when it underwent a 2007 leveraged buyout, only to go bankrupt barely a year later.

U.S. District Judge Denise Cote in Manhattan said a federal bankruptcy judge erred in dismissing a bid by Edward Weisfelner, a trustee representing Lyondell unsecured creditors, to recover the money from shareholders who pocketed roughly $12.5 billion.

"We are extremely encouraged," Weisfelner said in an interview. "There is a very good chance there will be recompense for creditors who were injured and have been waiting years."

A lawyer for the shareholders did not immediately respond to requests for comment.

Lyondell had merged with an affiliate of Russian billionaire Len Blavatnik's Access Industries in December 2007, but went bankrupt in January 2009 as it struggled with too much debt and slumping demand amid the global financial crisis.

Litigation over the LBO persists even though Lyondell emerged from bankruptcy in April 2010. It is now part of LyondellBasell Industries NV, which has offices in Houston, London and Rotterdam, the Netherlands.

Weisfelner accused Lyondell's former Chairman and Chief Executive Dan Smith of pushing for a buyout he knew would overburden the company with debt even as it benefited shareholders, with Smith himself netting more than $100 million.

In November 2015, U.S. Bankruptcy Judge Robert Gerber, who has since left the bench, rejected the trustee's intentional fraudulent transfer claim.

He found no proof that Smith controlled his board on the LBO vote, or that a "critical mass" of directors intended to defraud creditors, such that Smith's intent could be imputed to Lyondell.

Cote, however, said Gerber misinterpreted the law.

Without deciding whether Smith had fraudulent intent, Cote said his intent could be imputed to Lyondell because he pursued the LBO through his roles as chairman and chief executive.

Weisfelner's allegations suggest that Smith "not only recklessly disregarded the likelihood that the LBO would quite quickly injure creditors, but also contemplated and believed that Lyondell would default on its obligations to its creditors within a very short period of time," Cote wrote. "And, indeed, that is precisely what happened."

Cote sent the matter to U.S. Bankruptcy Judge Martin Glenn, who now oversees litigation related to the LBO. Weisfelner said this includes breach of fiduciary claims against other Lyondell officers and directors, Blavatnik and Access Industries.

The case is Weisfelner v Hofmann et al, U.S. District Court, Southern District of New York, No. 16-00518. The bankruptcy case is In re: Lyondell Chemical Co, U.S. Bankruptcy Court, Southern District of New York, No. 09-10023.

(Reporting by Jonathan Stempel in New York; Editing by Alan Crosby)

By Jonathan Stempel