In re Positron Corp.

Citations: 556 B.R. 291; 76 Collier Bankr. Cas. 2d 302; 2016 Bankr. LEXIS 3132; 2016 WL 4487634Docket: Case No.: 15-50205-RLJ-11

Court: United States Bankruptcy Court, N.D. Texas; August 25, 2016; Us Bankruptcy; United States Bankruptcy Court

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In the involuntary bankruptcy proceeding involving Positron Corporation, a settlement was reached between the alleged debtor and the petitioning creditors, including DX, LLC and the Kittens, resulting in a Joint Motion to Approve an Agreed Structured Dismissal. Cecil O’Brate, the largest shareholder of Positron and owner of DX, LLC, is a key party in the agreement. As part of the settlement, Positron will buy O’Brate's shares for $100,000, financed through a promissory note with a 4.5% interest rate, secured by the shares being acquired.

Additionally, Positron will transfer assets or membership interests of Manhattan Isotope Technologies, LLC (MIT), which it wholly owns, to a designated entity by DX, LLC. This includes valuable intellectual property and other assets, in exchange for discharging approximately $452,000 of debt owed to DX, LLC. 

Positron will also attempt to sell a condominium, distributing the proceeds according to the bankruptcy priority, with administrative claims capped at 50% of the sales price. Recognized claims from the petitioning creditors will receive pro-rata distributions from the sale, while unsecured creditors have the option to either accept a share of the distributions or pursue other remedies for their debts.

The agreement stipulates that if the motion for approval is denied or if Positron is found to have materially breached the Structured Dismissal Agreement, it must file for voluntary Chapter 11 bankruptcy or convert the case to a voluntary Chapter 11 within ten days. Upon fulfilling all terms of the agreement, Positron and the Petitioning Creditors are to file a Joint Motion to dismiss the involuntary petition.

The Court previously denied Positron's request to dismiss or transfer the involuntary proceeding, noting Positron as a troubled enterprise with significant financial losses exceeding $9 million over three years, and no history of profitability. Positron's operations consist mainly of a few service contracts, while its only tangible asset is an office condominium in Westmont, Illinois, proposed for sale under the settlement. Additionally, the closure of the Lubbock facility would incur substantial costs related to the disposal of radioactive materials, which are central to Positron's bankruptcy administration.

The proposed settlement is seen as beneficial given Positron's financial liabilities, including over $450,000 owed to DX, LLC, which would be eliminated; adverse management issues would be resolved; and potential problems associated with MIT would be avoided, as its issues currently outweigh its value. The settlement involves liquidating the Illinois condominium with proceeds distributed to creditors, acknowledging disputed claims of petitioning creditors.

Notably, the settlement was negotiated during the trial of the involuntary petition, which remains contested. No relief order has been entered, and the case is still under consideration as to whether Positron should be adjudicated as a debtor under Chapter 11. Under 11 U.S.C. 303(j), an involuntary petition may be dismissed if all parties consent, but this requires notice to all creditors and a hearing to prevent harmful settlements and protect the interests of other creditors.

In Wynne v. Rochelle, the court emphasizes the protection of creditors not involved in the original bankruptcy proceedings, underscoring the legislative intent to prevent collusive settlements that could disadvantage non-participating creditors. The proposed dismissal in the case at hand is characterized as a "structured dismissal," which occurs only after the terms of a settlement are fulfilled, leading to Tradex's objection on the grounds that it circumvents the requirements of the Bankruptcy Code, particularly Chapter 11 provisions. Structured dismissals, while often viewed as cost-effective solutions in bankruptcy, lack explicit authorization in the Bankruptcy Code, which typically allows for exit through confirmed plans or liquidation. Critics, including U.S. Trustees and the American Bankruptcy Institute, raise concerns about potential violations of the absolute priority rule and the absence of a clear framework for handling creditor claims. The core issue is whether the court can approve the settlement in the context of an involuntary proceeding, as the Bankruptcy Code does not accommodate a loosely defined process where a court retains jurisdiction while parties execute their agreement.

A court is required to resolve contested involuntary proceedings promptly by either entering an order for relief, dismissing the petition, or issuing another suitable order, as stated in Fed. R. Bankr. P. 1013(a). The term "earliest practicable time" has been interpreted to mean when sufficient information is available to address the dispute (Quinton v. Medley Mfg. Inc. In re Medley Mfg. Inc.). Although the proposed settlement has merit, it lacks authority under the Bankruptcy Code since it does not facilitate a dismissal but rather stipulates that a motion to dismiss will be filed after the settlement terms are fulfilled. Consequently, the Court denies the motion's approval and mandates that Positron must proceed under chapter 11 within ten days, either by filing a voluntary chapter 11 petition or converting the case to a voluntary chapter 11 proceeding. 

Additionally, two objections were filed: one from J&S&G Properties, LLC, which was later withdrawn, and another from Brenda Mullin, a pro se stockholder, who expressed concerns that the settlement would result in Positron relinquishing significant value. Mullin supported her objection with an outdated affidavit, which the Court deemed irrelevant to the current situation of Positron or MIT. Furthermore, Tradex's unsecured claim is associated with an alleged fraudulent transfer of property by Positron's former CEO, which they have a judgment against. The ongoing interpretations and debates regarding the Bankruptcy Code's provisions, particularly concerning structured dismissals and the distribution of assets, are highlighted by references to relevant case law and reports.