In Weisfelner v. Blavatnik (In re Lyondell Chemical Company), 2017 BL 131876 (Bankr. S.D.N.Y. Apr. 21, 2017), the bankruptcy court presiding over the chapter 11 case of Lyondell Chemical Company ("Lyondell") handed down a long-anticipated opinion in the protracted litigation concerning the failed 2007 merger of Lyondell with Basell AF S.C.A. ("Basell"), a Netherlands-based petrochemical company. After a three-week trial ending in November 2016, the court ruled that the Lyondell estate litigation trustee (the "trustee") failed to meet his burden on, among other things, claims that: (i) $6.3 billion in payments made to the former stockholders of Lyondell as part of the merger were avoidable as actual or constructive fraudulent transfers; (ii) $300 million in loan repayments made by the post-merger company, LyondellBasell Industries AF S.C.A. ("LBI"), were avoidable as preferential transfers; and (iii) Basell's ultimate owner, Len Blavatnik ("Blavatnik"), as well as certain companies he controlled (including Access Industries, Inc. ("Access")) and various insiders, had breached their fiduciary duties and committed various torts, or aided and abetted such infractions, under Luxembourg and Texas law.

However, the trustee prevailed on a claim under New York law that Access affiliate AI International Chemicals, S.A.R.L. ("AI International"), a lender under an unsecured revolving line of credit, improperly denied LBI's December 30, 2008, request to draw $750 million because the company's impending bankruptcy allegedly triggered the material adverse change ("MAC") clause in the credit agreement. The court awarded the trustee $7.2 million in restitution damages on this claim.

The "cornerstone" of the trustee's causes of action was that the defendants relied on inflated and unreasonable projections, prepared shortly after Access and Blavatnik had acquired a "toehold" position in Lyondell in 2007, in connection with the merger. According to the trustee, the post-merger company was "predestined" to fail, leading to LBI's chapter 11 filing in 2009. The defendants countered that the logic of the merger was sound, the transaction was supported by reasonable projections, and the bankruptcy filing was caused by a "perfect storm" of intervening events.

The Bankruptcy Court's Ruling

Intentional Fraud

In Weisfelner v. Hofmann (In re Lyondell Chem. Co.), 544 B.R. 635 (S.D.N.Y. 2016), the U.S. District Court for the Southern District of New York reversed a 2015 ruling by the bankruptcy court dismissing the trustee's claims that the $6.3 billion in payments to Lyondell's shareholders were avoidable under section 548(a)(1)(A) of the Bankruptcy Code because they were made with the intent to hinder, delay, or defraud Lyondell's creditors. The district court ruled that the knowledge of Lyondell's CEO and board chairman, Dan Smith, of allegedly grossly inflated pre-merger projections could be imputed to Lyondell for the purpose of establishing fraudulent intent.

After trial on the reinstated claims, the bankruptcy court concluded that the trustee failed to demonstrate that the CEO had the requisite fraudulent intent. The trustee relied on a novel "collapsing doctrine" theory, whereby the CEO's fraudulent intent, once proved, could be imputed horizontally to Basell and its ultimate owner, Blavatnik. However, the court held, this theory faltered because the trustee failed to prove fraudulent intent.

According to the court, the crux of the intentional fraudulent transfer claim was that "refreshed" projections prepared at the behest of Lyondell's CEO were "completely bogus, and prepared with the intent to defraud creditors." However, the evidence showed that there was "no basis" for concluding that the projections or any other aspect of the merger had been carried out with the intent to hinder, delay, or defraud creditors. The court was not persuaded that Lyondell's former CEO (or anyone else) intentionally sabotaged the post-merger company with illusory financial projections. The court explained, among other things, that it was telling that the trustee proffered no legitimate reason why the CEO, who asked to stay on after the merger, "would volunteer to captain a ship he had engineered to sink." The court also found incredible the allegation that the financing banks invested billions of dollars in a company they believed would fail.

Constructive Fraud

The trustee initially sought to avoid constructive fraudulent transfers allegedly made in connection with the merger under both section 548(a)(1)(B) of the Bankruptcy Code, which provides for the avoidance of such transfers under federal law, and section 544(b), which empowers a trustee to avoid transfers that can be avoided by creditors under "applicable law" (generally, state law). The defendants moved to dismiss the state law claims, claiming that they were barred by section 546(e), which expressly precludes avoidance by "the [bankruptcy] trustee" of constructive fraudulent transfers made in connection with the settlement of securities contracts.

