Texaco Embarks on What May Be Long, Unpredictable Course
Texaco’s action Sunday in seeking protection from creditors involves the same novel use of the bankruptcy law but raises fewer knotty questions than the recent cases of other big, essentially solvent companies, such as Manville Corp., according to bankruptcy lawyers and other professionals.
But that does not mean that Texaco will find life simple operating under Chapter 11 of the bankruptcy code. Experts say that bankruptcy is such an unpredictable process that Texaco’s management may yet regret having taken the step.
“No one would elect Chapter 11 unless they had no alternative,” said Elihu Inselbuch, a New York bankruptcy attorney who advised creditors in the case of Denver-based Manville, which in 1982 filed for Chapter 11 protection. Chapter 11 allows companies to continue operating under existing management while they work out a plan to systematically pay creditors.
“Bankruptcy can severely cramp a business,” Inselbuch said. “It becomes very difficult to retain or attract senior personnel. There’s a disruption in the whole running of the business; anytime the company wants to do anything, it needs the approval of the bankruptcy court.”
Texaco’s case resembles Manville’s insofar as both companies were essentially solvent at the time of their filing but faced potentially devastating liabilities. In Manville’s case, the liabilities stemmed from an onslaught of claims from thousands of victims of asbestos, of which the company was once the nation’s major producer.
For Texaco, the liability is a $10.5-billion jury award it lost in 1985 to Pennzoil, which had contended that Texaco illegally interfered with its planned purchase of Getty Oil Co. Texaco outbid Pennzoil for Getty. The award now totals nearly $11 billion, including interest.
The differences between the two cases outweigh the similarities, however. Manville posed unique legal questions for the bankruptcy court, chief among them how to deal with thousands of asbestos victims whose diseases had not yet manifested themselves, but who would ultimately be filing claims against the company. The court has approved a plan to create a Manville-financed trust fund for those as-yet unknown victims.
In contrast, Texaco “would be a very traditional bankruptcy, but for its size,” said Robert Rosenberg, another New York bankruptcy lawyer.
Other professionals say Texaco’s case may more resemble that of Smith International, a Newport Beach-based oil services company that filed under Chapter 11 in March, 1986, just three weeks after being ordered by a court to pay Hughes Tool Co. $200 million in a patent-infringement case. The filing blocked the payment indefinitely.
Texaco’s filing will block Pennzoil’s ability to foreclose on any Texaco assets to cover its award, clearly Texaco’s principal concern. In the week before the filing, negotiations between the companies had focused on Pennzoil’s demand that Texaco pledge close to $11 billion in assets as security while Texaco’s appeal makes its way through Texas and federal courts, and Texaco’s equally adamant position that it could afford to pledge no more than $1 billion. The two firms also made one last attempt Saturday to settle the entire case.
Although under federal rules litigation against bankrupt companies is automatically stayed or brought before the bankruptcy court, experts assume that Texaco’s appeal of the jury award, which is due to be heard next by the Texas Supreme Court, will continue. Of course, if the courts ultimately rule against Texaco, it still faces the devastating burden of paying the judgment.
How long Texaco will remain in bankruptcy is an open question. If Texaco and Pennzoil can negotiate a settlement, that could be the key to a reorganization plan that allows Texaco to emerge from bankruptcy in relatively short order.
As Texaco’s largest unsecured creditor, Pennzoil is likely to have a prominent place on the company’s creditors’ committee, although not enough sway to materially affect Texaco’s operations, lawyers say.
If the two companies continue to be unable to negotiate, however, Texaco could spend years as a subject to the bankruptcy court, an unenviable situation under any circumstances.
“Chapter 11 is expensive and unpredictable,” Rosenberg said. “It takes business judgment out of the hands of management to some extent. It will undoubtedly have a negative effect on the company’s credit for a long period. It will accomplish the holding back of Pennzoil, but at the price of chaos.”
