Holliday v. Brown Rudnick LLP
| Decision Date | 28 July 2020 |
| Docket Number | 19 Civ. 10925 (PAE) |
| Parties | MARK E. HOLLIDAY, as Trustee of the LB Litigation Trust, Plaintiff, v. BROWN RUDNICK LLP, Defendant. |
| Court | U.S. District Court — Southern District of New York |
Plaintiff Mark E. Holliday, trustee of the LB Litigation Trust (the "Trust") brings this action for legal malpractice against defendant Brown Rudnick LLP ("Brown Rudnick"). Brown Rudnick represented the Trust in Weisfelner v. Blavatnik (In re Lyondell Chem. Co.), Adv. Pro. No. 09-1375 (Bankr. S.D.N.Y.), before the Bankruptcy Court for the Southern District of New York, in which the Trust lost a $300 million preference claim (the "Preference Claim") to Access Industries Holdings, LLC ("Access"). Holliday alleges that this loss was due to Brown Rudnick's negligence. He accordingly brings claims against the firm under New York state law for legal malpractice for loss of the Preference Claim, legal malpractice for lost settlement value, and breach of fiduciary duty.
Brown Rudnick moves to dismiss the Amended Complaint ("AC"). For the reasons that follow, the Court grants that motion in part and denies it in part. The Court sustains Holliday's claim of legal malpractice for loss of the Preference Claim but grants the motion as to the two other claims.
Plaintiff Holliday is the trustee of the Trust. AC ¶¶ 18, 23. He was appointed to succeed Edward Weisfelner, a Brown Rudnick partner, as trustee following Weisfelner's removal. See id. ¶¶ 15, 23.
Defendant Brown Rudnick is the law firm that represented the Trust in the underlying bankruptcy case, including the Preference Claim litigation. See id. at 1 & ¶ 1. It has an office in New York, New York. Id. ¶ 24.
Non-party Lyondell Chemical Co. ("Lyondell") was a debtor in the underlying bankruptcy case. Id. ¶ 1. Lyondell's holding company was LyondellBasell Industries AF S.C.A. ("LBI"). Id. ¶ 7. The Trust was created in connection with Lyondell and LBI's filing for bankruptcy under Chapter 11. See id. ¶¶ 22, 29.
In December 2007, Basell B.V. ("Basell"), a Netherlands petrochemical company, acquired Lyondell in a leveraged buyout ("LBO"). Id. ¶ 25. Basell is indirectly owned by Access, which organized the LBO. Id. Following the LBO, Basell was renamed LBI, and Lyondell became its subsidiary. Id. In early 2008, LBI began running into financial trouble, and, on March 27, 2008, it and Lyondell entered into a credit agreement with Access (the "Revolver Agreement"). Id. ¶ 26. Under that agreement, Lyondell had access to a $750 million revolving credit facility, which it could draw upon on a day's notice and hold until September 28, 2009, if it wished. Id.
On October 15, 2008, Lyondell borrowed $300 million from Access under the Revolver Agreement. Id. ¶ 27. Lyondell repaid the $300 million in equal payments over the course of the next few days, specifically on October 16, 17, and 20, 2008. Id.
On January 6, 2009, Lyondell filed for bankruptcy. Id. ¶ 28. A few months later, LBI did the same. Id. The Trust was later created under the Chapter 11 reorganization plan of LBI and its affiliated entities, including Lyondell. Id. ¶ 29. Weisfelner was named its first trustee. Id. ¶ 30.
In July 2009, litigation relating to Lyondell and LBI's bankruptcy commenced. See id. ¶ 31. Among the claims filed was the $300 million Preference Claim against Access.2 Id. Sometime after its Chapter 11 plan became effective on April 30, 2010, Lyondell assigned thePreference Claim to the Trust. See id. ¶ 29. The Preference Claim proceeded to summary judgment and later to a bench trial.
Brown Rudnick, on behalf of the Trust, moved for summary judgment on the Preference Claim. Id. ¶ 41; see also Dkt. 27 ("Clark Decl."), Ex. 14 ("SJ Op.") at 3-6. Access cross-moved for summary judgment based on an affirmative defense. See AC ¶ 113 n.24; SJ Op. at 6-9.
In its motion for summary judgment, Brown Rudnick argued that it had established the elements of an avoidable preference claim, and that it was entitled to a presumption that Lyondell was insolvent at the time of the transfers. SJ Op. at 3, 5. Under 11 U.S.C. § 547(b), which governs preference claims, a trustee may "avoid a transfer by the debtor to a creditor within 90 days prior to bankruptcy if the debtor was insolvent at the time of the transfer."3 AC ¶ 32. The debtor is presumed insolvent for transfers made within those 90 days, although this presumption can be rebutted. See id. Brown Rudnick argued that Lyondell should be presumed insolvent, because the Preference Claim was based on Lyondell's repayment of the $300 million to Access within 90 days of Lyondell's filing for bankruptcy. See AC ¶¶ 27, 40; SJ Op. at 5.
