Enforcement

Case Summary: Court Decision in Tronox Bankruptcy Fraudulent Conveyance Case Results in Largest Environmental Bankruptcy Award Ever

On December 12, 2013, the U.S. Bankruptcy Court for the Southern District of New York decided against Kerr-McGee Corporation (“Kerr-McGee”) and related companies that are subsidiaries of Anadarko Petroleum Corporation (“Anadarko”) in a fraudulent conveyance case and determined that the defendants "acted to free substantially all [their] assets - certainly [their] most valuable assets - from 85 years of environmental and tort liabilities."

On April 3, 2014, EPA and the Department of Justice (DOJ) announced an agreement to resolve fraudulent conveyance claims against Kerr-McGee Corporation and related subsidiaries of Anadarko Petroleum Corporation, resulting in the largest recovery for the cleanup of environmental contamination in history. More information on the April 2014 settlement agreement.

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Overview

The Court awarded damages between approximately $5.2 billion and $14.2 billion to the plaintiffs which, even at the low end of the damages range, is the largest amount ever awarded in a bankruptcy proceeding for governmental environmental claims and liabilities. Approximately $4.5 billion to $12.4 billion will go toward cleanup at contaminated sites across the country.

As referenced in the USAO-SDNY press release, some of the key environmental recoveries for environmental liabilities and for cleanup of environmental sites are estimated to be the following based on the Court’s decision:

  • Between $1.1 billion and $3.1 billion for the Multistate Environmental Response Trust created in the bankruptcy to clean up more than two dozen contaminated sites around the country, including the Kerr-McGee Superfund Site in Columbus, Miss.
  • Between $1.1 billion and $3.1 billion to be paid to the Nevada Environmental Response Trust created in the bankruptcy to clean up the perchlorate and other contamination resulting from operations at an industrial park near Lake Mead in Nev.
  • Between $880 million and $2.4 billion to be paid to EPA for cleanup of contamination from uranium mining on the Navajo Nation.
  • Between $220 million and $620 million to be paid to EPA for cleanup of thorium contamination at the Welsbach Superfund Site in Gloucester, N.J.
  • Between $213 million and $601 million to be paid to the federal Superfund in repayment of costs previously incurred by EPA cleaning up the Federal Creosote Superfund Site in Manville, N.J.
  • Between $45 million and $124 million for the Savannah Environmental Response Trust created in the bankruptcy to clean up metals and volatile organic compounds in the soil and groundwater at a site that includes a sulfuric acid plant, a former municipal landfill, and a former wastewater-treatment plant in Savannah, Ga.

 

Factual Background

Since its founding in 1929, Kerr-McGee operated various businesses around the country, including wood-treating, uranium mining and processing, thorium processing, and the manufacturing or use of various chemicals (e.g., creosote and ammonium perchlorate). By the early 2000s, Kerr-McGee had discontinued most of these historic business operations yet remained responsible for environmental, tort, workers’ compensation, and retiree and employee benefit liabilities related to these “legacy” businesses. Kerr-McGee continued to operate two core businesses: oil and gas exploration and production; and chemical production.

The Court’s decision makes a strong statement that companies should take responsibility for the toxic pollution they cause. Those that manipulate their assets and leave American taxpayers to foot the bill to clean up their mess will be held accountable. This is a huge win for public health and the environment, as proceeds from the decision will fund needed cleanups across America. Cynthia Giles, Assistant Administrator, Office of Enforcement and Compliance Assurance


In 2001, Kerr-McGee began an internal reorganization – referred to as “Project Focus” – through which the oil and gas business was separated from the chemical business and the legacy liabilities. Unable to sell the liability-laden chemical business following Project Focus, Kerr-McGee decided to separate the chemical business from the oil and gas business through a multi-step transaction that involved an initial public offering (“IPO”) of stock for Tronox Incorporated (“Tronox”) in 2005 and a spin-off of Tronox from Kerr-McGee in 2006. A few months after the spin-off, Anadarko acquired Kerr-McGee (and the oil and gas business) for $18 billion.

