Weisfelner v. Hofmann (In re Lyondell Chem. Co.)
| Decision Date | 27 July 2016 |
| Docket Number | 16cv518 (DLC) |
| Parties | In Re: LYONDELL CHEMICAL CO., et al. Debtors, EDWARD S. WEISFELNER, as Litigation Trustee of the LB Litigation Trust Trustee, v. HOFMANN, et al. Shareholders. |
| Court | U.S. District Court — Southern District of New York |
APPEARANCES
For Trustee:
Sigmund S. Wissner-Gross
May Orenstein
Marek P. Krzyzowski
BROWN RUDNICK LLP
Seven Times Square
New York, NY 10036
Steven D. Pohl
BROWN RUDNICK LLP
One Financial Center
Boston, MA 02111
For Shareholders:
Philip D. Anker
Ross E. Firsenbaum
Hanna Baek
WILMER CUTLER PICKERING HALE & DORR LLP
7 World Trade Center
250 Greenwich Street
New York, NY 10007
Ari J. Savitzky
WILMER CUTLER PICKERING HALE & DORR LLP
1975 Pennsylvania Avenue NW
Washington, DC 20006
Roughly one year after its 2007 leveraged buyout ("LBO"), Lyondell Chemical Company ("Lyondell") filed a petition for chapter 11 relief. In this appeal from decisions of the bankruptcy court, Lyondell's unsecured creditors, through their trustee Edward S. Weisfelner (the "Trustee"), ask for reinstatement of their claim that Lyondell engaged in an intentional fraudulent transfer in connection with the LBO. The claim, which is brought pursuant to 11 U.S.C. § 548(a)(1)(A), seeks to claw back approximately $6.3 billion in distributions made to Lyondell shareholders (the "Shareholders") through the LBO.
On appeal, the parties principally dispute two issues. They are: whether the fraudulent intent of Lyondell's CEO may be imputed to Lyondell, and what standard applies in determining the existence of "actual intent" to defraud. For the following reasons, the intentional fraudulent transfer claim is reinstated.
The following facts are taken from the Second Amended Complaint (the "SAC"). In brief, the Trustee contends that DanSmith ("Smith"), Lyondell's CEO and Chairman of the Lyondell Board of Directors (the "Board"), knowingly presented false financial projections to the Lyondell Board when it was considering the LBO, and that in using those projections to urge adoption of the LBO, Smith had the actual intent to defraud Lyondell's creditors by stripping the company of assets in order to enrich himself and other Lyondell shareholders.
Lyondell was a large publicly-traded petrochemicals company based in the United States. Lyondell's Board consisted of Smith and ten outside directors. The financials that Smith presented to the Board at the time of the LBO contained allegedly false projections about the operations of Lyondell's oil refinery on the Gulf Coast near Houston, Texas (the "Houston Refinery").
For roughly thirteen years, Lyondell had operated the Houston Refinery as a joint venture between Lyondell and CITGO Petroleum Corporation, supplying crude oil at a fixed price. But, in 2006, Lyondell purchased a 100% stake in the Houston Refinery. The acquisition exposed Lyondell for the first time to the full market force of the prices for crude and for petroleum products.
While Lyondell was acquiring the Houston Refinery, Leonard Blavatnik ("Blavatnik"), an active investor in heavy industry and commodities, identified Lyondell as a potential acquisitiontarget. Blavatnik made his first formal offer for Lyondell in August 2006, at a price of $26.50 to $28.50 per share. Smith instructed the Board to reject this offer and to wait until he presented a "strategic update" in October 2006 before considering any merger. The Board rejected Blavatnik's offer.
The October 2006 strategic update, which was presented to the Board, included management projections of approximately $14.9 billion in earnings before interest, tax, depreciation, and amortization ("EBITDA") from 2007 to 2011. The SAC alleges that these projections were inflated by over $5 billion to justify a higher value for Lyondell stock in any future acquisition. Despite having information indicating that the projections were grossly inflated, the Board adopted Smith's projections as part of Lyondell's 2007 Long Range Plan ("2007 LRP") in December 2006. In 2007, Lyondell's actual revenues fell short of the projections for that year in the 2007 LRP.
