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BP Business Economic Loss Claim Appeal 2015-1696: Smoothing allowed as first step matching, despite 5th Circuit case law (decision affirmed)


The following is an Appeal Panel Decision issued pursuant to Section 6 of the BP Deepwater Horizon Economic & Property Damages Settlement Agreement and the Rules Governing the BP Appeals Process. Links may have been added to assist the reader. The original decision may be found here, as well as a glossary of BP Settlement terms.

Claimant appeals the denial of its BEL claim. Claimant is a business based in Morgan City, Mississippi that rents farm land and farm equipment to third parties through written leases. It receives the farm land rental income once per year and the farm equipment rental income two times a year. As counsel explained the situation to the Settlement Program (“the SP”):

“The Land Lease payments are generally made in December of the Lease year. The Claimant’s fiscal year is December to November, which is different from the lease year. Therefore, the payments shown on the books in December are for the current lease year. However, December is the first month of the fiscal year and is reflected as income for the fiscal year that begins in December. By way of example, if the P&L shows $175,000 in revenue in December of 2008, that is payment for the 2007 Land Lease but the income is reflected in the 2008 fiscal year.”

The equipment lease payments are generally made in the same manner except the lease does not set the payment date in December and there are some months where those payments are made and booked in other months. The Land Lease Contracts were for multiple years.

The SP evaluated the claim under Policy 495, stating that the policy:

“[A]llows for the restatement of revenues and/or expenses in the event that the Settlement Program identifies an error…or a mismatch of revenues and variable expenses. As a result of such restatement, this claim did not met the revenue pattern causation requirements established by Exhibit 4B of the Settlement Agreement.”

Claimant’s position on appeal is that the SP had no authority to restate its revenues, so as to spread them evenly over the entire year, because Policy 495 allows such a restatement only if an accounting “error” has been identified, and that utilization of its non-restated P&Ls would have demonstrated causation. Amplifying, Claimant asserts that the Settlement Agreement, Policy 495, Appeal Panel decisions and court rulingsexpressly forbid spreading or ‘smoothing’ of revenue in Step 1 of the Matching Policy.”

This panelist disagrees. While such “smoothing” is not mandated as a function of Step 1, it is not forbidden. Numerous portions of Policy 495 speak to the discretion the Program’s Accounting Vendors have to restate revenue in appropriate situations absent the presence of any accounting error. See Policy 495 page 1, paragraphs 2 and 4; page 3, paragraph 7; page 4, paragraphs 9 and 11, and note 4 to paragraph 11; page 6, fourth unnumbered paragraph; and page seven, first and second paragraphs from the bottom.

The SP having determined that a mismatch of revenues and variable expenses existed, the accountants were authorized by Policy 495 to exercise their professional judgment to allocate the lease payments over the entire lease year. Appeal denied.

[Editor’s Note: Section 4.3.8 of the Settlement Agreement, 5th Circuit precedent, Settlement Program Appeal 2015-1694 (issued concurrently with the instant appeal), as well as other appeal panel decisions regarding the “claimant friendly” nature of the Settlement Program, seem to be at odds with this decision.]

[Editor’s Note II: This decision was affirmed by Judge Barbier on Discretionary Review.]

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