Is The BP Oil Spill Victim Compensation Fund Legitimate?
Is The BP Oil Spill Victim Compensation Fund Legitimate?
By Brian J. Donovan
July 27, 2010
On June 16, 2010 President Obama announced that BP has agreed to set aside $20 billion to pay economic damage claims to people and businesses that have been affected by the BP oil gusher. President Obama stated, “This $20 billion will provide substantial assurance that the claims people and businesses have will be honored. It’s also important to emphasize this is not a cap. The people of the Gulf have my commitment that BP will meet its obligations to them. BP has publicly pledged to make good on the claims that it owes to the people in the Gulf, and so the agreement we reached sets up a financial and legal framework to do it.
Another important element is that this $20 billion fund will not be controlled by either BP or by the government. It will be put in a escrow account, administered by an impartial, independent third party. So if you or your business has suffered an economic loss as a result of this spill, you’ll be eligible to file a claim for part of this $20 billion. This fund does not supersede either individuals’ rights or states’ rights to present claims in court. BP will also continue to be liable for the environmental disaster it has caused, and we’re going to continue to work to make sure that they address it.”
BP and the Obama administration agreed to appoint Kenneth Feinberg, a Washington lawyer and Democratic Party supporter who administered the claims process for victims of 9/11, to run the independent claims process commonly referred to as the BP Oil Spill Victim Compensation Fund (BPOSVCF). Feinberg declines to comment on how much BP is paying him to run the BPOSVCF.
BP OIL SPILL LIABILITY
Estimates of BP’s oil spill liability by financial analysts and environmental economists range from $60 billion to $90 billion. The truth is that these are merely guesstimates. The actual cost will not be known for years.
Containment, Collection and Clean-up
To date, BP has spent $4 billion on oil containment, collection and clean-up. This equates to approximately $40 million per day. Assuming clean-up continues for 750 days, at this rate the cost would total $30 billion.
BPOSVCF addresses compensation for victims of the BP oil spill. BP allegedly intends to deposit $20 billion in an escrow account to fund the BPOSVCF. The amount of compensation payable to victims for “legitimate” claims is not capped and could total $40 billion.
Penalties and Fines
Under the Clean Water Act (CWA), BP faces fines of up to $4,300 for each barrel spilled. Furthermore, pursuant to Section 2702 of Oil Pollution Act of 1990 (OPA), BP would be required to pay royalties (18.75%) owed to the federal government for the oil gushing from the well.
As of July 27, 2010, regardless of whether you prefer to say “spill” or “gusher,” these are the numbers to consider:
Total Amount of Oil Released to Date: 4,675,000 barrels
Amount of Oil Recovered by BP to Date (via Containment Cap): 826,800 barrels
Oily Water Recovered (via Skimming): 823,810 barrels of oily water = 82,381 barrels of oil
Oil Consumed by Controlled Burns: 264,286 barrels
Total Amount of Unrecovered Oil in the Gulf of Mexico to Date: 3,501,533 barrels
In this case, it may be argued “Barrels Spilled” means either:
(a) Total Amount of Oil Released to Date: 4,675,000 barrels or
(b) “Oil Consumed by Controlled Burns” + “Total Amount of Unrecovered Oil in the Gulf of Mexico” = 264,286 + 3,501,533 = 3,765,819 barrels of oil spilled.
The definition of “Barrels Spilled” will probably be determined by whether BP has sold the oil that it has recovered via the containment cap and skimming. As explained below, on June 8, 2010, BP announced it would donate the net revenue from the sale of oil recovered via the containment cap and skimming to a wildlife fund to help restore and improve wildlife habitat in Louisiana, Mississippi, Alabama, and Florida.
Under the CWA alone, gross negligence penalties based upon 4,675,000 barrels of oil spilled would equal $20.1 billion; gross negligence penalties based upon 3,765,819 barrels of oil spilled would equal $16.2 billion.
Under OPA, BP is required to pay a royalty of 18.75% to the federal government for the oil gushing from the well. Assuming oil is selling at an average of $70 a barrel, U.S. taxpayers should receive a royalty payment of $61.4 million from BP for the total amount of oil released to date.
BP’s liability, based upon the above-estimated amounts for oil containment, collection and clean-up, BPOSVCF and penalties and fines would total between $66.3 billion and $90.2 billion.
Funding of BPOSVCF
In a June 16, 2010 news release, BP stated it will pay $3 billion into the fund in the third quarter of this year and another $2 billion in the fourth quarter. That will be followed by quarterly payments of $1.25 billion until the full $20 billion has been paid. The company said the fund will be backed by the assets of its U.S. subsidiary.
