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Getty Petroleum buyer puts it into Ch. 11

by Aviva Gat | Published December 6, 2011 at 11:59 AM

Getty Petroleum Marketing Inc., the leading independent marketer of petroleum products in the Northeast, filed for bankruptcy on Monday, Dec.5, after a sale of the company unearthed a lease dispute and environmental contamination at several of locations that the buyer didn't know about.

Getty filed its Chapter 11 petition in the U.S. Bankruptcy Court for the Southern District of New York in Manhattan on Monday. Judge Shelley C. Chapman was to consider first-day motions during a late hearing on Monday.

Getty is seeking authority to pay prepetition obligations to critical vendors, insurers and employees, as well as to continue using its prepetition bank accounts and for an extension to file its schedules of assets and liabilities. Getty is also seeking joint administration with three of its four wholly-owned subsidiaries, Gasway Inc., Getty Terminals Corp. and PT Petro Corp. Its fourth wholly owned subsidiary, Cambridge Petroleum Headquarters LLC, did not file a bankruptcy petition.

Getty's business consists of two components. First, Getty acts as a lease intermediary for about 765 leases between landlords and operators of gas stations and other businesses. Second, it purchases gasoline from sellers of finished petroleum products and delivers gasoline to gas station operators that sublease from Getty.

Getty was founded in 1997 as a spinoff from predecessor Getty Petroleum Corp., which then became Getty Realty Corp. Getty is one of the nation's largest marketers of petroleum products, while Getty Realty concentrates on real estate. The parties then entered into a lease agreement for about 1,200 properties.

Lukoil America Corp. purchased Getty through a series of transactions starting in December 2000 and sold the company to Cambridge Petroleum Holding Inc. on Feb. 28. Cambridge is owned by Bjorn Q. Aaserod, Getty's chief executive and board chairman, and Scott Karro, Getty's chief financial officer.

Since the acquisition, Cambridge has sought to enhance the company's cash flow. But Getty's landlord, Getty Realty, has unlawfully sought to terminate Getty's leasehold interest in the properties it subleases, according to a court declaration by Aaserod. Moreover, Aaserod alleged that Getty's management before the acquisition by Cambridge participated in fraudulent transfers of the company's assets, which damaged the company and ultimately rendered it insolvent.

Aaserod said Getty was put into Chapter 11 to protect its leasehold interest from being wrongfully terminated and to correct the wrongs committed by Lukoil.

Getty leases its properties from Getty Realty under a Nov. 2, 2000, agreement. Aaserod asserted that the lease is structured to maximize Getty Realty's value with no regard for Getty. Because the companies had the same management when the lease was negotiated, the lease went unchallenged until now. Annual rent under the lease totals $ 59 million, which is paid in $4.9 million monthly payments.

When Cambridge acquired Getty, the new management began a comprehensive evaluation of environmental contamination at the properties. The consultants and numerous Getty employees notified Cambridge that there was significant contamination of soil and groundwater at several properties that had predated the lease agreement by up to 30 years.

The contamination resulted from leaking storage tanks, systems components and spills of petroleum, diesel fuel, motor oil and other automotive fluids. In many instances, the contaminants migrated beyond the properties and have spread into neighboring areas that could cause harm to people's health.

Aaserod alleged that Getty Realty was fully aware of the contamination and has refused to perform the requisite work to determine how to best fix the contamination.

Aaserod said remediating the properties is critical for Getty's business because Getty has been unable to obtain financing to improve its facilities due to liabilities relating to the contamination.

Moreover, the lease agreement will be up for renewal in four years, and Getty said it would not want to renew the lease unless remediation is completed. As an example, Getty noted that underground tanks have a 25-year warranty, so it wouldn't purchase a tank if the lease expires in four years. The lease requires Getty Realty to remediate environmental contamination at its properties but Getty Realty has allegedly declined to take any actions regarding the remediation.

Because of Getty Realty's inaction, Getty has taken over the remediation and subsequently offset its rent owed to Getty Realty for the months of October and November to pay for the process. Aaserod said Getty plans to offset the rent obligations through July to pay for remediation and that the offset plan is consistent with the lease agreement. Getty estimated the costs for remediation to exceed $75 million. Getty notified Getty Realty of its intentions to offset rent on Aug. 23. Getty Realty then on Sept. 27 filed an action in the New York State Supreme Court seeking a temporary restraining order to toll the offset notice. The court denied Getty Realty's request on Oct. 3.

That same day Getty Realty served Getty with a default notice for its failure to pay October rent. Getty, in turn, filed an action in the New York State Supreme Court for a declaration that it did not violate its lease. On Oct. 14, the court granted Getty's motion on the condition that it pay Getty Realty $4 million and deposit $888,000 into court pending a further order or agreement.

Getty did what it was ordered and sought a stay pending an appeal of the order.

Meanwhile, Getty Realty served Getty with a second default notice on Nov. 2 for its failure to pay November rent. Getty then sought a second injunction, which the court granted on Nov. 10 on the condition that Getty pay Getty Realty $4.6 million and deposit $336,462. Getty did not make the payment or the deposit, but also appealed the ruling.

Then on Nov. 29, Getty Realty notified Getty that the lease would be terminated effective Dec. 12. On Dec. 2, Getty Realty sought an order enjoining Getty from collection rents. The court granted that motion, but ordered all rents be placed in escrow by noon on Dec. 5, leading Getty to file its petition. As if its dispute with Getty Realty was not enough to render Getty insolvent, the company is also fighting a $230 million payment awarded to Bionol Clearfield LLC during an arbitration over an ethanol supply agreement. The agreement, dated Sept. 28, 2006, allows Bionol to sell ethanol to Getty under a "complicated pricing formula" intended to reflect costs of producing ethanol. Aaserod said the formula contains errors that have made Getty pay prices substantially above market price for ethanol.

Getty sought to amend the terms of the agreement, but Aaserod said the arbitrators awarded Bionol the full amount of its $230 million contractual claim on July 22. Aaserod said the award was issued in error and moved the U.S. District Court for the Southern District of New York to vacate the award on July 25. Meanwhile, however, Bionol and certain affiliates filed for Chapter 7 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware in Wilmington on July 20. The Chapter 7 trustee sought to confirm the award on Aug. 10, asserting Getty's motion to vacate was stayed by the bankruptcy proceeding. The Delaware court determined on Nov. 30 that Getty's motion to vacate the award did not violate the automatic stay and allowed the motion to proceed in the District Court. Neither court has made a ruling on whether Getty must pay the award. Aaserod said this payment should be deemed a fraudulent transfer and the money should be returned to Getty. Furthermore, Aaserod also asserted that upon Cambridge's acquisition of Getty, Getty's previous management destroyed documents and corporate records reflecting asset transfers. Upon investigation, the new management believed that a substantial amount of Getty's assets were transferred to Lukoil and its subsidiary, Lukoil North America LLC, before the acquisition.

Specifically, Aaserod said on Nov. 13, 2009, that Lukoil sold to LNA all of Getty's stock. Less than three weeks later, on Nov. 30, 2009, LNA transferred the stock back to its parent as a dividend, but not before transferring to itself some of Getty's assets, including land and profitable subleases and subsidiaries. In its petition, East Meadow, N.Y.-based Getty listed assets and liabilities between $50 million and $100 million. Getty does not have any secured creditors. Debtor counsel is John H. Bae of Greenberg Traurig LLP.

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