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All Talk, but no Action Leads to the Loss of Ground Breaking Cancer Research

By: Nicholas Marcello

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

            In In re Genesys Research Institute, the United States Bankruptcy Court for the District of Massachusetts denied motions for reconsideration holding there was no error in approving the sale and disposition of research equipment and biological samples free and clear of liens, claims, and interests.[1]  In support of its motion to sell research equipment by public auction and destroy experimental cancers cells, the Trustee of Genesys Research Institute, a debtor, argued that the costs and burdens of maintaining the biological materials warranted the prompt disposition of them.[2]  The Trustee noted that no party appeared to take custody and control of the biological materials despite all marketing efforts.[3] The Trustee also represented that he had no ability to reorganize the research lab and that he was required to liquidate the debtor’s assets in furtherance of his duties as a chapter 11 trustee.[4] The Court approved the disposition of the cells and the sale of the equipment free and clear of all interest and liens over the objection of, among others, the Department of Energy (“DOE”).[5] The disposition of the research led to the incineration of (hundreds) of biological samples, backed by thousands of dollars in grants, which were part of vital cancer research.[6] The researcher’s work was considered to be “groundbreaking and paradigm-shifting in the field of cancer biology” because they were able to turn normal human cells into cancer cells.[7]

            The DOE opposed the sale motion asserting that it had a property interest in the equipment and cancer cells because it provided funding through federal grant money.[8]  Dr. Lynn Hlatky, a former researcher for Genesys Research Institute, opposed the sale arguing that the biological materials and equipment were not actually the property of the estate and that the research lab held the research equipment and cells in trust for the government because it was funded through federal grants.[9]  The Court rejected these arguments principally because the Debtor had insufficient funds to operate and there was no reorganization plan offered in opposition by the DOE, Dr. Hlatky, or others.[10]  Here, a viable reorganization plan could have allowed Genesys Research Institute to avoid liquidation of its research and to continue conducting its studies.  However, none was proposed. The Court found “that there was a bona fide dispute as to the interest of DOE in the assets being sold.”[11] Additionally, due to the nature of the biological materials, it would be “difficult, if not impossible, to determine whether and to what extent the biological materials were the product of federal grants.”[12]

            Scientists asserting an interest in their research during a chapter 11 bankruptcy should attempt to provide a viable plan of reorganization.[13]  It is clear that the Court knew how important this research was to combating the ever-present cancer threat.  In its opinion the Court blames the researchers and the government for taking insufficient and improper action.[14] Not one party could propose a viable option that satisfied the creditor’s rights and allowed years of research to survive.[15] Had a scientist proposed an alternative plan, the research might have been saved. Let this case serve as a lesson to scientists to be proactive when chapter 11 bankruptcies present themselves.

[1] See In re Genesys Research Institute, Inc., Case No. 15-12794, 2016 Bankr. LEXIS 2376, at *57 (Bankr. D. Mass. June 24, 2016).

[2] See id. at *35. Costing an estimated $600 per week to maintain the biological materials.

[3] See id., see also Priyanka D. McCluskey, A lab is liquidated, and so is decade of cancer studies, Boston Globe (August 6, 2016) Tufts University had reportedly offered $35,000 for the research but had to shut down due to the funding environment at the time.

[4] See In re Genesys Research Institute, Inc., Bankr. LEXIS 2376 at *34.

[5] See id. at *82–83. (“If the Sale/Disposition Order is not implemented, the estate's Settlement Agreement with the Steward Entities is in jeopardy, including release of claims in excess of $16 million, and the estate will continue to incur the expense of maintaining the Equipment and Biological Materials, as well as potentially more use and occupancy charges.”).

[6] See McCluskey, supra note 2.

[7] Id.

[8] See In re Genesys Research Institute, Inc., Bankr. LEXIS 2376 at *38.

[9] See id. at *41.

[10] See id. at *42–43.

[11] In re Genesys Research Institute, Inc., Bankr. LEXIS 2376 at *73.

[12] Id. at *74.

[13] Collier on Bankruptcy, ¶ 1.07, at 3 (Alan N. Resnick & Henry J. Sommers eds., 16th ed. 2009). “The essence of chapter 11 is to provide a mechanism for the reorganization of a financially distressed business or individual in the hope that a profitable and productive member of its economic community can once again emerge.”

[14] See In re Genesys Research Institute, Inc., Bankr. LEXIS 2376 at *79–80.  The Court exercised its discretion to allow grant more time for the researchers to formalize an arrangement with Tufts University to save the research, but that failed. The bankruptcy estate was prejudiced by the continuing “barrage of objections” by Hahnfeldt and Hlatky who did not recognize that an estate in bankruptcy “cannot magically produce funds.” And despite asserting that the cells may only be transferred in accordance with nonbankruptcy law, the governmental entities responsible failed to take those positions.

[15] See id. at *35 “[n]o party had offered to take custody and control of the Biological Materials on terms that were beneficial to the estate.”