The Reed Action Judgment Creditors v. Alecto Healthcare Services LLC, 1:24-cv-00494

Alecto Healthcare Services, LLC (“Alecto”) filed for bankruptcy under Subchapter V of Chapter 11, asserting eligibility based on its non-contingent, liquidated debts being below $7.5 million.
Appellants (the "Reed Creditors"), a group of former employees with a WARN Act judgment, challenged Alecto’s eligibility, arguing that inclusion of a large claim by LHP Hospital Group would put Alecto over the debt limit.
The dispute hinged on whether the LHP claim was contingent/unliquidated as of the bankruptcy petition date, based on a settlement agreement requiring LHP to make a written demand for payment, which had not occurred by the petition date.
The Bankruptcy Court found for Alecto, ruling the LHP debt was contingent and unliquidated as of the petition date, and allowed the case to proceed under Subchapter V.
The plan of reorganization settled potential fraudulent transfer and breach of fiduciary duty claims against Alecto insiders for $25,000, over objections by the Reed Creditors.
The District Court reviewed consolidated appeals of the eligibility and plan confirmation orders, affirming both.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Eligibility for Subchapter V given LHP claim	LHP claim should count; makes debt exceed $7.5M	LHP debt is contingent/unliquidated—excluded	LHP debt was contingent and unliquidated; Alecto eligible
Interpretation of Settlement Agreement with LHP	Only a payment procedure, not a liability contingency	Written demand is a condition precedent to liability	Settlement required demand before liability; thus, contingent
Approval of settlement and insider releases in Plan	Settlement too low; did not fully investigate claims against insiders	Independent director acted with reasonable business judgment; evidence showed no viable claims	Settlement approved; investigation sufficient and reasonable
Burden on proof of insolvency for fraudulent transfer claim	Alecto needed expert financial analysis to disprove insolvency	Reasonable business judgment and testimony showed solvency; no need for expert	No abuse of discretion; evidence of solvency was sufficient

Anchor Resolution Corp., 197 F.3d 76 (3d Cir. 1999) (sets standard of review for bankruptcy appeals)
In re Martin, 91 F.3d 389 (3d Cir. 1996) (outlines factors for evaluating approval of settlements in bankruptcy)
CitiSteel USA, Inc. v. Connell Ltd. P'ship, 758 A.2d 928 (Del. 2000) (merger clause in contract law -- new agreement supersedes prior obligations)
LeJeune v. Bliss-Salem, Inc., 85 F.3d 1069 (3d Cir. 1996) (contract interpretation is a question of law when contract is unambiguous)
In re Nutraquest, Inc., 434 F.3d 639 (3d Cir. 2006) (sets standards for review of bankruptcy court approval of settlements)