Texaco Considers Filing Chapter 11 Petition by Monday
Texaco may file for bankruptcy protection by Monday if it is unable to reach an agreement on how much of its assets it must pledge as security to Pennzoil while the companies’ acrimonious legal dispute moves through Texas state courts, it was learned Thursday.
Sources close to meetings between the two oil companies said Pennzoil so far has been “unsympathetic” to Texaco’s contention that it is unable to put up security valued anywhere near the $12 billion that Pennzoil has asked. Texaco says that if it is forced to pledge property and assets on that scale it will trigger provisions in its debt agreements that might bring to a halt its access to credit and its ability to do business.
“Pennzoil’s really putting the screws to us,” said one source familiar with the talks.
Pennzoil sources also say that the talks have been largely unsuccessful. “Don’t count on much happening before Monday,” one Pennzoil source said.
Monday is the day set for a hearing before the Texas Court of Appeals in Houston on the size and nature of Texaco’s security.
The case arises from a jury’s decision in late 1985 that Texaco illegally interfered in Pennzoil’s agreement to acquire Los Angeles-based Getty Oil. The jury awarded Pennzoil damages of $10.3 billion plus interest.
Texaco had threatened previously during the legal battle to file for bankruptcy to confound any Pennzoil attempt to seize Texaco assets, but the threat has generally been seen largely as a bargaining ploy. Still, Texaco Chairman Alfred C. DeCrane Jr. said Monday that the company has retained bankruptcy counsel and “made itself familiar” with bankruptcy procedures. Moreover, one source argued that the brinksmanship engaged in by the two parties as Monday’s hearing nears only raises the possibility of a “miscalculation” resulting in a preemptive Texaco filing.
Under a Chapter 11 bankruptcy filing, Pennzoil would become Texaco’s largest unsecured creditor, meaning that it would be reduced to having have equal claim on Texaco’s assets with all other such creditors--a position considered legally inferior to that which it has now. For that reason, lawyers and executives at both companies have agreed that it is in neither company’s interest for Texaco to be forced into Chapter 11.
Pennzoil, aware that a Texaco filing under Chapter 11 could seriously damage its creditor’s position as the owner of a court judgment worth as much as $12 billion, has offered to accept a “flexible” security arrangement in lieu of a bond to cover its claim. But sources say discussions over the nature of that security have foundered on Pennzoil’s insistence that the value of the secured assets approach $12 billion.
A Texaco filing for protection from creditors under Chapter 11 of the bankruptcy code would be one of the largest such filings, rivaling the bankruptcy filings of Penn Central, Manville Corp. and LTV. Because Texaco is a solvent company, with the exception of its huge liability to Pennzoil, it would also raise new questions about the application of bankruptcy law.
Discussions have intensified between the two companies as Monday’s hearing draws closer. At the hearing, the court would be asked to approve the size and nature of Texaco’s security.
The court also has the power, however, to dissolve a temporary restraining order preventing Pennzoil from seizing Texaco assets to cover the court judgment it won from Texaco in 1985.
Texaco attorneys say the company is unwilling to risk entering the hearing without a prearranged guarantee that Pennzoil would refrain from attaching any Texaco assets between the time the court of appeals dissolves the restraining order and the time Texaco files an appeal to the Texas Supreme Court.
“Texaco can’t even tolerate a five-minute risk of being exposed,” said one source, “because Pennzoil could slap down liens in minutes that could total billions.”
Texaco is seeking an agreement from Pennzoil to extend the restraining order for as little as 24 hours after a court of appeals ruling, to enable it to file an appeal before and win a further stay from the Texas high court.
Under Texas law, to prevent Pennzoil from seizing Texaco assets to cover the award during its appeal, Texaco was required to post a bond equal to the entire amount of the jury’s award of damages.
Contending that that was an impossible requirement, Texaco managed to overturn the bond requirement in federal district court in New York. The court allowed Texaco to post a bond of only $1 billion.
But last week the U.S. Supreme Court overturned that ruling, reinstating the full bond on grounds that Texaco should have first appealed the bond to higher state courts in Texas. Only after it does so and is still unsuccessful, the high court said, can it seek a rehearing in federal court.
Since then, Texaco has been grappling with the implications of the ruling, which sent it back to a state court system where it has never won a significant victory in its battle with Pennzoil. In court papers, Texaco executives have said that its bankers, suppliers and creditors have wasted little time since the Supreme Court decision in reducing their exposure to Texaco’s problems.
Several suppliers have placed Texaco on a cash-only basis, and several banks have refused to lend to the company on an unsecured basis, according to an affidavit filed with the Texas court by Richard G. Brinkman, Texaco’s chief financial officer.
Although Pennzoil has said it would accept a “flexible” security arrangement rather than a bond, Texaco sources have complained that Pennzoil’s insistence that the security amount to close to $12 billion--the sum of the judgment plus interest--is an insurmountable obstacle. Committing company assets in that amount as security, Texaco attorneys say, would trigger creditor covenants that would render Texaco in default on many debts.