Access attempted to rebut this presumption by showing that Lyondell was in fact solvent at the time of the transfers. See AC ¶¶ 42-44. Access did so by presenting valuations of Lyondell, including an expert's adjusted valuation that valued the company's assets in October 2008 at a low-end value of $10.6 billion and a mid-point value of $12.23 billion. See id. ¶ 43.Access also presented evidence that Lyondell's direct liabilities were $9.1 billion. Id. ¶ 44. It then argued that there was sufficient evidence to rebut the presumption that Lyondell was insolvent because Lyondell's assets exceeded its liabilities and there was a dispute as to whether Lyondell was liable under any guarantees. Id. Significant here, Access's calculations did not account for an $8 billion intercompany debt that Lyondell owed. See id. ¶¶ 3, 45. A large portion of this $8 billion debt was a $7.16 billion intercompany note, which Lyondell had filed as an exhibit and which Access referenced only in relation to its affirmative defense. See id. ¶¶ 45, 49.
Brown Rudnick, however, did not focus on Lyondell's stand-alone solvency, but instead the solvency of LBI as a whole. See, e.g., id. ¶ 41. Brown Rudnick's theory was that Lyondell was insolvent only if LBI was also insolvent. Id. ¶ 37. The AC alleges that Brown Rudnick's theory was wrong. See id. ¶ 38. It further alleges that, in choosing to pursue this theory, Brown Rudnick forewent the theory that Lyondell itself was insolvent, and therefore did not present expert evidence at summary judgment of Lyondell's stand-alone insolvency, id. ¶ 5, or offer evidence of Lyondell's $8 billion debt to other LBI entities or the intercompany note, see id. ¶¶ 41, 48. Instead, Brown Rudnick called the intercompany note "immaterial." Id. ¶ 49. Had Brown Rudnick advised the Bankruptcy Court of Lyondell's $8 billion debt, the AC alleges, Lyondell's liabilities would have clearly outstripped its assets, entitling the Trust to the presumption of insolvency—and summary judgment. See id. ¶¶ 4, 47, 52.
The Bankruptcy Court denied Brown Rudnick's motion for summary judgment. See id. ¶ 52; see also SJ Op. at 5-6. It found that Brown Rudnick had established all but one element ofan avoidable preference claim: Lyondell's insolvency.4 See SJ Op. at 4-5. As to that element, it held that Access had rebutted the presumption of Lyondell's insolvency, and that disputed issues of fact remained. See AC ¶ 52; see also SJ Op. at 5-6.
At some point after trial, Brown Rudnick attorneys marked up Access's summary judgment briefing and wrote that Access's valuation of Lyondell "plus $8 billion debt = insolvent." AC ¶ 53 (emphasis omitted).
Access cross-moved for summary judgment, asserting the "ordinary course" affirmative defense. See id. ¶ 113 n.24; see also SJ Op. at 8. For this defense to succeed, a transferee must show that "the debt (1) was incurred 'in the ordinary course of business or financial affairs of the debtor and the transferee' and (2) was repaid 'in the ordinary course of business or financial affairs of the debtor and the transferee' or pursuant to ordinary business terms." AC ¶ 114 (quoting 11 U.S.C. § 547(c)(2)).
Access argued that Lyondell had drawn on the Access credit facility according to the terms of the Revolver Agreement, and that Lyondell had incurred and repaid the debt in its ordinary course of business. See id. ¶ 115; SJ Op. at 8.
The Bankruptcy Court denied summary judgment to Access on this claim, finding that unresolved issues of fact precluded summary judgment. AC ¶ 113 n.24; SJ Op. at 8-9.
In 2016, the Bankruptcy Court held a bench trial on the Preference Claim, along with the other remaining claims. AC ¶ 31. In pursuing malpractice claims against Brown Rudnick, theAC highlights two aspects of the trial: (1) the failure to offer evidence of Lyondell's stand-alone insolvency, and (2) the improper valuation of LBI. Access again asserted its affirmative defense.
At trial, Brown Rudnick did not argue that the presumption of insolvency was applicable. See id. ¶ 54. Instead, it waived the presumption, stating that it was the Trust's burden to prove insolvency. Id.
As during the summary judgment stage, Brown Rudnick continued to focus on LBI's insolvency, rather than that of Lyondell. See id. ¶¶ 35-37. Brown Rudnick analyzed only LBI's balance sheet, rather than Lyondell's, and did not consider Lyondell's assets and liabilities on their own terms. See id. ¶¶ 7, 58. Along these lines, the AC faults Brown Rudnick for not presenting evidence of Lyondell's intercompany debt or expert testimony as to Lyondell's insolvency. See id. ¶¶ 35-36, 75.
First, it alleges, Brown Rudnick did not gather or present evidence of Lyondell's stand-alone insolvency. Id. ¶ 35. Nor did Brown Rudnick present evidence of Lyondell's $8 billion debt, including the $7.16 billion intercompany note. See id. ¶¶ 65, 75. These debts, the AC alleges, could have been added to Access's own calculations of Lyondell's balance sheet to demonstrate Lyondell's...
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