On December 31, 2013 four small companies merged and one surviving corporation was formed from the merger: Freedom Industries, LLC. The three separate companies, other than Freedom Industries, which had existed independently prior to the merger, were owned solely by one man:
J. Clifford Forrest. The surviving company, Freedom Industries, was owned by a single company, Chemstream, LLC. Chemstream was owned by a single man:
J. Clifford Forrest. When a tank full of hazardous chemicals owned and operated by Freedom Industries exploded, causing a massive chemical spill and affecting hundreds of thousands of West Virginian residents, the company, Freedom Industries, filed for bankruptcy. In filing this pe ion, all lawsuits pending against the company for damages related to tort claims were halted. Thus, any one of the thousands of people who were injured from drinking the contaminated water was barred from pursuing their claims against the company in state court. Suddenly, any claim would have to be brought in bankruptcy court as part of the bankruptcy proceeding — and any potential liability determined under the purview of bankruptcy law. Compounding it’s already existing debt, the potential tort actions were likely to mean that Freedom Industries was insolvent;
J. Clifford Forrest was not.
Freedom Industries then filed a motion that, if granted, would enable the company to secure a $5 million loan to assist in its reorganization during the bankruptcy process. This means that unlike a company who chooses liquidation over reorganization, the company will continue to run its current operations . In addition, it would provide for the maintenance of those operations by the in bent management to remain in place: the company will not change hands. Freedom saw its motion granted and a lender secured. This lender was, indeed, a secured lender, and as such
would be the very first creditor to be repaid when Freedom begins the bankruptcy process of repaying its creditors. The lender secured by Freedom Industries was a company named WV Funding LLC. WV Funding is wholly owned by another company, Mountaineering Funding LLC. Mountaineer Funding, the sole owner of WV Funding, was owned by one man:
J. Clifford Forrest.
In an effort to demystify the current set of affairs: the “lender” company was owned by the very same man who owned the company that owns the very company who is now his debtor. In short, the lender is lending to himself — or, rather, the debtor is becoming indebted to himself. In repaying debts owed by his now-insolvent company, he then is allowed to prioritize repayment of the post-pe ion loan he made to himself.
While this may sound utterly absurd, it is in fact the
very set of cir stances which occurred earlier this year in the city of Charleston, West Virginia. This sort of corporation restructuring is part of a much larger trend in this country.
[7] Apparent exposure to tort liability through the doctrine known as “piercing of the corporate veil” has led to widespread reorganization of firms. This reorganization, in conjunction with courts’ already limited use of the doctrine, has effectively declawed the doctrine as a legal device — a legal device once conceived to prevent corporations from abusing the corporate form or exploiting its limited liability status. This behavior is creating a system of corporate law in which the notion of tort liability itself is slowly disappearing: there is liability
in the abstract but a failure within the system to actually enforce money judgments.
[8] When control parties create legal structures that render potential defendants judgment-proof, they assure that in the event of major torts, those who foot the bill will be the victims, the most blameless and most injured parties.
[9]
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