Soil pollution: American law orders Kerr-McGee to pay $5.15 billion for its environmental liabilities

After five years of litigation, on 3 April 2014, the US Department of Justice entered into a settlement agreement with Kerr-McGee Corporation and its parent company, Anadarko Petroleum (“Kerr-McGee”). This agreement requires Kerr-McGee to pay $5.15 billion in order to compensate for its environmental and tort liabilities of the past 85 years.

This agreement came after the 12 December 2013 judgment of the US Bankruptcy Court for the Southern District of New York in Tronox Inc., et al., v. Kerr-McGee Corp., et al. (In re Tronox Inc.), 503 B.R. 239 (Bankr. S.D.N.Y. 2013).

The following analysis will first tackle the judgment of the US Bankruptcy Court for the Southern District (“the Court”), before looking at the agreement itself.

After its founding in 1929, Kerr-McGee operated various businesses around the US, including wood-treating, uranium mining and processing, thorium processing and the manufacture or use of various chemicals. These operations resulted in a lot of contamination across the country.

By the early 2000s, Kerr-McGee decided to terminate its historical activities responsible for environmental liabilities. From then on, Kerr Mc-Gee continued to operate two core businesses: oil and gas exploration and production; and chemical production.

In 2005, Kerr-McGee transferred all its oil and gas assets to a new company, also called Kerr-McGee (“the new Kerr-McGee”, which was acquired by Anadarko in 2006); the chemical activities, and all the environmental liabilities attached to it, remained with the “old Kerr-McGee”. After that, through an initial public offering, the “old Kerr-McGee” and its activities was renamed Tronox Incorporated (“Tronox”). In 2006, there was a spin-off of Tronox from Kerr-McGee. In 2011, burdened by environmental liabilities, Tronox, after being placed under Chapter 11 bankruptcy protection for two years, emerged from bankruptcy.

In May 2009, Tronox, feeling it had been wronged by Kerr-McGee, initiated the case before the Court. After the bankruptcy of Tronox in 2011, a US and litigation trust (“the trust”) was established in order to pursue the litigation.

In its judgment, the Court held Kerr-McGee liable on the grounds of “fraudulent conveyance”. Indeed, according to the Court, Kerr-McGee left Tronox insolvent and undercapitalized and should have known that Tronox would incur debts beyond its ability to pay them. Moreover, the Court added that it is obvious that the spin-off was created by Kerr-McGee with the intention of creating a “pure play” oil and gas business free and clear of its environmental liabilities, which is not permitted under US law.

The Court considered the amount of damages that should be awarded to the plaintiffs and held that the defendants were liable for between $5.15 billion and $14.16 billion. No agreement was finalized at the time as to the proper amount that Kerr-McGee would have to pay; this was a task for the US Department of Justice.

By referring to the Supreme Court’s Stern v. Marshall decision, the Court stated that it had jurisdiction to enter a final judgment (i.e. without further appeal).

On 3 April 2014, the US Department of Justice announced the agreement. Under the settlement, Kerr-McGee will pay $5.15 billion to the trust. A total of 88% of this amount will be distributed to the US, certain state governments, the Navajo Nation and environmental organizations, in order to clean up all the contaminated sites.

Note that this is the largest recovery for the clean-up of environmental contamination in history.

According to Cynthia Giles, assistant administrator for the US Environmental Protection Agency, Office of Enforcement and Compliance Assurance: “The Court’s decision makes a strong statement that companies should take responsibility for the toxic pollution they cause. Those that manipulate their assets and leave American taxpayers to foot the bill to clean up their mess will be held accountable. This is a huge win for public health and the environment, as proceeds from the decision will fund needed clean-ups across America.”