Breaking down Freedom Industries' bankruptcy

By Chris Dickerson | Jan 23, 2014

CHARLESTON – A federal bankruptcy judge has ruled that the company behind the chemical leak that left more than 300,000 West Virginians with tainted water can continue to operate and get some temporary financial relief.

On Tuesday, U.S. Bankruptcy Judge Ronald Pearson called the bankruptcy filing for Freedom Industries one of the most unusual Chapter 11 cases he has ever seen.

Freedom had sought approval for debtor-in-possession financing while it reorganizes under bankruptcy rules. That financing would allow a lender to put new money into a company and be first priority among creditors when the company emerges from bankruptcy.

During a six-hour hearing Tuesday, Freedom asked Pearson to let Mountaineer Funding loan it $5 million to continue operations. Pearson decided Freedom won’t get all of that money. He also said Mountaineer Funding will not receive top priority among creditors.

Mountaineer Funding is owned by J. Clifford Forrest. He also owns Chemstream Holdings, which is Freedom's parent company. Mountaineer Funding was incorporated Jan. 17, the same day Freedom filed for bankruptcy.

Under an agreement reached during Tuesday’s hearing, Freedom will receive $3 million from Mountaineer and possibly another $1 million later.
The next step is a meeting in February when creditors can ask questions of Freedom.

More than 30 lawsuits have been filed against Freedom and other companies after the Jan. 9 leak into the Elk River that left more than 300,000 residents without tap water for days.

A Charleston attorney whose firm has filed some of those suits agreed that this bankruptcy is an unusual one.

“Once a person or company that is sued files bankruptcy, there is an automatic stay under the federal bankruptcy law for the protection of the debtor,” said Jim Peterson of Hill, Peterson, Carper, Bee & Dietzler. “That’s so the creditors can’t come after them, hound them, come after them.

“It also gives the debtor the opportunity to reorganize if they can to continue their business by shedding assets or paying off debts at an agreed to rate, such as five cents on the dollar or whatever.”

Peterson said what makes this situation more difficult is that there are other defendants named in the civil lawsuits already filed. Those include West Virginia American Water Company (the local water supplier) and Eastman Chemical (the company that made the “Crude MCHM” chemical that leaked.

“All they did at Tuesday’s hearing was discuss debtor financing, Peterson said Wednesday. “With this infusion of cash Freedom received, it is hoped they can meet their obligations. But in terms of the civil lawsuits, we can’t do anything now until the federal bankruptcy judge says we can move forward with other people in the litigation.”

Peterson said another option involves insurance.

“If the parties agree to go after the insurance of the bankrupt company, then the federal judge can take them out of that bankruptcy and go just after assets in insurance policy,” he explained. “Then, they go through bankruptcy and try to get house in order.”

He said he didn’t know what would happen though.

“With a mass tort like this, who knows,” Peterson said. “We have filed the motion with the state Supreme Court to have it transferred to Mass Litigation Panel in West Virginia. But that’s on hold right now pending what the federal judge is going to do.”

Peterson also said he didn’t know when the federal judge would make his ruling.

“I would assume because of the amount of people and businesses involved, the judge will move very quickly,” he said. “Tuesday’s hearing was set by the judge on short notice. Because of all that was going on, the judge convened the meeting right away. He wanted to get the parties before the court to give them some time to work things out.

“Right now, we all are trying to see how we can move the litigation on and help federal bankruptcy judge with his job.”

Peterson also further explained the move to allow Mountaineer Funding to loan money to Freedom.

“The judge allowed one of the owners or the owner to invest $3 million into the business so creditors could be paid off,” he said. “There is another million the judge may allow it to be infused down the road.

“But the judge is interested in seeing to it that if the business can succeed out of bankruptcy, but he has to give Freedom a length of rope to get their house in order.”

For now, Peterson said he hopes things happen soon.

“My hope is that the bankruptcy judge moves quickly and that the stay is lifted as to defendant Freedom as far as insurance proceeds are concerned,” he said. “Our hope is that nobody has to spend inordinate amounts of money and money on this. I suspect the defendants would agree to a referral to a Mass Litigation Panel as well.

“But, right now, we sure hope there are no additional chemicals in the water. The litigation will take care of itself.”

More News

The Record Network