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Anadarko Found Liable for Tronox Cleanup Costs

13 December 2013

Following a lengthy bench trial, a bankruptcy judge has put Anadarko Petroleum Corp.'s Kerr-McGee unit on the hook for between $5 billion and $14.5 billion in environmental cleanup costs and toxic tort liability. The ruling is a slam-dunk win for attorneys at Kirkland & Ellis and Irell & Manella, who squared off against Anadarko's defense lawyers at Bingham McCutchen and Weil Gotshal & Manges.

In a 166-page decision issued on Thursday, U.S. Bankruptcy Judge Allan Gropper in Manhattan ruled that Kerr-McGee's spin-off of Tronox Inc. was a fraudulent conveyance intended to shield Kerr-McGee from environmental liability. Gropper ordered Anadarko to pay billions of dollars into a trust established on behalf of Tronox creditors holding environmental claims against the company that date back decades. Eighty-eight percent of the ultimate judgment will be used to remediate pollution sites around the U.S., while the remaining 12 percent will compensate individuals with tort claims against Anadarko.

Gropper wrote that Anadarko's ultimate liability to the creditors is $14.5 billion, but that the award will be offset by the value of claims that Anadarko filed as a creditor of Tronox. Gropper has not yet indicated the size of the offset. Under Anadarko's legal theory, the value of the offset is about $9 billion, putting the actual value of the award at about $5 billion. Gropper ordered additional briefing from the parties on the offset issue.

Tronox, a chemical company, was spun off by Kerr-McGee in 2005. A year later, Anadarko acquired Kerr-McGee for $18 billion. Burdened by environmental liabilities, Tronox declared bankruptcy in 2009. Tronox sued Anadarko and Kerr-McGee in U.S. bankruptcy court in Manhattan, alleging they saddled it with decades worth of environmental liabilities, leaving it "destined to fail."

Tronox emerged from bankruptcy in 2011. Under the company's reorganization plan, any proceeds from its fraudulent conveyance claims would be put into a litigation trust. The beneficiaries of that trust include the U.S. government 12 states, and the Navajo Nation. John Hueston of Irell & Manella was appointed litigation trustee for Tronox creditors. A Kirkland team led by David Zott represented the trust in court.

Kirkland's task was to persuade Gropper that the Tronox spin-off constituted a fraudulent transfer. Over the course of 34 trial days, Gropper heard from 28 witnesses, 14 of which were designated experts.

Anadarko's legal team, led by Bingham's Thomas Lotterman, argued that it was the economic downturn, and not a fraudulent transfer, that doomed Tronox. But Gropper rejected that argument in Thursday's opinion, writing that "[t]he transaction, which left the debtors insolvent and undercapitalized, was not made for reasonably equivalent value."

"An inner circle of Kerr McGee top executives stripped from the corporation its most valuable oil and gas assets, leaving behind a small cyclical business and 80 years of toxic liabilities," said Kirkland's Zott of Thursday's ruling in an e-mail. "The parties least able to protect themselves—the individuals that lived in these tainted communities and suffered the consequences of Kerr McGee's conduct every day—are the real victims," The court's thorough decision is a major step in righting this wrong."

Anadarko had estimated its potential liability at no more than $1.4 billion. In a statement, Anadarko's CEO Al Walker said that the company would appeal. Given the significant factual evidence supporting our position, we vehemently disagree with the judge's memorandum of opinion, and we fully expect to pursue every avenue available to use through the appellate process to protect the interests of our stakeholders, once a final judgment including damages has been rendered," Walker said.

David J. Zott, P.C.