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BP Claims in Bankruptcy

By Bob Lawless

A few weeks ago, an Alabama attorney on the Bankr-L list noted more of his clients were showing up with claims against BP (née British Petroleum). It is hardly surprising that the same job disruptions, dislocations, and general economic losses recognized through a BP claim also are driving people to bankruptcy court. The irony, however, is that in a bankruptcy filing, a debtor's claim against BP is just another asset. Unless those claims are protected by bankruptcy law, they will go to pay credit card companies and banks rather than serving as insurance against the losses that have been incurred. It would be a good idea for Congress to act to clarify the status of BP claims in bankruptcy and to do so around existing principles of bankruptcy law.

The basic chapter 7 deal is that the creditors get the debtor's past as represented by the value left in the assets the debtor currently owns (although in most all cases there is no value left for the creditors) and the debtor gets to keep his or her future income free of creditor claims. The future income is the debtor's fresh start. In many places, the U.S. Bankruptcy Code draws a line between the past and the future so as to give meaning to these long-standing principles.

One place where the law makes this distinction is in the the federal list of exemptions in bankruptcy. As bankruptcy specialists know, the exemptions are the list of assets the debtor gets to keep after bankruptcy. They are fairly modest -- some home equity, a modest automobile, some home furnishings. Elizabeth Warren and Jay Westbrook explain it well in their bankruptcy textbook. You may wonder in the drawings of the bankrupt debtor left only with a barrel hanging by a couple of straps why the creditors left the barrel.The barrel represents the exemptions.

Under the federal list of exemptions a debtor can exempt the right to receive "a payment in compensation of loss of future earnings." (Bankr. Code § 522(d)(11)(E)). To the extent a BP claim represented compensation for loss of future income, it would seem to be clearly exempt if this section were to apply. But, the bankruptcy law allows states to opt out of the federal list of exemptions. In an "opt out" state, debtors must use the list of exemptions allowed under state law, and Florida, Alabama, Mississippi, and Louisiana are all "opt out" states. According to the exemption checklists in a standard bankruptcy treatise (Collier on Bankruptcy), their exemption statutes do not appear to exclude the kind of claim being paid by BP for persons victimized by its oil spill.

Persons filing bankruptcy in these states may be putting their BP claims at risk. If they list the claim as an asset, then it becomes an asset the bankruptcy trustee may use to repay creditors. If they fail to list the claim as an asset, they might be precluded later from asserting the claim or, in extreme cases, might face sanctions for failure to list all of their assets. Because BP apparently will not pay claims relating to loss of future income, a debtor might argue that the portion of the BP claim relating to future income is not yet ripe and therefore is not an asset that the debtor must report or turn over to creditors. Maybe. It would be better to get some clarity on the situation.

BP claims that have not been submitted at the time of filing should be exempt from the bankruptcy process. The best solution would for Congress to amend the Bankruptcy Code making this change. Another solution that is perhaps more politically likely is for these states simply to amend their exemption statutes. In the absence of state or federal legislative action, the Executive Office of U.S. Trustee could direct its employees and bankruptcy trustees not to object to the exclusion of such claims from the debtor's bankruptcy estate. Such an administrative action, however, would not prevent an individual creditor from making the same argument in a bankruptcy case, although it probably would lower the chance that a bankruptcy court would agree.

Some might argue that my proposal does not go far enough in that it does not protect BP claims already paid. On just my personal preferences, I might even agree. As between the financial industry and a bankrupt consumer, the equities would seem to lie with the consumer in terms of rights to the claims. Others will certainly disagree, questioning why BP claims should be treated differently from other claims for damages, some of which are subject to creditors' claims. For example, if your house burns down and you still owe on the mortgage, your bank has a claim against the insurance.

The proposal is meant to avoid these controversies and only clarifies the application of long-standing principles of bankruptcy law as they relate to the BP claims. The past (the claims already submitted) goes to the creditors, and the future (the claims yet to be submitted) becomes part of the debtor's fresh start. Although there might be other ways to divide the past and future when it comes to the BP claims using the submission of the claim as the relevant measuring date is an administratively easy rule to apply. Ease of administration is an important consideration in an already overloaded bankruptcy system.

Persons with BP claims have suffered from one of the worst environmental disasters in history. A small change to clarify the bankruptcy law would seem to be among the least of the things we can do.

Full post as published by Credit Slips on October 21, 2010 (boomark / email).