INTRO BY JOHN DONOVAN: THIS BLOOMBERG BUSINESSWEEK ARTICLE PROVIDES A CAUTIONARY TALE OF THE POTENTIAL BANKRUPTING CONSEQUENCES FOR A FOREIGN OWNED OIL COMPANY THAT MESSES UP SPECTACULARLY WHEN DRILLING IN US WATERS. ROYAL DUTCH SHELL SENIOR MANAGEMENT WAS WELL AWARE OF THE POTENTIAL DIRE CONSEQUENCES WHEN IT SENT AN ANTIQUATED ILL-PREPARED DRILLING FLEET INTO ALASKAN/ARCTIC WATERS, CULMINATING IN ANOTHER PR DISASTER, FORTUNATELY WITHOUT ANY FATALITIES.Â
By Paul M. Barrett: June 27, 2013
Until this year, Tampa attorney Kevin McLean specialized in suing nursing homes for neglecting patients. In January he switched the focus of his practice to a fund BP (BP) established to compensate business losses from the 2010 oil spill in the Gulf of Mexico. In its attempt to dilute a legal and public-relations mess of epic proportions, BP began paying claims within weeks of the disaster and has so far spent more than $25 billion for cleanup and compensation. That hasnâ€™t stemmed demands for more. The installation last year of a particularly generous claims administrator prompted scores of additional plaintiffsâ€™ attorneys to swarm onto the scene, signing up a new wave of clients, many located far from the once-sullied shoreline. Just five months after his pivot, McLeanâ€™s three-attorney firm has 260 clients with claims ranging from $20,000 to $4 million apiece. â€œThe craziest thing about the settlement,â€ he wrote in a solicitation letter, â€œis that you can be compensated for losses that are UNRELATED to the spill.
â€One of McLeanâ€™s clients, a real estate agent in Brandon, Fla., an hour from the Gulf, wants $80,000 from BP, reflecting a revenue dip in 2010 that â€œhad nothing to do with the spill,â€ the attorney candidly admits. (The culprit was the bursting of the Florida real estate bubble.) Under the settlement, though, â€œthatâ€™s a good claim,â€ McLean says, â€œand weâ€™re going to get paid.â€
He has millions of reasons to be confident. A construction company in northern Alabama, 200 miles from the coast, was recently awarded $9.7 million, even though it does no work near the Gulf of Mexico, according to court records. Attorneys are submitting claims on their own behalf. A law office in central Louisiana that actually enjoyed improved profits in 2010 collected $3.3 million. The compensation process is confidential, so claimantsâ€™ identities arenâ€™t a matter of public record, though the amounts are.
The blowout of the Macondo well cost 11 men their lives and, according to the government, spewed 4 million barrels of oil into the Gulf. It shut down fisheries and despoiled beaches. Oystermen and charter boat captains lost months and, in some cases, years of work. While much of the Gulf economy has recovered, degraded oil remains in coastal marshes in Louisiana. Some ruined small businesses never reopened.
BP apologized and opened its checkbook to make amends. One component of the companyâ€™s response, an economic-damages fund initially expected to dole out $7.8 billion, now appears likely to cost billions more, BP said in an appellate court brief filed in May. The British company blames the overage on Patrick Juneau, a Louisiana-based court-appointed administrator whom it accuses of compensating â€œfictitious and inflated losses.â€ On June 21, the controversy intensified when Juneau suspended an attorney on his staff amid allegations of kickbacks. Juneau announced that heâ€™s investigating. People familiar with the situation but who are not authorized to speak on the record say the FBI has been alerted.
Even as it continues a cheerful quarter-billion-dollar print and television ad campaign about how the Gulf has returned to normal, BP is crying foul. â€œIt was never our intention for the company to become an open cash register for every claim or project anyone could dream up,â€ says spokesman Geoff Morrell. Locals say BP may have been naive. â€œThis is Louisiana, after all,â€ says Danny Abel, a longtime New Orleans plaintiffsâ€™ lawyer not involved in the case. â€œA big foreign company with deep pockets and youâ€™re surprised thereâ€™s a feeding frenzy? Come on, man.â€
Trying to do something about its predicament, BP faces an enormous obstacle: It agreed to the arrangements it now asserts are out of control. â€œBuyerâ€™s remorse does not alter the deal that was struck,â€ contends a Louisiana-based consortium of plaintiffsâ€™ lawyers. On July 8, a federal appeals court in New Orleans will hear oral arguments on the private-claims dispute.
