Weisfelner v. Blavatnik (In re Lyondell Chem. Co.)

• Citation: 585 B.R. 41
• Decision Date: 24 January 2018
• Docket Number: 17cv4375(DLC)
• Parties: IN RE: LYONDELL CHEMICAL CO., et al., Debtors. Edward S. Weisfelner, as Litigation Trustee of the LB Litigation Trust, Plaintiff–Appellant, v. Leonard Blavatnik, et al., Defendants–Appellees.
• Court: U.S. District Court — Southern District of New York

585 B.R. 41

IN RE: LYONDELL CHEMICAL CO., et al., Debtors.

Edward S. Weisfelner, as Litigation Trustee of the LB Litigation Trust, Plaintiff–Appellant,

v.Leonard Blavatnik, et al., Defendants–Appellees.

17cv4375(DLC)

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

Signed January 24, 2018

As Modified January 29, 2018

For the Plaintiff–Appellant: Michael K. Kellogg, Gregory G. Rapawy, Daniel G. Bird, Daniel V. Dorris, KELLOGG, HANSEN, TODD, FIGEL & FREDERICK PLLC, 1615 M Street, N.W., Suite 400, Washington, DC 20036, Sigmund S. Wissner Gross, May Orenstein, BROWN RUDNICK LLP, Seven Times Square, New York, New York 10036, Steven D. Pohl, BROWN RUDNICK LLP, One Financial Center, Boston, Massachusetts 02111.

For the Defendants–Appellees: Richard I. Werder, Jr., Susheel Kirpalani, David Cooper, Rex Lee, Victor Noskov, QUINN EMANUEL URQUHART & SULLIVAN, LLP, 51 Madison Avenue, 22nd Floor, New York, New York 10010, Kenneth N. Klee, Whitman L. Holt, KLEE, TUCHIN, BOGDANOFF & STERN LLP, 1999 Avenue of The Stars, 39th Floor, Los Angeles, California 90067.

OPINION AND ORDER

DENISE COTE, United States District Judge

This appeal arises out of the leveraged buyout ("LBO") and ensuing bankruptcy of Lyondell Chemical Company ("Lyondell"). In December 2007, Lyondell was acquired in an LBO by Basell B.V. ("Basell"), a Netherlands-based petrochemical company. The LBO was arranged by Basell's indirect owner, Access Industries, Inc. ("Access"¹ ), which, in turn, is owned by Leonard Blavatnik, an American multi-billionaire. Three months later, in March 2008, Lyondell was in need of additional liquidity, and obtained a $750 million revolving credit facility from Access, now known as the "Access Revolver." Lyondell first drew on the Access Revolver for $300 million in October 2008, and repaid that draw over the next 5 days. A few months later, in December 2008, while on the brink of bankruptcy, Lyondell sought to draw the full amount of the Access Revolver. Access refused. A week later, Lyondell filed a petition for Chapter 11 bankruptcy relief.

Edward S. Weisfelner, appointed by the bankruptcy court as Litigation Trustee of the LB Litigation Trust (the "Trustee"), pursued numerous claims against Access and Blavatnik. Two of these claims are now the subject of this appeal.

First, the Trustee claims that Access breached the Access Revolver agreement by failing to lend pursuant to its terms in December 2008. Although at trial, the Trustee proved that Access breached the agreement, the bankruptcy court had held on Access's motion to dismiss that a provision of the agreement that limited its liability for damages was enforceable. The Trustee has appealed that ruling, and in the alternative, challenges the amount of the bankruptcy court's damages award.

Second, the Trustee seeks to recover the October 2008 repayments on the Access Revolver as avoidable preference payments. On summary judgment, the bankruptcy court held that the Trustee had proven four of the five elements of the claim. But on the last element, that Lyondell was insolvent when the repayments were made, the court ruled at trial that the Trustee failed to carry its burden to prove that insolvency. The Trustee now challenges that ruling, on both legal and factual grounds. For the following reasons, the bankruptcy court's judgment is affirmed in all respects, except as to its calculation of damages.

BACKGROUND

The following facts are primarily drawn from the bankruptcy court's findings of fact after trial, and are not contested on appeal except where noted. Only those facts relevant to the issues on appeal are discussed below; further detail can be found in the bankruptcy court's thorough and well-reasoned April 21, 2017 opinion, In re Lyondell Chem. Co., 567 B.R. 55 (Bankr. S.D.N.Y. 2017) (" Trial Opinion"), with which familiarity is presumed.

Leonard Blavatnik, an American multi-billionaire, is the 100% owner of the Access group of companies. Id. at 69. In 2005, the Access group acquired Basell, a Netherlands-based petrochemicals company. Id. at 70. Soon after acquiring Basell, Blavatnik began to pursue combining Basell with an American refining company, with the goal of building a global petrochemical and refining company. Id. at 71. Among the acquisition targets Access identified was Lyondell. Id.

