Creditors urge judge to reject Philly refinery bankruptcy plan, heap scorn on executive bonuses

The committee of unsecured creditors in the Philadelphia Energy Solutions bankruptcy case has served up a scathing denunciation of the refinery’s reorganization plan, saying two rival offers to buy the refinery are flawed, and heaping scorn on the refinery’s plan to pay millions of dollars in what it calls “bogus” bonuses for executives.

The committee, which represents creditors to whom PES owes a total of more than $1 billion, called the reorganization plan “an artifice for doling out control, bonuses, and releases to insiders,” and asked U.S. Bankruptcy Court Judge Kevin Gross to reject it at a confirmation hearing scheduled for Wednesday in Wilmington.

The committee asked the judge to submit the plan instead to mediation or convert it to a Chapter 7 liquidation, which it argues would protect creditors more than the current Chapter 11 reorganization plan.

If the judge approves the plan, the committee asked him to suspend implementation while it pursues an appeal.

The committee’s objections, filed late Thursday, are one of more than 10 pleadings submitted by parties this week, suggesting that plans for the 1,300-acre South Philadelphia oil refinery are still very much in flux and contention. The refinery, which employed 1,100 people, shut down last June after a devastating fire.

The committee said things have not proceeded correctly: "The facility occupies a massive percentage of the city of Philadelphia; it occupies a position of economic significance and national security; many political and special interests have asked this court to be especially deliberative and thoughtful as to how these cases should conclude, and the livelihood of thousands of people hangs in the balance.

“Creditors were not given sufficient time to vote and, importantly, interpose objections and avail themselves of their rightful day in court. Due process is supposed to mean something. Confirmation should be denied.”

The committee’s objections focused on the legal procedures that PES followed in preparing and presenting its plan, which it said excluded all but the secured lenders, and concealed information from parties. Resolution of the refinery’s most valuable asset, a $1.25 billion insurance policy whose payment insurance carriers are fighting, is still undetermined.

The committee also offered contempt for the refinery’s plan to pay eight top executives as much as $20 million in bonuses if the company generates $1 billion in net proceeds from a sale and an insurance recovery. The bonus plan is excessive, the committee said, and does not take into account the “lavish” $5.25 million in retention bonuses that the refinery “secretly doled out” to the same executives just days after the fire, but before the company declared bankruptcy.

The creditors called those bonuses “fraudulent transfers,” but said the company’s reorganization plan absolved it and its officers of liability.

Much public attention on the bankruptcy case has focused on the outcome of the sale of the refinery, which hinges on plans to clean up land that is seriously contaminated after 150 years of oil processing.

The committee said that six finalists submitted bids, but that PES determined that only two could participate at a closed-door Jan. 17 auction in New York.

» READ MORE: Hilco’s $240 million bid for South Philly refinery wasn’t the highest offer, aggrieved creditors say

The successful bidder, Hilco Redevelopment Corp. of Chicago, proposes to largely demolish the refinery and redevelop the land to a mixed-use industrial park. The runner-up, Industrial Realty Group (IRG) of Santa Monica, Calif., has teamed up with Philip Rinaldi, a former chief executive of PES, to reopen the refinery.

Various stakeholders with opposing visions of the refinery property have rallied around the rival bidders: Environmentalists and community activists support the Hilco bid, while unionized workers and refinery suppliers have sided with IRG and Rinaldi.

Hilco’s successful $240 million offer was $25 million less than IRG’s offer. But Hilco put down a $30 million deposit, while IRG’s $265 million bid was not accompanied by the required 10% cash deposit. PES selected the lower Hilco bid “based on perceived closing risks attendant with IRG’s lower deposit,” said the committee, which is represented by the Brown Rudnick LLP law firm in New York and Elliott Greenleaf PC in Wilmington.

But Hilco’s offer includes several conditions that will require negotiation and court intervention, and “Hilco may walk with its deposit” if its conditions are not met by May 31, the committee said.

Hilco wants the Pennsylvania Department of Environmental Protection to approve a site-specific soil management plan, “including the testing, handling, storage, transportation, disposal and reuse of facility soil” to allow Hilco to build an industrial park. It also requires revisions to a restrictive deed covenant on the property, which limits “disturbance of the subsurface strata and soils” and the facility’s use as anything other than a refinery.

» READ MORE: ‘Their timeline is aggressive’: Hilco plans to clean up polluted South Philly refinery site, city says

The modification of deed restrictions would require the approval of Sunoco Inc., the refinery’s previous owner, which is financially responsible for the cleanup.

But Sunoco this week objected to efforts to remove the deed covenants as a "direct violation of Pennsylvania law and the Bankruptcy Code.” The language was added in 2012 to protect Sunoco’s interests, and also to assure the property was properly remediated.

In addition to the environmental issues, Hilco also wants the court to terminate the collective bargaining agreement with the United Steelworkers. USW was allowed to attend the auction as a “consultation party,” but said in objections that it filed on Monday that it “was not asked for its view as to the highest or best bid before the decision was made.”

IRG may try to boost its runner-up offer before Wednesday. The committee’s attorneys, in a footnote, said IRG continues to work on its bid and “may present a proposal that is both higher and better at or prior to the confirmation hearing.”