Solutia's disclosure statement needs more work, judge says; hearing on Monsanto settlement pushed back to Oct. 1

By Reshmi Basu

New York, Aug. 1 - Solutia, Inc.'s disclosure statement for its plan of reorganization needs major tweaking before it can be approved by the court, a U.S. bankruptcy judge ruled Tuesday.

Deciding not to approve the document, judge Prudence C. Beatty of the U.S. Court for the Southern District of New York admonished the debtors' legal team, saying she was "hopeful that they will get their act together."

"I'm tired of this mess." Beatty told the court.

Among her foremost complaints, the judge said she could not confirm the statement without reviewing the "piece de resistance," the settlement agreement between former parent Monsanto Co, an agricultural biotechnology corporation which spun off its industrial and fiber divisions into Solutia in1997.

That proposed agreement is the foundation of Solutia's reorganization plan, but has not been filed yet.

The plan calls for a $250 million rights offering by Monsanto. In exchange it would receive 20% of the equity in the reorganized Solutia. The plan also provides for significant relief from the legacy liabilities Solutia was required to assume when it was spun off.

The hearing on approval of the agreements between Monsanto and the retiree committee had been scheduled for Sept. 5, but judge Beatty said she was not prepared to leave that date in place without the Monsanto agreement in front of the court. The date has now been pushed back to Oct. 1.

The "settlement agreement is a very sticky point," she warned the debtors. During previous hearings, judge Beatty had expressed concern that Solutia was getting the raw end of the deal while Monsanto was receiving protection from tort claims.

In addition, she also took offense to the debtor's lack of reality regarding the financial amount of tort claims and liabilities.

"The debtor has its head in the sand about how big these liabilities are going to be," Beatty noted.

She added that there also needs to be information regarding the backstopped rights offering and the possibility that Monsanto would now receive a fee.

Solutia's attorney Jonathan S. Henes, of Kirkland & Ellis LLP, told the court his team was close to filing the Monsanto agreement, but was still working on adding exhibits, which included various changes such as a modification to the definition of tort claims. He noted that the changes in the agreement were mere details and that an executed agreement should be filed by Aug. 15.

Equity holders want settlement agreement,

However, the official committee of equity security holders disagreed, saying that the so-called details were most likely substantial changes that needed evaluation. Within the context of a Sept. 5 hearing, that was an improbable order.

"We don't have it," complained David A. Crichlaw of Pillsbury Winthrop Shaw Pittman LLP

In another objection, on behalf of the ad hoc committee of Solutia's noteholders, Bruce Bennett, of Hennigan, Bennett & Dorman, LLP, voiced his concern that the disclosure statement lacked pertinent information relating to the shareholder agreement, which is "nevertheless a vehicle for initiating a rights offering."

"This disclosure statement has a lot of pages devoted to the settlement agreement, but not the settlement agreement itself," he argued.

Negotiate with everyone, says judge

Meanwhile, in another stern warning, judge Beatty told Solutia's counsel that it needed to negotiate with all relevant parties, including the Nitro tort claims attorney.

"The process is not one where you can treat it like a two-part negotiation," she said, adding that the case was a multi-party negotiation where everyone has to go away somewhat satisfied.

In rendering her decision not to rule, she criticized the document for not being straightforward, adding that someone from Solutia's legal team needed to read the document carefully because the statement was peppered with "word glitches."

Judge Beatty adjourned the hearing, choosing not to schedule a fifth approval hearing until there was a major clean-up to the disclosure statement.

On a separate matter, judge Beatty referred to a ruling by the federal court of appeals for the third circuit which potentially could be fundamental to her decision to approve the plan. That court endorsed the use of market valuation evidence for a spin-off company in deciding whether unpaid creditors could recover from the former parent's breach of fiduciary duties.

Crichlaw said that the equity committee had been studying that case, arguing that the parent company had misrepresented itself in terms of tort liabilities and environmental clean-up liabilities, which resulted in a correction in the company's stock.

"Win, lose or draw, the debtor has significantly undervalued the company," he said.

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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