Tighter Standards Emerge For Pleading Intentional Fraudulent Transfer Claims

posted in: Avoidance | 0

By Mark Chehi, Robert Weber and Stephen Della Penna of Skadden, Arps, Slate, Meagher & Flom LLP

The U.S. Bankruptcy Court for the Southern District of New York recently dismissed intentional fraudulent transfer claims asserted against former shareholders of Lyondell Chemical Company. Weisfelner v. Fund 1 (In re Lyondell Chemical Co.), 541 B.R. 172 (Bankr. S.D.N.Y. 2015) (“Lyondell II”). The Bankruptcy Court opinion adopts a strict view of what constitutes “intent,” and thereby tightens pleading standards applicable to complaints asserting intentional fraudulent transfers.

The intentional fraudulent transfer claims at issue focused on Basell AFSCA’s 2007 leveraged acquisition of Lyondell Chemical Company. As is typical in LBO transactions, Lyondell itself borrowed money to finance the LBO and pay its former shareholders for their Lyondell shares. Just 13 months later, Lyondell filed a voluntary chapter 11 petition.

A bankruptcy trustee subsequently asserted fraudulent transfer claims against the former Lyondell shareholders to recover the LBO payments received by them. The litigation asserted that the 2007 LBO transaction was avoidable as an intentional fraudulent transfer. The Bankruptcy Court dismissed the claims and adopted a restrictive pleading standard that requires an intentional fraudulent transfer plaintiff to plead facts that show “actual intent, as opposed to implied or presumed intent.” The plaintiff must allege some sort of “intentional action to injure creditors.” Alleging “[o]ther wrongful acts that . . . may be seriously prejudicial to creditors” – such as negligence or a breach of fiduciary duty – will not support an intentional fraudulent transfer claim.

The full article is available here.

Overview of ABI Commission Report and Recommendation on the Reform of Chapter 11 of the Bankruptcy Code

By Jay M. Goffman, George N. Panagakis, Ken Ziman, Van C. Durrer II, John K. Lyons, Mark A. McDermott, and David M. Turetsky of Skadden, Arps Slate, Meagher & Flom LLP

The American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11 recently released its Final Report recommending comprehensive reforms to Chapter 11 of the Bankruptcy Code. The report is the culmination of a three-year effort by over 200 restructuring professionals to evaluate Chapter 11 in light of the changing environment in which financially distressed companies operate. The Report is approximately 400 pages long. Skadden, Arps has prepared a comprehensive overview of the Report that condenses the salient points into a 30-page summary which can be found here. Selected recommendations for reform include:

  • DIP financing orders cannot impose milestones requiring the debtor to perform material tasks within the first 60 days (e.g., conduct a sale or file a plan).
  • No 363 sales of all or substantially all assets (“363x sales”) within the first 60 days unless the debtor demonstrates a high likelihood that the value of the debtor’s assets will decrease significantly.
  • 363 sales must satisfy requirements similar to plan confirmation requirements.
  • Junior, out-of-the-money stakeholders may be entitled to receive an allocation of value from senior creditors to reflect a possible upswing in the reorganized debtor’s value.
  • The cost of capital for similar debt issued to companies comparable to the debtor as a reorganized entity should be used when determining the appropriate discount rate for purposes of cram down.
  • Eliminating the requirement of at least one impaired accepting class of creditors for plan confirmation.
  • No appointment of an unsecured creditors’ committee if general unsecured creditors do not need representation in the case (e.g., if their claims are out-of-the-money).