By Jim Reed and David Leonard

The Fifth Circuit has taken steps to fine-tune the interpretation and implementation of the agreement BP negotiated to settle its massive liabilities arising from the April 2010 oil spill following the explosion of the Deepwater Horizon. Interpretation of the 1,000- plus-page settlement agreement—which the court described as one of the “largest and most novel class actions in American history”—has led to several disputes between BP and the plaintiffs’ class counsel. This recent activity should not impact the ability of businesses that employ accrual accounting systems to recover qualified business economic losses under the settlement agreement.

The Issue

Business economic loss claimants must satisfy a complex causation standard established by the settlement agreement in order to recover economic losses. Determining whether a business passes causation requires an analysis of financial performance before and after the April 2010 spill. The financial data required for this causation analysis will rely on different accounting assumptions depending on which accounting system a business employs.

BP has taken specific issue with the treatment of claims submitted by businesses that employ cash (as opposed to accrual) accounting systems. BP argues that financial data generated by cash accounting systems may generate inflated business economic loss awards. BP therefore sought to enjoin the Settlement Administrator from paying business economic loss claims in order to give the court a chance to address these concerns regarding the interpretation and implementation of the settlement agreement with regards to cash accounting systems.

The Solution

Responding to BP’s concerns, the Fifth Circuit ordered the federal district court to ensure the Claims Administrator “is not applying the cash-in, cash-out interpretation to claims that are presented with matched revenues and expenses.” The Fifth Circuit also directed the federal district court to “expeditiously craft a narrowly-tailored injunction that allows the time necessary for deliberate reconsideration of these significant issues on remand.”

To this end, last Friday the federal district court in New Orleans targeted claimants employing cash accounting systems.  The court  ordered the Claims Administrator to immediately suspend payments with respect to those business economic loss claims in which the Claims Administrator determines that the matching of revenues and expenses is an issue. Although this order may jeopardize the ability of businesses employing cash accounting systems to recover under the settlement agreement, it should not endanger the viability of claims supported by accrual accounting systems.