Bumbling, Blame and Bankruptcy in Wake of West Virginia Chemical Spill

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Crews clean up a chemical spill along the Elk River in Charleston, W.Va., which compromised the public water supply of eight counties on Thursday, Jan. 9, 2014. (AP Photo/Tyler Evert)
Crews clean up a chemical spill along the Elk River in Charleston, W.Va., which compromised the public water supply of eight counties on Thursday, Jan. 9, 2014. (AP Photo/Tyler Evert)

Last Friday, as lawsuits piled up over the chemical spill that left hundreds of thousands of West Virginia residents without potable water for days, Freedom Industries, the company responsible for the leak, declared bankruptcy.

The filing set off a battle between several private companies trying to avoid liability for the damages suffered by West Virginians. It also provided new insight into the previously murky ownership of Freedom Industries, and a sense of what the company’s foreclosure strategy may look like.

Who Owns Freedom Industries?

As Bloomberg Businessweek’s Paul Barrett wrote, it “took some detective work” to figure out exactly who owns Freedom Industries. The company, first founded in 1986, merged with several other small operators on December 31, just weeks before the spill.

According to The Wall Street Journal, a company called Chemstream Holdings paid $20 million and is now the sole owner of Freedom Industries. Chemstream Holdings is owned by Pennsylvania coal magnate J. Clifford Forrest, president of Rosebud Mining Corporation.

Barrett notes that separate West Virginia filings also list Forrest as the manager of two of the companies that merged with Freedom last month.

Forrest and Rosebud are heavy political donors. According to Open Secrets, during the 2012 election cycle, Rosebud and its officers donated almost $600,000 to Republican candidates, PACs and outside spending groups.

Among other donations, last year, Forrest personally maxed out his contribution to Rep. Bill Johnson (R-OH), who sits on the House Committee on Energy and Commerce. He also donated to Speaker John Boehner (R-OH), Sen. David Vitter (R-LA), the ranking member of the Senate Committee on Environment and Public Works, and Rep. Shelley Moore Capito, a West Virginia Republican who sits on both the House subcommittee on railroads, pipelines, and hazardous Materials and the subcommittee on  water resources and environment.

What Does the Filing Mean?

Freedom Industries filed under Chapter 11 of the bankruptcy code. That temporarily halts all litigation against the firm as it reorganizes.

John Pottow, an expert in bankruptcy and commercial law at the University of Michigan Law School, tells BillMoyers.com that most claims are “dischargeable” by the bankruptcy court. That means that the company’s creditors, state regulatory agencies and anyone suing for damages would have to get in line for a piece of Freedom’s assets proportional to their claims.

There are “narrow” exceptions, he said. A company can’t get bankruptcy relief for damages resulting from “fraud, or intentional personal injury.” The company can also still be stuck with some kinds of government fines. Criminal investigations aren’t impacted by the bankruptcy.

But the courts will likely treat any fines that regulators may levy on Freedom — and they could add up — like any other debt. Asked whether the company could use the court to shirk responsibility for those sorts of liabilities, Pottow said that there’s “a gatekeeping power in the bankruptcy code, so when a company files a Chapter 11 petition, they can get thrown out of bankruptcy for bad faith.” But, he continued, “there’s a perverse reasoning here: The worse they are, the more likely they are to incur penalties and fines, which makes it more likely that they have a legitimate need to file for bankruptcy.”

According to the Charleston Gazette, Freedom claims to have between $1-$10 million in assets. Aside from those mounting lawsuits, it owes creditors $3.6 million, and Uncle Sam has a lien on the company for $2.4 million in back taxes.

A Fast One?

Here’s where things get interesting. At Bloomberg Businessweek, Paul Barrett notes that “Freedom’s filings also show that entities called VF Funding and Mountaineer Funding are seeking to lend as much as $5 million to keep Freedom Industries operating during its reorganization.” But Mountaineer Funding was only formed last week, and is owned by none other than J. Clifford Forrest.

According to West Virginia University College of Law’s Joshua Fershee, there’s a third company seeking to finance the re-organization: WV Funding. He writes, “WV Funding LLC was organized by the same Wheeling attorney who formed Mountaineer Funding LLC for Forrest. The sole listed member of WV Funding LLC? Mountaineer Funding LLC.”

Liability Battle

In bankruptcy proceedings, creditors who bail out a company in bankruptcy move to the front of the line for their share of its assets.

This is where West Virginia-American Water comes in. The private company that supplies drinking water to the area — and had an intake just a mile and a half downstream from Freedom’s chemical storage tanks — made its own filing on January 19, claiming that it had incurred massive damages, and would likely end up being Freedom’s largest creditor. According to Barrett, the company is alleging that Forrest’s loan to Freedom “is actually a disguised tool to manipulate the bankruptcy process.”

In its filing, West Virginia American Water claims that Freedom’s ownership is trying to use the loan to hold onto “those parts of the business that it deems valuable, abandoning the rest, taking the going concern value from the debtor, and leaving the debtor and its many creditors ‘holding the bag.’”

