Nervous investors drove down the price of Texaco shares Tuesday after the giant oil company said it may not be able to post a $12-billion bond that could be required to appeal a record damage verdict won against it last week by Pennzoil.
Texaco, the nation's third-largest oil company, also acknowledged that, if "all other legal remedies" are exhausted, it could be forced to reorganize under federal bankruptcy laws, but legal observers said they consider that possibility remote.
On the New York Stock Exchange, shares of the White Plains, N.Y.-based company dropped $2.125 each to close at $32.125 on Tuesday. With more than 8.42 million shares traded, Texaco was the Big Board's most active issue.
The sell-off was apparently sparked by comments attributed to Texaco President Alfred C. DeCrane Jr. in a story published Tuesday by the Dallas Morning News.
"If a $12-billion bond is required--Texaco doesn't have $12 billion and, in my opinion, probably can't get it--then we'd have to look for some heroic measure, whether it's Chapter 11 (bankruptcy reorganization) or whatever," DeCrane was quoted as saying.
After its stock price started sliding and the exchange called a temporary halt in trading, Texaco issued a statement Tuesday morning in which it called a bankruptcy filing "a very extreme step that would only arise as a possibility after all other legal remedies had been exhausted."
Under Chapter 11, a company is permitted to reorganize its finances under court protection without the threat of creditor lawsuits or seizures.
On Nov. 19, a Houston jury ordered Texaco to pay Pennzoil $10.53 billion--the largest damage award ever--for persuading Los Angeles-based Getty Oil to merge with it, thus allegedly interfering in a merger agreement that Getty had already signed with Pennzoil. Texaco paid $10.1 billion for Getty in 1984.
Texaco said Tuesday that it has a number of legal alternatives short of bankruptcy reorganization. The company said it plans to ask Texas trial Judge Solomon Casseb to overturn the jury's decision or, if that fails, to order a new trial.
Judge Casseb has scheduled post-trial hearings for Dec. 5-6 in Houston.
During the trial, Texaco had contended that champagne toasts, handshakes and joint press releases issued by Getty and Pennzoil after they agreed to merge didn't constitute a contract. Texaco's chief counsel, Richard B. Miller, has previously expressed confidence that the jury's decision will be overturned on appeal.
Under Texas law, however, defendants must post bond equal to a jury's damage award plus attorneys' fees and interest to appeal a judgment. The bond must be posted in cash or liquid assets.
Texaco insisted Tuesday that "a $12-billion bond (in the Pennzoil case) would serve no legitimate purpose," since there is no danger that Texaco will remove its assets from the court's jurisdiction.
"We believe and will urge the court that it would be absurd and irresponsible to force Texaco into bankruptcy by requiring an impossible bond," the company's statement said.
Legal experts said Texaco could ask the court to reduce the size of the bond, citing the so-called open courts provision of the Texas state constitution.
William Power, a law professor at the University of Texas at Austin, said the open courts provision "has been interpreted as ruling unconstitutional unreasonable impediments that would prevent litigants from having their day in court."
He said that, under such an interpretation, the court might set aside or reduce Texaco's enormous bond requirement, "but it's very difficult to predict the outcome."
Helen Bendix, a UCLA law professor, said a recent California case involving ComputerLand and its parent company bears some resemblance to the Texaco case. ComputerLand and related companies were unable to post a $141-million bond necessary to appeal a judgment against it, Bendix said, but a state appellate court reduced the size of the bond to a more manageable $25 million.
Bendix said the main problem in the ComputerLand case was "finding a bonding company that was willing" to post the $140 million. "I imagine Texaco is facing a similar problem," she said.
A Texaco bankruptcy proceeding would probably be unwelcome news for Pennzoil, Bendix added, because the Houston oil company would "have to get in line with other creditors to collect its judgment."