Don Davis

Hear No Evil, See No Evil, Drill No Evil

Filed By Don Davis | September 02, 2010 8:30 AM | comments

Filed in: Media
Tags: BP, Coast Guard, Deepwater Horizon, economic policy, Gulf of Mexico, Halliburton, Oil

I am one of those people who will actually watch those boring, boring, hearings on C-SPAN that most of us flip right on past while watching TV, and this past week I've been watching one of the longer events the channel broadcasts, but it's been far from boring. irish patriot trial.jpgThe Coast Guard and what used to be the MMS were in Houston looking into what caused the Gulf oil spill and they're taking testimony from representatives of the involved parties. Let me tell you, this is more than just an accident inquiry--it's also a warm-up for the lawsuits that are surely going to follow. We've had dozens of trial attorneys basically conducting a deposition process, witnesses who can teach a master course in "plausible unawareability," BP employees who have taken the Fifth and refused to testify at all, and, overseeing the entire process, a retired Federal District Court Judge and a Coast Guard Captain who might very well be on the way to trading his eagles for stars one day soon. Do you really believe all those "We'll make it right" BP commercials? If you watch this hearing, that impression may well change.
When I talk on the stage, people often have the impression that I make up things as I go along. That isn't true. I know a lot of things I want to say, I'm just not sure exactly when I'll say them. --From Lenny Bruce's book "How to Talk Dirty and Influence People"
Here's the scene: a nondescript conference room in Houston is set with a table for the several Board members, who are drawn from across the Federal Government, including the old and exceptionally dysfunctional MMS (the Minerals Management Service), which has sort of morphed into the brand-new Bureau of Ocean Energy Management, Regulation, and Enforcement (the BOEM) and the Coast Guard. In front of them is another table for the witness and their attorney, and right behind them are three very, very, long tables that are set up for the possibly four dozen attorneys that represent all the "parties of interest" who are involved in the hearing and require a bit of desk space (among that group are lawyers for BP, Transocean, Halliburton, certain individuals involved in the incident, and the Republic of the Marshall Islands, where the now sunken vessel was "flagged"; that Nation is conducting their own investigation). Behind that are rows of "gallery seats" for the interested public. (You can see the entire thing by visiting the C-SPAN site, but do grab a beverage and some snacks first.) The way this all works is that the Board begins the process of eliciting information by questioning the witness themselves. Next up is the attorney for the Marshall Islands; the witnesses' attorney and employer's attorney then "cross examine," and then every other lawyer in the room gets a crack at the witness, should they so desire. "Wrangling" all of this from his Co-Chair seat is retired Federal Judge Wayne Andersen; the Coast Guard has a "good cop/bad cop" team on the Board (the Board's Recorder, Lieutenant Robert Butts, and Co-Chair Captain Hung Nguyen, respectively). Mssrs. David Dykes (the other co-chair) and Jason Matthews, who are representing BOEM on the Board, are among the technical and regulatory experts who are also asking some very pointed questions. Since many witnesses also represent Halliburton, BP, and Transocean, there is very much a "trial of the century" atmosphere in the air, and everyone is trying to protect their own interests at the expense of the others. As is common in these situations, the witnesses are busily playing "duck and cover," and I have been privileged to watch what has essentially been the construction of the "pyramid of denial" by a team of master craftsmen. Now these folks don't deny like you or I would deny, instead, they have far more sophisticated techniques of obfuscation that they employ. The first method: imagine a group of people, sitting in a circle, each pointing a finger at the person to their left. Later, we saw a new approach: imagine a group of people, sitting in a circle, pointing both fingers at the people sitting to either side of themselves. Even later, it became a three-dimensional game, as some of those in the circle began pointing either upward or downward...and the most sophisticated of all had personal attorneys available at the witness table to do some of that pointing for them. Another effective tactic is to never be the person actually in charge of whatever it is someone wants to know about. If your company operates worldwide, there are lots of places to move from, and to, along with lots of potential "shifting responsibilities"; sure enough, there are witnesses here who seem to be "Johnny-not-on-the-spot" over and over and over again. The Fifth Amendment's protection against self-incrimination can also provide a shield that'll keep you out of the witness chair; that's why BP engineers Mark Hafle and Brian Morel and Deepwater Horizon's BP day shift manager Robert Kaluza have not given testimony to the Board. Now this is not something your normal "mom and pop" denier can typically pull off, and that's why it appears that at least some of these companies require an entire corps of specialists who don't actually know anything at all, just so they can appear before courts and investigative boards such as this one, where they either "don't recall," or they spend an astonishing amount of time not looking into this "casualty," as it's described by those involved in the investigation. One example that leaps to mind is a certain BP executive who, even though he's in charge of the "drilling and completions" operations on various BP owned and leased oil rigs in the Gulf of Mexico, reports he has never read any information regarding this accident that BP might have developed since the April 20th event, and has never spoken to a BP investigator to enquire as to whether any "lessons learned" exist that he can apply to the operations he oversees. There has been another week of hearings, and if you watch those hearings you'll have seen basically a 1/12th scale model of the lawsuits that are already piling up in Louisiana, Texas, and Federal Courts, and that if you watch certain portions of the hearings you can see bombast, tough questions, and the kind of elbow bending and finger pointing that can only lead to severe arthritis later on in life. Next time, we'll be talking about "command and control" on the Deepwater Horizon (did you know an oil rig is actually a ship?), about what actually happens down a well, and about why things like "centralizers" and "channeling" matter--a lot. In the meantime, if you want to get your homework on, all the hearings, in more or less backwards order, can, as we said before, be found at the C-SPAN site, which is why we appreciate them very much. So either get deeply buried in what will become the legal soap opera of the decade or run away, quickly.