On July 24, 2010, the Press-Register reported, “BP spokesman Justin Saia said the company’s agreement with the White House is still being finalized. ‘Funds will be made available immediately upon the conclusion of this process,’ he said.”
On July 26, 2010, the Press-Register reported, “BP spokesman Daren Beaudo said the company had no new information on the negotiations surrounding the $20 billion pledge. Neither Beaudo, nor the U.S. Department of Justice, which is handling negotiations for the government, would discuss how long those talks might take, whether there are serious substantive differences or where the deposited money would be held while claims are processed.”
BP’s Ability to Fund BPOSVCF
BP’s current operating income is estimated to be $34 billion in 2010. BP has the fourth highest revenues and profits of the Fortune 500.
According to estimates from bond rating agency Moody’s, BP has total proven reserves of approximately 18 billion barrels of oil in the ground.
In releasing second-quarter results on July 27, 2010, BP said it was taking a pretax charge of $32 billion to cover damages, business claims and cleanup costs related to its oil spill. That total will be offset against its U.S. tax bill, resulting in a $10 billion reduction in taxes, the company said. Although legal, it would be adding insult to injury to allow BP’s costs from its oil spill to come out of taxes it owes to the U.S. government. According to its 2009 annual report, BP paid $10.4 billion in taxes world-wide last year.
BP has the responsibility and financial wherewithal to fully compensate each and every BP oil gusher victim.
The Potential Benefits
The potential benefits of the BPOSVCF include:
(a) the facilitation of settlement for those claims where litigation otherwise would not be brought because the value of individual claims is so small that it is not economically feasible to bring individual lawsuits. Such negative value claims may be feasible only when grouped in a class action, where the overhead of bringing the lawsuit is shared among all class members;
(b) the protection of BP from financial uncertainty due to ongoing and potentially inconsistent litigation;
(c) the protection of the interests of the BP victims if their claims are fully paid in a timely manner by BP;
(d) the provision of a convenient and economical means for disposing of legitimate claims: BPOSVCF could eliminate costly attorneys’ fees associated with time-consuming litigation due to the avoidance of pre-trial procedures, the reduced emphasis on evidentiary processes such as discovery, depositions, etc.;
(e) since BP and BP’s victims are directly engaged in the negotiation of the settlement, the BPOSVCF may be more collaborative and less antagonistic as compared to litigation thereby rebuilding the relationship between BP and the community;
(f) the BPOSVCF settlement is more likely to produce a final payment, resolution of the dispute and closure than is a trial court judgment which can be appealed; and
(g) the BPOSVCF saves the resources of the courts by permitting an issue to be settled in an economical fashion without the need for litigation.
The Potential Risks
The potential risks of the BPOSVCF include:
(a) the failure of BP to fund the BPOSVCF: The question is whether the BPOSVCF is merely another hollow BP promise similar to the “BP wildlife fund.” As of July 26, 2010, BP reports that it has made 77,880 payments to claimants for a total amount of $235 million. This equates to an average payment of only $3,018 per claimant.
(b) the fact that memories fade with the passage of time: Therefore, if the BPOSVCF is merely a delaying tactic on the part of BP to postpone the day of financial judgment, lawsuits should be filed by BP’s victims and witnesses should be deposed as soon as possible. In the absence of a well-funded BPOSVCF, postponing litigation will only benefit BP;
(c) the reality that BP’s victims face a settlement offer from BP without benefit of adversarial investigation;
(d) the BPOSVCF terminates emergency payment claims ninety days after the well is capped and allows for just one final lump-sum settlement payment thereafter;
(e) the fact that it is too early to calculate the damages for some potential claimants. For example, the benzene in spilled oil can cause leukemia and lymphoma which may not be diagnosed for several years;
(f) a continued delay in the funding of the BPOSVCF by BP which may place many claimants in the financial position of having to accept a final settlement offer from BP that is substantially lower than the amount an independent third-party mediator would consider to be fair and reasonable. Moreover, in order to receive the final settlement offer, the claimants must waive any right to bring further court proceedings against BP; and
(g) the unique nature of the BPOSVCF: In arbitration and mediation, the parties have considerable control over the selection of the arbitrator or mediator. The parties can agree on the type of experience and expertise the arbitrator or mediator should have. In this case, BP victims have no control over who hears their claims. BP victims must blindly trust the knowledge, experience and fairness of Kenneth Feinberg.
ADMINISTRATION OF THE FUND
BP and the Obama administration agreed to appoint Kenneth Feinberg, a Washington lawyer and Democratic Party supporter who administered the claims process for victims of 9/11, to run the BPOSVCF. Feinberg is due to take full control by August 10, 2010.
