In re Texaco Inc.
| Decision Date | 28 September 1988 |
| Docket Number | No. 88 Civ. 2800 (GLG).,Bankruptcy No. 87 B 20142 (HS)-87 B 20144 (HS),88 Civ. 2800 (GLG). |
| Citation | 92 BR 38 |
| Parties | In re TEXACO INC., Texaco Capital, Inc., Texaco Capital N.V., Debtors. TRANS WORLD AIRLINES, INC., ACF Industries, Incorporated, Swan Management Corp., and Unicorn Associates Corporation, Appellants, v. TEXACO, INC., Texaco Capital, Inc., Texaco Capital N.V., and Pennzoil Company, Appellees. |
| Court | U.S. District Court — Southern District of New York |
Gordon, Hurwitz, Butowsky, Weitzen, Shalov & Wein, New York City (David M. Friedman, Timothy T. Brock, of counsel), for appellants.
Weil, Gotshal & Manges, New York City (Harvey R. Miller, Stephen Karotkin, Jacqueline Marcus, Lori R. Fife, Kevin W. Barrett, of counsel), for appellees Texaco Inc., Texaco Capital Inc., and Texaco Capital N.V.
Levin & Weintraub & Crames, New York City (Michael J. Crames, Myron Trepper, of counsel), Paul Weiss, Rifkind, Wharton & Garrison, New York City (Simon H. Rifkind, of counsel), Baker & Botts, Houston, Tex. (John L. Jeffers, G. Irvin Terrell, David A. Burns, Keith P. Ellison, Susan E. Roehm, Mary M. Gregory, of counsel), Stutman, Treister & Glatt, Los Angeles, Cal. (Isaac M. Pachulski, Kenneth N. Klee, Mark A. Miller, Audrey J. Wohlgemuth, of counsel), for appellee Pennzoil Co.
Kramer, Levin, Nessen, Kamin & Frankel, New York City (Joel B. Zweibel, Geoffrey M. Kalmus, Kenneth H. Eckstein, Suzanne L. Telsey, Jason Brown, of counsel), for the Gen. Committee of Unsecured Creditors of Texaco Inc., et al.
Keck, Mahin & Cate, Chicago, Ill. (Dennis M. O'Dea, of counsel), for Committee of Equity Security Holders of Texaco, Inc.
Lasky, Haas, Cohler & Munter, San Francisco, Cal. (Charles B. Cohler, Thomas E. Woodhouse, of counsel), for Gordon P. Getty.
Dechert Price & Rhoads, New York City, and Philadelphia, Pa. (Steven B. Feirson, Melvin A. Schwarz, of counsel), for Former Getty Oil Co. Directors: For former Directors Petersen, Wendt, Tisch, LaForce, Medberry, Stuart, Berg, Mitchell, Boothby and Teets, and the Estate of Mr. Miller.
Miro, Miro and Weiner, New York City (Deborah S. Minowitz, of counsel), for former Directors Taubman and Allison.
The "rich" history of this case — involving the largest civil damages award in history, the largest bankruptcy in history, perhaps the largest settlement in history, and undoubtedly the largest attorney's fees in history — now moves to its next (and, hopefully, its last) chapter.
On March 23 of this year, the bankruptcy court in this district, the Honorable Howard Schwartzberg presiding, confirmed the Chapter 11 reorganization plan of Texaco Inc. ("Texaco"). In re Texaco Inc., 84 B.R. 893 (Bankr.S.D.N.Y.1988). Included as part of that plan was a $3 billion payment to the Pennzoil Company ("Pennzoil") as settlement of the widely publicized litigation spawned by Texaco's takeover of the Getty Oil Company ("Getty"). As is well known, it was that litigation and the resulting judgment of over $11 billion that precipitated Texaco's decision to file for reorganization under Chapter 11.
Following the commencement of Texaco's Chapter 11 proceedings, a group of companies owned or controlled by Carl Icahn began buying Texaco stock. Those firms — Trans World Airlines, Inc., ACF Industries, Inc., Swan Management Corp., and Unicorn Associates Corp. (referred to collectively hereinafter as the "Icahn Group")—now own approximately 14.8% of Texaco's outstanding shares of common stock and collectively are Texaco's largest stockholders.
The Icahn Group, appellants herein, challenge two aspects of the now-confirmed reorganization plan, to be described infra. The upshot of their argument is that these provisions are unnecessary to Texaco's successful reorganization and, indeed, are contrary to the best interests of Texaco shareholders. The contention, mainly, is that the offending provisions were included as a result of self-dealing by Texaco's officers and Board of Directors and, thus, should be severed from the reorganization plan.
We hold today that, whatever the merits of these challenges, this appeal must be dismissed as moot.
Texaco and Pennzoil have been competitors in the petroleum industry for years. With Texaco's takeover of Getty for $128 a share on January 6 and 7, 1984, however, the battleground of their competition shifted from the oil fields to the courts. We summarize below, as concisely as possible, the ensuing litigation, resulting bankruptcy and reorganization plan, and subsequent challenges to that plan by the Icahn Group which serve as the bases of this appeal.
