FINAL POLICY POLICY 506 V.2: BUSINESS ECONOMIC LOSS CLAIMS: GUIDELINES FOR EVALUATING FAILED BUSINESS AND FAILED START-UP BUSINESS CLAIMS

Transcription

1 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,

2 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, 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 2

3 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 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 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-of- 3

4 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 pre- DWH 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. 4

5 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: 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 5

6 restricted to employment. As such, only the gross income, as reported on a W- 2 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. 6