After a blowout at its Macondo exploration well killed 11 workers, set fire to the Deepwater Horizon oil rig and triggered a massive oil spill in the Gulf of Mexico, a contrite BP vowed to “make things right” and set aside $42.5 billion to do so.

But nearly four years later, BP knows just how hard things can get in the Big Easy.

The London-based oil giant is mired in litigation in federal courts in New Orleans. No longer apologetic, BP has stiffened its spine. It has filed new motions and countersuits, taken out a slew of full-page ads in newspapers (including The Washington Post) and enlisted the British ambassador to express concerns to the Obama administration over how aggrieved the company feels.

One issue pending before U.S. District Judge Carl Barbier is how much BP will have to pay the government in Clean Water Act fines, a figure that could range from less than BP’s $3.5 billion estimate to the maximum allowable $18 billion.

But the source of much of BP’s ire lies with a legal donnybrook over a settlement designed to compensate individuals and businesses for economic harm caused by the spill. BP alleges that many of the 256,478 claims filed — by a parade of fishermen, hotels, surf shops, law firms, nursing homes, strip clubs and others — are unjustified or even fraudulent.

It is, by any standard, a monumental task.

“This thing has taken a life of its own far beyond what I thought,” says Patrick A. Juneau, the court-appointed special master who administers payouts from the BP fund. Juneau, 76, calls it a “Herculean task” and jokes, “I don’t know whether I’ll be alive” when it’s finished.

 He defends the process, noting that while his office has deemed 63,128 claims eligible for just under $5 billion in payments, 52,525 other claims have been denied as of Feb. 12. He points out that BP and the plaintiffs’ lawyers agreed to terms that don’t require those harmed to show direct links to the oil spill.

It’s hard to feel sorry for an immensely profitable oil company that helped cause the largest oil spill in U.S. history. Nevertheless, BP is crying foul. It is taking aim not only at individual claims but also at the cozy New Orleans legal establishment, which it suspects is taking unfair advantage of the settlement terms and years of close relationships.

Exxon Mobil spent two decades fighting claims from the 1989 Exxon Valdez tanker spill off Alaska; 8,000 original plaintiffs died while awaiting compensation, BP’s Web site notes, calling it “a legacy that BP sought to avoid.”

“This case may well serve for years to come as a disincentive to companies looking to do the right thing in response to an industrial accident,” Geoff Morrell, BP spokesman and senior vice president, said in an e-mail, “and that would be a bad outcome all around, including for individuals whose only option may then be years of litigation and for the taxpayers who may be left holding the bag.”

Interpreting the deal

Trouble brewed from the day BP and the steering committee of lawyers representing a broad array of plaintiffs unveiled their settlement in April 2012. BP said the deal would limit its liabilities and end up costing about $7.8 billion; the plaintiffs’ lawyers, however, said that there would be no limit and costs could climb billions of dollars higher.

At the heart of their dispute lies a legal term — causation. Even Juneau and his staff weren’t sure how to interpret it, so they posed a hypothetical case to the two sides: What should be done if a small accounting firm’s revenue dropped during the spill year because a partner went on sick leave for six months? If the firm claimed damages, should it get paid? And BP said yes, Juneau said, even though the firm wasn’t close to the gulf.

A Florida lawyer pursuing clients boasted in a solicitation letter, quoted by Bloomberg Businessweek, “The craziest thing about the settlement is that you can be compensated for losses that are UNRELATED to the spill.”

BP says that isn’t the correct interpretation. Barbier, who is also overseeing this settlement, agreed with Juneau that proof of a close link to the disaster was unnecessary. On Dec. 30, the company asked the U.S. Court of Appeals for the 5th Circuit for an injunction, saying that before a case ­reaches Juneau’s office for payment, a plaintiff must show that it qualifies for consideration and can only do that by asserting economic loss or damages “arising out of” or “as a result of the Deepwater Horizon incident.”

Both sides are well armed. The plaintiffs’ lawyers played star roles in epic class-action cases such as tobacco, Chinese drywall and asbestos. Among the leading names: James Roy and Stephen J. Herman in New Orleans and former agriculture secretary Mike Espy. BP has retained a bevy of top-drawer firms: Kirkland & Ellis, Williams & Connolly, Covington & Burling, Arnold & Porter, and Gibson Dunn & Crutcher (including former solicitor general Theodore B. Olson).

Under the settlement, claimants’ identities must be kept confidential but can be reviewed by BP. So while BP has not named people in its ads, it has provided some salacious details.

In one ad, BP cites an adult-escort service that submitted four years of unsigned and undated tax returns as well as undated accounting statements. The settlement program paid the entire amount of the escort service’s $173,000 claim, BP said.

BP also questioned $172,253 awarded to a lawyer based 200 miles from the coast and whose business license was revoked for all of 2010; $662,834 awarded to a Louisiana nursing home that it said was shut down for a year before the spill; and $704,000 handed out to the owner of a Florida RV park foreclosed upon two weeks before the spill.

