## Facts

- Biolitec, Inc. (Biolitec) was the United States affiliate of a multinational group of companies known as the Biolitec Group, substantially controlled by Wolfgang Neuberger.
- Biolitec entered into a supply-and-distribution agreement with AngioDynamics, Inc. (AngioDynamics).
- AngioDynamics sued Biolitec in federal court in New York for breach of the contract and obtained a judgment of about $23 million against Biolitec.
- After the New York lawsuit began, Biolitec experienced a drastic drop in assets and an increase in debt.
- Biolitec appealed the New York judgment and later filed a Chapter 11 petition, continuing to operate as a debtor-in-possession.
- AngioDynamics filed a separate action in Massachusetts alleging that Biolitec and related entities funneled roughly $18 million to affiliates to place assets beyond the reach of creditors.
- The Massachusetts court issued a preliminary injunction that froze assets (with an ordinary-course exception) and barred a merger involving Biolitec’s corporate family.
- The First Circuit affirmed the preliminary injunction, but the merger was completed before the First Circuit issued its decision.
- In the Chapter 11 case, AngioDynamics moved for appointment of a Chapter 11 trustee, arguing that insider control and alleged asset shifting made current management unable to act as a fiduciary for the estate and its creditors.

## Issues

1. Whether the bankruptcy court was required to order appointment of a Chapter 11 trustee for “cause” under 11 U.S.C. § 1104(a)(1), based on alleged fraud, dishonesty, or gross mismanagement by those controlling the debtor.
2. Whether, even absent a finding of “cause,” the court should appoint a trustee under 11 U.S.C. § 1104(a)(2) because doing so would serve the interests of creditors and the estate.

## Decision

- The court granted AngioDynamics’ motion and directed that a Chapter 11 trustee be appointed.
- The court concluded that the record supported trustee appointment under § 1104(a)(1) based on credible allegations and evidence of insider-directed transfers and conduct inconsistent with a debtor-in-possession’s fiduciary role.
- The court also determined that trustee appointment was warranted under § 1104(a)(2) because an independent fiduciary was needed to protect creditors and administer the estate in light of the history of disputed transfers and the merger completed in the face of the injunction.

## Legal Principles

- A debtor-in-possession generally remains in control in Chapter 11, but that default yields when the movant establishes grounds for a trustee under 11 U.S.C. § 1104(a).
- Under § 1104(a)(1), the court must order appointment of a trustee upon a showing of “cause,” including fraud, dishonesty, incompetence, or gross mismanagement by current management before or after the petition date.
- Under § 1104(a)(2), the court may appoint a trustee if doing so is in the interests of creditors, equity holders, and the estate, even if “cause” is disputed.
- When those controlling the debtor are alleged to have shifted assets to affiliates and acted to frustrate creditor collection efforts, the court may find that an independent trustee is necessary to investigate and administer potential estate claims.
- Conduct reflecting disregard of a federal court injunction and actions that suggest an effort to place assets outside creditor reach can support a conclusion that current management cannot be relied upon to carry out fiduciary duties in Chapter 11.

## Conclusion

In re Biolitec, Inc. held that appointment of a Chapter 11 trustee was warranted where the debtor’s control structure and prepetition conduct—especially alleged transfers of value to affiliates and completion of a merger despite an injunction—created serious doubt that the debtor-in-possession could administer the estate for the benefit of creditors, making an independent fiduciary necessary under § 1104(a).


In re Biolitec, Inc., 2013 WL 1352302 (2013)