Mallinckrodt PLC v.

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 23-1111
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In re MALLINCKRODT PLC,
Debtor
SANOFI-AVENTIS U.S. LLC,
Appellant
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On Appeal from the United States District Court
for the District of Delaware
(D.C. No. 1:21-cv-01636)
Circuit Judge: Honorable Thomas L. Ambro,
sitting by designation
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Argued: December 11, 2023
Before: BIBAS, PORTER, and FREEMAN, Circuit Judges
(Filed: April 25, 2024)
Stuart M. Brown
R. Craig Martin [ARGUED]
DLA PIPER
1201 N. Market Street
Suite 2100
Wilmington, DE 19801
Ilana H. Eisenstein
DLA PIPER
1650 Market Street
One Liberty Place, Suite 5000
Philadelphia, PA 19103
Counsel for Appellant
Melissa Arbus Sherry [ARGUED]
LATHAM & WATKINS
555 11th Street NW
Suite 1000
Washington, DC 20004
Michael J. Merchant
Amanda R. Steele
RICHARDS, LAYTON & FINGER
920 N. King Street
One Rodney Square
Wilmington, DE 19801
Counsel for Debtor-Appellee
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OPINION OF THE COURT
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BIBAS, Circuit Judge.
Creditors take on risks. When a debtor goes bankrupt, those
risks can become reality. Years ago, Sanofi sold its rights in a
drug to Mallinckrodt in exchange for $100,000 plus a perpetual
annual royalty. Though the drug was a hit, Mallinckrodt filed
for bankruptcy and tried to turn Sanofi’s right to royalties into
an unsecured claim. That right is contingent and unliquidated.
Yet under the Bankruptcy Code, it is still a claim. And because
that claim arose when the parties signed the drug-rights contract,
it can be discharged in bankruptcy. So we will affirm.
I. THE AGREEMENT TO SELL ACTHAR GEL
Acthar Gel relieves chronic inflammation and treats auto-
immune diseases. In 2001, Sanofi sold Mallinckrodt the rights
to the drug outright. Mallinckrodt paid Sanofi $100,000 up
front and promised a perpetual royalty of 1% of all net sales
over $10 million per year. Sanofi took a security interest in the
up-front payment but not the royalty.
For years, the annual royalty was immense. By 2019, sales
hit almost one billion dollars. But then Mallinckrodt filed for
bankruptcy. Now it seeks to discharge all future royalty pay-
ments and to keep selling the drug royalty-free, leaving Sanofi
with only an unsecured claim.
The bankruptcy court approved Mallinckrodt’s discharge.
It held that because Sanofi had fully performed its side of the
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bargain by transferring ownership outright decades earlier, the
contract was not executory. It also held that Sanofi’s remaining
contractual right to future royalties was an unsecured, contin-
gent claim, so Mallinckrodt could discharge it. The District
Court affirmed. We review these rulings of law de novo. In re
Grossman’s Inc., 607 F.3d 114, 119 (3d Cir. 2010) (en banc).
The bankruptcy court had jurisdiction under 28 U.S.C.
§§ 157(b) & 1334. The District Court had jurisdiction under
§ 158(a)(1). And we have jurisdiction over Sanofi’s appeal
under §§ 158(d)(1) & 1291.
II. THE ROYALTIES CAN BE DISCHARGED IN BANKRUPTCY
Bankruptcy settles debts, distributing a debtor’s assets
among competing creditors. But a creditor with a bankruptcy
claim might recover only pennies on the dollar through the
bankruptcy process. Yet if its entitlement survives bankruptcy,
and the debtor becomes profitable again, the creditor could
then collect in full.
The Bankruptcy Code defines a claim broadly as any “right
to payment.” 11 U.S.C. § 101(5)(A). And if a claim for money
arises before the bankruptcy ends, the debtor pays only what it
can in bankruptcy—nothing more. § 1141(d)(1)(A). Because
Sanofi’s right to payment arose before Mallinckrodt filed for
bankruptcy, its royalties are dischargeable in bankruptcy.
A. The royalties are a contingent, unliquidated
contract claim
Sanofi argues that the future royalties are too indefinite to
be a claim. In any year, Mallinckrodt pays royalties only if it
sells more than ten million dollars’ worth of Acthar Gel. So we
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never know in advance whether there will be royalties or how
much they will be. But Sanofi’s argument fails because the
Bankruptcy Code allows for claims that are both contingent
and unliquidated. § 101(5)(A).
Sanofi has a contingent claim to future royalties. We give
the term “claim” in the Bankruptcy Code “the broadest availa-
ble definition.” Johnson v. Home State Bank, 501 U.S. 78, 83
(1991). A contingent claim is one that “has not accrued and
[that] is dependent on some future event that may never hap-
pen.” Contingent Claim, Black’s Law Dictionary (5th ed.
