As a follow-up to the In re Lyondell Chemical Co. opinion Judge Gerber issued in November 2015, in which he ruled on various avoidance action claims against the Debtors’ shareholders (the “Shareholder Opinion”, whose related blog post can be found here), the Court issued an opinion last week addressing similar claims against the Debtors’ Pre-Merger directors and officers (the “Pre-Merger Directors and Officers”). This blog’s post on the Shareholder Opinion provides the pertinent background on the bankruptcy and adversary cases and the defined terms therein apply here unless otherwise stated.
The additional background included here is limited solely to that which pertains to the allegations against the Defendants. At bottom, the instant complaint (the “Complaint”) included a count charging that Merger-related payments to Lyondell’s Pre-Merger Directors and Officers were intentional fraudulent transfers. The Court noted that although the sums sought against the shareholders differed, the allegations supporting the requisite scienter overlapped with those in the Complaint; likewise, the Court found the allegations equally deficient against the Pre-Merger Directors and Officers as they were against the shareholders. As such, the fraudulent transfer count was dismissed.
The Pre-Merger Directors and Officers
Prior to the events at issue here, Lyondell’s Board of Directors (the “Pre-Merger Directors”) consisted of 10 elected outside directors (the “Outside Directors”) and one additional director, Dan Smith (“Smith”), Lyondell’s CEO. Lyondell’s COO, Morris Gelb (“Gelb”), was not a director at the time of the Merger, but became one as of March 28, 2008, along with Edward Dineen (“Dineen”), who was Lyondell’s former Senior Vice President of the Chemicals and Polymers business segment. Gelb and Dineen were among the 12 senior Lyondell executives, including Smith (collectively, the “Pre–Merger Officers”), who collectively received over $158 million in “Change of Control” payments and over $93 million in Merger consideration pursuant to the Merger, on account of stock options, restricted stock, performance units, severance/retirement plans and other benefits. Similarly, Lyondell’s Outside Directors received, as a result of the Merger, a total of approximately $19 million in Change of Control payments and Merger consideration.
The Fraudulent Transfer Allegations
The fraudulent transfer count seeks to recover approximately $271 million that was transferred to the Pre-Merger Directors and Officers in the form of Change of Control payments and as Merger consideration for their Lyondell stock. The allegations underlying this count essentially break down into two categories: (1) those speaking of Smith’s actions in bringing about Lyondell’s “refreshed” projections and the Merger, and (2) those speaking of Lyondell’s Outside Directors in approving it.
As discussed at some length in the related opinion preceding the Shareholder Opinion, the Court held that the Trustee had to establish a “critical mass” of the Lyondell (pre-Merger) Board members had the requisite fraudulent intent. In the Shareholder Opinion, the Court examined in great detail the nature of the intent required to establish claims for intentional fraudulent transfers. After doing so, the Court concluded that the Trustee had still failed to satisfactorily plead factual allegations demonstrating a strong inference of an actual intent to hinder, delay or defraud creditors by a critical mass of Lyondell’s board of directors.
In this case, the Court found that although the Trustee sought to recover Merger consideration and Change of Control payments received by the Pre–Merger Directors & Officers (as contrasted to Merger consideration received by Lyondell’s shareholders generally), the same facts underlie the claims of both types. In both cases, the intentional fraudulent transfer claims rested on (i) alleged efforts by Smith and confederates to present fraudulent “refreshed” earnings projections; (ii) the presence of Pre–Merger Directors at Board meetings at which the “refreshed” projections were discussed; (iii) failures by Pre–Merger Directors to challenge Smith’s allegedly inflated projections, and (iv) to engage in basic due diligence to satisfy themselves that the projections had a reasonable basis; and Pre–Merger Directors’ acts to nevertheless approve the Merger and the terms of the LBO financing.
The Trustee, of course, alleged that the payments provided motivation for action and inaction by Pre-Merger Directors and Officers, even with respect to payments to shareholders for their stock. Nevertheless, the Court found that the Trustee made no additional allegations with respect to control by Smith over other Pre-Merger Directors, or that a critical mass of them otherwise intended to hinder, delay, or defraud Lyondell creditors. The Court noted that this result would not differ if the Pre-Merger Directors and Officers had the requisite intent as transferees, as the intent must be the intent of the transferor.
Ultimately, then, “just as the Court determined that the allegations supporting the fraudulent transfer claims were insufficient vis-a-vis payments to shareholder defendants, the Court comes to the same conclusion vis-a-vis payments to Pre–Merger Ds & Os.” The Court found that while the allegations (again) raised “serious concerns over whether they breached fiduciary duties as directors and officers, those allegations are insufficient to demonstrate that a critical mass of the Lyondell Pre–Merger Directors (who were the ones in a position to control the transfer at issue) possessed an “actual intent to hinder, delay or defraud creditors” by their actions.” As such, the fraudulent transfer count was dismissed.
A copy of the opinion can be found here or on Westlaw as Weisfelner v. Blavatnik (In re Lyondell Chemical Co.), Adv. Proc. No. 09-1375 (REG), 2016 WL 48155 (Bankr. S.D.N.Y. Jan. 4, 2016).