Behind Getty Petroleum's Bankruptcy

Published in CSP Daily News

Vows to continue normal operations; claims Getty Realty failed to perform remediaition

EAST MEADOW, N.Y. -- The announcement that Getty Petroleum Marketing Inc.--and its subsidiaries Gasway Inc., Getty Terminals Corp. and PT Petro Corp.--has filed a voluntary petition for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Southern District of New York comes after Getty Realty Corp. said last week that it was terminating the master lease of Getty Petroleum for its nonpayment of rent.

Getty Petroleum said it expects operations to continue as usual and remains focused on serving its customers during and after the restructuring process, which the company said it intends to complete as expeditiously as possible.

In a separate statement, Getty Petroleum said it believes that Getty Realty has no legal basis to terminate the lease and intends to take all necessary steps to protect its rights and the rights of its subtenants.

The Jericho, N.Y.-based real-estate investment trust (REIT) served its largest tenet with a formal notice of termination and notified Getty Petroleum that it was exercising its right to take possession of the premises underlying the master lease effective December 12, 2011.

Getty Realty leased approximately 70% of its approximately 1,155 properties nationwide to East Meadow, N.Y.-based Getty Petroleum. (See Related Content below for previous CSP Daily News coverage.)

As reported yesterday in a Morgan Keegan/CSP Daily News Flash, the company expects to continue to purchase and deliver gasoline without interruption to its gas station operators; pay trucking companies for continued delivery of gasoline without interruption; pay utilities and maintenance companies and continue to do everything necessary to ensure normal operations at its gas stations; and honor its environmental remediation obligations.

The company's board of determined that a Chapter 11 reorganization will enable the company to continue conducting normal business operations while it restructures its finances, addresses and resolves claims held by creditors and resolves disputes with Getty Realty Corp., Bionol Clearfield LLC, Lukoil Americas Corp. and Lukoil North America LLC, which have negatively impacted the company.

According to the bankruptcy filing, accessed by CSP Daily News, Getty Petroleum owes more than 200 debtors more than $50 million; however, a breakdown of the company's largest financial claims shows it owes $230 million to Bionol Clearfield.

That claim stems from an August arbitration ruling in which it accused Bionol Clearfield of breach of contract, fraudulent inducement and related claims. In 2007, Bionol and Getty Petroleum entered into a five-year "Off-take Agreement" requiring Getty Petroleum to purchase essentially all of the output from the Clearfield County ethanol plant under a commodity-based pricing formula. When the plant came online in early 2010, and after a precipitous drop in the commodities market, according to reports, Getty Petroleum challenged the pricing mechanisms of the contract, seeking damages of $10 million. A panel of AAA Arbitrators sided with Bionol, awarding the company $47 million for damages incurred to date, and $180 million for "future damages."

Getty Petroleum's other major creditors include Lukoil North America, owed $42 million; Getty Properties Corp., owned $14 million, and legal firm Akin Gump Strauss Hauer & Feld, owed $2 million.

Court documents show Getty Petroleum claims estimated assets of between $50 million and $100 million.

Getty Petroleum has secured sufficient capital to fund operations through its reorganization and remains in ongoing, productive dialogue with its stakeholders regarding terms of the restructuring, it said.

"The process of reorganization is a significant and positive step toward restoring the luster of one of America's most iconic brands--Getty," said Bjorn Q. Aaserod, chairman and CEO. "This action will enable Getty to emerge operationally stronger with a better balance sheet, hasten environmental cleanup and pave the way for the company to provide its service station operators, vendors and valued customers with the best possible service and pricing. I am confident that our management team's expertise and vision will prove an invaluable asset as we execute our strategic growth plan in our core markets moving forward."

The company said that the voluntary reorganization will enable it to maintain and enhance the company's growth and execute its transformation plan to remediate environmental issues and provide competitive services and prices to its partners and customers.

Getty Petroleum said that it believes Getty Realty breached the master lease by failing to perform its obligations of remediating environmental contamination at certain properties. It said that Getty Realty has the responsibility to evaluate and remediate certain environmental contamination on particular properties leased by Getty Petroleum. It said it believes it has the express contractual right to take over the obligations to remediate the contamination at the effected properties and offset its performance of Getty Realty's obligations against the rent.

On August 23, 2011, the company delivered a Notice of Failure to Perform and Intent to Offset November 2011 rent. Pursuant to that notice, the company exercised its rights under the master lease to offset the November 2011 rent against a portion of Getty Realty's environmental obligations. On November 30, 2011, the company sent Getty Realty another Notice of Intent to Offset the rent that otherwise would be due and payable for January 2012 through July 2012.

"Environmental remediation is not only critical to protect the quality of surface water, groundwater, soils, sediments and other parts of the environment from various contaminants, but is equally critical for Getty Petroleum's business operations," the company said.