In re Genesys Research Inst., Inc., Case No. 15-12794-JNF

• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts
• Parties: In re: GENESYS RESEARCH INSTITUTE, INC., Debtor
• Docket Number: Case No. 15-12794-JNF
• Decision Date: 24 June 2016

In re: GENESYS RESEARCH INSTITUTE, INC., Debtor

Case No. 15-12794-JNF

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS

June 24, 2016

Chapter 11

I. INTRODUCTION¹

The matters before the Court for determination are: 1) the "Emergency Motion by Party Philip Hahnfeldt ("Movant"), In Light of Additional Facts and Testimony, for Court Reconsideration of 1) Order Approving Settlement Agreement (Doc. 351) and 2) Order Authorizing Disposition of Biological Samples and Sale of Equipment (Doc. 347)" filed by Dr. Philip Hahnfeldt ("Hahnfeldt") ("Hahnfeldt's Reconsideration Motion"); 2) the Application to Employ Licensed Site Professional filed by the Chapter 11 Trustee, Harold B. Murphy (the "Trustee"), of Genesys Research Institute, Inc. ("Genesys," "GRI," or the "Debtor") (the "Application to Employ Licensed Site Professional"), pursuant to which he seeks expedited authority to employ The Vertex Companies ("Vertex") to dispose

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of certain biological materials (the "Biological Materials")² for purposes of implementing this Court's "Order Granting Motion by Trustee for Order Authorizing Disposition of Biological Materials and Sale of Equipment by Public Auction Sale Free and Clear of Liens, Claims, Encumbrances and Interests" (Doc. 364), dated May 21, 2016, (the "Sale/Disposition Order"); 3) the "Objection to Application to Employ Licensed Site Professional and Cross Motion for Reconsideration or Stay" filed by Dr. Lynn Hlatky ("Hlatky") ("Hlatky's Objection and Cross Motion");³ and 4) the "Objection by Interested Party Clare Lamont to Motion of Chapter 11 Trustee to Employ Licensed Site Professional" filed by Clare Lamont ("Lamont") (the "Lamont Objection"). Through these motions and objections, Hahnfeldt, Hlatky, and Lamont⁴ request that the Court reconsider and vacate two orders of the Court: an "Order Approving Settlement Agreement Between and Among (I) Harold B. Murphy, as Chapter 11 Trustee for Debtor

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Genesys Research Institute Inc., (II) Steward Health Care System LLC and (III) Steward St. Elizabeth's Medical Center of Boston, Inc. Pursuant to Federal Rule of Bankruptcy Procedure 9019," dated May 19, 2016 (the "Order Approving Settlement Agreement"), and the Sale/Disposition Order.

The Order Approving Settlement Agreement resolved all outstanding claims among Genesys and both Steward Health Care System LLC ("Steward" or SHC") and its affiliate, Steward St. Elizabeth's Medical Center of Boston, Inc. ("SSEMC") (collectively the "Steward Entities" or "Steward") and required the Debtor to vacate St. Elizabeth's Hospital's premises in exchange for $750,000 (the "Settlement Agreement").⁵ The Court, through the Sale/Disposition Order,

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granted the Trustee permission to sell research and other equipment (the "Research Equipment") on Steward's premises at public auction and to dispose of the Biological Materials.

II PROCEDURAL BACKGROUND

On July 14, 2015, the Debtor filed a voluntary Chapter 11 petition. The Debtor is a Massachusetts nonprofit corporation which conducted biological research and was partially funded by federal, state, and private grants. One aspect of the research it conducted involved the gathering and collection of tissue samples and their preservation for examination and analysis at a future date. The Debtor's operations were conducted at the campus of St. Elizabeth's Hospital, owned and operated by SSEMC (the "Leased Premises"). In an Opposition and Response to the Debtor's Expedited Notice of Intent to Abandon Certain Assets, discussed below, Hlatky stated that she is the founding director of the Center of Cancer System Biology (the "Center"). According to Hlatky, she founded the Center in 2006, which was established at St. Elizabeth's Hospital. She added: "In 2011, Steward Health Care Systems, LLC and/or its affiliates . . . a for-profit corporation, acquired St. Elizabeth's Hospital. Because federal law bars for-profit entities from administering federal grants, Steward Health created a new, non-profit corporation to which Dr. Hlatky's lab was assigned. That entity is the Debtor."

In September of 2014, prior to filing its bankruptcy petition, Genesys had terminated all but one employee. The remaining employee was terminated on the

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petition date of July 14, 2015. On July 28, 2015, the Court granted the Debtor an extension until August 14, 2015 for filing schedules, the statement of financial affairs, and other required documents.

