Todd Shipyards Corp., which is struggling to bring itself out of Chapter 11 bankruptcy and to sell the assets of its defunct San Pedro operation, faces a new problem: a battle with the Port of Los Angeles over an expensive environmental cleanup of the waterfront property it has leased for four decades.
Officials at Todd and the Harbor Department are at odds over how they will split the bill for the cleanup, which port officials estimate will cost "tens of millions" of dollars.
Already, the Harbor Department has spent more than $100,000 on preliminary testing at the 112-acre facility leased by Todd, and the shipyard has spent the same amount cleaning up contamination it has discovered.
Todd officials, meanwhile, say the way the environmental issue is resolved could have a serious effect on the company's reorganization plan, filed last month in federal bankruptcy court in New Jersey, and could also delay their efforts to sell the San Pedro yard.
"This environmental matter has just shelved everything," said Tom O'Toole, who is assistant manager of the San Pedro yard and is among a group of Todd managers who have proposed a leveraged buyout of the operation.
Since the yard shut down in July, O'Toole said, Todd has been keeping a core crew of 87 employees--including managers, secretaries, accountants and purchasing staff--in San Pedro so a new owner could immediately restart operations. But if negotiations over the environmental cleanup drag on, he said, it might be too expensive for Todd to keep the team in place.
The other potential buyer of the yard said his company, Intercontinental Logistics Inc., had hoped to purchase the shipyard assets and begin operations Nov. 1.
Jim Dobson, a principal in the Agoura-based investment group, said Intercontinental proposes to take over the entire Todd property, possibly in a joint venture with the union that represents shipyard workers. In addition to operating a scaled-down ship repair business, he said, Intercontinental hopes to establish a training school that would teach trades used in ship repair and other industries, such as aircraft manufacturing, to as many as 1,800 apprentices.
But neither the Intercontinental plan, nor that of the Todd managers, can be presented to the bankruptcy court for approval until the environmental issue is resolved.
Although the environmental problems are not likely to keep a new owner from moving into the yard, the prospective buyers want assurances that they will not be liable for the contamination.
Said Dobson: "I think the problem is between the Harbor Department and Todd, and we are sort of stuck in the middle."
The dispute between Todd and the port revolves around the shipyard's lease for its facility. The lease has a so-called restoration clause that requires Todd to return the property to its condition in 1970, when the agreement was negotiated.
In part, that means a physical restoration. Todd is required to remove buildings and equipment that it built after 1970, a requirement that may become moot if a new owner continues to operate the entire 112 acres as a shipyard.
But the lease also calls for environmental restoration--removal of toxins that may have contaminated the soil or the sediment in the waters where Todd built and repaired hundreds of ships since the 1940s.
Source Hard to Determine
Chris Foley, the port environmental scientist who is supervising testing at the Todd site, said consultants are checking for petroleum hydrocarbons, perhaps from underground fuel tanks that may have leaked, and for heavy metals, such as lead, zinc and mercury.
But in Todd's case, determining responsibility for such contamination is complicated because the site has been home to a shipyard since World War I. Thus, consultants are reviewing Todd's records, as well as those of state and county agencies, to check for possible toxic spills or accidents for which Todd has liability.
"Even if you find contamination, how do you determine what was as a result of Todd's operation or was it a result of a previous operation?" asked Lillian Kawasaki, director of environmental management for the port. "We're trying to determine how you allocate those responsibilities."
So far, Todd and the port have disagreed not only on the extent of the contamination but also on how heavy a burden the shipyard must bear for cleaning it up. Todd has also hired consultants to do testing, and its test results conflict with those of the port.
In a recent interview, Todd Shipyards President Hans Schaefer said that during a meeting last month, port officials handed company representatives a report that estimated Todd's cost for the restoration would be $35 million, with $20 million devoted to environmental cleanup.
Asked about his response, Schaefer said: "What could we say? We terminated the meeting."
Last Resort Procedure