The Supreme Court of the United States yesterday dashed BP’s highest hopes in rejecting the company’s challenge to the Deepwater Horizon Economic & Property Damages Settlement Agreement’s causation protocols. The ruling confirmed the legality of the objective causation standards found in the Settlement Agreement’s Exhibit 4B.
Buoyed by an apparent unanimous SCOTUS rebuff, which came on the heels of a glowing audit by McGladrey LLP, Claims Administrator Juneau and Judge Barbier should take this opportunity to reconsider the implementation and application of the so-called “matching” policy (Policy 495), as requested several months ago by Class Counsel.
“Matching” Never Discussed By Parties
As Judge Barbier concluded in his response to the 5th Circuit’s remand (December 24, 2013 Order & Reasons):
“[T]here were no specific discussions as to the intended meaning of the language in Exhibit 4C prior to the execution of the Settlement Agreement. However, it is clear the parties did discuss and were in agreement that similarly situated claimants must be treated alike, and that in order to achieve a class settlement agreement, it was necessary that there be a transparent, objective methodology adopted to determine lost profits. In contrast, there was never any discussion or suggestion that the calculation or determination of compensation for lost profits would be based simply on how financial data was maintained by a claimant, or would depend on whether a claimant kept its accounting records on a cash or accrual basis.”
Judge Barbier subsequently tasked Claims Administrator Patrick Juneau with crafting a protocol to “match” otherwise “unmatched” profit and loss statements. Nearly all observers, most notably 5th Circuit Judge Edith Clement (a vocal critic of the entire settlement framework), assumed that the vast majority of offending P&L’s, if not all of them, would be based on cash-basis accounting principles. Judge Clement observed:
“[A] delineation might be fairly made between cash and accrual accounting. Depending on which of these methods a business chooses, the terms ‘revenue’ and ‘expenses’ take on widely variant meanings. Typically, only very small and fledgling businesses keep their primary financial records in accordance with cash accounting principles.”
“Matching” is Baked Into Accrual
The 5th Circuit panel was concerned that outlier claims, likely belonging to “very small and fledgling business[es]” that kept their “primary financial records in accordance with cash accounting principles” would receive the occasional windfall. Hence the divided panel’s remand to Judge Barbier and his subsequent instructions to Claims Administrator Juneau to design a policy to capture the oddball claim.
The 5th Circuit understood that accrual accounting methods naturally aligned revenue and expenses, while cash accounting often did not. In fact, the concept of “matching” revenues and expenses is by definition embeded in accrual accounting. As described by Judge Clement, “matching” is at the heart of the accrual method:
“[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.” (emphasis added)
Large, Sophisticated, Publicly Traded, Fortune 500, Accrual Based Businesses Deemed “Unmatched”
Unfortunately, the criteria that Claims Administrator Juneau devised to identify claims that may have matching problems capture the overwhelming majority of all claims – cash and accrual. Despite the 5th Circuit’s directives, as written Policy 495 gives little deference to accrual-based claims, and as applied, the Claims Administration’s accounting vendors give even less. After six months of applying Policy 495, nearly 90% of all claims have been deemed “unmatched.”
While Judge Barbier recognized that it was theoretically possible for an accrual based claim to be “unmatched,” like the 5th Circuit, he assumed it would be a rarity:
“Ordinarily, such “matching” will occur naturally when a claimant maintains its accounting records on an accrual basis. There may, however, be specific instances when accrual accounting records do not accurately match expenses to revenues, and the Court leaves it to the Claims Administrator to make such determinations.” – December 24, 2013, Order & Reasons
The “specific instances” Judge Barbier refers to are now the rule and not the exception under Policy 495. Fortune 500 businesses, publicly traded companies and entities keeping their books as per Generally Accepted Accounting Principles (GAAP) are now being deemed deficient under the Settlement Program’s matching protocol. Wall Street would likely be quite surprised to hear that the largest and most sophisticated companies in the world are misstating their earnings according to the Claims Administration’s vendors.
Instead of catching the occasional outlying claim filed by “very small and fledgling businesses” using the cash method, Policy 495 captures nearly every claim. Worse, by applying the newfangled compensation formulas found in Policy 495, the typical claimant experiences a diminished claim value between 30% and 75%. It should come as no surprise then that BP has no complaints about Policy 495.