How BP Got Screwed on Gulf Oil Spill Claims

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 hasn’t stemmed demands for more. The installation last year of a particularly generous claims administrator prompted scores of additional plaintiffs’ 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, McLean’s three-attorney firm has 260 clients with claims ranging from $20,000 to $4 million apiece. “The craziest thing about the settlement,” he wrote in a solicitation letter, “is that you can be compensated for losses that are UNRELATED to the spill.”

One of McLean’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 “had nothing to do with the spill,” the attorney candidly admits. (The culprit was the bursting of the Florida real estate bubble.) Under the settlement, though, “that’s a good claim,” McLean says, “and we’re going to get paid.”

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 claimants’ identities aren’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 company’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 “fictitious and inflated losses.” On June 21, the controversy intensified when Juneau suspended an attorney on his staff amid allegations of kickbacks. Juneau announced that he’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. “It was never our intention for the company to become an open cash register for every claim or project anyone could dream up,” says spokesman Geoff Morrell. Locals say BP may have been naive. “This is Louisiana, after all,” says Danny Abel, a longtime New Orleans plaintiffs’ lawyer not involved in the case. “A big foreign company with deep pockets and you’re surprised there’s a feeding frenzy? Come on, man.”

Trying to do something about its predicament, BP faces an enormous obstacle: It agreed to the arrangements it now asserts are out of control. “Buyer’s remorse does not alter the deal that was struck,” contends a Louisiana-based consortium of plaintiffs’ 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 company’s fiscal future. The second-guessing has irritated the judge, a former plaintiffs’ attorney born and bred in Louisiana. During a hearing in April, he goaded BP’s lead outside litigator, a partner at 1,600-lawyer Kirkland & Ellis in Chicago, noting that his perspective “doesn’t make sense to most people down here.”

Barbier’s exasperation could carry over to another part of the proceedings he’s supervising: a nonjury trial in which the Obama administration seeks up to $17.5 billion from BP in environmental penalties. “BP’s in a tough spot, and they deserve it,” says Garret Graves, Louisiana Governor Bobby Jindal’s top aide for coastal affairs. Louisianans, says Graves, “don’t care” what BP has already done to make things right. The company’s bill, he adds, “could easily reach tens of billions of dollars on top of whatever they’ve already paid.”

With all the legal instability, Louisiana and four other states in the region—Alabama, Florida, Mississippi, and Texas—are scrambling to get their share of BP money. They’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 Europe’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. “BP has not done a damn thing to clean it up!” he says to applause and appreciative hollers. “They have spent more money on these commercials than they have spent restoring” 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 out—admittedly, under tremendous pressure—are not nothing.

The stakes in the Gulf go well beyond whether Biloxi gets a ballpark. In the wake of a terrible accident—and, realistically, such events are going to occur from time to time—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 project’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 BP’s stock price and sparked rumors about a possible corporate breakup. In June 2010, the company’s leaders went to the White House for some well-earned humiliation. Then they made an unusual gesture: They promised President Obama they’d set aside $20 billion in earnest money for cleanup and compensation. “Nothing like this had ever occurred in American history,” 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 tanker’s corporate owner “litigated for 20 years according to this exact strategy.”

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. “It was not in anyone’s interest for this to become another Exxon Valdez,” says BP’s Morrell. “We stepped up.” With White House approval, the company hired Feinberg’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, BP’s lawyers scrambled to forestall a potentially ruinous reckoning in Barbier’s courtroom.

In March 2012, the oil company agreed to what it estimated as the $7.8 billion deal with the Plaintiffs’ 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 BP’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 company’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 plaintiffs’ attorneys viewed as too stingy. (Feinberg says he got batted around like “a piñata.”) At the PSC’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. He’s also worked as a court-appointed “special master” 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 BP’s money. “My message to everyone is, when in doubt, file a claim,” he said during a news conference in Mobile, Ala., in August 2012. On that occasion, he “wore 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,” the Mobile Press-Register noted. “He comes from our part of the world,” said Representative Jo Bonner (R-Ala.), a persistent critic of BP and Feinberg. “He didn’t have to take a plane to get here. We have someone who, for the first time, understands us.”

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 Barbier’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, he’d paid out an additional $1.4 billion.

Many of Juneau’s awards looked suspect to BP because, according to court records, the recipients’ annual take for 2010 exceeded their profits from the prior year. That was the case for Wall’s Gator Farm, whose identity became public in local media coverage. Located in Springfield, La., 50 miles northwest of New Orleans, Wall’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 Wall’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, Wall’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 Wall’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 he’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. “At the time they settled, BP believed the process would be equitable to both sides,” Jason Gammel, an industry analyst in London with Macquarie Capital, told Bloomberg News. “It’s played out in a way that’s clearly awarding claims they would not have viewed as being equitable.”

David Berg, a prominent Houston trial lawyer, disagrees. “BP cut itself a bad deal,” says Berg, who isn’t involved in the case. BP’s biggest mistake, he says, was failing to demand a cap on its total payout. “It is a stupid agreement.”

Barbier repeatedly brushed off the company’s objections. “BP’s interpretation injects a subjective notion of alternative causation and a degree of complexity that are contrary to the settlement’s terms,” the judge ruled on March 5. At a hearing a month later, in response to another BP objection, Barbier repeatedly interrupted the company’s lead lawyer from Kirkland & Ellis, Richard Godfrey. “I am having a real hard time understanding how BP is now asking me to enjoin Mr. Juneau from following my order,” Barbier lectured. “Basically, you’re asking me to enjoin myself.”

To challenge Barbier’s ruling before the U.S. Court of Appeals for the Fifth Circuit, BP has hired one of the country’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 Juneau’s “garbage in, garbage out approach.” There would have been “no reason for a defendant in BP’s position,” Olson adds, to agree to the “windfalls” Juneau has distributed.

Berg, the Houston trial attorney, can think of one reason: There was “panic within BP to get the arrangement done and keep the Justice Department at bay by showing good faith.” In that environment, even a corporation with top-dollar legal talent might sign something it later regrets.

BP counters that it wasn’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 plaintiffs’ 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 Juneau’s top aides, Lionel “Tiger” Sutton III, had been forced out because of corruption allegations has given BP another basis to cast doubt on Juneau’s stewardship. Sutton did not respond to messages seeking comment. “Our goal is to operate in an efficient, transparent manner,” Juneau said in a prepared statement announcing Sutton’s suspension. “All allegations are taken seriously and investigated thoroughly.”

If BP’s goal with the claims settlement was to keep the feds “at bay,” it wasn’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 BP’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 polluter’s degree of negligence. Those are the issues pending in the civil trial before Barbier: Did the company commit “gross negligence,” 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 don’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 didn’t reach an all-encompassing resolution with the Justice Department, according to several people familiar with the negotiations, was that Louisiana wouldn’t agree on a total price tag. Because of a statute pushed by Louisiana’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 didn’t like—namely, a separate set of environmental claims they’ve filed against BP. Without an agreement that extinguished the state demands, the company decided to take its chances before Barbier.

“Louisiana wants to settle,” says Graves, the state’s coastal official. “But until it’s a number based on all the science, regulations, and facts, we’re fighting like hell, and we’re going to hold BP accountable.”

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 Louisiana’s insouciant let’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 “mats” traceable to Macondo once again washed up on the Louisiana coast, he says. “We have to prepare for recontamination.”

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 BP’s total liability ought to exceed $125 billion. BP’s market capitalization—the value of all of its shares—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. He’s not suggesting the company be liquidated.

Business Week