Weisfelner v. Fund 1. (In re Lyondell Chem. Co.)

503 B.R. 348

In re: Lyondell Chemical Company, et al., Debtors.Edward S. Weisfelner, as Litigation Trustee of the LB Creditor Trust, Plaintiff,

v.Fund 1., et al., Defendants.

Case No. 09–10023 Jointly Administered

Adversary Proceeding Case No. 10–4609 (REG)

United States Bankruptcy Court, S.D. New York.

January 14, 2014

As Corrected January 16, 2014

Brown Rudnick LLP, Counsel for the Plaintiff, 7 Times Square, 46th Floor, New York, New York, 10036, By: Sigmund S. Wissner–Gross, Esq. (argued), Steven D. Pohl, Esq., May Orenstein, Esq., Aaron Lauchheimer, Esq.

Wilmer Cutler Pickering Hale and Dorr LLP, Counsel for Movant Defendants, 7 World Trade Center, New York, New York 10007, By: Philip D. Anker, Esq. (argued), Ross E. Firsenbaum, Esq., Peter J. McDonald, Esq., Pamela Karten Bookman, Esq., 1875 Pennsylvania Avenue, NW, Washington, D.C. 20037, By: Craig Goldblatt, Esq., Joel Millar, Esq.

Chapter 11

DECISION AND ORDER ON MOTIONS TO DISMISS

ROBERT E. GERBER, UNITED STATES BANKRUPTCY JUDGE:

Table of Contents

Facts (3)27355

Discussion ...356

I. Effect of Section 546(e) ...358

A. Section 546(e)s Applicability to Individual Creditors State Law Claims... 358

B. Preemption...359

1. Express Preemption...361

2. Field Preemption...361

3. Conflict Preemption...363

(a) Conflict Preemption: the Impossibility Branch...363

(b) Conflict Preemption: the Obstacle Branch ...364

(i) Conflict Preemption General Principles...364

(ii) The Totality of Congressional Intent...364

(iii) Section 546(e) Intent...369

(iv) The Barclays Decision...373

II. Funds to Stockholders Not Property of the Debtor?...379

III. Conduits, Nominees, Non-beneficial Holders...381

IV. Ratification by LBO Lender Creditors?...383

V. Intentional Fraudulent Transfer Claims...385

A. Failure to Allege Fraudulent Intent on Part of Board of Directors...386

B. Failure to Allege Which Debtor Made the Transfer...389

C. Facts Supporting Intent to Hinder, Delay or Defraud...389

D. Plausibility...391

Conclusion ...391

In late December 2007, Basell AF S.C.A. (“Basell”), a Luxembourg entity controlled by Leonard Blavatnik (“Blavatnik”), acquired Lyondell Chemical Company (“Lyondell”), a Delaware corporation headquartered in Houston—forming a new company after a merger (the “Merger”), LyondellBasell Industries AF S.C.A. (as used by the parties, “LBI,” or here, the “Resulting Company”), ¹ Lyondell's parent—by means of a leveraged buyout (“LBO”). The LBO was 100% financed by debt, which, as is typical in LBOs, was secured not by the acquiring company's assets, but rather by the assets of the company to be acquired. Lyondell took on approximately $21 billion of secured indebtedness in the LBO, of which $12.5 billion was paid out to Lyondell stockholders.

In the first week of January 2009, less than 13 months later, a financially strapped Lyondell filed a petition for chapter 11 relief in this Court. ² Lyondell's unsecured creditors then found themselves behind that $21 billion in secured debt, with Lyondell's assets effectively having been depleted by payments of $12.5 billion in loan proceeds to stockholders, who, under the most basic principles of U.S. insolvency law, are junior to creditors in right of payment.³

This adversary proceeding is one of three ⁴ now in the federal courts that were brought by trusts created for the benefit of Lyondell unsecured creditors to assert any legal claims that might have merit as a consequence of the LBO, the Merger and related transactions or incidents. In this adversary proceeding, which was removed by the defendants from state court, the LB Creditor Trust (the “Creditor Trust”) asserts state law constructive fraudulent transfer claims with respect to the LBO as the assignee of such claims from Lyondell creditors. The Creditor Trust seeks to recover, from the Lyondell former stockholders who received the largest payments, ⁵ approximately $6.3 billion in payments that were made to them as transferees incident to the LBO. The fraudulent transfer claims here are asserted only under state law, and not under any provision of the Bankruptcy Code.

