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BP Business Economic Loss Claim Appeal 2016-1444: Reallocation of Lump-Sum Annual Rent Payment Received by Commercial Lessor Over the Term of the Lease is a Permissible Exercise of Professional Discretion

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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.

BEL Claimant appeals the denial of its claim, asserting that the Settlement Program improperly reallocated its “land rent” and“pasture rent” revenues, causing it to fail all causation tests. Specifically, is a farmland and equipment rental business located in Providence, Louisiana (ZoneD). Its “land rent” and “pasture rent” revenue accounts are for annual leases with the terms of the leases providing for annual payments. Claimant’s books are maintained on the cash basis method of accounting so the annual rent payments are recorded when received.
The SP’s adjustments, about which complains, were explained in Calculation Notes 7 and 11, to-wit:
7 LAND RENT Claimant provided land renal contracts from 2007-2011. The DWH Accountant  noted that rents are typically paid annually. As such, the DWH Accountant allocated the rental income evenly over 12 month periods in adjustments 1 & 2. Adjustment 1: Remove rental income as booked Adjustment 2: Allocate the rental income evenly over 12 month periods
11 PASTURE RENT Per review of the transactions and rental agreements in Doc ID #the DWH Accountant noted the ‘Pasture Rent’ account mainly consists of two
leases: One with term of April 15 to April 14 and annual rent of $3,625, and one with term of January 1 – December 31 and annual rent of $7,850. Since both rental agreements have a rental period of 12 months, the DWH Accountant allocated the rental income evenly over 12 month periods using adjustments 7 &8. Adjustment 7: Remove rental income as booked Adjustment 8: Allocate the rental income evenly over 12 month periods. By way of further explanation, Note 14 states “This claim has been evaluated under Policy 495, which allows for the restatement of revenues and/or expenses in the event that the Settlement Program identifies an error (as defined
in Policy 495) or a mismatch of revenues and variable expenses. As a result of such restatement, this claim did not meet the revenue pattern causation requirements established by Exhibit 4B of the Settlement Agreement.”
In support of its appellate contention, points to Calculation Note 15 reading: 15 Purpose of Packet: The purpose of this PDF packet is to provide the Claimant insight into revenues utilized in reaching the causation determination for this claim. Since the claim’s revenues did not establish causation under Exhibit 4B of the Settlement Agreement, additional consideration of expenses was not necessary and therefore is not included within this packet. Similarly, exhibits such as Excel P&Ls, Calculation Summary, Tax Return and Declaration Analysis do not include, consider, or address expense information. No additional analysis of expenses has been performed at this time, as expenses have no bearing on the causation determination under Exhibit 4B.
In the ensuing Re-Review and Reconsideration Denials, the SP advised that the rental payments were moved “to accurately reflect the claimant’s monthly business activity.” This year, the District Court has issued a number of Decisions On Discretionary Review involving claimant challenges to revenue reallocation, the first six of which dealt with reallocation of rents received by a commercial landlord or renter, to-wit: Numbers 2015-1722, 2015-1696, 2015-1694, 2015-1732, 2015-1765, and 2016-100. In 2015-1696, 1722, 1732, and 2016-100, the Court cited as the only needed justification for upholding the SP’s reallocation of rent payments, the following:
Policy 495 provides that “Contemporaneous P&L’s submitted by the claimant will be restated if in analyzing and processing a claim, the CSSP Accounting Vendors identify either an error (as previously defined)or a mismatch of revenue and variable expenses which can be explained and supported by appropriate documentation.” (Policy 495, page 7, second paragraph).
In 2015-1696, the Court Decision (i.e., “Order and Judgment”) upholding the rent reallocation states that “Claimant rents farm land and farm equipment,” just as Claimant does. Claimant acknowledges that “the Court has recently allowed some Pre-Step 1 Adjustments for ‘obvious’ or ‘apparent’ mismatches of revenues and variable expenses,” but argues that the quoted provision from Policy 495 can’t serve as justification for the reallocation made of its rental revenue because the DHECC
made no inquiry into the variable expenses associated with Claimant’s Land Rent revenue and Pasture Rent revenue to justify the restatement. They simply spread the income across 12 months with no analysis into whether it was properly matched with their associated variable expenses. Therefore, the revenue was moved for neither an error nor a mismatch between revenues and variable expenses. This clearly violates the purpose and terms of Policy 495 and was an error on the part of the Claims Administrator. Finally, had the DHECC accounting vendor inquired into variable expenses associated with these revenues, the Claimant would have informed the DHECC that there were none.
The DHECC determined Claimant had five variable expenses: bad debt, building repair, contributions, contributions– political, and travel. None of these expenses were incurred to earn Claimant’s Land Rent revenue or Pasture Rent revenue. Additionally, the only payroll expenses associated with the earning of this revenue were fixed owner/officer payroll. As such, the DHECC did not follow the express terms of Policy 495 and simply smoothed these revenues with no attempt to “match” them with the associated variable expenses.
In sum, Claimant’s position is that because the Calculation Notes establish that there was no analysis whatsoever of variable expenses, the SP could not have moved the revenues to correct “a mismatch of revenue and variable expenses which can be explained and supported by appropriate documentation.”
Claimant’s argument finds support in the Appeal Panel Decision in Claim ID ****. There, after noting the three District Court Decisions referenced herein as 2015-1722, 2015-1696 and 2015-1694, the panelist reasoned that “there is no evidence of any analysis performed to Claimant’s variable expenses, such that the ‘obvious mismatch’ justification appears inapplicable.” Consequently, the panelist concluded, the SP “exceed the discretion allowed as a first step by Policy 495, because there was no
underlying analysis of variable expenses justifying the ‘judgment call’ allowed in cases of obvious mismatches of revenue and variable expenses.”
On the other hand, BP cites in its Opposition Memorandum to another provision of Policy 495, which declares, “it may be appropriate to make adjustments to the claimant’s financials as to the timing of the recognition of either revenues or expenses or both.” Policy 495, page 3, item 7.
This panelist notes that in the two most recent District Court Decisions approving of the reallocation of revenue, 2016-540 and 2016-548, the Court has simply upheld the movement of revenue as “a reasonable exercise of the Program Accountants’ discretion under Policy 495,”without referencing any particular provision of the Policy.
Taking all of this into consideration, the panelist’s “best guess” is that a decision by the Program Accountants to reallocate a lump-sum annual rent payment received by a commercial lessor, over the term of the lease, is a permissible exercise of professional discretion, without strict regard to the nature of the variable expenses. Such movement of revenues, so as to place them in the months in which they were actually earned, provides for a more realistic picture of a claimant’s earnings and best reflects a claimant’s economic reality. Denial upheld and appeal denied.

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