The BPOSVCF will operate for three years. Feinberg explains the compensation plan includes two components: a no-obligation six month emergency payment for lost income and a final lump-sum payment with acceptance of release for BP. All victims can apply for the six month payment, up until ninety days after the well is capped. However, if claimants choose to accept the second and final BPOSVCF offer, they waive any right to bring further court proceedings against BP.
Feinberg plans to apply tort law principles in weighing claims, meaning plaintiffs will have to show that their losses wouldn’t have occurred “but for” the oil spill.
The Appearance of a Conflict of Interest
Reuters reports, “In Bayou La Batre, a small fishing community in south Alabama, Feinberg convened an early-morning session on Saturday (July 24, 2010) to listen to residents’ concerns and answer questions on the claims process.” “I learned today the depth of frustration in people here on the coast,” a visibly-tired looking Feinberg said. “I am your lawyer. I do not work for BP. I do not work for the White House. I work and answer to the residents of the Gulf.”
The residents of Bayou La Batre find that hard to believe. They know that Feinberg is being compensated by BP, travels on a private jet paid for by BP, and has requested that lawyers for BP, not attorneys general from the Gulf states, be involved in drafting releases that exempt BP – but not other potential defendants – from any future liability for the spill.
Bloomberg reports that on July 15, 2010, during a meeting with local government officials in Harahan, Louisiana, “Councilman Thomas Capella from Jefferson Parish, Louisiana asked Feinberg if claimants should hire an attorney. Feinberg said that’s not necessary because his office will have attorneys on staff to provide free services to individuals and businesses.” The fact that Feinberg’s attorneys intend to represent both BP and BP’s victims, clearly appears to be a conflict of interest to BP victims in Louisiana.
BPOSVCF Administrator’s Compensation
Feinberg declines to comment on how much BP is paying him to run the BPOSVCF. Is it appropriate for Feinberg to keep his compensation from BP confidential?
Professor Byron Stier, an expert in mass tort litigation and a member of the Southwestern Law School faculty, makes the following observations on his Mass Tort Litigation blog. Professor Stier states, “Feinberg will likely have tremendous discretion in fashioning the administrative claim mechanism for the BP compensation fund. His exercise of discretion could possibly result in BP saving substantial funds, especially if any remainder of the $20 billion fund is to be returned to BP. Accordingly, a fair process at a minimum requires that both the amount of his compensation, and the method of compensation be disclosed publicly. If BP has the ability to review and cut his billable hours or his billable-hour rate, for example, Feinberg might have a conflict of interest that could lead him unconsciously to favor BP in structuring the administrative fund or making awards. As a result, in addition to public disclosure, an even better solution might be for BP and Feinberg also to agree to have a federal judge review Feinberg’s billable hours, billable-hour rate, and total fee, much as is already typically done by judges reviewing class counsel fee awards in class-action settlements under Rule 23. See Fed. R. Civ. P. 23(h).
Federal judges have their compensation set publicly and in a manner that could not be said to incentivize them to favor one litigant over another. We would never approve of a judge being paid confidentially by only one litigant – and we shouldn’t here either, especially when the claims structure could be seen as quasi-public in light of the President’s central involvement and comments that “in order to ensure that all legitimate claims are paid out in a fair and timely manner, the account must and will be administered by an independent, third party.” Ultimately, removing the issue of Feinberg’s fees from any controversy would aid Feinberg in making the BP fund a success.”
Complete transparency is essential in order to avoid the appearance that the BPOSVCF is not being administered by an impartial, independent third party. Public disclosure of at least the following information is required to ensure this transparency:
(a) The final written agreement entered into between BP and the federal government;
(b) The final written agreement entered into between Mr. Feinberg and the federal government;
(c) The final written agreement entered into between Mr. Feinberg and BP;
(d) Any and all standard written agreements that may be entered into between BPOSVCF and claimants, e.g., emergency payment agreement and final settlement agreement with waiver;
(e) The name and location of the financial institution where the BPOSVCF escrow account is held;
(f) A monthly accounting of the escrow account;
(g) An itemized accounting of payments, if any, made to BP by the BPOSVCF; and
(h) A detailed accounting of the operating costs, including staff attorney compensation, of the BPOSVCF.
THE BP WILDLIFE FUND
On June 8, 2010, BP announced it would donate the net revenue from the sale of oil recovered via the containment cap and skimming to a wildlife fund to help restore and improve wildlife habitat in Louisiana, Mississippi, Alabama, and Florida.
