The Bankruptcy Law Review is a collaboration of expert legal practitioners and academicians who write about both the legal and public policy aspects of corporate bankruptcy law.

Lyondell

Lyondell

Pre-bankruptcy LBOs as fraudulent transfers

Caplin & Drysdale
Trevor W. Swett III and Jeffrey A. Liesemer

To read article in its entirety with full references, please view the article on Lexology.

In a bankruptcy fraudulent transfer suit, a representative of the bankruptcy estate, usually a bankruptcy trustee or a debtor-in-possession, sues individuals and business entities to unwind (or “avoid”) the fraudulent transfer, and to recover the money or property that was transferred before the debtor filed for bankruptcy. If the estate representative prevails in the suit, the net proceeds of the recovery will be distributed to the debtor’s creditors according to the payment priority scheme set forth in the Bankruptcy Code.

Former shareholders of a company that has gone into bankruptcy may find themselves on the receiving end of a fraudulent transfer suit, which may come as a rude awakening to those who participated in open transactions in public markets with no expectation that the company from which they received a payment or distribution was destined for bankruptcy. Nevertheless, former shareholders may be found legally obligated to return the sums of money paid to them. This article examines the implications and risks presented to shareholders for fraudulently transferred property, focusing in particular on one type of transaction that, under certain circumstances, may be avoided as a fraudulent transfer – the leveraged buyout.

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"Not to decide is to decide." Judge Robert E. Gerber, bankruptcy judge of the Southern District of New York, has refused to rule on motions to dismiss filed in clawback suits, and he has refused to rule on them for three years. Is the Law King, or is the King Law in the courts in the United States? Stern v. Marshall made clear that bankruptcy courts cannot abuse their limited authority. Gerber's refusal to rule is either passive-aggressive judicial activism, or at the very least, a lack of diligence in the performance of his duties. BLR examines the rules of conduct governing judges, and the remedies for failure to abide by basic standards, including sanctions and removal by the circuit judicial council.

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Robin Hood, a heroic bandit in English tales, is known for “taking from the rich and giving to the poor.”  In the case of clawback suits against innocent shareholders and former officers and directors in the LyondellBasell bankruptcy, Judge Robert Gerber, of the Southern District of New York (“SDNY”), seems to be making wealthy NYC lawyers richer.  Judge Gerber is taking from innocent shareholders, and former officers and directors, and giving to wealthy New York lawyers who are racking up legal fees. He is refusing to dismiss inappropriate, baseless claims based upon causes of action that do not exist under bankruptcy law.  By refusing to dismiss these vexatious claims, plaintiffs lawyers are allowed to use the delay to  intimidate shareholders and former officers and directors until they settle.  Gerber’s fellow judges disagree with him and so does the U.S. Court of Appeals for the Second Circuit and the United States Supreme Court.  Other judges have diplomatically called these lawyers and their lawsuits “creative.” 

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