Marzell Ike Dumas, et al. v. Angus Chemical Company, IMC Fertilizer, Inc., et al.
Fourth Judicial District Court, Parish of Ouachita, State of Louisiana; Docket No. 92-1707
Expert for Plaintiff Class: Marc S. Margulis, C.F.A., A.S.A., M.B.A.
Counsel for Plaintiff Class: Herman, Herman, Katz & Cotlar
At all relevant times, Angus Chemical Company owned, and IMC Fertilizer, Inc. managed and operated, a chemical plant near the Town of Sterlington in Ouachita Parish, Louisiana. The plant was designed, constructed, and operated for the purpose of manufacturing, processing, handling, storing and transporting nitroparaffins and other ultrahazardous substances.
On May 1, 1991, the Sterlington plant exploded with an estimated force of 12,000 pounds of TNT causing widespread substantial damages, including death, physical and psychological injuries, and property damage. Plaintiffs allege that this explosion occurred because a compressor and related piping, flanges, valves and connections were not properly designed, manufactured, installed, maintained, and/or inspected to assure their safe functioning.
Plaintiffs further allege, in part:
– that the ownership, control and operation of a plant involving ultrahazardous substances imposes absolute liability under Louisiana law on those defendants engaging in such activities;
– that the defendants are strictly liable under Louisiana law for damages resulting from defects in the plant;
– that the defendants are strictly liable under Louisiana law for their failure to exercise the high degree of care required for the safe operation of the plant and its components;
– that the owner and the operator of the plant knowingly aided and abetted each other in continuing the operation of the plant when each knew, or reasonably should have known, that disastrous consequences were substantially certain to occur and, hence, these defendants are liable under Louisiana law for all damages caused by their intentional acts; and
– that under Louisiana law those persons or entities who sustained compensatory damages as a result of the explosion are entitled to recover exemplary, or punitive, damages from the defendants.
Mr. Margulis proposed to Plaintiffs’ counsels, and was subsequently retained to execute, an innovative approach to quantify a demand for punitive damages without bankrupting the corporate defendant. The approach goes beyond the obvious and often inflammatory measures of corporate wealth and focuses, instead, on the defendant’s debt-carrying capacity. Debt-carrying capacity is a determinable measure of a firm’s ability to service indentured claims against its assets and income.
Solvency opinions are often required by lenders in connection with an LBO or leveraged recapitalization as evidence on their behalf that, in the event of a subsequent bankruptcy, (i) the additional obligations incurred and security interests conveyed by the debtor to the lender did not constitute a constructive fraud on pre-transaction creditors of the debtor, and (ii) the lender acted both in good faith and with reasonable prudence in making the loan to the debtor. Solvency opinions analytically address whether an intended debtor, upon incurring the indebtedness associated with a leveraged transaction, would be both currently and prospectively solvent. To render a solvency opinion, Mr. Margulis performed a balance sheet test, a capital adequacy test and a cash flow/fixed charge coverage test, as explained in more detailed below.
In a litigation context, the aggregate dollar amount of debt obligations that a defendant can incur before it is rendered insolvent (the balance sheet test), or is left with inadequate capital with which to engage in its business (the capital adequacy test), or before its cash flows become insufficient to meet its current and prospective obligations as they mature and become due (the cash flow/fixed charge coverage test), can represent a measure of a defendant’s capacity to satisfy a judgement award for compensatory and punitive damages that is consistent with the generally accepted admonition that punitive damages, while intended to punish and deter, should not be so great as to destroy the defendant in financial terms. The net proceeds from a new debt offering, an amount which is always less than a defendant’s debt-carrying capacity, represents a determinable and reasonable ceiling on the aggregate dollar amount of compensatory and punitive damages.
In the matter of Dumas v. Angus Chemical Company, et al., Mr. Margulis first evaluated the financial performance and condition of Angus Chemical Company and IMC Fertilizer, Inc. (“Defendants”), separately, to determine their respective debt-carrying capacities. He, then, assessed each Defendants’ ability to borrow incrementally to satisfy the judgement award under current market conditions. Because negative covenants associated with existing debt restricted the Defendants’ ability to incur additional debt, we proposed new debt structures, the proceeds from which would be used to retire existing debt, provide for working capital and satisfy the claims of judgement creditors, including the Plaintiffs. Next, he determined that the proposed debt structures and maturity schedules would not be expected to render the Defendants insolvent based on general economic, market and industry-specific business conditions as they could be reasonably evaluated by us as of the date of our analysis. Finally, he issued opinions, based on this innovative approach, as to the maximum, aggregate dollar amount of compensatory and punitive damages that a jury could reasonably award to Plaintiffs from each Defendant.
Mr. Margulis also provided expert testimony in depositions.
The defendants, including Angus and IMC, entered into settlement agreements totaling $85,812,240.08 for the benefit of approximately 1300 Class members.