October
23, 2010
Should BP’s
Money Go Where the Oil Didn’t?
By DAVID SEGAL
ST.
PETE BEACH, Fla.
IN
late April, a week after the BP oil spill began, Keith Overton had
an alarming encounter with one of his employees here at the TradeWinds Resort.
The guy — an engineer who had worked at the hotel for a dozen years — had just
spoken with his mother, who lives in Bosnia, and the conversation went like
this:
“Are
you going to be fired?” she asked.
“Fired?”
the son replied. “Why would I get fired?”
“Because
your beach is covered with oil,” she said.
Actually,
there wasn’t a drop of oil anywhere in sight. Not then, not in the months that
followed and not now. This barrier-island city and snowbird haven is hundreds
of miles from the nearest land befouled by the collapse of the Deepwater
Horizon platform and the epic gusher it left behind.
“That
was the moment I realized how big the problem had become,” recalls Mr. Overton,
who runs the resort. “At first we thought, ‘Well, people will know there’s a
spill in the Gulf of Mexico, and they won’t think that St. Pete has been
affected.’ ”
Not
so. After the explosion on April 20, there were some cancellations, but what
really wrecked the summer for TradeWinds was the countless number of people who
feared that oil was about to hit St. Pete and never called in the first place.
By Mr. Overton’s calculations, his profits from April to late October sank by
slightly more than $1 million, compared with his average earnings during the
same period for the last three years.
Of
course, anyone who bothered to look at a map would have known that St. Pete
Beach — and hundreds of other vacation spots throughout the Sunshine State —
would have pristine beachfronts through the summer, even under the worst of the
worst-case scenarios.
But
Mr. Overton and others don’t blame tourists or the news media for failing to
grasp basic geography and ocean currents. They blame BP, and they think the
company should compensate them for money they would have earned but for the
onset of black-crude hysteria.
Are
they right? Should companies like TradeWinds collect damages from an oil spill
even if their beaches were never sullied? Put another way, should BP have to pay
for economic hardship caused by the public’s reaction to the oil, even if that
reaction was utterly irrational?
The
answers involve a sum of money that can safely be described as staggering. The
aftermath and legal wranglings of the BP fiasco have focused so far on
commercial interests — like fishing, shrimping and food processing — that relied directly on
the gulf for their livelihoods. For the most part, these are people in
Louisiana, Mississippi and Alabama.
What
has scarcely been noted, however, is that virtually oil-free Florida just might
hoover up the bulk of BP’s settlement money. The company has set aside $20
billion for a fund intended to make whole both private enterprises (for lost
earnings) and the states and the federal government (for cleanup costs), with a
promise to throw additional money in the pot if more is needed to cover
legitimate claims.
But
what if every business in Florida’s $60 billion-a-year tourist trade stands up
and demands compensation for what it would have earned this summer had the
spill not happened?
And
what if hotels, restaurants, gas stations, miniature-golf courses, amusement parks, grocery stores, retailers, movie
theaters and others want more than just those losses? What if they demand
future lost revenue, too — money that would have come to Florida next year, and
the year after, but won’t because people who spent their summer vacations in, say,
South Carolina decided that they liked it enough to go back?
None
of this should be very hard to imagine — because it’s happening. According to
the estimates of plaintiffs’ lawyers, more than 100,000 entities in Florida
will make what are known as proximity claims, which are based on arguments of
indirect harm.
Already,
the sheer number of Florida claims is outpacing those of Louisiana, among
claimants who have provided addresses of where they suffered damages to the
Gulf Coast Claims Facility, which is administering the BP fund: 35,500 versus
just over 31,000, as of last week. Even businesses in Miami and Key West are
lawyering up.
“The
entire tourism industry in this state has been impacted by people’s fear that
oil was going to hit Florida, whether those fears were reasonable or not,” says
Brian Barr, a Florida lawyer and a member of the plaintiffs’ executive
committee in the BP case. “People don’t come to Florida to sit in a hotel. They
come to enjoy the natural resources of this state, and they were worried that
the oil would affect that resource.”
