The PRACS Bankruptcy: the Collision between Health Law and - PDF document

The PRACS Bankruptcy: the Collision between Health Law and Bankruptcy and How Cooperation Saved the Day. 1 PRACS Institute, LLC provided clinical research and bioanalytic services to, inter alia , pharmaceutical firms. On or shortly before March 22, 2013 the PRACS Institute, LLC and certain affiliates (collectively, “PRACS Debtors”) 2 abruptly ceased operations. On March 22, 2013, they each filed a voluntary petition for relief, not for reorganization under chapter 11 of the Bankruptcy Code, but for liquidation under chapter 7 in the United States Bankruptcy Court for the Western District of Texas, San Antonio Division (“Bankruptcy Court”). Jose C. Rodriguez (“Trustee”) was appointed as chapter 7 Trustee for all of the PRACS Debtors. The PRACS’ Debtors' shut-down and bankruptcy filings significantly impacted numerous stakeholders. Employees were suddenly without income. Participants in the research trials similarly lost income and, in some cases, experimental treatment. On top of their impact on stakeholders, the shut down and bankruptcy filings created a venue for a potentially nasty collision between the policies underlying bankruptcy and health law. None of the stakeholders had as much to lose from such a collision as the research sponsors, who were primarily pharmaceutical companies. They had invested millions of dollars in clinical trials, many of which were ongoing when the PRACS Debtors ceased operations. Completion of the clinical trials was necessary before the pharmaceuticals and biologics could be marketed. Many of the research sponsors, therefore, needed to retrieve the samples used and/or created in the clinical trials of their pharmaceuticals and biologics and the records of those trials, which all parties agreed was their property, and have them transferred to entities that could complete the trials. Because time was of the essence for the marketing of some of those pharmaceuticals and biologics, the retrieval and transfer of the research sponsors’ property had to be accomplished as quickly as possible. However, extensive and complex FDA regulations govern (i) the conduct of those clinical trials, (ii) the maintenance, preservation and security of biological and pharmaceutical samples created and/or used in those clinical trials; and (iii) the creation and maintenance of study files, investigative reports and other records in connection with these clinical trials. To ensure the integrity of clinical trials, FDA regulations also prohibit the sponsor from having possession of certain materials or records created or used in connection with a clinical trial; those materials and records must be in the possession of third parties. 3 Failure to comply with any of those complex regulations could invalidate a clinical trial (whether completed or ongoing), requiring the research sponsor to commence new clinical trials. Research sponsors were poaced 1 For purposes of full disclosure, Gibbons P.C. was counsel to one of the Funding Sponsors which was a party to the Global Agreement described herein. This article expresses the views of the author only. 2 The PRACS Debtors include (i) PRACS Institute, LLC; (ii) PRACS Institute Holdings, LLC; (iii) PRACS Institute Management, LLC; (iv) PRACS Institute Canada B.C., Ltd.; (v) PRACS Institute San Antonio, LLC; and (vi) PRACS Institute, Miami, LLC. The PRACS Debtors’ bankruptcy cases are being jointly administered under Case No. 13-50743. 3 FDA regulations requires samples and records to be retained to permit review of a clinical trial by the FDA, such as if an approved drug subsequently proves to have unanticipated and significant side effects. Newark New York Trenton Philadelphia Wilmington

