By Peg Brickley and Gretchen Morgenson
The Ironbound neighborhood of Newark, N.J., has been
revitalized. The tree-lined river that runs beside it has not.
Half a century ago, the herbicide Agent Orange was manufactured
along the banks of the Passaic River. Poison hosed off factory
floors drained into the waterway, where it sank to the bottom and
became toxic sludge. The estimated cost of cleaning it up and
compensating for environmental damage could run as high as $11.8
billion.
Who will pay the bill? That's now a question for a federal
bankruptcy court in Delaware. And its answer could determine
whether other companies with billions of dollars in environmental
liabilities can use the U.S. bankruptcy system to avoid them.
YPF SA, an Argentine state oil company, took over the Agent
Orange site in 1995 as part of its acquisition of Maxus Energy
Corp., an oil-and-gas company. Over the years, YPF sold off Maxus's
oil-and-gas holdings, then put the unit into bankruptcy in 2016.
YPF says it isn't responsible for covering the cost of the cleanup.
And the bankrupt subsidiary, it says, has no money to pay for
it.
Other interested parties, including another company that shares
the liability, are up in arms over the maneuver. They say the
subsidiary was a puppet company emptied of value and left to take
the fall for the Passaic River. Creditors sued YPF in June,
alleging it improperly bled Maxus dry, intending to use its
subsidiary's bankruptcy filing to ditch its cleanup
obligations.
YPF, for its part, accuses its critics of the same sin.
According to YPF's lead lawyer, James F. Conlan of Sidley Austin
LLP, the lawsuit is an attempt by Maxus's largest creditor,
Occidental Chemical, which shares the liability, to avoid being
stuck with the cleanup bill itself. He says YPF will "strongly
defend against the lawsuit." YPF's bid to have the case thrown out
is scheduled for argument on Dec. 18 in bankruptcy court.
Many other companies are watching the case, none more closely
than the 100 or so the Environmental Protection Agency says may
share responsibility for polluting the Passaic with byproducts from
the manufacture of paints, pesticides and other chemical products.
If YPF doesn't pay, billions of dollars of Agent Orange cleanup
costs would fall first to other companies, and then, possibly,
taxpayers.
Since 1980, federal law has made it difficult for U.S. companies
to escape paying for environmental contamination. In recent years,
some companies have used chapter 11 of the bankruptcy code to
minimize environmental liability, says Joshua Macey, a research
fellow at Cornell Law School who co-wrote a paper on the topic to
be published by the Stanford Law Review.
Coal-mining companies have reduced their environmental
obligations in bankruptcy proceedings. In 2015 and 2016, Alpha
Natural Resources Inc., Arch Coal Inc. and Peabody Energy Corp.
persuaded state regulators to reduce the amount the companies had
committed to reclaim mines by nearly $1.9 billion during their
bankruptcy cases. Those obligations rose again for the latter two
companies when they emerged from bankruptcy, illustrating how tough
it is to shake off environmental costs completely.
The dioxin pollution in the Passaic River dates back to the
Vietnam era, when the U.S. military used Agent Orange to kill
Vietnamese crops and vegetation. Demand for the toxic herbicide ran
high. A company called Diamond Alkali, whose name was later changed
to Maxus Energy, manufactured it in a factory along the river.
Workers spoke of factory floors so slick with Agent Orange
byproducts that it was treacherous to walk, according to a 1992 New
Jersey court decision in a lawsuit Diamond filed against dozens of
insurance companies, seeking coverage for the environmental damage.
A lethal Agent Orange byproduct called dioxin flowed into trenches
that emptied into the Passaic, the workers said in court
papers.
The tidal river carried dioxin upstream and down, tainting a
17-mile stretch of riverbed in one of New Jersey's most populous
areas. The contaminants reached to Newark Bay and other waterways,
according to the Environmental Protection Agency, which has
designated the area a Superfund site. To this day, crabs and fish
from the river are too contaminated for human consumption.
In 1983, New Jersey declared the Passaic River site a state of
emergency. The EPA sent crews in biohazard suits into the Ironbound
neighborhood to test for dioxin on streets and in yards.
The looming potential liability for the pollution hung over much
of the deal making that followed.
In 1986, Occidental Chemical, a unit of Occidental Petroleum Co.
that is widely known as OxyChem, bought the chemicals business then
owned by Diamond. Concerned about the Agent Orange liability, it
didn't buy any part of the Newark site, but it still was liable as
a successor owner of the business. As part of the deal, it got
indemnity from Diamond, meaning that it would have to be reimbursed
for any money spent on cleanup.
In 1995, YPF bought the rest of the company, which had changed
its name to Maxus Energy, for $750 million, eager to own its prized
oil-and-gas assets in Bolivia, Venezuela, Ecuador, Indonesia and
the U.S. Along with those holdings came the Agent Orange factory
site in Newark and its liabilities.
The risk of a multibillion-dollar environmental liability didn't
weigh heavily in the deal, according to documents cited in the
current lawsuit by creditors. Shortly after the purchase, however,
a Maxus lawyer warned that the contamination carried "the potential
for total destruction of the company it had just purchased," the
lawsuit said.
