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BP Settlement: Judges Barbier & Clement Suggest Majority of Accrual P&Ls Inherently Matched

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"... 'matching' [of] revenues and expenses, ... is a fundamental aspect of day-to-day record keeping on the accrual-basis.” - Judge Clement, October 2, 2013 Opinion in 13-30315

“…matching is required and occurring with respect to the vast majority of accrual-basis claims.” – Judge Clement, October 2, 2013 Opinion in 13-30315

Last year the 5th Circuit Court of Appeals, along with Judge Barbier of the Eastern District of Louisiana, held that profit and loss statements (P&Ls) supporting claims for losses under the BP Deepwater Horizon Economic & Property Damages Settlement must be “sufficiently matched.” This resulted in Claims Administrator Patrick Juneau’s development of Policy 495: “Matching of Revenues and Expenses.” This eighty-eight page addendum was meant to more accurately measure loss associated with the disaster by treating claims based on cash accounting principles more like those supported by accrual P&Ls (an oversimplified explanation to be sure).

“Vast Majority” of Accrual P&Ls Sufficiently Matched

Both the appellate and trial courts assumed that the consequences of this new matching requirement would fall primarily on the backs of cash basis claimants, as matching of revenues and expenses is already baked into claims supported by accrual P&Ls:

“[A]ccrual accounting has as a fundamental principle the recognition of revenue when the entity becomes entitled to receive payment, as opposed to when the payment is actually received. Expenses that can be readily traced to the recognized revenues are themselves recognized at the same time as those revenues. … This is sometimes referred to as ‘matching’ revenues and expenses, but in any case this procedure is a fundamental aspect of day-to-day record keeping on the accrual-basis.” – Judge Clement, October 2, 2013 Opinion in 13-30315 at 11 (emphasis added)

“Ordinarily, such ‘matching’ will occur naturally when a claimant maintains its accounting records on an accrual basis.” – Judge Barbier, Order & Reasons, December 24, 2013, Footnote 5

Synonyms for “ordinarily” include “usually,” “mainly,” “mostly,” and “most of the time.” In other words, following Judge Barbier’s reasoning, at the very least, greater than 50% (i.e. “most”) of all accrual based claims should at the outset be deemed sufficiently matched and thus processed as per the original causation and compensation constructs found in the Settlement Agreement (Exhibits 4B & 4C), not Policy 495.

Further, Judge Clement of the 5th Circuit Court of Appeals wrote that accrual P&Ls are sufficiently matched in the “vast majority” of instances:

“…the parties apparently agree that matching is required and occurring with respect to the vast majority of accrual-basis claims.” – Judge Clement, October 2, 2013 Opinion in 13-30315 at 17 (emphasis added)

Barbier

“Ordinarily, such ‘matching’ will occur naturally when a claimant maintains its accounting records on an accrual basis.” – Judge Barbier, Order & Reasons, December 24, 2013

Like Judge Barbier’s “ordinarily,” Judge Clement’s “majority” means more than half. Yet Judge Clement goes further by adding the modifying adjective “vast,” which indicates that some number of accrual P&Ls well in excess of 50% must be deemed sufficiently matched. Synonyms for “vast” include “huge,” “extensive,” “sweeping,” “enormous,” “immense,” “great,” “massive,” “tremendous,” etc.

In other words, according to Judge Clement, some percentage of accrual claims well north of 50% are inherently matched and not subject to Policy 495’s claim eroding methodologies.

Professional Judgment Required

Policy 495 contains seven tests, which if tripped, should result in a claim being set aside for “further matching analysis” to determine whether the claim should be processed under one of the Policy 495 methodologies (AVM, Construction, Professional Services, Agriculture, or Education) or revert to the original Exhibit 4C formula. After one or more of the tests are tripped:

“Accounting Vendors will exercise their professional judgment to determine whether that claim is ‘sufficiently matched’ based upon the evaluation of the information submitted and available to them, including, when applicable, the nature and complexity of the industry or business in question, particularly with regard to claims based upon cash-basis accounting records.” – Policy 495 at 6 (emphasis added)

The occurrence of a trigger(s) in and of itself is not what determines whether a claim is supported by insufficiently matched P&Ls. The trigger event simply flags the P&Ls for further scrutiny. It is only through the “exercise of professional judgment” subsequent to a trigger event that a claim’s matching status may be determined, with cash basis records subjected to heightened scrutiny (which implies deference for accrual P&Ls).

