Medly’s Chapter 11 bankruptcy case converted to Chapter 7

By Sarah Lizee

Olympia, Wash., April 26 – Medly Health Inc.’s Chapter 11 bankruptcy case was converted to Chapter 7 on Wednesday, according to an order filed with the U.S. Bankruptcy Court for the District of Delaware.

As previously reported, Medly said that since the closing of its asset sales, the debtors’ efforts have been focused on evaluating the potential for a consensual plan of liquidation with their key stakeholders, rejecting burdensome executory contracts and nonresidential real property leases, and winding down the remaining businesses of the debtors.

The debtors later determined that a plan of liquidation in the Chapter 11 cases was not feasible in light of their estimate of administrative and priority claims, the value of their remaining assets, the limited prospect of future recoveries to the estates, and the lack of cash to fund a further wind down, Medly said.

The conversion motion had drawn a limited objection from Regions 3 and 9 U.S. trustee Andrew R. Vara.

The U.S. trustee said he didn’t oppose conversion in general, but he took issue with the unapproved settlement term sheet entered into between the debtors, the official committee of unsecured creditors and prepetition lenders.

The settlement created a reserve of $1 million, which is held by the debtors.

The term sheet also sets forth various sharing arrangements between the prepetition lenders and general unsecured creditors regarding proceeds of causes of action.

Vara said the creditors committee did not seek or obtain approval of the settlement agreement.

The U.S. trustee said that because the proposed settlement does not comply with the bankruptcy code’s distribution scheme, by requiring distribution of estate assets to general unsecured creditors without payment in full of claims with higher priority, it cannot be approved.

At a hearing held April 25, judge Karen B. Owens noted that a Chapter 7 trustee will oversee what happens to the $1 million reserved amount, and parties to the Chapter 11 case can discuss their concerns regarding the funds with the Chapter 7 trustee going forward.

The Boulder, Colo.-based pharmacy company filed Chapter 11 bankruptcy on Dec. 9 under case number 22-11257.

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