FINAL POLICY
POLICY 506 V.2: BUSINESS ECONOMIC LOSS CLAIMS: GUIDELINES FOR
EVALUATING FAILED BUSINESS AND FAILED START-UP BUSINESS CLAIMS
I.
Introduction.
Exhibit 6 of the Settlement Agreement sets forth the Failed Business Compensation
Framework (“Failed Business Framework”). A Failed Business is defined as:
an entity that commenced operations prior to November 1, 2008, and that,
subsequent to May 1, 2010 but prior to December 31, 2011, either (i) ceased
operations and wound down, or (ii) entered bankruptcy (through the filing of a
petition for bankruptcy in a court of competent jurisdiction), or (iii) otherwise
initiated or completed a liquidation of substantially all of its assets.
A “Failed Start-Up Business” is defined as:
an entity that commenced operations on or after November 1, 2008, and that, subsequent
to May 1, 2010 but prior to December 31, 2011, either (i) ceased operations and wound
down, or (ii) entered bankruptcy (through the filing of a petition for bankruptcy in a court
of competent jurisdiction), or (iii) otherwise initiated or completed a liquidation of
substantially all of its assets.
The Claims Administrator announces this policy to clarify how the Deepwater Horizon
Settlement Program for Economic and Property Damage claims (the “Settlement Program”)
interprets certain aspects of the Failed Business Framework. The Policy covers those claims that
the Settlement Program will typically process under the Failed Business Framework, how the
Settlement Program interprets the definitions of a Failed Business and Failed Start-Up Business
and how the Settlement Program applies certain aspects of the compensation calculation.
All capitalized terms used in this policy that are defined in the Settlement Agreement
shall have the meanings given to them in the Settlement Agreement.
II.
Policy Statement.
A. Determining Failed Business Claimants.
The Settlement Program will evaluate any claimant that meets the definition of a Failed
Business or Failed Start-Up Business using the causation and compensation calculations
provided in Exhibit 6 of the Settlement Agreement.1 A claimant that ceased operations and
wound down, entered bankruptcy or otherwise initiated a liquidation of substantially all of its
assets prior to December 31, 2011, will not be deemed eligible to file a General Business
1
The Settlement Program will continue to apply Policy 173 v.2, Business Economic Loss Claims: Failed
Business, as it relates to claimants that ceased operations between May 1, 2010 and May 30, 2010.
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Economic Loss (“General BEL”) claim (under Exhibit 4) or Start-Up Business Economic Loss
claim (under Exhibit 7), regardless of whether the claimant can produce financial records for the
Compensation and Benchmark Periods as defined in Exhibits 4 and 7. For Multi-Facility
Business claimants that elect to file separately for each individual Facility, the Settlement
Program will perform this analysis on each Facility included in the Multi-Facility Business.
If the Settlement Program has reason to believe, through the identification of evidence in
the claimant’s documents or otherwise, that a claimant discontinued business operations in the
Gulf Coast Areas after May 1, 2010 but prior to December 31, 2011, and that claimant has
submitted a General BEL claim, the Settlement Program may request that claimant to confirm
that it did not cease operations or otherwise dispose of substantially all of its assets during that
timeframe.
B. Definition of Failed Business and Failed Start-Up Business
In interpreting the definition of a Failed Business and Failed Start-Up Business, the
Settlement Program applies the following meanings to the definitions:
a) Time periods for Failed Businesses and Failed Start-Up Businesses: Exhibit 6
of the Settlement Agreement defines both Failed Businesses and Failed Start-Up
Businesses as those that failed subsequent to May 1, 2010, but prior to December
31, 2011. The Settlement Program interprets that these dates themselves are not
inclusive, and therefore a claimant that reports that it failed on May 1, 2010 or on
December 31, 2011 does not meet the definition of a Failed Business or Failed
Start-Up Business under the Failed Business Framework and would be treated as
a General BEL claimant or a Start-Up BEL claimant. The Settlement Program
will make best efforts to verify and/or accurately determine the actual failure date
of the business claimant. Where there is evidence that the claimant ceased to a)
sell products in the Gulf Coast Areas or Specified Gulf Waters, b) perform its full
time services while physically present in the Gulf Coast Areas or Specified Gulf
Waters, or c) own, operate or lease a vessel that was Home Ported or landed
seafood in the Gulf Coast Areas, on a date different from the failure date reported
on its claim form, the Settlement Program will apply professional judgment in
determining the actual failure date.
b) “Ceased operations and wound down”: The Settlement Program does not
interpret the definition of a Failed Business or Failed Start-Up Business claimant
to require that the entity enter “bankruptcy” through an official Court proceeding.
