Appeal from the United States District Court for the Eastern District of Louisiana.
Before DENNIS, CLEMENT, and SOUTHWICK, Circuit Judges.
EDITH BROWN CLEMENT, Circuit Judge:
BP Exploration & Production, Inc. ("BP") appeals the district court's decision upholding the Claims Administrator's interpretation of the settlement agreement between it and the class of parties injured in the Deepwater Horizon oil spill. BP also appeals the district court's dismissal of its action for breach of contract against the Administrator and denial of its motion for a preliminary injunction. We affirm the district court's dismissal of BP's suit against the Claims Administrator. We reverse the district court's denial of BP's motion for a preliminary injunction and the district court's order affirming the Administrator's interpretation of the Settlement and remand to the district court for further consideration.
FACTS AND PROCEEDINGS
BP leased the Deepwater Horizon drilling platform from Transocean to drill its Macondo prospect off the Louisiana coast. On April 20, 2010, the exploratory well Transocean was drilling blew out. After the initial explosion and during the ensuing fire, the platform sank, causing nearly five billion barrels of oil to spill into the Gulf of Mexico. Eleven workers died; sixteen more were injured. Litigation followed.
The Judicial Panel on Multidistrict Litigation centralized the non-securities federal lawsuits in the District Court for the Eastern District of Louisiana. BP, as lessor of the rig, was named as a defendant in most of these suits.
BP waived its statutory limit of liability and committed to pay all legitimate claims, even those in excess of the $75 million liability cap under the Oil Pollution Act, 33 U.S.C. § 2704(a)(3). BP initially established its own claims process and later funded the claims process administered by the Gulf Coast Claims Facility ("GCCF") to begin paying out claims immediately instead of at the conclusion of litigation. Over approximately 18 months, the company paid out more than $6.3 billion to individuals and businesses with spill-related losses.
BP began negotiating a class settlement in February 2011. In March 2012, the district court granted the parties' request to implement a process to transfer claims from the GCCF to a court-supervised program that the parties agreed to in principle. The court appointed Patrick Juneau as Claims Administrator of this program. The parties filed notice of their proposed settlement (the "Settlement") in April 2012, to which the district court gave preliminary approval in May and directed to begin processing claims in June.
Businesses' claims for economic loss are one type of claim covered by the Settlement. Under the class definition, business economic loss ("BEL") claimants must have conducted commercial activities in the Gulf Coast region during the relevant period. In order to qualify as a class member, BEL claimants also must have suffered loss of income, earnings, or profits as a result of the Deepwater Horizon accident. This category of economic damage to a business is fully described in the attached Exhibit 4, which includes requirements for documenting losses (Exhibit 4A) and establishing causation (Exhibit 4B), as well as the compensation scheme (Exhibit 4C).
After a BEL claimant provides the documentation needed to submit a claim and evidence required that the oil spill caused its losses, the claimant is entitled to compensation for the difference between its actual profit "during a defined post-spill period in 2010 [and] the profit that the claimant might have expected to earn in the comparable post-spill period of 2010." This amount includes "the reduction in Variable Profit, " defined as "any reduction in profit between the 2010 Compensation Period selected by the claimant and the comparable months of the Benchmark Period." The post-spill Compensation Period "is selected by the Claimant to include three or more consecutive months between May and December 2010." It is compared to a pre-spill baseline, the "Benchmark Period, " of the claimant's choosing: either 2009, the average of 2008-2009, or the average of 2007-2009. Variable Profit "is calculated for both the Benchmark Period and the Compensation Period as follows:
1. Sum the monthly revenue over the period.
2. Subtract the corresponding variable expenses from revenue over the same time period."
As early as September 28, 2012, BP raised concerns about the varied accounting methods claimants used in the ordinary course of their record-keeping and the ways in which erroneously-stated expenses could cause erroneous variable profit calculations. The district court held the final fairness hearing on November 8 and granted final approval on December 21, 2012.
On December 5, 2012, BP requested that the Administrator convene a Claims Administration Panel to consider "the issue of the assignment of revenue to the proper months for purposes of the BEL causation framework and the proper matching of revenue and corresponding expenses for purposes of the BEL compensation framework." BP asked to meet with the Administrator, Class Counsel, and the accounting vendors to discuss this issue, followed by a formal Panel, if necessary.
