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Volume 8, Number 4
States Will Benefit from $5.15 Billion Settlement, Largest Ever for Environmental Claims
Karen Cordry, NAAG Bankruptcy Chief Counsel
On April 3, a $5.15 billion cash settlement was announced in a fraudulent transfer action brought as a result of the spin-off of Tronox, Inc., from the Kerr-McGee Corporation. The funds will go to environmental clean-up costs for some 2500 sites across the country for which the United States, about 25 states, the Navaho Nation, and a number of municipalities have oversight responsibilities to ensure their remediation. The settlement is the largest ever for such clean-up costs and was the result of a long, hard-fought battle to undo efforts by Kerr-McGee to avoid liability for the long history of environmental contamination that it had created.
Kerr-McGee Corporation began operating in 1929 as an oil and gas exploration company. Along the way, it acquired a refinery, oil pipeline and marketing operations, some 800 gas stations, uranium milling and mining operations on the lands of the Navajo Nation, wood-treating plants using creosote, a large operation in Nevada producing ammonium perchlorate for rocket fuel, a plant in West Chicago, Ill., producing radioactive thorium, and a plant making titanium dixode pigment for paint in Mississippi. And, yes, it was also the company that employed union activist Karen Silkwood who died in mysterious circumstances after being found on three succeeding days to have high levels of plutonium contamination from the plant at which she worked.
By around 2000, Kerr-McGee had largely terminated all of its operations except the oil and gas exploration and production (E&P) business and the titanium dioxide business. The E&P business was very profitable on an ongoing basis but the costs of dealing with all of its environmental and personal injury legacy liabilities from its 70-plus years of operations were both daunting and difficult to quantify. It had already spent $1 billion on clean-up costs and was spending another $160 million a year for the foreseeable future. It had also settled $100 million worth of personal injury claims from creosote liability. From 2000 through 2005, Kerr-McGee made several efforts to try to unlock the value in the company which it believed was unfairly weighted down by the uncertainty over the liability costs. While Kerr-McGee operated as one entity, it was unable to sell itself at a meaningful value to anyone because no one wanted to take on the potential for those clean-up costs, even with the profits being made by the E&P business.
After a great deal of internal discussion and restructurings, Kerr-McGee split in two by March 2006 – the “new Kerr-McGee” took the E&P business and liabilities directly associated with those ongoing activities. The titanium dioxide business was placed in a separate company, Tronox, Inc., which was required to take out a loan on its assets and upstream almost $500 million in newly-acquired funds up to the new Kerr-McGee. At the same time, Tronox was saddled with all of the remaining liabilities of the old Kerr-McGee, including many relating to oil and gas obligations, while retaining only $40 million in operating cash (25 percent of what Kerr-McGee had been spending a year on clean-up costs alone). Not surprisingly, Tronox struggled from the start, and by January 2009, despite drastic cost-cutting measures, had to file bankruptcy. In the meantime, the new Kerr-McGee, cleansed of its liabilities, had quickly been bought by Anadarko Petroleum Corp., for $18 billion.
In the Tronox bankruptcy, the United States, and about 25 states, as well as a number of municipal entities in the Chicago area, the Navajo Nation, and many personal injury claimants, agreed to a resolution of their claims as part of the debtor’s plan of reorganization. They would take a relatively small amount of cash from the existing estate funds (about $250 million, which was basically only enough to keep the clean-ups limping along for a few years) and leave the rest behind for other creditors. In return, they would be assigned all rights to the recoveries from any fraudulent transfer actions brought against new Kerr-McGee and Anadarko. Considering the $18 billion value of the assets transferred, there was clearly the potential to recover full compensation for those claims if the litigation was successful. Considering the difficulty of the litigation, though, there was also the strong possibility that these creditors would receive far less than others in the case if they lost at trial. The plan set up several environmental trusts to handle the cleanup of most of the properties and certain other state claims were separately provided for. Those trusts received funding from the initial $250 million allocation, but any costs above that (and the estimates under the plan for the liabilities were in the range of up to $4 billion) would only be paid if the litigation were successful.
The fraudulent transfer case was tried on behalf of a Litigation Trustee---John Hueston from Irell & Manella---who was designated under the plan to represent all of the various trusts, and the other environmental and personal injury claimants as the client in the litigation. The trial was actually litigated by a large team from Kirkland & Ellis with assistance from the U.S. Department of Justice counsel and with information from the various states and other creditor entities. A Trustee Advisory Board (TAB) was set up to help the Litigation Trustee determine how to pursue the case and whether he should accept any settlement offers that were proffered. I, as NAAG Bankruptcy chief counsel, was selected by the states to be one of the five TAB members.
