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BP Business Economic Loss Claim Appeal 2017-1332:Law Firm’s Cross-Year Expenses Properly Allocated

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 is a law firm which received an award from the Settlement Program of $820,874.50, pre-RTP. BP appeals alleging that the Settlement Program did not properly allocate Claimant’s cross-year expenses in accordance with Policy 495’s Professional Services Methodology.
One of the instructions under the Professional Services Methodology indicates that “[w]here revenue has been restated and/or allocated on a basis other than the straight line basis, variable expenses . . . will be allocated to individual months based on the total effort expended, estimated using the same information utilized in allocating revenue.” The Settlement Program determined that Claimant’s revenues were not recorded over the time period over which they were earned because Claimant receives lump sum payments on a contingency fee basis and charges hourly fees that are not billed/paid on a monthly basis. Claimant recorded a $4 million case fee associated with XXX. This case fee represented over 95% of Claimant’s revenues for 2012. The Settlement Program obtained billing records for that case and reallocated Claimant’s $4 million case fee based on “the Time & Effort model,” rather than the straight line method. According to BP, because the Settlement Program reallocated Claimant’s cross-year revenues based on the time and effort method, i.e. “on a basis other than the straight line basis” pursuant to Policy 495’s Professional Services Methodology, the Settlement Program was required to reallocate Claimant’s variable expense associated with those cross-year revenues “using the same information utilized in allocating revenue.” In other words, the Settlement Program had to reallocate Claimant’s variable expenses associated with across years
based on the Time and Effort model because that is how the Settlement Program reallocated the corresponding revenues.
BP contends that had the Settlement Program performed the required adjustments to Claimant’s variable expenses, the Settlement Program¹s calculations would contain different annual totals for variable expenses than Claimant’s restated P&Ls. But the annual totals for Claimant’s variable expenses remain the same within each year. Therefore, according to BP, the Settlement Program cannot have allocated variable expenses across years using the time and effort method as required by Policy 495.
Claimant counters by submitting that the Settlement Program has already properly calculated variable expenses consistent with Policy 495. Claimant refers to document XXX and contends that it shows that the annual variable margin for each month per year is identical, and because the annual variable margin is consistent both the revenue and variable expenses from all cases were apparently allocated properly on the basis of the Time and Effort model. The revenues were reported cross-year and the variable expenses are allocated in the same proportions per year.
From the response to a request for a Summary of Review by this panelist we learn that the Claimant has a cash basis of accounting. This does not differ from the Claimant’s P&Ls which are also maintained under a cash basis of accounting. This claim was classified under a Professional Services NAICS code. As was noted, revenue for casework performed over multiple months, may be recognized in a single period at the time of deposit. The DWH Accountant utilized the Summary of Client Transactions sheet to complete the Case Summary Sheet, entering each case, their respectful start and end dates, monthly fees earned, and the total fee amount. Per the Claimant’s Fee Income Case Breakout sheet, the majority of the clients were on contingency fee basis or hourly fees based projects not billed/paid on a monthly basis, in which the revenue recorded relates to work performed over a period of time. As such, the Professional Services Methodology was utilized to allocate the revenue recognized from fee income over the life of each case. As the Claimant provided a detail time and billing record on the engagement level, DWH Accountant utilized the Time and Effort allocation.
Additionally, Policy 495 in Attachment F at p. F2 provides that: “Variable expenses will be allocated to each month of the Benchmark Period and the Compensation Period based on that month’s percentage of total annual revenue, unless alternative documentation has been provided that supports when effort actually occurred. The Claimant provided documentation which detailed the hours worked on the relevant case along with the bill rate for each case of each fiscal year. As such, while this
documentation supports the allocation of revenue on a time and effort basis under the Professional Services methodology, it does not include detail into the amounts or timing as to when the variable expenses associated with each case were incurred. Additionally, once the Professional Services methodology was applied with respect to the Claimant’s revenues, the variable profit margin consistently ranged between 85-90% for 2009 and 2010, and as such DWH Accountant exercised professional judgement to determine variable expenses did not require any further outreach to achieve sufficient matching. As the Claimant did not provide alternative documentation regarding the variable expenses related to particular cases/engagements, and the Profit and Loss statements are on the cash basis of accounting in which variable expenses would be recorded as incurred over the life of the cases/engagements, DWH Accountant allocated variable expenses to each month of the Benchmark and Compensation Periods based on that month’s percentage of total annual Revenue.
This panelist finds no error in the manner in which the Settlement Program handled this claim. Claimant’s Final Proposal is adopted and BP’s appeal is denied

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