Management projections take center stage in bankruptcy case

Weisfelner v. Blavatnik (In re Lyondell Chem. Co.), 2017 Bankr. LEXIS 1097 (April 21, 2017)

In a complex bankruptcy case involving players in the petrochemical industry, the court trained its eyes on the management projections underlying a merger that led to the formation of a company that went bankrupt only a year after the close of the transaction. 

The litigation trustee later claimed the transaction amounted to constructive fraud. To succeed on the claim and recover billions of dollars from the defendants, the trustee needed to show insolvency on the merger date. Questions of capital adequacy took center stage.

Basell was a Europe-based petrochemicals company worth billions of dollars that aimed to acquire an American refining company, Lyondell, for the purpose of creating a global petrochemical and refining company. Lyondell was the largest U.S. producer of ethylene and recently had acquired full ownership of a large oil refinery in Houston.

Lyondell prepared a bottom-up long-range plan in the course of ordinary business. However, once Basell’s owner and Lyondell began to negotiate in earnest, Lyondell’s CEO ordered certain members of management to produce “refreshed” projections that ostensibly reflected the promising performance the Houston refinery had shown under Lyondell’s recent control. The revised projections were produced under less stringent conditions than the long-range plan. Together with nonpublic due diligence material, Lyondell provided the projections to the buyer entities, their advisors, and a group of major banks for analysis and financing. The banks, performing a series of valuations, committed to financing the merger.

The newly created entity, LBI, confronted a series of unforeseen events in 2008, not the least being the decline of the national and global economies in late 2008. LBI filed for Chapter 11 bankruptcy in January 2009.

A starting point for the trustee's claim that the newly created entity was predestined to fail was an analysis of Lyondell’s refreshed projections. The issue was whether they were reasonable and reliable at the time Lyondell produced and presented them.

Drawing on testimony from industry and valuation experts, the trustee contended the projections at the time were inflated. The Bankruptcy Court did not agree.

For more on the case, click here.