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There's been a lot of hype in the media about BP scoring what seems a legal victory. One example of a ridiculous story is entitled "Court Decision Will Save BP Billions, Party Breaks Out at HQ." Yet pages 6-7 of the ruling specifically says "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." It seems many media outlets have been piggybacking each other with false facts since the story which broke Oct 2. It may be a tad premature to break out the champagne. BP's 'victory' appears rather hollow if one actually reads the 67 page order.

The appellate court made three basic rulings (page 36):

1. BP appealed its suit against the claims administrator itself got thrown out. A loss for BP.

2. BP appealed one of the accounting methods used by some claimants. The appellate court sent the case back to the district court where BP has always lost, asking the court to merely examine the settlement language more closely. In fact, on page 25 of the order it states:

we see nothing in the agreement that provides a basis for BP's interpretation...The district court was correct that BP's proposed interpretation is not what the parties agreed.

It also called the accounting treatment "ambiguous." The issue at stake, according to BP, is that it doesn't want claimants to be able to use cash accounting principles when calculating their claims. While there's a possibility that the district court will change its mind and demand that accounting method not be used, there's a more important aspect the media is missing. From page 11 of the order:

Typically, only very small and fledgling businesses keep their primary financial records in accordance with cash accounting principles.

The average settlement size is around $250,000 for business economic losses. The "small and fledging businesses" on average likely do not have anywhere near the $250,000 average and make up a minority of the pool. If the court orders the claims administrator to force cash-accounting claims to be changed using accrual-based accounting, there's going to be plenty of cases where the claim actually goes up, not down. The timing of cash flows can differ from accounting records in ways that won't be favorable to BP and actually increase the claims. The settlements for compensation to businesses that saw a decline in incomes in certain periods in 2010 vs. certain periods in 2007-2009. As such, for businesses with cash accounting, the more cash that went out in 2010 the higher their expenses, the less the profit, and the bigger the claim. Now picture yourself a business in the Gulf that saw the economy collapse after the spill. Are you going to be stocking up on new inventory? Of course not. Businesses that sold off inventory and replenished it more slowly than usual would have improved cash flows (spending last cash) using cash accounting. Forcing these same businesses to switch to accrual based (where the timing of cash flows becomes irrelevant) would actually increase claims for many businesses.

3. BP asked for a temporary halting of cash payments while for certain claims while it appeals those claims. BP won that. Think of this "victory" similar to a victim winning a lawsuit for a car accident, but doesn't get paid until the appeals process is exhausted. BP won the right to hold off until it's done with its appeals -- a process thus far which has resulted in nothing but losses for BP. Also a hollow victory except that BP gets to hold onto some of its money a little longer.

Stephen Herman, a lawyer for some claimants, put it well:

We're pleased that the vast majority of class members will continue to be paid in a timely and expeditious manner. We look forward to working with the claims administrator and the court to determine the best way to get the affected claims processed and paid as soon as possible.

In short, the suit against the administrator got thrown out. The anti-BP district court was asked to take another look. And some of the payments for claims will be temporarily held until the anti-BP district court is done taking another look. The settlement continues, so do the claims, and so does the hit to BP's income statement. BP investors beware.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: BP's Hollow Legal 'Victory'