The Donovan Law Group

BP Oil Spill: Failure to Act by the Obama Administration and Congress Threatens the Financial Viability of the Oil Spill Liability Trust Fund (OSLTF)

Posted in Feinberg, GCCF, Napolitano, Obama, oil spill, OPA, OSLTF by renergie on December 6, 2010

BP Oil Spill: Failure to Act by the Obama Administration and Congress Threatens the Financial Viability

of the Oil Spill Liability Trust Fund (OSLTF)
_______________________________

Oil Spill Victims are Left with an Uncertain Future

By Brian J. Donovan

December 6, 2010

Although Congress created the OSLTF in 1986, Congress did not authorize its use or provide taxing authority to support it until after the Exxon Valdez incident in 1989. The Oil Pollution Act of 1990 (OPA), signed into law on August 18, 1990, provided the statutory authorization and funding necessary for the OSLTF. The National Pollution Funds Center (NPFC), an administrative agency of the United States Coast Guard (USCG), manages the OSLTF and acts as the implementing agency of OPA. Since 2003, the USCG has operated in the Department of Homeland Security.

A primary purpose of the OSLTF is to compensate persons for removal costs and damages resulting from an oil spill incident. In essence, the OSLTF is an insurance policy, or backstop, for victims of an oil spill incident who are not fully compensated by the responsible party.

OPA established an expenditure cap of $1 billion per oil spill incident. This $1 billion expenditure limit includes $500 million for natural resource damage assessments and claims. Although not allowed to be taken into consideration by the NPFC, $1 billion today does not have the same value as it did in 1990, when OPA was enacted. If the $1 billion amount had been adjusted for inflation, it would be approximately $1.6 billion in today’s dollars. Coincidentally, on September 30, 2010, the unaudited OSLTF balance was approximately $1.69 billion.

To date, NPFC has billed the responsible party for the BP oil spill $581 million for response activities performed by nine federal government agencies and various state government agencies. As of October 12, 2010, BP has paid NPFC $518.4 million.

Victims of the BP oil spill are at risk as a result of the cap. The cap is for total expenditures. This $1 billion expenditure limit applies even if the OSLTF is fully reimbursed by the responsible party and net expenditures are zero. The OSLTF will very likely reach the $1 billion per incident cap on total expenditures in the near future.

The advantage of defining an expenditure, under the OSLTF, as “an expenditure that is not reimbursed by the responsible party,” is twofold:
(a) It eliminates, without the need to pass retroactive legislation, the $1 billion cap which may be paid from the OSLTF with respect to any single incident and allows the OSLTF to maintain a balance of at least $1 billion for the purpose of paying claims for damages resulting from other oil spill incidents. As the OSLTF pool of $1 billion is depleted by payments made to oil spill claimants, it is replenished, by virtue of subrogation, by reimbursements made to the OSLTF by the responsible party; and
(b) It ensures that the cost of a catastrophic oil spill incident shall be borne by the responsible party, not the federal taxpayer.

On November 27, 2010, The Donovan Law Group sent a letter to the Honorable Janet Napolitano, Secretary of the Department of Homeland Security, explaining the need to  properly define the term “expenditure” under the OSLTF.

The full text of the letter follows. Links have been added for clarification.

November 27, 2010

VIA CERTIFIED MAIL
RETURN RECEIPT REQUESTED

The Honorable Janet Napolitano
Office of the Secretary
Department of Homeland Security
245 Murray Lane, SW
Washington, DC 20528

Re: BP Oil Spill – The Need to Properly Define “Expenditure”
Under the Oil Spill Liability Trust Fund (OSLTF)

Dear Secretary Napolitano:

I am writing in regard to the need to properly define the term “expenditure” under the OSLTF. Under the OSLTF, expenditure should mean “an expenditure that is not reimbursed by the responsible party.” Defining the term in any other manner ignores the legislative intent of Congress and the Internal Revenue Code.

The question is whether victims of the BP oil spill of April 22, 2010 will have to pay three times: (a) once for the oil spill, the environmental and economic damages of which will devastate their way of life and leave many in financial ruin; (b) again by being mislead and undercompensated by GCCF; and (c) a third time for daring to demand justice, which will consume their time, energy and hopes for years to come if they are held hostage by protracted individual lawsuits or class action lawsuits.

The damages suffered by victims of the BP oil spill incident of April 22, 2010 will be enormous and on-going. The livelihoods of all persons whose businesses rely on the natural resources of the Gulf Coast are at risk. Commercial fishermen, oyster harvesters, shrimpers, and  businesses involved, directly or indirectly, in processing and packaging for the seafood industry will experience the end of a way of life that, in many cases, has been passed down from one generation to the next.

