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From Absolute Priority: Lawsuit against Lyondell Shareholders

By Timothy J. Durken

The Southern District of New York Bankruptcy Court held in Weisfelner v. Fund 1 (In re Lyondell Chemical Co.) that Section 546(e)’s safe harbor for settlement payments of securities transactions does not apply to or preempt a state law constructive fraudulent transfer claim to recover LBO payments to shareholders.  See Decision and Order on Motion to Dismiss, No. 09-10023, Adv. No. 10-4609 (Bankr. S.D.N.Y. Jan. 14, 2014) (Gerber, B.J.).

On January 14, 2014, the Court ruled that the post-confirmation Creditor Trust’s lawsuit against Lyondell shareholders seeking repayment of LBO proceeds as intentional and constructive fraudulent transfers under state law can continue to go forward.

In 2007, Lyondell was acquired in an LBO led by Leonard Blavatnik for $21 billion of debt secured by the company’s own assets.  Shareholders were paid $12.5 billion of the LBO proceeds.  Less than 13 months later, Lyondell filed for bankruptcy under the weight of the LBO debt.  The Creditor Trust argues that the LBO payments allowed shareholders to leap frog unsecured creditors in violation of the absolute priority rule of bankruptcy law that debt is paid before equity.  The clawback action sought to recover $6.3 billion from shareholders to pay creditors.

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