In re Biolitec, Inc.
528 B.R. 261
Bankr. D.N.J.2014Background
- Biolitec, Inc. (Debtor) filed chapter 11 after substantial litigation with AngioDynamics, which obtained a multi‑million dollar judgment and alleged fraudulent transfers to foreign affiliates. A chapter 11 trustee was appointed in 2013.
- Trustee sold substantially all assets to AngioDynamics under an earlier settlement and later filed a motion seeking court approval of a second settlement and a "structured dismissal." The plan would form a Liquidating Trust funded largely by estate assets and AngioDynamics, with DSI as Liquidating Trustee and AngioDynamics as trust advisor.
- The proposed structured dismissal would (a) dismiss the chapter 11 case, (b) retain court jurisdiction over certain adversary proceedings and claims administration, (c) assign most estate interests to the Liquidating Trust, and (d) subordinate or disallow claims of certain Non‑Debtor Affiliates.
- U.S. Trustee objected that the Bankruptcy Code provides no authority for the requested structured dismissal; Non‑Debtor Affiliates filed a cross‑motion to convert to chapter 7. The court kept the record open to consider conversion or liquidation alternatives.
- The bankruptcy court denied the Trustee’s motion to approve the settlement and structured dismissal, concluding § 105(a) and Rule 9019 could not be used to circumvent core Code protections; the court denied the cross‑motion to convert to chapter 7 without prejudice and directed the Trustee to determine whether to convert under § 1112(b) or liquidate under § 1129.
Issues
| Issue | Trustee's Argument | Objectors' Argument | Held |
|---|---|---|---|
| Whether the court can approve the proposed settlement and structured dismissal under Rule 9019 and § 105(a) | § 105(a) + Rule 9019 authorize approval because the settlement is practical and preserves value for creditors via a Liquidating Trust | Structured dismissal alters nonconsenting parties’ rights, bypasses Code protections, and is not authorized by the Code | Denied: § 105 cannot be used to override explicit Code requirements or approve a sub rosa plan absent creditor protections and consent |
| Whether dismissal under § 1112(b) is appropriate (cause exists) | Cause exists: continuing diminution of estate and no reasonable likelihood of rehabilitation; dismissal preferable to conversion because liquidation under chapter 11 is impracticable | Conversion or chapter 7 liquidation better protects creditor rights; dismissal cannot be structured to deprive parties of statutory safeguards | Court found cause arguable but refused to approve the proposed structured dismissal because it lacked statutory safeguards; directed Trustee to consider conversion or liquidation options |
| Whether the court can retain jurisdiction and make prior orders "survive" dismissal despite § 349 | Retention necessary to administer Liquidating Trust and pending adversary proceedings; preserves realized value | § 349 requires restoration of prepetition positions; court cannot retain jurisdiction over core adversary proceedings after dismissal | Denied: court skeptical it can retain jurisdiction over core matters post‑dismissal and cannot override § 349 to bind nonconsenting parties |
| Whether conversion to chapter 7 should be granted now | (Trustee) preferred dismissal/structured plan; argues conversion increases costs without benefit | Non‑Debtor Affiliates moved to convert to chapter 7 to protect creditor rights and ensure disinterested liquidation | Cross‑motion to convert denied without prejudice; court ordered Trustee to evaluate conversion under § 1112(b) or liquidation under § 1129 |
Key Cases Cited
- Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (U.S. 1968) (Rule 9019 settlement standard: fair and equitable; in best interests of creditors)
- In re AWECO, Inc., 725 F.2d 293 (5th Cir. 1984) (senior interests must retain priority in settlements)
- In re Martin, 91 F.3d 389 (3d Cir. 1996) (factors for evaluating reasonableness of settlements)
- In re Nutraquest, Inc., 434 F.3d 639 (3d Cir. 2006) (proponent bears burden to show settlement reasonableness)
- Law v. Siegel, 134 S. Ct. 1188 (U.S. 2014) (§ 105(a) cannot override explicit Code provisions)
- In re Fesco Plastics Corp., 996 F.2d 152 (7th Cir. 1993) (limits on § 105 equitable power)
- In re Combustion Eng’g, Inc., 391 F.3d 190 (3d Cir. 2004) (§ 105 cannot trump specific Code provisions)
- United States Trustee v. Price Waterhouse, 19 F.3d 138 (3d Cir. 1994) (equitable powers cannot disregard unambiguous statutory language)
- In re Lowenschuss, 67 F.3d 1394 (9th Cir. 1995) (§ 105 does not authorize relief inconsistent with specific law)
- In re Continental Airlines, Inc., 780 F.2d 1223 (5th Cir. 1986) (courts may not approve arrangements that function as sub rosa plans)
- In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir. 1983) (prohibition on short‑circuiting chapter 11 confirmation requirements)