DuPont or Chemours? Who will pay the costs of C8 lawsuits?

DuPont is facing some 3,500 lawsuits and more than $1 billion in potential liability for improperly dumping the toxic chemical C8, used in the manufacturing of Teflon, at its Washington Works plant near Parkersburg, West Virginia.

Releasing the chemical through outflow pipes into the Ohio River, up the plant's industrial chimneys and at two unlined company landfills is blamed for widespread illnesses in the region.

Experts say the liability will do little to derail DuPont's proposed $130 billion merger with The Dow Chemical Co., but could have dire consequences for Chemours, the performance chemical company DuPont spun off last July – about six months after it left downtown Wilmington for the suburbs.

Part of the separation agreement requires Chemours, which now occupies offices adjacent to Hotel du Pont that has stood as the parent company's headquarters for more than 100 years, to indemnify DuPont for any costs in "product liability intellectual property, commercial, environmental and anti-trust lawsuits."

But Chemours, with about 1,100 employees in Delaware,  may not pay, company spokeswoman Janet Smith said.

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"These are DuPont liabilities," said Smith. "That means it would be DuPont's responsibility to pay any settlement or judgement in these cases. Under the separation agreement, DuPont may be entitled to indemnity from Chemours."

Ultimately, lawsuits brought by citizens against DuPont may lead to litigation between the two companies.

"Liability is like a contagious disease," said Marie Reilly, a professor of corporate and bankruptcy law at Pennsylvania State University Law School. "You can pass it to someone else and you still have it. It's not like a baton in a relay race where you don't have it any more."

Beginning in 2017, the 3,500 lawsuits are scheduled to begin grinding through the U.S. District Court for the Southern District of Ohio at a pace of 40 cases per year, meaning it could take 90 years to resolve them all.

DuPont must first pay any damages awarded to plaintiffs before it pursues indemnification from Chemours. The volume of lawsuits makes it difficult to know exactly when DuPont could seek reimbursement, but it is unlikely DuPont would wait 90 years for one large indemnification payment from Chemours.

And DuPont must be careful not to overwhelm Chemours with liability payment demands so that it collapses under the strain.

Alex Geisinger, a professor of economics at Drexel University's law school, said DuPont is better off structuring the indemnification over a long period of time – even if it means receiving less than expected from Chemours.

"If DuPont is paying millions of dollars to 3,500 individuals and there is no Chemours in its back pocket to pay for that, DuPont is losing in that circumstance," he said.

Chemours is in a precarious position. It's total capitalization of $1.24 billion barely exceeds the estimated liability for pain and suffering of West Virginians and Ohioans harmed by C8 exposure. The company has lost money every quarter since separating from DuPont – $18 million and $29 million in the second and third quarters of 2015, respectively. Those loses nearly tripled in the fourth quarter, to $86 million.

The company's troubles have largely been tied to weak demand for its top products – titanium dioxide, Teflon, and sulfuric acid. All three of Chemours' product lines reported double-digit sales declines in the fourth quarter, and overall sales fell to $1.4 billion, a 12 percent decrease from the same quarter in 2014. For the year, Chemours' sales dropped 10 percent to $5.7 billion from $6.4 billion in 2014.

Chemours has responded to the quarterly losses with an aggressive plan to eliminate $350 million from its budget by the end of 2017. Cuts include the shuttering of its Edge Moor facility just outside Wilmington, along with a Niagara Falls, New York plant next year and the sale of a Beaumont, Texas plan to Dow for $140 million. In addition, the company has laid off 400 employees, about 5 percent of its workforce.

"If Chemours is in trouble, a DuPont lawyer will have the possibility of a bankruptcy in the back of their mind, and a Chemours attorney will use the possibility of bankruptcy as leverage with DuPont," Geisinger said. "This is a touchy situation."

DuPont spokesman Dan Turner would not speak directly to whether DuPont would attempt to force Chemours to cover liabilities. In a statement, Turner said, "DuPont remains committed to continuing to fulfill all of its legal obligations and environmental obligations in accordance with existing local, state and federal regulatory guidelines."

So far, two cases related to C8 contamination have been resolved. In October, a federal jury awarded $1.6 million to Guysville, Ohio resident Carla Bartlett after finding DuPont's dumping of C8 into Ohio River caused her kidney caner. DuPont's appeal of the jury decision is still pending.

A second case, John M. Wolf v. DuPont, was settled in February for an undisclosed amount.

Chemours conceded in a Securities & Exchange Commission filing that indemnification claims could "materially" affect its financial condition, but noted the scope of the liability cannot be estimated because each individual plaintiff's claim is unique.

