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Turbulence Continues in Safe Harbors

By ALM Staff | Law Journal Newsletters |
March 25, 2014

This two-part article highlights two recent decisions arising in the United States Bankruptcy Court for the Southern District of New York. The decisions in both Lyondell and Lehman demonstrate how courts are applying the so-called safe harbor provisions contained in the Bankruptcy Code to a variety of different factual circumstances and provide some valuable lessons and insights.

Lyondell Weisfelner v. Fund 1

(In re Lyondell Chemical Co.), 503 B.R. 348 (Bankr. S.D.N.Y. 2014) involved the transfer of funds to shareholders arising out of a leveraged buyout (LBO) transaction and the prosecution of state-court fraudulent transfer actions to recover those funds. Certain shareholder defendants sought to dismiss the actions on five grounds, namely that: 1) after a company files for bankruptcy, stockholder recipients of proceeds of leveraged buyouts are immunized from constructive fraudulent transfer claims by the Bankruptcy Code's section 546(e) safe harbor, even when the constructive fraudulent transfer claims are not brought by a trustee under the Bankruptcy Code, and instead are brought on behalf of individual creditors under state law; 2), the creditor trust cannot recover because the transferred funds were not property of the debtors; 3) many of the shareholder defendants were merely nominees, non-beneficial holders, or conduits; 4) the creditor trust lacked standing to sue on behalf of the lenders, who must be found to have ratified the transfers in question; and 5) the creditor trust failed to satisfactorily plead its claims for intentional fraudulent transfer.

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