On May 9, 2007, Smith spoke at a conference in Las Vegas about the impact of an LBO on Lyondell creditors. He stated that an LBO could "enrich the shareholders" but have a different impact on creditors. Specifically, 1
On May 11, 2007, Blavatnik announced that he had acquired a "toehold" of approximately 10% of Lyondell stock and was interested in acquiring the rest of Lyondell.2 That same day, Robert Salvin, Lyondell's Manager of Portfolio Planning in its Corporate Development Group, was told that Smith was "going to want to take another look" at the LRP. On May 15, Smith instructed Salvin to come up with a set of "refreshed" annual refining EBITDA projections for 2007 to 2011. Salvin's notes of his meeting with Smith contain the numbers "1.5-1.6B" and the word "Refining." The SAC alleges that Salvin thereafter improperly added almost $2 billion of additional total company EBITDA to the 2007 LRP on Smith's instructions. This increase came from a manipulation of the projections for the EBITDA for refining operations. In "refreshed" projections, the refiningEBITDA was increased to a flat $1.6 billion for four years and to $1.3 billion for the last year covered by the 2007 LRP.3
Smith began a series of private negotiations on June 7, 2007 with Blavatnik and his representatives. Smith suggested a purchase price of $48 per share. On July 9, Blavatnik raised his offer for Lyondell from $40 per share to $48, on the condition that Lyondell sign an agreement by July 16, 2007 and agree to a $400 million break-up fee. Blavatnik gave Smith until July 11 to respond.
On July 10, Smith reported to the Board on his discussions with Blavatnik. The Board was provided with the "refreshed" projections reflecting the "current" view of management, which showed that Lyondell would earn almost $2 billion more than had been projected in the 2007 LRP. The new analysis was discussed and compared with the materially lower 2007 LRP. Smith explained to the Board that Blavatnik would sign a merger agreement after only a couple of days of due diligence and, once signed, there would be no "out" based on information discovered after-the-fact. The Lyondell Board authorized management to continue the discussions with Blavatnik.
The SAC asserts that the Board knew that the new projections were "inflated, unreasonable, and unachievable" andhad been developed to generate a higher valuation of Lyondell for the merger. For example, the Board had copies of the Spring 2007 ratings agency presentation that Smith had made weeks earlier, which had adjusted the 2007 LRP downward due to Lyondell's poor first quarter performance in 2007. The Board also knew that short term results from a refinery's operations are volatile, that there was a need to limit the company's leverage to ensure financial flexibility in difficult times, and that "all leading industry analysts" were forecasting a downturn in the petrochemical cycle to begin in 2008 or 2009.
On July 16, 2007, Lyondell's financial advisor Deutsche Bank Securities, Inc. ("Deutsche Bank") made a presentation to the Board finding that the merger was fair to shareholders. Deutsche Bank adopted management's new projections without verification and expressed no view as to their reasonableness.
On July 16, 2007, Blavatnik's companies confirmed his proposal in writing. The deal was structured as a merger of an indirect subsidiary of Basell AF S.C.A. ("Basell") into Lyondell (the "Merger"), with Basell to become the parent of the merged entity under a new name, LyondellBasell Industries AF S.C.A. ("LBI"). Basell had also obtained commitment letters from the Lending Banks. The Board unanimously voted to approve the Merger on July 16, and the parties signed the merger agreement the same day. During the Board's meeting, Smith was excused twice to allow the outside directors to discuss the transaction without management being present.
The Merger closed on December 20, 2007. The LBO was 100% financed by debt secured entirely by Lyondell. Lyondell took on approximately $21 billion of secured indebtedness in the LBO provided by the Lending Banks, of which $12.5 billion was paid out to Lyondell Shareholders (the "Shareholder Payments"). The Shareholder Payments included approximately $100 million in payments to Lyondell officers and directors. A further $337.3million of the Merger proceeds was also paid to Lyondell officers and employees pursuant to various benefit and incentive plans, stock option plans, and other equity-based incentive programs triggered by the change of control of Lyondell. Approximately $7.1 billion of the Merger proceeds went to refinance pre-existing debt of Lyondell, Basell, and certain subsidiaries. As a result, much of Lyondell's then-existing debt was...
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