The bankruptcy court ruled in 2014 and 2015 that the section 546(e) "safe harbor" does not preclude constructive fraud claims under state law brought by a litigation trustee on behalf of creditors. However, the court retracted those rulings in Weisfelner v. Fund 1 (In re Lyondell Chem. Co.), 554 B.R. 655 (Bankr. S.D.N.Y. 2016), after the U.S. Court of Appeals for the Second Circuit held unequivocally in Deutsche Bank Trust Co. Ams. v. Large Private Beneficial Owners (In re Tribune Co. Fraudulent Conveyance Litig.), 818 F.3d 98, 105 (2d Cir. 2016), that "creditors' state law, constructive fraudulent conveyance claims are preempted by Bankruptcy Code Section 546(e)."

After trial of the claims that survived—constructive fraudulent transfer under section 548(a)(1)(B)—the court found that the trustee failed to establish, among other things, that LBI (or Lyondell) was insolvent on December 20, 2007, the closing date of the merger, under any of the Bankruptcy Code's alternative financial condition tests—balance sheet insolvency, unreasonably small capital, or the inability to pay debts as they become due. According to the court, the testimony of the trustee's expert was "largely unreliable," unlike that of the defendants' experts, who presented credible testimony and financial projections consistent with the views of the banks that financed the merger. Noting that each bank considered the merger to be worthy of investment after conducting thorough due diligence, the court wrote that:

the views of these sophisticated investors provided perhaps the clearest indication that the combined company was left with sufficient capital upon the merger closing, given that the financial projections prepared by both Lyondell management and the banks all reasonably showed LBI to be solvent on the closing of the merger.

The court acknowledged that LBI "ultimately failed in a colossal manner" just one year after the merger. Even so, the court observed, this does not mandate a finding that LBI was insolvent at the merger closing or afterward. A number of intervening events, including an accident at the Houston refinery, two hurricanes, and plunging demand and liquidity issues related to the Great Recession, combined to propel LBI into bankruptcy. Because the trustee failed to show that Lyondell or LBI was insolvent on the relevant transfer dates, the court ruled that it need not extensively discuss the other element of a constructive fraudulent transfer claim under section 548(a)(1)(B)—"reasonably equivalent value."

Preferential Transfer

The court ruled that the preferential transfer claim under section 547 of the Bankruptcy Code failed because the trustee could not show that LBI was balance sheet insolvent after it made the $300 million loan repayment to Access in October 2008. The court noted, among other things, that the trustee repeatedly invoked internal LBI emails which referenced the possibility of bankruptcy in late 2008. However, the court wrote that "[a] few emails mentioning the abstract possibility of bankruptcy do not an insolvent balance sheet make."

Breach of Contract

The trustee prevailed on the breach of contract claim. The court rejected the argument that LBI's impending chapter 11 filing was a MAC which excused AI International's performance under the revolving credit agreement's MAC clause. The court explained that the credit agreement required LBI to represent and warrant that it was solvent as of March 27, 2008—the closing date of the agreement—but did not require a similar representation on solvency "as a condition precedent to loan draws." The court declined to "infer a solvency requirement where none was drafted by the parties" and ruled that AI International breached its contractual obligation to LBI to fund the December 2008 draw request.

However, the court held that the trustee was entitled only to restitution damages on account of the breach of contract claim. According to the court, "[T]he most equitable way to calculate restitutionary damages in this case is to estimate the benefits paid for but not received by LBI." LBI paid a $12 million commitment fee under the credit agreement. The court found that 60 percent of that fee, or $7.2 million, was the fair value of the benefits which LBI did not receive and should therefore be awarded to the trustee as restitution.

Other Claims

Finally, the court ruled that the trustee's remaining claims were without merit, including claims against Blavatnik, Access, and various other defendants for tort and breach of fiduciary duty arising under the Luxembourg Civil Code and the Companies Act of 1915, as well as an aiding and abetting claim under Texas law.

The trustee announced on May 5, 2017, that the Lyondell creditor and litigation trusts intend to "appeal certain aspects" of the ruling.