Liberty Medical Supply Highlights the Impact of the Alleged Inequitable Conduct of Express Scripts’ Subsidiary, Medco Health Solutions, On Liberty’s Chapter 11 Exit Strategy
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The Company highlighted today a recent complaint that it filed with the
Among other remedies, Liberty seeks damages relating to a series of transactions and over
Liberty issued the following statement with respect to the substance of its complaint against Medco:
The Liberty Board and management team believe it is important to set the record straight with respect to the causes, effects and outlook of our restructuring, particularly with respect to the inequitable conduct taken by Medco leading up to the chapter 11 cases and the impact that conduct has in connection with the Liberty's emergence from chapter 11.
In early
April 2012 , Medco, which includedPolymedica and the Liberty business, was acquired byExpress Scripts Holding Company for$29.1 billion . Subsequently, inDecember 2012 , Medco soldPolymedica and the Liberty business to the Liberty management team for$30 million in cash. Less than three months later, Liberty found itself unable to survive without the immediate intervention of theBankruptcy Court and was forced into bankruptcy.It is our view that Medco was aware that Liberty would be unable to survive as a stand-alone company should Medco fail to perform as promised in connection with the management buyout. We are further disappointed that the inequitable conduct and overreaching that we have alleged against Medco occurred under the oversight of Medco's parent company,
Express Scripts , which claims a strong commitment to ethical business practices. Indeed,Express Scripts has itself benefited from Medco's actions: in late 2012 it recorded an impairment charge of$23 million in connection with the sale of Liberty andPolymedica , and it is currently pursuing an additional tax write-off of approximately$545 million to reflect a claimed loss on the sale.Liberty's complaint details that in
October 2012 , with preparations for a sale of Liberty already underway, Medco causedPolymedica to redeem a large portion of Medco's equity in a series of transactions that leftPolymedica and its subsidiaries insolvent. Specifically, we allege that Medco cancelled more than$900 million in outstanding debt that it owed to Liberty and saddled those entities with an additional$200 million in new debt due to Medco. It is alleged that Medco's actions reduced Liberty's stockholder equity from more than$1.3 billion to negative$80 million in the months leading to its sale to management, all in violation of state and federal laws. In addition, from October throughDecember 2012 , Liberty alleges that Medco causedPolymedica to transfer approximately$27 million in cash from Liberty's accounts for which Liberty received no cognizable value and at a time when Liberty was insolvent.Liberty alleges that Medco prepared certain financial statements that overstated the value of the Liberty business by more than
$26 million . It was only after the filing of the chapter 11 cases that Liberty's management learned that more than$42 million listed in accounts receivable were uncollectable, that the value of Liberty's property and equipment was overstated by$9 million and that Liberty owed potentially millions of dollars in undisclosed credit payables.Liberty also alleges that Medco, in addition to breaches of various financial warranties, also breached its contractual obligations under the purchase agreement to provide certain vital assets and payments that were and remain critical to Liberty's operations. Among other things, Medco:
- Did not deliver software that was essential to Liberty's accounting and management functions, causing a
$4 million loss;- Refused to indemnify Liberty officers in lawsuits arising out of pre-closing activity; and
- Failed to compensate Liberty management for third-party expenses associated with the transaction.
Most significantly, despite the urging of its own accounting staff, the Company alleges that Medco has refused to pay pre-closing taxes for
Polymedica leaving Liberty on the hook for millions of dollars in taxes.Liberty's complaint seeks to compel Medco to comply with the purchase agreement, to recover funds associated with the allegedly fraudulent transfers of value from Liberty and to subordinate and disallow Medco's claims against Liberty. Should Liberty be successful in its case, the Company intends to use this additional liquidity to pay its creditors and support its business of providing lifesaving treatments to patients who depend on Liberty.
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