Proximity
claims, it turns out, fall into an area that has been debated for decades in
law schools and in court opinions. Until early October, Kenneth Feinberg, the
longtime mediator and the lawyer in charge of administering the spill fund,
said publicly that he wouldn’t consider such claims, in part because he thought
they would open a door that thousands of businesses across the country would
try to walk through.
The
theoretical possibilities are endless. A restaurant owner in Boston: “I had a
Gulf shrimp scampi special that was off the menu for months. Pay me.” A T-shirt
maker in Tennessee: “I’m stuck with 10,000 ‘I Love Pensacola’ shirts. Pay me.”
These examples are just conjecture, but real ones are piling up. Thousands of
claims from all 50 states have already been filed.
There
is another reason that Mr. Feinberg initially balked at proximity claims: it’s
far from clear how they’d fare if they ever landed in court.
But
he was “clobbered,” as he later put it, by Floridians, including some
high-profile critics like the state attorney general. In a little-noticed
reversal, Mr. Feinberg announced on Oct. 4 that he and his team would consider,
though not necessarily pay out, proximity claims.
Now,
plaintiffs’ lawyers in Florida are already worrying aloud that BP hasn’t set
aside the kind of money that would constitute real compensation.
“They’re
worried that $60 billion won’t be enough, and they might be right,” Mr.
Feinberg said in a recent interview. “Especially if every single restaurant and
hotel in Florida can simply stand up and say: ‘Before the spill. After the
spill. Pay me the difference.’ ”
Mr.
Feinberg then shrugs like a man trying to wrap his arms around a number that is
simply too large to fathom.
A
DECISION about proximity claims is coming in the next few weeks, with the approach
of the Nov. 23 application deadline for emergency payouts related to the spill.
For now, all eyes are on Mr. Feinberg as he determines the rules and decides
who will be dealt a hand in a game of Texas Hold ’Em with some of the highest
stakes in legal history.
His
job is to keep everyone at the table. For him, success means presenting terms
to all sides that sound more appealing than ditching the claims process and
opting for an expensive, protracted swarm of lawsuits.
As
Mr. Feinberg would be the first to acknowledge, this won’t be easy. Florida
plaintiffs might assume that juries will be sympathetic if these cases actually
get to court. Then again, if plaintiffs overreach, BP might decide that it has
no choice but to try its luck in the judicial system, betting that judges might
toss out cases before they get to trial, or that big verdicts could be scaled
back or even tossed out on appeal.
The
trick for Mr. Feinberg is to sort through a jumble of legal minutiae, state politics
and pitched emotion to find a solution that feels Solomonic to everyone, or at
least better than the alternatives.
“The
decision to at least consider proximity claims is the correct one,” he says,
enunciating carefully in his Massachusetts accent and speaking, as he always
does, loud enough for the hard of hearing.
“Everybody
stays in the fund and, hopefully, decides not to sue. But the big issue remains
— how do I assess the damages?”
For
a guy on the verge of such a weighty decision, Mr. Feinberg seems at ease.
Sitting one recent morning in his spacious office at his Washington law firm,
Feinberg Rozen, he sips San Pellegrino Limonata as an opera plays faintly from
a stereo system near his desk. His interior decoration of choice appears to be
adulatory newspaper articles about Ken Feinberg. One is a recent Boston Globe editorial
headlined “Can Ken Feinberg Be Cloned?” This would seem a
little egomaniacal if the guy didn’t project so much decency and personal
warmth.
The
Globe article, and many others, praise Mr. Feinberg for earlier performances
distributing money in catastrophes. He was acclaimed for processing the 9/11
victims fund established by the federal government. He resolved 97 percent of
those cases on his own. A mere 94 went to court.
It’s
a success rate that he does not anticipate in the BP matter. Part of the
problem is no one is sure how BP will handle the Florida cases. The company
didn’t respond to interview requests.
The
other issue confronting Mr. Feinberg is one of sheer volume.
“If
proximity isn’t a bar to claims, who knows how many there will be,” he says.
