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BP Business Economic Loss Claim Appeal 2016-1258: In Consignment Sale No Revenue Event Until Payment Required; AVM Erroneously Not Utilized

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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.


The Claims Administrator denied the BEL claim of this machine parts manufacturer in Wilmer, Alabama (Zone D) for failure to meet the causation requirements of Exhibit 4B. Claimant appeals, arguing that the reviewing accountant misapplied the matching methodology of Policy 495 with regard to consignment sales. Although represented by counsel, Claimant did not file a supporting memorandum which, as noted in other appeals, is unhelpful to an appeal panel’s understanding of its position.
One of Claimant’s major customers is XXX which purchases parts directly from Claimant and also on consignment. It is the consignment sales that are the subject of this appeal.  The consignment parts are manufactured by Claimant and delivered to the consignment inventory at XXX. Periodically, XXX will send a list to the Claimant identifying the parts it had removed from the consignment inventory. At this point, the revenue was recognized on Claimant’s P&Ls even though an invoice had been generated at the time of original delivery. In response to outreach from the program accountant, Claimant advised that the consignment inventory could be used by XXX as early as the week that the parts were delivered or as late as a year later. In other words, revenue was not recognized by Claimant until a particular part was taken from the consignment inventory for use by XXX.
The reviewing accountant made adjustments that reallocated the consignment revenue to the months in which the products were shipped. Claimant argues that this distorted the actual revenue patterns throughout its financials and ignored the consigned nature of the sales.
BP argues that Claimant’s handling of the consignment revenue does not accurately reflect when it was earned. Citing fluctuations in September 2007 and July 2009 BP also points out that six of the seven criteria of Policy 495 were triggered which required the reallocation of revenue.
The basis of the program accountant’s adjustments was that the date when parts were actually delivered and invoiced was the appropriate date for the recognition of revenue. The problem with this approach, as it relates to the consignment sales, is that until removed a particular part for use, Claimant had no right to require payment from the customer. It is counterintuitive to suggest that revenue should be recognized prior to the Claimant’s right to receive payment. In addition, the accountant used the standard BEL methodology even though Policy 495 criteria were triggered.
Numerous appeal panel decisions have held that the triggering of any of these criteria mandates application of one of the methodologies in Policy 495. Clearly that was not followed here.
After careful de novo review, this panelist concludes that in reallocating the consignment revenue to the date of delivery rather than the date of usage exceeded the discretion afforded by Policy 495. Failure to utilize the AVM or other appropriate methodology was likewise in error. It is therefore necessary for this claim to be returned to the Claims Administrator for recalculation of the claim consistent with this decision. No opinion is expressed as to the ultimate result of the recalculated causation analysis.

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