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In re Lyondell Chemical Co.

United States District Court, S.D. New York

January 24, 2018

In re LYONDELL CHEMICAL CO., et al. Debtors.
v.
LEONARD BLAVATNIK, et al., Defendants-Appellees. EDWARD S. WEISFELNER, as Litigation Trustee of the LB Litigation Trust, Plaintiff-Appellant,

          For the Plaintiff-Appellant: Michael K. Kellogg Gregory G. Rapawy Daniel G. Bird Daniel V. Dorris KELLOGG, HANSEN, TODD, FIGEL & FREDERICK PLLC, Sigmund S. Wissner Gross May Orenstein BROWN RUDNICK LLP, Steven D. Pohl BROWN RUDNICK LLP

          For the Defendants-Appellees: Richard I. Werder, Jr. Susheel Kirpalani David Cooper Rex Lee Victor Noskov QUINN EMANUEL URQUHART & SULLIVAN, LLP Kenneth N. Klee Whitman L. Holt KLEE, TUCHIN, BOGDANOFF & STERN LLP

          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 or proceeding) and regardless of whether any Indemnitee is a party thereto (all the foregoing, collectively, the “Indemnified Liabilities”), in all cases, whether or not caused by or arising, in whole or in part, out of the negligence of the Indemnitee; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses or disbursements resulted from the gross negligence, bad faith or willful misconduct of such Indemnitee . . . as determined by the final judgment of a court of competent jurisdiction. [No Indemnitee] or the Borrowers or any Subsidiary [shall] have any liability for any special, punitive, indirect or consequential damages relating to this Agreement or any other Loan Document or arising out of its activities in connection herewith or therewith (whether before or after the Closing Date).

(Emphasis supplied.)

         In early April 2008, LBI contemplated borrowing on the Access Revolver, to the considerable consternation of Access. Id. at 85. The draw never ended up occurring, largely because around the same time, LBI was able to “upsize” certain other lending facilities it had available. Id. at 85-86. These lenders were only willing to increase their commitments if the Access Revolver was in place, but once the Access Revolver was implemented, they promptly did so. Id.

         In October 2008, LBI again experienced liquidity problems. Id. at 86. Through the summer of that year, LBI faced significant headwinds. LBI's turnaround plan for its Houston refinery was prolonged by a serious crane accident. Id. Then two hurricanes caused LBI's Gulf Coast chemical plants to remain idle for most of September 2008. Id. And the beginnings of the Great Recession began having an impact when $175 million of LBI's cash equivalents, held in a money market account, were frozen due to the Lehman Brothers bankruptcy. Id. With no other liquidity available, Lyondell drew $300 million from the Access Revolver on October 15, 2008 (the “October Draw”). Id. Lyondell expected to pay the draw back in a matter of days. The repayments accordingly took place in equal installments on October 16, 17, and 20, 2008 (the “October Repayments”).

         Meanwhile, the global economic collapse in the fall of 2008 had an extremely serious, negative impact on LBI's business, after the October Repayments. Id. at 86. On December 30, 2008, while on the brink of bankruptcy, LBI submitted a draw request for the full $750 million available under the Access Revolver. Id. The next day, Access refused to lend. Id. On January 6, 2009, Lyondell filed for bankruptcy, and LBI joined it a few months later. Id. at 69.

         The Trustee, in his operative complaint, made various allegations about the negotiation and performance of the Access Revolver. Although the bankruptcy court did not need to reach the factual validity of these allegations in light of its ruling on motion to dismiss, these allegations remain relevant to review of that ruling. The gravamen of the Trustee's additional allegations concern the allegedly one-sided negotiation process for the Access Revolver, and the imposition of extra-contractual conditions on its use beyond the written terms of the agreement. Thus, for example, the Trustee alleged that Access never wanted to be a lender to LBI; that it imposed an extra-contractual requirement that any draws be repaid immediately as soon as funds were available; and otherwise attempted to discourage use of the Access Revolver. The Trustee also alleged that, in December 2008, Access failed to lend to LBI because it preferred to lend on more favorable terms after the bankruptcy petition rather than as a general unsecured creditor. The complaint alleges that Access was well aware of LBI's precarious financial situation when it failed to lend.

