of Law, JD 2024
In the midst of a lawsuit brought by the Department of Justice (“DOJ”), Rite Aid Corporation announced it had filed for Chapter 11 Bankruptcy protection after agreeing with creditors on a financial restructuring plan. Rite Aid, one of the “big three” pharmaceutical retailers alongside CVS and Walgreens, has previously attempted to revamp its stores before ultimately deciding to file for bankruptcy protection. But what happens to lawsuits filed against the company? Like the DOJ, there are thousands of individuals, cities, counties, and states that have filed lawsuits against the pharmaceutical giant for their alleged handling of the opioid crisis which has plagued the country.
Rite Aid’s fall from grace is significant for a public company. At its peak, Rite Aid operated over 5,000 stores and employed over 100,000 people, which now stands at less than 2,500 stores and 50,000 employees. In its bankruptcy filing, the company listed $4 billion of debt, and a nearly $1 billion gulf between assets and liabilities (pointing in the wrong direction). In an earnings report, it claimed losses of over a billion dollars in the months leading up to the filing. Rite Aid owes over $1.1 billion to its top five unsecured creditors, and the list of unsecured creditors is likely to grow.
Rite Aid’s creditors
In American bankruptcy law, claimants with open lawsuits against a corporation may become unsecured creditors when that company files for bankruptcy. Under 11 U.S. Code § 362, bankruptcy triggers an automatic stay which is imposed against all open lawsuits, among other injunctions. The Internal Revenue Service calls this process “rehabilitative,” as it gives companies a “breathing period” to create a plan to repay creditors.
Chapter 11 stands out from chapters 7 and 13 of the bankruptcy code as it does not strictly require a “proof of claim” to be listed as a creditor. A proof of claim is a legal document that must be filed by a claimant who is not listed in a company’s schedule as a creditor. As such, parties with open claims against Rite Aid must pay close attention to the company’s schedule as it is released during bankruptcy proceedings. Individual claimants are not typically listed as creditors and must quickly consider submitting their claims. Once the schedule of creditors is finalized, the company can ask the court to estimate the value of claims that are “not apparent” at the time of filing. Afterwards, a reorganization plan is approved, and claimants typically present their claims to a trust organized to oversee a settlement plan.
Besides filing proofs of claim, lawsuits may also be removed directly to bankruptcy court and in some cases may continue independently. Though typically, the cases that are allowed to continue amid Chapter 11 proceedings are those brought by the government to “enforce police powers.”
What similar cases show
A company representative said Rite Aid is using Chapter 11 to “resolve litigation claims in an equitable manner.” But what does that look like on a practical level? Several notable bankruptcies help paint a picture.
In 1995, Dow Corning, filed for Chapter 11 bankruptcy amidst a wave of lawsuits claiming the company manufactured breast implants that created severe health problems. Dow Corning had agreed to settle a large number of claims but faced additional lawsuits outside the proposed settlement. After years of litigation attempting to oppose a settlement plan, the Chapter 11 proceedings led to the establishment of a trust which paid out settlements to nearly 250,000 individuals.
In 2019, the Pacific Gas & Electric Company (“PG&E”) filed for Chapter 11 bankruptcy to restructure the company in the aftermath of fires that ravaged California, which were attributed to faulty equipment operated by PG&E. All pending litigation against the company was automatically stayed, allowing the company to create a trust to settle claims that had mounted before bankruptcy. The “Fire Victims Trust” was funded by a mix of cash and company stock. It has since been claimed that the issuance of stock ultimately underfunded the trust due to the company’s low valuation.
Unlike the bankruptcies of Purdue Pharma, Mallinckrodt, and Insys Therapeutics, Rite Aid made its filing without an explicit settlement agreement with opioid plaintiffs. Some speculate this is due to the Supreme Court’s decision to temporarily block Purdue Pharma’s own $6 billion settlement plan with victims of the opioid crisis. Nonetheless, as Rite Aid quickly closes hundreds of stores and settles with medical suppliers, plaintiffs of opioid cases wait with more questions than answers.