BP and Oxford Economics estimate the total cost to clean up this unprecedented spill to be in the tens of billions of dollars. On November 2, 2010, BP raised its estimated cost of cleaning up the Macondo oil spill incident to $40 billion. Other independent third party estimates range between $60 billion and $90 billion.

Secretary Janet Napolitano
November 27, 2010
Page 2

How will victims of this unprecedented oil spill be fully compensated for their losses? Theoretically, there are three potential avenues of compensation which victims of this oil spill may pursue to be made whole: (a) the Gulf Coast Claims Facility (GCCF); (b) litigation; and (c) the Oil Spill Liability Trust Fund (OSLTF).

GULF COAST CLAIMS FACILITY (GCCF)

GCCF was meant to replace the inefficient claims process which BP had established to fulfill its obligations as a responsible party pursuant to the Oil Pollution Act of 1990 (OPA). It was not the legislative intent of Congress for OPA to limit an oil spill victim’s right to seek full compensation from the responsible party. BP and Kenneth Feinberg, the GCCF claims administrator, allege that GCCF (and the protocols under which it operates) are structured to be compliant with OPA. However, as explained in my letter, dated October 18, 2010 and received by your office on October 25, 2010, GCCF is in violation of OPA. In lieu of ensuring that oil spill victims are made whole, GCCF’s primary goal appears to be the limitation of BP’s liability via the systematic postponement, reduction or denial of claims against BP.

LITIGATION

Kenneth Feinberg uses the fear of costly and protracted litigation to coerce victims of the BP oil spill to accept grossly inadequate settlements from GCCF. During town hall meetings organized to promote GCCF, Feinberg repeatedly tells victims of the BP oil spill, “the litigation route in court will mean uncertainty, years of delay and a big cut for the lawyers.” “I am determined to come up with a system that will be more generous, more beneficial, than if you go and file a lawsuit.” “It is not in your interest to tie up you and the courts in years of uncertain protracted litigation when there is an alternative that has been created,” Feinberg says. He adds, “I take the position, if I don’t find you eligible, no court will find you eligible.” Mr. Feinberg intentionally fails to mention that litigation is not the only alternative to GCCF.

BP, the responsible party, is a powerful and well-funded defendant, does not lack imagination or incentive to pose innumerable legal barriers, and will aggressively assert its legal rights and otherwise use the law, the courts and the judicial system to serve its interests. BP can afford to stall, and actually benefits from delay, but its victims cannot afford to wait for years to be fully compensated for their losses.

Secretary Janet Napolitano
November 27, 2010
Page 3

OIL SPILL LIABILITY TRUST FUND (OSLTF)

As Representative Lent explained in urging passage of OPA, “The thrust of this legislation is to eliminate, to the extent possible, the need for an injured person to seek recourse through the litigation process.” See 135 Cong. Rec. H7962 (daily ed. Nov. 2, 1989) Prior to OPA, federal funding for oil spill damage recovery was difficult for private parties. To address this issue, Congress established the OSLTF under section 9509 of the Internal Revenue Code of 1986 (26 U.S.C. 9509).

The OSLTF is currently funded by: a per barrel tax of 8 cents on petroleum products either produced in the United States or imported from other countries, reimbursements from responsible parties for costs of removal and damages, fines and penalties paid pursuant to various statutes, and interest earned on U.S. Treasury investments. On September 30, 2010, the unaudited OSLTF balance was approximately $1.69 billion.

Under OPA, claims for damages must be presented first to the responsible party. 33 U.S.C. § 2713(a) In the event that a claim for damages is either denied or not paid by the responsible party within 90 days, the claimant may elect to commence an action in court against the responsible party or to present the claim to the OSLTF. 33 U.S.C. § 2713(c)

 

Expenditure
The maximum amount which may be paid from the OSLTF with respect to any single incident shall not exceed $1 billion. 26 U.S.C. § 9509(c)(2)(A) Furthermore, except in the case of payments of removal costs, a payment may be made from the OSLTF only if the amount in the OSLTF after such payment will not be less than $30,000,000. 26 U.S.C. § 9509(c)(2)(B)

This is an incident of first impression for the OSLTF. The BP oil spill of April 22, 2010, a catastrophic oil spill incident, represents the first time that the viability of the OSLTF has been threatened. Federal statutes and relevant regulations neither specifically address such a scenario nor provide authority for further compensation. However, OPA legislative history and statements from OPA drafters indicate that drafters intended the OSLTF to cover “catastrophic spills.” See U.S. Congress, House Committee on Merchant Marine and Fisheries, Report accompanying H.R. 1465, Oil Pollution Prevention, Removal, Liability, and Compensation Act of 1989, 1989, H.Rept. 101-242, Part 2, 101st Cong., 1st sess., p. 36

If an expenditure is reimbursed, is it still an expenditure? The OSLTF is established under Internal Revenue Code. 26 U.S.C § 9509 Under the Internal Revenue Code, a reimbursed expenditure is not deductible. It is not considered to be an expenditure. Therefore, under the OSLTF, why should an expenditure, reimbursed by the responsible party, be defined as an expenditure?