Burdened by legacy liabilities, and especially environmental liabilities, Tronox filed for Chapter 11 bankruptcy protection in January 2009 in the U.S. Bankruptcy Court for the Southern District of New York. Tronox emerged from bankruptcy on February 14, 2011, when its plan of reorganization was confirmed by the Court. As part of the reorganization, Tronox settled with various environmental regulators for approximately $270 million and approximately 88% of any net proceeds from the fraudulent conveyance litigation. At the same time, Tronox established a litigation trust to pursue the litigation after Tronox’s emergence from bankruptcy and to distribute any recoveries from the litigation to the trust’s environmental and tort beneficiaries. 

Procedural Background

In May 2009, Tronox initiated the case against the defendants as an adversary proceeding before Judge Allan L. Gropper. The U.S. intervened in the case under the Federal Debt Collection Procedures Act to recover response costs for environmental cleanups at numerous sites around the country. In their complaints, the plaintiffs alleged that the defendants fraudulently transferred valuable assets out of the entity that became Tronox, imposed the legacy liabilities on Tronox, and left Tronox with insufficient funds to pay the liabilities that Tronox owed to involuntary creditors (i.e., governmental environmental and tort claimants).

The U.S. and the litigation trust have pursued the case since Tronox emerged from bankruptcy. The 34-day trial took place between May and September 2012, the parties filed post-trial briefs in November 2012, closing arguments were in December 2012, and the parties filed supplemental post-trial briefs in January 2013.

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Overview of the SDNY Bankruptcy Court Decision

The Court’s 166-page opinion considered the following “basic issue” in deciding against the defendants on charges of both actual and constructive fraudulent conveyance: “under what circumstances can an enterprise rid itself of its legacy environmental and tort liabilities by spinning off substantially all of its assets and leaving behind property incapable of supporting the liabilities.” On the actual fraud claim, the Court noted the “clear and convincing evidence” showing that the transfers that concluded with the spin-off were made by the defendants with the intent "to hinder or delay creditors when they imposed all the legacy liabilities on Tronox.”

The Court also held that the transfers in question were constructively fraudulent because they “left the debtors insolvent and undercapitalized” and were made for “less than reasonably equivalent value," and because the defendants "reasonably should have believed that [Tronox] would incur debts beyond [its] ability to pay as they became due." In doing so, among other things, the Court rejected the defendants’ “market” defense, which asked the Court to rely on what the defendants advanced as market-based evidence (e.g., the terms of funding and loan commitments) rather than expert testimony, when it found that “the market as a whole, no matter how efficient or inefficient, cannot be relied on to determine [Tronox’s] solvency or insolvency.”

In analyzing statute of limitations’ issues, the Court contemplated whether the defendants’ two-step transaction (i.e., Project Focus transfers and transfers associated with Tronox’s IPO/spin-off) should be “collapsed” for liability purposes. According to the Court, the facts “overwhelming[ly]” demonstrated that the defendants “devised, carried out and had complete knowledge that the transfer of the oil and gas business was part of a ‘single integrated scheme’ to create a ‘pure play’ [oil and gas] business free and clear of the legacy liabilities.” In making this determination, the Court noted that key transaction documents were signed in 2005 yet backdated to 2002. Similarly, the Court found that “there is no credibility to the uniform testimony of the inner circle [of Kerr-McGee management] that isolation of the oil and gas assets from the chemical business had nothing to do with an effort to cleanse the oil and gas assets from the legacy liabilities.”

After making its liability determination, the Court considered the measure of damages that should be awarded to the plaintiffs and held that the defendants are liable for between $5,150,490,000 and $14,166,148,000. To determine the amount of damages within this range, the Court is allowing the parties to file briefs and to schedule oral argument on the amount of the defendants’ “offset” claim.

The Court’s opinion also considered whether it has jurisdiction to enter a final judgment in the case based on the Supreme Court’s Stern v. Marshall decision. After noting that the defendants had filed proofs of claim against the Tronox debtors and after finding that the defendants’ answer to Tronox's complaint “constituted unconditional consent to the entry of a final order,” the Court held that it is authorized to enter a final judgment in the case. If an appellate court were to disagree with the Court’s conclusion on this issue, the Court “requested that this decision be deemed proposed findings of fact and conclusions of law for final entry by the District Court.”

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Contact Information

For more information, contact:

Craig Kaufman
Attorney-Advisor
U.S. Environmental Protection Agency (MC2272A)
1200 Pennsylvania Avenue, NW
Washington, D.C. 20460
(202) 564-4284
kaufman.craig@epa.gov