Federal Bankruptcy Judge Brendan L. Shannon on August 21 rebuffed the California Air Resources Board’s effort to block the sale of Searles Valley Minerals’ operations in Trona through the imposition of a requirement that any entities which purchase the failing company’s assets, either in whole or piecemeal, inherit its past $76.3 million environmental pollution debt.
Judge Shannon’s ruling cleared the way for Searles Valley Minerals’ parent company, Karnavati Holdings, Inc., a division of Ahmedabad, Gujurat, India-based based Nirma, to sell its North American soda ash customer contracts and related commercial rights to Tata Chemicals North America Inc., a subsidiary of the Tata Group, an Indian multinational conglomerate headquartered in Mumbai, India.
The California Air Resources Board had made a filing in the U.S. Bankruptcy Court in Wilmington, Delaware, where the matter is being heard, that Searles Valley Mineral’s so-called cap-and-trade debt should, under Section 363 of the U.S. Bankruptcy Code, be assumed by whatever company purchases the operations and assets of Searles Valley Minerals and its two related companies, Trona Railway Company LLC and Searles Domestic Water Company, LLC.
In its past operations, Searles Valley Minerals had relied upon the coal-fired Argus Cogeneration Plant, which is located near Searles Dry Lake just outside the town of Trona which was subject to a air pollution credit trade agreement with the California Air Resources Board. Under that agreement, Nirma/Searles Valley Minerals was allowed to use coal, which upon being burned releases smoke into the atmosphere that contains carbon dioxide, sulfur dioxide, nitrogen oxides, carbon monoxide, particulate matter fly ash and bottom ash, mercury, arsenic, lead and volatile organic compounds. For the California Air Resources Board to tolerate those pollutants being released, Searles Valley Minerals was subject to having to purchase offsetting pollution credits brokered by the California Air Resources Board from other companies in California which had earned those credits by reducing hydrocarbon emissions at their plants. Those companies would sell those credits to the California Air Resources Board, which purchased them on behalf of Searles Valley Minerals. Searles Valley Minerals’ running tab on the purchase of those credits stands at $76,318,424.00.
John Wemple Searles, who first arrived in the West Mojave Desert as a gold and silver prospector in the 1860s. encountered copious quantities of white crystalline borax on the bed of what is today known as Searles Dry Lake, which is located on the San Bernardino County side of where San Bernardino County, Inyo County and Kern County converge. John Searles used 20-mule teams to haul borax in wagons roughly 170 miles to San Pedro. In 1895, Searles sold the San Bernardino Borax Mining Company to the Pacific Coast Borax Company, which shuttered the Searles Dry Lake operation. In 1913, the British-owned American Trona Company resumed mining operations on the dry lake, collecting the crystals of soda ash formed through the evaporation of chemical-rich water commonly found in the lake bed in combination with borax. The American Trona Company began production of potash, an ingredient in gunpowder, in 1915 as the First World War was intensifying. In 1926, after the American Trona Company became the American Potash & Chemical Corporation, it began producing borax, soda ash, and sodium sulfate. During the Second World War, as productions of those chemicals expanded, the town of Trona grew in population to over 4,000. American Potash employed an industrial- grade solvent extraction process, entailing the evaporation of chemical-rich water, to recover boric acid and potassium sulfate from weak brines. In 1974 American Potash and Chemical was acquired by Kerr-McGee. Kerr-McGee sold the Searles Valley production facilities in 1990 to capital investors D. George Harris and Associates, which formed the North American Chemical Company. North American sold the operation to the IMC Global Corporation in 1998. In 2004, Sun Capital, LLC purchased IMC Global corporation and the facilities at Trona and on Searles Lake. In November 2007, Karnavati Holdings purchased the operation, from Sun Capital Partners.
Searles Valley Minerals reported an operating profit of $56 million in 17, $46 million in 2018 and $52 million in 2019. Shortly thereafter, the company moved into the red. In 2019, on July 4 and July 5, there were a series of seismic disturbances in the northwest Mojave Desert, including a magnitude 6.4 event on the morning of July 4 at 10:33 a.m. about 8 miles west-southwest of Trona, and a magnitude 7.1 quake at 8:19 p.m. on July 5, which became the mainshock and the strongest in California in 20 years. The quakes caused significant damage to homes, businesses, and infrastructure.
