CHARLESTON, W.Va. -- In the year before it filed for bankruptcy, Freedom Industries paid more than $6 million to its former owners and to companies affiliated with its current owners, court filings show.
These payments to what bankruptcy law calls "insiders" will be closely examined by Freedom's creditors and could be ordered returned to the company if they're deemed improper, bankruptcy lawyers said.
"It is a red flag," said Bob Simons, a bankruptcy lawyer with the Pittsburgh firm Reed Smith. "Any transfer within a year, to even as much as four years before the bankruptcy, can be scrutinized to see if those transfers should be returned to the bankruptcy estate."
Simons added that it is good that Freedom is being forthcoming and not trying to hide the payments.
He said if the transfers were made when the company was insolvent, or they helped make the company insolvent, then they could be "clawed back."
"The distinguishing feature of this case is that the spill arguably was unforeseen, so how do you plan for it?" Simons said. "You could argue that, if you transferred a lot of the money out of the company, you left it with unreasonably small capital. It would be tough to establish that, because this was an unforeseen liability, but I must say, not impossible under the right circumstances."
Freedom, which contaminated thousands of West Virginians' water with a chemical leak into the Elk River on Jan. 9, filed for Chapter 11 bankruptcy on Jan. 17. Under the bankruptcy code, Chapter 11 permits a company to reorganize and continue operating.
Three men identified as former owners of Freedom -- Dennis Farrell, Charles Herzing and William Tis -- all received at least $180,000 from Freedom in the year before the chemical leak.
Farrell, who remains with Freedom but no longer is an owner, received more than $288,000 in 33 "withdrawals or distributions" from the company in the past year, according to bankruptcy filings.
The last payment was made Jan. 8, the day before the leak was discovered.
Freedom gave Herzing more than $256,000, and gave his consulting firm, Useful Solutions Inc., another $157,000 in 2013.
Tis got more than $180,000 from Freedom, and his consulting firm, Indigo Astoria, got more than $131,000.
All of those payments are above and beyond the $15 million that Chemstream Holdings, Freedom's current owner, paid to acquire the company in December.
In addition to being listed as former owners, Farrell, Herzing and Tis are listed as Freedom's former president, vice president and secretary, respectively. They all were terminated from those positions on Dec. 6, as Freedom was changing ownership.
The bankruptcy filing this week also reveals a web of payments and debts among Freedom and several companies with close affiliations.
The sole owner of Chemstream Holdings, and thus Freedom, is J. Clifford Forrest, who also is the founder and president of Rosebud Mining, a Pennsylvania-based coal company.
Freedom paid Rosebud $30,000 in "reimbursement" on Jan. 8, the day before the leak, filings show.
Chemstream Inc., another affiliated company, took more than $81,000 from Freedom in 2013. Freedom still owes Chemstream Inc. more than $175,000 for "dust control chemicals."
Blackwater LLC, which also is listed as an affiliated company, took more than $1.1 million from Freedom in 2013.
Gary Southern, Freedom's current president, also is president of Enviromine Inc., according to records on file with the West Virginia secretary of state.
Enviromine, based in Scott Depot, makes products to help address environmental mining problems. The company did not return requests for comment Wednesday, but on Jan. 10, the day after the leak, a representative confirmed that Southern was still with the company.
In 2013, Enviromine took more than $3.8 million from Freedom for "goods/services." Freedom still owes Enviromine more than $1 million in additional payments, filings show.
That debt is the second largest among the 240 unsecured creditors that Freedom owes money to, according to the bankruptcy filings.
The U.S. Department of Justice's bankruptcy office appointed an official committee of unsecured creditors in the case earlier this month. Unsecured creditors are those who are close to the bottom of the list to get paid and don't have, for example, the power to file a lien to ensure they get paid.
The committee includes: Larry Bostick, Archer Daniels Midland; Daniel K. Adkins, Hartman & Tyner Inc., also known as Mardi Gras Casino; Charles W. Lawler, Rogers Electrical Contracting Company Inc.; Stephen Smith of Charleston; and Carolyn Mount of West Virginia American Water.
The water company has said it is the largest unsecured creditor in Freedom's bankruptcy case because it also has been named in most of the lawsuits since the leak.
Many of the unsecured creditors are those who filed a lawsuit against the company before its bankruptcy filing. About 30 lawsuits were filed in Kanawha Circuit Court and federal court. The bankruptcy filing put a hold on all lawsuits against Freedom.
A meeting of creditors is scheduled for Tuesday.
Anthony Majestro, who represents Smith, one of the unsecured creditors, said Wednesday that the committee is reviewing the financial information Freedom filed this week.
"We are examining [the documents] to determine if there are any inappropriate payments that should be reversed and returned to the company," Majestro said.
On Friday, U.S. Bankruptcy Judge Ronald Pearson will consider allowing Freedom to hire its own experts to investigate the tank farm along the Elk River before it's torn down. In an agreement with the state Department of Environmental Protection, the company agreed to begin dismantling the site by March 15.
Freedom Industries had $16 million in assets and $6 million in liabilities when it filed for bankruptcy last month, according to the financial documents filed Monday.
The company made $25.6 million in fiscal year 2012 through its sale of chemicals, $30.6 million in fiscal year 2013 and $19.6 million from July 1, 2013, through when it filed for bankruptcy.
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