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

• Decision Date: 04 January 2016
• Docket Number: Adversary Proceeding No. 09–01375 (REG),No. 09–10023(REG) (Jointly Administered),09–10023(REG) (Jointly Administered)
• Parties: In re: Lyondell Chemical Company, et al., Debtors. Edward S. Weisfelner, as Litigation Trustee of the LB Litigation Trust, Plaintiff, v. Leonard Blavatnik, et al., Defendants.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

544 B.R. 75

In re: Lyondell Chemical Company, et al., Debtors.

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

v.Leonard Blavatnik, et al., Defendants.

No. 09–10023(REG) (Jointly Administered)

Adversary Proceeding No. 09–01375 (REG)

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

Signed January 4, 2016

BROWN RUDNICK, LLP, Seven Times Square, New York, New York, 10036 By: Sigmund S. Wissner–Gross, Esq., May Orenstein, Esq., One Financial Center, Boston, Massachusetts 02111, By: Steven D. Pohl, Esq. (argued) Counsel for Plaintiff Edward S. Weisfelner, as Litigation Trustee of the LB Litigation Trust.

PAUL, HASTINGS, JANOFSKY & WALKER, LLP, 75 East 55th Street, New York, New York 10022 By: Bill Novomisle, Esq., Douglas Koff, Esq. Attorneys for Defendant Alan S. Bigman

DLA PIPER, LLP, 500 Eighth Street NW, Washington, D.C. 20004 By: James D. Wareham, Esq., Attorneys for Defendant Alan S. Bigman

QUINN, EMANUEL, URQUHART & SULLIVAN, LLP, 51 Madison Avenue, 22nd Floor, New York, New York 10010 By: Richard I. Werder, Jr., Esq. (argued), Susheel Kirpalani, Esq., Benjamin Finestone, Esq., Attorneys for Defendants Access Industries, Inc.; Access Industries Holdings LLC; AI International, S.à . r.l.; Nell Limited; BI S.à .r.l; Len Blavatnik; Lincoln Benet; Philip Kassin; Peter Thorén; and Alex Blavatnik

COVINGTON & BURLING, LLP, 620 Eighth Avenue, New York, New York 10018 By: Dianne Coffino, Esq. (argued), Andrew Ruffino, Esq., Andrea Gildea, Esq., Attorneys for Defendant Edward J. Dineen

PORTER & HEDGES, L.L.P., 1000 Main, 36th Floor, Houston, TX, 77002 By; John F. Higgins, Esq., Eric. D. Wade, Esq., Thomas A. Woolley, III Esq., Attorneys to Defendant Morris Gelb

DENTONS U.S. LLP, 1221 Avenue of the Americas, New York, New York 10020 By: Peter D. Wolfson, Arthur H. Ruegger, Attorneys to Defendant Morris Gelb.

DECISION AND ORDER ON DEFENDANTS' MOTIONS TO DISMISS COUNTS 12, 15, AND 16

ROBERT E. GERBER, UNITED STATES BANKRUPTCY JUDGE:

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. Lyondell's assets were allegedly also depleted by payments incident to the LBO and the Merger—of approximately $575 million in transaction fees and expenses, and another $337 million in payments to Lyondell officers and employees in change of control payments and other management benefits.

Those events led to the filing of what are now five adversary proceedings—three against shareholder recipients of that $12.5 billion, one dealing with unrelated issues,³ and one other—this action, which was originally the first of the five—against Blavatnik and companies he controlled; Lyondell's officers and directors; and certain others.

In his Amended Complaint (the "Complaint ") in this adversary proceeding (brought, like the others, under the umbrella of the jointly administered chapter 11 cases of Lyondell, the Resulting Company and their affiliates (the "Debtors ")), Edward S. Weisfelner (the "Trustee"), the trustee of the LB Litigation Trust (one of two trusts formed to prosecute the Debtors' claims), asserts a total of 21 claims against the defendants in this action. The 21 claims variously charge breaches of fiduciary duty; the aiding and abetting of those alleged breaches; intentional and constructive fraudulent conveyances, unlawful dividends, and a host of additional bases for recovery under state law, the Bankruptcy Code, and the laws of Luxembourg, under which several of the Basell entities were organized.⁴ The Complaint also seeks to equitably subordinate defendants' claims that might otherwise be allowed.