Big
numbers present complications. Almost from the start, there have been
accusations leveled at Mr. Feinberg and his 25 assistants that claims for those
hit hardest and most directly in the gulf aren’t being processed fast enough;
in late September, the Justice Department described the pace of his work as
“unacceptable.” Adding tens of thousands of claims from Florida, and the rest
of the country, won’t help.
Then
there is the matter of resource allocation. To the extent that there is a limit
to what BP will pay, this is a zero-sum game, and in Louisiana, there is
growing anxiety that proximity claims will siphon money from those suffering
the most.
“There
is a huge concern here about depletion of the BP fund,” says Patrick Juneau,
who is working as a liaison to Mr. Feinberg on behalf of the attorney general
of Louisiana. “Obviously, we’re at ground zero here in Louisiana, and the
farther away someone is from the oil, the more questions are raised by the
claim — like whether the losses were really the result of the spill.”
ON
a late September afternoon, the temperature at the TradeWinds is just warm
enough for sunbathing and the sky is cloudless, but the white-sand beach
abutting the hotel is nearly empty.
“We
run at about 30 percent occupancy in September,” says Mr. Overton, a
square-jawed 43-year-old in a Hawaiian shirt who manages to look both stern and
laid back at the same time — picture Jimmy Buffett’s bodyguard. “We
make all our money in six months, and our best months are March to July.”
He
is giving a tour of the premises — 800 hotel rooms and condo rentals and 13
bars and restaurants — and explaining why the spill could hardly have been
timed worse. He has a spreadsheet detailing his losses and the story behind
those figures.
The
tale is more complicated than just “People stopped booking rooms here.” What
happened is that occupancy rates sank, which led Mr. Overton to drop prices.
That pushed up occupancy rates, which left him with what he calls “the double
whammy” — a large-ish number of visitors, with all the overhead costs they
incur, but a smaller revenue stream to cover those expenses.
Details
like this get to the challenge of proximity claims: figuring out what, if
anything, they’re worth.
How
much of the TradeWinds’ duress can be blamed on its strategy, which led to the
dire-sounding “double whammy”? Is BP liable for both whammies? If another hotel
experienced a triple whammy, should BP pay for all three? And how much of the
TradeWinds’ troubles this summer stemmed from the lousy economy, as opposed to
oil-phobia?
Once
the resort asks for money for future losses, which it plans to do, there are
more imponderables. Mr. Overton couldn’t maintain the level of staffing that he
desired, and, as a result, service suffered.
“You
arrive at the hotel and it takes you an extra couple minutes to get your stuff
unloaded,” he says. “It takes longer at the front desk, and you get up to your
room and you think: ‘I’m not going to come back to this place. It just isn’t up
to my standards.’ How do you value that?”
How
indeed? And once you figure that out, how do you decide what part, if any, of
the shortfall should be covered by BP?
It’s
the kind of conundrum that scholars have been puzzling over for a very long
time.
ON
the morning of Aug. 24, 1924, a 43-year-old homemaker named Helen Palsgraf
stood on the Jamaica Station platform of the Long Island Rail Road in
Queens, waiting for a train. When it arrived, a man struggling to climb aboard
was given an assisting push by a railroad employee on the platform and a pull
by another employee on the train. That caused the man to drop the package he
was carrying, a newspaper wrapped around some fireworks.
What
happened in the next few seconds was described the next day in The New York
Times as a “short-lived pyrotechnics display,” though it sounds more like a
scene from a Looney Tunes reel. The fireworks exploded, and the shock
reportedly toppled a scale on the platform some distance away, which fell on
Ms. Palsgraf.
She
sued the railroad over her injuries and won $6,000, roughly $75,000 in today’s
dollars. But her victory didn’t last. It was reversed by the New York Court of
Appeals, and the majority opinion in the 4-to-3 decision was written by the
future Supreme Court justice
Benjamin N. Cardozo.
To
win a tort claim, as every law student knows, a plaintiff needs to prove that a
defendant was negligent and owed the plaintiff a duty — in Ms. Palsgraf’s case,
a duty not to be harmed. Chief Judge Cardozo was skeptical that railroad
employees had acted negligently, because the package carried by the passenger
didn’t outwardly appear to be dangerous. But, more important, he dismissed Ms.
