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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.

This appeal presents the issue of whether a business enterprise which had been doing business and operating in the Gulf Coast Areas for many years preceding the April 20, 2010 Oil Spill, but coincidentally underwent an organizational restructuring after the Spill, involving replacement of its Entity existence as a corporation with that of a Limited Liability Company, but with an uninterrupted continuation otherwise of its management and business operations, was doing business or operating in the Areas at the time of the Spill. The successor Entity in this case, the limited liability company (“Claimant” or “the LLC”), filed the present BEL claim on behalf of its Destin, Florida location, which was one of its several Multi-Facility Business locations. The Settlement Program (“the SP”) denied it with the explanation “[w]e cannot allow your claim for the reason that we are unable to determine causation and/or calculate a compensation amount under the BEL frameworks because you were not doing business or operating in the Gulf Coast Areas or Specified Gulf Waters at the time of the Oil Spill, April 20, 2010.” Claimant joins issue with the SP on that point, stating in its Reply Memorandum, “[t]he central issue on appeal is whether [XXXXX] was operating at the time of the oil spill.” Therefore, the panelist accepts that formulation as the determinative question presented.

The issue thus framed is apparently one of the first impression as far as Appeal Panel decisions and Discretionary Review rulings by the District Court are concerned. Also, there are no Claims Administrator policies which specifically address the issue. In fact, this explanation appears in the Policy Keeper User Manual:

“The Claims Administrator previously adopted Policies 354 and 363 regarding Business Economic Loss claims under the Settlement Program. Policy 354 pertained to the evaluation of claimants with changes in business ownership. Three versions of Policy 354 were previously available on the Settlement Program’s public Policy Keeper. . . . Additionally, the Claims Administrator had previously adopted several policies regarding multi-facility businesses . . ., which were available on the Settlement Program’s public Policy Keeper. Following discussion and consideration with the Parties, the Claims Administrator has determined that formal policies on these topics are no longer necessary. In the event these topics are at issue in the course of processing a claim, the Settlement Program will process the claim in accordance with the Settlement Agreement as interpreted by the Claims Administrator. Accordingly, all prior versions of Policies 354 and 363 and those policies related to multi-facility businesses identified above have been withdrawn from the public Policy Keeper and are no longer to be considered as adopted or approved policies.”

In contrast to Claimant’s layered arguments on appeal, as hereafter discussed, BP’s position is singular and straight forward: it maintains that because in September 2010 the predecessor Entity, sold all of its assets to the new entity which new Entity was assigned a new Taxpayer Identification Number; and the LLC was created post-Spill by the filing in Delaware of its “Certificate of Formation” on July 8, 2010; and it took over business operations as of September 3, 2010, the LLC simply was not in business at the time of the Spill. “That the business of [XXXXX] continued uninterrupted is of no matter. The relevant question is whether Claimant was in business at the time of the Spill. It was not, and that basic fact ends the inquiry.” (BP’s “Opposition,” pp. 2-3) BP expands on that dichotomy of the “Inc.” versus the “LLC” by arguing, “[i]ndeed, if a claim is to be made, it is to be made by [XXXXX]. While [XXXXX] has not filed a claim with the Settlement Program, it did file a claim with GCCF and received GCCF payments totaling $480,472.25.” (Id., n. 3 on p. 3) Claimant counters to put a different spin on the GCCF payment, arguing in its Request for Reconsideration during the claim process, “Gulf Coast Claims Center paid [XXXXX] for a claim after [XXXXX] provided an explanation of how [XXXXX] formed [XXXXX] and was still managed by the same CEO and facility managers. The partial payment from the GCCC is further evidence that establishes [XXXXX] was an operator during the entire qualifying period. The GCCC paid [XXXXX], in May 2012 for claims related to its Destin and Pensacola locations.” The GCCF paperwork in the record reflects that on May 3, 2012, that agency issued an Interim Payment to [XXXXX] for May 1, 2010 – December 31, 2010 Lost Profits, in the net amount of $451,643.91, representing an award of $480,472.25 less “Court-Ordered 6% Hold-Back for Common Benefit Reserve Account,” of $28,828.34.

