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Tronox Expert Says Co. Was Bankrupt At Time Of IPO

A Tronox Inc. solvency expert took the stand Monday in a trial in which the pigment maker is suing ex-parent Kerr-McGee Corp. over legacy environmental liabilities it says sent it into bankruptcy, testifying that Tronox was insolvent following its 2005 initial public offering.

Dr. Grant W. Newton — executive director of the Association of Insolvency and Restructuring Advisors and solvency expert for the Anadarko Litigation Trust, which is pursuing claims against Kerr-McGee as successor to Tronox — supported the plaintiff's stance that because of the environmental, tort and retiree liabilities the company was saddled with at the time of its IPO and subsequent spinoff, Tronox was in fact insolvent and doomed for failure.

"Tronox was balance-sheet insolvent immediately following the IPO because the sum of its debts exceeded its assets at fair market value by approximately $1.12 billion," Newton said in written direct testimony submitted ahead of Monday's hearing. "On an individual basis, each of the Tronox plaintiffs was balance-sheet insolvent — Tronox Worldwide was balance-sheet insolvent by approximately $989 million."

Newton testified that Kerr-McGee artificially inflated the value of Tronox's titanium dioxide assets as the IPO approached by departing from its historical methodology.

"There is no support for the significant [titanium dioxide] price increases that occurred between the February and March 2005 Kerr-McGee projections and were in large part carried forward into the Kerr-McGee IPO projections," Newton said.

"Once the spinoff of Tronox was completed and Tronox was free from the influence of Kerr-McGee's management, Tronox reverted to its long-standing historical approach for preparing [titanium dioxide] price forecasts," he said. "As a result, in April 2006, Tronox's [titanium dioxide] price forecasts were revised downward from the Kerr-McGee IPO projections."

Because of its unhealthy financial condition, Tronox was left unable to pay its debts as they came due and would have experienced a cash shortfall of about $475 million between 2006 and 2012, Newton said. In addition, he said, it lacked adequate capital to operate its business at the time.

The trial, which began May 15 and is expected to last all summer, features the Anadarko Litigation Trust and the U.S. Department of Justice, which stepped into the case during Tronox's bankruptcy on behalf of the U.S. Environmental Protection Agency as the debtor's largest creditor, suing Kerr-McGee, which is now wholly owned by Anadarko Petroleum Corp.

The suit focuses on the 2005 and 2006 sale/spin move that saw Kerr-McGee put its valuable oil and gas exploration and production assets into an entity known as New Kerr-McGee, leaving behind its titanium dioxide pigment business laden with decades worth of environmental liabilities from Kerr-McGee's chemical operations.

The company has been calling witnesses in the case in its effort to paint Kerr-McGee and Anadarko as having purposely isolated good assets from the toxic liabilities and having created Tronox as a company that was doomed to fail.

In his testimony, Newton said he analyzed the financial projections Kerr-McGee prepared in connection with the sale/spin, concluding that the titanium dioxide prices included in the IPO projections were "overly optimistic and did not fairly present reasonable expectations for Tronox's future financial performance at the time of the IPO."

Counsel for Kerr-McGee, on cross-examination, emphasized the connection between Newton's work and that of other witnesses for Tronox in the case, suggesting that should their calculations turn out to be wrong, his would consequently be wrong as well. In addition, the attorney focused on a bid by Apollo Group Inc. to purchase Tronox, which the defense has cited as proof that the company was not overvalued.

Newton's cross-examination was set to continue Tuesday.

After filing for bankruptcy protection in 2009, Tronox filed the current suit in an attempt to recover $15 billion it said Kerr-McGee and Anadarko owed it as a result of the fraudulent transfer. That figure has since grown to $25 billion with interest.

Judge Gropper ruled the week before the trial began that Anadarko is not a proper defendant in the suit because it maintained Kerr-McGee as an isolated business unit. Now the debtor and the government are only going after Kerr-McGee and related entities, which are nonetheless owned by Anadarko, for recovery in connection with the spinoff and liabilities.

The Anadarko Litigation Trust is represented by David J. Zott, Andrew A. Kassof, David H. DeCelles and Jeffrey J. Zeiger of Kirkland & Ellis LLP.

The defendants are represented by Lydia Protopapas, Richard A. Rothman, Melanie Gray, Jason W. Billeck and Bruce S. Meyer of Weil Gotshal & Manges LLP, James J. Dragna, Thomas R. Lotterman and Duke K. McCall III of Bingham McCutchen LLP, and Kenneth N. Klee and David M. Stern of Klee Tuchin Bogdanoff & Stern LLP.

The case is Tronox Inc. v. Anadarko Petroleum Corp. et al., case number 1:09-ap-01198, in the U.S. Bankruptcy Court for the Southern District of New York.