The Settlement Program interprets the Failed Business Framework to include any
claimant that has entered into a voluntary closure of the business within the
defined time periods, outside of a Court administered or approved process.
Further, the Settlement Program does not interpret the definition of a Failed
Business or Failed Start-Up Business to require that the failed Entity no longer
legally exist. The legal Entity may remain in existence, but the Claiming Facility
will be considered a Failed Business if it ceased doing business or operating in the
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Gulf Coast Areas or Specified Gulf Waters and wound down during the time
period specified in the preceding section.
c) “Bankruptcy” and “Otherwise initiated or completed a liquidation of
substantially all of its assets”: The Settlement Program interprets the definition
of a Failed Business or Failed Start-Up Business to include any Entity that
initiated or completed a liquidation of substantially all of its assets, irrespective of
whether or not the sale was initiated in connection with a formal bankruptcy
proceeding administered by the Court, a foreclosure situation, short sale or deed
in lieu of foreclosure. A voluntary sale of a business, or substantially all of the
assets of an Entity, that occurred after May 1, 2010 but before December 31, 2011
would cause such Entity to be considered a Failed Business or Failed Start-Up
Business.
If any liquidation of all or substantially all of an Entity's assets has been effected
through a sale, plan or reorganization or other transaction conducted as part of a
proceeding under Chapter 11 of the United States Bankruptcy Code, the
Settlement Program shall consider the particular facts and circumstances to
determine whether the Entity has actually "failed" or whether it has been
successfully reorganized or rehabilitated and thus would not constitute a "Failed
Business" or a "Failed Start-Up Business."
Example 1: An individual who since 2007 was the sole owner of a vacation rental
condominium located in the Gulf Coast Areas and who reported vacation rental
income and expenses on Schedules C, E or F of his or her tax returns, voluntarily
sells the property in August 2011. This claimant will be considered a Failed
Business as the individual has sold substantially all of its assets; in this instance
the entire assets of the business.
Example 2: An individual who purchased three vacation rental condominiums
located in the Gulf Coast Areas in 2007, and who reported vacation rental income
and expenses on Schedules C, E or F of his or her tax returns, voluntarily sells one
condominium in August 2011. This claimant would not be considered a Failed
Business if filing a consolidated claim as a multi-facility business as the owner
continues to do business and operate in the Gulf Coast Areas by virtue of renting
the remaining two vacation properties.
C. Failed Business Compensation.
Section V.1 of Exhibit 6 sets forth the basis for calculating compensation for Failed
Business claimants. The Liquidation Value of assets is determined:
as either (i) the court- approved reorganization value, to the extent reorganized
under bankruptcy law process or (ii) sales proceeds from assets liquidated plus
certified appraisal value of assets yet to be liquidated under a plan of
liquidation, net of actual or anticipated liquidation costs (including out-of3
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pocket costs to the claimant for the liquidation or wind down process), as
relevant. If no certified appraisal exists for un-liquidated assets, net book
value will be used. The total liquidation value (including both realized and
unrealized amounts) will be increased for any creditor claims existing preDWH Spill and discharged during bankruptcy . . . .
