Closing BP's Escape Routes

BP generates enough cash to absorb its liabilities from the oil gusher
in the Gulf of Mexico.

But that doesn't mean it will.

One of the benefits of the corporate form is that it gives giant
corporations the ability to escape liability. BP may or may not choose
to capitalize on such escapes, but it would be foolish to presume that
it won't. That's why President Obama's call for the company to establish
a $20 billion escrow account is such a positive and needed -- if still
inadequate -- step.

Consider first the liabilities that BP may face. No one really knows
what the damage from the oil gusher or the overall costs to BP may
ultimately be. Some analysts are now throwing around numbers of $70
billion on the upper end -- but it's not hard to see how the ultimate
cost to BP could rise even higher.

The company faces civil fines of up to $3,000 per barrel of oil
polluting the ocean. If the gusher lasts for four months at 40,000
barrels a day, the fine alone could hit $14 billion. If it is found that
the actual oil flow is double that level, the fine could potentially
approach $30 billion -- more, if the gusher lasts for more than four
months.

Beyond the payments the company is making, it is going to face massive
lawsuits, with damages surely in the billions and quite possibly in the
tens of billions. On top of that, it may face a massive punitive damage
award. Exxon challenged a punitive damages award of $10 billion in the
Valdez case, and succeeded through appeals in dragging out payment for
20 years and lowering the amount to $500 million. But that was $500
million on top of compensatory damages of $500 million.

On top of all this, BP's brand -- just a couple months ago, the most
valued among oil companies -- is now ruined.

Still, as hard as it is to conceptualize, BP can afford to pay $70
billion. The company made $14 billion in profits in 2009, a bad year.
Before the Gulf disaster, it was on track to make much more in 2010.

BP may be able to pay $70 billion, but it surely doesn't want to. Even
as the company pledges again and again to cover all "legitimate" claims,
you can be sure that its attorneys are conjuring a variety of maneuvers
to avoid paying. Here are five approaches they must be considering:

1. The AH Robins/Dalkon Shield Bankruptcy Scam

A.H. Robins, the manufacturer of the defective Dalkon Shield
intrauterine device, filed for Chapter 11 bankruptcy in 1985. Women who
were victims of the dangerous device received less compensation than
they otherwise would have. Meanwhile, with the company's otherwise
open-ended liability demarcated in the bankruptcy process, Robins' value
shot up. AHP (now part of Wyeth, itself now part of Pfizer) acquired the
company at a premium, with the Robins family making off with hundreds of
millions of dollars.

BP wouldn't follow the Robins' model exactly. The play for BP would not
be to declare bankruptcy for the parent company, but for BP America or
another subsidiary that could be tagged with the liability for the Gulf
of Mexico gusher.

In advance of such a move, BP might try to move assets out of the
designated subsidiary and into other subsidiaries in its vast network.
Such asset shifting is not permissible, and creditors would challenge
any such moves, if they could discover them. But using its labyrinthian
structure, BP might hope to evade the creditors.

Even without the asset shifting effort, bankruptcy for an affiliate
could prove attractive for BP.

2. The Union Carbide Disappearance

Union Carbide was the company responsible for the world's worst
industrial disaster. A gas escape from its chemical facility in Bhopal,
India killed many thousands (likely tens of thousands) and severely
injured tens of thousands more. After settling for a paltry amount with
the Indian government, Union Carbide disappeared as a standalone
company. It is now a subsidiary of Dow Chemical.

Says Dow: "Dow has no responsibility for Bhopal." Moreover, "the former
Bhopal plant was owned and operated by Union Carbide India, Ltd. (UCIL),
an Indian company, with shared ownership by Union Carbide Corporation,
the Indian government, and private investors. Union Carbide sold its
shares in UCIL in 1994, and UCIL was renamed Eveready Industries India,
Ltd., which remains a significant Indian company today."

BP might conceivably be acquired by another oil major. Or, more likely,
it might just sell some or all of its U.S. subsidiaries. If the
liability cap in the Oil Pollution Act works to protect BP from legally
recoverable claims (perhaps less likely than has been reported, since
the cap does not apply to a spill caused by violation of applicable
federal rules), an acquiring company could simply state that it refuses
to make good on the liabilities that BP now says it will voluntarily
accept. A new company would also benefit from operating BP assets with a
new, uninjured brand name.

3. The Shell Company Game

A variant on the Union Carbide Disappearance gambit would involve
selling one or more subsidiaries' assets, but leaving the current
corporate structure in place. Liability would still attach to the old
subsidiaries, but it would be devoid of assets to pay -- if BP could
find a way to move the cash it received for selling assets out of the
subsidiary and out of reach of creditors.

Again, such a move should not be legal. But it would be a mistake to
assume that formal legal rules provide guarantees when billions or tens
of billions of dollars are at stake for a giant, global multinational.

4. The Exxon Hardball Approach

BP's lawyers are undoubtedly considering other, more straightforward
approaches to limit the company's liability.

Under the Exxon Hardball approach, BP would follow its oil company
brethren's approach to the Valdez spill. Drag out compensation payments.
Challenge adverse legal rulings. Rely on a corporate-friendly judiciary
to overturn or scale back any large scale jury verdicts or
government-proposed fines.

5. The Big Tobacco Global Deal

Another approach might be for BP to offer a "global settlement" of all
claims arising from the Gulf Oil gusher. This would follow the precedent
of Big Tobacco, which in 1997 offered to put hundreds of billions of
dollars on the table, and accept some regulatory restraints, to settle
lawsuits for its past misconduct and effectively preclude new
litigation. (This deal was ultimately scuttled.) For BP, the play would
be to put a "shock and awe" amount of money on the table to resolve all
claims and penalties. Its aim would be to eliminate the prospect of
getting hit with outsized punitive damages or fines, and escaping
payment for ecological damage that may not be apparent for many years
--amounts that might vastly exceed what BP pays.

Against this panoply of available maneuvers, public officials have
limited options. The Obama administration is finally doing the right
thing in first, talking about the danger of BP draining company assets
via dividend payments, and, second, demanding the establishment of an
escrow fund. Calling attention to abusive corporate stratagems not yet
underway is one of the best ways to prevent their deployment. And an
escrow fund would establish a guaranteed pool of available money for
victims -- establishing the fund apart from BP's control is at least as
important as ensuring fair and independent handling of victims' claims.

What this and future administrations also need is a way to exert
control over companies facing environmental or other liabilities of the
scale now facing BP -- a kind of receivership to prevent manipulations
of the corporate form to enable corporate goliaths to escape liability.

Forcing corporations to pay for the damage they cause is not sufficient
to prevent them from recklessly endangering people and the planet, but
it is certainly necessary. Permitting them to avoid liability and foist
costs on to others is to ensure more and worse corporate catastrophes.