John Pottow, the University of Michigan scholar, says that there’s precedent for these kinds of maneuvers. “This happened in the car company bankruptcies,” he said. “When ‘old GM’ sold itself to ‘new GM,’ the purchasers wanted to buy the nice cherries from the company, but they said, ‘Oh we don’t want to buy those pieces of land that have leaking gas on them.’ They didn’t want to pick up the claims from people that were hurt.’” Eventually, public outcry led the company to change course, but Pottow says “it was pretty clear that the court couldn’t force them to do so.”

The Wall Street Journal reported that the litigants ultimately agreed to a deal that would allow Forrest’s WV Holdings to loan his troubled company $4 million, but wouldn’t grant it special status as a creditor.

Meanwhile, Freedom Industries’ filing claims that a water main underneath the ruptured chemical tanks may have been responsible for the leak in the first place, which would shift liability for the mess back onto the water company. So everyone is suing everyone, and a big question is how much insurance Freedom carries — according to the water company, it didn’t specify in its filing.

Poor Response Continues

Last week, it became clear that early communication issues between West Virginia-American Water and Freedom may have aggravated the impact of the spill. Both firms have continued to bumble the aftermath.

After being cited for numerous violations at its Elk River depot, Freedom Industries moved the remaining mining chemicals to a second facility in Nitro, West Virginia. Several days later, according to the Associated Press, state environmental inspectors found similar violations at the Nitro site.

West Virginia-American Water, meanwhile, was using water from tanker trucks to service its customers, who then reported that they smelled the same licorice-like odor that had accompanied the spill in the first place. The water company told local officials that the trucks were being filled, “off site, out of Charleston.” But according to the Gazette, the company was actually filling up their trucks near the plant where the original spill occurred.

Second Chemical Discovered

We previously reported that little is known about the potential health affects of Crude MCHM, the chemical discharged into the Elk River. On Wednesday, the Gazette reported that state and federal health officials had been informed by Freedom that a second chemical was also contained in the tank.

According to the Gazette, the “health impacts of the [second] chemical remain unclear, and Freedom Industries has claimed the exact identity of the substance is ‘proprietary.’”

In an email to state officials Tuesday night and a press statement this morning, the U.S. Centers for Disease Control noted that data about the potential health effects of the chemical “PPH” are — like the information on Crude MCHM — “very limited.”

Unlike with food or drugs, the government doesn’t require most chemicals to be tested for harmful effects in humans before they’re put on the market.

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  • Peg Walsh

    It’s so disheartening, isn’t it? The buying and selling of what we used to think of as our government of the people, by the people, an for the people.
    The folks in West Virginia, who should have some recourse in the courts for retribution and compensation, will be pushed aside as so much debris, while the plutocrats and Republican donors dance away from responsibility.
    Each and every state and our congress are all undergoing the same backroom buying of our political parties as citizens watch in amazement and horror. The futures of the politicos as colleagues in lobbying efforts are assured.
    Somehow, someway, I hope the tide turns before folks remember another revolution, the one that employed the guillotine to settle such injustices.

  • http://Beaufishblues.wordpress.com/ leah #lovemyplanet

    Well unregulated by state republicans who dislike government this companies roam free and are careless money better spent keeping thing in order rather than politics.
    Mentality of greed is evil and cause infinite damage to earth and life.
    We have possibility of free clean energy to develop but it may collapse the oil business, so no one is talking…insane.

  • Carl from Nanticoke

    This is a smoke screen for a larger man made disaster , the one their trying to hid. And if it’s uncovered , still it will not be addressed.

  • Anonymous

    Thanks for posting this, Bill. Ironic that Erin Brockovich is in West Virginia (from Bill Maher, last night) helping locals cope with this as she was personally affected by “foul” water in her first litigation. Good luck to both of you.

  • Ricardo

    Hello students, welcome to “Shady Dealings 101″, a course in which you will be shown how, with the benefit of a very large bank account, to screw everyone but yourself.

  • Anonymous

    I hope that the bankruptcy filings, intended to avoid financial responsibility for the mess, backfires. I really hope that it gives the people time to access ever morsel of damage done to them and their property. Also I hope that it brings impeachment of corrupt politicians, since the fact that they are buying off politicians whose position should make them protective of the environment, but instead gives Freedom Industries permission to be criminally destructive of the property and health of others.

  • Anonymous

    More robber barons. Are there any companies with executives who have an ounce of decency? The decline and fall of the United States will be written with the names of all the corporations and their executives. They are completely corrupt.

  • SoAndSo

    It’s not irony–it’s someone with experience and compassion stemming from said experience stepping forward.

  • Steve Purnell

    hush money… “contributions”, donations, BRIBES watch them all scatter and try to divert the attention. What piss poor leadership when you can pay to be over-looked…

  • 10Swords

    Don’t you mean “Dixiecrats”? Some of us have been paying attention.

  • Anonymous

    what I want to know is what day the citizens are going to drag this cockroach out and burn him alive?

