United States Announces $5.15 Billion Settlement With Anadarko To Pay For Environmental And Toxic Tort Liabilities
More Than $4.4 Billion To Be Available For Environmental Clean-Up And Claims
Largest Payment for the Clean-Up of Environmental Contamination in History
James Cole, Deputy Attorney General of the United States, Preet Bharara, the United States Attorney for the Southern District of New York (“SDNY”), Robert G. Dreher, the Acting Assistant Attorney General for the Justice Department’s Environment and Natural Resource Division (“ENRD”), and Cynthia Giles, Assistant Administrator of the U.S. Environmental Protection Agency, announced today that the United States has entered into a settlement agreement with the Kerr-McGee Corporation and certain of its affiliates (“New Kerr-McGee”), and their parent Andarko Petroleum Corporation, in a fraudulent conveyance case brought by the United States and co-plaintiff Anadarko Litigation Trust (the “Trust”) in the bankruptcy of Tronox Inc. and its subsidiaries (“Tronox”). The bankruptcy court had previously found, in December 2013, that the historic Kerr-McGee Corporation (“Old Kerr-McGee”) fraudulently conveyed assets to New Kerr-McGee to evade its debts, including its liability for environmental clean-up at contaminated sites around the country. Pursuant to the settlement agreement, the defendants agree to pay $5.15 billion to settle the case, of which approximately $4.4 billion will be paid to fund environmental clean-up and for environmental claims. This is the largest payment ever for the clean-up of environmental contamination.
Deputy Attorney General James Cole said: “Kerr-McGee’s businesses all over this country left significant, lasting environmental damage in their wake. It tried to shed its responsibility for this environmental damage and stick the United States taxpayers with the huge cleanup bill. Through a lot of hard work, we uncovered this fraud and recovered over $5 billion dollars for the American people. This settlement demonstrates the Justice Department’s firm commitment to preventing and combating all forms of fraud and to securing environmental justice.”
Manhattan U.S. Attorney Preet Bharara said: “If you are responsible for 85 years of poisoning the earth, then you are responsible for cleaning it up. That’s why this case was brought. And that’s why the defendants are paying a record $5.15 billion -- to fund that colossal cleanup and to make things right. The company tried to keep its rewards and shed its responsibilities by playing a corporate shell game, putting its profitable oil-and-gas business in a new entity and leaving behind a bankrupt shell holding the environmental liabilities of the defunct, polluting lines of business. The company tried to cleanse its valuable business from its toxic legacy liabilities. Now the defendants will pay to cleanse the land and water.”
Acting Assistant Attorney General Robert G. Dreher said: “Today’s settlement is a just resolution of an historic injustice to the American people and our environment. The money recovered will result in clean-ups of a toxic history the Old Kerr-McGee unsuccessfully tried to walk away from.”
EPA Assistant Administrator Cynthia Giles said: “EPA’s vigorous pursuit of this case will have a big return for communities across the country. Companies that pollute can’t escape their responsibility to pay for the cleanup. EPA will continue to fight for those affected by pollution.”
The Fraudulent Conveyance
According to the complaints of the Government and the Trust and the December 12, 2013, written opinion of U.S. Bankruptcy Judge Allan L. Gropper:
Old Kerr-McGee operated numerous businesses, which included uranium mining, the processing of radioactive thorium, creosote wood treating, and manufacture of perchlorate, a component of rocket fuel. These operations left contamination across the nation, including radioactive uranium waste across the Navajo Nation; radioactive thorium in Chicago and West Chicago, Illinois; creosote waste in the Northeast, the Midwest, and the South; and perchlorate waste in Nevada.
In the years prior to 2005, Old Kerr-McGee concluded that the liabilities associated with this environmental contamination were a drag on its “crown jewel” business, the exploration and production of oil and gas. With the intent of evading these and other liabilities, Old Kerr-McGee created a new corporate entity – defendant New Kerr-McGee – and, through a scheme executed in 2002 and 2005, transferred its valuable oil and gas exploration assets to the new company. The legacy environmental liabilities were left behind in the old company, which was re-named Tronox, and spun off as a separate company in 2006. As a result of these transactions, Tronox was rendered insolvent and unable to address its environmental and other liabilities. In 2009, Tronox went into bankruptcy.
The United States and the bankruptcy estate (now represented by the Trust) brought this lawsuit to hold the defendants accountable and require them to repay the value of the assets fraudulently conveyed from Old Kerr-McGee.
