We are pleased to report that the injunction imposed by the court in October, 2013 due to appeals by BP has been lifted as of May 28, 2014. The injunction caused a halt to all payments for business economic loss claims. The not so good news is that, as a result of the appeals, the procedure for processing claims has been revised to effect a closer matching of revenues and expenses. This is holding up most of the payments because the Claims Administrator now must apply the new procedures to review all previously approved but unpaid claims. We expect payment of these claims to ramp up as this process is completed. In addition, the causation issue has been raised again which may result in still another appeal by BP to the Supreme Court.
On October 2, 2013 a panel for the 5th Circuit Court of Appeal directed that the District Court issue a temporary injunction stopping payments of all business economic loss claims. This was a result of appeals by BP on two issues.
The first issue was whether or not the use of the cash basis method of accounting resulted in a proper matching of revenues with corresponding variable expenses. The appellate court agreed that loss calculations had to be based upon accounting records that sufficiently match revenues and expenses. Where the Claims Administrator finds that the revenue and variable expenses do not match, the accounting records are to be adjusted to match revenues and expenses to produce a “realistic” measurement of economic loss.
Pursuant to this ruling, the Claims Administrator proposed and the court accepted Policy 495. It recognizes that use of the cash basis of accounting does not necessarily result in mismatching revenue and expenses. The policy provides that for the majority of the claimants there will be a sufficient matching of revenues and expenses using an annual variable margin methodology. This methodology totals all variable expenses for each fiscal year and allocates them to each month on a prorated basis of monthly revenues for the same period. The policy does recognize that this may not work for all businesses and adjustments may be made to the financial statements as to the timing of the recognition of either revenues or expenses or both.
However, the policy does recognize that certain industries warrant a customized methodology to achieve the proper matching. These industries are identified as construction, agricultural, education and professional services.
For the construction industry, there is a deviation from the annual variable margin methodology described above. The modified methodology is premised on the assumption that variable expenses of a construction claimant are more accurately recorded on monthly P&Ls than the revenues. So where a construction company has a indicia of mismatched revenue and expenses, the Claims Administrator will adjust revenues by taking an entire year’s revenues and reallocating them on a monthly basis in proportion to each month’s expenses. At this point, it is too early for us to even hazard a guess as to what impact this will have either on the entitlement or on the calculation of the claims.
The second major issue before the appellate court was causation. Although BP had never raised the issue, one of the appellate judges raised a concern that the formula agreed to in the settlement agreement did not sufficiently demonstrate a causal connection between the oil spill and the claimed damages. This issue was subsequently addressed by two different panels of the appellate court and rejected by both panels. BP then filed a request that this issue be heard by all fifteen judges in the 5th Circuit Court of Appeals. This is a very rare procedure. This request was denied. BP’s next step was to ask the Supreme Court to keep the injunction against payments in place until the Supreme Court could hear its appeal. That too was denied. Finally, on May 28 of this year, the District Court entered an order dissolving the injunction against payments.
Because Policy 495 relating to matching of revenues and expenses was not approved until May 5, 2014, the processing of claims came to a virtual standstill. Even those claims which were previously approved and moved to the payment or appellate process have all been pulled back for review. The effect on payments has been quite dramatic. In July, August and September of 2013 the settlement facility was paying around 4,000 claims per month. Now the monthly number is well below 2,000. Further, the resolution of appeals has fallen to almost zero because of the re-reviewing of thousands of claims required by the appellate court decision relating to the matching of revenues and expenses. Our inquiries to the settlement facility have not provided any definitive answers as to when this logjam might be broken and when payments might reach previous levels.
While this is generally good news, we expect that BP will press an appeal to the Supreme Court, so the matter is not yet completely final. As matters develop, we will continue to keep you informed. For the moment our advice remains the same. There is no way to predict when claims will be paid and no one should be planning on the use of these funds in the near future.
One of the positive results of the appeals by BP is that it extends the time for filing claims. The final deadline has not yet been established. If you know of a business that has not yet determined if it qualifies for a claim, please put them in contact with us. Thank you for your continued patience and understanding.