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The real crime is the fact that there is no "$20 billion escrow account" that Obama claimed. So far, BP has paid out less than $500 million and they don't have the other $19.5 billion. There was never an escrow account.

Many believe BP will eventually enter bankruptcy and that court will determine how much must be paid to those who suffered from the oil spill. It will depend on many things, including how much BP has in marketable assets.

BP is currently selling some of their best assets, but they haven't even created the magical "escrow account" politicians bragged about. There is no $20 billion fund - it was a lie.

i don't entirely agree with how you see this here, so let offer a bit of nuance to fill out the picture.

there is in fact an escrow account; the question is whether bp will meet its commitment to fund that account to the tune of $5 billion a year for the next four years--and that is today a question with an unknown answer.

feinberg, who is in charge of distributing the fund's assets to claimants, has done this before, with pretty good success (he was in charge of distributing the 9/11 compensation fund), and that should be taken into account as well.

i don't think bp can simply declare chapter 11 and force a workout at this point, simply because any claimant can choose to opt out of the feinberg distribution offer and litigate individually, and a bankruptcy today would not discharge liability from unfiled future claims.

what bp could do is sell assets, and then make certain "extraordinarily distributions" to shareholders with the proceeds...and then, after the claims pile up, declare bankruptcy..but the odds are that much, if not all, of the "new bp's" future income would be presumably awarded to the claimants.

it is important to keep in mind that there are really no legal means by which bp can be forced to create and fund such an escrow account other than successful litigation and an appeals process..and if you recall, it took 21 years for that process to work out for exxon valdez claimants.

the fifth amendment bans unconstitutional "takings", the 14th guarantees "due process"; the combination of the two means bp can either voluntarily go along with the escrow account or vigorously defend themselves in court...and i presume the claimants are seeing the voluntary process as their better option.

it's also possible that bp will recover a large part of that $20 billion from transocean and/or halliburton, and their willingness to fund this escrow account would presumably be based on how they view the odds of such a recovery.

it's also theoretically possible that $20 billion will not be enough to fully fund claims.

here's another point to consider: a large percentage of the dollars involved will be owed to governments, either state or federal, and those claimants have the legal wherewithal to fight bp as long as is required in court.

they also have, to a greater or lesser extent, the ability to disrupt bp's production and marketing operations within their jurisdictions.

that suggests bp (and other defendants, for that matter) could well do better in an arbitration process than in a protracted process of litigation.

so let's sum all this up:

there is an account, it is today distributing funds, but it is uncertain if it will be funded to the amount that's required--or even if $20 billion will be enough.

it is to bp's advantage, because of the sophistication of the largest claimants involved, to arbitrate rather than litigate..but in fairness, bp might also be able to "duck and cover" their way out of individual claims by not funding the escrow account after the first year.

bp could distribute assets and then file liquidation ot chapter 11, but chapter 11 would mean bp claimants would probably own any remaining assets and income streams going forward.

(by the way: bp could "spin off" a subsidiary that exists to provide the income stream for these claims as an attempt to isolate the rest of the assets from liability.)

because bp wants to continue to do business here they have an incentive to settle with government claimants, and they may collect much of the $20 billion from their partners, which makes settlements more likely than less so, if they see the odds as good for them.

finally, consider the alternative: the exxon valdez took 21 years to litigate, and the results were no better for the individual claimants than the potential outcome here.

i misspoke in my previous comment: government claims are not covered by feinberg's arbitration process, but the money does come from the $20 billion fund.

The only problem with what you have just explained is that an "Escrow Account" means:

Something of value, such as a deed, stock, money, or written instrument, that is put into the custody of a third person by its owner, a grantor, an obligor, or a promisor, to be retained until the occurrence of a contingency or performance of a condition.