The Settlement Program will apply the following interpretations in calculating compensation:
a) Liquidation Value of Assets: The value of assets already sold by the claimant
will represent the gross proceeds, net of any out-of-pocket expenses associated
with the sale. Similarly, in determining the value of assets remaining to be
disposed of, the value will be the appraised value net of any out-of-pocket
expenses associated with the anticipated sale, or net book value in the absence of
an appraisal. Out-of-pocket expenses will not include the settlement of any long
term interest bearing debt obligations associated with the sale, and may include,
but are not limited to, limited repairs, transportation, title transfer costs,
commissions payable to third parties that facilitated the sale. Net book value of
assets remaining to be disposed of is interpreted to be the original cost, as
recorded in the financial statements, less accumulative depreciation, but not to
include any debt associated with the asset (e.g., mortgage, secured loans, lease
financing arrangements). Further, as set forth in Section V.1 d. of Exhibit 6,
Liquidation Value of assets may alternatively be determined in relevant situations
as “the court approved reorganization value, to the extent reorganized under
bankruptcy law process.”
b) Adjustments for creditor claims discharged during bankruptcy: The Settlement
Agreement requires “the total liquidation value (including both realized and
unrealized amounts) shall be increased for any creditor claims existing pre[Deepwater Horizon] Spill and discharged during bankruptcy . . . .” The
Settlement Program includes in this definition any long term interest bearing debt
that has been forgiven by a lender, as well as distributions to owners/shareholders
after the Deepwater Horizon (“DWH”) Spill, and will increase total Liquidation
Value to the extent that payments have been made to owners/shareholders, in
forms that may include, but are not limited to capital withdrawals, owner’s
compensation, dividend payments or the forgiveness of an owner’s loan.
Conversely, to the extent that the creditor claims have increased after the DWH
Spill, including an increase in amounts due to an owner/shareholder, the
Settlement Program will reduce the Liquidation Value of assets for the purposes
of the compensation calculation. Creditor claims and/or shareholder distributions
are typically not calculated when the entire business or substantially all of its
assets are disposed of.
To determine the change in creditor claims and/or shareholder distributions after
the DWH Spill, the Settlement Program will typically compare the balance sheets
dated closest to the date of the DWH Spill and the claim filing date.
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D. Failed Start-Up Business Compensation.
Exhibit 6 of the Settlement Agreement states that a Failed Start-Up Business claimant
shall be eligible to receive compensation for owner’s “sweat equity” if it is eligible for
compensation under Section V.2.
a) Monthly Sweat Equity Income: The Settlement Agreement prescribes that
Monthly Sweat Equity Income is determined by dividing “[t]otal income earned
from all employers and/or activities (including self-employment) during the
Sweat Equity Benchmark Period . . . by total number of months in the Sweat
Equity Benchmark Period, adjusted, if relevant, to exclude . . . .” The Settlement
Program will consider income from employers (included on a W-2) to mean the
gross salary/wage. The Settlement Program will include income derived from a
business and share of income from a partnership or S-Corp as net income,
calculated as total revenues and income less total expenses and losses.
Income from “activities” will not include income derived from passive activities,
such as real estate rental income, or income/loss from businesses in which the
individual is not a material participant. In evaluating which income sources would
be considered passive, reference will be made to Publication 925 of the Internal
Revenue Service.
The total income earned during the Sweat Equity Benchmark Period is total
income earned, excluding passive income. Such income may include but is not
limited to:
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Salaries and Wages
Share of Net Income from Partnerships/S-Corps, unless the concerned
individual is passive
Net Income from Business, unless the concerned individual is passive
Interest
Dividends
Gain/(Loss) on sale of stocks and bonds
Total income from all activities will be consistently included in every month of
the Sweat Equity Benchmark Period, including months where a loss was derived
from a business interest.
b) Net Sweat Equity: The Settlement Agreement prescribes that Net Sweat Equity is
determined by subtracting “(i) any funds (including payroll earnings, draws,
cancelled loans or other distributions) actually paid to an owner by the Failed
Start-Up during its operation and (ii) any income earned by the owner from
employment outside the Failed Start-Up…” from Total Sweat Equity. The
Settlement Program will consider the definition of “income earned by the owner
from employment outside the Failed Start-Up” to differ from that of “Total
income” calculated for Monthly Sweat Equity Income (see a) above) in that it is
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restricted to “employment.” As such, only the gross income, as reported on a W2 will be included in the calculation of Total Income. Under no circumstances will
either of the individual amounts calculated under (i) and (ii) above be less than
zero.
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