Solutia's disclosure statement needs more fine tuning, judge says; schedules another hearing for July 26

By Reshmi Basu

New York, July 17 - Solutia, Inc.'s disclosure statement for its plan of reorganization needs a major clean-up before it can be approved by the court, a U.S. bankruptcy judge said Tuesday.

Declining to approve the document, judge Prudence C. Beatty of the U.S. Court for the Southern District of New York reiterated the same concerns from last week's hearing that the statement was far from complete in providing clear and concise information to claimants as well as shareholders.

A third disclosure statement approval hearing has been scheduled for July 26.

"I don't think you are close to where you need to be," judge Beatty told counsel for Solutia.

Among her chief concerns, the judge criticized Solutia for catering to the interests of Monsanto Co., an agricultural biotechnology corporation which spun off its industrial and fiber divisions into Solutia in 1997.

Additionally, judge Beatty expressed concern that the plan did not financially account for the potential proliferation of future tort victim claims.

Under the bankruptcy plan, Monsanto would assume the liabilities for all present and future claims involving Solutia's environmental liabilities.

Nitro tort claims to float through

During last week's hearing, questions had risen regarding how Solutia would deal with the Nitro tort claims and whether residents of that community could pursue lawsuits even if the company exits bankruptcy. Nitro is a small town in West Virginia which its residents say has become polluted from the release of the toxic chemical dioxin from an old chemical plant of Monsanto.

The nitro claims will be unaffected by the Chapter 11 bankruptcy and will be allowed to float through, said Solutia attorney Jonathan S. Henes of Kirkland & Ellis LLP.

"I think you are really talking about [those claims] passing through unimpaired," emphasized judge Beatty.

"They don't get any better rights than before. They just don't get worse rights."

However, judge Beatty warned that this did not resolve tort claims because many more were likely to pop up now that the gates were open.

Once a tort claimant raises the issue, it ushers in other claimants, she told Solutia, adding that since the amount of future tort liabilities is unquantifiable, it could potentially render the plan unfeasible.

"Don't make me think that since you solved his problem, you've solved all the problems," said judge Beatty referring to the resolution of Nitro claimants.

Meanwhile she also took offense to the disclosure statement's so-called running theme, which suggests a "view that Monsanto could get off without a problem," and that Monsanto and Pharmacia Corp, a former Monsanto affiliate would prevail at the end.

The plan is "placing economic risk on Monsanto as they relate to pre-1997 spin-off activity," argued John C. Longmire, of Wilkie Farr Gallagher LLP, counsel for Monsanto.

Nonetheless, judge Beatty expressed disdain for Solutia and Monsanto's position that Monsanto is making great sacrifices.

"The issue here still comes back to the allocation of risks between Monsanto, Solutia and Pharmacia," she said.

"I really don't think Monsanto is doing itself any favors by trying to whitewash the situation," added Beatty.

Not enough disclosure to retirees, says judge

The judge also criticized the plan's disclosure to Solutia's retirees, saying that the language was confusing and raised a host of questions, which could make retirees feel "hot and bothered."

"I think retirees have the right to know that their claims will be disallowed," Beatty said, adding that they should be aware that the plan is essentially securitizing their claims.

In another issue, the ad hoc committee of Solutia's noteholders contended that solicitation on the plan was premature because it is still not understood who is liable for the eventuality of future claims.

"What's the gap in allocation of risk?" asked Bennett Murphy, of Hennigan Bennett & Dorman LLP, counsel to the ad hoc committee of Solutia's noteholders.

More disclosure says equity holders

In objecting to the motion, the official committee of equity security holders said there needed to be more disclosure as to the relationship between Monsanto and Solutia.

In addition, the equity committee accused Solutia of being "purposefully misleading" in order to sell the settlement, doing Monsanto's bidding and drafting the statement "from Monsanto's point of view."

In agreeing to pay for Solutia's liabilities, Monsanto will receive 20% of the company, noted the committee.

"They are getting back more than they are giving," argued David A Crichlow of Pillsbury Winthrop Shaw Pittman LLP, adding that the risk calculation was not even clear.

The judge agreed with the equity holders, telling Solutia's attorney Henes that his client cannot "simply mimic and imitate" what Monsanto is dictating.

In rendering her decision to hold a third hearing on the approval of the statement, judge Beatty told counsel from Solutia to take a step back from over-arguing the merits of the statement, suggesting that the courtroom was "testosterone" driven.

"We want the tort claimants and retirees out of our hair," so that the big money players can hammer out details, the judge told the court.

She added that her aim was to approve the disclosure statement in advance of the Sept. 5 hearing in which there are motions to approve Monsanto and retiree settlements.

"It is clear that there is enough work that has to be done to get this going." Judge Beatty told the court. Solutia, a St. Louis-based manufacturer and provider of performance films, specialty chemicals and an integrated family of nylon products, filed for bankruptcy on Dec. 17, 2003. Its Chapter 11 case number is 03-17949.

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