Freedom Industries heads to court amid questions on ‘insider’ payments

Freedom Industries, the West Virginia company involved in last month's chemical spill, is heading back to bankruptcy court Friday after it was reported that it paid out millions of dollars to "insiders" — as they're referred to in bankruptcy law — in the months before its Chapter 11 filing.

The company filed for bankruptcy soon after the Jan. 9 spill that contaminated water for 300,000 West Virginia residents.

The Friday court date follows revelations that Freedom Industries gave about $6 million to executives and associated companies in the year before filing for bankruptcy, court filings show.

These payments to insiders will be closely examined by Freedom’s creditors and could be ordered returned to the company if they’re deemed improper, bankruptcy lawyers told local media.

“It’s a red flag,” Bob Simons, a bankruptcy lawyer with the Pittsburgh firm Reed Smith, told the Charleston Gazette. “Any transfer within a year, to even as much as four years before bankruptcy, can be scrutinized to see if those transfers should be returned to the bankruptcy estate.”

The company sent $1.1 million of that pot to three former company owners — Charles Herzing, Dennis Farrell and William Tis. They received most of the money before leaving top positions in a Dec. 6 merger deal worth $15 million. Farrell is still with the company in a sales role.

The last payment was made on Jan. 8, the day before the leak was discovered.

Freedom Industries paid some connected companies, like Enviromine Inc. and Blackwater LLC, millions of dollars over the past year. Enviromine is run by Freedom Industries President Gary Southern, according to West Virginia records, and received $3.8 million from Freedom Industries in the past year.

Freedom Industries' insider payments are described as consulting, goods and services, expenses and distributions in court documents.

If some of the company's payments to officers and closely tied companies are deemed out of line, they could be returned under bankruptcy law. The money would end up in a pool of Freedom Industries assets available to pay back hundreds of creditors.

Many restaurants and businesses are among the groups in line for compensation from Freedom Industries, a producer of chemicals for the mining and steel industries. They were shuttered for days during a water-use ban after the company leaked coal-cleaning agents into the Elk River. And dozens are suing Freedom Industries over lost profits. But the company's bankruptcy proceedings temporarily froze their lawsuits.

An official committee of unsecured creditors is already combing through payments for possible impropriety, said Charleston attorney Anthony Majestro, who represents a creditor on the committee.

The creditors will get the chance to question Freedom Industries representatives under oath next Tuesday at a bankruptcy hearing in Charleston. West Virginia American Water, whose water supply was tainted, claims it's the biggest of the group.

"Parties suing to get recovery would naturally want to capture any source of payment," said Robert Simons, a Pittsburgh bankruptcy lawyer not involved in the case.

Freedom Industries attorneys said they could not comment because of ongoing court proceedings. The company has spent $150,000 on bankruptcy counselors and lawyers so far, court documents show.

Bankruptcy lawyer Simons told the Charleston Gazette it was positive that Freedom did not try to hide the payments. Whether those transfers could be “clawed back” depends on if they were made while the company was insolvent, or whether they helped make the company insolvent.

“The distinguishing feature of this case is that the spill arguably was unforeseen, so how do you plan for it?” Simons told local media. “You could argue that, if you transferred a lot of the money out of the company, you left it with unreasonably small capital. It would be tough to establish that, because this was an unforeseen liability, but I must say, not impossible under the right circumstances.”

A month after Pittsburgh coal executive J. Clifford Forrest acquired the company, one of its Charleston tanks leaked chemicals into a river providing drinking water for 300,000 people. The company spiraled into bankruptcy by Jan. 17, while some citizens still weren't allowed to bathe in or drink their tap water.

The ban lasted four to 10 days. Many residents still won't trust their taps, however, and are sticking to bottled water.

After filing for bankruptcy last month, Freedom was approved to borrow up to $4 million in credit from a lender to cover costs associated with the cleanup at its chemical-laden grounds in Charleston.

Al Jazeera and wire services