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BP Business Economic Loss Claim Appeal 2017-655:Program Accountants May Only Re-characterize Expense If it Is Not Listed In Exhibit 4D

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 welding shop in Church Point, Louisiana. The Settlement Program awarded Claimant $95.32 pre-RTP. Claimant now appeals, asserting (1) the revenues listed in the Settlement Program’s “Current/Last Review”do not match the revenues in Claimant’s P&Ls, and (2) the Settlement Program improperly classified several
expenses in violation of Settlement Agreement Exhibit 4D. More specifically, Claimant contends that the DHECC misclassified “Equipment Rental,” “Shop Supplies,” “Welding,” and “Permits” as Variable Expenses in contravention of the binding language of Exhibit 4D, Attachment A, which provides these must be deemed Fixed
BP agrees that certain revenues listed on the Current/Last Review do not match Claimant’s P&Ls. However, BP contends that this apparent error has no effect on Claimant’s award because the revenues in the Current/Last Review are posted for recording purposes only.The Accountant Compensation Calculation Schedules, from which Claimant’s Compensation is actually derived, reflect the correct monthly amounts. It appears that Claimant did not pursue its position on this issue with any substantive rebuttal.
Policy 361 v5 governs the characterization of expenses as fixed or variable, and provides that the Claims Administrator will treat expenses as Variable or Fixed if they fall within either of those categories pursuant to Exhibit 4D Attachment A. If an expense does not fit the description of the Variable or Fixed expense categories in Exhibit 4D Attachment A, the accountants will use discretion to apply the classification that best conforms to delineations made by the Parties, as reflected in Ex. 4D. Here, the relevant starting point is Exhibit 4C, which states “the parties have agreed to a defined list of fixed and variable expenses as reflected in [Exhibit 4D]
Attachment A.”
Pursuant to Exhibit 4D Attachment A, “Rental Expense” and “Supplies” are specifically characterized as Fixed Costs. Claimant further asserts that Claimant’s “Welding” expense is best characterized as “Overhead,” which is a Fixed Cost under Attachment A to Exhibit 4D; and Claimant’s “Permits” expense is best characterized as “Licenses And Taxes,” or perhaps “Fees,” both of which are also Fixed Costs.
BP asserts that expenses must be classified based on the nature of the expense, not simply by the label a claimant used in its financial statements, and expenses labeled by claimants as fixed may actually be variable pursuant to both economic reality and Exhibit 4D. Therefore, according to BP, although “Rental Expense” and “Supplies” are listed as Fixed Costs under Exhibit 4D, these expenses are variable due to the nature of the expense in relationship to Claimant’s business.
What Policy 361 v.5 means to this panelist is that if the expense is listed it is placed where it is listed, and only if it is not specifically listed do the accountants have discretion to use their professional judgment to place the expense in one category or the other. Otherwise it makes little sense for the Parties to have negotiated specific lists. Failure to uniformly apply the definitions as agreed to in the Settlement Agreement would result in each accountant applying subjective classifications of Fixed and Variable expenses agreed to by the Parties. The discretionary determination on how an expense should be classified comes into play only when the expense is not specifically listed in Exhibit 4B.
Claimant asserts that “Welding” should be considered “Overhead” and deemed Fixed, and Claimant’s “Permit” expense should be considered “Licenses And Taxes” or “Fees,” both of which are Fixed expenses. Both of these items are not specifically characterized as Fixed expenses and this is when the program’s discretion comes into play. BP’s position as to “Welding” is that the cost of welding is a direct cost of taking on and completing each new project, and Claimant offers no support whatsoever for its contention that this is an “overhead” expense. Indeed, asserts BP, this cost fluctuates substantially from one month to the next. As to “Permits,” contends BP, for Claimant, the cost of obtaining job-specific permits is a direct cost of obtaining new work. BP points out that here again, the timing and quantity of Claimant’s Permit expense varies substantially. Critically, and contrary to Claimant’s argument says BP, “Permits” are not the same as “Licenses,” which a business must maintain as an overhead cost regardless of work levels, and which Claimant accounts for separately as an independent line item. ?This panelist finds that the Settlement
Program erred in its classification of “Equipment Rental” and “Shop Supplies,” but appropriately exercised its discretion in its classification of “Welding” and “Permits.”
This claim is remanded so as to adjust the award accordingly.

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