## Facts

- Biolitec, Inc. (the debtor) was a U.S. affiliate of Biolitec AG (BAG), a German corporation, and filed for Chapter 11 bankruptcy protection.
- AngioDynamics, Inc. (AngioDynamics) was the debtor’s largest unsecured creditor and held an approximately $23 million judgment against the debtor.
- AngioDynamics also pursued a federal-court fraudulent-transfer action against the debtor and BAG; that litigation was ultimately decided in AngioDynamics’ favor.
- To ensure proper administration of the estate, the bankruptcy court appointed a Chapter 11 trustee (Trustee).
- The bankruptcy court previously approved a settlement between the Trustee and AngioDynamics that (1) fixed AngioDynamics’ unsecured claim at $29 million and (2) provided for the sale of most of the debtor’s assets to AngioDynamics to satisfy the $23 million judgment component.
- Under that earlier settlement, AngioDynamics agreed it would recover the remaining $6 million only after other unsecured creditors were paid in full.
- After the asset sale, the Trustee and AngioDynamics sought approval of a proposed “structured dismissal” that would dismiss the Chapter 11 case while implementing a post-dismissal mechanism to collect and distribute remaining estate value.
- The proposed structured dismissal included creation of a liquidating trust to collect and distribute remaining assets, to be administered by a new, nonbankruptcy trustee.
- The proposed trust distributions would be subject to AngioDynamics’ review and consent.
- The proposal also subordinated BAG’s senior interests to all other allowed claims without BAG’s consent.
- BAG and other non-debtor affiliates objected and filed a cross-motion to convert the case to Chapter 7.
- The U.S. Trustee objected, arguing the Bankruptcy Code did not authorize the requested structured-dismissal relief.

## Issues

1. Whether the Bankruptcy Code and Rule 9019 authorized dismissal of the Chapter 11 case through a “structured dismissal” that imposed post-dismissal distribution and control terms.
2. Whether the court could approve, over objection, a dismissal/settlement structure that reordered rights by subordinating BAG’s interests and granting AngioDynamics consent rights over distributions.
3. Whether the case should be converted to Chapter 7 under 11 U.S.C. § 1112(b) instead of being dismissed.

## Decision

- The court denied the Trustee’s motion to approve the proposed structured dismissal and related settlement/distribution structure.
- The court granted the non-debtor affiliates’ cross-motion to convert the case from Chapter 11 to Chapter 7.

## Legal Principles

- Dismissal of a Chapter 11 case is authorized in limited circumstances under provisions such as 11 U.S.C. §§ 305(a), 349, and 1112(b), but the court must still act within the Bankruptcy Code’s framework.
- Section 349 generally returns parties to their prepetition positions upon dismissal unless the court, “for cause,” orders otherwise; dismissal is not a substitute for a plan process that finally reallocates rights over objection.
- Section 105(a) permits orders necessary to carry out the Code, but it does not allow the court to create outcomes that conflict with the Code’s distribution structure or plan-confirmation safeguards.
- A compromise under Fed. R. Bankr. P. 9019 must be fair and equitable and in the estate’s best interests, and the court may consider how the compromise affects statutory priority and creditor rights.
- When a proposed case-ending arrangement functions like a plan by dictating distributions and changing relative rights without consent, the court may decline approval and instead select a Code-provided alternative.
- Under § 1112(b), upon a showing of cause, the court chooses between dismissal and conversion based on the best interests of creditors and the estate; conversion may be favored where it provides a trustee-administered liquidation under ordinary statutory distribution rules.

## Conclusion

In In re Biolitec, Inc., the bankruptcy court refused to approve a proposed structured dismissal that would have dismissed the Chapter 11 case while imposing post-dismissal distribution controls and subordinating BAG’s interests without consent, and the court instead converted the case to Chapter 7 so a Chapter 7 trustee could administer remaining value under the Bankruptcy Code’s standard framework.


In re Biolitec, Inc., 528 B.R. 261 (2014)