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June 2017: Trial Victory in Multi-Billion Dollar Fraudulent Transfer Trial

June 2017

The firm recently obtained a trial victory in a closely-watched case that will have a significant impact on bankruptcy litigation.

In late 2007 the firm’s client, Access Industries, sponsored the merger of Lyondell Chemical Company and Basell AF SCA to form LyondellBasell Industries, or “LBI,” then the world’s third largest chemical company. LBI struggled in late 2008 as a result of a confluence of events including the Great Recession, and it filed for bankruptcy in early 2009. A committee of unsecured creditors quickly filed a multi-billion dollar lawsuit against Access, its founder Len Blavatnik, the banks that financed the merger, and various other officers, directors and affiliates of the pre-merger companies. A year later, the unsecured creditors’ claims were transferred to a litigation trustee, who upped the ante by filing an amended complaint asserting that the merger was the result of a massive fraud.

As the judge noted, the trustee threw the “kitchen sink” at Access and the other defendants. The thrust of the trustee’s allegations was that the financial projections used to support the merger were deliberately and massively inflated, meaning that LBI was insolvent and inadequately capitalized at its formation. On that basis, the trustee sought to use fraudulent transfer law to claw back billions of dollars that LBI paid to buy out the shareholders of Lyondell. This included amounts that were paid to Access on account of a “toehold” position it had acquired in Lyondell before the merger. The trustee also asserted claims relating to a credit facility that Access provided to LBI in 2008, claiming that LBI’s repayment of a draw on that loan (of $300 million) just months before the bankruptcy was an illegal preference. The trustee also claimed that Access and Blavatnik breached their management obligations under the law of Luxembourg (where LBI was organized), resulting in billions of dollars in additional damages to creditors.

Over the eight-year course of the litigation, the firm obtained a number of crucial decisions that positioned Access for trial, including, in a rare feat, rebutting the legal presumption that LBI was insolvent in 2008 when it repaid $300 million under its credit facility with Access. This meant that a threshold element of one of the trustee’s more significant claims could not simply be assumed but rather had to be proven.

Along the way, the other defendants settled with the trustee, leaving Access and Blavatnik to vindicate the merger at trial. Over 13 days in October and November 2016, the Bankruptcy Court heard from dozens of witnesses, including Access’s most senior members and the parties’ experts. In April, the court ruled overwhelmingly in Access’s favor.

In a 173-page opinion, the court awarded judgment for Access on all but one claim (worth only $7.2 million out of the more than $3 billion the trustee sought against Access). The court cleared Access and Blavatnik of fraud, finding that they and others “fully appraised the merits of the merger based on droves of public and non-public information, and decades of industry experience.” And, as to the trustee’s case, the court concluded that the trial exposed “serious flaws with the Trustee’s experts … rendering [their] testimony largely unreliable.”

Fraudulent transfer claims are frequently turned to by creditors seeking an advantage in bankruptcy. Yet, few cases of this magnitude are ever decided at trial. Because the trial dealt with fundamental issues to these types of cases, the decision will no doubt be studied by bankruptcy practitioners for a long time.