Juneau says that BP is able to take claims to a three-person appeals panel. Moreover, the whole process was designed to avoid excessively costly scrutiny of each claim.

Some of BP’s targets have spoken out. In one ad, BP said a “celebrity chef” had claimed and received $8 million for a “fictional loss.” The chef is television personality Emeril Lagasse, who has 13 restaurants nationwide, including three in New Orleans.

His restaurant company, Emeril’s Homebase, said in an e-mail that its claim was filed “in accordance with the settlement agreement that was set forth by BP and administered by the federal court in New Orleans.” Juneau said that after BP challenged the claim, it went to an appeals panel, where it was approved.

In many cases, fund administrators under Juneau are lobbied. One former claims official said in a court filing that about a dozen politicians called him every day seeking to expedite payments to their constituents.

Accusations against lawyers

BP is also pointing a finger at some of the trial lawyers, who can keep up to 25 percent of the awards as their fees. Members of the lawyers’ steering committee will divide $600 million for negotiating the settlement.

“Trial lawyers and some politicians are attempting to capi­tal­ize on this misinterpretation by encouraging the submission of thousands of claims for inflated losses, or losses that do not even exist,” BP said in another ad.

Plaintiffs’ lawyers say that BP has little reason to complain about the payments or Juneau’s oversight. “BP selected and proposed Patrick Juneau to be appointed as Claims Administrator for the Court-Supervised Settlement Program,” says plaintiffs’ firm Herman Herman & Katz on its Web site. The site adds that BP knew all along that people could claim damages without a clear-cut link to the oil spill. Under the settlement’s “business economic loss” framework, it says, individuals or companies in the region need to show only that revenue fell after the spill.

Herman Herman & Katz quotes a Sept. 28, 2012, filing by BP that conceded “ ‘false positives’ are an inevitable concomitant of an objective quantitative, data-based test.”

But some of the disputes seem to raise more-fundamental questions about the integrity and reliability of the claims process.

In December, BP filed suit against San ­Antonio-based plaintiffs’ lawyer Mikal C. Watts, a major Democratic Party contributor, accusing him of fabricating the identities and Social Security numbers of thousands of fishermen. BP’s lawsuit against Watts and his firm alleges that he claimed to represent more than 42,722 commercial fishermen, many of Vietnamese origin. BP said Watts’s mass of clients helped persuade the company to devote $2.3 billion to a seafood compensation fund.

In the end, BP says, Watts filed only 648 claims. Eight have been approved, and only 17 are pending. Meanwhile, BP has been checking the tens of thousands of Social Security numbers of the original list of fishermen. The company found that 40 percent belonged to other people, 13 percent weren’t actual numbers (for example, 000-00-0001) and 5 percent belonged to dead people. “The facts shout fraud,” BP’s lawyers said in a motion for relief filed with Barbier on Dec. 17, adding that most of the claimants “are simply phantoms.”

BP said in court that one of its employees appeared twice on the Watts list even though the person had not filed a claim or agreed to be represented by Watts’s firm. The first time his name appeared with a defunct phone number and incorrect Social Security number. The second time was with his parents’ address and phone number and a different incorrect Social Security number.

BP said the irregularities justified a suspension of payments from the seafood fund, which has already paid out $1 billion. On Thursday, Barbier rejected BP’s request and granted Watts’s motion to stay BP’s civil suit against him pending the outcome of a related federal criminal inquiry.

Watts’s attorney Robert McDuff said in an e-mail that BP’s attack was “unfair and unwarranted” and an effort “to detract from its own misconduct.” He said Watts “never committed identity theft and did not defraud BP.”

A family affair

For the Duval clan of New Orleans, the BP oil spill has been a family affair.

Take David Duval. A lawyer, he had gone to work for a family friend’s tugboat company before being laid off by new owners. Then in May 2012, he got a job as the appeals coordinator for disputed claims in the court-supervised BP settlement fund.

He didn’t get his job through the help-
wanted ads, he later told court-appointed investigators. David’s father, U.S. District Judge Stanwood R. Duval Jr., helped arrange it over lunch with Juneau, an old friend who had just been appointed special master over the BP fund.

Other Duvals got in the act, too. The judge’s sister-in-law Alexis was hired in July as one of three principals in the accounting firm of Bourgeois Bennett, which is advising restaurant owners and suppliers seeking money from the BP settlement. And the judge’s brother C. Berwick and nephew Stan (whose full name is also Stanwood R. Duval) both work at a law firm representing local ports, school boards, fire and recreation departments, and others seeking money from the fund.

Although warned to avoid conflicts of interest, David skirted ethical boundaries, according a court-ordered investigation of possible misconduct. On Oct. 3, he sent an e-mail from his private Hotmail account to his cousin Stan describing concerns that a panel member reviewing claims had about a client of his firm.

Uncle Berwick, who saw the e-mail, had the good sense to report David’s indiscretion to the court. On Oct. 7, former FBI director and federal judge Louis J. Freeh — who has been appointed as a second special master to essentially second-guess claims and look for improprieties — began investigating the young Duval’s breach of confidentiality. David resigned that day. Freeh, whose investigators obtained a detailed account from David, later wrote that his “violations are mitigated” by the fact that “Mr. Duval did not receive any financial benefit from his actions.”

