Fri 04/29/2022 11:59 AM
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Relevant Documents:
Voluntary Petition
First Day Declaration
First Day Hearing Agenda
Adversary Complaint

Energy Insights: HONX Chapter 11 Filing

HONX Inc., a non-operating subsidiary of publicly traded energy company Hess Corp., filed for chapter 11 relief on Thursday, April 28, to “address and fairly resolve its alleged asbestos liabilities” in what it calls “an effective, efficient, and equitable forum,” the Bankruptcy Court for the Southern District of Texas. HONX says it has been named as a defendant in approximately 580 cases alleging exposure to asbestos and other “toxic” substances at an oil refinery in St. Croix, U.S. Virgin Islands.

The debtor asserts that it “intends to use the breathing spell and other tools afforded by chapter 11” in order to establish a claims trust “consistent with the requirements of section 524(g) of the Bankruptcy Code that would be approved pursuant to a chapter 11 plan.” Section 524(g) provides the basis for a debtor to implement a channeling injunction in connection with a trust pursuant to a plan that would assume the debtor’s liabilities for personal injury damages allegedly caused by exposure to asbestos.

HONX states that it aims to secure an injunction that will “permanently protect” the debtor and its affiliates, including parent Hess, “subject to an adequate contribution,” from any future asbestos-related claims. Pursuant to the funding agreement described below, Hess has agreed to fund the chapter 11 case, including up to $10 million for an asbestos claims trust.

In conjunction with the filing, HONX filed an adversary complaint seeking a temporary restraining order and preliminary injunction that would halt asbestos litigation against the debtor and Hess. The TRO hearing before Judge Marvin Isgur is scheduled for today, Friday, April 29, at 2:30 p.m. ET. The first day hearing is scheduled for Monday, May 2, at 9 a.m. ET.

In advance of the TRO hearing, the judge issued an order in which he questioned the logic for seeking the relief where an automatic stay is already in place as a result of HONX’s chapter 11 filing. He also questioned the evidentiary bases on which the debtor would rely.

The debtor reports $10 million to $50 million in assets and $500 million to $1 billion in liabilities, including approximately $800 million of intercompany payables to parent Hess and its affiliates. Substantially all of the debtor’s other liabilities are contingent, unliquidated and disputed, the petition notes.

HONX says that it “hopes to reach a consensual resolution of the chapter 11 case with representatives for current and future claimants as soon as the representatives are in position and willing to begin discussions.” The debtor expresses a willingness to “promptly engage in good-faith negotiations” with any asbestos claimants committee and future claimants’ representative appointed in the case.

The first day declaration emphasizes that “[t]his chapter 11 case is not the result of an attempt to spin off liabilities from a parent corporation through any corporate reorganization.” “Instead,” the declaration continues, “the Debtor’s status as a non-operating entity with minimal assets is the result of natural corporate changes over its 57 years of existence.”

HONX also says it intends to file a motion in the “near term” to schedule an estimation trial to determine its asbestos claim liability, so it “can utilize a key tool of section 524(g) of Bankruptcy Code in the event the parties are unable to reach a settlement.”

The debtor has entered into a funding agreement with Hess, attached as Exhibit A to the first day declaration, which obligates Hess to fund an asbestos claims trust up to $10 million plus the costs of the chapter 11 case and HONX’s ordinary course expenses. The agreement contemplates initial funding of approximately $11 million in two tranches: $4 million, plus a $1.5 million liquidity reserve, disbursed on the April 27 funding agreement effective date, as well as another $4 million, plus a $1.5 million liquidity reserve, that would be paid out 70 days after the petition date.

Under the funding agreement, Hess has conditioned its commitment to continue funding this process on HONX obtaining an extension of the automatic stay or a preliminary injunction to Hess, the first day declaration explains.

The funding agreement contains the following case milestones in addition to certain milestones related to the request for a TRO and injunction:

  • July 12 (75 days postpetition): Deadline for filing of estimation scheduling motion;

  • Aug. 6 (100 days postpetition): Deadline for entry of an order approving the estimation scheduling motion;

  • April 28 (365 days postpetition): Deadline to file a plan and disclosure statement;

  • Aug. 21 (480 days postpetition): Confirmation order entry deadline; and

  • Oct. 30 (550 days postpetition): Deadline for occurrence of effective date.


