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September 22, 2022 – The Court hearing the HONX case has extended the periods during which the Debtor has an exclusive right to file a Chapter 11 Plan, and solicit acceptances thereof, through and including November 2, 2022 and January 2, 2023, respectively [Docket No. 328]. Absent the requested relief, the Plan filing, and solicitation periods were scheduled to expire on August 26, 2022, and October 25, 2022, respectively (with the Debtor having been given an automatic extension to the September 19th hearing at which the Debtors' extension motion was scheduled to be considered).
At that September 19th hearing, the Court, the Debtor and the Debtor's Official Committee of Unsecured Creditors (the “Committee”) agreed the short extensions notwithstanding the Committee's September 15th reservation of rights as to exclusivity which outlined arguments against the Debtor's right to more time (not to mention its right to be in a bankruptcy court in the first place); with those arguments evolving by September 22nd into a full-blown motion to dismiss or convert.
On April 28, 2022, HONX, Inc. (“HONX” or the “Debtor”) filed for Chapter 11 protection noting estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $500.0mn and $1.0bn. At filing, the Debtor, a non-operating, wholly-owned subsidiary of Hess Corporation ("Hess"), noted that it “intends to use the breathing spell and other tools afforded by chapter 11 of the Bankruptcy Code 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;” with the 524(g) trust used to channel claims related to asbestos and other toxic tort-related injuries filed by former employees of the Debtor’s U.S. Virgin Islands refinery.
On September 15th, the co-mediators appointed in the Debtor's Chapter 11 case notified the Court that the mediation has been terminated, effective September 15th [Docket No. 296]. The notice states that the Debtor, Hess, the Debtor's official committee of unsecured creditors (the “Committee”), the Court appointed future claimants’ representative (the “FCR”), and counsel to certain asbestos claimants (collectively, the “Mediation Parties”) "participated in a mediation (the 'Mediation') led by Judge David R. Jones and Mr. Kenneth Feinberg (the 'Co-Mediators') in an effort to resolve certain issues presented in the chapter 11 case, including potential liabilities related to alleged exposure to asbestos….[T]he Mediation Parties have not been able to reach a consensual resolution and, consistent with the authority granted pursuant to the Mediation Order, the Co-Mediators terminated the Mediation on September 15, 2022."
On September 22nd, the Committee filed a motion to dismiss the Debtors’ cases, or in the alternative, convert it to a case under Chapter 7 [Docket No. 324, with a related seal motion filed at Docket No. 325]. As covered in earlier reporting, the Committee views the Debtor’s use of the bankruptcy process as a “particularly stark” example of a bad faith filing, by a Debtor that is not a going concern, has no employees, has no chance of rehabilitation and has been non-operational for more than decade. The filing, the Committee continues is just to protect the Debtor’s parent, Hess Corp, “a financially robust global behemoth, generating about $4 million in unlevered free cash flows each day, with a market capitalization of some $37 billion. The financial exposure Hess faces in connection with its former USVI operations, while meaningful to its victims, is microscopic to Hess itself….” A hearing to consider the dismissal motion is scheduled for November 2, 2022.
The Extension Motion
The extension motion [Docket No. 268] states, “The Debtor’s primary goal in this chapter 11 case is to confirm a plan of reorganization pursuant to relevant sections of the Bankruptcy Code that would channel all of the valid present and future asbestos‑related claims that have or may be asserted against the Debtor to a trust to ensure an equitable and efficient distribution to all holders of valid claims.
Accordingly, shortly after the commencement of the chapter 11 case, the Debtor filed a motion to establish a schedule for an estimation proceeding in this Court. However, at the request of the Committee, the Debtor, its corporate parent, Hess Corporation (‘Hess’), the Committee, the FCR, and Burns Charest LLP, in its capacity as counsel to certain asbestos claimants (collectively, the ‘Mediation Parties’), all decided that prior to litigation, consensual mediation would allow for a potential opportunity for the parties to determine whether a potential settlement with holders of asbestos claims and/or the FCR on behalf of holders of potential future asbestos claims could be reached. Therefore, the Mediation Parties focused their efforts on negotiating and documenting a mediation protocol that was approved by this Court on July 18, 2022 pursuant to the Mediation Order. Since entry of the Mediation Order, the Debtor and the other Mediation Parties have been mediating under the supervision of The Honorable David R. Jones and Mr. Kenneth Feinberg as co-mediators (the ‘Mediation’).
