Texaco Files for Bankruptcy Relief : Seeks Legal Protection to Fend Off Asset Seizure in Pennzoil Dispute
Texaco, taking a drastic step to fend off a possible seizure of assets in its historic $11-billion legal dispute with Pennzoil Inc., Sunday filed for protection from creditors under Chapter 11 of the bankruptcy code.
Texaco, the world’s third-largest oil company, is the biggest firm ever to seek bankruptcy protection. But it is only the latest in a string of essentially solvent companies to seek bankruptcy refuge from the effects of potential liabilities, such as lawsuits and labor contracts.
The filing, made Sunday morning in Texaco’s headquarters community of White Plains, N.Y., came after lengthy meetings of its board and one last negotiating session with Pennzoil over the weekend. It was announced here by Chief Executive James W. Kinnear, who called it “a most difficult, painful and wrenching decision for me and the other members of Texaco’s board of directors.”
Texaco was forced into bankruptcy as a result of a 1985 decision by a Houston jury that Texaco had illegally interfered with Pennzoil’s plan to acquire Los Angeles-based Getty Oil Co. The jury awarded Pennzoil damages of $10.5 billion plus interest, the largest such award in U.S. history.
Kinnear said Sunday that the bankruptcy filing was necessary to halt the company’s steady deterioration in finances over the last few weeks. In that time, Texaco has suffered two adverse legal rulings in its continuing court battle to overturn the Houston jury’s verdict.
The rulings, which raised the possibility that Pennzoil might gain the right as early as today to seize billions of dollars in Texaco assets, have provoked Texaco’s banks and suppliers to restrict credit to the giant oil producer, despite its assets of nearly $35 billion and net worth of $13.7 billion.
Under Chapter 11 of the bankruptcy code, a company is permitted to continue operating under its existing management while it attempts to work out a plan to repay creditors. Texaco Chairman Alfred C. DeCrane Jr. said the company will now be able to assure its skittish creditors that they will be paid. Kinnear and DeCrane told a news conference here that Texaco should operate relatively normally while under bankruptcy court supervision.
DeCrane said most of Texaco’s operating subsidiaries, including Getty Oil and all Texaco subsidiaries operating abroad, remain outside the bankruptcy filing. These operations accounted for 96% of the company’s revenues last year, he said. Still, virtually all of Texaco’s debt and other financial obligations are held by the parent company and its two finance subsidiaries, which are those involved in the bankruptcy.
Moreover, DeCrane acknowledged that creditors, concerned that Texaco might try to hide assets in units that did not file for bankruptcy, might successfully seek to include the remaining subsidiaries in the bankruptcy filing.
Among the principal victims of the bankruptcy filing are holders of Texaco’s $6.8 billion in outstanding bonds, on which interest payments will cease until the company emerges from bankruptcy. Payments of dividends to the company’s more than 240,000 shareholders will also be suspended.
But another big loser may well be Houston-based Pennzoil, which will be relegated under the law to the status of an unsecured creditor, albeit by far the largest one. Legal professionals say that gives Pennzoil much less leverage to force an out-of-court settlement from Texaco than it had as the holder of an $11-billion court judgment against a company not in bankruptcy.
Manville Case Cited
Texaco is far from the first to make such use of the bankruptcy law. The first was Denver-based Manville Corp., which sought protection in 1982 from potentially billions of dollars in claims from victims of diseases caused by asbestos, then its principal product. The company is expected to emerge from the court proceedings in about a year as a company largely owned by asbestos-disease claimants.
Later, Continental Airlines sought bankruptcy protection from what it called the ruinous burden of its union wage contracts; the carrier emerged as a lower-paying, non-union company. Most recently, A. H. Robins Co. last year filed for protection from claims filed by women who claimed to have been injured by its Dalkon Shield intrauterine device.
Bankruptcy professionals say that in filing under Chapter 11, Texaco is entering a possibly long and unpredictable process. Among other things, the Texaco management will have to bring any substantive business decision before the bankruptcy court for approval. Management could face ouster by the court or shareholders, and the filing’s effect on its suppliers, customers and 52,000 employees can only be conjectured.
‘Traumatic Experience’
“Bankruptcy is a traumatic experience,” said Frank R. Kennedy, a bankruptcy expert who is emeritus professor of law at the University of Michigan and a member of the Chicago law firm of Sidley & Austin. “Texaco might face a lot of disillusionment.”
Others say that the protection afforded by the bankruptcy court might give Texaco the financial breathing room it needs to reach a reasonable settlement with Pennzoil. Up to now, the companies’ negotiations have been dominated by Pennzoil’s threat to begin seizing Texaco assets to cover the award made by the Houston jury in 1985, and Texaco’s counter threat to file bankruptcy to prevent that.
Sunday saw an escalation of the rhetoric each corporation has directed at the other.
Kinnear and DeCrane bluntly laid the blame for Texaco’s Chapter 11 filing at the feet of Pennzoil, which they said had repeatedly refused to consider any reasonable settlement of the legal case.
“Pennzoil has forced Texaco into this position and Pennzoil must ultimately bear responsibility for the consequences,” Kinnear said. “Pennzoil’s conduct amounts to nothing less than a transparent and reprehensible manipulation of the legal system . . . . They raised the stakes constantly--pushed and prodded at every opportunity--turned up the heat in their legal pressure cooker hoping that heat would become unbearable.”
Texaco Intent Scored
Pennzoil officials, in turn, maintained Sunday night that Texaco had never offered a reasonable settlement. Baine P. Kerr, a Pennzoil director and former company president who has been working as its chief negotiator in the matter, said: “I became convinced they never had any intention of trying to settle.”