As noted, Claimant’s present BEL claim is for the Destin, Florida facility. Documents in the appeal record show that this facility was first leased by [XXXXX] of Destin, “a Division of [XXXXX],” for the lease term of June 1, 2009 to May 31, 2011, and then leased to the LLC for a consecutively succeeding lease term of June 1, 2011 to May 31, 2013. The Landlord was the same on each lease and the same individual, [XXXXX], signed on behalf of the lessee in each instance, as the “Division President” of each. (The reference in the first lease to [XXXXX] was an apparent holdover from the fact that the business was incorporated on December 21, 1959 under that name but shortened its name to [XXXXX] April 11, 2008.)

The more detailed history of the reorganization at issue in this appeal was as follows: At the same time the LLC was chartered on July 8, 2010, its initial member [XXXXX] executed a Limited Liability Company Agreement. That document is not in the record, but on September 3, 2010, a superseding First Amended and Restated Limited Liability Company of [XXXXX] was entered into, referencing [XXXXX] as the original member and admitting [XXXXX] as a new member [XXXXX] was the CEO of [XXXXX].). The “Purposes and Powers” of the LLC were described in part thus: “The purpose for which the Company is organized is to enter into an agreement with [XXXXX] a Delaware corporation (‘[XXXXX] to acquire substantially all of the assets and liabilities from [XXXXX] in exchange for a membership interest in the Company and to transact any or all lawful business for which limited liability companies may be organized under the Act.” Two days before the LLC was chartered, [XXXXX] had signed a “Consent” for the LLC to use [XXXXX] in its name. On September 29, 2010, a Second Amended and Restated Limited Company Agreement of [XXXXX] was entered into among its then members [XXXXX]; and two “Employee Members.” The introductory “Recitals” explained, first, that [XXXXX] had transferred to the LLC all of [XXXXX]’s “operating assets and liabilities in the business of distributing and marketing produce and other related food products . . . in exchange for all of the Class A Units, Class B Units, Class C Units, and Class D Units representing 99% of the Unit Percentage Interests (with [XXXXX] holding the remaining 1% of the Class D Units).” Then the Recitals explained that [XXXXX] and [XXXXX] had acquired all of [XXXXX] Unit Percentage Interests pursuant to a Membership Interest Purchase Agreement dated September 3, 2010, between [XXXXX] and [XXXXX] the sole member of which was [XXXXX] (Elsewhere in the record, [XXXXX] is described as an affiliate of Dallas-based hedge fund [XXXXX]) [XXXXX] (through [XXXXX] as its CEO) joined in the execution of this second Agreement, designating [XXXXX] as a “Withdrawing Member,” and declaring “its withdrawal from the Company and agreeing and acknowledging that it no longer holds any membership interest in the Company.” Claimant states in its Opening Memorandum, and BP does not thereafter dispute, that as a result of the transactions described above, after [XXXXX] dissolved the LLC “continued to operate the same business, including each Facility making a claim here, and all of its employees, equipment, real estate, customers, vendors. The business had the same assets and liabilities, the same debts and claims, and the same payables and receivables from the day before.” The panelist has located in the appeal record various documents executed in connection with the company reorganization (including the September 3, 2010 “Asset Contribution Agreement” between [XXXXX] and the LLC; the September 3, 2010 “Plan of Liquidation” of [XXXXX] and the October 27, 2010 “Certificate of Dissolution” of [XXXXX] which became effective upon its November 3 filing with the Secretary of State of Delaware), and considers the legal effect of the same to be reasonably summarized by Claimant’s submissions. (Two schematic charts showing the sequential movements of all of these ownership interests are in the record).

Fast forwarding in the interest of completing the story, the business of [XXXXX] conducted by the LLC eventually failed and the LLC filed for Chapter 11 bankruptcy on April 27, 2012. An attempted reorganization was not successful and was therefore converted to a liquidation. A Liquidation Trust was established and [XXXXX] was appointed Liquidation Trustee. It is he who has filed the present BEL claim on behalf of the LLC. The Plan of Liquidation approved by the Bankruptcy Court included the LLC’s “Deepwater Horizon Claim” among its “contingent assets – unliquidated,” describing it as “an unliquidated claim at this time that represents unknown claim value related to the financial impact to eligible [XXXXX]locations by the Deepwater Horizon incident.”

