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A U.S. bankruptcy judge approved a settlement Thursday in a bankruptcy suit involving the former owner of the Sparrows Point steel mill, agreeing to dismiss the long-running and contentious case.
The deal in the RG Steel case, reached after more than a year of mediation, directs $12 million of a $15.6 million pool toward union creditors, including $6.3 million for vacation and severance pay.
The agreement is expected to yield about $1,500, before taxes, for each of the more than 4,000 union workers who lost their jobs when the firm entered bankruptcy in 2012.
The structured dismissal removes the case from the traditional Chapter 11 bankruptcy process in a rare but increasingly popular move to resolve hopeless cases. It satisfies a fraction of the outstanding claims stemming from the more than $1 billion owed at the time of bankruptcy.
RG Steel's owners, The Renco Group and Cerberus Capital Management, as well as the United Steelworkers and other union parties backed the agreement as the only option to recover money for unsecured creditors.
"It's the best and only opportunity in this case to provide any payment to our members," said David Jury, a Pittsburgh-based attorney with the United Steelworkers, who was involved in the negotiations.
At the time of its bankruptcy, filed in Delaware, RG Steel was the fourth-largest steelmaker in the United States, with capacity to produce 8.2 million tons of steel annually at Sparrows Point and other plants in Ohio and West Virginia.
The rising cost of raw materials, falling steel prices and unexpected litigation faced after Renco's acquisition of the steel plants led to the May 2012 bankruptcy, according to court filings. The rapid sale that summer of RG Steel's facilities raised about $125 million — far less than expected — with more money recouped through litigation and other means.
RG Steel repaid Wells Fargo, its largest secured creditor, and expunged more than 600 other claims, but still owes about $330 million in secured claims brought by its owners, Renco and Cerberus, according to court filings.
The claims pool, to which Renco and Cerberus agreed to contribute $14 million, satisfies about 10 percent of the outstanding priority and administrative claims — such as $115 million owed members of United Steelworkers in severance pay, Jury said. Other unsecured creditors are to recoup less than 1 percent of what is owed.
"The USW did a good job in making the best of a bad situation. It's sad that it had to come to this, and unfortunate that this has affected so many hardworking people," David Boyd, a United Steelworkers Local 9477 retiree who was employed at Sparrows Point, said in a statement.
The uncertainty and cost of future litigation likely persuaded the creditors' committee and debtors that a structured dismissal was to their advantage, said Michelle Harner, a University of Maryland law professor involved in a recent commission to study reform of bankruptcy law. Courts examine such cases particularly closely when parties wear "two hats" — as Renco and Cerberus do in this one.
But while the settlement is less than optimal from the perspective of due process, as well as the scope of the recovery for former employees, it is better than nothing, Harner said.
"We typically like to see parties be able to have an opportunity to make sure the estate's assets are being maximized in value and that all parties are getting an opportunity to voice their opinions and ensure they're getting their fair share of the pie," she said. "I think where we are with the current facts that we know, at least in the public record, what they are getting is better than nothing."
Debtors and creditors have been opting for structured dismissal, especially in cases where there are few assets remaining. But the rise of the practice suggests that the bankruptcy code is no longer meeting its goals of allowing companies to rehabilitate themselves, Harner said.
In many cases, companies opt for rescue financing instead of seeking protection from the court. If they fail anyway, they are further in debt than before, she said.
That scenario is similar to allegations brought by the creditors committee in 2013, when it asked the court to allow it to sue Renco and its billionaire founder, Ira Rennert.
Renco, a privately owned New York company founded by Rennert in 1975, buys struggling companies and resells them, but it also continues to run a number of businesses in mining, metal fabrication and defense equipment. Companies in its portfolio produce more than $5 billion in revenue each year and employ more than 12,000 people worldwide.
Renco purchased Sparrows Point and other mills in a $1.2 billion transaction in 2011. Creditors alleged that the firm's distressed finances were apparent quickly, but Rennert delayed filing for bankruptcy to protect Renco and himself, placing the company in further debt and other creditors at a disadvantage.
Renco argued that Rennert was not liable, given the way the firms were structured, and called the claims generally "incoherent and internally inconsistent." The court pushed the two sides to mediation, Jury said.
The Evening Sun
Under the terms of the bankruptcy dismissal, Renco and Cerberus agreed to contribute $14 million toward creditors' claims and an additional $7.8 million to pay expenses related to the winding down of the case, including more than $3 million in professional fees and litigation expenses. The insurer of Rennert and an RG Steel manager agreed to contribute an added $3.4 million.
About $15.6 million will go to the claims pool, with $12 million to union creditors, including pension and health funds, and $3 million for other allowed claims. Recipients of the settlement money must cash their checks within 60 days. Jury said the union is notifying employees.
Two companies filed objections to the settlement. In response, U.S. Bankruptcy Judge Kevin J. Carey amended the deal Thursday, ordering three law firms to further reduce their fees and specifically directing some money to the objecting companies.
A spokesmen for Renco did not respond to a request for comment Thursday evening. Cerberus declined to comment.
While the dismissal bars most future claims against them, litigation related to the bankruptcy is not over.
A separate lawsuit against Renco filed by the federal Pension Benefit Guaranty Corp., which oversees and insures pensions, alleges that the firm sought financing from Cerberus that would dilute its ownership of the company to avoid liability for pension obligations. That suit is scheduled to go to trial in December.