554 B.R. 635
S.D.N.Y.2016Background
- Lyondell undertook a 2007 leveraged buyout (LBO) that placed about $21 billion of secured debt on the company and paid roughly $12.5 billion to shareholders; the deal closed Dec. 20, 2007.
- Trustee alleges CEO Dan Smith prepared and presented materially inflated EBITDA projections (the “refreshed” projections) to the Board and to buyer/financing sources to induce a higher purchase price.
- The Board approved the merger after relying on those projections; officers, directors, and shareholders received substantial merger-related payouts; lenders were paid and new secured liens encumbered most assets.
- Lyondell and affiliates entered bankruptcy within about a year of the LBO; the Trustee brought § 548(a)(1)(A) intentional fraudulent transfer claims to recover shareholder payments (~$6.3 billion claimed).
- The bankruptcy court dismissed the Trustee’s intentional-fraud claims (finding Smith’s intent could not be imputed to the corporation absent pleading Smith controlled the board); the district court reversed and reinstated the § 548(a)(1)(A) claim and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether CEO Smith’s intent/knowledge can be imputed to Lyondell | Impute Smith’s intent to Lyondell under agency principles because he acted within scope of duties (prepared projections, negotiated the deal) | Imputation is invalid here because Delaware law requires board approval of mergers; Trustee must plead Smith controlled or dominated the board | Imputation permitted: Delaware agency law imputes officers’ knowledge/intent when acts are within scope of employment; no special control/"critical mass" requirement applies |
| What standard governs pleading “actual intent” under § 548(a)(1)(A) on a motion to dismiss | Trustee: circumstantial evidence and badges of fraud can establish a strong inference; natural-consequences reasoning supports inference of intent | Shareholders: allegations insufficient to show board knew projections were fraudulent or that conduct manifested intent to defraud creditors; business justification plausible | Court: actual intent requires subjective appreciation (Judge Hand/Restatement formulation); Rule 9(b) applies — pleader may rely on badges of fraud and circumstantial evidence; here allegations (inflated projections, timing, payments, insolvency shortly after) suffice to plead a strong inference of actual intent |
Key Cases Cited
- O’Melveny & Myers v. FDIC, 512 U.S. 79 (federal preclusion of certain state-law imputation principles and choice-of-law guidance)
- Stewart v. Wilmington Trust SP Servs., Inc., 112 A.3d 271 (Del. Ch. 2015) (Delaware principle that officers’ knowledge/actions within scope of authority are imputed to corporation)
- Kirschner v. KPMG LLP, 15 N.Y.3d 446 (N.Y. 2010) (imputation of management’s fraudulent conduct to corporation under general agency principles)
- In re Roco Corp., 701 F.2d 978 (1st Cir. 1983) (imputing transferee’s intent where transferee was president, director, sole shareholder who controlled disposition)
- In re Tribune Co. Fraudulent Conveyance Litig., 818 F.3d 98 (2d Cir. 2016) (§ 546(e) safe-harbor can preclude state-law constructive-fraud LBO claims)
- Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011) (broad interpretation of “settlement payment” under § 546(e) and effect on constructive-fraud claims)
- In re Sentinel Mgmt. Grp., Inc., 728 F.3d 660 (7th Cir. 2013) (discusses natural-consequences presumption but does not replace subjective-intent requirement)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (standard for assessing competing inferences when evaluating scienter under heightened pleading rules)