Appeals court reverses 'failed business' declaration in Deepwater Horizon judgment

By Charmaine Little | May 13, 2019

U.S. Fifth Circuit Court of Appeals Judge Jennifer Walker Elrod  

NEW ORLEANS – An appeals court placed fault with a district court in incorrectly ruling that a company was considered a “failed business” in its settlement agreement amid the 2010 BP oil spill payout and reversed and remanded a judgment.

The U.S Court of Appeals for the 5th Circuit determined that claimant JME Management Inc., a vacation rental business that was impacted by the spill, is not a “failed business” as defined in the settlement agreement. Still, that’s how the compensation for JME was determined as it relates to the Failed Business Economic Loss outline. 

Circuit Judge Jennifer Walker Elrod wrote the opinion while Circuit Judges Thomas Morrow Reavley and Don Willett concurred. 

It was the U.S. District Court for the Eastern District of Louisiana that also said JME was a failed business. But the appeals court ruled the lower court interpreted the agreement incorrectly, so it vacated and remanded the case. 

In the settlement agreement, there were two types of losses — a Business Economic Loss (BEL) or Failed Business Economic Loss (FBEL). Under FBEL, those claimants do not get a Risk Transfer Premium that includes unknown and future risks and injuries, like those in the BEL.

By definition, a failed business in the settlement is one that “ceased operations and wound down, entered bankruptcy or otherwise initiated or completed a liquidation of substantially all of its assets,” according to the lawsuit.

Since JME never underwent bankruptcy, the only way it would be considered an FBEL is if it fulfilled one of the other two requirements. While the lower court said JME was a failed business because it stopped operations once it sold its assets to a partnering company, the appeals court said this was an incorrect application because while it might have “ceased operations” it did not “wind down.” 

“The punishment must meet both standards to fall within the constitutional prohibition,” said the appeals court. “By using the conjunction ‘and’ … the instruction required the government to prove an additional element…. Having ceased operations or having wound down alone does not render an entity a failed business.”

The appeals court added that the lower court also incorrectly interpreted the third criterium of a failed business concerning the liquidation of its assets.

JME and BP failed to define “liquidation,” but JME properly raised a genuine issue of fact that would help it escape summary judgment, leading to the court vacating and remanding the entire case.

Months after the oil spill, JME signed an agreement with Gulf Blue Vacations, Inc., which is founded by JME’s owner and his family. JME sold its assets to Gulf Blue for $800,000. Two years later, in 2013, JME issued claims to the BP settlement claims administrator, using the BEL framework. 

But the administrator used the FBEL framework and said that JME was owed nothing for three of its locations, and also denied compensation for two locations. JME asked the adjuster to use the BEL framework, but they refused, and the lower court concurred with the refusal. The appeals court, however, agreed with it.

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