On December 16, Class Counsel requested a Policy Announcement addressing the issue. After reviewing both parties' written submissions, the Administrator issued a Policy Announcement on January 15, 2013. He stated that, for both calculation of Variable Profit and purposes of causation, he would "typically consider both revenues and expenses in the periods in which those revenues and expenses were recorded at the time, " and would "not typically re-allocate such revenues or expenses to different periods, " but would "however, reserve the right to adjust the financial statements in certain circumstances, including but not limited to, inconsistent basis of accounting between benchmark and compensation periods, errors in previously recorded transactions and flawed or inconsistent treatment of accounting estimates." The Administrator later explained that he did not believe he was authorized "to carve out specific types of claims for additional analysis as BP had proposed."
BP was not satisfied with the Policy Announcement. BP alleged that the Administrator's misinterpretation of the Settlement resulted in awards of hundreds of millions of dollars to BEL claimants with inflated losses or no losses at all. The parties convened a Claims Administration Panel. When the panel failed to reach a unanimous agreement, they presented the matter to the district court for resolution. Before the district court, BP contested the Administrator's interpretation of the meaning of several of the Settlement's terms: "revenue, " "expenses, " "corresponding, " and "comparable." According to the company, revenue and expenses have generally accepted definitions among economists and accountants that do not permit the Administrator to calculate a BEL claimant's Variable Profit based only on cash receipts or cash disbursements. Rather, a claimant's expenses must be "matched" to corresponding revenue. In addition, the Settlement's requirement that the Administrator measure the difference between Variable Profit in the Compensation Period and the "comparable months of the Benchmark Period" requires that the Administrator compare Variable Profit in comparable months—in other words, when a claimant engaged in similar conduct—not necessarily the "same" months.
On January 30, the district court affirmed the Administrator's Policy Announcement. The district court acknowledged that the Administrator's interpretation "may sometimes cause apparent anomalies (in either direction) in claim determinations." But it noted that this consequence "appears to be the result of the objective, straight-forward mechanisms set forth in the Settlement." It found that "BP's proposed remedy does not appear to be based on any generally accepted accounting principle, and might only result in adding another level of complexity and subjective analysis to the BEL calculation."
BP filed a motion to reconsider, and the district court issued a written ruling on March 5 upholding the Administrator's interpretation and denying BP's motion. The district court reasoned that "[n]owhere does the Agreement state or indicate that revenue and expenses must be 'matched' or revenues 'smoothed, ' nor does it state that one should inquire into when revenue was 'earned.'" The district court held that revenues and expenses need not be matched and that "the same months of the Compensation Period are to be compared with the months in the Benchmark Period" rather than "months where the claimant engaged in comparable activity."
In response to the district court's order, BP filed a breach of contract claim against the Administrator and an emergency motion for a preliminary injunction to enjoin the Administrator from implementing the Settlement in accordance with the March 5 order and instead to require the Administrator to implement BP's proposed interpretation. The Administrator filed a motion to dismiss BP's breach of contract claim, arguing that BP failed to state a claim. The district court granted the motion, concluding that the Administrator could not breach the Settlement by interpreting and implementing the agreement in compliance with the district court's order. It also denied BP's request for injunctive relief.
BP appeals the district court's March 5 order affirming the Administrator's interpretation of the Settlement, its order granting the Administrator's motion to dismiss, and its order denying a preliminary injunction.
STANDARD OF REVIEW
A district court's interpretation of a settlement agreement is a question of law, which we review de novo. Waterfowl L.L.C. v. United States, 473 F.3d 135, 141 (5th Cir. 2006). For a denial of a preliminary injunction, a "district court's findings of fact 'are subject to a clearly-erroneous standard of review, ' while conclusions of law 'are subject to broad review and will be reversed if incorrect.'" Janvey v. Alguire, 647 F.3d 585, 591-92 (5th Cir. 2011) (citations omitted).
BP argues that the district court disregarded the plain text of the Settlement by interpreting it to permit recovery of fictitious and inflated losses. It contends that this misinterpretation also leads to absurd results and contravenes the purpose of the Settlement, which BP characterizes as "compensat[ing] for actual lost profits rather than . . . provid[ing] unjustifiable windfalls to uninjured claimants."
