## Facts

- Pennzoil held an approximately $11.259 billion judgment claim against Texaco arising from Texas litigation over the Getty Oil transaction.
- Texaco and certain subsidiaries filed Chapter 11 petitions in the Southern District of New York on April 12, 1987, with the Pennzoil judgment threatening insolvency.
- Shareholders had filed 16 derivative actions alleging fiduciary breaches and mismanagement by Texaco’s officers and directors tied to the Getty/Pennzoil events.
- Texaco and Pennzoil negotiated a joint plan of reorganization incorporating a global compromise under which Texaco would pay Pennzoil $3 billion in settlement.
- The plan provided for full payment (with interest) of all allowed creditor claims and allowed existing shareholders to retain their equity.
- The plan also included releases and indemnification for Texaco officers and directors related to the Getty/Pennzoil matters and required abandonment and dismissal of the derivative actions.
- The official unsecured creditors’ committee and the official equity committee supported the plan; approximately 96% of voting shareholders accepted it, while a minority (including the Icahn Group) objected.

## Issues

1. Whether the joint plan, including officer/director releases, indemnities, and abandonment/dismissal of derivative suits, was proposed in good faith under 11 U.S.C. § 1129(a)(3).
2. Whether the plan otherwise satisfied the confirmation requirements of 11 U.S.C. § 1129, including feasibility and best-interests standards.
3. Whether a Chapter 11 plan may permissibly provide for releases and indemnification of officers and directors and for abandonment/settlement and dismissal of shareholder derivative actions as part of a comprehensive reorganization settlement.

## Decision

- The court confirmed the joint plan of reorganization.
- The court found the plan satisfied all applicable requirements of 11 U.S.C. § 1129, including good faith and feasibility.
- The court approved the $3 billion settlement of Pennzoil’s judgment claim as a central component of a reasonable reorganization.
- The court held that the releases, indemnifications, and dismissal/abandonment of derivative actions were permissible settlement terms in light of disclosed terms, constituency support, and the plan’s overall benefits.

## Legal Principles

- A plan is proposed in good faith under § 1129(a)(3) when it results from arms-length negotiations, is supported by affected constituencies, and advances Bankruptcy Code objectives such as preserving the enterprise and maximizing value.
- Derivative claims are property of the estate; the debtor-in-possession may compromise or abandon such claims with court approval when their expected value is outweighed by litigation cost, delay, risk, and reorganization needs.
- Plan provisions releasing and indemnifying officers and directors may be approved when adequately disclosed and integral to a fair and reasonable settlement that benefits the estate.
- Full payment of allowed creditor claims (with interest) and avoidance of liquidation support confirmation findings on feasibility and best interests where liquidation or continued major litigation presents materially worse outcomes.

## Conclusion

The bankruptcy court confirmed Texaco’s Chapter 11 plan, concluding that the Pennzoil settlement and the related releases, indemnities, and dismissal of shareholder derivative actions were lawful, disclosed, and justified components of an arm’s-length restructuring that paid creditors in full and preserved shareholder equity.


In re Texaco Inc., 84 B.R. 893 (Bankr. S.D.N.Y. 1988)