The Trustee's Complaint, in turn, engendered a large number of motions to dismiss. This is one of several opinions ruling on those motions⁵ —here relating to Counts 12, 15, and 16.⁶

Those counts relate to a $750 million revolving credit facility (the "Revolver ")—one of several debt facilities into which the Debtors ultimately entered—under which the Resulting Company, Lyondell and Basell Finance Company, B.V. ("Basell Finance ") were the borrowers (collectively, the "Borrowers "), and Access Industries Holdings LL ("Access Holdings") and its assignee AI International, S.á.r.l. ("AI International ") were the lenders (collectively, the "Lenders"). The Revolver was put into place following the Merger in an attempt to supply Lyondell with much-needed liquidity. Count 12 charges the Lenders with breach of the Resolver agreement by reason of their failure to fund upon a draw request in December 2008, shortly before the Debtors' chapter 11 filing. Counts 15 seeks to recharacterize the Revolver as equity, and, assuming the Revolver debt is recharacterized as equity, to impose liability against the post-Merger Board of Directors of Lyondell (the "Post–Merger Directors") for unlawful dividends based on the repayment of the Revolver debt.

The Lenders assume potential liability under Count 12 for 12(b)(6) purposes, but seek to dismiss Count 12 under provisions of the Revolver documentation exempting them from liability for "any special, punitive, indirect or consequential damages related to this Agreement." And the Lyondell Post–Merger Directors (who might be civilly liable for illegal dividends for Lyondell's repayments to the Lenders if the Revolver is recharacterized as equity) move to dismiss the Trustee's recharacterization claim in Count 15, and then the illegal dividend claims in Count 16 that might exist if the recharacterization claims were upheld.

For the reasons set forth below, the Court:

(1) Denies the motion to dismiss Count 12 to the extent Count 12 seeks restitutionary damages, but grants the motion to the extent Count 12 seeks damages of other types;

(2) Grants the motion to dismiss Count 15, seeking recharacterization; and

(3) Grants the motion to dismiss Count 16, charging illegal dividends.

The bases for the Court's determination follow.

Facts

The Complaint is quite detailed, at over 140 pages, but most of those details are unnecessary for purposes of the motions being decided here. Useful background may be found in the Court's prior opinions in the actions brought by the Trustee against selling shareholders, familiarity with which is assumed. To minimize the length of this already very long decision, the Court summarizes background facts essential for context and ease of reference, but otherwise focuses only on facts relevant to Counts 12, 15, and 16.

As previously noted, the gist of the Trustee's claims is that the Merger—and more importantly, the highly leveraged financing of the Merger—left the newly formed Resulting Company, Lyondell and many of their affiliates insolvent, inadequately capitalized, and grossly overleveraged. To finance the Merger, Lyondell and Lyondell affiliates incurred obligations of approximately $20.7 billion, entering into several borrowing facilities (collectively, the "Merger Loans "), secured by one type of collateral or another:

(i) a senior credit facility (consisting of term and revolving loans) in the aggregate amount of approximately $12.4 billion;

(ii) second lien bridge loans in the total amount of $8 billion; and

(iii) a $1 billion inventory-based revolving credit facility (the "ABL Inventory Facility ");⁷ and

(iv) a $1.15 billion receivables securitization credit facility (the "ABL Receivables Facility, " and together with the ABL Inventory Facility, the "ABL Facilities ").

But by the time the Merger closed in December 2007, the Debtors were already experiencing a liquidity crisis. And within weeks after the Merger, the Resulting Company's management was forced to seek a $600 million "upsize" in its borrowing capacity under the ABL Facilities.

While waiting for additional funds to become available through the upsizing of the ABL Facilities, the Borrowers entered into the agreement with Access Holdings, as lender, dated March 27, 2008 (the "Revolver Agreement"), underlying the Revolver. It provided for a $750 million unsecured revolving line of credit. Among many other provisions, the Revolver Agreement included one of particular relevance here. Its Section 9.05, captioned "Indemnification by the Borrowers," stated, in relevant part:

Whether or not the transactions contemplated hereby are consummated, the Borrowers shall ... indemnify and hold harmless the Lender and its Affiliates, and the directors, officers, partners, employees ... from and against any and all liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses and disbursements of any kind or nature whatsoever which may at any time be imposed, incurred by or asserted against any such Indemnitee in any way relating to or arising out of or in connection with [the Revolver].... [No Indemnitee ] shall have any liability for any special, punitive, indirect or consequential damages related to this Agreement ... or arising out of its activities in connection herewith or therewith.⁸ (emphasis added)

Even as the parties were putting the Revolver...