In Weisfelner v. Hofmann (In re Lyondell Chem. Co.), 2016 BL 241310 (S.D.N.Y. July 27, 2016), the U.S. District Court for the Southern District of New York reversed a 2015 ruling by the bankruptcy court presiding over the chapter 11 case of Lyondell Chemical Company ("Lyondell"). By that ruling, the bankruptcy court dismissed claims asserted by a chapter 11 plan litigation trustee seeking to avoid as actual fraudulent transfers $6.3 billion in payments made to the former stockholders of Lyondell in connection with its 2007 leveraged buyout ("LBO") by Basell AF S.C.A. See Weisfelner v. Fund 1 (In re Lyondell Chem. Co.), 541 B.R. 172 (Bankr. S.D.N.Y. 2015).
The avoidance claims dismissed by the bankruptcy court were brought under section 548(a)(1)(A) of the Bankruptcy Code, which empowers a bankruptcy trustee to avoid pre-bankruptcy transfers made with the intent to hinder, delay, or defraud creditors. The court ruled that: (i) the trustee did not adequately allege that Lyondell incurred debt and transferred the payments to shareholders with "actual intent" to hinder, delay, or defraud its creditors; and (ii) the knowledge, conduct, and intent of Lyondell's CEO in connection with the shareholder transfers could not be imputed to Lyondell.
The district court reversed on appeal. It ruled that the bankruptcy court "relied on inapposite law" in concluding that the CEO's intent could be imputed to Lyondell only if the litigation trustee adequately pleaded that the CEO was in a position to control the decision of Lyondell's board to proceed with the LBO. According to the district court, the imputation of intent to defraud under the circumstances was "entirely consistent with Delaware agency law." It also held that the trustee adequately pleaded that Lyondell made the transfers to its shareholders with the intent to hinder, delay, or defraud creditors. The district court accordingly reversed the bankruptcy court's ruling and reinstated the actual fraudulent transfer claims.
On August 10, 2016, the shareholder defendants asked the district court to reconsider its July 27 decision. In the alternative, the shareholders asked the district court to certify an interlocutory appeal to the U.S. Court of Appeals for the Second Circuit. According to the shareholders, the district court overlooked controlling agency law regarding the imputation of an agent's intent. Under Delaware agency law, they argued, Lyondell's CEO did not have authority to make that "extraordinary, merger-related transfer"; rather, "only the Lyondell Board did." Accordingly, the shareholders contended that "[the CEO's] intent cannot be imputed with respect to a transfer that he had no authority to approve (and did not approve), and without imputation."
The district court denied the shareholders' motion on October 5, 2016. See Weisfelner v. Hofmann (In re Lyondell Chem. Co.), 2016 BL 332813 (S.D.N.Y. Oct. 5, 2016).
In its October 5 ruling, the district court revisited its examination of Delaware agency law. As before, it concluded that, on the basis of the facts in Lyondell, the authorities cited in its July 27 decision confirmed "the fundamental principle that the knowledge and actions of a corporation's officers and directors, acting within the scope of their authority, [are] imputed to the corporation."
The court rejected the shareholders' argument that the opinions cited in its July 27 opinion—principally Hecksher v. Fairwinds Baptist Church, 115 A.3d 1187 (Del. 2015), and Stewart v. Wilmington Tr. SP Servs., Inc., 112 A.3d 271 (Del. 2015)—compel the conclusion that the fraudulent intent of Lyondell's CEO cannot be imputed to Lyondell under the circumstances. The court explained, among other things, that: (i) Hecksher's mandate that imputation of an employee's knowledge to its employer is warranted only if the employee "has the authority to act on the knowledge" does not mean that "the employee must be able to effectuate all of the challenged conduct in this case, that is, that [Lyondell's CEO] must have had the power by himself to approve the Shareholder Payments or must have caused the Board to do so"; and (ii) the shareholders' attempt to distinguish Stewart is unavailing because the court in Stewart did not hold that, in order for an officer's intent to be imputed to the company, the officer must dominate the company.
The district court also denied the shareholders' request for certification of an interlocutory appeal to the U.S. Court of Appeals for the Second Circuit. The district court concluded, among other things, that the shareholders, who did not identify any conflicting authorities other than the reversed ruling of the bankruptcy court below, failed to show that there is a "substantial ground for difference of opinion" on the issue of imputation.
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