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BP Business Economic Loss Claim Appeal 2016-2043: Claimant Allowed to Submit Additional Information to Show Arms-Length Nature of Rental Payments

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 lessor of farm land in Transylvania, Louisiana (Zone D) after excluding rental payments determined to be non-arms length in nature. As a result, Claimant did not satisfy the causation requirements of Exhibit 4B. Reconsideration and re-review were likewise unsuccessful. Claimant appeals.
Claimant’s primary argument is that under the circumstances of this claim, the excluded rental revenue was based on standard market rental rates for agricultural property. Claimant leases acreage to YYY, a related party, based on an oral lease. The rental rates for 2007-2010 range from $130-$150 per acre. The reviewing accountant applied Policy 328 v.2 and excluded this revenue. Accounting Review was unable to determine the arm’s length nature of the related party rental income because there were no written agreements with YYY, there was no independent data with which validate the information provided to justify higher rates charged to the related parties than nearby unrelated parties were charging one another in ’07 and ’08, and no comparable rate information was provided for ’09-’11.
Claimant argues that in the agricultural industry, joint farming operations among related parties are common and that farm leases are frequently oral rather than in writing. In support of its position, Claimant relies on the original and supplemental affidavits of ***, a lawyer who represents farming operators in  NNN and adjoining parishes.  The affidavits state that he has drafted numerous agricultural leases and is familiar with market rental rates in this area of Louisiana. Among other things,
***provided redacted leases for farming operations in adjacent parishes showing comparable rental rates …goes on to state that the nature of the crops and the condition of the land are factors that effect market rates and payment schedules.  ***concludes that the rates Claimant charged to $150/acre in 2007-2008 and $130/acre in 2009-2010, represented the fair market value of the land under lease.
Claimant argues that the vendor accountant erred by rigidly applying Policy 328 v.2 under circumstances where the practices of the farming industry should have produced a different result.
BP contends that the rental revenue was properly excluded because the Claimant failed to produce sufficient evidence for the program accountant to evaluate the rental rate charged compared to market rates. BP argues that Claimant failed to justify higher rates charged to than nearby unrelated parties were charging. BP therefore contends that the lack of independent data with which to validate Claimant’s rental rate justified the denial of the claim.
Policy 328 v.2 provides that non-arms length, related party transactions “shall not typically be treated as ‘revenue’.” One of the purposes of this policy is to exclude revenue that is not earned in a genuine market transaction. However, this policy does not require exclusion of related party revenue in every circumstance. A claimant can demonstrate that the revenue was based on market rates or fair market value. However, the burden is on the claimant to demonstrate fair market value so as to avoid the exclusionary effect of Policy 328 v.2.
Here, the program accountant concluded that “there was no independent data with which to validate the information provided to justify higher rates charged to the related parties than nearby unrelated parties….” Careful review of Policy 328 v.2 discloses no support for the requirement of “independent” data to establish market rates or fair market value. Regardless, de novo review of the entire record leads this panelist to conclude that the affidavits are themselves independent evidence with accompanying data that supports the rental rates charged by the Claimant. The fact that the rental rates charged by Claimant are at the upper end of range of fair market value does not render them unreasonable or unsupported.
It is the conclusion of this panelist that the record supports a finding of fair market value in Claimant’s rental rates for 2007-2010. In concluding that the record lacks sufficient data to support a finding of fair market value, the program accountant was in error. It is therefore necessary for this claim to be remanded. The Administrator shall recalculate the claim and include the farm lease revenue in the calculation. Claimant shall be afforded an opportunity to submit additional documentation. Denial overturned and claim remanded.

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