On July 23, 2015, Attorney General Maura Healey of the Commonwealth of Massachusetts ("the Attorney General"), filed a Notice of Appearance and Request for Service of All Papers. The Attorney General has statutory authority to monitor non-profit corporations and charities.

On July 31, 2015, the Debtor filed an "Expedited Notice of Intent to Abandon Certain Assets," including the Biological Materials listed in the Debtor's schedules, which are the subject of the Sale/Disposition Order central to Hlatky's Objection and Cross Motion. The Debtor claimed that maintenance of the Biological Materials was burdensome to the estate, as there was no on-going research operation which required the preservation of the tissue samples and specimens, and there were no funds available with which to employ a person to care for the Biological Materials. The Debtor requested a hearing no later than August 14, 2015 with respect to its Notice of Intent to Abandon. The Court scheduled a hearing for August 12, 2015. Several responses and oppositions were filed, including responses from the Attorney General, Steward, Hahnfeldt, Hlatky, and sixteen researchers or former employees.

Specifically, on August 6, 2015, the Attorney General filed a Response and Limited Opposition to the Debtor's Expedited Notice of Intent to Abandon Certain Assets. The Attorney General requested this Court to disapprove the Debtor's

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Intent to Abandon until a hearing could be held at which all potentially interested researchers and agencies could be identified and all available options for transfer of the Biological Materials could be explored.

On August 11, 2015, the Steward Entities also filed a Response and Limited Opposition to the Debtor's Notice of Intent to Abandon. Steward represented that it did not own the Biological Materials, but stated that unless the Debtor could offer proof that the samples and specimens would be safely and lawfully handled and transferred to another custodian at another location, authority to abandon the Biological Materials should be denied.

On August 11, 2015, Hahnfeldt, an Associate Professor of Medicine at Tufts University School of Medicine and a former research scientist at Genesys, filed an objection to the Debtor's Notice of Intent to Abandon in which he claimed that the material Genesys sought to abandon constituted "a restricted asset" because they were "either derived from US Government grant funds restricted to a specific cancer research purpose proposed by Dr. Hlatky, or were the ongoing developing product of the pursuit of that purpose. . . ." He added that "the motion to dispose is a de facto request to deviate from donor intentions with respect to the disposition of assets, an action that triggers a need to request cy pres relief."

In addition to those objections, on August 11, 2015, sixteen individual researchers or former employees of Genesys, including Lamont, filed requests for a continuance, arguing there was lack of adequate notice and, consequentially, an inability on their part to appropriately respond. The researchers asserted that the

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assets that the Debtor proposed to abandon were in fact part of on-going, public research in accordance with terms set forth under the federal research grant agreements.

In her Opposition and Response to the Debtor's Notice of Intent to Abandon, Hlatky⁶ argued that 1) the Debtor did not give the Court full and adequate disclosure regarding the abandonment; 2) the Court should allow additional time to consider the issues and schedule a further hearing so that

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interested parties could understand the value of the assets at stake; and 3) the assets should not be abandoned as they are critical to cancer research and represent products of restricted federal funds. Hlatky also stated that she would consider accepting the Biological Materials and related research materials through a newly formed non-profit entity.⁷

On August 12, 2015, the Court, ruling from the bench, disapproved the Debtor's Notice of Intent to Abandon and sustained the objections of the Commonwealth and Hlatky. In its ruling, the Court stated that it was the Debtor's burden to prove that the property of the estate that it intended to abandon was burdensome and of inconsequential value and that the Debtor had not sustained that burden. The Court also stated that, the Debtor, as a non-profit corporation, had an obligation to comply with applicable, non-bankruptcy law in connection with the disposition of its assets. Because the Debtor had not attempted to find a buyer for its assets, the Court ruled that the Debtor had not complied with Massachusetts law. The Court ordered that there should be a specific solicitation to public charities and research laboratories for the Debtor to fulfill its obligations under non-bankruptcy law.

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On August 14, 2015, the Debtor filed its schedules of assets and liabilities and a statement of financial affairs. On Schedule A-Real Property, the Debtor listed no interests in real property. Likewise, on Schedule D-Creditors Holding Secured Claims, the Debtor did not list any creditors holding secured claims. On Schedule E-Creditors Holding Unsecured Priority Claims, however, the Debtor listed numerous creditors holding priority claims for unpaid salary and wages. On Schedule F-Creditors Holding Unsecured Nonpriority Claims, the Debtor disclosed general unsecured creditors with claims totaling $842,755.59. On September 28, 2015, the Debtor filed an amended Schedule F identifying...