Anadarko Tank facility, Uinta Basin, Utah. ()
After a federal judge in New York ruled in December that Kerr-McGee Corporation’s spin-off of Tronox Inc. was a fraudulent transfer intended to shield it from billions in environmental liabilities, Kerr-McGee parent Anadarko Petroleum Company claimed in January it should pay no more than $850 million in damages. But this week, Kirkland & Ellis’s David Zott told the judge that the ruling is worth a staggering $21 billion.
Anadarko derived the $850 million number based on the gap between Tronox’s assets and its liabilities when the company was first deemed insolvent in 2005. On Wednesday, however, Kirkland filed a 34-page objection on behalf of one of two litigation trusts that filed the suit, arguing that Anadarko was improperly trying to apply Kerr-McGee’s equity interest in Tronox before Tronox went bankrupt in order to vastly reduce the damages it should have to pay. Zott, the plaintiffs’ lead lawyer, argued that under the bankruptcy code, Anadarko’s equity claim should either be disallowed completely, or should offset the judgment by no more than 2.8 percent. The defendants have until early March to respond; the judge is expected to make a decision before mid-year.
Regardless of whether the judge sides with the plaintiff trusts or the defendants, the award is likely to be among the largest judgments of this year.
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.” U.S. Bankruptcy Judge Allan Gropper agreed, ruling that Anadarko’s ultimate liability would be $14.5 billion, less an amount to be determined post-trial representing the value of Anadarko’s claims as a creditor of Tronox.
Zott, tapped as Litigator of the Week for the trial win, told The Litigation Daily on Friday that the plaintiffs’ much larger figure includes the eight-plus years in appreciation in the oil and gas assets that Kerr-McGee stripped from Tronox back in 2005.
Anadarko, meanwhile, appeared confident enough in its own damages calculations that in its fourth-quarter earnings report on Feb. 3, the company announced it had put aside litigation reserves of $850 million and noted that the range of potential damages “after all appellate processes” was $850 million to $5.15 billion—far below the range indicated by Gropper.
Zott rejected that calculation. “It’s our view that those alternative measures were previously litigated by the parties and properly rejected by the court,” he told us.
We reached out to Melanie Gray of Winston & Strawn and P. Sabin Willett of Bingham McCutchen; Gray referred us to Anadarko spokesman John Christiansen, who issued this statement on behalf of the company: “There was nothing unexpected in the plaintiffs’ filing, and we look forward to providing our response in about 30 days as instructed by the Court.”
Ultimately, whatever award the judge awards will be split by two trusts: one to benefit 12 states, the federal government, and the Navajo Nation, which collectively held some $25 billion in environmental claims, and the other to compensate about 8,100 people affected by contamination.
In a separate filing Wednesday, Kirkland asked Gropper to approve roughly $63 million in plaintiffs’ legal fees and costs. Calling the preparations in the case “massive even by complex litigation standards,” the Kirkland team argued that the amount, coming after five and a half years’ intensive work on the adversary proceeding, was reasonable. The firm noted, among other things, that more than 26 million pages of documents were produced and reviewed via 400-plus document requests; and that both parties collectively designated and deposed 18 experts who filed 14,000 pages of reports.
The case was heavy on motions by both sides, culminating in a 34-day trial in 2012. Anadarko and Kerr-McGee, by contrast, had already spent $67 million defending the adversary proceeding by November 2010—with trial still 18 months away. At the rate of $4 million a month in litigation expenses as of late 2010, Kirkland wrote in its fee filing, Anadarko and Kerr-McGee were on track to spend about $155 million as of this month.