Executive Paid $20 Million for Freedom Industries
Freedom's President Testifies Chemstream Holdings Bought Company Last Month
By
By KRIS MAHER
CHARLESTON, W.Va.—A company controlled by a Pennsylvania coal-mining executive paid $20 million last month to acquire Freedom Industries Inc., the firm at the center of a chemical spill that authorities said tainted the water supply for 300,000 people, Freedom's president testified here Tuesday.
Gary Southern said in a hearing in U.S. Bankruptcy Court that Chemstream Holdings Inc., controlled by J. Clifford Forrest, closed the deal on Dec. 6 and hired him as president of Freedom.
A little more than a month later, on Jan. 9, authorities said about 7,500 gallons of a coal-processing substance called Crude MCHM leaked from a tank at a Freedom storage facility, breached a faulty containment wall and spilled into the Elk River. The chemical infiltrated a nearby water treatment plant, contaminating the supply for as many as nine days.
Mr. Forrest is the president of Rosebud Mining Co., based in Kittanning, Pa., and the 20th largest U.S. coal company by production in 2012, according to the National Mining Association. He didn't respond to requests for comment.
Mr. Southern's testimony, along with that of company CFO Terry Cline, offered the most detailed look yet at the structure and finances of the closely-held Freedom. The company filed for Chapter 11 bankruptcy protection on Friday amid a host of lawsuits stemming from the chemical spill.
Mr. Cline said the former principals—co-founder Dennis Farrell and William Tis of West Virginia and Charles Herzing of Pennsylvania—each held a one-third share in the company and received $300,000 to $400,000 annually from it and the storage facility, which they operated separately. The businesses together cleared about $2 million in profits a year, Mr. Southern said.
Mr. Southern said, before he became president, he was a financial consultant for Freedom Industries for three years. He said the former owners were paid $15 million up front in the sale and were to get the remaining $5 million over three years.
A lawyer representing Messrs. Tis and Herzing declined to comment on the case Tuesday afternoon. A lawyer for Mr. Farrell didn't respond to requests for comment.
"We've learned a lot about the business and who's running it," U.S. Bankruptcy Judge Ronald Pearson said during a nearly six-hour hearing to determine whether Freedom could borrow $5 million it said it needed to stay afloat.
While the bankruptcy filing has temporarily shielded Freedom from lawsuits, it has also set up a fight between the company and West Virginia American Water Co., a subsidiary ofAmerican Water Works Co. AWK +0.79% and the operator of the treatment plant. The water company said in a filing Monday that it faces at least 23 lawsuits related to the spill and expects to have large claims against Freedom.
The initial point of contention was the $5 million loan. In court filings, the water company and lawyers for people suing Freedom over the spill alleged close connections between the lender and Freedom and said the loan could allow company insiders to protect their money before creditors were paid. The lender would have been granted special status that typically puts it first in line to be repaid.
The lender is WV Funding LLC, an entity formed on Friday whose managing member is Mountaineer Funding LLC, according to documents filed with the West Virginia Secretary of State. Similar documents list J. Clifford Forrest as the only named member of Mountaineer. Mr. Southern testified he didn't know if Mr. Forrest was behind the proposed loan.
Mark Freedlander, a lawyer for Freedom in the bankruptcy case, said in court it is "undeniable that the insider is providing the financing." He didn't specify names.
Toward the end of the hearing, the parties met privately and reached a deal: Judge Pearson approved a loan of up to $4 million from WV Funding to pay key vendors, meet its payroll and pay for a cleanup but didn't give it special status as a creditor.
Bill DePaulo, a lawyer representing several local residents who have sued over the spill, called the agreement a fair compromise. Lawyers for West Virginia American Water declined to comment.
Other details about the company were provided earlier by Mr. Cline, who said Freedom has $600,000 in available cash while owing $3.3 million to vendors in the next two weeks. The company has 51 employees, including 35 in West Virginia, and is taking in about $1 million a week in revenue now, which Mr. Cline described as the firm's busy period.
Mr. Southern estimated that Freedom spent $800,000 last week on cleanup efforts at the site of the spill. He said he believed the company has a general insurance policy that covers claims as high as $2 million and pollution insurance that covers about $3 million in damages.
—Cameron McWhirter contributed to this article.
No comments:
Post a Comment