On Monday, December 2, Judge Barbier is scheduled to hear arguments on whether the parties to the Deepwater Horizon settlement agreement had discussed the intended meaning of Exhibit 4C (Compensation Framework for Business Economic Loss Claims) as it applies to the use of cash versus accrual basis accounting to calculate claimants’ loss of variable profits. Briefs have been submitted, and the issue has been joined for a hearing.
As one would expect, BP’s attorneys quote heavily from Judge Clement’s 5th Circuit panel opinion and focus on how calculations of variable profits for claimants who kept their financial records on a cash-basis should be based on accrual accounting (expenses matching revenues). In my opinion, BP presented no credible evidence that it ever intended this outcome when it signed the settlement agreement nor did BP contemplate using this method when it strenuously defended the Consent Decree before Judge Barbier last December. Be that as it may, BP now argues that real economic loss can only be measured when revenue is attributed to the month when it was earned and is matched by the corresponding variable expenses. There is no indication as to how to define the moment revenue is earned for claimants who keep their contemporaneous records and file their tax returns on a cash-basis; and there is certainly no evidence on the record that any party to this litigation had contemplated this scenario before the 5th Circuit panel decided to read into the four corners of the agreement an intent that, if there at inception, would have made significant parts of the settlement agreement impossible to implement.
Class Counsel argues that there were never any discussions whether the cash-based financials would have to be converted to accrual prior to submission, or that they would have to be converted to accrual-based P&Ls by the administrator’s accountants. In fact, it was accepted by both litigants that the business economic loss framework deviated from generally accepted accounting principals (GAAP) in several material respects, primarily because many small business claimants’ records were not kept in compliance with GAAP. In other words, these small businesses were not preparing their records for a Deepwater Horizon catastrophe damage recovery; they were just running their businesses and kept records as best they could. Further identifying the weakness in BP’s position, class counsel point out that revenue as outlined in Exhibit 4C of the settlement agreement does not get qualified by any form of the verb “earn.” For small businesses who keep their books on a cash-basis, revenue is earned when the cash hits the bank. Accordingly, it’s a stretch to argue, as BP does, that it assumed the revenue for cash based businesses would be leveled out using some nebulous smoothing formula that accountants at the administrator’s office would have to devise using claimants’ cash- based contemporaneous records and tax returns.
It would seem that the District Court has a simple, logical, decision to make. If so, that decision will, once again, find its way to the 5th Circuit Court of Appeals.