Kirkland & Ellis LLP Achieves Landmark Trial Victory for Tronox Litigation Trust
On December 12, Judge Allan Gropper of the U.S. Bankruptcy Court for the Southern District of New York issued a historic decision in favor of the Tronox Litigation Trust. In a 166-page opinion, Judge Gropper concluded that Kerr-McGee's spin-off of Tronox in 2005 was done with the actual intent to delay, hinder or defraud creditors.
Through a series of corporate transactions, Kerr-McGee removed billions of dollars of oil and gas assets and left Tronox—then a small, unprofitable and declining chemical business—with 85 years of environmental, tort and retiree liabilities. Judge Gropper awarded damages of $14.1 billion subject to a potential offset of up to $9 billion for claims that Anadarko (which now owns Kerr-McGee) asserted in Tronox's chapter 11 cases. This represents the largest bankruptcy award in history related to governmental environmental claims and liabilities.
Kirkland & Ellis partners David Zott, Andrew Kassof and Jeffrey Zeiger represented the Tronox Litigation Trust at trial, which took place in the summer of 2012. Closing arguments occurred on December 12, 2012.
"This has always been a classic fraudulent conveyance case. 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 85 years of toxic liabilities. 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," said partner David Zott.
The massive case was tried over 34 days, during which 28 witnesses testified, 14 of whom were qualified as experts. More than 6,100 exhibits and thousands of pages of deposition testimony from 40 additional witnesses were entered into evidence. Judge Gropper noted that the case raises issues of first impression regarding the application of the fraudulent conveyance laws in the face of substantial environmental and tort liability.
"This was a prototypical Kirkland trial effort—a small, efficient team put on 26 of the 28 trial witnesses against multiple experienced litigators from two national firms," said partner Andrew Kassof.
Tronox filed the lawsuit in 2009. The complaint alleged that Kerr-McGee stripped all of Tronox's valuable assets and then spun-off an insolvent entity that was destined to fail given the massive environmental, tort and retiree liabilities for which Tronox became responsible following the spin-off. The litigation trust sought to recover the value of the oil and gas assets that it contended were fraudulently transferred from Tronox in connection with Tronox's initial public offering and spin-off from Kerr-McGee.
"The ruling is the culmination of five years of hard work to investigate and prosecute these very complex claims. The fact that Judge Gropper found for us on almost every issue confirms the benefit of investigating a case like this thoroughly from the outset," said partner Jeffrey Zeiger.
Kerr-McGee was founded in 1929 as an oil and gas company. During the next 70 years, it expanded into numerous far-flung businesses that created a toxic legacy across the United States. The company left massive piles of radioactive waste at nearly 50 uranium mines on the Navajo Nation, polluted the primary source of drinking water for Southern California with contaminants from its rocket fuel production facility, and exposed tens of thousands of people to toxins from more than a dozen plants where it treated railroad ties.
In 2002, Kerr-McGee executives embarked on a scheme to separate Kerr-McGee's valuable oil and gas assets from these massive liabilities. They transferred the oil and gas assets to a newly-created corporation and spun-off what remained of the historical entity—which was then a small, unprofitable and declining chemical business called Tronox that was overburdened with decades of accumulated environmental, tort and retiree liabilities that were unrelated to Tronox's core titanium dioxide business. Three months after the spin-off, Anadarko acquired the Kerr-McGee oil and gas assets for $19 billion. By that point, Tronox already was struggling to survive. Tronox filed for Chapter 11 bankruptcy protection in 2009, less than three years after the spin-off.
Kirkland also represented Tronox and its affiliates in their Chapter 11 reorganization, which was confirmed in February 2011. In the bankruptcy case, Tronox transferred its fraudulent conveyance claims against Kerr-McGee to the litigation trust for the benefit of governmental entities and other claimants that had been harmed by Kerr-McGee's toxic legacy. Relieved of Kerr-McGee's legacy liabilities, Tronox is now a growing company with an expanding presence in its core chemicals business.
During the bankruptcy, Kirkland's litigation team worked with Tronox General Counsel Michael Foster and other company personnel to begin investigating and prosecuting the claims. Once the claims were transferred to the litigation trust, Kirkland worked with litigation trustee John Hueston of Irell & Manella, LLP. The United States filed a parallel lawsuit, which was stayed pending trial of this action. Robert William Yalen of the U.S. Attorneys' Office in Manhattan and Katherine Kane of the U.S. Department of Justice Environment and Natural Resource Division in Washington, D.C. represented the United States at trial.
The lawsuit is Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox Inc.), 09-1198, U.S. Bankruptcy Court, Southern District New York (Manhattan).
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