The petition includes the following list of law firms representing asbestos plaintiffs in lieu of a list of largest unsecured creditors:

 

The debtor is represented by Kirkland & Ellis as general bankruptcy counsel, Jackson Walker as co-bankruptcy counsel, Piper Sandler Cos./TRS Advisors LLC as financial advisor and Bates White as estimation professional. Stretto is the claims agent. The case has been assigned to Judge Marvin Isgur (case No. 22-90035).

Background

The first day declaration of Todd Snyder, managing director and global head of restructuring of Piper Sandler and the chief administrative officer of HONX, describes HONX as the corporate successor of Hess Oil Virgin Island Corp., or HOVIC, which owned and operated an oil refinery in St. Croix from its construction in 1965 to 1998. The refinery was the largest refinery in the Hess family of companies and had a peak processing capacity of 650,000 barrels of oil per day, “making it one of the largest refiners in the world at the time.”

Since 1998, the debtor has remained a non-operating entity with “minimal assets consisting primarily of a 50% ownership in a joint venture from 1998 to 2016, and post-2016 it has continued its corporate existence solely to manage its alleged asbestos liabilities related to the Refinery.”

HONX “currently has no operations, no employees, no funded third-party debt, and minimal assets aside from the Funding Agreement,” says the declaration.

Snyder emphasizes that “the Company has been in continued existence for the last 57 years; it is not the result of a recent corporate spinoff through any corporate reorganization, but rather the same corporate entity that directly or indirectly operated and owned the Refinery until 2016.”

The declaration also says that in 1998, the debtor formed a joint venture with Petróleos de Venezuela, SA to share 50/50 ownership of an entity called HOVENSA, which operated the refinery until February 2012 when it ceased all refining operations after suffering losses of $1.3 billion in its last three years of operation. HOVENSA filed its own chapter 11 petition in 2015 in the U.S. District Court for the Virgin Islands, resulting in a sale transaction that also led to the resolution of HOVENSA’s environmental liabilities.

HOVENSA liquidated its assets, including the refinery, in a sale to Limetree Bay Terminals. (Limetree Bay Refinery filed for chapter 11 in 2021, with its bankruptcy case ongoing. Limetree sold the refinery as part of its chapter 11 case.)

The debtor’s equity in HOVENSA was canceled, Snyder continues, since which time the debtor has not held any financial interest in the refinery and “neither the Debtor nor Hess have any business operations currently in the U.S. Virgin Islands.”

In May 2020, “for efficiency reasons and to consolidate its corporate entities closer to its business operations,” Hess effectuated a plan of merger pursuant to which HOVIC merged with and into a newly formed New York corporation, HONYC. Prior to the commencement of this chapter 11 case, HONYC changed its name to HONX in an effort to “(a) avoid confusion between HONX and the large public company, Hess, and (b) recognize that although HONX remains a New York-incorporated entity, its principal place of business is in Houston, Texas, where its officers that are responsible for managing its litigation docket are located.”

Virtually all of HONX’s alleged liabilities are legacy liabilities of HOVIC stemming from HOVIC’s ownership and operation of the refinery from 1965 to 1998, says the declaration.

The debtor provides the following illustrative timeline of its corporate history:

The declaration also includes information on historical tort litigation arising from the refinery, saying that beginning in 1987, plaintiffs began bringing lawsuits against HONX and Hess in the U.S. Virgin Islands alleging damages related to asbestos and other toxic tort-related injuries incurred while employed at the refinery, with approximately 1,000 plaintiffs bringing suit from 1987 to 2018.

The debtor and Hess settled approximately 1,100 claims between 1995 and 2018, with 498 claims settled in a single settlement agreement in 2018, referred to as the Gomez settlement. The Gomez settlement provided for a nonbinding mediation process to resolve future claims and was believed to be a “comprehensive solution to the Debtor’s and Hess’s asbestos liabilities associated with the Refinery.”

However, in February 2020, the first and only mediation was held and was unsuccessful, after which plaintiffs’ counsel abandoned the mediation process and filed suit. Over the past two years, more than 570 additional cases have been filed, with an additional 500 claims anticipated to be filed “soon.”

The debtor says that litigating each case is “extremely costly and time-consuming.” Further, the debtor says it has exhausted any applicable insurance policies for defending against these claims, so that it and Hess must expend “material” out-of-pocket resources for defense.

