BP's compensation fund: a buoy for both claimants and BP.

• Author: Sole, Shannon L.

1. Introduction II. Background A. Devastation of the Deepwater Horizon Spill and Portents of Disaster B. Exxon Valdez Disaster Lays the Groundwork for Future Recovery Efforts C. Composition of BP's Compensation Fund. 1. Feinberg's 9/11 Victims Compensation Fund as a Point of Reference for the BP Compensation Fund 2. Limitations on Compensation III. Analysis A. Will the Compensation Fund Buoy or Sink BP's Reputation?. 1. Exxon's Reaction to the Exxon Valdez Disaster as a Model for Recovery. 2. Uncertainties and Modifications Cause Confusion and Undermine Confidence B. Financial Implications of the Compensation Fund 1. Bankruptcy as a BP Bailout 2. Effects of Shareholders' Shaken Confidence. C. Costs and Consequences of Litigation. IV. Recommendation. A. Effective Plan Administration Requires Flexibility B. Bridging the Gap Between Judicial Economy and Adequate Compensation: Complexities of Estimating Damages. C. Increased Communication Between BP and Claimants Facilitates Understanding. V. Conclusion I. INTRODUCTION

   Crude oil has proven to be the fuel for human ingenuity in the twenty-first century. Powering our factories, automobiles, and homes, oil in its many forms is essential to the well-being of our society. Yet for all its beneficial properties, oil in its crude form is inherently incompatible with life. At no time is this incompatibility more apparent than when, through human negligence, oil is introduced to our ecosystem.

   Until recently, the 1989 Exxon Valdez tanker spill was considered to be the worst oil-related disaster on American territory. (1) Though Exxon invested nearly $2.1 billion to clean up the 11 million gallons of oil spilled in Alaska's Prince William Sound, the effects of the spill are still felt today. (2) In terms of quantity, however, the recent Deepwater Horizon explosion and pipeline leak has vastly eclipsed the Exxon Valdez spill. (3) Before BP capped the leak, an estimated 4.9 million barrels of oil were released into Gulf waters. (4) Under pressure from the Obama Administration and affected residents, BP unveiled a $20 billion plan to compensate victims. (5)

   The BP compensation fund, administered by Kenneth Feinberg and modeled after his highly-regarded 9/11 plan, (6) is promising. Part II of this Note examines the provisions of the plan, as well as the context in which it arose. It also includes a history of the Exxon Valdez disaster and recovery as a point of comparison. Part III analyzes the plan's potential as a reputational recovery tool for BP, examines the financial implications of the plan, and includes a general investigation into the high costs of litigation. Part IV offers a recommendation for BP's successful execution of the plan. Through administrative flexibility, adequate compensation estimates, and increased communication, BP may be able to use the compensation fund as a tool for firm recovery and fair victim compensation.

2. BACKGROUND

   The BP compensation fund is a unique mechanism, drawing on former compensation schemes to address the economic devastation created by the Deepwater Horizon spill. An understanding of the severity of the spill and BP's shoddy safety record help to contextualize the fund. Examining the framework of the fund in comparison to the 9/11 Victim's Compensation Fund and in light of the Exxon Valdez disaster provides insight into the effectiveness of the plan's compensation methods.

   1. Devastation of the Deepwater Horizon Spill and Portents of Disaster

      On April 20, 2010, an offshore drilling rig operated by Transocean exploded off the coast of Louisiana, killing 11 workers and resulting in the largest oil spill in American history. (7) Operators lost control of an underwater well, "allowing hydrocarbons to enter the drilling riser and reach the Deepwater Horizon [rig], resulting in explosions and subsequent fires." (8) The rig sank on April 22, 2010, but the underwater pipeline continued to leak oil. (9) Estimates indicate that nearly 62,000 barrels of oil were leaking from the well daily. (10) BP did not successfully cap the well until July 15, 2010, (11) and it was "permanently plugged with cement and 'killed' on September 19, 2010." (12) While "containment activities conducted by BP under U.S. direction captured approximately 800,000 barrels of oil" during the 87 days of leakage, an estimated 4.9 million barrels of oil were ultimately released from the well. (13)

      The spill continues to have devastating environmental, economic, and social consequences. (14) While current body counts of fish and wildlife are high,15 scientists warn that "what we see has a strong multiplier affect [sic]" and that the effects of the spill on marine wildlife will be felt long into the future. (16) However, Gulf residents felt some impacts immediately. (17) The region has seen a sharp decline in tourism. (18) In response to plummeting property values, coastal residents filed a class action suit. (19) On June 16, 2010, under pressure from families of those killed or injured in the disaster, affected Gulf residents, and the U.S. government, BP unveiled a $20 billion fund to compensate victims and pay damage claims. (20)

