Tronox Inc. v. Kerr Mcgee Corp. (In re Tronox Inc.)

503 B.R. 239

In re Tronox Incorporated, et al., Debtors.

Tronox Incorporated, et al., Plaintiffs,

v.Kerr McGee Corporation, et al., Defendants.

The United States of America, Plaintiff-Intervenor,

v.Tronox, Inc., et al. Defendants.

Case No. 09–10156 (ALG) (Confirmed Cases)

Adv. Proc. No. 09–1198 (ALG)

United States Bankruptcy Court, S.D. New York.

Filed December 12, 2013

Kirkland & Ellis LLP, Counsel to the Anadarko Litigation Trust, 300 North LaSalle, Chicago, Illinois 60654, By: David J. Zott, Esq., Andrew A. Kassof, Esq., Jeffrey J. Zeiger, Esq.

Preet Bharara, United States Attorney, Counsel for the United States of America, 86 Chambers Street, New York, New York 10007, By: Robert William Yalen, Esq., Joseph A. Pantoja, Esq.

Weil, Gotshal & Manges LLP, Co–Counsel to Anadarko Petroleum Corporation and the Kerr–McGee Corporation Defendants, 767 Fifth Avenue, New York, New York 10153, By: Richard A. Rothman, Esq., Bruce S. Meyer, Esq.

Bingham McCutchen LLP, Co–Counsel to Anadarko Petroleum Corporation and the Kerr–McGee Corporation Defendants, 2020 K Street, NW, Washington, DC 20006, By: Thomas R. Lotterman, Esq., Duke K. McCall III, Esq., and 355 South Grand Avenue, Suite 4400, Los Angeles, California 90071, By: James J. Dragna, Esq.

Klee, Tuchin, Bogdanoff & Stern LLP, Co–Counsel to Anadarko Petroleum Corporation and the Kerr–McGee Corporation Defendants, 1999 Avenue of the Stars, 39th Floor, Los Angeles, California 90067, By: Kenneth N. Klee, Esq., David M. Stern, Esq.

Winston & Strawn LLP, Co–Counsel to Anadarko Petroleum Corporation and the Kerr–McGee Corporation Defendants, 1111 Louisiana Street, 25th Floor, Houston, TX 77002–5242, By: Melaine Gray, Esq., Lydia Protopapas, Esq., Jason W. Billeck, Esq.

Chapter 11

MEMORANDUM OF OPINION, AFTER TRIAL

ALLAN L. GROPPER, UNITED STATES BANKRUPTCY JUDGE

On January 12, 2009, Tronox Incorporated and 14 of its affiliates (the “Debtors”) filed for protection under chapter 11 of the Bankruptcy Code. On November 30, 2010, they confirmed a First Amended Joint Plan of Reorganization (the “Plan”) which, among other things, created the Anadarko Litigation Trust (the “Trust”) to pursue certain claims that three of the Debtors had brought against Anadarko Petroleum Corporation (“Anadarko”) and several of Anadarko's subsidiaries, including Kerr McGee Corporation (collectively, “Kerr McGee” or “Defendants”). The beneficiaries of the Trust are public and private entities that have claims against the Debtors for damages for environmental response costs and tort liabilities. These include the United States, eleven states, the Navajo Nation, four environmental response trusts, and a trust for the benefit of tort plaintiffs. The Trust beneficiaries have agreed on an allocation of the recovery in this lawsuit, if there is a recovery.

The amended complaint (the “Complaint”) was initially filed by three of the Debtors: Tronox Incorporated, a holding company created in 2005 to hold the stock of the other members of the group; Tronox Worldwide LLC, which is the successor to Kerr–McGee Corporation, formed in 1929 and sometimes called hereafter “Old Kerr McGee;” and Tronox LLC, formerly known as Kerr–McGee Chemical LLC, which is the successor to Old Kerr–McGee's chemical business. ¹ The Complaint charges that these three entities were left with 70 years and billions of dollars of legacy environmental and tort liabilities when the oil and gas assets of the group were transferred out and spun off; that the transfer was designed to “hinder, delay or defraud” creditors; that it left the Debtors insolvent and undercapitalized; and that these creditors can recover from the defendants the value of the transferred oil and gas assets. These assets were acquired by Anadarko for $18 billion only a few months after they were spun off, and there is no dispute that they are worth billions more today.²

Not surprisingly, the litigation was hotly contested, consuming 34 trial days at which 28 witnesses testified, 14 of whom were qualified as experts. Over 6,100 exhibits and thousands of pages of the deposition testimony of 40 witnesses were also admitted into evidence.³ As far as the Court is aware, the case raises issues of first impression regarding the application of the fraudulent conveyance laws in the face of substantial environmental and tort liability. For the reasons stated hereafter, the Court finds that the Defendants acted with intent to “hinder and delay” the Debtors' creditors when they transferred out and then spun off the oil and gas assets, and that the transaction, which left the Debtors insolvent and undercapitalized, was not made for reasonably equivalent value. It finds that the Defendants must respond in damages, but not at the level demanded by the Plaintiffs.