I. Artificial Claims
We repeat the relevant language of Exhibit 4C:
Variable Profit: This is calculated for both the Benchmark Period and the Compensation Period as follows:
1. Sum the monthly revenue over the period.
2. Subtract the corresponding variable expenses from revenue over the same time period.
BP contends that the district court's interpretation of "revenue" and "expenses" for the purposes of Exhibit 4C does not comport with the accepted economic and accounting meanings of those terms. It also argues that "corresponding" necessarily implies matching variable expenses to the revenues with which they are properly associated. Accordingly, BP argues the district court erred in concluding that "revenue" and "corresponding variable expenses" refer only to "cash received" and "cash disbursed" in the relevant period. We will explain why this language in Exhibit 4C cannot be interpreted so that it always means cash received and cash disbursed. We leave open for remand whether it ever has that meaning.
To understand our interpretation of variable profit, we start with a discussion of some accounting concepts that are fundamental in understanding the meaning of the agreement.
A. Revenue and Expense Recognition Principles
The purpose of financial record-keeping is to provide businesses with accurate and reliable information upon which to make decisions. Principles of revenue and expense recognition vary based upon accounting judgment, regulatory or transactional requirements, or even internal management preferences. While an imperfect presentation of the broad array of accounting methods in the business world at-large, a delineation might be fairly made between cash and accrual accounting. Depending on which of these methods a business chooses, the terms "revenue" and "expenses" take on widely variant meanings.
Typically, only very small and fledgling businesses keep their primary financial records in accordance with cash accounting principles. See CPA Societies' Amicus Brief at 7-8 ("some small enterprises . . . use a strict or modified cash-basis approach"). That is, they recognize revenue when cash from a given transaction is received and expenses when cash is paid. Id. at 11-12. Class Counsel urged in a December 2012 memorandum: "[w]hen a business keeps its books on a cash-basis, revenue is earned during the month of receipt, irrespective of when the contract was entered or services were performed." It argued further that "[t]he 'corresponding variable expenses' associated with monthly revenue are the expenses that are expended or incurred during the . . . months in question." These statements are consistent only with revenue and expense recognition principles of cash accounting. Cash accounting can be useful for many enterprises as a method of analyzing periodic cash needs, but this use is largely unrelated to the concepts of "revenue" and "expenses."
On the other hand, accrual accounting has as a fundamental principle the recognition of revenue when the entity becomes entitled to receive payment, as opposed to when the payment is actually received. See Statement of Financial Accounting Concepts No. 6, Fin. Accounting Standards Bd., ¶ 139. Expenses that can be readily traced to the recognized revenues are themselves recognized at the same time as those revenues. Id. at ¶ 146. This correlation gives business decision-makers a real-time view of the net economic value of a transaction in the period most relevant to its overall economic significance. Id. at ¶ 140. This is sometimes referred to as "matching" revenues and expenses, but in any case this procedure is a fundamental aspect of day-to-day record-keeping on the accrual-basis. See id. at ¶ 144, 146.
BP argues extensively in its brief that these revenue and expense recognition principles were to apply to Exhibit 4C computations. Class Counsel argues that the agreement's language does not, in fact, permit such an interpretation because the settlement does not state that revenues and expenses must be matched or that revenues must be recognized according to any objective standard.
Business and Economic Loss ("BEL") claimants in the agreement are a broad spectrum of businesses throughout the Gulf region. Some claimants ("cash-basis claimants") will present cash-basis records because this is how they contemporaneously record their financial activities. Others ("accrual-basis claimants") will present accrual-basis records for the same reason. For many of the BEL claimants who are the focus of this appeal, their contemporaneously recorded financial records, absent mere bookkeeping errors, will contain "matched" revenues and expenses before they even submit their claims. In a December 2012 Memorandum, BP acknowledged that many claims presented data that "sufficiently match" revenue and expenses. This is because they apply the accrual accounting recognition and matching principles BP advances here as a matter of their ordinary record-keeping. On the other hand, cash-basis claimants might present records that are not so matched.
The March 5 Order apparently adopted Class Counsel's interpretation of Exhibit 4C, holding that revenue and expenses referred only to cash payments and disbursements. The practical effect of this ruling is unclear in light of the different recognition principles under different accounting methods. We now turn to a more focused discussion of the district court's decision.
B. Accrual-basis Claimants
Exhibit 4C directs the Administrator to "[s]um the monthly revenue over the period, " and then "[s]ubtract the corresponding variable expenses from revenue over the same time period." In the March 5 order, the district court appears to have interpreted "revenue" as "cash received" and "expenses" as "cash disbursed, " without reference to whether the holding was to apply to all claims or just those from cash-basis claimants. The order derives from a series of events that we briefly trace.