Secretary Janet Napolitano
November 27, 2010
Page 4

Legislative history and the Internal Revenue Code strongly support the conclusion that, in the case of a catastrophic oil spill, the proper definition of the term “expenditure,” under the OSLTF, means “an expenditure that is not reimbursed by the responsible party.”

 

Subrogation
Any person, including the OSLTF, who pays compensation pursuant to OPA to any claimant for damages shall be subrogated to all rights, claims, and causes of action that the claimant has under any other law. 33 U.S.C. § 2715(a)

Moreover, at the request of the Secretary, the Attorney General shall commence an action on behalf of the OSLTF to recover any compensation paid by the OSLTF to any claimant pursuant to OPA, and all costs incurred by the OSLTF by reason of the claim, including interest (including prejudgment interest), administrative and adjudicative costs, and attorney’s fees. Such an action may be commenced against any responsible party or guarantor, or against any other person who is liable, pursuant to any law, to the compensated claimant or to the OSLTF, for the cost or damages for which the compensation was paid. 33 U.S.C. § 2715(c) Thus, a responsible party may ultimately pay a claim that was initially denied, or not addressed for more than 90 days, by the responsible party.

 

Proposed Retroactive OPA Legislation
The cost of this catastrophic BP oil spill will far exceed the current OSLTF per incident expenditure limit. In response, since the BP oil spill disaster of April, 2010, bills have been introduced to amend OPA to increase the liability limit of the responsible party and the OSLTF’s per incident expenditure limit for oil spills. For example, H.R. 4213, the American Jobs and Closing Tax Loopholes Act, passed by the House on May 28, 2010, includes provisions that would raise the per barrel tax used to fund the OSLTF to 34 cents and increases the per incident expenditure limit to $5 billion, including up to $2.5 billion in natural resource damage claims.

An important question is whether this legislation can and should be applied retroactively to the BP oil spill disaster of April, 2010. The constitutional issues that may be raised from retroactive application of this legislation are based on the Ex Post Facto Clause, Substantive Due Process, the Takings Clause, the Bill of Attainder Clause, and the Impairment of Contracts Clause.

Secretary Janet Napolitano
November 27, 2010
Page 5

CONCLUSION

The advantage of defining an expenditure, under the OSLTF, as “an expenditure that is not reimbursed by the responsible party,” is twofold:
(a) It eliminates, without the need to pass retroactive legislation, the $1 billion cap which may be paid from the OSLTF with respect to any single incident and allows the OSLTF to maintain a balance of at least $1 billion for the purpose of paying claims for damages resulting from other oil spill incidents. As the OSLTF pool of $1 billion is depleted by payments made to oil spill claimants, it is replenished, by virtue of subrogation, by reimbursements made to the OSLTF by the responsible party; and
(b) It ensures that the cost of a catastrophic oil spill incident shall be borne by the responsible party, not the federal taxpayer.

Thank you for your prompt attention to this issue. If you have any questions, please do not hesitate to contact me at 352-328-7469 or via e-mail at BrianJDonovan@verizon.net.
Very truly yours,

Brian J. Donovan
BJD/rc

cc:   The Honorable Edward J. Markey           The Honorable Daniel K. Inouye
The Honorable James L. Oberstar           The Honorable Barbara Boxer
The Honorable Elijah E. Cummings         The Honorable Joseph I. Lieberman
The Honorable Corrine Brown                  The Honorable Troy King
The Honorable Anh “Joseph” Cao            The Honorable David R. Obey
The Honorable John Conyers, Jr.             The Honorable Henry A. Waxman
The Honorable John L. Mica                     The Honorable Bennie G. Thompson
The Honorable Jeff Bingaman                  The Honorable Nick J. Rahall, II
The Honorable Bill Nelson                          The Honorable Charles W. Boustany, Jr.
The Honorable Bobby Jindal                     The Honorable Eric H. Holder, Jr.

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