5th Circ. Rejects Deepwater Settlement Calculations
By Kat Sieniuc
Law360, New York (May 23, 2017, 7:46 PM EDT) -- The Fifth Circuit on Monday rejected most of the formula BP used to determine the settlement it will pay a class of Gulf Coast businesses harmed by 2010’s Deepwater Horizon disaster, saying the calculation methods don’t match the settlement deal.
In an order reversing four out of the five methodologies included in Policy 495, the policy used to determine the economic losses arising out of the BP oil spill, the panel concluded four “industry-specific methodologies,” or ISMs, were not consistent with the text of the settlement terms, saying the ISMs infringe on claimants’ right to choose their own compensation period by spreading revenue across the crop season.
“The settlement agreement grants each claimant the right to choose his or her compensation period, consisting of three or more consecutive months between May and December 2010. If the claims administrator is permitted to remove revenue from the compensation period, and spread it throughout the noncompensation months, the claimant’s choice no longer matters. June is the same as December, and November is the same as July,” adding that “this is not the agreement that the parties entered into. And we decline to rewrite the settlement agreement under the guise of contractual interpretation.”
The panel noted that “the relevant ISM would … [ensure] that damages are awarded to those who have suffered real losses. This may well be a fairer alternative. But it cannot be implemented, because it is inconsistent with the plain text of the settlement agreement,” the court said.
The court accepted the fifth method, the “annual variable margin methodology,” or AVMM, finding it to be consistent with the terms of the deal.
The formula known as Policy 495, developed by the claims administrator and approved by the lower court, consists of five methodologies that divide claimants into two categories. Those engaged in construction, education, agriculture and professional services are subject to ISMs. Everyone else is subject to an AVMM.
The class in April 2015 appealed the policy, claiming that the method did not match the calculation the class agreed to in the settlement and goes beyond what the Fifth Circuit intended.
BP Exploration & Production Inc. asked the appellate panel in September 2015 to end years of wrangling over how to calculate the oil spill’s impact on affected businesses’ bottom line, requesting it accept the very model that the appeals court suggested when it tossed an earlier proposed formula and sent it back to a Louisiana district court, which approved the accrual model in May 2014.
BP claims that the class’ appeal is an implicit request for the court to overturn its own decision on calculating the payments and an attempt to “reintroduce the fictitious, grossly inflated and economically irrational awards that led to that decision in the first place.
The class argues that the final matching policy “exceeds the scope” of the remand order and succeeds in “smoothing” revenues in a way that undercuts the settlement agreement’s intentions.
“Rather than accepting the contemporaneous profit and loss statements that are required under the express terms of the settlement agreement, the final matching policy asks program accountants to apply vague and subjective determinations about when revenues may have been ‘earned’ according to the claimant’s underlying business activities,” the class has said in court documents. “This was never discussed nor agreed to during the settlement negotiations.”
The dispute hinges on the interpretation of the settlement agreement, which BP says sets a policy for a claims administrator to calculate lost profits in part by adding revenues and subtracting “corresponding variable expenses” in time periods before and after the spill in a “business economic loss” framework.
The claims administrator’s initial policy, which the Fifth Circuit rejected, did not fairly account for real-world economic impact because it was based on cash receipts and disbursements whenever they were recorded, BP says.
“That approach created gross disparities among similarly situated claimants who maintained their records according to different accounting principles,” BP said, given that payments could occur in different periods.
“Under this interpretation, the claims administrator issued hundreds of millions of dollars in fictitious, inflated and irrational awards,” BP says, citing one example that resulted in a $3 million reward for a $100,000 loss.
An accrual formula, instead, is based in “economic reality” on the time frame in which revenue is earned and expenses are correlated to the revenue, BP says.
BP won the right to appeal individual Deepwater claim determinations in its $10.3 billion settlement in May 2015.
The parties were not immediately reached for comment.
The plaintiffs are represented by Stephen J. Herman and Soren E. Gisleson of Herman Herman & Katz LLC, James Parkerson Roy of Domengeaux Wright Roy & Edwards LLC and Samuel Issacharoff.
BP is represented by Richard C. Godfrey, Wendy L. Bloom, R. Chris Heck and Jeffrey Bossert Clark of Kirkland & Ellis LLP, Thomas G. Hungar, Theodore B. Olson, Miguel A. Estrada, George H. Brown, Scott P. Martin and Amir Cameron Tayrani of Gibson Dunn & Crutcher LLP, Daniel A. Cantor and Allison B. Rumsey of Arnold & Porter Kaye Scholer LLP, S. Gene Fendler, Don K. Haycraft and R. Keith Jarrett of Liskow & Lewis and Kevin M. Downey and F. Lane Heard III of Williams & Connolly LLP.
