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In re Texaco
United States Bankruptcy Court for the Southern District of New York
84 B.R. 893 (1988)
In 1985 Pennzoil Company (creditor) won a judgment of over $11 billion against Texaco, Inc. (debtor) after a state court found that Texaco had tortiously interfered with Pennzoil’s business. The state court judgment resulted in Pennzoil being Texaco’s largest unsecured creditor. A group of Texaco shareholders (the opposing shareholders) filed 16 shareholder derivative actions on behalf of themselves and Texaco against Texaco’s board of directors for actions that were related to the Pennzoil lawsuit. In 1987 Texaco filed for bankruptcy and reorganization under Chapter 11 of the United States Bankruptcy Code. In 1988 Texaco and Pennzoil proposed a reorganization plan under which Texaco would pay Pennzoil $3 billion to settle the state court judgment, release and indemnify its officers and directors from further liability related to the Pennzoil lawsuit, and dismiss the 16 shareholder derivative actions filed by the opposing shareholders. The opposing shareholders opposed the reorganization plan, arguing that the plan did not meet the requirements of 11 U.S.C. § 1129(a)—the provision of the Bankruptcy Code that provides the requirements for a reorganization plan—because it took the right to sue the board of directors away from Texaco and its shareholders. The opposing shareholders argued that because these rights were taken away from the shareholders and Texaco, the plan was not made in good faith. Texaco claimed that the plan ultimately benefited its shareholders because it allowed Texaco to settle its debts owed to Pennzoil and because the shareholder derivative suits were unlikely to prevail.
Rule of Law
Holding and Reasoning (Schwartzberg, J.)
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