What BP Is Appealing And Why

By: Jeff Lieser Posted on: Thursday, August 1st, 2013

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.

proud and confident owner of a small pastry store
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.

After allegedly learning for the first time that the Claims Administrator was not requiring claimants to submit their financials in an accrual accounting format, BP filed an emergency motion for injunction in which they essentially asked the trial court to require accrual accounting.

BP’s position was and continues to be that under generally accepted accounting principles, the term ‘revenue’ alone implies such a method – but if BP truly expected accrual accounting to be used in processing claim, it is puzzling that they would leave so much  to chance by not including any specific language to that effect in the Settlement Agreement.

In addition to its injunction motion, BP also filed a separate lawsuit against the Claims Administrator and the Settlement Program, seeking to prevent the further payment of claims based on cash accounting.

The federal trial court dismissed that lawsuit and denied BP’s motion for a Injunction.

The Appeals

BP then appealed both matters to the Fifth Circuit of Appeals, which consolidated the cases (Nos. 13-30315 and 13-30329).

BP’s appellate brief used multiple examples to raise their problem with cash accounting. They wrote:

Consider, for example, a distributor that purchases inventory and then sells it in a later month. If the distributor recorded inventory purchases as an expense in the month of the disbursement, and treated the sale of that same inventory as generating revenue in another month when cash was received, the monthly financial statements would create the illusion of some months with large losses (when inventory was purchased) and other months with large profits (when inventory was sold). The Claims Administrator made an error like this in evaluating the claim of a distributor that recorded revenue in July 2010, when its customer placed and pre-paid for an order, but then recorded expenses in August 2010, when the distributor purchased the inventory . . . This created a large artificial profit in July 2010 and a large artificial loss in August 2010. August 2010 was included in the compensation period while July 2010 was excluded, thus generating a significantly inflated award.

Although such arguments make sense, it is not for the courts to rewrite settlement agreements or to add in missing provisions, after the fact.

Oral argument occurred on July 8, 2013, which you can hear by clicking on this link, and the Fifth Circuit seemed skeptical of BP’s position. Perhaps this was in part because it is hard to believe that a massive, sophisticated company like BP, would not have included language in the settlement agreement requiring accrual accounting, if that was truly what they intended and had in mind when the Agreement was crafted and signed.

BP continues to argue that irreparable financial harm will be done to the company if accrual versus cash accounting is not implemented, which again begs the question – why did they not insist on including a section or at the very least, a page, paragraph, sentence or even footnote in the Settlement Agreement stating as much?

Why Now?

Plaintiff’s lawyers believe that the answer to that question is that BP underestimated the volume of claims and the amount of the payouts. Indeed, the numbers are staggering. As of July 3, 2013:

  • Nearly 200,000 claims had been filed.
  • Although Business Economic Loss (BEL) claims made up only 57,761 or 30% of the claims (other types of claims, include those for individuals, start up businesses and failed businesses), the 6,675 BEL claims that have been paid received a total of $1.3 billion.
  • Interestingly, 6,871 other BEL claims were denied or withdrawn, so of the 57,761, BEL claims that had been filed as of July 3, 2013, only 13,546 had been processed to completion
  • Stated differently, about half the BEL claims that are processed to completion result in a payout.
  • The average BEL pay-out is nearly $196,444.00 ($1.3 billion divided by 6,675 successful claimants).
  • Therefore, even if all new claims had somehow stopped on July 3, 2013, 44,215 BEL claims would remain to be processed. Assuming, half resulted in a payout, that would mean 22,107 BEL claims would be paid, which at an average payout amount of $196,444.00, would total an additional $4.3 Billion.
  • Meanwhile, approximately 5,000 new BEL claims are being filed every month and there are at least another 10 months to file claims – BP could thus see another 50,000 BEL claims, so if the above numbers endure, 25,000 claimants could be paid another $4.9 Billion.
  • Therefore, BP could be on the hook for $10.5 Billion just for BEL claims.
  • While BEL claims comprise only 30% of the claims they make up about half (48%) of what has been paid out (a total of $2.7 Billion has been paid under the Claims Administrator), if BEL and other claims continue at this rate it is foreseeable that BP could be looking at well over $20 Billions Dollars in total claim awards.

It is no wonder BP is appealing when you consider that the company initially estimated 7.8 Billion in total claims. Moreover, many would perceive the above numbers to be a conservative estimate of what will ultimately be paid.

However, if BP is successful in its appeal, they would save vast sums of money. Many businesses use cash accounting and submitted claims packages accordingly.  Such claim packages would have to be redone – an unlikely proposition when one considers business owners’ initial skepticism that their claims would ever be paid combined with the amount of time, labor and expense it would take to re-do one’s books using accrual accounting for 2007-2011. An appellate win, would also help facilitate BP’s apparent (ostensible from their recent advertising campaign attacking the claims process) goal of discouraging others from filing claims.

The Claims Appeals

In addition to appealing the rulings of the federal trial court judge, BP is more aggressively filing appeals of individual claims. BP has filed more that 1,300 appeals of individual claims once an Eligibility Notice/Offer has been sent to claimant from the Claims Administrator.