By provoking a fight over this issue, BP risks antagonizing U.S. District Judge Carl Barbier of New Orleans, who approved the settlement in December and retains jurisdiction over the companyâ€™s fiscal future. The second-guessing has irritated the judge, a former plaintiffsâ€™ attorney born and bred in Louisiana. During a hearing in April, he goaded BPâ€™s lead outside litigator, a partner at 1,600-lawyer Kirkland & Ellis in Chicago, noting that his perspective â€œdoesnâ€™t make sense to most people down here.â€
Barbierâ€™s exasperation could carry over to another part of the proceedings heâ€™s supervising: a nonjury trial in which the Obama administration seeks up to $17.5 billion from BP in environmental penalties. â€œBPâ€™s in a tough spot, and they deserve it,â€ says Garret Graves, Louisiana Governor Bobby Jindalâ€™s top aide for coastal affairs. Louisianans, says Graves, â€œdonâ€™t careâ€ what BP has already done to make things right. The companyâ€™s bill, he adds, â€œcould easily reach tens of billions of dollars on top of whatever theyâ€™ve already paid.â€
With all the legal instability, Louisiana and four other states in the regionâ€”Alabama, Florida, Mississippi, and Texasâ€”are scrambling to get their share of BP money. Theyâ€™ve proposed some projects related to ecological restoration; others sound more like generic public works. Mississippi plans to spend $15 million of BP cash to help build a minor-league baseball stadium in Biloxi. Alabama has announced an $85 million beachfront conference center and hotel.
Baiting Europeâ€™s second-largest oil producer, a company that had $376 billion in revenue last year, has become a picaresque form of entertainment in some Gulf precincts. In mid-June, at a standing-room-only meeting in the civic auditorium in Belle Chasse, a town just south of New Orleans, Graves whips up the crowd of 250 with some well-practiced lines about the spill. â€œBP has not done a damn thing to clean it up!â€ he says to applause and appreciative hollers. â€œThey have spent more money on these commercials than they have spent restoringâ€ the coastal ecosystem.
These statements are misleading at best. BP, by some measures, may not have done enough yet, but the billions it has paid outâ€”admittedly, under tremendous pressureâ€”are not nothing.
The stakes in the Gulf go well beyond whether Biloxi gets a ballpark. In the wake of a terrible accidentâ€”and, realistically, such events are going to occur from time to timeâ€”should companies stress contrition or litigation? And will chief executives look back at BP and decide that no attempt at conciliation goes unpunished?
After the Macondo well 45 miles off the Louisiana coast erupted on the evening of April 20, 2010, investigations spread the blame among three companies: BP, the projectâ€™s majority owner, misinterpreted a crucial pressure test; Transocean (RIG), the contractor operating the doomed Deepwater Horizon drilling rig, failed to arrest the blowout once it began; Halliburton (HAL), another contractor, made mistakes in formulating the cement securing the well.
The blowout depressed BPâ€™s stock price and sparked rumors about a possible corporate breakup. In June 2010, the companyâ€™s leaders went to the White House for some well-earned humiliation. Then they made an unusual gesture: They promised President Obama theyâ€™d set aside $20 billion in earnest money for cleanup and compensation. â€œNothing like this had ever occurred in American history,â€ says Kenneth Feinberg, a Washington attorney who has supervised mass settlements following the Sept. 11 terrorist attacks and other disasters. Most companies would have fought in court to slough off liability, Feinberg writes in his 2012 book, Who Gets What: Financial Compensation After Tragedy and Financial Upheaval. Following the Exxon Valdez disaster in Alaska in 1989, he notes, the tankerâ€™s corporate owner â€œlitigated for 20 years according to this exact strategy.â€
Following a different course, BP waived the $75 million liability limit imposed by the federal Oil Pollution Act and quickly paid claims of $396 million in the spring of 2010. â€œIt was not in anyoneâ€™s interest for this to become another Exxon Valdez,â€ says BPâ€™s Morrell. â€œWe stepped up.â€ With White House approval, the company hired Feinbergâ€™s firm at a rate of $850,000 a month (later raised to $1.25 million) to continue disbursing funds. Over a year and a half, he cut checks totaling $6.7 billion for 220,000 recipients, among them legions of deserving working people and business owners. Some recipients surrendered their opportunity to seek additional compensation; others did not.
Numerous claimants took the company to court, as was their right. More than 2,700 suits were consolidated before Judge Barbier, who set a February 2012 date for a trial of almost unimaginable complexity. Barbier increased the pressure on BP by interpreting its contracts with Transocean and Halliburton to require BP to cover certain economic damages assessed against those companies. With the Obama administration and the states simultaneously pursuing civil and criminal penalties, BPâ€™s lawyers scrambled to forestall a potentially ruinous reckoning in Barbierâ€™s courtroom.
