Smith’s Return From Chapter 11 Eased by Court : Gearhart Shareholder Suit Won’t Halt Reorganization

A federal judge has removed a significant obstacle to Smith International Inc.’s plan to emerge from Chapter 11 bankruptcy proceedings by the end of the year.

And, in a related development, the Newport Beach oil services firm reported Friday that it lost $59.3 million during the second quarter. The deficit includes a $47.6-million write-off related to the sale of one of the company’s divisions.

Late Thursday, U.S. District Judge Matthew Byrne Jr. ruled that a lawsuit filed against Smith could not interfere with the company’s reorganization schedule.

The suit, filed by a group of shareholders in Gearhart Industries Inc., a Fort Worth, Tex., oil services firm, had threatened to jeopardize Smith’s pledge to pay off a major creditor by Dec. 31.

Financial Losses Claimed

In their suit, scheduled to go to trial in October, the Gearhart shareholders say they suffered financially when Smith unsuccessfully attempted to acquire Gearhart nearly four years ago. They are seeking $300 million in damages from Smith.

As part of its proposed reorganization, Smith has agreed to pay $95 million to Baker Hughes Inc. to settle a 14-year-old patent infringement suit. If Smith does not meet the Dec. 31 deadline, Hughes officials said they will demand the original $205-million judgment awarded by a Los Angeles federal judge last year.

In a brief ruling from the bench, Byrne said any delay created by the Gearhart shareholders’ suit could jeopardize Smith’s pledge to pay Baker Hughes by the end of the year.

“I think it (the ruling) removes a potential obstacle to confirmation (of the reorganization plan),” said Richard F. Broude(, Smith’s bankruptcy attorney.

Broude said Byrne’s ruling clears the way for U.S. Bankruptcy Judge James Dooley to consider the value of the Gearhart shareholders’ claim at an Aug. 26 hearing. Broude said their $300-million claim is equal to all of the other claims combined.

Smith continues to deny all liability in the shareholders’ case, he said.

Most of Smith’s creditors have tentatively agreed to support Smith’s reorganization plan. A bankruptcy court hearing on the plan is set for Aug. 24.

Reaction to Ruling

Attorneys representing the Gearhart shareholders appeared to take Byrne’s ruling in stride. “We would have preferred to have one court proceeding in Texas,” said Steven Cohen, a Chicago attorney representing Gearhart shareholders.

The acrimonious takeover battle between Smith and Gearhart ended in May, 1985, when Smith agreed to sell its Gearhart stock at an $80-million loss.

Smith’s $59.3-million second-quarter loss is more than three times the $15.5-million loss it sustained in the same period a year ago. This year’s deficit includes a $47.6-million write-off resulting from the sale of Smith’s McEvoy-Willis division, a manufacturer of oil and gas wellhead equipment.

Second-quarter sales were $59.6 million, down 23% from $77.6 million in the same quarter a year ago.

For the first six months of the year, Smith reported a net loss of $47.3 million, compared to a $40.3 million loss for the first half of 1986. Sales for the first half were $115.6 million, down from $191.5 million in 1986.

Times staff writer Leslie Berkman contributed to this story.