Prior to Texaco's takeover bid, Pennzoil had been negotiating with Getty on a package whereby Pennzoil would purchase approximately three-sevenths of Getty's shares at $110 a share. Contending that an agreement to this effect had been reached prior to Texaco's successful bid, Pennzoil commenced an action in the Delaware Court of Chancery on January 10, 1984 to enjoin the Texaco-Getty merger. After the Delaware court refused preliminarily to enjoin the Texaco bid, Pennzoil Co. v. Getty Oil Co., No. 7425 (Del. Ch. Feb. 6, 1984) (LEXIS), Pennzoil withdrew its claim and, on February 18, 1984, brought suit against Texaco in the Harris County Court for the 151st Judicial District of Texas. The complaint, like that filed in the original Delaware action, alleged that Texaco's takeover tortiously interfered with the allegedly existing agreement between Pennzoil and Getty. On November 19 of that year, a Texas jury agreed with Pennzoil and awarded $7.53 billion in actual damages and $3 billion in punitive damages on its claim. On December 10, the trial court entered judgment in the amount of over $11.1 billion, adding approximately $600 million in prejudgment interest to the jury's award (the "Pennzoil Judgment").
As one might imagine, this celebrated award — the largest civil award in U.S. history (and perhaps in the world)—had an immediate and devastating impact upon Texaco. The price of its stock dropped appreciably, its credit and bond ratings were lowered, and it was unable to obtain crude oil from trade creditors on customary terms. Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 107 S.Ct. 1519, 1523, 95 L.Ed.2d 1 (1987). These problems were compounded by the fact that, under Texas law, a judgment creditor may secure a writ of execution on its judgment usually within thirty days from the time judgment is entered. Tex.R.Civ.P. 627. To suspend execution on the judgment, the judgment debtor must file a bond at least equal to the total cost of the judgment plus interest. Tex.R.Civ.P. 364. See generally Pennzoil, 107 S.Ct. at 1522-23 (discussing these issues).
In this case, the resulting bond total would have amounted to over $13 billion, which far outstrips the world's surety bond capacity of less than $2 billion. Texaco Inc. v. Pennzoil Co., 784 F.2d 1133, 1138 (2d Cir.1986), rev'd, 481 U.S. 1, 107 S.Ct. 1519, 95 L.Ed.2d 1 (1987). Moreover, when the Pennzoil Judgment was entered, the net worth of Texaco, as measured by the stock market, was in the vicinity of $9.5 billion, although Pennzoil (and others) argued that this total was grossly undervalued. Texaco, Inc. v. Pennzoil Co., 626 F.Supp. 250, 253 (S.D.N.Y.), modified, 784 F.2d 1133 (2d Cir.1986), rev'd, 481 U.S. 1, 107 S.Ct. 1519, 95 L.Ed.2d 1 (1987). Whatever Texaco's actual worth may have been, it is clear that the jury's award, if left materially intact, would have proven ruinous to Texaco.1
Confronted by these staggering prospects, Texaco, on the day the trial court entered judgment, brought suit in Federal court to challenge both the Pennzoil Judgment and the Texas bond provisions. It alleged that the Texas jury award violated various aspects of federal law and that the Texas bond provisions violated the Due Process Clause of the Fourteenth Amendment by effectively denying Texaco's right to appeal. On January 10, 1986, this court granted Texaco's motion for a preliminary injunction preventing Pennzoil from executing on its judgment. Texaco, Inc. v. Pennzoil Co., 626 F.Supp. 250 (S.D.N.Y 1986) (Brieant, J.). That decision was affirmed on more limited grounds in Texaco Inc. v. Pennzoil Co., 784 F.2d 1133 (2d Cir.1986). The Supreme Court, however, reversed, holding that, in light of the pending Texas litigation, principles of abstention dictated that the Federal courts refrain from interfering in the Texaco-Pennzoil brawl in its then-existing posture, suggesting that there were other avenues of relief available to Texaco. Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 107 S.Ct. 1519, 95 L.Ed.2d 1 (1987).
On April 12, 1987, six days after the Supreme Court's decision and with interest on the Pennzoil Judgment accruing at the rate of $2.8 million per day, Texaco filed for reorganization under Chapter 11 of the Bankruptcy Code. Joining in the filing were two of Texaco's wholly-owned subsidiaries, Texaco Capital Inc. and Texaco Capital, N.V. It was management's assessment that, in addition to providing time for negotiation of a settlement, a Chapter 11 filing was the only remaining, viable means by which appeal of the Pennzoil Judgment could be pursued. Second Amended Disclosure Statement, In re Texaco Inc., Nos. 87 B. 20142, 20143, & 20144, § III.F., at 10 (Bankr.S.D.N.Y. Jan. 29, 1988) () hereinafter the "Disclosure Statement § ___, at ___".
In the interim, Texaco pursued appeals with the Texas courts. On February 12, 1987, the Court of Appeals for the First Supreme Judicial District of Texas substantially affirmed the Pennzoil Judgment, subject only to a $2 billion remittitur of the punitive award (to which Pennzoil agreed). On November 2 of 1987, Texaco having since filed for bankruptcy, the Texas Supreme Court denied Texaco's motion for appeal without hearing, concluding that no reversible error had been committed by the lower courts. That left Texaco with the sole...
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