According to the suit, it wasn't long before YPF executives
recognized that costs associated with the Passaic cleanup were a
threat. YPF developed a legal strategy with an endgame that
included bankruptcy, according to YPF memos that surfaced in
litigation brought by the New Jersey Department of Environmental
Protection against YPF, Maxus and OxyChem.
The plan was called "Project Jazz" for a New York nightclub
where the company and its lawyers worked out final details,
creditors said in their lawsuit. YPF would sell off Maxus's
oil-and-gas assets over an extended period, mostly to itself or to
a big shareholder. That is what happened, depleting Maxus of
valuable assets and revenues and leaving it dependent on its parent
and loaded with Agent Orange liabilities.
For the bankruptcy strategy to work, YPF had to keep Maxus alive
for years after the last significant transaction, waiting out the
period when creditors were allowed to challenge the deals, the
company's lawyers advised in a later memo.
The state of New Jersey sued Maxus and OxyChem in 2005, accusing
both companies of delaying the cleanup. New Jersey reached
settlements with Maxus, YPF and OxyChem that covered the $220
million the state had spent cleaning the Passaic, but the
settlement didn't cover the cost of finishing the job.
The claim filed by the EPA in Maxus's bankruptcy case says
remaining cleanup costs could exceed $6.3 billion. The EPA pegged
the natural-resource damages at $5.5 billion, bringing the total
bill for what Agent Orange did to the Passaic River to $11.8
billion.
"The Passaic is hard because the contamination is so heavy, it's
so close to where people live, and the polluters have fought EPA
every step of the way," says Judith Enck, a former EPA regional
administrator.
In 2016, the EPA laid out its plan for cleaning up an 8-mile
stretch of the Passaic, with an estimated cost of $1.4 billion.
That cost would fall first upon Maxus and OxyChem, and later,
perhaps on other businesses identified as potentially liable. Up to
that point, Maxus had been handling the cleanup work on OxyChem's
behalf. Months later, Maxus filed for bankruptcy -- the final step
of Project Jazz.
Maxus claimed it had spent $755 million over the years on
cleanup, but didn't have the money either to finish the job or to
reimburse OxyChem for what it has to spend, as stipulated in their
deal years earlier. That left OxyChem on the hook for the entire
Passaic cleanup -- except for what it can collect by suing other
businesses that put the river to industrial use.
Similar bankruptcy maneuvers haven't worked in the past. In a
2013 decision, a New York bankruptcy court determined that
Kerr-McGee Corp. had fraudulently "acted to free substantially all"
their valuable oil-and-gas assets "from 85 years of environmental
and tort liabilities" by shifting them out of its Tronox Inc. unit,
which filed for bankruptcy.
Four months after the bankruptcy judge ruled Kerr-McGee could be
liable for up to $14 billion in environmental damages, the
company's parent settled for $5 billion. It didn't respond to a
request for comment.
Creditors led by OxyChem sued YPF in June, alleging it had
improperly drained Maxus of assets. The creditors are seeking $14
billion from YPF -- an amount that includes the cost of cleaning up
the Passaic River and other alleged abandoned waste sites across
the U.S.
Mr. Conlan, YPF's lead lawyer, says OxyChem is spinning a
sinister narrative about ordinary business decisions YPF made
during the last 30 years.
At a bankruptcy court hearing in late 2016, David Gordon, a
lawyer for the EPA, opposed YPF's effort to end its exposure,
saying the stakes for public health and safety are "tremendous."
The federal government will lead a cleanup of the Passaic Superfund
site that will take 20 to 30 years to complete, he said.
At a hearing last year, New Jersey lawmakers called for an
investigation into whether Maxus's bankruptcy was an attempt to
evade Passaic River cleanup costs. OxyChem lawyer Frank Parigi said
at the hearing that YPF's bankruptcy strategy threatens to set a
dangerous precedent.
Other companies -- foreign or domestic -- would see YPF's scheme
as a viable option to manage their balance sheets, which will harm
American citizens, communities and corporations as well as state
and federal government agencies," he said.
After the hearing, YPF issued a statement accusing OxyChem of
pursuing "pointless litigation."
YPF has moved to have the Maxus creditors' suit dismissed, on
the grounds that time has run out for the creditors to challenge
the deals that stripped out the valuable assets. If the bankruptcy
court rules in YPF's favor, the share of cleanup costs becomes
heavier for OxyChem and other companies that did business on the
river, potentially spurring more court fights.
OxyChem this summer sued other companies identified by the EPA
as a "potentially responsible party"' for polluting the Passaic,
including U.S. Steel Corp. The lawsuit seeks to collect a portion
of the cleanup costs. U.S. Steel, which built warships along the
river in World War II, didn't respond to requests for comment.
Ultimately, taxpayers may have to pay for the cleanup if the
companies involved don't have enough money to cover it. At the end
of 2017, OxyChem's parent, Occidental Petroleum, was holding $457
million in reserve for environmental fixes at 34 Superfund sites,
according to a regulatory filing. The Passaic cleanup accounted for
a large share of that reserve.
One part of the Agent Orange legacy has been cleaned up. The
plant where the toxic herbicide was manufactured now is a gravel
lot.
Write to Peg Brickley at peg.brickley@wsj.com and Gretchen
Morgenson at gretchen.morgenson@wsj.com
(END) Dow Jones Newswires
December 03, 2018 10:35 ET (15:35 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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