| NEW YORK
NEW YORK Jan 14 A U.S. bankruptcy judge on
Tuesday partly upheld efforts by creditors of the former
Lyondell Chemical Co to reclaim money from its shareholders, in
a ruling that could help resolve the murky issue of how far
shareholder protections extend when companies go bankrupt.
U.S. Bankruptcy Judge Robert Gerber in New York dismissed
one fraud claim against shareholders in the $6.3 billion
lawsuit, but allowed another one to proceed. He also said the
creditors, who are represented by a trust, could replead the
dismissed count, keeping the lawsuit alive.
More critically, Gerber's decision denied a portion of the
shareholders' bid to dismiss the lawsuit in which they argued
that so-called "safe harbor" protections afforded to
shareholders under bankruptcy laws also apply under state laws.
Under federal bankruptcy laws, safe harbor provisions
protect certain securities transactions, including payments to
shareholders, from being unwound by representatives of a
bankrupt company's estate.
Gerber's ruling fails to settle the question of far those
protections extend. A federal judge in a case arising out of
SemGroup's bankruptcy said safe harbors preempt state
law claims, while another found the opposite in the bankruptcy
of Tribune Co. Those cases have been appealed to the
2nd U.S. Circuit Court of Appeals.
Tuesday's ruling came in a lawsuit stemming from the 2009
bankruptcy of Lyondell, which was saddled with debt in a buyout.
Lyondell had been bought by a group led by investor Len
Blavatnik, and then merged with Blavatnik's Basell AF SCA to
form LyondellBasell. Lyondell shareholders were paid
about $12.5 billion as part of the $21 billion all-debt buyout.
After Lyondell came out of bankruptcy in 2010, a trust
representing Lyondell's unsecured creditors sued shareholders
who made at least $100,000 in the deal. The trust argued that
the transactions contributed to Lyondell's insolvency, with
shareholders profiting while creditors lost money.
The trust argued that the safe harbor did not apply in this
case because the claims were brought under state law clawback
provisions rather than the federal bankruptcy code, and because
the lawsuit was brought by a creditor trust, not by Lyondell's
The shareholders, for their part, said the claims
nonetheless violated the spirit of the law, which they contend
was designed to forbid exactly this sort of after-the-fact
In his ruling on Tuesday, Gerber sided with the trust,
saying the claims were not preempted by federal safe harbors
because it was not clear that Congress meant to preempt state
laws when creating safe harbors.
Gerber wrote that "if Congress intended (safe harbor rules)
to be more broadly applicable, 'it could simply have said so,'"
in an echo of the ruling in the Tribune case.
Ed Weisfelner, the lawyer heading the trust, declined to
If the ruling is appealed, it could be expedited and heard
along with the appeals of SemGroup and Tribune, which are
expected to be heard by the appeals court in March.
If the Tribune and Lyondell decisions are upheld on appeal,
it would appear to curtail the protections shareholders thought
they had, putting them and others at risk if transactions are
later found to have contributed to a company's bankruptcy.
Philip Anker, an attorney for the shareholders, did not
respond to a request for comment.
Safe harbor laws were borne out of the so-called "salad oil
scandal" of the 1960s, which brought down the New York Produce
Exchange. They are meant to prevent turmoil in financial markets
by providing certainty that settled securities trades cannot be
unwound, except in circumstances of intentional fraud.
The case is one of three related lawsuits brought by
Weisfelner that have been pending for about three years. In one
of the others, Weisfelner, representing Lyondell's estate, is
asserting federal intentional fraud claims against the
shareholders, which are exempt from safe harbors.
In the third case, Weisfelner is suing Blavatnik, his Access
Industries investment group and others who led the buyout,
saying they overloaded Lyondell with debt and set it up to fail.
In that case, too, Weisfelner represents the Lyondell estate.