In preparation for the trial, the plaintiff’s environmental expert, Dr. Neil Ram and his firm spent more than 40,000 hours compiling a 2,600 page report on remaining environmental liabilities which included visits to numerous sites and consultations with the governmental agencies responsible for overseeing the cleanups of those sites. His work only dealt with a portion of the sites and only considered what was known about them in 2005, when the corporate transfers were taking place, as part of the determination as to whether the known liabilities then exceeded the assets. He evaluated the environmental liabilities at that time as being in the range of $1-$1.7 billion (and an additional amount would be owed for the personal injury claims).
Kerr-McGee and Anadarko had argued for a much lower valuation of the liabilities – and also argued that the recovery in the case had to be capped at whatever amount the court found those liabilities were known to be in 2005 (regardless of what the final actual costs might turn out to be). In Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox Inc.), 464 B.R. 606 (Bankr. S.D. N.Y. 2012), the bankruptcy court firmly rejected that argument, holding that the debtor (Tronox) would have been entitled to have the entire transfer undone and the assets returned to it so it could pay creditors and keep any remaining balance. When the plan assigned Tronox’s rights to the creditor trust, those parties had the same right to recover if they won. Even if this resulted in a theoretical “windfall,” that was the result of the fact that those creditors had agreed to take a huge risk under the plan by agreeing to be paid from the litigation proceeds. In doing so, they allowed the company to survive and other creditors to be paid quickly while they took the risk that they would receive nothing. Receiving the upside of a high verdict was the flip side of the risk of facing the low side of a loss in court.
Several attempts at settling the case before and during the trial were unsuccessful, with the members of the TAB swallowing hard but agreeing with the Litigation Trustee and the trial team that the offers were too low and/or had too many unacceptable conditions on them to be acceptable. The trial lasted for 34 days during 2012; after it ended, it took more than a year for Judge Gropper to digest the mammoth trial record but the result was well worth waiting for. In Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox Inc.), 503 B.R. 239 (Bankr. S.D. N.Y. 2013), he found the spin off was an intentionally fraudulent transfer that had been designed to leave the liabilities behind in a residual entity, Tronox, with grossly inadequate assets to satisfy those costs. He also agreed that the initial measure of recovery was the full net value of the assets transferred, which he valued in the range of $15 billion. The one potential downside was that he indicated that he believed Anadarko had a potential offsetting claim that could reduce the amount owed by anywhere from a few hundred million to potentially as much as $10 billion. The court did not issue a final decision pending briefing by the parties on that last question.
As with the mule that had to be hit by a 2x4 to “get its attention,” the court’s judgment finally appeared to do the trick in terms of reaching agreement with Anadarko. It eventually came back to the table and settled with the Litigation Trustee just prior to the date the court was expected to hold a hearing on the final damages issue. While Anadarko wanted to avoid the imposition of what might have been a devastating $15 billion judgment (with plaintiffs arguing for an even higher number), the governmental entities also wanted to end the litigation sooner rather than later and ensure the finality of the order so that they could start spending money on the massive remediation efforts that still needed to be carried out.
The $5.15 billion settlement, with accruing interest, appears likely to be enough to fully remediate the thousands of sites left behind by Kerr-McGee, and to compensate the personal injury claimants based on the evidence at the trial. The net result is an extraordinarily beneficial result and one where the states benefitted mightily from their association with the United States and the trial team and a strong word of thanks is offered to all involved. There is a still a several month comment and approval process for the decision to be adopted, but there seems to be nothing of substance that will preclude this order from going into effect and providing significant benefits at all of the affected sites. The U.S. Department of Justice website has a fact sheet with sites listed and recoveries for cleanup costs: http://www.justice.gov/iso/opa/resources/954201443135921454851.pdf.Hopefully the results in this case---as well as a similar result in the case of Asarco LLC v. Ams. Mining Corp., 396 B.R. 278 (S.D. Tex. 2008) which also found an intentionally fraudulent transfer in connection with corporate restructurings and similarly required the return of assets valued in the range of $6-$7 billion---will give pause to others considering similar maneuvers as a way to avoid payment of existing liabilities. In both cases, bankruptcies that initially seemed likely to result in huge environmental problems going without remedy ended up resulting in full payments for all claims – now if we could just get that result in every case!
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