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BP Business Economic Loss Claim Appeal 2016-2226: Claimant Meets Requirements To Qualify As A Start-Up

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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.

Claimant appeals the denial of its Start-Up Business Claim. The basis for the denial is that Claimant was not doing business or in operation at the time of the Spill.
Claimant acknowledges that it did not earn revenue prior to the Spill. However, Claimant contends that it incurred “substantial costs or expenses of a nature indicative of the actual start-up of business operations.” See Policy 362 v.2.
BP contends that the expenses incurred were primarily “build out” expenses that were not “indicative of the actual start-up of business operations.” This Panel continues to find vexing the issue presented in this appeal – at what point along a business’s conception-to-revenue time line does the “start-up of business operations” begin?
The bookends of this time line are fairly obvious. Two business partners drawing up plans for a business on the back of a napkin does not constitute the start-up of operations. On the other hand, receiving the first credit card payment from a customer does. The devil, of course, is everything in between. On the back end, the
Settlement Program does not exclude businesses that have not yet begun generating revenue. Further, Policy 362 v.2 states that a business may qualify if it “incur[ed] substantial costs or expenses of a nature indicative of the actual start-up of business operations.” Policy 362 v.2 makes no mention of revenue. On the front end, the District Court has ruled that expenses that are largely “legal, architectural, and engineering” do not meet the criteria set forth in Policy 362 v.2. See Appeal Decision 2016-227. While the Court’s decision has narrowed the gap, there nevertheless remains a gap between the planning stage of a business and the receipt of revenue.
In the instant appeal, Claimant is a restaurant. Presumably after conceiving the idea of putting a restaurant in the French Quarter, and presumably after paying architects and engineers to design the space, and paying lawyers to secure a location, Claimant began to “build out” the restaurant. According to an itemized list submitted by Claimant at this Panel’s request, Claimant incurred at least $30,000 in expenses prior to the Spill. The majority of these expenses were for the following:
installation of plumbing, structural steel work, electrical wiring. One expense of note was a “down payment on point of sale system” in the amount of $4,674. This system is utilized to perform all of the “cash register” functions. [For completeness, Claimant did incur other costs, but this Panel directed the Claimant to exclude any expenses that pre-dated the “buildout,” including legal, architectural, and engineering expenses.]
BP does not seriously contest that Claimant’s expenses are not substantial. Rather, BP argues in support of affirming the Program’s denial that these expenses do not constitute an operating history for the restaurant. Additionally, BP argues that the “totality of circumstances” do not support Claimant’s position. In particular, BP correctly points out that Claimant incurred an equal amount of “build out” costs after the Spill. Further, BP correctly notes that Claimant did not report its first
revenue until December 2010.
Unfortunately, the Settlement Agreement does not provide any “legislative history” (with apologies to Justice Scalia) that would help this Panel understand what the parties intended by using the phrase “operating history.” See Exhibit 7. Further, Policy 362 v.2 offers no examples of businesses that have “actual[ly] start[ed]-up . . . business operations.”
At first read, one might assume that the “start-up of operations” begins when a business starts receiving revenue. But a fair reading of Policy 362 v.2 suggests that the “start-up of operations” can occur pre-revenue. For instance, Policy 362 v.2 does not use the phrase “ongoing history of operation.” Rather, the policy refers to the “start-up of operations.” Hence, one might reasonably infer from this language that the business need not be “up and running.”
So, what constitutes “operations”? And when do operations “start up?” After considerable reflection, this Panel is of the view that there is a distinction between “open for business” and “operations.” [This distinction appears to be supported by the Settlement Program, who on occasion has made an award to a Start-Up Business even though that business did not generate revenue pre-Spill.] This distinction can be demonstrated by several hypotheticals:
First, a house builder buys a lot, incurs substantial expenses
constructing the house, and then sells the house. No one would
reasonably suggest that the builder wasn’t “operating” until the act of
sale. To the contrary, purchasing the lot probably began “operations.”
At the very least, pouring the foundation, erecting the framing, and
installing the roof (“build out”) constituted “operations” that had
“start[ed] up.”
Second, a manufacturer decides to build a better mousetrap. A
designer is paid to come up with the product, a warehouse is leased, a
production line is assembled, employees begin assembling the product,
sales agreements are entered into, the product is delivered, and revenue
is received. Again, no one would reasonably suggest that the
manufacturer wasn’t “operating” until the first customer paid. Rather,
“operations” “start[ed] up” at least when employees began assembling
the product, and probably when the manufacturer built the assembly
line (“build out”).
In the instant appeal, Claimant’s restaurant was not “open for business.” On the other hand, Claimant had moved beyond the “back of the napkin.” In fact, Claimant had moved beyond the legal, architectural, and engineering services stage. The record clearly shows that Claimant was in the “build out” stage. Neither Claimant nor BP dispute this. Like the hypothetical businesses above, Claimant had “crossed the Rubicon” into “operations.” This Panel is mindful that reasonable persons may interpret
“start-up of operations” differently. But without a bright line, whether or not a claimant has begun operations must be viewed on a claim-by-claim basis through Policy 362 v.2’s “totality of circumstances” lens.
Hence, in light of the above, this Panel finds (a) that the expenses incurred by the Claimant pre-Spill were “substantial” and (b) that these expenses were “indicative of the . . . start-up of business operations.” Therefore, the denial of this Claim is overturned.

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