Monday, August 01, 2016

Bankruptcy court failed to impute CEO’s intent to Lyondell

By Amy Leisinger, J.D.

The Southern District of New York has reversed a bankruptcy court’s dismissal of an intentional fraudulent transfer claim in connection with a company’s merger. According to the court, the CEO’s knowledge and intent regarding financial projections in connection with the leveraged buyout may be imputed to the firm, and the complaint plausibly alleged that the CEO acted with actual intent to benefit shareholders at the expense of creditors. The court reinstated the claim and remanded the matter for further proceedings (In re Lyondell Chemical Co., July 27, 2016, Cote, D.).

Merger. In 2006, Lyondell Chemical Co., a large petrochemicals company, became engaged in a potential acquisition. After urging rejection of the offer, Lyondell’s CEO (and board member) provided a “strategic update” suggesting large growth and increased projections, which the board accepted. Negotiations recommenced, and the merger closed in December 2007 at a share price well above the initial offer. As a result of the structure of the leveraged buyout, much of Lyondell’s debt was extinguished. One year later, Lyondell filed a petition for bankruptcy relief.

Fraud claim. The trustee filed a complaint alleging that Lyondell’s CEO knowingly presented false financial projections to the company’s board and had actual intent to defraud Lyondell’s creditors by stripping the company of assets while enriching himself, as well as other board members and shareholders. The board knew that the new projections were “inflated, unreasonable, and unachievable” and that engaging in a leveraged buyout based on false projections left Lyondell inadequately capitalized and put its creditors at risk, the trustee alleged. Through an intentional fraudulent transfer claim, the trustee sought to claw back around $6.3 billion in shareholder distributions through the LBO.

The bankruptcy court granted the shareholder defendants’ motion to dismiss, finding that the CEO’s intent could not be imputed to Lyondell and that the trustee failed to plead facts showing intent to defraud by the directors who approved the merger. The complaint also failed to show any actual intent to injure creditors as opposed to an intention to enrich others, the court found. The trustee appealed to dispute whether the fraudulent intent of the CEO may be imputed to Lyondell and what is required to plead an “actual intent” to defraud.

Imputation of intent. Under the general rule of imputation, an employee’s knowledge can be imputed to the company if the employee acquires knowledge pertaining to job duties while within the scope of employment and has authority to act, the court noted. The CEO was an agent of Lyondell, and his preparation and presentation of the questionable projections were done as part of his duties as CEO and board member, according to the court. His alleged knowledge and intent in making and disseminating false figures can be imputed to Lyondell, and the bankruptcy court erred in concluding otherwise, the court found.

Actual intent. The court noted that a debtor’s actual intent to defraud does not need to focus on a particular target, but instead may involve intent to interfere with creditors’ normal processes.

Given the difficulty of proving actual intent to defraud creditors, “badges of fraud” may support the case, the court stated. According to the complaint, the CEO knew that the projections were inflated but presented them anyway, and with the completion of the buyout, officers, directors, and shareholders (including the CEO) received substantial payouts with the majority of Lyondell’s assets were subject to liens, effectively stripping Lyondell of its assets. These contentions and related plausible inferences create disputes that cannot be resolved on a motion to dismiss, and the intentional fraudulent conveyance claim must be reinstated for consideration in the bankruptcy court, the court concluded.

The case is No. 16cv518 (DLC).