In March 2012, the oil company agreed to what it estimated as the $7.8 billion deal with the Plaintiffsâ€™ Steering Committee (PSC). The pact, which allows claims until April 2014, was designed to address most outstanding private economic losses and medical claims, but it resolved only a portion of BPâ€™s potential liability. Plenty of other federal, state, and private claims remained in litigation before Barbier. With BP obviously looking for compromise, the judge postponed the trial over those other claims for another year. The delay provided BP with breathing room, or so the companyâ€™s lawyers hoped, to come to terms with the Obama administration and the states.
As part of its settlement, the PSC wanted to get rid of Feinberg, whom the plaintiffsâ€™ attorneys viewed as too stingy. (Feinberg says he got batted around like â€œa piÃ±ata.â€) At the PSCâ€™s behest, BP agreed to replace the Washington settlement expert with a local appointee. Barbier selected Juneau, an old acquaintance from the Louisiana trial bar and a name partner in the nine-attorney Lafayette (La.) firm Juneau David. A 1965 graduate of Louisiana State University School of Law, Juneau, 75, specializes in defending personal injury cases. Heâ€™s also worked as a court-appointed â€œspecial masterâ€ to resolve mass suits involving breast implants and train-car chemical leaks. Juneau declined to comment for this article.
From the start of his assignment in the summer of 2012, Juneau toured the Gulf region, urging residents to seek BPâ€™s money. â€œMy message to everyone is, when in doubt, file a claim,â€ he said during a news conference in Mobile, Ala., in August 2012. On that occasion, he â€œwore a white poplin suit and professed his love generally for the Gulf Coast and specifically for the peach milkshakes served at Burris Farm Market in Loxley,â€ the Mobile Press-Register noted. â€œHe comes from our part of the world,â€ said Representative Jo Bonner (R-Ala.), a persistent critic of BP and Feinberg. â€œHe didnâ€™t have to take a plane to get here. We have someone who, for the first time, understands us.â€
That same month, Juneau lobbied BP to allow him to compensate commercial proprietors even if they could not produce a state business license. Skeptical about what legitimate entrepreneur lacks this most basic of documents, BP lawyers say they reluctantly agreed, in part because of their desire to obtain Barbierâ€™s final approval of the settlement.
By late fall, the bills were mounting. In November, BP settled another component of its liability, agreeing to plead guilty to 12 federal felonies and pay the U.S. government a record-setting $4.5 billion in fines. The Obama administration had threatened a criminal indictment, and the company feared that the mere initiation of a prosecution would spook investors and destroy BP, according to people familiar with the situation who were not authorized to speak for attribution. Following the guilty plea, Juneau reported that in six months he had paid $1 billion in private claims. By May 31, 2013, heâ€™d paid out an additional $1.4 billion.
Many of Juneauâ€™s awards looked suspect to BP because, according to court records, the recipientsâ€™ annual take for 2010 exceeded their profits from the prior year. That was the case for Wallâ€™s Gator Farm, whose identity became public in local media coverage. Located in Springfield, La., 50 miles northwest of New Orleans, Wallâ€™s is a rustic spread of one-story whitewashed climate-controlled sheds. Each year, the Wall family incubates and raises tens of thousands of hatchling alligators until, at an age of 12 to 16 months, they have a belly width of 25 to 29 centimeters, the ideal size for an Italian watch strap. Slaughtering, skinning, salting, and tanning precede shipping to luxury-goods manufacturers in Europe; the gator meat, a Cajun delicacy, is sold separately. Juneau awarded Wallâ€™s $1.2 million, even though the company rebounded from recession-related losses in 2008 and 2009 to show a profit in 2010, according to court records.
Juneau has defended such awards by noting that the settlement bases eligibility on broad geographic criteria and a numerical formula using sample financial results from three-month periods before and after the spill. Economic setbacks are presumed to have stemmed from the spill; claimants need not offer proof that the disaster caused their losses.
In a court filing, Wallâ€™s says it suffered when government officials flooded coastal marshes with fresh water in 2010 in response to contamination caused by the BP spill. The flooding ruined breeding grounds where gator farmers gather eggs, according to Wallâ€™s. Reached in the field on his cell phone (June is peak egg-harvesting season), proprietor Nathan Wall says his damages totaled about $2 million, making the Juneau award modest, in his opinion. He demurs on further comment, saying heâ€™s really busy.