Nothing of value was placed into an "escrow account" by BP, despite assurances from Obama and the White House. There is a simply a "promise" to fund $4 billion a year for the next 5 years. Promises aren't worth the paper they are printed on or the political moths that suggest them.

If BP did declare Bankruptcy all bets (promises) are off. I suppose I would look at this differently if BP had even assigned the supposed Escrow Account some assets.

Most of America believes there IS a $20 billion fund provided by BP. There isn't. If this ends up in Bankruptcy Court everyone will be very surprised that there is no real Escrow Account.

Here is a copy of the Agreement:

http://media.nola.com/2010_gulf_oil_spill/other/Trust%20Agreement.pdf

BP has paid $3 billion. The "collateral" is a requirement that BP "set aside" revenues during the next 4 years. That would not survive Bankruptcy.

i'm walking out the door this very second, so let me grab a read of this and comment in a few hours.

having seen the document, what i'm seeing is an irrevocable trust, with two third-party administrators (gccf and citbank), and no way for bp to access the distribution of funds, which is a pretty good definition of an escrow account.

This Agreement and the Trust created hereby shall be irrevocable. Except as provided herein or in Article II, Section F or in Article IX, Section F4, neither the Grantor , the Trustees nor the Beneficiaries shall have any right to alter this Agreement or amend it in any way.
Anything herein to the contrary notwithstanding, neither the Grantor nor any affiliate, subsidiary, officer, director, employee, controlling person or agent of the foregoing shall ever serve as Trustee hereunder.

We do absolutely know an actual account does exist, and here's bp's wire transfer information to make deposits, with the account number included:

Citibank, N.A. ABA # 021000089 Account #: 36855852 F/B/O: Escrow Concentration A/C Ref: A/C#798462 Obo and at the direction of BPEP in satisfaction of certain obligations pursuant to the Trust

according to news reports, the first payment of $3 billion was made on schedule august 9th.

bp is going to spin off the revenue stream to an affiliate company. the newly formed company will have the most senior claim on production payments, to the tune of $5 billion annually. ebitda for bp was about $33 billion in 2009, which suggests that the revenue is there to fund the claims.

To secure the payment and performance of its obligations to make the Contributions to the Trust hereunder, the Grantor hereby agrees to grant, convey, and/or assign to the Trust first priority perfected security interests in production payments pertaining to the Grantor’s U.S. oil and natural gas production (“Production Payments”) (which Production Payments shall be issued and held in a newly formed limited liability company subsidiary of the Grantor that shall have no business or operations other than holding such Production Payments) or a perfected security interest in other property mutually agreed to by the Grantor and the Individual Trustees (the “Collateral”)...

the next payment of $2 billion, according to the agreement, is due december 31st.

here's the clause referring to a potential bp bankruptcy:

In the event the Grantor becomes subject to any bankruptcy proceeding, the Individual Trustees, after consultation with the Corporate Trustee, shall seek direction from the bankruptcy court regarding alternative means of processing Other Resolved Claims.

bp can claim back the money if all claims are paid:

E. Distribution at Expiration of Term of Trust. Upon the expiration of the Trust Term (as defined below), any assets then remaining in the Trust Fund, including the Payment Account, shall be distributed to the Grantor, provided that all amounts payable under any pending Distribution Notices have been paid in full or otherwise satisfied and that all Approved Expenses (as defined below) have been paid in full or otherwise satisfied, and the Trust shall terminate.

having read the agreement, and with the understanding that i'm not a trust attorney, i have to tell you that i would stand by everything i said above: the trust does exist, and the real question is whether they'll stand up to the agreement and make the $2 billion payment in december, then the quarterly payments to which they've agreed over the next four years.

I agree with your review Don, but the fact remains the money from BP isn't "secure" (or even available) unless they actually make the deposits. In Bankruptcy (if that were to happen) the amount already deposited would be in question, but not what hasn't been deposited.

My point was, and continue to be, there is no "$20 billion Escrow Account" to pay claims. There is an "Agreement" and so far $3 billion has been contributed. We'll see how it goes.

I think it has been dishonest for Obama and others to misrepresent what they have inaccurately referred to as a "$20 billion Escrow Fund." That would only be true if the money was already deposited and out of BP's control. But, this is politics and most of us expect misrepresentation.

i think we only disagree on a small technical point: i'm suggesting that the account does exist, and the question is whether bp will keep making the payments to which they've agreed.

you seem to be of the opinion that only cash, paid in full, would constitute a "complete" escrow agreement.

my response would be that precedent for this type of arrangement can be found in the asbestos trusts, where future income streams were committed to pay future claims.

we both agree that bp may or may not pay up, and that is the big question that no one can today answer.

Yes, a true "escrow account" would have the $20 billion already deposited. BP still has control of revenues until they are deposited.

Great! I'm hoping too that there'll be a just resolution.