Section 38.65 of the Settlement Agreement states: “Entity shall mean an organization or entity, other than a GOVERNMENTAL ORGANIZATION, operating or having operated for profit or not-for-profit, including a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture or an unincorporated association of any kind or description.”

The Settlement Agreement defines the Settlement Class, in pertinent part, as follows:

“Economic and Property Damages Settlement Class shall mean the NATURAL PERSONS and ENTITIES defined in this Section 1, subject to the EXCLUSIONS in Section 2 below. If a person or entity is included within the geographical descriptions in Section 1.1 or Section 1.2, and their claims meet the descriptions of one or more of the Damage Categories described in Section 1.3, that person or entity is a member of the Economic and Property Damages Settlement Class, unless the person or entity is excluded under Section 2:

· · ·

1.2. Entities. All Entities doing business or operating in the Gulf Coast Areas or Specified Gulf Waters that: 1.2.1. at any time from April 20, 2010 to April 16, 2012, owned, operated, or leased a physical facility in the Gulf Coast Areas or Specified Gulf Waters and (A) sold products in the Gulf Coast Areas or Specified Gulf Waters (1) directly to CONSUMERS or END USERS of those products or (2) to another Entity that sold those products directly to Consumers or End Users of those products, or (B) regularly purchased Seafood harvested from Specified Gulf Waters in order to produce goods for resale; . . .”

Clearly, the LLC was an Entity that owned, operated, or leased a physical facility in the Gulf Coast Areas during the time frame April 20, 2010 to April 16, 2012 and sold products in the Areas. However, the Settlement Program interprets the introductory phrase of Section 1.2 referencing “All Entities doing business in the Gulf Coast Areas” to mean doing business there at the time of the Oil Spill. Although the panelist might otherwise question that strict a temporal requirement, (i.e., for example, that an Entity which was doing business or operating in the Gulf Coast Areas during 2009 and January-March of 2010, but which suspended operations for some reason at the start of April, would be disqualified, despite resuming operations during the last half of 2010, because it was not doing business or operating in the Areas on the precise date of April 20, 2010), the Claimant seems content to accept that construction of Section 1.2 and, consequently, focuses all of its argument on making the case that it should be deemed to have been so doing business or operating because it was a continuum of [XXXXX]. The success of that argument depends on whether one analyzes the issue from a pure “Entity” approach, or from a more generic business entity approach.

Arguing in favor of the business enterprise entity approach, Claimant points out that excluded from Class Membership are certain Entities and “any and all of their past and present predecessors [and] successors . . . .” Section 2.1 of the Settlement Agreement. Moreover, the exclusions “are based on the substantive nature of the business, not the legal or juridical form of that business.” Section 2.2.4 Pursuant to Section 10.1, “all Economic Class Members, on behalf of themselves and their . . . subsidiaries, corporate parents, predecessors [and] successors . . . hereby release and forever discharge with prejudice . . .” the specified Released Parties. Thus, reasons Claimant, the Settlement Agreement envisions claims by reorganized and restructured businesses.

Claimant includes with its Opening Memorandum the Memorandum Class Counsel submitted to the Claims Administrator on April 1, 2015 addressing, among other various topics, “Claiming Entity/Changes-in-Ownership/Multi-Facility Issues.” In that section of their memorandum, Class Counsel argued:

There is absolutely nothing in the Settlement Agreement, (either the Class Definition, the definition of an Entity, the definition of a Start-Up Business, the definition of a Failed Business, Exhibit 4, Exhibit 5, Exhibit 6, or Exhibit 7), that defines a ‘business’ or an “Entity” in terms of its Tax ID No. or EIN.

· · ·

It was certainly intended and contemplated that, if an Entity was transferred, merged, sold or otherwise converted into a successor Entity during the Benchmark or Class Period, the successor-in-interest would be able to submit a Claim based, in whole or in part, on the revenues, expenses and/or facilities of the predecessor-in-interest Entity. (Not only is this a basic feature of general corporate and business enterprise law, but BP secured express consideration for this by ensuring that the claims of both “predecessors” and “successors” would be released.)