The first substantial payment to C-8 plaintiffs is expected to occur sometime in 2018 or 2019, and a lot can happen between now and then. In its transformative plan, Chemours expects to liquidate its non-core chemical solutions portfolio, which could improve profits by $500 million within the next two years.

Wall Street analysts say Chemours is relying upon a lot of what-ifs.

"Anytime we are thinking about 2019, there has to be a lot of uncertainty on anything," said John Roberts, an analyst with UBS Global.

In August, Chemours launched it Opteon line of products – environmentally-friendly refrigerants used in automobile and home air conditioning units – and has already doubled capacity to meet demand both in the United States and Europe. That could help Chemours weather the storm, said Lawrence A. Hamermesh, a professor of corporate law at Delaware Law School.

"Companies can lose money still have a lot of assets left," Hamermesh said. "Big companies lose money all the time in any given quarter or year."

Hamremesh compared the liability of C8 exposure to the asbestos lawsuits which bankrupted more than 100 companies throughout the United States. If the C8 liability is big enough it could bankrupt Chemours, forcing plaintiffs attorneys to settle the exposure cases on the cheap.

"If you know in the long run you are looking at at bankruptcy you'll take your 40 cents on the dollar and get out," he said. "But it is too early to think about that based on one settlement and one lawsuit on appeal."

DuPont Chief Executive Officer Ed Breen has publicly expressed confidence in Chemours' ability to survive independently. At a recent meeting with Wall Street analysts, Breen said he is "comfortable" with Chemours' strategy and ability to manage the debt.

DuPont agreed in December to merge with Dow to create a massive conglomerate with holdings in chemicals, agriculture, safety products and plastics among other industries. Typically, pre-merger liability is transferred to the successor company. However, DuPont and Dow are planning to split into three separate companies roughly a year after the merger is complete.

The new company will be called DowDuPont, and its agriculture and specialty products businesses will be headquartered in Delaware. A third arm focused on material sciences will be based in Dow's hometown of Midland, Michigan.

It is not known which of three new companies will be responsible for pursuing indemnification from Chemours. DuPont and Dow filed an S-4 with the SEC disclosing the assets that will be transferred to the three companies, but it did not detail the spin-off that will receive the merged DowDuPont liability.

UBS' Roberts expects the specialty products company to assume the liabilities. Of the three spin-offs, the $12 billion specialty products business is comprised of four former DuPont units and only one former Dow unit. The $45 billion material sciences company will include four former Dow units and one DuPont business, and the $16 billion agriculture company is a combination of a former unit from each company.

"The liability is a DuPont legacy issue and specialty products has the most DuPont-centric portfolio," Roberts said.

However, specialty products is the smallest of three spin-offs, raising questions about whether it struggle to pay off the C8 liability.

"Old DuPont didn't disclose the C8 liability in its regulatory filings because it wasn't material to them, but it is material to Chemours," Roberts said. "Specialty products will be a lot smaller than old DuPont."

Hamermesh said the DowDuPont spinoff assigned the liability must also include enough assets to offset the legal costs. If a spin-off is packed with underperforming business lines and has the C8 liability, it could set up a shareholder lawsuit under state and federal Fraudulent Transfer laws. Chemours received some of DuPont's weaker products, but those assets still have value that can offset liability.

A New York Bankruptcy Court recently voided Oklahoma City-based Kerr-McGree's spinoff of Tronox, its chemical business. After decades of mounting environmental, tort and retiree liabilities, including toxic dumping across 22 states, Kerr-McGree packed those expenses, totaling billions, into Tronox without telling investors –– and kept its most valuable oil and gas assets. The court ordered Kerr-McGree's parent, Andarko Petroleum, to pay damages related to the environmental cleanup.

Andarko paid $5.15 billion to settle the environmental claims – including $4 billion to clean up thousands of sites nationwide contaminated with uranium debris.

"There has to be some reasonable judgement that you are not putting liabilities into a company clearly incapable of meeting them," Hamermesh said. "That's a tough judgement because you need to think about the value of the liabilities and how much these assets are really worth."

If the spin-off obtaining the liability collapses under the weight of those costs, yet another headache emerges for plaintiffs' attorneys in the Mid-Ohio Valley. They would then become tort creditors of the bankrupt company attempting to squeeze what they can out of it. The good news, according to Penn State's Reilly, is tort creditors are ahead of other bankruptcy claimants. But tort creditors would have to push the company into bankruptcy first, something Reilly likened to a "nuclear weapon."

"If you are a shareholder you have some say in the corporate decision making, but not much," she said. "If you are tort creditor you have a nuclear weapon, and that's all you have."

Contact Jeff Mordock at jmordock@delawareonline.com or (302) 324-2786.