Freedom Paid Millions to Leaders, Related Companies Before Spill, Ba...

In the year before a chemical spill from one of its tanks tainted the water supply for 300,000 people in West Virginia and sent Freedom Industries Inc. into bankruptcy, the three men who owned it took $1.1 million out of the company, much of it in the form of expense reimbursement or consulting fees, according to court filings.

The three men—Dennis Farrell, Charles Herzing and William Tis—sold their stakes about a month before the 10,000 gallons of crude MCMH spilled from a Freedom-owned tank farm into the Elk River. The $1.1 million in payments detailed in court documents filed Monday are in addition to the $15 million Freedom’s owners got in the sale. Included in the payments are more than $180,000 in expense reimbursements for Freedom’s former president, Mr. Farrell, and $26,000-per-month consulting payments to Mr. Herzing and Mr. Tis for part of the year.

Generous payments to insiders are typically a red flag to creditors in any bankruptcy case, vulnerable to attack as unjustified, and subject to being clawed back. In Freedom’s case, where the former owners were paid $15 million  from the sale a month before the spill of an allegedly hazardous chemical, the expense payments and consulting fees are already getting a hard look.

“The official creditors committee is reviewing the records to see if there are any inappropriate payments,” said Anthony Majestro of Powell & Majestro PLLC, a Charleston, W.Va., firm that represents people with damage claims stemming from the Jan. 9 spill.

A lawyer for Freedom could not immediately be reached Monday to discuss the money Freedom’s leaders took before selling the company to Cliff Forrest, owner of Rosebud Mining Co. in Pennsylvania.

Additionally, Monday’s bankruptcy court filings add new names to the web of small private companies connected to Freedom and its leaders. There’s Enviromine Inc., which was paid $3.8 million for goods and services to Freedom. West Virginia business records list Gary Southern, a longtime consultant who became president of Freedom as a result of the sale, as president of Enviromine in its founding documents. According to its website, Enviromine, of Nitro, W.Va., provides environmentally safe solutions for the mining industry, including on-site water testing and emergency response to environmental problems.

A representative of Enviromine could not immediately be reached to discuss the services it provided to Freedom or say whether Mr. Southern continues to be connected to the company.

Another new name is Blackwater LLC, which was paid $1.1 million by Freedom in the year before the spill, including a $162,000 consulting fee in December, the month Freedom was sold to Chemstream Inc., a company owned by Mr. Forrest.  Court papers identify Blackwater as a related entity but don’t say whether it’s related to the new owner or the former owners.

Freedom’s lawyers were not available to discuss the services Enviromine and Blackwater provided to the company or the nature of their connection to it.

Companies known to be associated with Freedom’s new owner took relatively small amounts of money out of Freedom, court papers say. Chemstream and Mr. Forrest’s Rosebud Mining, combined, took less than $100,000 out of Freedom, court papers say. An attorney for Rosebud did not return a call Monday. Mr. Forrest could not be reached to talk Tuesday.

“I never heard of any of these companies, and I primarily sue coal companies in environmental matters. I’m pretty well dialed into the local industry,” said Kevin W. Thompson of Thompson Barney in Charleston, W.Va. Mr. Thompson sued in federal court on behalf of people and businesses who claim they were damaged by the spill from Freedom’s tank farm on the Elk River.

In the wake of the spill, Freedom was hit with about 20 lawsuits seeking damages for health problems, property damage and business losses stemming from the contamination, which triggered a do-not-use edict from the state.

Bankruptcy stopped action against Freedom in the lawsuits, but those with claims against the company are believed to be the dominant creditors in the Chapter 11 case. They will get a chance to question company officials under oath next week, when the Office of the U.S. Trustee, an arm of the Department of Justice that monitors the bankruptcy court, convenes an information-gathering session in Charleston, a city whose residents were banned from drinking or bathing in tap water for a week last month.

A small company that chalked up about $30 million in annual revenues when times were good, Freedom is staggering under the costs of a state-ordered shutdown of the site where the spill occurred. Under orders to empty and remove all the tanks on the site due to alleged inadequate containment walls, the company is racing to comply.  The costs will be high.

Write to Peg Brickley at [email protected].