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BP Business Economic Loss Claim Appeal 2015-582: Condo developer excluded

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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.


For the reasons set forth in the well reasoned decision authored by my co-panelist and set forth below, the Claims Administrator’s denial of this claim is affirmed.

Claim

Claimant has filed 24 BEL and Start-Up Business Loss Claims for condominium units. Over 200 units were developed by the Claimant, with the construction of the units completed prior to 2010.

Most of the units were sold prior to 2010. Three units closed in 2010. On two of those, the purchase agreements were executed in 2009, but the closing took place in 2010 prior to the Oil Spill. The third unit was conveyed to a related party later that year.

The remaining 24 units were held out for rental in 2010 through Claimant’s vacation rental management company’s rental license.

Settlement Program’s Determination

The Settlement Program denied these claims, finding that Claimant was an excluded Real Estate Developer.

Relevant Settlement Agreement Provisions

The Real Estate Developer exclusion, which is “based on the substantive nature of the business,” (Section 2.2.4) covers “any Natural Person or Entity that develops commercial, residential or industrial properties . . . including condominiums with multiple residential units.” Section 2.2.4.7.

Relevant Claims Administrator’s Policies

Policy 468 “revises, consolidates and supersedes Polices 89, 299 and 377.” Those provisions pertinent to these claims are summarized below:

Part I — Introduction

“Settlement Agreement provides no revenue threshold applicable to determining who is or is not a Real Estate Developer; rather, the Settlement Agreement takes a more subjective approach and leaves that determination to the sound discretion of the Claims Administrator.”

Part II (B) — Time Period for Analysis

The CA will examine the attributes of the Entity during 2010. However, the CA may examine certain attributes of the Entity outside 2010 as necessary to determine whether the Entity’s attributes relate back to prior development activities.

Part II (C) — Criteria for Analysis

(1) 2010 Tax Return: An Entity who designates itself as real estate development is presumed to be an excluded Real Estate Developer. However, the presumption is rebuttal if to a reasonable degree of certainty the Entity ceased Real Estate Development Activity by 1/1/2010.

(2) 2010 Permits and/or Licenses: Any 2010 real estate development related business permits and licenses?

(3) Revenue: Any 2010 revenue from real property sales reported as ordinary income?

(4) Expenses: Any 2010 expenses related to Real Estate Development Activity?

(5) Other Available Information: Any promotional materials, website statements describing Entity as a real estate developer? Did Entity engage in activities such as making material changes in the use of buildings or land, including the renovation and release of existing buildings, the purchase of raw land for development, the sale of improved land or parcels to others, and the planning, design, arranging of financing, zoning approvals, construction, marketing, sale or lease of such projects.

Part II (D) — Cessation of Real Estate Development Activity

(1) An Entity will be considered to have ceased Real Estate Development Activity after it (a) has disposed of all real property connected to its prior Real Estate Development Activities and has no further revenues or expenses associated with Real Estate Development, OR (b) completed all Real Estate Development Activities and assumed the responsibilities of operating the developed property according to its intended use and without holding them for sale at a future time.

(2) An Entity that in 2010 sold or continued to hold out for sale any real property developed by the Entity has not ceased Real Estate Development Activity, even though the project was completed prior to 2010.

(3) An Entity that suspended all Real Estate Development activity but re-commenced activity during the Class Period (April 20, 2010 until April 16, 2012) is excluded.

BP’s Position

BP offers the following arguments for upholding the Settlement Program’s denial:

1. In 2010, Claimant satisfied some of the criteria for analysis set forth in Policy 468, Part II (C):

a. Claimant maintained a real estate developer license in 2010. See Policy 468, Part II (C) (2).

b. Claimant closed on three condos in 2010 and reported the sales as ordinary income. See Policy 468, Part II (C) (3). [Per BP, the income from two of these sales make up 66% of Claimant’s total normal operating income for 2010.]

c. Claimant received $8,248 in “Developer Subsidies.” See Policy 468, Part II (C) (5).

2. Because Claimant sold three condos in 2010 that had been developed by Claimant, Claimant had not ceased all Real Estate Development activity, even though the project was completed prior to 2110. See Policy 468, Part II (D) (2).