1979). So, to be contingent, a right to payment must not be
guaranteed until something triggers it. And that trigger must be
contemplated by the contract. See Contingent (def. 9), Oxford
English Dictionary (2d ed. 1989) (“Dependent on a pre-
contemplated probability….”); cf. In re Manville Forest
Prods. Corp., 209 F.3d 125, 128–29 (2d Cir. 2000). Here, the
contractual trigger is express: once Mallinckrodt sells $10 mil-
lion in Acthar Gel, it must start paying Sanofi royalties. The
royalties are contingent on the sales.
Sanofi’s contingent claim is also unliquidated. Though
Sanofi complains that the amount of royalties is unknown, that
uncertainty does not place the royalties outside the broad defi-
nition of “claim.” Rather, the Code explicitly covers claims
that are unliquidated, meaning “[n]ot ascertained in amount;
not determined.” Unliquidated, Black’s Law Dictionary (5th
ed. 1979). Thus, though the royalties are contingent and
unliquidated, they are a claim.
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B. Like most contract claims, this one arose with
the agreement
Next, Sanofi insists that bankruptcy cannot resolve its roy-
alties claim because it will not exist until Mallinckrodt hits the
sales trigger each year. Bankruptcy cannot discharge claims
that have not yet arisen. 11 U.S.C. § 1141(d)(1)(A). But a claim
can arise before it is triggered. Confusing those concepts reads
“contingent” out of the Code’s broad definition of claims.
Sanofi tries to analogize its claim to a tort claim. In tort, a
post-bankruptcy injury is a contingent claim if the claimant
was exposed to the debtor’s injurious product or conduct be-
fore the bankruptcy filing. In re Grossman’s, 607 F.3d at 125.
We require pre-bankruptcy exposure so that claimants could
know about their claims before losing their chance to sue. Id.
at 125–26. Applying that rule here, Sanofi says it will not be
exposed to Mallinckrodt’s injurious conduct until Mallinckrodt
hits the sales trigger and refuses to pay.
But the tort analogy is inapt. A contract embodies the par-
ties’ consent. The contracting parties not only know of their
contingent right to payment, but also negotiate for it. So rather
than analogize to torts, we rely on the regular rule: most con-
tract claims arise when the parties sign the contract. See St.
Catherine Hosp. of Ind., LLC v. Ind. Fam. & Soc. Servs. Admin.,
800 F.3d 312, 316 (7th Cir. 2015); In re THC Fin. Corp., 686
F.2d 799, 802–04 (9th Cir. 1982). That is when the parties fix
their liability—even if it is still unliquidated or contingent. See
In re U.S. Pipe & Foundry Co., 32 F.4th 1324, 1330 (11th Cir.
2022) (Pryor, C.J.).
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Once the parties agree to a contingent right to payment, the
claim exists. And once the claim exists, bankruptcy can reach
it. We have said this before in dicta in In re M. Frenville Co.,
744 F.2d 332, 337 (3d Cir. 1984). And though In re Gross-
man’s overruled Frenville’s holding, its discussion of contract
claims is correct.
A few contract claims may not fit this general rule. For
instance, we might hesitate to find a pre-bankruptcy claim if a
debtor’s post-bankruptcy conduct is so unexpected that the
contract could not give the creditor notice. See In re Castellino
Villas, A.K.F. LLC, 836 F.3d 1028, 1035–36 (9th Cir. 2016).
Or we might worry if a debtor games bankruptcy, wielding it
as both a sword and a shield. See In re Ruben, 774 F.3d 1138,
1141 (7th Cir. 2014); Siegel v. Fed. Home Loan Mortg. Corp.,
143 F.3d 525, 533 (9th Cir. 1998); In re Sure-Snap Corp., 983
F.2d 1015, 1018 (11th Cir. 1993). In both circumstances, fair-
ness might compel special treatment.
But Sanofi confuses these exceptions for the rule. It argues
that a claim does not exist in bankruptcy if it must be triggered
by a debtor’s post-bankruptcy choices, as opposed to an
“extrinsic event.” Yet nothing in the statutory text or Sanofi’s
out-of-circuit case citations supports such a broad carve-out.
And because this case does not involve lack of notice or games-
manship, the equities do not call for an exception. Sanofi knew
that Mallinckrodt’s royalties would be contingent on its sales.
By selling the drug, Mallinckrodt is doing exactly what the
contract “contemplat[es].” Castellino Villas, 836 F.3d at 1037.
So once bankruptcy discharges Sanofi’s claim, it cannot collect
future royalties. See In re Weinstein Co. Holdings, 997 F.3d
497, 506 (3d Cir. 2021).
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To protect itself, Sanofi could have structured the deal dif-
ferently. It could have licensed the rights to the drug, kept a
security interest in the intellectual property, or set up a joint
venture to keep part ownership. But it chose not to do so.
Instead, it sold its rights outright, leaving itself with only a
contingent, unsecured claim for money. And under the Bank-
ruptcy Code, that claim is dischargeable.
*****
Bankruptcy frees debtors from lingering claims like this
one. Sanofi kept no property or security interest in Acthar Gel,
but only a contractual right to a royalty. Because that contin-
gent claim arose before Mallinckrodt went bankrupt, it is dis-
chargeable in bankruptcy. We will thus affirm.
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