|
Abstract: The police power exception to the automatic stay recently made the news, thanks to events in Rite Aid’s bankruptcy case. Although Rite Aid filed for bankruptcy in October of last year, the events precipitating the police power exception issue arose several months earlier. In March of 2023, the U.S. Department of Justice (“DOJ”) sued Rite Aid in Ohio district court, alleging that the drugstore chain’s pharmacists had ignored so-called “red flags”—signs that a patient might be struggling with addiction—and had illegally filled prescriptions for highly addictive opioid medications. Rite Aid’s October 2023 bankruptcy filing brought a halt to this lawsuit, with the DOJ itself indicating that it was amenable to a “brief pause” in the litigation. However, negotiations between the two sides over when and how the Ohio district court litigation should resume broke down fairly quickly, and in November 2023, the DOJ moved to lift the automatic stay over Rite Aid’s objection in order to allow the suit to proceed.
In response, Rite Aid asked Judge Michael Kaplan of the U.S. Bankruptcy Court for the District of New Jersey not to lift the stay and to prevent the DOJ lawsuit from continuing during the bankruptcy case. In support of its argument, Rite Aid stressed that keeping the lawsuit on hold would put the government on equal footing with other opioid plaintiffs whose lawsuits were also stayed by the bankruptcy, thus promoting the bankruptcy policy of equality of treatment among similarly situated creditors. For its part, the DOJ has claimed that the Ohio litigation falls within the police power exception to the automatic stay, and indeed, negotiations between the DOJ and Rite Aid broke down precisely because the DOJ wanted Rite Aid to acknowledge the applicability of the exception before the DOJ would agree to a continued stay of the lawsuit. Interestingly, the parties also disagree on who should decide whether to stay the case: the DOJ has asked the Ohio district judge to determine whether the litigation can continue, while Rite Aid maintains that the bankruptcy judge is the proper person to make that call.
Rite Aid is hardly the first debtor to contend with the police power exception to the automatic stay, and it certainly won’t be the last. This Bankruptcy Law Letter examines several issues raised by Rite Aid’s bankruptcy as they relate to the automatic stay, the police power exception, and a debtor’s ability to gain breathing space from government lawsuits more generally. In particular, this issue examines the police power exception and the case law interpreting it, questions whether the exception should be viewed differently in light of the public nature of the opioid crisis, and suggests that the interplay between §§ 362 and 105 of the Bankruptcy Code could neutralize any stay-related victory by the DOJ in the Rite Aid case.
|