In multiple appeals to Barbier, BP accused Juneau of accepting questionable kitchen-table accounting that fails to match expenses to related revenue. Some outside observers sympathize with BP. â€œAt the time they settled, BP believed the process would be equitable to both sides,â€ Jason Gammel, an industry analyst in London with Macquarie Capital, told Bloomberg News. â€œItâ€™s played out in a way thatâ€™s clearly awarding claims they would not have viewed as being equitable.â€
David Berg, a prominent Houston trial lawyer, disagrees. â€œBP cut itself a bad deal,â€ says Berg, who isnâ€™t involved in the case. BPâ€™s biggest mistake, he says, was failing to demand a cap on its total payout. â€œIt is a stupid agreement.â€
Barbier repeatedly brushed off the companyâ€™s objections. â€œBPâ€™s interpretation injects a subjective notion of alternative causation and a degree of complexity that are contrary to the settlementâ€™s terms,â€ the judge ruled on March 5. At a hearing a month later, in response to another BP objection, Barbier repeatedly interrupted the companyâ€™s lead lawyer from Kirkland & Ellis, Richard Godfrey. â€œI am having a real hard time understanding how BP is now asking me to enjoin Mr. Juneau from following my order,â€ Barbier lectured. â€œBasically, youâ€™re asking me to enjoin myself.â€
To challenge Barbierâ€™s ruling before the U.S. Court of Appeals for the Fifth Circuit, BP has hired one of the countryâ€™s premier appellate advocates, Theodore Olson. In his brief, Olson, a partner in Washington with 1,000-lawyer Gibson, Dunn & Crutcher, asks the Fifth Circuit to reject what he disparages as Juneauâ€™s â€œgarbage in, garbage out approach.â€ There would have been â€œno reason for a defendant in BPâ€™s position,â€ Olson adds, to agree to the â€œwindfallsâ€ Juneau has distributed.
Berg, the Houston trial attorney, can think of one reason: There was â€œpanic within BP to get the arrangement done and keep the Justice Department at bay by showing good faith.â€ In that environment, even a corporation with top-dollar legal talent might sign something it later regrets.
BP counters that it wasnâ€™t panicked, and that, interpreted correctly, the settlement is perfectly fair and workable. Determined not to be taken advantage of, the company has begun to send letters to hundreds of plaintiffsâ€™ lawyers, warning their clients not to spend the money Juneau gave them. If it wins its Fifth Circuit appeal, BP wants the cash returned. The revelation on June 21 that one of Juneauâ€™s top aides, Lionel â€œTigerâ€ Sutton III, had been forced out because of corruption allegations has given BP another basis to cast doubt on Juneauâ€™s stewardship. Sutton did not respond to messages seeking comment. â€œOur goal is to operate in an efficient, transparent manner,â€ Juneau said in a prepared statement announcing Suttonâ€™s suspension. â€œAll allegations are taken seriously and investigated thoroughly.â€
If BPâ€™s goal with the claims settlement was to keep the feds â€œat bay,â€ it wasnâ€™t particularly successful. During intense private negotiations late last year and into 2013, the company could not come to terms with the Justice Department over BPâ€™s civil liability under the Clean Water Act and another federal environmental-restoration law. The Clean Water Act empowers the government to seek substantial per-barrel fines in a spill, depending on a polluterâ€™s degree of negligence. Those are the issues pending in the civil trial before Barbier: Did the company commit â€œgross negligence,â€ as opposed to less egregious carelessness, and just how many barrels of crude ultimately got away. The penalty could range from $3 billion to $17.5 billion.
The backdrop for the civil trial, which began in February 2013 and is scheduled to resume in mid-September, does not appear to favor BP. In addition to having vexed Barbier on the business-claims process, the company admitted as part of its federal criminal plea to misleading Congress on the scale of the spill. As a formal matter, the criminal admissions donâ€™t constitute evidence against BP in the civil case. Practically speaking, though, the guilty plea hovers over the proceedings and could help set the stage for a punitive verdict.
The main reason BP didnâ€™t reach an all-encompassing resolution with the Justice Department, according to several people familiar with the negotiations, was that Louisiana wouldnâ€™t agree on a total price tag. Because of a statute pushed by Louisianaâ€™s congressional delegation and enacted last July, 80 percent of damages flow to the five Gulf states instead of the U.S. Treasury. And the states had leverage to block a federal settlement they didnâ€™t likeâ€”namely, a separate set of environmental claims theyâ€™ve filed against BP. Without an agreement that extinguished the state demands, the company decided to take its chances before Barbier.
