As it continues to fight what could be multibillion-dollar damage awards in the federal civil trial following the 2010 Gulf of Mexico oil disaster, BP recently revived another multibillion-dollar dispute — one that it agreed to end last year with the historic Deepwater Horizon Economic and Property Damages Settlement.
Despite agreeing to the settlement in 2012 (after a year of legal wrangling and scrutiny of the settlement by scads of lawyers and accountants), BP now alleges that thousands of claimants are reaping "absurd and illogical" awards from settlement claims administrator Pat Juneau — even though Juneau is basing the awards on objective criteria that BP agreed to in the settlement. On March 15, BP asked for an injunction blocking payments to certain businesses that had filed claims for economic losses under the settlement.
BP, which agreed to compensate for economic damages caused by one of the largest environmental disasters in history, says it stands to suffer "irreparable harm" because it will be forced to pay out billions of dollars in what the company now asserts are false claims. The oil giant's request to halt — or at least rewrite — the claims process threatens to derail future payments under the already-agreed-upon settlement plan.
BP representatives declined to comment for this story. The Plaintiffs' Steering Committee (PSC), a group of lawyers who represent the plaintiffs' class against BP, also declined an interview request from Gambit — but the PSC did provide a written statement.
Even without lawyers' comments, hundreds of pages of court filings — which were made public last week — tell a story of legal jockeying by BP that could threaten billions of dollars in payouts for Gulf Coast residents and businesses. At a minimum, BP's latest move could slow the oil disaster compensation process — which was designed to make payouts using objective criteria — if not stop it completely for a while.
In its motion, BP singles out several payments it claims are particularly egregious: $9.7 million to a construction company in northern Alabama, almost 200 miles from the Gulf, "that does no business in the Gulf region, even though 2010 was its best year on record" or "$21 million to a rice mill in Louisiana," 40 miles from the coast, even though it made more money in 2010 than the three previous years.
BP's March 15 request for an injunction follows a March 5 decision by U.S. District Court Judge Carl Barbier affirming Juneau's interpretation of the settlement. Barbier acknowledged that some awards might be more than claimants deserve, but said occasional overpayments are "all consequences BP accepted when it decided to buy peace through a global, class-wide resolution."
While BP has made an issue of business claimants' proximity to the Gulf and, as a result, the tangible "damage" they suffered from the disaster, those are unlikely to be the crux of arguments on the proposed injunction, as those businesses are within the unambiguous geographic boundary to which BP agreed. And multiple court filings show that BP's own attorneys have repeatedly agreed that if a company within the boundaries can show decline in 2010 compared to 2009 and 2011 (a so-called "V-shaped revenue pattern"), the decline is presumed to be attributable to the spill.
"BP insisted that all of Louisiana, Mississippi and Alabama be included in class settlement and eligible to see if objective formula fit them regardless of where they lived or worked, making proximity to the water irrelevant," reads a prepared statement attributed to PSC attorneys Steve Herman and Jim Roy, who represent the settlement class.
The key issue now is how the business claimants' profits and losses are calculated.
Claims are paid in part based on 2010 monthly profits versus prior-year profits from the same months. Each claimant has to select three or more months after May 2010 (the compensation period) compared to the same months in 2009, or the average of the same months in 2008-2009 or 2007-2009 (the benchmark period). Compensation under the settlement equals the difference in profits between the benchmark period and the compensation period.
To produce the best possible result, a claimant would want to select three or more months in the benchmark period during which it showed high levels of incoming cash and low costs (high profit), in contrast to the same months in 2010, during which it would have had low incoming cash and high costs (low profit). The settlement expressly gives claimants the right to choose the comparative months based on the configuration that will provide the highest compensation.
BP now argues for an approach that smoothes out revenues and expenses over the life of a business project, in order to eliminate what it characterizes as anomalies. But attorneys for the settlement class believe — and Barbier has ruled — that each month should be counted individually.
A BP-submitted legal declaration from Roman Weil, a professor of accounting at the University of Chicago, says the claimants' method is flawed because it produces rates of return that vary from month to month on a single business project.
"The class counsel interpretation advocates whimsy, random and capricious computations that result from the distorted measurements of rates of return," Weil writes. "Class counsel's interpretation also would not require the skills of a professional accountant, only those of a data entry clerk."
