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Smith Wins Order Getting Hughes Off Creditors’ Board

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Times Staff Writer

Smith International Inc. won a major victory Monday when a federal bankruptcy judge removed arch-rival Hughes Tool Co. from Smith’s creditors’ committee.

Smith, a Newport Beach oil-field equipment company, filed for bankruptcy protection in early March, three weeks after being ordered by a federal judge to pay Hughes $205 million in damages in a 14-year-old patent infringement suit. Both companies are appealing the judgment.

Because of the award, Houston-based Hughes Tool became Smith’s single largest creditor and was placed on the creditors’ committee by the bankruptcy trustee.

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Arguing against the trustee’s decision, Smith bankruptcy attorney Ronald Trost told U.S. Bankruptcy Judge James R. Dooley that “the ideal thing is for Hughes to collect their $205 million and put us out of business.”

Trost said Hughes had no place on a committee trying to reorganize Smith because “these companies have been at each other’s throats for 25 years.” In granting Smith’s motion to remove Hughes from the 19-member committee, Dooley said that while Hughes is Smith’s largest creditor, it would be difficult to prevent conflicts of interest from arising because the two companies are direct competitors in the oil-field equipment market.

“I think Hughes is a sufficiently large creditor to protect itself,” said Dooley.

The order means Hughes will be barred from sending representatives to creditor meetings. But the company’s lawyers will receive information about the reorganization from other committee members and their attorneys. Hughes, like Smith’s 40,000 other creditors, can appear at bankruptcy court hearings, raise objections to the reorganization plan or file motions through its attorneys. “The door is open for any relief you feel is necessary,” Dooley said.

David Toy, Hughes’ bankruptcy attorney, said it was “premature” to comment on the effect of Dooley’s ruling. The judge also rejected a suggestion that a Hughes representative serve as an ex-officio member of the committee.

Trost said Dooley’s order, which is effective immediately, removes a “roadblock to successful reorganization.”

In court, Trost said Hughes should be removed from the committee because Smith does not “want our business damaged when we are trying to save ourselves.”

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Seeks to Protect Jobs

Trost said that one of Smith’s goals is to protect the jobs of its 5,500 employees, including the 3,600 who work for Smith in the United States.

He also said Smith is “optimistic” that the $205-million judgment awarded Hughes will be “substantially reduced” by the appeals court.

Hughes attorney Larry Schreve unsuccessfully argued that the “sheer size” of Hughes’ claim and its offer to abstain from voting in the creditors’ committee on sensitive issues affecting competition between the companies merited Hughes’ representation on the creditors’ committee.

“What Hughes wants in this case is to collect the $205 million (from Smith),” Schreve told the judge. “It took 14 hard years to win that judgment.”

Smith reported a $265.1-million loss in 1985. The loss included a one-time charge of $216.9 million--taken before the award was made--to cover anticipated damages in the patent infringement case.

As of Dec. 31, 1985, Smith had assets of $671.3 million and liabilities of $483.9 million, according to the company’s bankruptcy petition. Although its assets outweigh its debts, Smith would be forced to sell much of its real estate and other assets to pay its debt to Hughes.

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