Judge Duval is playing his own role in the oil-spill legal morass. He has overseen the trial of Kurt Mix, a BP engineer who in December was convicted of obstruction of justice and is awaiting sentencing. Mix, who worked on BP’s internal estimates of the size of the spill, had deleted hundreds of text messages to a supervisor and a contractor. His case — the only spill-
related criminal conviction so far — and the outcome of two other criminal trials connected to the spill could significantly affect the size of Clean Water Act fines BP will ultimately have to pay if they help the government make a case for gross negligence.

But recent revelations have made this complicated tale even messier. The judge and his wife (his longtime law clerk Janet Daley) own property on Grand Isle, La., that they say was damaged by the oil spill. Recently they filed a claim for payment by BP.

Mix’s lawyers, who are being paid by BP, say that constitutes a conflict of interest, and on Jan. 22, they filed a motion asking that Judge Duval recuse himself. (Attorneys for the two criminal defendants awaiting trial said they saw no conflict.)

The tight-knit nature of New Orleans’s legal circles was illustrated when a photograph was recently posted online from the 2003 wedding of Calvin C. Fayard on Nantucket Island, Mass. Among the champagne glasses, it shows Judge Duval standing alongside Juneau, the claims administrator, and Fayard, one of 15 lawyers on the plaintiffs’ steering committee in the BP case. The posting sought to emphasize their close ties.

Drawing conclusions about these links can be hazardous. Juneau said in an interview Feb. 12 that he has never spoken to Judge Duval about his property-damage claim. The next day, the judge rejected Mix’s recusal motion, calling its contentions “naive at best and disingenuous at its worst” and saying it “read more like an Oliver Stone movie script than any legal document this Court has encountered in its nearly 20 years on the bench.” Mix’s attorney Joan McPhee said he would appeal.

Stanwood Duval described himself as a 72-year-old who practiced law in Houma, La., for 28 years, has sat as a judge for nearly 20 more and has been active in the Louisiana Bar — adding that “the number of ‘friends’ that could ‘profit’ from the proceedings are innumerable.” The judge noted that one of Mix’s lawyers was a schoolmate of one of his clerks and that he was a regular bridge partner of the grandfather of another of Mix’s lawyers.

Moreover, he added, the criminal case he was overseeing was about Mix’s state of mind when he destroyed evidence, which the judge said was unrelated to the “state of mind of BP or any other of its employees.” Therefore, he said, the Mix case had no impact on BP’s other legal problems or the judge’s damage claim.

Meanwhile, BP has asked the federal court to let the company read all of Freeh’s supporting documents, including the e-mails between David Duval and his cousin and uncle. David Duval, now unemployed, has retained a prominent criminal lawyer Harry Rosenberg, who said it was “inappropriate” to comment.

On Dec. 20, Berwick Duval began a year-long leave of absence from his firm, his secretary said. He and his wife, Alexis, who had joined the Bourgeois Bennett accounting firm five months earlier, took off on their boat for the Caribbean and a trip that could take them as far as Canada, the secretary said. She said he could not be reached for comment.

What’s next?

BP will continue to press on multiple tracks, including the Clean Water Act fines.

Barbier has a great deal of latitude in assessing fines for the spill. The Justice Department is seeking steep penalties, which could run as much as $4,300 for every barrel spilled if BP is found guilty of gross negligence — although no court has ever imposed a fine of more than $111 a barrel. Phase one, the trial to apportion blame, ran last year from February to April; there’s been no ruling yet. BP and Justice are also quarreling about the size of the spill. BP says it was no more than 2.5 million barrels, while Justice puts the figure at 4.2 million. Barbier will decide that, too.

But the sharpest change in posture has grown out of the economic damages settlement, which BP says will cost $1.4 billion more than its original estimate. (The company posted a $23.5 billion profit last year.)

Over the past six months, BP has made a lot of noise — and scored some victories. Watts resigned from the plaintiffs’ steering committee. And the two top settlement program officers quit amid revelations that they had taken subordinates for drinks at a New Orleans strip club that had been awarded about $550,000 in economic damages. They had also been simultaneously seeking, in partnership with David Duval, outside work related to the massive settlement involving Chinese drywall, according to Freeh’s September report. The two deny any wrongdoing.

Freeh and his team have exposed other questionable behavior. Their September report said that two lawyers who joined the claims-
administration office received a 10 percent fee for payments made to a former client. Freeh’s report called the behavior of the law firm that is now representing the former client “particularly egregious” and alerted federal prosecutors. Freeh also sought to stop a $7 million payment the firm claimed on its own behalf. The firm also denies wrongdoing.

While BP has sought to put the spill behind it, the resolution of plaintiffs’ claims seems far off. When Berwick and Alexis Duval return from their sabbatical in January, the case will probably still be on.