Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox Inc.) – Bankruptcy Court Takes Unusual Steps to Declare Corporate Restructuring a Fraudulent Transfer

Companies that have valuable assets but also face significant liabilities will sometimes engage in restructurings to isolate, or “ring-fence,” the good assets from the liabilities. Often the companies are able to accomplish their shuffling of assets without judicial interference, especially if they proceed over a period of years and justify the transactions with analyses from independent professionals and industry observers.

But every once in a while, a court will put a stop to such actions if they harm creditors, especially when the companies proceeded quickly and without creditor involvement. In December 2013, in Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox Inc.), 503 B.R. 239 (Bankr. S.D.N.Y. 2013), Judge Allan Gropper, a bankruptcy judge in the influential United States Bankruptcy Court for the Southern District of New York, issued a lengthy opinion that avoided billions of dollars of transfers involving such “ring-fencing” efforts. Judge Gropper made preliminary findings of a range of net damages of at least $5.15 billion. The parties subsequently settled, meaning that the decision will not undergo appellate review. Nevertheless, the opinion may have a wide-ranging impact on what steps companies with long-term liabilities can take to preserve value for shareholders by separating valuable assets from such liabilities, and may open the floodgates for bankruptcy estates and unsecured creditors to challenge transactions that occurred years earlier.

Among the interesting rulings in Tronox are the court’s decision to reach back to avoid transfers that occurred nearly a decade before the companies filed for bankruptcy, its heavy criticism of defendants’ use of market data to justify the transfers, and its decision to permit avoidance of transfers even where the value of the avoided transfers exceeded what was necessary to pay creditors in full. The decision discusses a number of issues important to insolvency practitioners, investors in distressed debt, and private equity sponsors. For companies like Ceasar’s and Sears and their equity sponsors—which recently have engaged in arguably analogous transactions to unlock value for equity security holders in the face of substantial debt—Tronox could be worrisome because it gives hedge funds, distressed debt traders, and bankruptcy counsel roadmaps on how to challenge transactions that most industry professionals previously would have viewed as untouchable. Tronox is also important for companies seeking to restructure their long-term environmental and tort remediation liabilities.

To set the stage for his rulings, Judge Gropper reviewed a lengthy chronology of the transactions of Kerr-McGee Corporation from 2000 to 2006. Kerr-McGee had “enormous legacy environmental and tort liabilities” from 2,700 environmental sites (including at least seven “Superfund” sites). Beginning in 2000, the company, with input from financial and legal professionals, started developing a plan to separate certain of its valuable businesses from its legacy liabilities to make the businesses more attractive to investors and acquirers. Over a six-year period, the company engaged in numerous transactions that resulted in its valuable businesses being separated from the entities liable for the legacy environmental and tort liabilities. These included an initial public offering for Tronox, Inc., entry into a secured credit facility, and an issuance of unsecured notes.

In 2002 the most valuable business was transferred to a new entity, the so-called “New” Kerr-McGee, leaving a chemical business and legacy liabilities with “Old” Kerr-McGee, which was renamed Tronox Worldwide LLC. Three years later, in 2005, Tronox incurred approximately $450 million in secured bank debt and issued unsecured notes of $350 million. All but $40 million of the proceeds from these transactions were paid to New Kerr-McGee. Later in 2005, Tronox was taken public in an initial...