United States District Court, S.D. New York
In re LYONDELL CHEMICAL CO., et al. Debtors.
LEONARD BLAVATNIK, et al., Defendants-Appellees. EDWARD S. WEISFELNER, as Litigation Trustee of the LB Litigation Trust, Plaintiff-Appellant,
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
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
COTE, United States District Judge.
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”), 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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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
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).
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.
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
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.
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.
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.
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
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.
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.
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.
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.
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.
bankruptcy court entered a final judgment on May 15, 2017.
The Trustee timely filed a notice of appeal on June 9. The