In addition, if none of the triggers are tripped, there is a presumption that the subject P&Ls are sufficiently matched (Policy 495 at 6). Tellingly, there is no similar presumption that P&Ls are insufficiently matched when one or more of the triggers are tripped.  Again, in that instance, only the exercise of professional judgement can determine same.

Finally, the accounting vendors are to document the exercise of their professional judgment in the claimant’s file:

“The claimant’s file will be appropriately and reasonably documented to reflect the basis for the exercise of professional judgment by the CSSP Accounting Vendors as to material matters in the identification and resolution of matching issues.” – Policy 495, Footnote 4

Pavlov’s Bell

The requirement to “appropriately and reasonably” document the “exercise of professional judgment” is not satisfied by simply regurgitating which of the seven tests were triggered, as the mere occurrence of a trigger event is not determinative of matching issues, particularly as to accrual based claims. Yet recent experience suggests that the accounting vendors are indeed relying 100% on the seven tests to determine matched status – not the exercise of their learned, professional judgment as required. This rote reaction is particularly troublesome as the tests are overly-inclusive, capturing upwards of 90% of all claims in their nets, cash and accrual.

"... 'matching' [of] revenues and expenses, ... is a fundamental aspect of day-to-day record keeping on the accrual-basis.” - Judge Clement, October 2, 2013 Opinion in 13-30315

“… ‘matching’ [of] revenues and expenses … is a fundamental aspect of day-to-day record keeping on the accrual-basis.” – Judge Clement, October 2, 2013 Opinion in 13-30315

The vendors’ Pavlovian response to the occurrence of a trigger is in clear contravention of Policy 495. And if indeed the practice is to rely exclusively on the tests to determine matching status (abdicating the duty to exercise professional judgement), then “ordinarily” the “vast majority” of accrual based claims will not be deemed sufficiently matched, as perhaps 90% of them will trigger at least one of the seven overly-inclusive tests.

This result should surprise Judges Barbier and Clement, as it is the polar opposite of what their courts require, will wipe out several billion dollars in legitimate claims, and will result in a gross miscarriage of justice. Policy 495 was developed to identify and reign in the occasional outlier claim (or put another way, the “inevitable concomitant of an objective quantitative, data-based test”), not to wrongly decimate the vast majority (application of Policy 495 generally reduces claim value and sometimes eliminates causation).

What’s the fix?

First, the Claims Administrator should determine the percentage of accrual based claims that trip one or more of the seven triggers. Second, administration officials should determine how many of those flagged accrual claims are ultimately deemed insufficiently matched. I suspect it will be the vast majority of that subset, if not 100%. If this is indeed the case, we will have confirmation that the accounting vendors are systematically failing to exercise their professional judgment, instead substituting the seven tests for same.

Accountants by their nature are conservative. Some employed by the Claims Administration come from the insurance world of claims adjusting, where they are conditioned to minimize compensation. The opposite should be the case here. The BP Deepwater Horizon Settlement Agreement explicitly tasks the Claims Administration and its vendors with the fiduciary duty of maximizing claimant compensation, not eviscerating it:

“The Claims Administration Vendors shall evaluate and process the information in the completed Claim Form and all supporting documentation under the terms in the Economic Damage Claim Process to produce the greatest economic damage compensation amount that such information and supporting documentation allows under the terms of the economic damage claim framework.” Settlement Agreement, Section 4.3.8 (emphasis added)

Wrongly applying Policy 495’s methodologies to P&Ls that are at the outset inherently matched (the “vast majority” of accrual P&Ls), rather than utilizing the original causation and compensation formulas found in Settlement Agreement Exhibits 4B and 4C, violates the Claims Administration’s fiduciary duty to maximize claimant compensation.

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