NEW YORK — Texaco, taking a drastic step to fend off a possible seizure of assets in its historic $11-billion legal dispute with Pennzoil Inc., Sunday filed for protection from creditors under Chapter 11 of the bankruptcy code.
Texaco, the world's third-largest oil company, is the biggest firm ever to seek bankruptcy protection. But it is only the latest in a string of essentially solvent companies to seek bankruptcy refuge from the effects of potential liabilities, such as lawsuits and labor contracts.
The filing, made Sunday morning in Texaco's headquarters community of White Plains, N.Y., came after lengthy meetings of its board and one last negotiating session with Pennzoil over the weekend. It was announced here by Chief Executive James W. Kinnear, who called it "a most difficult, painful and wrenching decision for me and the other members of Texaco's board of directors."
Texaco was forced into bankruptcy as a result of a 1985 decision by a Houston jury that Texaco had illegally interfered with Pennzoil's plan to acquire Los Angeles-based Getty Oil Co. The jury awarded Pennzoil damages of $10.5 billion plus interest, the largest such award in U.S. history.
Kinnear said Sunday that the bankruptcy filing was necessary to halt the company's steady deterioration in finances over the last few weeks. In that time, Texaco has suffered two adverse legal rulings in its continuing court battle to overturn the Houston jury's verdict.
The rulings, which raised the possibility that Pennzoil might gain the right as early as today to seize billions of dollars in Texaco assets, have provoked Texaco's banks and suppliers to restrict credit to the giant oil producer, despite its assets of nearly $35 billion and net worth of $13.7 billion.
Under Chapter 11 of the bankruptcy code, a company is permitted to continue operating under its existing management while it attempts to work out a plan to repay creditors. Texaco Chairman Alfred C. DeCrane Jr. said the company will now be able to assure its skittish creditors that they will be paid. Kinnear and DeCrane told a news conference here that Texaco should operate relatively normally while under bankruptcy court supervision.
DeCrane said most of Texaco's operating subsidiaries, including Getty Oil and all Texaco subsidiaries operating abroad, remain outside the bankruptcy filing. These operations accounted for 96% of the company's revenues last year, he said. Still, virtually all of Texaco's debt and other financial obligations are held by the parent company and its two finance subsidiaries, which are those involved in the bankruptcy.
Moreover, DeCrane acknowledged that creditors, concerned that Texaco might try to hide assets in units that did not file for bankruptcy, might successfully seek to include the remaining subsidiaries in the bankruptcy filing.
Among the principal victims of the bankruptcy filing are holders of Texaco's $6.8 billion in outstanding bonds, on which interest payments will cease until the company emerges from bankruptcy. Payments of dividends to the company's more than 240,000 shareholders will also be suspended.
But another big loser may well be Houston-based Pennzoil, which will be relegated under the law to the status of an unsecured creditor, albeit by far the largest one. Legal professionals say that gives Pennzoil much less leverage to force an out-of-court settlement from Texaco than it had as the holder of an $11-billion court judgment against a company not in bankruptcy.
Manville Case Cited
Texaco is far from the first to make such use of the bankruptcy law. The first was Denver-based Manville Corp., which sought protection in 1982 from potentially billions of dollars in claims from victims of diseases caused by asbestos, then its principal product. The company is expected to emerge from the court proceedings in about a year as a company largely owned by asbestos-disease claimants.
Later, Continental Airlines sought bankruptcy protection from what it called the ruinous burden of its union wage contracts; the carrier emerged as a lower-paying, non-union company. Most recently, A. H. Robins Co. last year filed for protection from claims filed by women who claimed to have been injured by its Dalkon Shield intrauterine device.
Bankruptcy professionals say that in filing under Chapter 11, Texaco is entering a possibly long and unpredictable process. Among other things, the Texaco management will have to bring any substantive business decision before the bankruptcy court for approval. Management could face ouster by the court or shareholders, and the filing's effect on its suppliers, customers and 52,000 employees can only be conjectured.
"Bankruptcy is a traumatic experience," said Frank R. Kennedy, a bankruptcy expert who is emeritus professor of law at the University of Michigan and a member of the Chicago law firm of Sidley & Austin. "Texaco might face a lot of disillusionment."