Lyondell CEO's Alleged Fraud Supports Trustee's Claims

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By Daniel Gill

Aug. 1 — A litigation trust can pursue fraudulent transfer claims for about $6.3 billion in distributions made through a leveraged buy-out prior to the Lyondell Chemical Co. bankruptcy ( Weisfelner v. Hofmann (In re Lyondell Chem. Co.), 2016 BL 241310, S.D.N.Y., No. 16cv518 (DLC), 7/27/16 ).

Judge Denise Cote of the U.S. District Court for the Southern District of New York on July 27 overruled a bankruptcy court's order dismissing a complaint brought by the trustee of a litigation trust, finding that the intent of Lyondell's CEO and chairman to defraud creditors by intentionally overstating the value of the company could be imputed to the corporation.

The court held that the trustee adequately pleaded a cause of action to avoid payments to shareholders in the LBO as fraudulent transfers, sending the matter back to the bankruptcy court for further proceedings.

Cooking the Books

According to trustee Edward S. Weisfelner, Lyondell CEO and Chairman Dan Smith responded to a 2006 offer by Leonard Blavatnik to acquire Lyondell by presenting the company with financial statements indicating that Lyondell had an EBITDA (earnings before interest, tax, depreciation and amortization) of $14.9 billion, which the trustee alleged was artificially inflated by more than $5 billion.

Not long thereafter, a “refreshed” EBITDA was presented to the board — and to Blavatnik and his supporting investment bankers — overstating the actual value by an additional $2 billion, according to the complaint. According to the complaint, Blavatnik relied on these figures when he raised his initial offer of around $27.50 a share to the final offer of $48 per share, the court said. Similarly, the board relied on the purposefully inflated values when it approved the takeover.

The LBO was “100% financed” by new debt — about $21 billion of indebtedness taken on by Lyondell and secured by virtually all of the company's assets, the court said. $12.5 billion was paid to Lyondell's shareholders, and its officers and directors got more than $437 million of payments from the transaction, the court said.

Although the merger satisfied much of Lyondell's then existing debt (approximately $7.1 billion worth), the $21 billion of new debt, secured by the company's assets, put the company's creditors at “grave risk,” according to the trustee's allegations as recounted by the court.

“By the end of February 2008, [the debtor] was ‘fighting for its life,' suffering from negative liquidity, lower oil prices, and other adverse developments,” the court said. The company filed its Chapter 11 case in January 2009. Chapter 11 allows companies (or individuals) to enjoy protections from creditors while they seek to reorganize their debt or liquidate pursuant to a plan which must be approved by the bankruptcy court.

Claims for Fraudulent Transfers

A number of adversary proceedings (as lawsuits filed in bankruptcy cases are called) were commenced to recover moneys transferred in the LBO transaction. Following the confirmation of Lyondell's plan, the trustee filed adversary proceedings against shareholders to recover the money they received through the LBO.

The court noted that there were sufficient “badges of fraud” alleged in the complaint for it to survive a motion to dismiss. Smith oversaw the preparation of the “grossly overstated” EBITDA projections and presented them to the board. “Because the majority of Lyondell's assets were subject to liens after the LBO, the LBO had the effect of essentially stripping Lyondell of its assets.”

The trustee was represented by Sigmund S. Wissner-Gross, Brown Rudnick LLP, New York. The defendant shareholders were represented by Philip D Anker, Wilmer Cutler Pickering Hale & Dorr LLP, New York.

To contact the reporter on this story: Daniel Gill in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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