The Mediation Parties agreed that in order to avoid disputes regarding the duration of the Debtor’s exclusive periods during Mediation, the Mediation Parties would consent to one thirty‑day extension of the Debtor’s exclusive periods that would effectively commence no later than September 16 (which is the date under the Mediation Order that all Mediation Parties can resume litigation efforts absent further agreement, notwithstanding the pendency of Mediation).”
Goals of the Chapter 11 Filing
The Snyder Declaration (defined below) provides, "HONX intends to use the breathing spell and other tools afforded by chapter 11 of the Bankruptcy Code 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. Resolving the Asbestos Claims in a comprehensive manner through a section 524(g) trust will be the most efficient and equitable use of resources, expenses, time, and will benefit and all of HONX’s stakeholders—including present and future claimants."
Notably in light of other companies, particularly Johnson & Johnson subsidiary LTL Management, making news in connection with a corporate reorganization leading to the spin-off of LTL to absorb J&J's talc-related liabilities via a so-called "Texas Two-Step," the Snyder Declaration also points out, "This chapter 11 case is not the result of an attempt to spin off liabilities from a parent corporation through any corporate reorganization. Instead, as evidenced above, 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."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Snyder Declaration”), Todd R. Snyder, the Debtor's chief administrative officer, detailed the events leading to HONX’s Chapter 11 filing. The Snyder Declaration provides: “Starting in 1987, plaintiffs began bringing lawsuits against the Debtor 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. From 1987 to 2018, approximately 1,000 plaintiffs filed suit against the Debtor and Hess, under numerous theories of tort liability, generally alleging exposure to asbestos-containing compounds and products arising from the Debtor’s prior ownership and operation of the Refinery….
Because of these litigation burdens, hurdles, and expense, the Debtor and Hess have historically sought alternative ways to resolve asbestos and other litigation related to the Refinery short of taking cases to trial irrespective of the underlying merits of the claims. Between 1995 and 2018, the Debtor and Hess managed to settle approximately 1,100 claims, with 498 claims settled in a single settlement agreement in 2018 (the 'Gomez Settlement')….
The Gomez Settlement was, at the time, believed to be a comprehensive solution to the Debtor’s and Hess’s asbestos liabilities associated with the Refinery. Approximately 660 Tolled Cases were submitted for mediation pursuant to the Gomez Settlement. However, in February 2020, the first and only mediation pursuant to the Gomez Settlement was held. This mediation was unsuccessful, and plaintiffs’ counsel decided to abandon the mediation process and file suit instead. Since then, plaintiffs’ counsel has filed a number of the Tolled Cases. In the last two years, more than 570 additional cases have been filed, with another approximately 500 claims asserted to be brought soon."
The Synder Declaration continues, "The Debtor’s decision to commence this chapter 11 case is a result of a lack of an alternative mechanism to efficiently and equitably address its alleged asbestos liabilities. After negotiating the Gomez Settlement, 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….
HONX currently has no operations, no employees, no funded third-party debt and minimal assets aside from the Funding Agreement.
Hess Corp. owns 100% of the Debtor's equity.
About the Debtor
According to the Debtor's complaint for injunctive relief, "HONX is a New York corporation with its principal place of business in Houston, Texas. HONX is a non-operating, wholly-owned subsidiary of Hess. Almost all of the Debtor’s current liabilities are legacy liabilities of HOVIC stemming from HOVIC’s ownership of the Refinery from 1965 to 1998. HONX currently has no operations, no employees, minimal assets other than the assets provided via the Funding Agreement and no funded debt.
Hess is a Delaware corporation with its principal place of business in New York, New York, and regional headquarters in Houston, Texas. Hess is a global exploration and production company engaged in exploration, development, production, transportation, purchase and sale of crude oil, natural gas liquids and natural gas."
From the Snyder Declaration, "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."
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