How a Gulf settlement that BP once hailed became its target

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NEW ORLEANS -- Four years ago the Deepwater Horizon oil rig caught fire and exploded, killing 11 men, spewing millions of barrels of oil into the Gulf of Mexico and staining, seemingly indelibly, the image of BP, the international energy giant responsible for the well.

Its reputation in free fall, the company set aside billions of dollars and saturated the airwaves with contrite pledges to make thousands of businesses and workers whole, from shrimpers to hotel owners to charter boat operators.

Four years on, BP is no longer on the defensive. In March, the federal government allowed the company, after a period of exile, to bid for oil and gas leases in the Gulf. On April 15, BP announced the end of active shoreline cleanup with so much fanfare that the U.S. Coast Guard quickly reassured the public that the operation was far from over.

In an op-ed article this month in Gulf Coast newspapers, John Mingé, the chairman of BP America, highlighted the coast's record tourism numbers, emphasized the $27 billion BP had spent and dismissed environmentalists skeptical of the Gulf's recovery as advocates using the spill "to raise money for their causes."

But perhaps nothing has been as drastic as the company's change in attitude toward the process it helped set up in 2012 to settle hundreds of thousands of economic damage claims. In full-page newspaper ads, interviews and a gusher of court filings, BP officials have insisted that their good intentions were being hijacked by greedy lawyers and underhanded claimants.

As hundreds of millions of dollars were spent on claims with no apparent connection at all to the spill -- including a Florida escort service, a corporate law firm and businesses hundreds of miles from the Gulf -- BP warned of a dangerous precedent.

"I think there are really bad public policy ramifications to what's happening to BP," said Geoff Morrell, senior vice president for communications and government affairs at BP America, in his office in Washington. "It's not just bad for this company that illegitimate, dubious claims are being paid to the tune of hundreds of millions of dollars; it is bad for, dare I say, America."

But opposing lawyers, many legal experts and even some federal judges have said BP is denouncing the legitimate outcomes of a deal that its top-notch legal team not only helped create, but also fought for and hailed. They point out that the aggressive public and legal campaign by BP, which essentially seeks to shift the attention away from BP and onto trial lawyers and claimants, took hold as estimates of the deal's price tag began to soar and the company's bargaining position improved.

While BP has won some arguments in court, its fundamental point -- that the settlement has been brazenly misinterpreted to pay claims with no evidence linking them directly to the spill -- was batted away in a recent decision in the 5th U.S. Circuit Court of Appeals.

"There is nothing fundamentally unreasonable about what BP accepted," Judge Leslie H. Southwick wrote, "but now wishes it had not."

Yet as the fight has slogged on in recent months, thousands of claims have been indefinitely delayed and new rules have been drawn up, while scrutiny of both individual claims and the overall process has intensified. Many on the Gulf are beginning to wonder if holding out for compensation is still worth the trouble.

BP, exceeding its obligations under the federal Oil Pollution Act to compensate victims, set up a multibillion-dollar program and turned to Kenneth R. Feinberg, an expert in administering complicated programs like the Sept. 11 victims compensation fund, to run it.

"In the beginning they was all real nice," said Barry Labruzzo, a 35-year-old shrimper from Slidell, La.

Mr. Feinberg required proof that damages were directly caused by the spill, a rigorous standard reflected in the fact that he approved only 550,000 of the 1.2 million claims he received.

But in meeting halls and boardrooms along the Gulf, Mr. Feinberg's compensation program was criticized as being confusing and unpredictable.

With anger and criticism mounting, BP and a committee of plaintiffs' lawyers began to work out, over nearly 150 negotiating sessions, a broad settlement that could help the company limit the scope of any coming litigation.

Both sides agreed upon a claims administrator: Patrick Juneau, a laid-back Louisiana lawyer and a veteran administrator of major settlement funds.

A central element of the agreement, however, would prove to be a time bomb. Instead of having claims calculators contend with different kinds of arguable evidence to prove that damage was linked to the spill, the negotiators came up with a formula that relied solely on financial data for proof of harm. If a business was in a certain region, and could prove that its income dropped and rose again in a specific pattern during 2010, that would be enough to establish a claim.

When BP announced the deal March 2, 2012, it estimated the cost would reach $7.8 billion.

Plaintiffs' lawyers believed this figure, as one lawyer, Samuel Issacharoff, would later say in court, "was erroneous from the very beginning."

One lawyer in Tampa, Fla., sent out a mass mailing, later highlighted in court filings by BP, saying that "the craziest thing about the settlement is that you can be compensated for losses that are UNRELATED to the spill."

BP's eagerness to settle was understandable at the time. Negotiations with the federal government over civil penalties stemming from the spill had derailed. States along the Gulf were threatening ever higher demands in lawsuits of their own.

When Judge Carl J. Barbier of U.S. District Court in New Orleans finally approved the settlement in December, a BP spokesman described it as "good for the people, businesses and communities of the Gulf" and "in the best interests of BP's stakeholders."

By early 2013, a frenzy was developing. Funeral parlors in Florida filed claims, as did farmers in Mississippi, construction companies in Alabama and law firms in many places in between.

The frenzy of claims the settlement led to did not surprise many who had experience in mass litigation. What puzzled them was that BP seemed surprised.

Inevitably, in a case this sprawling, there have been situations seen by all parties as questionable. But the most consequential allegation of fraud, which would fuel BP's efforts to have the claims center overhauled, came from the claims center's investigation of itself.

Last spring, the center's fraud prevention director alleged that one of the center's senior lawyers had improperly influenced the outcome of a seafood claim on behalf of an outside law firm.

The lawyer, Lionel Sutton, who had come to the center from his private practice, resigned, and his wife, who also worked at the center, was fired. BP's lawyers demanded further scrutiny, so they, the lawyers committee and the judge agreed to bring in the Freeh Group, a firm headed by Louis J. Freeh, the former FBI director, to investigate further.

In September, Mr. Freeh released a 98-page report, expanding on the initial investigation -- finding that Mr. Sutton had received a $40,000 fee, undisclosed to Mr. Juneau, upon resolution of a claim by one of his former clients.

"Improper, unethical" conduct within the center, Mr. Freeh said in the report, was "pervasive and, at its extreme, may have constituted criminal conduct." In all, at least five senior officials at the claims center would resign or be fired.

While this was playing out, BP was having mixed success at the Court of Appeals.

Judges ordered the creation of a policy requiring all businesses to align revenues and expenses more precisely, a change potentially worth billions of dollars to BP.

Virtually all business claims have been delayed for six months awaiting the drafting of the complex new claims policy, which currently runs to 88 pages.

With a solid victory, BP pressed for the biggest prize of all. Its lawyers argued in U.S. District Court that businesses that could not prove their losses had been caused by the spill had no standing to sue. If the court agreed, it would essentially upend the settlement.

Instead, in a blistering order that quoted emails from BP's own lawyers, Judge Barbier rejected the argument, and accused BP of trying to "rewrite" the history of the case.

Last month, a divided three-judge panel of the Court of Appeals rejected BP's argument as well.

BP has appealed that decision to the full Court of Appeals.



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