(Reuters) - To call the outcome of litigation between the Lyondell Chemical Company’s litigation trust and billionaire Len Blavatnik one-sided does not quite do justice to the phrase. The trust went into a 14-day trial before Manhattan federal bankruptcy judge Martin Glenn in the fall of 2016 with billions of dollars of claims against Blavatnik, who took Lyondell private in a 2007 deal that left its successor company buried in debt. The trust emerged from the litigation in 2018 with a damages award of about $12 million.
It now appears that Lyondell’s litigation and creditors’ trusts have decided that blame for the debacle lies with Brown Rudnick, the law firm that prosecuted the case against Blavatnik.
On Monday, the trusts disclosed in a filing in U.S. bankruptcy court in Manhattan that they have removed Brown Rudnick partner Edward Weisfelner as trustee because the litigation trust has prospective malpractice claims against his law firm. That determination was made, according to the filing, by co-counsel for the trusts’ advisory board, Reid Collins & Tsai and former Texas federal bankruptcy judge Leif Clark.
Weisfelner said in an email that he could not comment at this time on the filing or allegations of malpractice by his firm. In a public filing in March, Weisfelner said he did not believe the litigation trust had a viable claim against Brown Rudnick and that if the trust pursued a case against the firm, the firm “may have valid indemnity claims against the trusts and may also have claims against the advisory board.” (Intriguingly, the Weisfelner report in March disclosed that certain Lyondell trust beneficiaries offered to buy the right to bring a malpractice case from the litigation trust for $5 million. That offer prompted the trusts’ advisory board to investigate the prospect of a suit against Brown Rudnick.)
Trust advisory board counsel William Reid of Reid Collins declined to provide a statement in response to my email request for comment.
Based on Monday’s filing, the trusts’ prospective claims against Brown Rudnick seem to be focused on just one aspect the ungainly litigation against Blavatnik and related defendants. In October 2008, Lyondell was operating as a subsidiary to the merged post-acquisition company LyondellBasell Industries, or LBI. Facing a cash crunch after a crane accident and two hurricanes disrupted operations on the Gulf Coast, Lyondell borrowed $300 million from a credit facility set up by Blavatnik’s Access Industries, the indirect owner of LBI. Lyondell repaid the $300 million within days but nevertheless ended up filing for Chapter 11 bankruptcy protection in December 2018. The Lyondell litigation trust asserted – among its many other claims against the Blavatnik defendants – that the $300 million repayment to Access was an “avoidable preference payment.” The $300 million, it alleged, should not have been paid to Access and properly belonged to the Lyondell estate.
As Judge Glenn explained in a 177-page tome of an opinion in 2017 (567 B.R. 55), to prove the $300 million should not have been paid, Lyondell had to show that it was insolvent at the time of repayment. Brown Rudnick, which represented the trust at the 2016 trial, failed to make that showing, according to Judge Glenn.
The judge said that the trust’s only proof that Lyondell was insolvent in October 2008, when it repaid $300 million to Blavatnik’s Access, came from testimony by an expert witness. Unfortunately for the litigation trust, Judge Glenn said, the expert fatally undermined his own credibility. Among other problems, according to the judge, the expert based his valuation on numbers that weren’t presented until December 2008, months after the $300 million repayment, and failed adequately to explain why he had previously opined, in connection with a debtor-in-possession loan, that Lyondell parent LBI was solvent in 2009. “The trustee’s insolvency case crumbled under the weight of (the expert’s) errors,” Judge Glenn wrote.
In post-trial briefing, Brown Rudnick tried to change the trustee’s insolvency theory. At trial, the firm had contended that LBI, the enterprise entity, was insolvent at the time of the $300 million repayment to Access. After trial, the trustee argued that the subsidiary Lyondell was insolvent as a stand-alone entity. (It was Lyondell that actually repaid the $300 million, although both the parent and the subsidiary were in Chapter 11.) The trustee’s post-trial brief noted that Lyondell’s balance sheet was encumbered by much of the debt from the LBO, including an $8 billion note to other parties in the deal.
Judge Glenn was unpersuaded by what he called an “eleventh hour” change of course, holding that the flawed expert testimony remained the trustee’s only evidence of insolvency as of October 2008, regardless of whether it was Lyondell or LBI that was purportedly insolvent.
U.S. District Judge Denise Cote of Manhattan, who reviewed Judge Glenn’s decision on the $300 million transfer, also noted in her ruling (585 B.R. 41) in January 2018 that the trustee and Brown Rudnick waited until post-trial briefing to assert its theory that the subsidiary Lyondell was insolvent. That meant the trustee was left to try to extrapolate Lyondell’s insolvency from expert testimony on LBI’s financials, without any support in the record for its methodology. The trustee, who brought in Kellogg Hansen Todd Figel & Frederick to work with Brown Rudnick in the proceeding before Judge Cote, argued that a Lyondell quarterly filing at the Securities and Exchange Commission showed the subsidiary’s insolvency. But Judge Cote said that in a case this complex, a lone “equivocal” SEC filing isn’t sufficient proof.
“The burden was on the trustee to (show) Lyondell’s insolvency as of October 2008,” she wrote. “This it has altogether failed to do, either in the bankruptcy court or on appeal.”
That failing appears to be the crux of the prospective malpractice case against Brown Rudnick, based on the filing Monday that disclosed the removal of Brown Rudnick partner Weisfelner as trustee. The filing said the Lyondell litigation trust “lost the $300 million preference claim because Brown Rudnick negligently failed to establish that Lyondell Chemical Co. was insolvent on the date of the preferential transfers at issue.”
I suspect Brown Rudnick will have something quite different to say about its handling of the case against Blavatnik and his companies. I’ll let you know when the firm weighs in.