Bank of New York Is Sued to Recover Losses on $1 Billion in Basell Notes

Bank of New York Mellon Corp. was sued by Arrowgrass Master Fund Ltd. and other holders of about $1 billion in notes to recover losses stemming from the bankruptcy of Lyondell Chemical Co.

Bank of New York is the indenture trustee for the notes, issued by Basell AF in 2005. The bank failed to protect the noteholders’ interests when Basell bought Lyondell in 2007, according to the lawsuit filed today in New York state Supreme Court.

Basell, based in Luxembourg, borrowed about $20 billion from banks to buy Lyondell, swelling its senior debt 10-fold, the noteholders said. The debt burden led Lyondell, a Houston- based chemical maker and oil refiner, to file for bankruptcy 13 months later, according to the suit.

“The plaintiffs will recover only a small percentage of the approximately $1 billion owed to them,” the noteholders said in the complaint. “BNY’s actions and omissions directly caused the hundreds of millions of dollars in losses that plaintiffs now seek to recover from it.”

The 8.375 percent notes are due in 2015. Bank of New York, instead of asserting defaults or taking other steps to ensure the noteholders were fully repaid, “inexplicably” signed an intercreditor agreement without notifying them that allowed the LBO to proceed, according to the complaint.

Ron Gruendl, a spokesman for Bank of New York, had no immediate comment.

The case is Arrowgrass Master Fund Ltd. v. The Bank of New York Mellon, 651497/2010, New York state Supreme Court (Manhattan).

To contact the reporter on this story: Karen Freifeld in New York at kfreifeld@bloomberg.net.