Access and Basell made various offers to acquire Lyondell over the course of 2006 and 2007. Id. at 72. These offers began at a price of approximately $24 to $27 per share of Lyondell, and steadily increased from there. Id. at 72–73. In early 2007, Blavatnik and Access began seriously evaluating an offer to purchase Lyondell at $38 dollars per share. Id. Some members of Blavatnik's team expressed concerns about the amount of leverage needed to consummate a deal at that price, noting that in the "downside case," the resulting company could end up in financial distress. Id. Despite the substantial analysis and modeling Access undertook at the $38 per share price, no deal was consummated. Id.

In May 2007, Access acquired an 8.3% position in Lyondell, in order to increase the pressure on Lyondell to negotiate with Basell. Id. By July 9, 2007, Blavatnik and Lyondell's CEO, Dan Smith, had reached a tentative arrangement for Basell to acquire Lyondell at a price of $48 per share. Id. at 76. At trial, the Trustee presented evidence that this price was perceived internally at Access as too high, because it would not provide sufficient upside for Access in view of the payments necessary to service the required debt load. Id. at 76–77. Nonetheless, the merger agreement between the Basell and Lyondell companies was signed on July 16, 2007. Id. at 77.

After the merger agreement was signed, financing needed to be arranged. Five major banks each committed billions of dollars to finance the merger, and each made internal projections for the resulting company based on non-public information regarding both Basell and Lyondell. Id. at 79, 87–89. Each of these banks engaged in an extensive diligence process commensurate with the lending exposure they were undertaking. Id. at 87–89. The bankruptcy court particularly focused on two models, one from Citibank, and one from Merrill Lynch, which each showed that they believed the debt associated with the merger was an acceptable risk. Id. at 90–91.

The merger closed on December 20, 2017. Id. at 79. As the bankruptcy court aptly described it, the deal involved elements both of a merger and acquisition, as well as leveraged finance. Id. Under the merger, Basell contributed its equity and borrowed funds from financing banks to purchase Lyondell, with the bank loans secured against the assets of the combined company. Id. at 79–80. Lyondell's previous shareholders and debtholders received approximately $19.63 billion as part of the transaction. Id. at 80. Contemporaneous with the closing, Citibank had prepared a valuation showing the Basell company assets were worth approximately $10–12 billion, which the bankruptcy court credited. Id. at 80.

After the closing, Basell renamed itself Lyondell Basell Industries ("LBI"), and Lyondell became one of LBI's subsidiaries. Id. Lyondell's liquidity and capital resources were then integrated into LBI. Id. at 81.

By early 2008, LBI began experiencing significant liquidity issues. Id. LBI had $2.3 billion in liquidity at the close of the merger, but by February 2008, that cushion had dwindled to $895 million. Id. Although LBI had ordinary seasonal needs that tended to negatively impact first quarter liquidity, a rise in oil prices, a sales decline, and various other unexpected costs caused liquidity to decrease more than anticipated. Id. When the merger was first discussed, the participants contemplated that an additional unsecured revolving line of credit for LBI could become necessary, but the events of the first quarter necessitated its implementation. Id.

On March 27, 2008, Lyondell and LBI entered into a $750 million unsecured revolving credit facility with Access: the Access Revolver. Id. at 84–85. LBI paid an approximately $12 million commitment fee to Access for setting up the facility. Id. at 151. Under the terms of the Revolver, Lyondell was entitled to borrow on one day's notice to Access. Id. at 85. Once it had borrowed, Lyondell was entitled to hold the money until September 28, 2009, but could voluntarily repay earlier on one day's notice. Id. Commensurate with the higher risk associated with lending on an unsecured basis, the Access Revolver was the one of the highest interest rate credit facilities LBI and Lyondell had available. Id. at 86.

Among the clauses included in the Access Revolver was Section 9.05, which purported to limit the liability of the parties to the agreement. Section 9.05 reads:

Whether or not the transactions contemplated hereby are consummated, the Borrowers shall, jointly and severally, indemnify and hold harmless the Lender and its Affiliates ... (collectively, the "Indemnitees") from and against any and all liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses, and disbursements (including attorney costs) of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against any such Indemnitee in any way relating to or arising out of or in connection with (a) the execution, delivery, enforcement, performance, or administration of any Loan Document or any other agreement, letter or instrument delivered in connection with the transactions contemplated thereby or the consummation of the transactions contemplated thereby, (b) any Revolving Credit Commitment or Loan or the use or proposed use of the proceeds therefrom ... or (d) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort, or any other theory (including any investigation of, preparation for, or defense of any pending or threatened claim, investigation, litigation

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