United States: Lyondell Bankruptcy Court Holds That Safe Harbors Do Not Prohibit Creditors From Asserting State Law Constructive Fraudulent Transfer Claims

Last Updated: January 30 2014
Article by Israel Dahan, Mark C. Ellenberg and Michael A. Stevens

Most Read Contributor in United States, October 2018

On January 14, 2014, Judge Robert E. Gerber of the United States Bankruptcy Court for the Southern District of New York in Weisfelner v. Fund 1. (In re Lyondell Chemical Co.), Adv. Proc. No. 10-4609 (REG), 2014 WL 118036 (Bankr. S.D.N.Y. Jan. 14, 2014) held that section 546(e) of the Bankruptcy Code did not bar or preempt state law fraudulent transfer claims asserted on behalf of creditors to recover certain leveraged buyout transfers made to shareholders.  In so holding, the Bankruptcy Court adopted the rationale of Judge Richard J. Sullivan of the United States District Court for Southern District of New York in In re Tribune Co. Fraudulent Conveyance Litig., 499 B.R. 310 (S.D.N.Y. 2013), and rejected the rationale of Judge Jed. S. Rakoff in Whyte v. Barclays Bank PLC, 494 B.R. 196 (S.D.N.Y. 2013), thus adding to the recent debate in the Southern District of New York as to what effect the Bankruptcy Code's safe harbor provisions have on state law fraudulent transfer actions. 

Background

In December 2007, Basell AF S.C.A. acquired Lyondell Chemical Company through an LBO, whereby Lyondell assumed $21 billion in secured debt and its shareholders received $12.5 billion of the loan proceeds.  Just over one year later, Lyondell and certain of its affiliates filed for chapter 11 protection.  On April 23, 2010, the Bankruptcy Court confirmed Lyondell's plan of reorganization.  Pursuant to the plan, the debtors abandoned certain state law fraudulent transfer claims that they could have asserted against Lyondell's former shareholders pursuant to section 544 of the Bankruptcy Code, and the Creditor Trust was created to prosecute those claims on behalf of certain Lyondell creditors. 

Following confirmation, the Creditor Trust commenced an action in the New York State Supreme Court asserting directly (and not pursuant to section 544 of the Bankruptcy Code) these state law fraudulent transfer claims.  Upon the application of certain defendants, the action was removed to the United States District Court for the Southern District of New York and then automatically referred to the Bankruptcy Court.  The defendants then filed a motion to dismiss, arguing that section 546(e) of the Bankruptcy Code provides a substantive defense to and impliedly preempts the Creditor Trust's fraudulent transfer claims.  In addition, the defendants contended that (i) the Creditor Trust may not recover because the funds transferred in the LBO were not the debtors' property; (ii) certain defendants were only non-beneficial owners or conduits; (iii) the Creditor Trust lacked standing to sue on behalf of the LBO lenders because those lenders ratified the LBO transactions; and (iv) the Creditor Trust failed to adequately plead its intentional fraudulent transfer claims.

The Court's Opinion

Before turning to the defendants' preemption argument, the Bankruptcy Court first rejected the Defendants' argument that section 546(e) applied to the Creditor Trust's state law fraudulent transfer claims, holding that "there is no statutory text making section 546(e) applicable to claims brought on behalf of individual creditors, or displacing their state law rights, by plain meaning analysis or otherwise."  Lyondell, 2014 WL 118036, at *6.

With respect to preemption, the defendants based their argument on the obstacle branch of conflict preemption, which "'precludes state law that poses an actual conflict with the overriding federal purpose and objective.'"  Id. at *10 (quoting In re Methyl Tertiary Butyl Ether Prods. Liab. Litig., 725 F.3d 65, 101 (2d Cir. 2013)).  Relying on the Tribune decision, the Bankruptcy Court also rejected this argument and held that state fraudulent transfer law does not conflict with the purposes of the Bankruptcy Code as a whole or section 546(e) itself.  Specifically, the Bankruptcy Court found that if Congress intended that section 546(e)'s purpose of protecting securities markets should override the other long-recognized purposes of the Bankruptcy Code advanced through avoidance actions, it could have evidenced that intent by expressly preempting state law fraudulent transfer actions in section 546(e).  Congress did not, however, expressly preempt those claims, in stark contrast to where Congress expressly preempted state laws providing for the recovery of certain charitable transfers in section 544(b)(2) of the Bankruptcy Code.  Id. at *11-16.  In addition, drawing a distinction between financial markets and financial participants, the Bankruptcy Court found that state law fraudulent transfer actions against shareholders that received consideration in an LBO do not obstruct 546(e)'s purpose of protecting financial markets.  Id. at *16-19.

In holding that section 546(e) does not preempt state fraudulent transfer law, the Bankruptcy Court, again in reliance on Tribune, rejected the reasoning of Whyte, where the district court held that section 546(g) of the Bankruptcy Code preempts state law fraudulent transfer claims that were assigned to a trust along with avoidance claims arising under the Bankruptcy Code.  First, the Bankruptcy Court found Whyte factually distinguishable.  The trustee in Whyte was empowered to assert both bankruptcy estate claims and creditor claims, theoretically allowing for the trust to assert avoidance claims (as a creditor representative) that section 546(g) would otherwise bar it from asserting under section 544 (as an estate representative).  In contrast, the Creditor Trust was only a creditor representative that could assert those creditors' claims.  Id. at *20.  Further, the Bankruptcy Court found that the Whyte court's preemption analysis was flawed – the district court failed to apply the legal presumption against preemption, failed to consider the Bankruptcy Code's objectives as a whole, accepted a market disruption argument against preemption without thorough analysis, and seemingly allowed its concern over the differing results arising from state and federal avoidance laws to trump settled preemption standards.  Id. at *21-23.

The Bankruptcy Court next rejected the defendants' argument that the funds transferred in the LBO were not the debtors' property because the Creditor Trust plausibly alleged facts warranting that the multi-step LBO be collapsed into a single transaction.  Id. at *23-26.  The Bankruptcy Court, however, accepted the defendants' remaining arguments and narrowed the Creditor Trust's claims.  Specifically, the Bankruptcy Court held that the Creditor Trust's claims against any conduits or non-beneficial owners of stock must be dismissed, and that the Creditor Trust's claims brought on behalf of LBO lenders must be dismissed because those lenders ratified the LBO through their participation.  Finally, the Bankruptcy Court held the Creditor Trust failed to adequately plead its claims of intentional fraudulent transfer, but dismissed those claims without prejudice so that the Creditor Trust could replead them with more particularity.  Id. at *26-33.

Conclusion

Lyondell marks the latest in a string of recent, conflicting decisions from the Southern District of New York concerning whether the Bankruptcy Code's avoidance action safe harbors bar or otherwise preempt creditors or creditor representatives from directly asserting state law fraudulent transfer claims.  The Second Circuit will, however, hear the appeals of the Tribune and Whyte decisions in tandem later this year and presumably dictate how Lyondell itself will fare on appeal. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Shearman & Sterling LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Shearman & Sterling LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions