By Richard G. Mason, David A. Katz, and Emil A. Kleinhaus (Wachtell, Lipton, Rosen & Katz)
In situations where leveraged buyouts prove unsuccessful, and the companies subject to the buyouts file for bankruptcy, it is not unusual for debtors or creditors’ committees to seek to challenge the LBOs on fraudulent transfer grounds. In recent years, however, it is has become increasingly difficult to mount such challenges — at least in certain jurisdictions — as a result of judicial decisions that have broadly applied the Bankruptcy Code’s “safe harbor” for securities transactions to protect LBO participants from fraudulent transfer liability.
In a significant set of decisions, the District Court for the Southern District of New York has reinstated a fraudulent transfer claim to recover approximately $6.3 billion in distributions made to Lyondell Chemical shareholders in connection with Lyondell’s 2007 leveraged buyout. The decisions demonstrate that, despite the broad reach of the Bankruptcy Code’s “safe harbor,” LBOs may still be subject to challenge on fraudulent transfer grounds where the seller’s management is alleged to have acted with the actual intent to hinder, delay or defraud creditors.
The full memo is available here.