in a catch-22 situation. On the one hand, they wanted to retrieve and transfer their property on an expedited basis. On the other hand, the retrieval and transfer had to be accomplished properly (and not too quickly) to avoid invalidating studies, whether ongoing or completed. The interests of PRACS’ Debtors’ secured lenders, however, were very different from, and potentially inconsistent with, those of the research sponsors. The secured lenders’ claims exceed $80 million and were secured by substantially all of the PRACS Debtors’ assets, which all parties agree are likely worth substantially less than $80 million. The secured lenders’ interest was in the expeditious liquidation of the PRACS Debtors’ assets so that they could recover a portion of their claims. The lenders desire for an expeditious liquidation of the PRACS Debtors potentially clashed with the research sponsors’ interest in a retrieval and transfer of their property in a manner that complied with FDA regulations. Unfortunately for the research sponsors, chapter 7 of Bankruptcy Code privileges the recovery by secured creditors of their collateral. Nevertheless, the secured lenders had an interest in an FDA-compliant retrieval and transfer of the research sponsors’ property, because they had no interest in incurring the expense of (and regulatory liabilities inherent in) the proper disposal of the research sponsors’ property. Caught in the middle of this perfect storm was the chapter 7 Trustee. As a chapter 7 trustee, he was charged with expeditiously administering the PRACS Debtors’ bankruptcy estates for the benefit of their creditors. In other words, he was supposed to gather and sell the PRACS Debtors’ assets as quickly and possible and distribute the proceeds to creditors according to the priorities set forth in the Bankruptcy Code. At first blush, his interests appeared more closely aligned to those of the secured lenders than the research sponsors. However, the Trustee lacked unencumbered funds with which to liquidate the PRACS Debtors’ estates; the lenders held a lien on all of the PRACS Debtors’ funds. He also faced the daunting task of complying with various federal and state statutes and regulations governing the research sponsors’ property, including (i) FDA regulations, (ii) regulations governing controlled substances ( i.e ., certain of the research sponsors’ pharmaceuticals); and (iii) regulations governing the maintenance and disposal of radioactive waste. It was not surprising that the chapter 7 Trustee filed a motion to dismiss the cases. The dismissal of the cases, however, would have resulted in a free-for-all between sponsors seeking to retrieve their property and the secured lenders seeking to realize on their collateral. To avoid such a free-for-all, two dozen parties (and, surprisingly, their even more numerous attorneys) were able to cooperate to provide for an expeditious, but FDA-compliant, retrieval of transfer of the research sponsors’ property and for an expeditious liquidation of the PRACS Debtors’ estates. The Trustee, certain research sponsors and the secured lenders memorialized this cooperation in a Global Agreement. Pursuant to the Global Agreement, fifteen of the research sponsors (the so-called “Funding Sponsors”) and the secured lenders will provide up to $3.5 million in funding for the wind down of the PRACS Debtors’ estates, including the retrieval and transfer of the research sponsors’ property. For their part, the secured lenders have agreed to the Trustee’s use of cash collateral up to approximately $2 million. The Funding Sponsors have agreed to advance up to $1.5 million to the Trustee. The Funding Sponsors, the secured lenders and the Trustee have agreed to enter into mutual releases. The Trustee’s release of the Funding Sponsors will preserve his claims for pre-petition accounts payable owed by Funding Sponsors, while preserving the Funding Sponsors right to offset their Newark New York Trenton Philadelphia Wilmington

pro-rata shares of the Funding Sponsors' loan against any pre-petition payables owed the debtors. With the secured lenders’ consent, the Trustee and the Funding Sponsors agreed to retain Lachman Consulting Services, Inc. to coordinate and effectuate the retrieval and transfer of the Funding Sponsors’ property pursuant to a Master Protocol between Lachman and the Funding Sponsors that was formulated both to expedite the retrieval and transfer of the Funding Sponsors' property and to ensure that the retrieval and transfer is FDA-compliant. Because time was of the essence and as further evidence of their election to cooperate with each other, the Trustee, the Funding Sponsors and the secured lenders incorporated their Global Agreement in the terms of the order on the Trustee’s emergent motion to, inter alia , approve the Global Agreement. The Bankruptcy Court approved the Global Agreement by an order dated May 24, 2013. The entry of the Order is proof that parties-in-interest in a bankruptcy case, albeit with inconsistent interests, can – and should – cooperate for their respective benefits and the benefit of the bankruptcy estates. Newark New York Trenton Philadelphia Wilmington