Holding an oil company liable for purported environmental damage isn't a typical assignment for an Am Law 100 firm. But when an unusual bankruptcy proceeding offered Kirkland & Ellis the opportunity to do just that, a trial team led by David Zott left no stone unturned—seeking out evidence from Wall Street to the Navajo Nation—and delivered what may go down as the biggest judgment of the year.
Siding with a litigation trust represented by Zott, U.S. Bankruptcy Judge Allan Gropper in Manhattan ruled on Dec. 12 that Kerr-McGee Corporation's spin-off of Tronox Ltd. was a fraudulent transfer intended to shield billions of dollars in assets from the U.S. Environmental Protection Agency, a dozen states, the Navajo Nation, and other municipalities and individuals holding pollution-related claims. While Gropper hasn't yet awarded damages, he indicated that he will put Kerr-McGee's parent, Anadarko Petroleum Corporation, on the hook for between $5 billion and $14 billion. (Read our previous coverage here.) Anadarko can appeal, but some analysts predict a settlement is in the works.
"This is a wake-up call," Zott told us. "Companies with massive legacy liabilities will think long and hard before engaging in transactions where as a result they leave insufficient assets to cover those liabilities."
Kerr-McGee faced a litany of environmental claims during its 77-year history. Municipalities in Southern California and Nevada complained of contaminated drinking water. Communities on the Navajo Nation reservation in the Southwest said they were sickened by radioactive waste left behind at Kerr-McGee's uranium mines. In 2005, Kerr-McGee unloaded those liabilities onto Tronox, a chemical company spin-off. One year later, Anadarko acquired Kerr-McGee.
Tronox declared bankruptcy in 2009. On the advice of Kirkland, the company sued Andarko and Kerr-McGee, alleging that the spin-off was a fraudulent conveyance intended to protect Kerr-McGee's lucrative oil and gas assets while dumping the legacy liabilities. When Tronox emerged from bankruptcy in 2011, a litigation trust was created to keep the fraudulent conveyance claims alive on behalf of creditors. John Hueston of Irell & Manella served as trustee and provided key strategic advice. But the task of representing the trust in court fell on Zott and his Kirkland colleagues Andrew Kassof and Jeffrey Zeiger.
In investigating their claims, the Kirkland attorneys travelled around the country and deposed individuals who said they'd witnessed Kerr-McGee's alleged pollution firsthand. One witness who left an impression on Zott was Perry Charley, a Navajo elder and college professor who blames Kerr-McGee for giving him cancer. "He spoke of the problems that are endemic to the Navajo Nation" because of Kerr-McGee, Zott said. "That's what this case was really about—helping these people undo damage."
Some of Zott's most critical evidence came from a third-party document request he made to Lehman Brothers Holdings Inc., which had advised Kerr-McGee on a potential spin-off way back in the early 2000s. Zott wanted Lehman's communications with Kerr-McGee, figuring they'd reveal Kerr-McGee's motives for spinning off Tronox. According to Zott, Lehman originally proposed a spin-off in which assets were proportionate to liabilities. After a meeting with Kerr-McGee executives, "all of all of a sudden the documents began to talk about how to isolate the oil and gas assets," Zott said. The judge cited those same documents in his Dec. 12 decision.
Oddly enough, Lehman's bankruptcy may have made Zott's job easier. Because of Lehman's financial troubles, he said, it didn't have the wherewithal to comb through the documents and find reasons not to turn over damaging evidence. "With third-party discovery, you normally don't get everything you're looking for," Zott said. "But they literally just turned over the keys to us."
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