FACTS

Background

Kerr–McGee Corporation, which later changed its name and business structure to become Tronox Worldwide LLC (and which is one of the Plaintiff Debtors), was founded in 1929 as an oil and gas exploration company. For purposes of clarity, it will sometimes be called Old Kerr–McGee hereafter. Old Kerr–McGee purchased its first refinery in 1945 and in 1955 acquired the refining, pipeline and marketing operations of Deep Rock Oil Corp., including more than 800 retail oil and gas outlets in 16 states. In 1952, Old Kerr–McGee entered the uranium business and began mining and milling uranium in the Lukachukai Mountains on the Navajo Nation and elsewhere. In 1963, it acquired T.J. Moss Tie Co., which operated 15 wood-treating plants using the chemical creosote and was responsible for at least 18 other similar plants that had operated throughout the country.

In 1967, Old–Kerr McGee acquired American Potash & Chemical Corp. (“APC”), which owned (among other things) a facility in Henderson, Nevada that produced ammonium perchlorate for use in rocket fuel; a rare earth facility in West Chicago, Illinois that produced radioactive thorium; and a titanium dioxide pigment plant in Hamilton, Mississippi.⁴ APC was initially merged into Old Kerr–McGee; some of its assets were later spun off into a wholly-owned subsidiary that was known at one time as Kerr–McGee Chemical LLC and was a predecessor to another of the Plaintiff Debtors, Tronox LLC.

By November 2005, which (as discussed below) is a key date in the case, Old Kerr–McGee had terminated all of its historical businesses except two—the oil and gas exploration and production (“E & P”) business and the titanium dioxide business. By 2005, the E & P oil and gas business had become wholly dominant, producing operating profits that year of approximately $1.8 billion as compared to the 2005 operating profit of the titanium dioxide business of $106 million. (PX 1224 at 30; Tr. (Wohleber) 5/24/2012 at 1235:25–1236:5). During the five years prior to 2005, the E & P business had produced cumulative operating profits of $5.2 billion as compared to $312 million for the titanium dioxide business. (PX 1224 at 30).

Despite the success of its E & P business, Old Kerr–McGee was also burdened with enormous legacy environmental and tort liabilities. Its portfolio of environmental sites numbered more than 2,700 in 47 states, including federal Superfund sites in Jacksonville, FL; Columbus, MS; Manville, NJ; Soda Spring, ID; West Chicago, IL; Milwaukee, WI; and Wilmington, NC. It had incurred more than $1 billion in environmental response costs since 2000 and was spending an average of more than $160 million annually on remediation. (DX 2227 at 238–45; JX 75 at 33–34; PX 915 at 84 (Kerr–McGee 10–K 2005 annual report)). It employed more than 40 professionals in its Safety and Environmental Affairs (“S & EA”) Group just to manage the active environmental sites. Beyond the costs of environmental remediation and control, during the six-year period ending in 2005, Old Kerr–McGee had settled approximately 15,000 claims of creosote tort liability for $72 million (plus $26 million in defense costs), and it was faced with an additional 9,450 pending claims and trial lawyers intent on prosecuting a new wave of creosote claims.⁵

Project Titan and Project Focus

As early as 2000 Old Kerr–McGee began to plan the transactions that restructured the company's E & P and chemical businesses and that are at the heart of the issues in this case. Starting in 2000, one of the company's investment bankers, Lehman Brothers, made a series of presentations, first, to the top management of the company,⁶ and later to the Board, regarding what came to be known as “Project Titan” and, later, “Project Focus.” These were names given to the corporate reorganization that included the transfer of the E & P business—oil and gas assets—which were initially owned by subsidiaries of Old Kerr McGee, to a new holding company known as Kerr–McGee Corporation that is called hereafter “New Kerr–McGee” and is one of the defendants in this litigation. Since the E & P business was no longer owned by Old Kerr–McGee, which was responsible for the legacy liabilities, New Kerr–McGee, which owned the billions of dollars of equity in the E & P assets, was in a position to disclaim liability for the legacy liabilities.

Plaintiffs contend that these steps were part of a general plan to split the E & P assets from the remaining assets (the titanium dioxide business) that would be left behind in Old Kerr McGee together with all of the legacy environmental and tort liabilities. Defendants insist that the purpose of Project Titan and Project Focus was to rationalize the companies' two main businesses by organizing them in separate corporate groups. They contend, reasonably, that there were sound business reasons for the corporate reorganization and that they had concluded that the E & P and chemical businesses would do better as independent players in their respective markets than as a complex whole. In Defendants' words, “Lehman and Kerr–McGee believed that Kerr–McGee's stock was trading at a discount because E & P analysts who covered Kerr–McGee...