The debtor says it filed for chapter 11 protection because of a “lack of an alternative mechanism to efficiently and equitably address its alleged asbestos liabilities.” After entry into the Gomez settlement, the first day declaration reads, the debtor and Hess “believed that they understood the entire universe of claims against the Debtor and Hess and had a mechanism to resolve them through mediation.”

However, a “surprising and curiously-timed influx of asbestos claims against the Debtor and Hess made clear that it is nearly impossible for the Debtor to obtain finality when it comes to potential asbestos liability claims, absent a bankruptcy case,” says the declaration.

Further, as a result of a Virgin Islands preference statute allowing plaintiffs in civil actions over the age of 65 to request an expedited trial date within 180 days, “the Debtor is expected to incur material near-term costs defending against the alleged asbestos claims in fact and expert-testimony intensive trials.”

Snyder details a pending case in the Virgin Islands, discussed more fully below in connection with the debtor’s filed adversary proceeding - Mohansingh v. Hess Oil Virgin Islands Corp. et al - in which the debtor and Hess have already spent millions of dollars in litigation fees for just this one trial. The debtor filed a motion seeking continuance of the trial through May 4 in connection with the chapter 11 case, after which Mohansingh sought to sever the debtor from the proceeding. The Virgin Islands Superior Court denied the debtor’s motion for a continuance and granted Mohansingh’s motion to sever the debtor from the proceeding,

Prepetition, on April 18, HONX appointed disinterested directors Matthew Kahn and D.J. (Jan) Baker to its board of directors, along with other governance changes. Around the same time, Timothy Goodell and John Rielly, each of whom also serve as senior vice presidents for Hess, resigned from HONX’s board of directors and as officers of HONX. Jason Wiley, associate general counsel of Hess, and Edd Prince, assistant general counsel of Hess, were appointed to serve in their place, and Snyder was appointed chief administrative officer.

Ultimately, HONX, with “no material assets,” entered into the funding agreement with Hess to fund the chapter 11 case and a section 524(g) claims trust. “The Funding Agreement provides HONX with an ability to advance this chapter 11 case to claims estimation, plan confirmation, and emergence, and provides a potential source of recovery for any valid asbestos claimants,” the debtor adds.

Funding Agreement

The key terms of the funding agreement are as follows:

  • Initial funding: Approximately $11 million, paid in two tranches: (a) $4 million, plus $1.5 million as a liquidity reserve, disbursed on the funding agreement effective date, or April 27, and (b) another $4 million, plus $1.5 million as a liquidity reserve, that would be paid out 70 days after the petition date.

  • Additional funding requests: The agreement permits HONX to make funding requests in addition to the first and second tranches described above in amounts no less than $500,000 per request. Hess’ obligation to make payments under the funding agreement is subject to certain conditions, including that HONX obtain an extension of the automatic stay or preliminary injunction to Hess as to asbestos liabilities. Funding requests must also comply with a monthly budget, the initial version of which is attached to the declaration.

  • Aggregate trust amount/trust reserve: The funding agreement places a $10 million cap on Hess’ obligation to fund an asbestos claims trust, unless increased by written agreement of the parties. Hess covenants and agrees to maintain a $10 million reserve to fund such a trust.

  • Permitted funding uses: (a) Ordinary course costs and expenses, (b) costs of the chapter 11 case, including professional fees, and (c) up to $10 million to fund an asbestos claims trust under Bankruptcy Code section 524(g).

  • Minimum balance: The funding account to be maintained by Hess will be required to maintain at least $3 million.

  • Hess covenants: Hess covenants and agrees to (a) maintain a funding account but to not withdraw any funds or otherwise exercise control over the account, (b) continue to provide HONX with reasonable administrative support with respect to operation of HONX’s business and (c) cause any successor to Hess will assume its funding obligations.

  • HONX covenants: HONX covenants and agrees to (a) use proceeds only for permitted funding uses, (b) use any cash on hand as of a plan effective date to reduce any payments necessary for Hess to satisfy the $10 million “aggregate trust amount,” (c) use any cash on hand not arising from the funding agreement to reduce any payment necessary for Hess to satisfy a funding request or the minimum balance and (d) provide Hess a budget semimonthly.


The funding agreement also notes that as of the agreement’s effective date, Hess has made payments of $2.3 million in anticipation of the bankruptcy case.