         PROCEDURAL BACKGROUND

         Lyondell's bankruptcy petition was filed on January 6, 2009. Id. at 69. In July 2009, the Official Committee of Unsecured Creditors commenced an adversary proceeding against, inter alia, Blavatnik, Access, and affiliated companies. In early 2010, the bankruptcy court approved a final plan of reorganization for LBI and Lyondell. Id. at 61 n.1. Under the plan, the claims of LBI and Lyondell were assigned to the LB Litigation Trust. Edward S. Weisfelner was appointed as Trustee, and took over the adversary proceeding from the Committee.

         The operative complaint for the claims on appeal is the Trustee's second amended complaint, filed on September 29, 2011. Id. at 67. As relevant here, the Trustee brought claims for breach of contract arising out of Access's failure to lend in December 2008, and to recover the October Repayments as avoidable preference payments. It bears noting, however, that these two claims were part of a massive litigation involving numerous additional claims, all resolved against the Trustee, as to which the Trustee has not appealed.

         On January 4, 2016, the bankruptcy court ruled on defendants' motion to dismiss with respect to the breach of contract claim. See In re Lyondell Chem. Co., 544 B.R. 75 (Bankr. S.D.N.Y. 2016) (“Dismissal Opinion”). The bankruptcy court held that Section 9.05 was enforceable as to all damages other than restitution damages. Id. at 92. Starting from the proposition that limitation-of-liability clauses are generally enforceable under New York law unless an exception applies, it found that the Trustee had failed to plausibly plead either that there was a disparity in bargaining power, or that the Kalisch-Jarcho exception for gross negligence or intentional wrongdoing applied. Id. at 86, 90. It also saw no possibility that any defects in the Trustee's allegations could be cured through amendment. Id. at 104-05. The bankruptcy court also found, however, that the plain language of Section 9.05 of the Access Revolver agreement did not preclude the Trustee from recovering restitutionary damages, and permitted the Trustee to proceed on the breach of contract claim to that extent. Id. at 92.

         On July 20, 2016, the bankruptcy court resolved cross motions for summary judgment on the avoidable preference claim. The bankruptcy court ruled that the Trustee had satisfied all of the elements of the avoidable preference claim as a matter of law, other than proving that LBI was insolvent when the October Repayments were made. On that issue, the bankruptcy court ruled that the defendants had submitted some evidence tending to show that LBI was solvent. It therefore found that the statutory presumption of insolvency, which, in the absence of any evidence to the contrary, is sufficient to find that the debtor was insolvent within 90 days of a bankruptcy filing, see 11 U.S.C. § 547(f), had been rebutted, and that triable issues of fact remained on the insolvency question.

         The case then proceeded to trial. The trial took place over 14 days in October and November 2016, with closing arguments in February 2017. The bankruptcy court issued findings of fact and conclusions of law on April 21, 2017.

         On the breach of contract claim, the bankruptcy court found that the Trustee had proven that Access breached the contract. Trial Opinion, 567 B.R. at 150. In accordance with the ruling on the motion to dismiss, the bankruptcy court awarded only restitution damages. Id. at 151. After noting the lack of argument on either side of the issue, the bankruptcy court found that the most equitable method to calculate restitution damages was to estimate them as the commitment fee paid by LBI and Lyondell, less 40% of that fee, to account for the benefit Lyondell received from the October Draw. Id.

         On the avoidable preference claim, the bankruptcy court, in contrast to its summary judgment ruling, found that the relevant debtor for the purposes of the claim was Lyondell, not LBI. Id. at 148. It also held that because the statutory presumption was defeated on summary judgment, it was the Trustee's burden to prove insolvency by a preponderance of the evidence, without the presumption. Id. at 118. Notably, the Trustee made statements at trial indicating that the presumption had disappeared from the case. After examining the testimony of the Trustee's valuation expert, Anders Maxwell, the court ruled that the testimony was unreliable and either excluded it or accorded it no weight. Id. at 104-07. The court also ruled that certain e-mails cited by the Trustee were insufficient to demonstrate insolvency. Id. at 149. Therefore, the bankruptcy court found that the Trustee had failed to produce any evidence tending to show that Lyondell was insolvent on the critical dates. Id.

         The bankruptcy court entered a final judgment on May 15, 2017. The Trustee timely filed a notice of appeal on June 9. The ...


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