Are Former Shareholders Subject To Clawbacks When LBOs Fail?

When a leveraged buyout goes bad and the company files for bankruptcy, can the bankruptcy trustee or creditors recover LBO payments made to the company's former shareholders as fraudulent transfers? Under the "safe harbor" provision in Section 546(e) of the Bankruptcy Code, a trustee may not avoid a transfer that is a "settlement payment" made pursuant to a "securities contract," unless the transfer was made with actual intent to hinder, delay or defraud creditors. It is fairly well settled that Section 546(e) prevents a trustee from avoiding payments to shareholders in connection with an LBO under a constructive fraud theory. But in a recent decision by the U.S. Bankruptcy Court for the Southern District of New York, Weisfelner v. Fund 1, et al. (In re Lyondell Chem. Co.), 2014 Bankr. LEXIS 159 (Bankr. S.D.N.Y. January 14, 2014), the court held that Section 546(e) does not apply to state law constructive fraudulent transfer claims brought by a creditor trust, in its