In its decision, the Court found that Old Kerr-McGee transferred assets with the intent to hinder or delay creditors, including particularly environmental creditors, and also transferred those assets for less than their fair value, which left Tronox insolvent, unable to pay its debts when they came due, and undercapitalized. Among other things, the Court concluded that:
- “[T]here can be no dispute that Kerr-McGee acted to free substantially all its assets – certainly its most valuable assets – from 85 years of environmental and tort liabilities.”
- “[O]verhelming” evidence demonstrated that “Defendants devised, carried out and had complete knowledge that [the transfer of Old Kerr-McGee’s oil and gas exploration and production assets was] part of ‘a single integrated scheme’ to create a ‘pure play’ E&P business [referring to the ‘crown jewel’ oil and gas exploration and production business] free and clear of the legacy liabilities.”
- “[T]here is no credibility to the uniform testimony of the inner circle [of Old Kerr-McGee management] that isolation of the oil and gas assets from the chemical business had nothing to do with an effort to cleanse the E&P assets from the legacy liabilities.”
- “The record is replete with evidence that Kerr-McGee misapplied [the] standard [for setting reserves for environmental claims under Generally Accepted Accounting Principles] and thereby understated its liabilities for GAAP purposes.”
- Statements by former Old Kerr-McGee employees that the cost of this environmental pollution would decline after the spin-off were “not rooted in reality.”
- Kerr-McGee had failed to conduct any “contemporaneous analysis of the effect of [its] transactions on the legacy liability creditors,” including the effect it would have on the United States’ environmental claims.
Under today’s settlement agreement, the defendants will pay $5.15 billion to the Trust to settle the fraudulent conveyance case. Pursuant to a 2011 settlement between the United States, certain state, local, and tribal governments, and the bankruptcy estate, approximately 88% of the net proceeds of this litigation will be distributed by the trust to the United States, certain state governments, the Navajo Nation, and environmental trusts created to clean up Tronox’s contaminated sites. The 2011 settlement agreement provides specific percentages of this funding that will be made available to each site.
As a result of these agreements, some of the key recoveries for environmental claims and for clean-up of environmental sites are estimated to be the following:
- $1.1 billion will be paid to a trust charged with cleaning up two dozen other contaminated sites around the country, including the Kerr-McGee Superfund Site in Columbus, Mississippi.
- $1.1 billion will be paid to a trust responsible for cleaning up a former chemical manufacturing site in Nevada that has led to contamination in Lake Mead. Lake Mead feeds into the Colorado River, a major source of drinking water in the Southwest.
- Approximately $985 million will be paid to U.S. EPA to fund the clean-up of abandoned uranium mines on land of the Navajo Nation, where radioactive waste remains from Kerr-McGee mining operations.
- Approximately $224 million will be paid to U.S. EPA for clean-up of thorium contamination at the Welsbach Superfund Site in Gloucester, New Jersey.
- Approximately $217 million will be paid to the federal Superfund in repayment of costs previously incurred by EPA cleaning up the Federal Creosote Superfund Site in Manville, New Jersey.
Additional amounts will be paid to the United States, states, the Navajo Nation, and environmental trusts for other environmental claims and contaminated sites at issue in this case.
The settlement agreement will be lodged with the United States Bankruptcy Court for the Southern District of New York for a period of at least 30 days before it is submitted for the Court’s approval, in order to provide public notice and to afford members of the public the opportunity to comment on the settlement agreement.
Mr. Bharara thanked the Trust, its trustee John C. Hueston, and its counsel, Kirkland & Ellis LLP, for their critical work on this case. Mr. Bharara also thanked the many federal, state, and tribal officials who worked tirelessly on this matter. The litigation of this case was assisted by EPA personnel from around the country; the U.S. Fish & Wildlife Service and Bureau of Land Management of the U.S. Department of the Interior; the National Oceanic and Atmospheric Administration of the U.S. Department of Commerce; the U.S. Nuclear Regulatory Commission; the U.S. Forest Service of the U.S. Department of Agriculture; and the U.S. Department of Defense, as well as numerous state governments and the Navajo Nation.
This case was handled by the Environmental Protection Unit and the Tax and Bankruptcy Unit of the SDNY’s Civil Division. Assistant U.S. Attorneys Robert William Yalen and Joseph Pantoja, along with Alan S. Tenenbaum, Katherine Kane, Frederick S. Phillips, Marcello Mollo, and Erica Pencak of ENRD, are in charge of this case.