  • JonThomas

    Corporations, and Limited Liability Companies must be done away with.

    The only way to ensure public safety is to make engaging in any business the full responsibility of the owners, partners, and any investor.

    Some say this will make it too risky to do business. YES… it will make it risky! IT IS RISKY!

    It is unconscionable to create and sell a chemical without knowing it’s effects on humans and the environment. There are hundreds… thousands of these chemicals out there, all being used by profit seeking individuals hiding behind bulwarks of ‘Limited Liability.’ In other words… they not only do not know the dangers of the products they are selling and using, they cannot be held personally responsible for any potential or real damage they cause.

    “It wasn’t my fault, I was just making profit. Isn’t that the American way? I shouldn’t be held liable for that.”

  • Anonymous

    note to self..file under..

    Evil exists because good citizens don’t kill government and corporate officials who commit it.

  • Anonymous

    I am a LLC and have never done or thought of doing such things. I am my only employee delivering blood and if I were in a car accident I didn’t want to lose my house. Maybe some rules need changing but not done away with.

  • Anonymous

    :( Can’t be the only state doing this.

  • Anonymous

    Rivers move, this Elk River is moving to the Ohio River on to the ocean killing as it goes. I wonder if anyone knows when this started, not detected but started. I suppose the janitor will be blamed. :/

  • JonThomas

    I do understand your concerns. Your situation, as a small business owner, is much different from a large company. I would hope, as someone who is ‘hands-on’ in your everyday business, that you also have a lot more ethics than many investor, board of director, or some partner-styled company arrangements.

    If, as a society, we are going to play this game of economics, then we shouldn’t be surprised when reality comes-a-callin’. In order to offset the responsibility which occasions from unintended consequences, people (long before we were born) came up with insurance. A small business owner should simply have enough insurance to offset the worst of emergencies.

    If a private individual were to be “in a car accident” (to use your example,) and they were at fault, then they are liable. There is no wall of ‘Limited Liability” for them. Why then should we as a society allow a business which causes harm to play by a different set of rules?

    If someone died in that accident, then the individual could potentially be charged with, and be sentenced to jail for, negligent man slaughter. The rules should not be any different for business.

    Like I said, I understand your concerns. The risks of running a business can be daunting. Besides, you are only playing by the rules as they exist. Perhaps you have made your choice for different reasons, but most people (businesses) choose to be an LLC, or incorporate for many other reasons, including taxes.

    However, every person, whether they are conducting business, or living their lives, MUST BE HELD ACCOUNTABLE (liable,) and even rewarded if that is the case, for their actions.

  • Anonymous

    True. I have plenty insurance and am bonded. So far the only accident I have been in was someone ran a red light and hit me. Fortunately my precious cargo was not hurt and I still got it there on time without speeding. As far as ethics I have never sold blood to a vampire and said to the hospitable that I lost it. I mentioned car accident because I am on the road a lot which adds percentage of a car accident quite a bit. I realy don’t know why you lectured me.

  • Anonymous

    Regardless of how lax West Virginia is, here is the last line in the article above screams the deficiency in U.S. law regarding all chemicals: “Unlike with food or drugs, the government doesn’t require most chemicals to be tested for harmful effects in humans before they’re put on the market.”

  • Anonymous

    no it is not, Susana the incubus, governor of NM with an executive order repealed the clean water act of new for the benefit of arizona copper mining interests that now have every right to pollute NM waterways. what does she care, she is going back to texas at the end of her governorship.

  • Matthew Hatfield

    Both of you make good points. I got quite a chuckle out of the “not selling to vampires” bit!

  • Anonymous

    People that hurt our home should be sued and/or jailed. I don’t think it would be difficult for any lawyer/attorney to at least prove indifference leading to death of people, flora or fauna..I don’t understand why that is not done. I wouldn’t even be against class action suits even though only the attorney gets the money.

  • Anonymous

    :))

  • Veteran

    chemical spills, train derailments loaded with oil tankers, gas explosions in Canada leaving thousands of people without gas for heat in sub zero temps, BP spill and Halliburton exec just skated with probation after destroying evidence, mass star fish die offs, mass fish die off, mass birds die off, 17 pilot whales just found dead…. mass bee die off’s.

    do a search.. Toxic pollution and choose images.
    People are so busy with the work of surviving in this country you don’t see how our country is becoming 3rd world poor nations.

    If you wait until the nightly news is showing you American images that look like your search, it’s way past too late.

  • Anonymous

    I am not a Conservative because I like change especially if it is better. But I don’t know that being a Conservative means you are a cheating lowlife. I know snakes come in all colors and names.

  • Anonymous

    10Swords is correct. Even everyday people register as one party but are another.

  • Anonymous

    People like her are sickening.

  • Christina

    We at Chanson Water feel for all those affected by the chemical spill because everyone deserves clean water! If you are looking for a solution we would be happy to assist you. Please call us at 1.888.624.2169 to order a Reverse Osmosis Filtration System at a reduced price.