Palsgraf’s claim because she was “outside the zone of foreseeable danger” and
therefore was not owed a duty.
The
key finding was this: The further away a plaintiff is from the defendant —
physically, or as part of a causal chain — the harder it is to win a lawsuit.
This
opinion, in Palsgraf v. Long Island Railroad Co., became a
central touchstone of American tort law, one with such abiding force in legal
culture that a re-enactment of the 1924 accident, performed with Legos, is now posted
on YouTube.
As
narrow as the law is when it comes to indirect physical harm, it is narrower
when the harm is indirect and economic.
“The
classic law school case example is a guy who negligently rams his boat into a
bridge and the bridge collapses,” says David Logan, dean of the Roger Williams
University School of Law in Bristol, R.I. “Business on that island is shut down
for as long as it takes to rebuild the bridge. But generally, the law says that
unless the boat physically harmed your property, you can’t collect.”
At
root, the law is concerned that people would be reluctant to operate a boat, or
drill for oil, if liability for an accident extended to its innumerable ripple
effects. In the case of the Exxon Valdez, a
tanker that devastated the Alaskan shore with oil in 1989, none of the
plaintiffs making proximity claims — hunting lodges, fishing lodges, cruise ships and so on — were given a dime.
“We
were operating under federal maritime law,” says David Oesting, an Anchorage
lawyer who handled litigation for the plaintiffs, “which basically says ‘no
touch, no foul.’ It was and is terrible.”
Mr.
Oesting speaks of the Valdez litigation in the present tense because it isn’t
over. On the day of this phone interview, an assistant in a nearby office was
preparing the last round of checks — about $130 million — to be sent to
plaintiffs, 21 years after the accident.
ALL
of this history explains why, in legal circles, Mr. Feinberg’s original
decision to bar proximity claims was considered utterly mainstream. But the BP
oil spill was unlike any that came before it — larger, and beamed live on
television for months. And the legal patchwork of laws under which plaintiffs
can make claims now includes the Oil Pollution Act, which provides for “damages
equal to the loss of profits or impairment of earning capacity due to the
injury, destruction or loss of real property, personal property or natural
resources.”
Does
that include a hotel on a beach, 450 miles from the nearest oil? How about one
50 miles inland from the same beach?
Working
outside of the court system, Mr. Feinberg isn’t necessarily constrained by the
act, or state or federal tort law. But to figure out what, if anything, these
claimants should be paid, he needs a sense of what would become of them if they
slogged through the dockets.
So
Mr. Feinberg has quietly hired one of the country’s foremost scholars on torts
— he declined to provide a name — to write a memorandum about the validity and
value of proximity claims.
The
memo is due soon, and Mr. Feinberg has no idea what it will say. But it won’t
serve as a blueprint, he says. It will serve as leverage. If the memo states,
for instance, that certain proximity claims are stinkers, Mr. Feinberg could
say to claimants, “You’ll get nothing in court, but I’ll give you 20 cents or
30 cents on the dollar.”
Or
the memo could say that some claims might well succeed, but only after clearing
a very high standard of proof of damages. Then Mr. Feinberg could offer a
slightly lower standard.
Those
are just two of many possibilities. Regardless of what is in the memo, Mr.
Feinberg won’t start writing checks willy-nilly, no matter how many plaintiffs
line up, no matter how many people yell at him, and no matter how many people
are eager to see BP punished, legal niceties be damned.
This
guy is versatile, but Santa Claus is one role he will not play.
Mr.
Overton and other business people in Florida think this is no time for
stinginess. He likens the BP oil spill to hurricanes that struck the state
years ago, and he worries that the impact will be the same.
“We
haven’t had a hurricane since ’04, but still today, we can’t get close to
achieving the occupancy level we had in August and September, pre-’04,” he
says. “People know a hurricane is possible and they don’t want risk it.”
The
analogy between storms that actually destroyed property and a spill that did
not is hardly perfect. But this may be the only difference that matters: you
can’t sue Mother Nature.