The case is In Re: Deepwater Horizon, Lake Eugenie Land & Development Inc. et al. v. BP Exploration & Production Inc. et al., case number 15-30377, in the U.S. Court of Appeals for the Fifth Circuit.
--Editing by Bruce Goldman.
In an order reversing four out of the five methodologies included in Policy 495, the policy used to determine the economic losses arising out of the BP oil spill, the panel concluded four “industry-specific methodologies,” or ISMs, were not consistent with the text of the settlement terms, saying the ISMs infringe on claimants’ right to choose their own compensation period by spreading revenue across the crop season.
“The settlement agreement grants each claimant the right to choose his or her compensation period, consisting of three or more consecutive months between May and December 2010. If the claims administrator is permitted to remove revenue from the compensation period, and spread it throughout the noncompensation months, the claimant’s choice no longer matters. June is the same as December, and November is the same as July,” adding that “this is not the agreement that the parties entered into. And we decline to rewrite the settlement agreement under the guise of contractual interpretation.”
The panel noted that “the relevant ISM would … [ensure] that damages are awarded to those who have suffered real losses. This may well be a fairer alternative. But it cannot be implemented, because it is inconsistent with the plain text of the settlement agreement,” the court said.
The court accepted the fifth method, the “annual variable margin methodology,” or AVMM, finding it to be consistent with the terms of the deal.
The formula known as Policy 495, developed by the claims administrator and approved by the lower court, consists of five methodologies that divide claimants into two categories. Those engaged in construction, education, agriculture and professional services are subject to ISMs. Everyone else is subject to an AVMM.
The class in April 2015 appealed the policy, claiming that the method did not match the calculation the class agreed to in the settlement and goes beyond what the Fifth Circuit intended.
BP Exploration & Production Inc. asked the appellate panel in September 2015 to end years of wrangling over how to calculate the oil spill’s impact on affected businesses’ bottom line, requesting it accept the very model that the appeals court suggested when it tossed an earlier proposed formula and sent it back to a Louisiana district court, which approved the accrual model in May 2014.
BP claims that the class’ appeal is an implicit request for the court to overturn its own decision on calculating the payments and an attempt to “reintroduce the fictitious, grossly inflated and economically irrational awards that led to that decision in the first place.
The class argues that the final matching policy “exceeds the scope” of the remand order and succeeds in “smoothing” revenues in a way that undercuts the settlement agreement’s intentions.
“Rather than accepting the contemporaneous profit and loss statements that are required under the express terms of the settlement agreement, the final matching policy asks program accountants to apply vague and subjective determinations about when revenues may have been ‘earned’ according to the claimant’s underlying business activities,” the class has said in court documents. “This was never discussed nor agreed to during the settlement negotiations.”
The dispute hinges on the interpretation of the settlement agreement, which BP says sets a policy for a claims administrator to calculate lost profits in part by adding revenues and subtracting “corresponding variable expenses” in time periods before and after the spill in a “business economic loss” framework.
The claims administrator’s initial policy, which the Fifth Circuit rejected, did not fairly account for real-world economic impact because it was based on cash receipts and disbursements whenever they were recorded, BP says.
“That approach created gross disparities among similarly situated claimants who maintained their records according to different accounting principles,” BP said, given that payments could occur in different periods.
“Under this interpretation, the claims administrator issued hundreds of millions of dollars in fictitious, inflated and irrational awards,” BP says, citing one example that resulted in a $3 million reward for a $100,000 loss.
An accrual formula, instead, is based in “economic reality” on the time frame in which revenue is earned and expenses are correlated to the revenue, BP says.
BP won the right to appeal individual Deepwater claim determinations in its $10.3 billion settlement in May 2015.
The parties were not immediately reached for comment.
The plaintiffs are represented by Stephen J. Herman and Soren E. Gisleson of Herman Herman & Katz LLC, James Parkerson Roy of Domengeaux Wright Roy & Edwards LLC and Samuel Issacharoff.
BP is represented by Richard C. Godfrey, Wendy L. Bloom, R. Chris Heck and Jeffrey Bossert Clark of Kirkland & Ellis LLP, Thomas G. Hungar, Theodore B. Olson, Miguel A. Estrada, George H. Brown, Scott P. Martin and Amir Cameron Tayrani of Gibson Dunn & Crutcher LLP, Daniel A. Cantor and Allison B. Rumsey of Arnold & Porter Kaye Scholer LLP, S. Gene Fendler, Don K. Haycraft and R. Keith Jarrett of Liskow & Lewis and Kevin M. Downey and F. Lane Heard III of Williams & Connolly LLP.
The case is In Re: Deepwater Horizon, Lake Eugenie Land & Development Inc. et al. v. BP Exploration & Production Inc. et al., case number 15-30377, in the U.S. Court of Appeals for the Fifth Circuit.
--Editing by Bruce Goldman.
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