BP Oil Spill

Last year, BP filed an appeal over concerns regarding claimants using cash versus accrual accounting.  We blogged about it here.   BP was concerned about scenarios in which a contractor, for example, could buy $100,000 worth of materials in June for a project that was set to begin in November; if the contractor received his first installment payment for the project in September, but then choose June, July and August as his “benchmark period,” as opposed to September, October, November, it would result in the appearance of a loss in June, which would, of course, be artificial.

On October 2, 2013, the Fifth Circuit Court of Appeal instructed the District Court (trial court) to issue a “narrowly tailored” injunction stopping the further payment of any claims that did not properly match revenues with expenses.   Ultimately, the trial court concluded that “revenue must be matched with the variable expenses incurred by a claimant in conducting its business.”  As a result, the trial court recently instructed the Claims Administrator, Patrick A. Juneau, “to adopt and implement an appropriate protocol or policy for handling business economic loss claims in which the claimant’s financial records do not match revenue with corresponding variable expenses.”

Introduction

As you likely know, under the terms of the Settlement Agreement, Gulf Coast and Florida Keys businesses may have a compensable BP oil spill claim if they suffered losses during certain periods in 2010 when compared to prior years.

More than one-third of all the claims filed are from Florida, so the settlement could pump hundreds of millions, if not Billions into Florida’s economy.

However, by now Florida business owners have also likely heard that BP has filed an appeal over the Settlement Agreement. There is a lot of misinformation or at least unclear information in the press and on the Internet as to what is being appealed and why. This blog post is designed to provide answers to Florida business owners who have filed a claim.

The Issue at Hand: Cash vs. Accrual Accounting

Under the Claims Administrator’s (the court appointed neutral charged with overseeing the claims/payout process) interpretation of the Settlement Agreement, a claimant’s eligibility and compensation amount, are typically just based on revenues and expenses, as recorded by the business. In other words, the Claims Administrator’s staff is not requiring claimants to re-allocate revenues or expenses to different periods in order to make sure they match or correspond in some manner (such as to a certain job performed by the company) or to smooth revenue and expenses out over the course of a company project.

Small businesses often use cash based accounting.

BP has argued that basic accounting principles require expenses and corresponding revenue to be so matched and, in essence, that they would not have entered into the Settlement Agreement otherwise. In short, BP is arguing that the Settlement Agreement requires accrual accounting instead of cash accounting.

With cash accounting, revenue is not counted until payment is actually received, and expenses are not counted until actually paid. Meanwhile, with accrual accounting, revenues for your business are counted when the order is placed, the item is delivered, or the services are rendered, etc. – regardless of when the corresponding money that is owed, is paid. Expenses in accrual accounting are similarly booked; for example, if you own a construction company, the materials you order for a job are booked as an expense on the day you order them, not the day you pay for them.

What is the Deepwater Horizon BP Oil Spill Settlement?

A settlement program set up to compensate businesses and individuals for economic losses caused by the April 20, 2010, explosion on the Deepwater Horizon oil rig and the resulting oil spill in the Gulf of Mexico. BP has agreed to pay all claims no matter the dollar amount. Although each claim will differ in value, the average economic loss is approximately $200,000. As of January 22, 2013, 106,103 claims have been filed and approximately $1.3 billion has been paid. Approximately $400 million of unfiled claims remains to be paid.  Find more basics about  BP oil spill claims.

Patrick Juneau, the court appointed administrator of the class-action settlement between BP and class claimants in relation to the 2010 oil spill, appeared before the Florida Senate Agriculture Committee this week and testified that, so far, more than 34,000 Florida businesses and individuals have been approved to receive $332 million in claim payments, of which $245 million has already been paid.

INTRODUCTION

The Deepwater Horizon oil rig explosion in the Gulf of Mexico on April 20, 2010, caused the largest offshore oil spill in U.S. history. The spill damaged marine and wildlife habitats and the Gulf’s seafood and tourism industries. As a result, British Petroleum (BP) set aside $20 billion dollars in an escrow fund to compensate affected businesses and individuals. Unfortunately, the claims process, which was administered by  the “Gulf Coast Claims Facility” was difficult, time-consuming and in many cases unfair.

CLASS ACTION LAWSUIT

Therefore, what followed was a federal class action lawsuit in the United States District Court for the Eastern District of Louisiana. Judge Carl J. Barbier oversees this case, which is known as In re: Oil Spill by the Oil Rig “Deepwater Horizon”in the Gulf of Mexico on April 20, 2010, MDL No. 2179.