â€œLouisiana wants to settle,â€ says Graves, the stateâ€™s coastal official. â€œBut until itâ€™s a number based on all the science, regulations, and facts, weâ€™re fighting like hell, and weâ€™re going to hold BP accountable.â€
A mountaineering guide prior to his involvement in politics, Graves has a friendly, youthful manner. His straight brown hair falls over his eyes, and his informality fits with Louisianaâ€™s insouciant letâ€™s-go-for-it negotiating stance on spill damages. He opens a chart on his laptop showing that by some estimates, the equivalent of more than 1 million barrels of oil remains unaccounted for in the Gulf. (BP says that figure is wildly exaggerated.) During the 2012 hurricane season, tar balls and oil â€œmatsâ€ traceable to Macondo once again washed up on the Louisiana coast, he says. â€œWe have to prepare for recontamination.â€
What kind of money is he talking about? Graves clicks to another chart extrapolating from settlements after other large spills. He points to a row of figures implying that BPâ€™s total liability ought to exceed $125 billion. BPâ€™s market capitalizationâ€”the value of all of its sharesâ€”comes to $132 billion. For comparison purposes, the four largest U.S. tobacco companies collectively settled liability suits by 46 states in 1998 for $206 billion to be paid over 25 years. Graves says that BP similarly could pay over time. Heâ€™s not suggesting the company be liquidated.
A self-interested corporate defendant, BP is not the only party upset by how money is being disseminated in the Gulf. Environmentalists worry that some of the companyâ€™s spill bucks are destined to finance concrete edifices and asphalt parking lots. The public works projects will be funded by the statesâ€™ 80 percent share of the Clean Water Act judgment, as well as by an as-yet undetermined amount BP will have to pay under a separate federal program called the Natural Resource Damage Assessment. Louisiana is proposing to restore barrier islands and marshes, construct research fish hatcheries, and enhance oyster habitats. Michelle Erenberg, coordinator of Gulf Future, a coalition of conservation groups, praises those projects as relevant to spill recovery and environmental protection. Sheâ€™s less excited about Alabamaâ€™s $85 million hotel and conference center, which will include trail development and an â€œecosystem interpretive center.â€ The Alabama resort, she says, will â€œrestrict access to the resources in this area to those who can affordâ€ pricey vacations, while making life more difficult for protected species such as the beach mouse and sea turtle.
Announcing the hotel project in May, Alabama Governor Robert Bentley said that, apart from the resort, his state will use its spill money to protect the environment. As for the beachfront lodge, he added: â€œI want more families to come to the Gulf State Park and explore our natural resources.â€
Andrew Whitehurst, assistant director of the Gulf Restoration Network, voices frustration over Mississippiâ€™s ballpark in Biloxi. â€œMississippi cities and counties,â€ he says, â€œseem to wait for the next big pot of federal money to fund long-standing items on wish lists.â€ Asked for comment, a spokesman for Mississippi Governor Phil Bryant pointed to a statement in which the politician said: â€œThe oil spill of 2010 had a significant impact in Mississippi, especially on our coastal tourism. This stadium will be a major regional asset for South Mississippi and will be an exciting new attraction for our residents and tourists of Mississippiâ€™s Gulf Coast.â€
Not every eligible claimant is extending an open palm in BPâ€™s direction. While cities all along Floridaâ€™s west coast, from Tampa to Key West, have filed claims, Tarpon Springs (pop. 23,000) has decided to sit tight. It relies heavily on fishing and tourism, but Macondo oil did not reach its marinas, says City Manager Mark LeCouris. â€œIâ€™d love to have an extra $1 million or $2 million or $3 million for the budget,â€ he concedes. â€œWe just couldnâ€™t document any losses related to BP, as opposed to the difficult times generally from the economy.â€
The oil companyâ€™s money, LeCouris continues, should go to â€œshrimpers or fishermen or restaurant owners who can really show they were shut down and need the help. We didnâ€™t want to take anything away from people who were really hurting as a result of the spill.â€ After Tarpon Springsâ€™ reticence received some local press coverage this spring, LeCouris braced for the worst. â€œI thought weâ€™d have a lot of people angry at us that we didnâ€™t get whatever we could,â€ he says. To his surprise, a lot of Tarponians congratulated him on doing the right thing.
The main protest came from the dozen or so law firms seeking to take the cityâ€™s case in exchange for a fat contingency fee, LeCouris says. â€œThey just kept calling and calling, telling us to do something. We said we didnâ€™t think we had a case, so no thanks.â€
Barrett, an assistant managing editor and senior writer at Bloomberg Businessweek, is working on a book about the Chevron oil pollution case in Ecuador, which is scheduled for publication by Crown in 2014. His most recent book is GLOCK: The Rise of Americaâ€™s Gun.