In December 2012, following unsuccessful attempts to raise the issue since September, BP requested a formal policy statement from the Administrator on matching. The Administrator responded by soliciting responses from BP and Class Counsel to help him make his policy determination. In the December 2012 memorandum to the Administrator, mentioned briefly above, Class Counsel urged an interpretation which could easily be read to interpret revenues and expenses under Exhibit 4C by their cash accounting meanings. Counsel also explicitly stated that "corresponding variable expenses" should be cash paid out during those periods, also a statement consistent only with cash accounting. Class Counsel's Memorandum was not clear whether its proposal applied to both cash and accrual records, despite discussing both. BP responded with its December 2012 memorandum, also referenced above, by explicitly rejecting Class Counsel's interpretation of "corresponding variable expenses, " restating its insistence that the agreement requires matching, and presenting alternative frameworks for industries it thought were most problematic. The dissent treats this argument as an effort to modify the agreement. That conclusion seems too facile. The process for resolving disputes between the Administrator and BP was to be collaborative and cooperative. Consequently, it is not clear to us that BP was attempting to rewrite the agreement as much as it was attempting to resolve apparent anomalies without derailing the entirety of the claims process.
In his January 15, 2013 Policy Statement, the Administrator stated, in relevant part:
In performing these calculations, the Claims Administrator will typically consider both revenues and expenses in the periods in which those revenues and expenses were recorded at the time. The Claims Administrator will not typically re-allocate such revenues or expenses to different periods.
Given that "revenues" and "expenses" take on different meanings in the context of cash or accrual accounting, this statement is ambiguous at best as to how exactly the Administrator is processing accrual-basis claims. Further, this Policy Statement apparently rejects BP's proposal and adopts, at least in part, Class Counsel's interpretation.
As we understand the district court's March 5 order, it interpreted "corresponding" to mean that any cash disbursed within a given month should be deemed to "correspond" to cash received in that month, simply by virtue of the fact that the cash flowed in and out in the same month. This is consistent with Class Counsel's December 2012 memorandum. At one point, the district court said it agreed with Class Counsel as to the method of identifying revenue and expenses, though it is not entirely clear to what aspect of Class Counsel's argument the court was referring. The district court determined that "in the same time period" would be deprived of meaning if "corresponding" were interpreted to connect expenses to the revenues with which they are directly related. The district court echoed Class Counsel's December 2012 memorandum, holding that "matching" would require the Administrator to look outside the claimant's chosen Benchmark and Compensation periods. Finally, the district court's only discussion of cash or accrual-basis regarded whether one or the other was required under Exhibit 4A's documentation requirements. The court said there was no such requirement, and the parties agree that claimants may submit documents using either method.
In light of the proposals and rulings we just discussed, we consider it possible (though unlikely) that the district court was holding that the cash-in, cash-out interpretation applied to all claims, including those supported by accrual accounting. If so, then the inherent matching that occurs as a matter of course would be undone. Regardless of whether Exhibit 4C requires matching when it has not been undertaken in the ordinary course of record-keeping, it cannot be said to permit ignoring sufficiently matched data from accrual-basis claimants. We conclude it would be error if the district court was stating that already-matched revenue and expenses could be ignored.
The Administrator has not made clear whether he is ignoring already-matched revenues and expenses in the manner the district court's interpretation appears to suggest. BP, though, has not explicitly complained to us that he is doing so. Implicit in this silence is that accrual-based claims continue to be processed using the inherently matched revenue and expense figures. BP acknowledged, in its own December 2012 Memorandum, that "[m]any types of Business Economic Loss claims . . . sufficiently match revenue and corresponding variable expenses, and as a result, [the Settlement] is properly applying" Exhibit 4C." This would likely be the case with most accrual-basis claimants. We see no reason for the Administrator to be doing this, but there are a few contrary indications. Class Counsel's December 2012 Memorandum, the January 15, 2013 Policy Statement, and the March 5 order do not offer any assurance that the Administrator is not applying the cash-in, cash-out interpretation to claims that are presented with matched revenues and expenses.
The district court on remand should make certain that this is not occurring. The Administrator on remand should be able quickly to dispel any doubts about the handling of accrual-basis claims. We expect the dissent is correct that this is not occurring, but we wish to be assured of that point. Once that is done, the more ...