A Primer On Administrative Expense Claims From An Oil And Gas Bankruptcy Case
This post provides a quick primer on administrative expense claims. These claims are entitled to priority for actual and necessary goods and services supplied to a debtor in bankruptcy. For a claim to qualify for administrative expense status, a debtor must request that the claimant provide goods and services post-petition or induce the claimant to do so. The goods or services must result in a benefit to the bankruptcy estate. And the claimant bears the burden of proof that a claim qualifies for priority treatment under 11 U.S.C. § 503(b)(1)(A).
The facts in a recent case in the oil and gas industry show how the test is applied. In re Whistler Energy II, LLC, No. 16-10661, 2020 WL 3580172 (Bankr. E.D. La. June 30, 2020). Whistler Energy II, L.L.C. owned an oil and gas platform in the Gulf of Mexico. It contracted with Nabors Offshore Corporation to supply a drilling rig, engines and generators, crew members, and living quarters for them. The contract called for Nabors to drill two wells. The first well was finished in 2015. While working on the second well in March 2016, a Nabors’ employee died after being trapped inside a mud/gas separator. The U.S. Bureau of Safety and Environmental Enforcement (BSEE) shut down the drilling work at the platform. Whistler then abandoned the work on the well.
Some of Whistlers’ creditors also filed an involuntary chapter 11 petition against Whistler. Nabors asked the court to compel Whistler to assume or reject its contract. Whistler rejected it, effective as of June 20, 2016.
On July 25, Whistler asked Nabors for a plan to demobilize its equipment at the platform. Nabors provided the plan on September 8. Demobilization began on October 20, after BSEE approved the plan.
In Whistler’s bankruptcy case, Nabors filed an administrative expense claim in the amount of $4.32 million for pre-demobilization expenses and $2.65 million for demobilization costs. The claim drew objections from Whistler, one of its secured creditors, and the unsecured creditors’ committee. Initially, the bankruptcy court granted an administrative expense claim of $897,024 and an unsecured claim of $6 million. Nabors moved for reconsideration, but the motion was denied. On appeal, the district court affirmed the bankruptcy court’s decision. The U.S. Court of Appeals for the Fifth Circuit then affirmed in part and remanded for further consideration. Nabors Offshore Corp. v. Whistler Energy II, LLC, 931 F.3d 432 (5th Cir. 2019).
The Fifth Circuit asked the bankruptcy court to consider (1) if Whistler induced Nabors to stay on the platform post-rejection, (2) how long Nabors stayed on the platform to service Whistler’s post-petition needs, and (3) the amount of the actual and necessary costs of staying on the platform.
On remand, the bankruptcy court analyzed the period from rejection of the contract on June 20 until demobilization started on October 20. The court found no evidence that Whistler induced Nabors to leave its equipment on the platform beyond June 20. For 10 weeks after the contract rejection, Nabors delayed in submitting a demobilization plan. Thus, the court concluded that Nabors hadn’t shown that it was providing an actual and necessary benefit in favor of Whistler’s bankruptcy estate during this time period, June 20 to September 8.
The court reached a different result beginning when Nabors submitted its demobilization plan on September 8. Whistler had abandoned work on the well and needed Nabors to remove its equipment. The demobilization plan required BSEE approval. Thus, from September 8 through October 19, Nabors no longer was the cause of delay. Removal of Nabors’ equipment as requested by Whistler pursuant to a required demobilization plan was an actual and necessary expense incurred by Nabors that benefitted the Whistler bankruptcy estate. Therefore, for this period, Nabors’ claim was entitled to administrative expense priority.