- Recent Rulings Highlight Risks of Shareholder Clawbacks, Capped Credit Bids for Distressed Investors; Appeals Pending
- February 10, 2014 | Authors: Adam H. Friedman; Jonathan T. Koevary; Mitchell Raab
- Law Firm: Olshan Frome Wolosky LLP - New York Office
A pair of Bankruptcy Court rulings last month, Weisfelner v. Fund 1 (In re Lyondell Chemical Co.,), Adv. Proc. Case No. 10-4609 (REG) 2014 WL 118036 (Bankr. S.D.N.Y Jan. 14, 2014) and In re Fisker Automotive Holdings, Inc.,Case No. 13-13087 (KG) (Bankr. D. Del. Jan. 17, 2014), address two of the more significant features of the distressed investing landscape: fraudulent transfer clawbacks and credit bids. In the Lyondell decision, Bankruptcy Judge Robert E. Gerber ruled that the Bankruptcy Code § 546(e) safe harbor does not shield a distressed company’s public shareholders from a clawback of leveraged buyout (LBO) payments pursuant to state law creditor claims. While in the Fisker decision, Bankruptcy Judge Kevin Gross capped a secured lender’s credit bid at the distressed sale price it paid for its claim - a warning as to possible limits of a restructuring technique sometimes considered sacrosanct in the markets. Investors and practitioners alike will be watching closely for possible near-term appeal rulings that are pending as to both issues.
The Lyondell decision stems from the 2007 acquisition of the Lyondell Chemical Company, a publicly traded company, by Basell AF S.C.A. through a conventional LBO financed by debt secured by Lyondell’s assets and where $12.5 billion of the loan proceeds were used to cash-out Lyondell stockholders. Less than 13 months later, Lyondell filed for Chapter 11 bankruptcy protection. As part of the company’s plan of reorganization and in effort to potentially enhance creditor recoveries, creditors assigned their rights to pursue state law fraudulent transfer claims to a litigation trust established to pursue these claims on their behalf. The trust is seeking to recover approximately $6.3 billion from Lyondell shareholders that were cashed out in the LBO. Counsel for certain of the defendants argued before Judge Gerber that shareholder recipients of LBO proceeds are immunized from claims of unintentional fraudulent transfer claims by the Bankruptcy Code’s § 546(e) safe harbor. The Court, however, found that § 546(e) only bars claims brought by a bankruptcy estate “trustee” and does not apply to bar state law fraudulent transfer claims brought by individual creditors or a trust acting on their behalf (notwithstanding that the claims in Lyondell (i) were assigned to a trust as part of a bankruptcy plan and (ii) were being heard by the Bankruptcy Court). In doing so, the Court relied heavily on In re Tribune Co. Fraudulent Conveyance Litigation, 499 B.R. 310 (S.D.N.Y. 2013), a recent Southern District of New York decision that reached a similar conclusion. The Court also took issue with a contrary result reached in another recent Southern District of New York decision Whyte v. Barclays Bank PLC, 494 B.R. 196 (S.D.N.Y. 2013). Both In re Tribune and Whyte have been appealed to the U.S. Court of Appeals for the Second Circuit, which will hold a joint oral argument - that we plan to attend.
In Fisker, a case arising out of the bankruptcy of premium plug-in hybrid electric vehicle company Fisker Automotive Holdings, creditor Hybrid Tech Holdings had, less than two months prior to the bankruptcy filing, purchased for $25 million in a U.S. Department of Energy auction, secured debt owed to the Department of Energy with a face amount of approximately $170 million. Thereafter, Hybrid and Fisker reached agreement for the purchase in bankruptcy of substantially all of Fisker’s assets using the debt so purchased in a credit bid of $75 million plus $725,000 in cash, of which $500,000 would be used to fund a distribution to unsecured creditors. Following Fisker’s bankruptcy filing, the Unsecured Creditors’ Committee found a competing bidder, Wanxiang America Corporation, which offered $37.5 million in cash. The Committee then argued before Judge Gross that the purchase should be decided by competitive auction in which Hybrid’s credit bid should be capped at $25 million, the price paid for the $170 million secured debt in a secondary purchase. Judge Gross agreed with the Committee, declaring the law is clear that where a court finds “cause,” the right to credit bid is not sacrosanct. Judge Gross noted with concern the speed with which the Hybrid credit bid was to have occurred, and ruled that “cause” to cap the credit bid existed where as a result of an uncapped credit bid “bidding will not only be chilled without the cap; bidding will be frozen.” In doing so, Judge Gross also observed that “Wanxiang is also prepared to increase its offer in an auction.” Judge Gross’s ruling also cited an issue raised by the Committee over the validity and the extent of the collateral package securing the Department of Energy loan that Hybrid acquired. This too argued in favor of the cap. Hybrid’s appeal of the ruling is currently pending before the District Court.
 Section 546(e) of the Bankruptcy Code provides in relevant part that “the trustee may not avoid a transfer that is a - settlement payment[.]” Shareholder cash outs pursuant to an LBO as well as the purchase price paid in stock buyback transactions are among the payments typically considered to be included within the term “settlement payment.