Kerr indicated that on Saturday Texaco rejected a Pennzoil proposal of a settlement in the $4-billion to $5-billion range, which he said would have only a “minimal impact” on Texaco’s finances. Texaco executives would not confirm that.
Joseph D. Jamail Jr., the Houston personal-injury lawyer who won the jury case for Pennzoil, said of the bankruptcy filing: “It’s an act of total irresponsibility. No one forced them into that.”
Pennzoil Chairman J. Hugh Liedtke, who is in New York on business, declined to comment Sunday night.
Both Pennzoil and Texaco pursued Getty Oil in 1984, with Texaco eventually acquiring the Los Angeles-based oil firm. Pennzoil concluded what it considered a binding merger agreement only to be outbid by Texaco at the 11th hour.
Although an appellate court this year reduced the original jury award to $8.5 billion, with interest it still comes to nearly $11 billion. To keep Pennzoil from seizing its assets while it appealed, Texaco was required under Texas law to post a bond equal to the jury award. Texaco contended that no bond of that magnitude could be obtained at any cost, and it quickly won an emergency ruling from a federal judge in New York cutting the required bond to $1 billion.
Judge Overruled
A week ago, however, the U.S. Supreme Court overruled the federal judge and ordered Texaco to exhaust its appeals of the bond requirement in the Texas courts before appealing to the federal judiciary. It was that ruling that provoked the company’s latest crisis.
Texaco and Pennzoil are scheduled to argue today before the Texas Court of Appeals over the size and nature of temporary security Texaco would be required to pledge while it appeals the bond question.
On Friday, Pennzoil said it was willing to accept cash, letters of credit and other liquid collateral equal to only half the judgment, or about $5.6 billion, but demanded in return that Texaco restrict its dividend payments to shareholders and accept several other constraints on its ability to raise money and sell assets. Pennzoil said it would also ask for a full $11 billion in collateral within 30 days.
The demand, Kinnear said, “would force Texaco to dismember itself.”
One uncertainty created by Sunday’s filing is the fate of the Texas proceeding. Texaco’s appeal of the jury award is expected to continue to the Texas Supreme Court, having been largely upheld in February by an intermediate appellate court.
Arguments Set Today
As for the bonding requirement, Texaco lawyers said they will report today to the Court of Appeals in Houston to argue their case, but they acknowledged that if the bond is upheld, its imposition would be blocked by the bankruptcy court’s jurisdiction.
If the state court overturns the bonding requirement, said David Boies, Texaco’s lead outside attorney, the company might be able to end the bankruptcy process on grounds that its most onerous potential liability had been lifted.
TEXACO vs. PENNZOIL: A CHRONOLOGY1984
Jan. 3 - After months of turmoil, in which Gordon Getty breaks with company management, Getty Oil accepts Pennzoil offer to acquire 43% of Pennzoil for $112.50 a share or about $2.6 billion, with an option to buy 8 million unissued Getty Oil shares for $110. Agreement is not sealed in writing.
Jan. 6 - Texaco signs agreement to buy Getty Oil for $9.9 billion, or $125 per share, in what was then the largest corporate acquisition in U.S. history.
Feb. 8 - In addition to other suits seeking an immediate halt to Texaco-Getty merger, Pennzoil sues in state court in Houston alleging that Texaco illegally interfered with its deal with Getty Oil.
1985
Nov. 19 - Pennzoil is awarded $10.53 billion by a Texas state court jury.
Dec. 10 - Texas state judge Solomon Casseb upholds judgment against Texaco for $11.1 billion, which includes interest.
Dec. 17 - Several rating agencies downgrade Texaco’s debt. A federal court in New York temporarily bars Pennzoil from attaching liens on assets.
Dec. 23 - Texaco reaches agreement with 27 banks, exchanging $2 billion in accounts receivable for $1.6 billion in short-term loans.
1986
Early January - Texaco and Pennzoil hold intensive negotiations on a possible settlement.
Jan. 10 - New York federal judge Charles L. Brieant rules that Texaco doesn’t have to post a $12-billion bond while it continues to fight Pennzoil in court.
Late March - Settlement talks resume.
June 23 - U.S. Supreme Court agrees to review federal court ruling that permitted Texaco to avoid posting a $12-billion bond.
Oct. 26 - Texaco undergoes leadership change. Chairman and chief executive John K. McKinley announces retirement. James W. Kinnear becomes president and chief executive while Alfred C. DeCrane becomes chairman.
1987
Feb. 3 - Pennzoil chief J. Hugh Liedke says he’ll stay with the company even after he turns 65 because of court fight with Texaco.
Feb. 12 - Texas appeals court upholds all but $2 billion of the original $11.1-billion judgment against Texaco.
April 6 - Texaco is stripped of its protection from having to post a huge bond when the U.S. Supreme Court rules that the company had no right to challenge the bond in federal court until it had exhausted appeals in Texas state courts.
April 8 - A group of banks cuts off the key short-term credit line, secured by accounts receivable, through which Texaco was covering its cash needs.
April 7-10 - Texaco and Pennzoil negotiate but fail to reach agreement on either overall settlement or how much of Texaco’s assets must be pledged as security to Pennzoil while the court fight proceeds.
April 12 - Texaco files for protection from creditors under Chapter 11 of the bankruptcy code., Los Angeles Times
Times staff writer J. Michael Kennedy in Houston contributed to this story.
