Decision Adds To Debate Whether LBO Payments are Vulnerable to State Law Fraudulent Transfer Claims

On January 14, 2014, the U.S. Bankruptcy Court for the Southern District of New York held that the Bankruptcy Code’s § 546(e) safe-harbor provision neither protects against nor preempts state law constructive fraudulent transfer claims brought on behalf of individual creditors against cashed-out former shareholders of a company acquired in a leveraged buyout (“LBO”). By refusing to dismiss these claims, prosecuted by a creditor trust pursuant to a confirmed plan of reorganization, Bankruptcy Judge Robert E. Gerber’s opinion in 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), opens up the former shareholders who received distributions under a failed LBO to creditor fraudulent conveyance claims where the Bankruptcy Code § 546(e) safe harbors would preclude a debtor from pursuing such claims.