Since the early days that LBOs came into common use, it has been recognized that LBOs are subject to fraudulent transfer laws, and that when an LBO renders a debtor insolvent or inadequately capitalized, a court can, subject to applicable defenses, grant injured creditors relief.⁶ Here, whether the evidence will establish that Lyondell was rendered insolvent or inadequately capitalized as a consequence of the LBO is a matter yet to be decided, and likely to be subject to debate, since Lyondell's misfortune took place at the time of the worst financial meltdown since the Great Depression. But a large numberof principally institutional stockholder defendants here (collectively, the “Movants”) seek dismissal of this case before reaching the insolvency issues. They move for dismissal of the claims on five grounds—contending, in the most far reaching of their arguments, that after a company files for bankruptcy, stockholder recipients of proceeds of leveraged buyouts are immunized from constructive fraudulent transfer claims by the Bankruptcy Code's section 546(e) safe harbor, even when the constructive fraudulent transfer claims are not brought by a trustee under the Bankruptcy Code, and instead are brought on behalf of individual creditors under state law.

While the Movants recognize that the Bankruptcy Code says nothing about cutting off rights asserted solely under state law, or preempting them, they argue that the Code's section 546(e) nevertheless applies, and also that state law rights are preempted by implication.

The Court cannot agree. Rather, it agrees with the recent holdings in the Tribune Company Fraudulent Conveyance Litigation⁷ and the Irving Tanning Company chapter 11 case ⁸ that section 546(e) does not apply to suits under state fraudulent transfer laws. And it agrees with the holding in Tribune that state fraudulent transfer laws are not preempted. Dismissal premised on the asserted applicability of section 546(e) to state law claims, and on implied preemption by section 546(e), is denied. The remainder of the motions are granted in part and denied in part, as set forth more specifically below.

Facts

It is unnecessary, for the purposes of this decision, to discuss the underlying allegations in the depth that would be required in the related Blavatnik action. The Creditor Trust here seeks to recover (but only from those receiving payments in excess of $100,000) ⁹ approximately $6.3 billion of the $12.5 billion that Lyondell former stockholders received incident to the LBO and Merger. The Creditor Trust is the assignee of claims assigned to it as a consequence of Lyondell's reorganization plan by creditors holding unsecured trade claims, funded debt claims, and senior and subordinated secured deficiency claims.¹⁰

The Creditor Trust alleges that $12.5 billion in payments to former Lyondell Shareholders was made without reasonable value in return—in fact, that “the Shareholder Defendants gave nothing in return.” ¹¹ The Creditor Trust then alleges that the $12.5 billion paid to stockholders pursuant to the Merger rendered Lyondell insolvent and with unreasonably small capital, having been financed by the incurrence of secured debt that Lyondell reasonably should have believed it would be unable to pay as such debt became due.¹²

As noted above, the claims here are asserted solely under state law. ¹³ As relevant here, the Creditor Trust's claims are not asserted in any way under the Bankruptcy Code, under its sections 548 (by which the trustee can assert, for the benefit of the estate, a federal cause of action to avoid fraudulent transfers); 544 (by which the trustee has a federal right to assert, for the benefit of the estate, state law causes of action to avoid fraudulent transfers); 550 (which provides a right of recovery for transfers avoided under, inter alia,sections 548 or 544) or otherwise.

Before this action was commenced, the Court confirmed Lyondell's plan of reorganization (the “Plan”). Among other things, the Plan provided for the creation of a trust to initiate or continue litigation at one time belonging to the bankruptcy estate. The Plan also provided for certain claims that the Lyondell estate could assert on behalf of its creditors to be abandoned to another trust for the benefit of Lyondell creditors.

The Plan defined “Abandoned Claims” as “the claims and causes of action brought on behalf of the Debtors' estates pursuant to section 544 of the Bankruptcy Code against former shareholders of Lyondell Chemical.” ¹⁴ The Plan further provided:

On the Effective Date, the Abandoned Claims shall be discontinued by the Debtors without prejudice and the Debtors shall be deemed to have abandoned, pursuant to section 554 of the Bankruptcy Code, any and all right to further pursue Abandoned Claims. Upon the effectiveness of the aforesaid discontinuance and abandonment, each holder of Allowed 2015 Notes Claims, General Unsecured Claims, and holders of the Deficiency Claims ... shall contribute to the Creditor Trust any and all State Law Avoidance Claims. The Creditor Trust shall be authorized to prosecute the State Law Avoidance Claims that are contributed to the Creditor Trust....¹⁵

The Creditor Trust then brought the state law avoidance claims in New York Supreme Court. One month later, a group of defendants (principally investment banking houses, brokerage firms and other financial institutions) represented by Wilmer Cutler Pickering Hale and Dorr LLP (“WilmerHale”), which has taken the lead in the defense of this adversary proceeding, filed a notice of removal to the district court, thereby removing this action from state court to federal court. No motion for remand was filed. The case was then referred to this Court under the district court's standing order of reference.

Discussion

The Movants seek dismissal ¹⁶ on five asserted grounds—that:

(1) (a) the state law...