Freedom Industries Chapter 11 Filing Reveals Owners' Strategy

Searching for shelter in the face of liability lawsuits, Freedom Industries, the source of the big West Virginia chemical spill, has retreated into federal bankruptcy court with a Chapter 11 filing late Friday. In addition to temporarily freezing litigation against a debtor company, Chapter 11 proceedings allow the bankruptcy judge to sort out whose claims go first. A side benefit is that the process forces troubled corporations to reveal some secrets. Here are my initial findings on Freedom Industries:

The company’s owner made one of the worst-timed acquisitions ever.
We now know who owns Freedom Industries, which was identified on Jan. 9 as the company leaking a hazardous coal-processing chemical into the Elk River in Charleston. The lucky winner is J. Clifford Forrest, a Pennsylvania coal magnate. Forrest acquired Freedom only weeks before the spill that cut off water to 300,000 people and shut down businesses in nine counties. Talk about buyer’s remorse!

Not that Forrest has stepped forward to deal with the mess. Connecting the dots took some detective work. Freedom’s Chapter 11 documents identify its sole owner as Chemstream Holdings. The Pennsylvania company is headquartered in Kittanning, near Pittsburgh, at the same street address as Clifford’s Rosebud Mining. Rosebud claims to be the third-largest coal producer in Pennsylvania and the 21st-largest in the U.S. Freedom’s filings also show that entities called VF Funding and Mountaineer Funding are seeking to lend as much as $5 million to keep Freedom Industries operating during its reorganization. Mountaineer Funding was incorporated just this past Friday in West Virginia; its sole “member” is Forrest. In other words, he’s seeking bankruptcy-court permission to lend millions to his besieged new acquisition.

Separate West Virginia corporate filings identify Forrest as the manager of two other companies that were merged into Freedom Industries as of Dec. 31, 2013. The corporate rearrangement might have seemed smart on New Year’s Eve; today, not so much. Lawyers for Forrest and for Freedom Industries didn’t respond to my phone calls and e-mail seeking comment.

Freedom has a strategy for spreading the blame.
The company’s bankruptcy attorneys, led by Mark Freedlander of the Pittsburgh office of McGuire Woods, used Chapter 11 to float a theory designed to ease Freedom’s liability: “It is presently hypothesized that a local water line break [caused] the ground beneath a storage tank at the Charleston facility to freeze in the extraordinary frigid temperatures in the days immediately preceding” what Freedlander delicately termed “the incident.” Freedom further hypothesized that “the hole in the affected storage tank” was caused by “an object piercing upwards through the base” of the tank.

It seems the idea is that water turning to ice expanded, pushing that mystery “object” through the floor of the tank. Hard to say if the court will buy that. Shouldn’t steel tanks containing dangerous chemicals be able to withstand the consequences of winter weather?

Whose allegedly troublesome water line is Freedom talking about?
Apparently, the suggestion is that the burst pipe might have been the responsibility of Freedom’s co-defendant in many of the liability lawsuits: the local water utility. Business and home owners are blaming the West Virginia unit of American Water Works for failing to move swiftly enough to shut down its intake, which is a mere mile and a half down the Elk River from Freedom’s plant. If the utility were also implicated in puncturing the chemical storage tank in the first place that might shift a lot of the legal hassle to American Water, the nation’s largest publicly traded water company.

The president of American Water’s West Virginia unit has said his company did everything possible to minimize harm from the spill. Something tells me Freedom’s lawyers are going to argue otherwise.

Freedom doesn’t have much money on hand.
American Water had revenue of $6.6 billion in 2012. The companies that now comprise Freedom Industries collectively had revenue of $25.7 million that year, according to the Chapter 11 filing. In 2013, Freedom’s sales increased, but only to $30.7 million. Freedom told the bankruptcy court that it has assets of worth from $1 million to $10 million. The filings show that Freedom’s top 20 unsecured creditors—apart from lawsuit plaintiffs, of course—are owed a total of $3.6 million.

Among the creditors is Eastman Chemical, the Kingsport (Tenn.)-based manufacturer that sold Freedom MCHM, the chemical that escaped into the Elk and from there into the regional water system. Eastman has much bigger concerns, however, than recovering the $127,474.84 Freedom owes it. Plaintiffs in liability suits have also named Eastman as a defendant, alleging that the company failed to warn adequately of MCHM’s hazards. Eastman’s spokeswoman has called the allegations meritless. She went out of her way, though, to add that the manufacturer couldn’t vouch for the conduct of American Water or Freedom Industries.

The next big legal question.
What kind of insurance coverage do these companies have?

    Before it's here, it's on the Bloomberg Terminal.