PSC attorneys representing the settlement class counter that the BP-proposed method would be hugely impractical, opaque and subjective. They also noted that in the course of settlement negotiations, BP expressly preferred an "objective" set of criteria for determining payouts. That's exactly what the settlement agreement created, the PSC lawyers say.
In a Jan. 23 court filing — part of hundreds of pages of sealed records made public last week — PSC lawyers point out that under BP's model, each claimant would be forced to provide enough documentation to show which expenses and revenues resulted from long-term projects and which did not. And businesses that have incurred expenses on a project but have not yet been (and may never be) paid, such as law firms, would have no way of calculating (and subsequently smoothing) future payments.
"The financial records — both past and future — that the program's accountants would have to review would be potentially infinite," reads the PSC's Jan. 23 filing.
Furthermore, the plaintiff attorneys argue, accountants would have to make determinations about the nature of each business — whether it typically earns its money from long-term projects or otherwise — on a case-by-case basis, because the settlement doesn't make any such distinction. The filing adds that BP did not request that kind of more granular process during the settlement negotiations, which lasted more than a year.
"BP could have, but did not, suggest during negotiations that a different economic loss framework should be applied to lawyers, doctors, farmers or construction companies," the plaintiffs' response reads. "BP could have, but did not, insist that these types of businesses be excluded from the settlement class."
Nor did BP request a different framework when PSC attorney Kevin Tomlinson actually provided the oil giant with examples of the types of month-to-month revenues that produce awards BP now characterizes as "illogical and absurd" — according to Tomlinson's sworn declaration last month.
Tomlinson says in his declaration that in 2011 he provided BP with a number of test cases, based on actual businesses' monthly statements. Among those were four — a brick paving company, a plumbing company, and two construction companies — with volatile monthly revenues and expenses, quite possibly related to payments or costs of long-term jobs, which Tomlinson calls "triggers" or "thresholds" that would identify, in BP's view, the need for smoothing.
"Despite having access to these test-case profit-and-loss statements, BP representatives did not raise the topics of proposed triggers/thresholds and/or the matching/smoothing of revenues and expenses in any of the negotiations I participated in," the declaration reads.
In other words, BP negotiated a deal that turns out to be not as good as the company initially thought, and now it wants to razoo the deal and start over.
No one will talk on the record, but an obvious motivator for BP could be concern over its stock price.
The PSC suggests as much in one of its filings, noting BP's recent objections to a deal it agreed to are all about the cost of living up to that agreement. "Simply put, BP undervalued the settlement and underestimated the number of people and businesses that qualify under the objective formulas that BP agreed to," says a written statement provided to Gambit from PSC lawyers Roy and Herman.
"Despite their legion attorneys and accountants, BP just guessed wrong on the cost."
The cost of the settlement indeed appears to be much greater than BP anticipated when it agreed to the deal last year. In statements to the press and numerous stockholder filings with the U.S. Securities and Exchange Commission, BP consistently estimated $7.8 billion as the total cost of the settlement. Subtracting the guaranteed $2.3 billion set aside for commercial fishing losses leaves $5.5 billion for each of the 10 remaining claim types, including business economic losses, the category so far receiving the largest settlement offers.
According to Juneau's most recent public report, $1.282 billion has been offered to about 5,500 business economic loss claimants thus far. That's an average of $233,000 per offer. What may have BP concerned is the fact that 34,000 claims have been submitted — thus far. If the average offer remains roughly $233,000, BP's potential exposure would be more than $7.9 billion — just for that category alone.
What's more, hundreds of new claims are submitted each week with more than a year to go before the April 2014 deadline. According to its 2012 annual report, the company — which still faces tens of billions more in Clean Water Act and Oil Pollution Act fines should it be found grossly negligent in the ongoing civil trial — has about $10.5 billion remaining in the original $20 billion Deepwater Horizon Oil Spill Trust it established to pay claims.
BP now concedes the final figure of the settlement could be higher — much higher — and says it has paid out nine-figure sums in "fictitious" claims.
"While the ultimate amount at stake is at present inestimable, awards for fictitious losses already are hundreds of millions of dollars and could reach billions," the company's motion for injunction reads. "This significant, impending harm will be irreparable to BP."
Oral arguments on the proposed injunction are scheduled for April 5 in New Orleans before Judge Barbier. At that time, plaintiff lawyers may get a clearer picture of BP's strategy for fighting the compensation plan to which the company has agreed — and which it now claims will cause "irreparable harm."