McClatchy Newspapers reported, “The company said it doesn’t know exactly how much money it’ll donate to the fund, but all net revenue from the well will go to the fund. So will the net revenue from any oil skimmed from the ocean’s surface and sold to a refinery for processing.
The wildlife fund will create, restore, improve and protect wildlife habitat along the coastline of Louisiana, Mississippi, Alabama and Florida, Tony Hayward, the company’s chief executive, said in a statement. The company also took pains to note that its contribution is voluntary; the fund it’s creating is ‘over and above BP’s obligations under the Oil Pollution Act of 1990.’ The money will be made available to state agencies and non-profits that are focused on wildlife protection and restoration, the company said.”
According to the McClatchy article, Hayward stated, BP is “committed to protecting the ecosystems and wildlife on the Gulf Coast.” “We believe these funds will have a significant positive impact on the environment in this region.”
BP said it would continue to donate all net revenue from the well until it “is killed and oil is no longer coming from this source.”
As of July 27, 2010, let’s calculate how much the BP wildlife fund should have received:
Amount of Oil Recovered by BP to Date (via Containment Cap): 826,800 barrels
Oily Water Recovered (via Skimming): 823,810 barrels of oily water = 82,381 barrels of oil
Total Amount of Oil Recovered by BP to Date: 909,181 barrels
Assuming: (a) oil is selling at an average of $70 a barrel; (b) BP has to pay a royalty of 18.75% to the federal government; and (c) BP has to pay the 35 percent share it owes to its co-owners in the lease, as of July 27, 2010, the BP wildlife fund should have received $33.6 million from BP.
As of July 27, 2010, the BP wildlife fund remains merely another BP public relations stunt. BP has not formed a wildlife fund, established an escrow account for Tony Hayward’s promised wildlife fund or donated any percentage of the net revenue from the sale of oil recovered via the containment cap and skimming to a wildlife fund, state agency or non-profit to help restore and improve wildlife habitat in Louisiana, Mississippi, Alabama, and Florida.
It is too early to tell if the BPOSVCF is legitimate. This BP fund may be no better than the BP wildlife fund or it may be the vehicle that will rebuild the relationship between BP and the community. BP oil spill victims should treat the BPOSVCF like an approaching hurricane, “hope for the best, prepare for the worst.”
The people and businesses of the Gulf will be made whole either by negotiating a settlement with BP, via the BPOSVCF, or by filing a lawsuit against BP. BP oil spill victims must realize that Kenneth Feinberg is not their lawyer. Each and every BPOSVCF claimant should immediately seek competent local legal counsel to represent his or her interests. Each and every BP oil spill victim should then immediately file a claim with BPOSVCF for a no-obligation six month emergency payment. The attorney will be able to advise the client on the maximum amount that may be recoverable under the emergency payment and will ensure that the claimant has the proper detailed documentation prior to submitting the claim. Most attorneys will be willing to provide this legal counsel on a pro bono basis. Upon receipt of the emergency payment, the claimant should consult with his or her legal counsel in regard to negotiating a final settlement with BP. The negotiating of a final settlement is complex and requires the claimant to waive any right to bring further court proceedings against BP. Here, it is essential for the claimant to be represented by legal counsel. Most attorneys will be willing to represent claimants during this phase of the negotiations on a contingent fee basis. A contingent fee of seven to ten percent would be money well spent. In order to be made whole, claimants must be willing to transform into plaintiffs if the final settlement offered by BP is unacceptable. However, BP oil spill victims should not become victims of class action lawsuits. Competent local legal counsel will be able to advise as to the proper litigation strategy.
The legitimacy of the BPOSVCF will not be determined by BP’s well-produced TV commercials or well-rehearsed townhall meetings. It will be defined by BP’s willingness to fully meet its obligations to the people and businesses of the Gulf in a transparent and timely manner.
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About the Author
Brian J. Donovan is an attorney and marine engineer with thirty-five years of international business experience.
Mr. Donovan, a member of The Florida Bar, The U.S. District Court, Middle District of Florida and The United States Court of Appeals for the Eleventh Circuit, holds a J.D. from Syracuse University College of Law (where he was recipient of the “Global Law & Practice Award” as the outstanding graduate in the areas of International Law and International Business Law) and a B.S., with honors, in Marine/Mechanical and Nuclear Engineering from the United States Merchant Marine Academy.
Mr. Donovan, with deep family roots in southern Louisiana, has first-hand knowledge of the catastrophic devastation of the Louisiana Gulf Coast caused by hurricanes Katrina and Rita. He fully appreciates that the damage caused by Katrina and Rita may pale in comparison to the massive and potentially unprecedented environmental and economic impact of the BP oil gusher of April, 2010.