💩New Chapter 11 Bankruptcy Filing - Kidde-Fenwal Inc.💩
💩New Chapter 11 Bankruptcy Filing - Kidde-Fenwal Inc.💩
On May 14, 2023, MA-based Kidde-Fenwal Inc. (“KFI” or the “debtor”) filed a chapter 11 bankruptcy case in the District of Delaware (Judge Silverstein), a hybrid case joining together two recent dominant but typically segregated themes in bankruptcy: mass torts and asset sales!
KFI is a manufacturing company that owns and operates businesses related to industrial fire detection and suppression, temperature and control products, and products to light and control gas burners; it did roughly $200mm in sales in ‘22, primarily out of two business lines, Kidde Fire Systems (“KFS”) and Fenwal Controls (“Fenwal”). KFS provides total system solutions for special hazard fire protection and its products are used by the U.S. military and various global industries (e.g., data centers, marine, power, oil and gas, manufacturing, etc.). Fenwal is an equipment manufacturer of, among other things, gas ignition and temperature controls.
The history here is a bit like a game of hot potato. KFI’s ultimate parent was incorporated (in Delaware … venue!) back in the mass torts heyday of the late ‘80s, went public, and then got taken private in ‘05 by United Technologies Corporation (now part of Raytheon Technologies Corp.)($RTX). Shortly thereafter in ‘07, KFI merged with a sister company, Kidde Fire Fighting Inc. (“KFF”), which produced and distributed aqueous film-forming foams (say that 5x fast, “AFFF”) as part of its “National Foam” line of business. AFFF appears to be nothing more than a fancy term for foam used to smother and extinguish fires. Post-merger, KFI owned and operated the National Foam business until June ‘13, when it sold that business to Lloyd’s Development Capital. Critically, under the sale agreement, the acquirer (ultimately named New National Foam and Angus Fire Limited) assumed all liabilities to defective products sold by National Foam prior to June ‘13 and agreed to indemnify KFI against such liabilities. Subsequently, some seven years later, RTX spun KFI out to Carrier Global Corporation ($CARR). Today KFI is wholly-owned by a subsidiary of CARR.
As noted above, KFI has real sales. And as of December 31, 2022, it had roughly $318mm in total assets. A majority of this related to inter-company receivables due from CARR (totaling about $232mm), of which, on May 11, 2023, CARR remitted roughly $134mm to the debtor. Other assets include, among other things, trade receivables ($42mm), inventories ($39mm), and property, plant, an equipment ($5mm). Due to CARR’s recent payment, the debtor has roughly $133mm of unrestricted cash as of the petition date.
So if liquidity is not the issue, what gives? Well, if you didn’t read the above paragraphs and think “liability, liability, liability” with each sentence, we don’t know what to tell you. The debtor is subject to 4,400 lawsuits filed by state and local governments, businesses, and individuals alleging the use of KFI’s foam contained “forever chemicals” that promote a bevy of health issues. Apparently that ‘07-vintage merger with KFF led to KFI getting KFF’d.
It turns out that AFFF(‘d) is made with flourosurfactants, which allegedly contain traces of perfluorooctanoic acid (“PFOA”) which is sexy nerd talk for “bad for human health if exposed.” The lawsuits include (i) cases from 31 water suppliers, (ii) 4,000 personal injury cases, (iii) 28 class suits, and (iv) 30 state attorney general actions, all of which have been consolidated into a multi-district litigation (“MDL”) in Charlestown, SC, with Judge Richard Gergel. The cases largely hinge on the allegation that KFI and its affiliates contributed to the contamination of various sites and the consequent health issues. New AFFF cases continue to be added to the MDL on a regular basis, and the Debtor is reporting more than $1b in potential liabilities.
But what about the agreement where New National Foam and Angus Fire Limited agreed to indemnify KFI for liabilities relating to AFFF? Well, it turns out that KFI’s counter-party lacks the financial wherewithal to satisfy its indemnification obligations.
Consequently, KFI, given its potential direct liability in the MDL, has assumed a leading role in defending claims based on the manufacture and sale of AFFF (but KFI has reserved its rights against New National Foam and Angus Fire). In 2023 alone, KFI has racked up over $6mm in litigation-related fees and that number is only going in one direction: ⬆️.
CARR assessed this situation and be like…
…”if only there were a way to create some distance between us and this seeping cesspool.”
Here is CARR’s telling of what happened next:
Oh, wait! There’s this thing called B.A.N.K.R.U.P.T.C.Y!
“The KFI Board informed Carrier…” LO-effing-L!! What a surprise! 🙄
Another surprise: “In connection with their review of strategic alternatives, the KFI Board directed its advisors to begin contingency planning for a potential chapter 11 filing in order to effectuate a sale of KFI free and clear of the AFFF liabilities or consummate an alternative restructuring transaction.” Emphasis ours.
For those of you who are keeping score, this would be YET ANOTHER chapter 11 sale case sans stalking horse purchaser.
The debtors are represented by Sullivan & Cromwell LLP (Andrew Dietderich, Brian Glueckstein, Alexa Kranzley, Julie Kapoor) and Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Andrew Remming, Daniel Butz, Tamara Mann) as legal counsel, AlixPartners LLP (James Mesterharm, Carrianne Basler) as financial advisor and Guggenheim Partners LLC as investment banker. The special committee of the Board has Schulte Roth & Zabel LLP (Adam Harris, Gayle Klein, Peter Amend, McKenzie Haynes, Reuben Dizengoff) as counsel and CARR is represented by Simpson Thatcher & Bartlett LLP (Sandeep Qusba, Sunny Singh, Alan Turner, Nicholas Baker) and Richards Layton & Finger PA (Paul Heath, Zachary Shapiro, Cory Kandestin).
Company Professionals:
Legal: Sullivan & Cromwell LLP (Andrew Dietderich, Brian Glueckstein, Alexa Kranzley, Julie Kapoor) and Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Andrew Remming, Daniel Butz, Tamara Mann)
Special Committee of the Board: Steve Hannan, Alexander Greene
Legal: Schulte Roth & Zabel LLP (Adam Harris, Gayle Klein, Peter Amend, McKenzie Haynes, Reuben Dizengoff)
Financial Advisor: AlixPartners LLP (James Mesterharm, Carrianne Basler)
Investment Banker: Guggenheim Partners LLC
Claims Agent: Stretto (Click here for free docket access)
Other Parties in Interest:
Carrier Global Corporation
Legal: Simpson Thatcher & Bartlett LLP (Sandeep Qusba, Sunny Singh, Alan Turner, Nicholas Baker) and Richards Layton & Finger PA (Paul Heath, Zachary Shapiro, Cory Kandestin)