Claimant’s Position

Claimant offers the following arguments for overturning the Settlement Program’s denial:

1. Policy 468 provides no revenue threshold but rather takes a more subjective approach. See Policy 468, Introduction.

2. Claimant does not meet any of the criteria for analysis set forth in Policy 468:

a. Claimant did not identify itself as a developer on its 2010 tax return. See Policy 468, Part II (C) (1).

b. Claimant did not apply for any real estate developer permits or licenses in 2010. See Policy 468, Part II (C) (2). [Claimant did apply for a permit in 2004 which does not expire. Thus, Claimant argues that it only technically held such a real estate developer license in 2010.]

c. Claimant had no 2010 expenses associated with real estate development activity. See Policy 468, Part II (C) (4).

d. Claimant did not engage in any of the following real estate developer related activities in 2010: hold itself out as a seller of condos, create materials promoting the sale of condos, make any material change in the use of buildings or land, renovate and release the condos, purchase raw land, perform new construction, arrange for new financing, seek zoning approvals, plan or design. See Policy 468, Part II (C) (5).

[Claimant acknowledges that it conveyed 3 condos in 2010, and thus arguably satisfies Policy 468, Part II (C) (3). However, Claimant points out that the purchase agreements on two of the condos were signed in 2009. Additionally, the sale of these two units took place prior to the Class Period and thus should not be considered. Finally, Claimant argues that the third transfer was not technically a sale but rather a transfer to a related party.]

3. Claimant ceased Real Estate Development Activity prior to 2010 per Policy 468, Part II (D):

a. Claimant “[c]ompleted all Real Estate Development Activities and assumed the responsibilities of operating the developed property according to its intended use and without holding them for sale at a future time.” See Policy 468, Part II (D) (1) (b).

b. Claimant had suspended all Real Estate Development Activity by 1/1/10 and did not re-commence any activity during the Class Period. See Policy 468, Part (D) (3).

Discussion

Claimant acknowledges that it engaged in Real Estate Development Activities prior to 2010. The issue on appeal, then, is whether or not Claimant ceased those activities and when they were ceased.

Policy 468, Part II (D) (summarized above) sets forth the Settlement Program’s guidelines for determining whether or not a Claimant has ceased Real Estate Development Activity.

Subpart 1 states that “An Entity will be considered to have ceased Real Estate Development Activity on the first day of the month after it has . . . Sold, conveyed, transferred, or otherwise disposed of all real property on which the Entity’s prior Real Estate Development Activities took place.” (emphasis added) Part II further provides that if an Entity ceases Real Estate Development Activity after 1/1/2010, Claimant is excluded. In the instant matter, Claimant disposed of three condos in 2010. Even if the third transfer is ignored, the other two transfers still took place after 1/1/2010.

Subpart 2 states that “An Entity that in 2010 sold . . . any real property developed by the Entity has not ceased all Real Estate Development activity and shall be considered an Excluded Real Estate Developer, regardless of the date the project was completed.” (emphasis added) As noted above, Claimant sold at least two condos in 2010, even though the units were completed prior to 2010.

Based on Policy 468, Part II (D) (1) and (2), Claimant would appear to be an excluded Real Estate Developer.

Claimant rebuts this appearance with two arguments. First, Claimant points out that the purchase agreements on the two units that closed in 2010 were executed in 2009. Claimant suggests that its Real Estate Developer Activities ceased when the purchase agreements were signed on those two units prior to 1/1/2010. [Claimant argues that the third unit that was transferred to a third party does not quality as a sale.] However, Subpart 1 says “sold, conveyed, transferred,” none of which occurred until after 1/1/2010.

Claimant’s second rebuttal is more nuanced. Claimant contends that because the two units were sold before the Class Period (albeit after 1/1/2010), these sales should not be classified as real estate development income. Claimant argues that Policy 468 improperly designates the applicable time period as all of 2010 rather than just the Class Period (April 20, 2010 through April 16, 2012). Claimant asserts that “[t]hroughout the Settlement Agreement, it is clear the 4/8/15 Parties’ intent was for any exclusion to be based on the Class Period rather than the full 2010 year.”

However, Exhibit 18 of the Settlement Agreement, which deals with exclusions, reads in pertinent part:

“For . . . Real Estate Developers . . . the applicability of the exclusion will be determined by the Claims Administrator based upon his review of (a) the claimant’s 2010 tax return, (b) 2010 business permits or licenses(s), and/or (c) other evidence of the relevant business’s . . . activities.”

Nothing in this language suggests that the Claims Administrator’s inquiry should be limited to just the Class Period. A fair reading of this provision suggests that all of 2010 is in play when analyzing a Claimant’s activities.

Conclusion

Based on the foregoing, Claimant did not cease its Real Estate Development Activity until after 1/1/2010. Hence, Claimant is excluded from making a Claim. The Settlement Program’s denial is upheld.

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