United States: District Court Reinstates Fraudulent Conveyance Claims Against Lyondell

Decision clarifies standards for imputation and actual intent; could result in clawback of over $6B to pre-LBO shareholders


In January 2009, just over a year after it was formed following a leveraged buyout transaction, Lyondell Chemical Company (and numerous affiliates) filed for chapter 11 protection in the United States Bankruptcy Court for the Southern District of New York1. In connection with those cases, Lyondell's creditors, acting through their Trustee2, have commenced several adversary proceedings, including claims under section 548(a)(1)(A) of the Bankruptcy Code alleging Lyondell engaged in intentionally fraudulent prepetition transfers in connection with the LBO transaction when it paid distributions to certain of its "pre-LBO" stockholders. These claims were dismissed by the Bankruptcy Court in 2015, but the United States District Court for the Southern District of New York recently ruled on appeal that the claims could be reinstated.3 This decision ultimately could result in a clawback of the approximately $6.3 billion distributed to certain of Lyondell's pre-LBO stockholders, and possible related increased creditor recoveries, which has materially impacted the trading market for Lyondell debt. Further, the District Court's holdings clarify the standards necessary to prove a claim of intentional fraudulent conveyance in a setting where knowledge or intent of an officer may be imputed to the underlying debtor.

Fraudulent Conveyance Law Generally

In its opinion, the District Court examined two main issues: first, when can the knowledge or fraudulent intent of a debtor's officer or director be imputed to the debtor itself; and second, what standards apply in order to prove the existence of an "actual intent" to defraud. However, before reaching its conclusions, the District Court first explained the two types of fraudulent transfers - intentional and constructive. A pre-bankruptcy "intentional" transfer may be avoided if it is found there is an "actual intent to hinder, delay or defraud" creditors.4 A pre-bankruptcy "constructive" transfer may be avoided if the bankrupt "received less than a reasonably equivalent value in exchange for such transfer" and, among other factors, "became insolvent under as a result of such transfer".5 The District Court noted that section 546(e) of the Bankruptcy Code places limitations on the avoidance of certain pre-bankruptcy transfers "in connection with a securities contract", but only under the theory of constructive (i.e., not intentional) fraudulent transfer.


With this background in mind, the District Court turned to its analysis of imputation. The Trustee had alleged that Lyondell's CEO knew certain financial reports prepared in connection with the LBO were fraudulent, and further that he intended to create and present such reports in order for the LBO to proceed. Thus, when Lyondell conveyed distributions to its shareholders in connection with the LBO, it did so not only with the imputed knowledge of its CEO that the financial reports were fraudulent, but also with the imputed intent of its CEO to defraud creditors. In its earlier decision, the Bankruptcy Court had found that the CEO's knowledge and intent could not be imputed to Lyondell because the CEO alone did not control the Lyondell Board's decision to enter into the LBO transaction and pay the distributions.

On appeal, the District Court observed that a "basic tenet" of Delaware agency law6 is that the "knowledge and actions of a corporation's officers and directors, acting within the scope of their authority, are imputed to the corporation itself", "even when the agent acts fraudulently or causes injury to third persons through illegal conduct". The District Court disagreed with the Bankruptcy Court's ruling that the CEO needed to be in a position of control to effectuate the LBO transaction in order for his intent or knowledge to be imputed to Lyondell. Rather, the District Court held the Trustee's argument was consistent with longstanding and established Delaware agency law and, therefore, the CEO's knowledge and fraudulent intent with respect to the LBO may be imputed to Lyondell.

Actual Intent

After determining that the CEO's knowledge and fraudulent intent may be imputed to Lyondell, the District Court then turned to an examination of the proper standards for proving a claim of intentional fraudulent transfer under section 548(a)(1)(A) of the Bankruptcy Code. Because it had found that the intent of the CEO could not be imputed to Lyondell (and thus the element of "actual intent" was lacking), the Bankruptcy Court previously dismissed the Trustee's section 548(a)(1)(A) claims.

The District Court noted that case law interpreting section 548(a)(1)(A) has long held that while a transferor's intent must be actual, it "need not target any particular entity or individual" as long as the intent is "generally directed toward present or future creditors" and could "interfere with creditors' normal collection processes or with other affiliated creditor rights". Here, the District Court found that the Trustee "adequately pleaded" that Lyondell engaged in an actual, intentional fraudulent transfer when it paid distributions to its pre-LBO stockholders because the Trustee's pleading contained facts "sufficient to create a strong inference that [the CEO] acted with actual intent to hinder, delay and defraud Lyondell's creditors". The District Court held that the Trustee sufficiently pleaded facts "from which it can properly be inferred that [the CEO] not only recklessly disregarded the likelihood that the LBO would quite quickly injure creditors" because it "created an enormous new debt burden for Lyondell" by subjecting the majority of Lyondell's assets to liens, "essentially stripping Lyondell of its assets", but also that the Trustee adequately pleaded from which it could plausibly be inferred that "Lyondell would default on its obligations to its creditors within a very short period of time," which is, in fact, exactly what happened.


The District Court reversed the Bankruptcy Court's decision to dismiss the Trustee's claims, reinstated the claims and remanded the case for further proceedings7. Eventually, this could mean a clawback of the over $6 billion distributed to Lyondell's pre-LBO stockholders, resulting in increased recoveries for Lyondell's creditors. In the short term, this decision has already materially impacted the prices at which Lyondell debt and claims trade. Moreover, this decision clarifies and emphasizes that, in the examination of a fraudulent conveyance action, if it is determined that any officer or director of a debtor engaged in wrongdoing, the knowledge and intent of such officer or director may be imputed to the debtor and, thus, it is the debtor itself that becomes the wrongdoer.


1 In re: Lyondell Chemical Co., et al., Case No. 09-10023 (REG) (Jointly Administered).

2 Creditor and Litigation Trusts have been established for the benefit of certain creditors pursuant to Lyondell's plan of reorganization. The Trustee for these Trusts has filed several actions under state and federal law seeking recovery of amounts paid to former Lyondell shareholders in connection with the LBO. This underlying action was filed on behalf of the Litigation Trust.

3 Edward S. Weisfelner, as Litigation Trustee of the LB Litigation Trust v. Hofman, et al., Shareholders, No. 16cv518 (DLC) (July 27, 2016).

4 See Section 548(a)(1)(A) of the Bankruptcy Code.

5 See Section 548(a)(1)(B) of the Bankruptcy Code.

6 Delaware law applies because Lyondell was organized in Delaware and the merger agreement was governed by Delaware law.

7 The District Court noted that, at the motion to dismiss stage of litigation, a court must accept as true all allegations in a complaint and draw all reasonable inferences in a plaintiff's favor. The Bankruptcy Court originally dismissed the Trustee's claims because it found that the Trustee "failed to plead either that [the CEO] controlled the Board or that a critical mass of the Board had formed the actual intent to defraud Lyondell's creditors". The District Court reversed this dismissal, however, ruling that the Trustee did adequately plead a claim of intentional fraudulent transfer. It held that because the Bankruptcy Court found that the CEO's knowledge and intent could not be imputed to Lyondell, it never completed the "appropriate analysis" to determine whether a claim of intentional fraudulent inducement had been appropriately pled. Therefore, the District Court ordered that analysis to be completed in light of the imputation of the CEO's knowledge and intent to Lyondell.

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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
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.


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.


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