The following year, with the advent of the COVID-19 pandemic, there was significant impact to the economy in Trona as well as to the operations of Searles Valley Minerals. Shortly thereafter, the company moved into the red. In recent years it was hemorrhaging on the average $42 million per year, and accumulated outstanding debt of $1,329,183.55 to the City Group/Capital Finance; $83,628,022.95 to the Trona Railway Company; $1,343,112.82 to Southern California Edison; $3,636,073.12 to San Bernardino County; $3,178,916.26 and for $2,541,948.00 to Process Equipment, Inc.; $1,014,206.30 and $2,020,367.83 to Pacific Gas & Electric; $309,984.00 and $884,522.40 to the Port of San Diego; $1,574,100.00 to Nirma, Limited; $1,423,941 to Navin Overseas Fzc; $4,020,670.87 to Metropolitan Stevedore Company; $135,198,062.90 to Karnavati Holdings, Inc.; $808,700 to Infinity Asset Holdings; $205,657.40 to Haynes Building Service, L.L.C.; $300,113.32 and $300,113.32 to HPC Industrial Services, $25,989,612 to HSBC Bank USA, National Association; $11,818,368 to GATX Corporation; $368,775 to Gatx Rail, a division of Gatx Financial; $1,082,537.50 to Bank & Trust Company (as successor by merger to CIT Bank, N.A.); $85,628.64 to First-Citizens Bank & Trust Company (as successor by merger to CIT Bank, N.A.); $2,190,773.87 to the Department of Treasury and the Internal Revenue Service; $218,763.64 and $209,510.24 to Delta Pump Systems Inc.; $1,444,838.16 to D2, also known as D Squared Industrial Services LLC; $3,518,795.89 and another $2,639,006.28 to Constellation NewEnergy – Gas Division, LLC; $266,870.08 and $311,250.70 to Continental Labor Resources; $3,942,031.00 and another for $651,686.92 to CIT Equipment Financing, LLC; $748,427.71 to the Bakersfield Machine Company $1,037,304.65 to Best Best and Krieger LLP, which represented Searles Valley Minerals in its legal effort to preserve its water rights; $978,763.15 to Applied Industrial Technology; $3,472,037 to XL Specialty Insurance Company; $442,280.46 to Walter’s Wholesale Electric Company $472,373.86 and $3,482,798.86 and another $3,019,913.30 to the Union Pacific Railroad Company.
The Sentinel previously reported, erroneously, that Tata was seeking to “take over [Searles Valley Minerals’] production operations for a $20 million buy-out. In fact, following the entering of Judge Shannon’s ruling, Tata participated in an auction on Tuesday, August 25, in which it outbid American Soda, $21.5 million to $21.25 million for Searles Valley Minerals’ North American soda ash customer contracts and related commercial rights. Yet to be hashed out is the disposition of the remainder of Searles Valley Minerals’ assets, which extends to the entirety of the Trona operation — Searles Valley Minerals and its affiliates, Trona Railway Company LLC and Searles Domestic Water Company LLC, which represents the true value of the conglomeration, most pointedly the mining operation, along with the railway and the water utility. The objective, expressed in pleadings to Judge Shannon, remains finding a buyer interested in keeping the operation intact.
Another auction on those entities is anticipated perhaps as early as late September. The companies most immediately profitable element, the soda ash contracts, are now in the possession of Tata.
There are yet outstanding objections to the sale planned by Karnavati Holdings, such as one filed by the Official Committee of Unsecured Creditors, the Union Pacific Railroad and Progress Rail Leasing Corporation. Those entities are seeking to ensure, just as the California Air Resources Board, that any contracts the company assign to a future buyer contain conditions that the notes they hold or debt they have absorbed on Searles Valley Minerals’ behalf to this point will not be lost in in its entirety in the write-down or write-off process, but that they will realize a possible recompense, even it proves to be, in the best case scenario, no more than twenty cents on the dollar, or, more likely, pennies on the dollar.
According to James J. Mazza Jr. of the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, Searles’ bankruptcy counsel, Searles Valley Minerals is seeking to unload the company as one that remains active and can remain in business on a realistic basis into the future – what he termed “a going concern.
In rejecting the California Air Resources Board’s bid that any a future buyer[s] of Searles Valley Minerals’ Trona operations satisfy the debt the company has with it across the board, Judge Shannon did not shut the door on the California Resources Board entirely, but he barred the agency from coming into the room while Nirma and Karnavati are awork trying to resuscitate the operation.
The California Air Resources Board’s insistence on its $76.3 million pound of flesh would have prevented any such scenario from coming about, Mazza said. He emphasized to Judge Shannon on August 26 that the company is maneuvering intensely to negotiate as sale with interested purchasers who are in a position to keep the company breathing.
Skadden, Arps, Slate, Meagher & Flom’s filing on behalf of Searles Valley Minerals in opposition to the California Air Resources Board’s filing to perpetuate the $76.3 debt onto the next owner and operator of the Trona mining operation stated that if the regulatory agency “were to prevail, the debtors would be forced to liquidate, lay off more than 200 employees, and discontinue operations at their water treatment facility that provides potable water to the residents of Trona.”
If that comes about, according to Skadden, Arps, Slate, Meagher & Flom, the California Air Resources Board will have succeeded in shooting itself in the foot as “there is little doubt the California Air Resources Board would receive nothing at all. No going concern bidder for the debtors’ assets is willing to assume the California Air Resources Board obligations and understandably will require a court order clearly providing that it would not be held liable as a successor for the debtor’s prepetition California Air Resources Board obligations that might come due post-closing.”
Judge Shannon found that appeal to preserve the company appealing. Accordingly, he may prove willing to straight-arm the Official Committee of Unsecured Creditors, the Union Pacific Railroad and Progress Rail Leasing Corporation.