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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