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.

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