· · ·

With respect to the sale of a business from one Entity to an unrelated Entity during the Benchmark Period, . . ., it is Class Counsel’s recollection and understanding that BP was willing to assume the risk of two separate Claims based upon the same underlying Benchmark financials, because the selling Entity (unless it was located in Zone A or a Tourism business located in Zone B) would generally not have the 2011 revenues necessary to satisfy Causation, and therefore have no compensable Claim. In determining whether the purchasing Entity can utilize the business’ pre-sale financials prepared by the selling Entity, we think the Program is correct to look at the nature and extent of the seller’s operations, if any, after the sale, as opposed to the mere existence of a Tax ID No. or EIN.

Hopefully, in at least some cases where a business might have been sold from one Entity to an unrelated Entity during the Class Period, some type of a reservation or assignment will make it clear that one Entity has the right to bring the Claim.

(As to that last point, in the September 3, 2010 “Asset Contribution Agreement” [XXXXX] conveyed and assigned to Claimant all “claims and causes of action” held by [XXXXX] “relating or pertaining to the Assets or the Business,” and the Bankruptcy Court has reserved to the LLC the right to pursue the “Deepwater Horizon claim.”)

Similarly, Claimant attaches to its Opening Memorandum the March 21, 2014 “Response” of Class Counsel to a “Request for Input” by the Claims Administrator on the BEL topic, “Evaluation of Businesses with Substantive Changes in Ownership or Operating Activities.” In it, Class Counsel first noted that “the Settlement Agreement does not specifically address how to evaluate business with substantive changes in ownership or operating activities during the Benchmark Period or Compensation Period years or the Class Period.” Then, Class Counsel provided answers to a series of questions the Claims Administrator has posed to the parties, in the context of the then-still-operable Policy 354 v.3. The up-shot of Class Counsel’s analyses was that where a business was sold during the Compensation Period (which for the present claimant is May-November, 2010), in an asset purchase, both parties would be Class Members but the transaction documents ideally would establish who owned the right to go forward to make the businesses’ claim. As already noted, the Asset Purchase Agreement and the Bankruptcy Court orders have resolved that issue as between [XXXXX] and Claimant.

In the final analysis, the business entity [XXXXX] continued to do business and operate within the Gulf Coast Areas without interruption throughout 2009, 2010 and 2011, as far as the rest of the world was concerned, including the company’s employees, vendors and customers. The form through which it operated until September 3, 2010 –[XXXXX]– was changed, but the business enterprise, i.e., the business the entity known as [XXXXX], did not change. Whatever “cause of action” [XXXXX] had by way of a “Deepwater Horizon claim” was expressly transferred by it to Claimant and the Bankruptcy Court authorized the Liquidation Trustee to pursue the present BEL claim on behalf of Claimant.

The panelist finds Claimant to be a member of the Settlement Class, entitled to pursue this claim. The panelist freely acknowledges that this outcome is not without doubt on his part. If in fact the correct analysis is that a successor “Entity” which continues its Entity predecessor’s business operations without any interruption whatsoever and under the same trade name, cannot be a member of the Class if it was not in existence on the day of the Spill, as the Settlement Program and BP contend, then the panelist’s assessment is simply wrong. The panelist has found himself essentially writing on a blank slate and has struggled over many days, reading all of the parties’ submissions, the complex restructuring documents, and all possibly pertinent portions of the Settlement Agreement, in his effort to reach the right decision.

The denial of the claim is overturned to the extent it is based on the discrete proposition that the LLC was not doing business or operating in the Gulf Coast Areas at the time of the April 20, 2010 Oil Spill because it had not yet been chartered, and remands the appeal for appropriate further proceedings.

BP encourages the panelist to uphold the denial on the alternative basis that Claimant’s financial documentation has been called into serious question by multiple lawsuits and criminal prosecutions involving Claimant’s owners and accountant. In that regard, BP has submitted with its “Opposition” voluminous materials chronicling those developments. None of them were in the record compiled before the Settlement Program, however, and nothing indicates that the same were ever called to its attention. De novo review by an appeal panelist means just that, a “review” of what the Settlement Program has decided in the first instance. Any issues of the unreliability of Claimant’s submitted financials will have to be addressed first by the Settlement Program on remand.

Appeal upheld and denial overturned, and claim remanded.

[Editor’s Note: This appeal panel decision was reversed by Judge Barbier under Discretionary Review.]

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