The funding agreement is subject to the following milestones:

  • May 3 (3 business days postpetition): Deadline for the bankruptcy court to enter the TRO;

  • 14 days after entry of the TRO: Deadline for the court to enter the preliminary injunction order;

  • July 2 (65 days postpetition): Deadline for court to enter an order extending the automatic stay or preliminary injunction to Hess;

  • July 12 (75 days postpetition): Deadline for filing of estimation scheduling motion;

  • Aug. 6 (100 days postpetition): Deadline for entry of an order approving the estimation scheduling motion;

  • April 28 (365 days postpetition): Deadline to file a plan and disclosure statement;

  • Aug. 21 (480 days postpetition): Confirmation order entry deadline; and

  • Oct. 30 (550 days postpetition): Deadline for occurrence of effective date.


The case representatives are as follows:


 






















































































Representatives
Role Name Firm Location
Debtor's Co-Counsel Christopher T. Greco Kirkland
& Ellis
New York
Matthew C. Fagen
Jaimie Fedell Chicago
Michael F. Williams Washington
Daniel T. Donovan
Debtor's Co-Counsel Matthew D. Cavenaugh Jackson
Walker
Houston
Jennifer F. Wertz
Veronica A. Polnick
Debtor's Financial
Advisor
Todd R. Snyder Piper Sandler /
TRS Advisors
New York
Debtor's Estimation
Advisor
NA Bates White NA
Counsel to Hess
Corp.
Charles A. Beckham, Jr. Haynes
and Boone
Houston
Arsalan Muhammad
Martha Wyrick Dallas
U.S. Trustee Alicia Lenae Barcomb Office of the
U.S. Trustee
Houston
Stephen Douglas Statham
Debtor's Claims
Agent
NA Stretto NA



Adversary Complaint

Shortly after filing the voluntary petition, HONX filed an adversary proceeding seeking a temporary restraining order and preliminary injunction that would halt asbestos litigation against the debtor and its parent Hess Corp.

The debtor and Hess are co-defendants in “over 570 Pending Actions in the U.S. Virgin Islands stemming from plaintiffs’ alleged exposure to asbestos and other toxic substances” arising from the ownership or operation of the St. Croix refinery from 1965 through 2015 by the debtor’s predecessor, Hess Oil Virgin Island Corp. and/or HOVENSA LLC.

According to the complaint, and as discussed above, the U.S. Virgin Islands Legislature passed a “preference statute” allowing individuals over age 65 to request an expedited trial date within 180 days, resulting in the first of these trials being scheduled to begin on Monday, May 2.

To effectuate a successful resolution of this chapter 11 case and work toward the funding of a section 524(g) trust to fairly and definitively resolve the pending actions, immediate equitable relief is necessary in addition to the automatic stay’s protection of the debtor, HONX says.

Specifically, the debtor requests that the court issue a TRO prohibiting asbestos plaintiff Kadar Mohansingh from continuing to prosecute his case, Mohansingh v. Hess Oil Virgin Islands Corp. against Hess. HONX also seeks a preliminary (and ultimately permanent) injunction enjoining the plaintiffs in the pending actions identified in the appendix to the complaint from continuing to prosecute such actions through the effective date of any plan confirmed in the debtor’s chapter 11 case. In addition, the complaint asks the court to extend the automatic stay as to Hess.

According to the debtor, if Hess is forced to litigate the pending actions, it would need to “focus its resources on litigation defense rather than negotiating a settlement with the Debtor and its creditors, and establishing a section 524(g) trust, further frustrating the Debtor’s ability to achieve an equitable outcome in this chapter 11 case.”

The complaint states that the Mohansingh action specifically will decide critical issues of law and fact that lie at the core of the chapter 11 case. The threshold issue in the Mohansingh trial is "whether Mohansingh was exposed to hazardous levels of asbestos and other toxic substances at the Refinery that the Debtor (not Hess) owned and operated.”

The complaint says that “[r]esolution of this threshold question will undoubtedly affect the Debtor’s legal rights and defenses, and thereby frustrate the goal of this chapter 11 case: the establishment of a section 524(g) trust to be funded by a contribution from Hess."

The debtor brings the adversary proceeding against plaintiffs in hundreds of asbestos suits, as well as “John and Jane Does 1-1000,” prospective plaintiffs who may seek to pursue asbestos claims against the debtor or Hess while the chapter 11 case is pending.

Other Motions

The debtor also filed the following first day motions:


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