      BP is no stranger to controversy. A series of high profile accidents preceded the Deepwater Horizon spill, placing BP in the headlines for safety failures and environmental abuse. (21) An explosion at a Texas city refinery in 2005 killed 15 workers (22) and resulted in record fines. (23) Just one year later, pipeline corrosion led to an oil spill in Alaska's Prudhoe Bay. (24) While the world focused on the Deepwater Horizon spill, BP attempted to quietly contain nearly 538,000 pounds of toxic emissions leaking from its Texas city refinery. (25) A recent study concluded that "BP's safety record lags peers," (26) and BP's former chief executive, Tony Hayward, "conceded that the company had problems when he took over three years ago." (27) However, Hayward claimed he improved safety by implementing changes. (28) Though critics acknowledged improvements, "[BP] looks like a house of cards that has totally collapsed." (29)

   2. Exxon Valdez Disaster Lays the Groundwork for Future Recovery Efforts

      The Deepwater Horizon disaster may be the largest oil spill in American history, (30) but it is not the first. On March 24, 1989, the oil tanker Exxon Valdez struck the Bligh Reef in Alaska's Prince William Sound, spilling an estimated 11 million gallons of crude oil. (31) The spill heavily damaged approximately 1300 miles of shoreline, "disrupting the livelihoods of thousands of Americans and fouling one of the country's richest fishing grounds." (32) While the amount of oil released in the Deepwater Horizon disaster greatly exceeds the amount of oil spilled by the Exxon Valdez, the latter is "widely considered the number one spill worldwide in terms of damage to the environment." (33)

      The Exxon Valdez spill is also notable for the protracted litigation it sparked. (34) claimants seeking punitive damages from the spill were embroiled in litigation for nearly 20 years, as the case was "appealed, remanded, appealed, and remanded again and again...." (35) Exxon Shipping Co. v. Baker (36) was ultimately settled on June 5, 2008, at which time "nearly twenty percent of the thirty two thousand plaintiffs that began the lawsuit [were] deceased." (37) The Court held that the Ninth Circuit Court of Appeals' award of $2.5 billion in punitive damages was excessive, reduced the damages to $500 million, and "set a new maximum ratio for punitive damage awards in federal maritime cases." (38)

      In response to the Exxon Valdez disaster, Congress enacted the Oil Pollution Act (OPA) of 1990. (39) The OPA "improved the nation's ability to prevent and respond to oil spills by establishing provisions that expand the federal government's ability, and provide the money and resources necessary, to respond to oil spills." (40) The OPA also created the oil spill Liability Trust Fund, which provides up to $1 billion per incident in the event that the responsible party is unable to cover removal costs or damages. (41)

   3. Composition of BP's Compensation Fund

      On June 16, 2010, BP executives announced a $20 billion fund to compensate victims of the Deepwater Horizon spill. (42) Prior to August 23, 2010, BP's claims team paid out $360 million to affected individuals and businesses. (43) Since August 23, however, individuals can no longer file claims for monetary compensation with BP. (44) The Gulf coast claims Facility (GccF) has assumed responsibility for processing claims. (45) It will administer (46) the $20 billion that BP placed in an escrow fund. (47) Claimants may seek compensation from the GCCF through a Final Payment, Interim Payment, or Quick Payment Final claim (Quick Payment). (48)

      Interim Payments "provide compensation to the claimant for all past documented damage due to the Oil Spill...." (49) Such damages include: individual lost earnings, business lost profits, removal and cleanup costs, physical damage to real and personal property, loss of subsistence use of natural resources, physical injury, or death. (50) Those seeking Interim Payments must provide proper documentation, but are not required to release the GCCF, the Coast Guard, BP, or any other defendant companies associated with the spill from liability. (51) In addition, Interim Payment recipients may file additional claims for Interim Payment; the Final Rules provide "the claimant may return to the GCCF once each quarter of the calendar year seeking additional documented past damage." (52)

      An individual Quick Payment recipient receives $5000, while a business claimant receives $25,000. (53) The Quick Payment option is available to any claimant who has received an Emergency Advance Payment (54) or Interim Payment without providing additional documentation. (55) However, recipients of a Quick Payment must sign a full release, waiving future rights to sue any "defendant companies allegedly responsible for the...