In an earlier study, biocatalytic carbon oxyfunctionalization with water serving as oxygen donor, e.g., the bioconversion of quinaldine to 4-hydroxyquinaldine, was successfully achieved using resting cells of recombinant Pseudomonas putida, containing the molybdenum-enzyme quinaldine 4-oxidase, in a two-liquid phase (2LP) system (Ütkür et al. J Ind Microbiol Biotechnol 38:1067-1077, 2011). In the study reported here, key parameters determining process performance were investigated and an efficient and easy method for product recovery was established. The performance of the whole-cell biocatalyst was shown not to be limited by the availability of the inducer benzoate (also serving as growth substrate) during the growth of recombinant P. putida cells. Furthermore, catalyst performance during 2LP biotransformations was not limited by the availability of glucose, the energy source to maintain metabolic activity in resting cells, and molecular oxygen, a possible final electron acceptor during quinaldine oxidation. The product and the organic solvent (1-dodecanol) were identified as the most critical factors affecting biocatalyst performance, to a large extent on the enzyme level (inhibition), whereas substrate effects were negligible. However, none of the 13 alternative solvents tested surpassed 1-dodecanol in terms of toxicity, substrate/product solubility, and partitioning. The use of supercritical carbon dioxide for phase separation and an easy and efficient liquid-liquid extraction step enabled 4-hydroxyquinaldine to be isolated at a purity of >99.9% with recoveries of 57 and 84%, respectively. This study constitutes the first proof of concept on an integrated process for the oxyfunctionalization of toxic substrates with a water-incorporating hydroxylase.