In Re: Whistler Energy II, LLC
Filing
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ORDER AND REASONS - IT IS ORDERED that the decision of the United States Bankruptcy Court for the Eastern District of Louisiana is AFFIRMED, for reasons set forth herein. Signed by Judge Jane Triche Milazzo on 7/20/2018. (cc: All Counsel, Bankruptcy Clerk & Judge, U.S. Trustee) (sa)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
CIVIL ACTION
IN RE WHISTLER ENERGY II, LLC
NO: 17-5470
SECTION: “H”(1)
ORDER AND REASONS
Before the Court is an appeal by Nabors Offshore Corporation from a
decision of the United States Bankruptcy Court for the Eastern District of
Louisiana. For the following reasons, the decision of the bankruptcy court is
AFFIRMED.
BACKGROUND
This matter arises out of the Chapter 11 bankruptcy of Whistler Energy
II, LLC (“Whistler”). Its creditor, Nabors Offshore Corporation (“Nabors”),
alleges that the bankruptcy court erred in disallowing much of its
administrative expense priority claim under 11 U.S.C. § 503(b)(1)(A) for
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materials and services that it provided to Whistler before and after it filed for
bankruptcy.
Whistler owns and operates an offshore oil and gas platform with several
producing wells. On February 25, 2014, Nabors and Whistler entered into a
contract under which Nabors agreed to provide the equipment and personnel
necessary to drill additional wells and perform auxiliary operations and
services for Whistler (the “Contract”). Specifically, it agreed to provide the
MODS 201 platform drilling rig, four engines with generators, a rig crane, nine
personnel buildings or living quarters, and 31 crewmembers. Nabors charged
a daily rate for these materials and services. On July 16, 2014, the Contract
was amended to add two additional living quarters and two cranes for an
additional fee.
In November 2015, Nabors began drilling the A-13 Well on Whistler’s
platform. On March 10, 2016, a Nabors employee suffered a fatal injury while
working on the platform before the A-13 Well was completed. As a result, the
Bureau of Safety and Environmental Enforcement (“BSEE”) ordered Whistler
to shut-in drilling operations but allowed it to continue producing existing
wells. On March 26, 2016, three of Whistler’s creditors filed an involuntary
bankruptcy petition against it. At some point thereafter, Whistler decided to
temporarily abandon the well, and it paid Nabors to complete the work, which
it did on June 20.
On July 25, the bankruptcy court entered an order rejecting the Contract
between Nabors and Whistler effective June 20, and Whistler asked Nabors to
provide a demobilization plan for its drilling rig and equipment. BSEE
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approved the demobilization plan on October 20, and Nabors began
demobilizing its equipment from Whistler’s platform.
In the bankruptcy action, Nabors filed a Motion for Allowance of
Administrative Expense Claim Pursuant to 11 U.S.C. § 503(b) for Unpaid
Services and Equipment Provided to Debtor Post-Order for Relief and for
Demobilization-Related Costs, which was heard by the bankruptcy court in
December 2016. Nabors sought, inter alia, a pre-demobilization administrative
claim in the amount of $4.7 million and a demobilization administrative
priority claim in the amount of $3.25 million. The bankruptcy court ultimately
held that Nabors was only entitled to an administrative priority claim for the
cost of pre-demobilization services between June 20 and October 20, 2016 that
Whistler had requested. It found that Nabors was not entitled to an
administrative priority claim for demobilization expenses because such were
merely a consequence of the rejection of the Contract. Nabors was allowed an
administrative priority claim in the amount of $897,024 and a general
unsecured rejection damages claim in the amount of $6,070,901.98.
Nabors now appeals the bankruptcy court’s decision, arguing that it
improperly applied 11 U.S.C. § 503. The debtor-in-possession opposes.
LEGAL STANDARD
Where a district court sits as an appellate court in a bankruptcy case,
“[t]he bankruptcy court’s findings of fact are reviewed under a clear error
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standard, while conclusions of law are reviewed de novo.” 8 Mixed questions of
law and fact are reviewed de novo. 9
LAW AND ANALYSIS
Pursuant to § 365 of the Bankruptcy Code, Whistler’s rejection of the
Contract with Nabors acts as a breach of the contract from the date of the filing
of the petition and leaves Nabors with an unsecured claim. Nabors contends,
however, that its claim should be treated as an administrative priority claim
because the services and materials that it provided were necessary and
beneficial to Whistler. Section 507(a)(1) of the bankruptcy code establishes that
administrative expenses incurred in bankruptcy are given priority in
distribution. These administrative expenses include “the actual and necessary
costs and expenses of preserving the estate.” 10 In order to qualify as an “actual
and necessary cost,” a claim “must have arisen post-petition and as a result of
actions taken by the trustee that benefitted the estate.” 11 Nabors seeks
administrative priority for its pre-demobilization and demobilization claims,
alleging that they are actual and necessary costs that benefitted the estate.
A. Pre-Demobilization Claims
The pre-demobilization claim spans the period between the rejection of
the Contract on June 20 and the beginning of demobilization on October 20.
The bankruptcy court found that a key requirement for proving an
administrative priority claim on a pre-petition contract is that the debtor must
In re Amco Ins., 444 F.3d 690, 694 (5th Cir. 2006).
In re ASARCO, L.L.C., 702 F.3d 250, 257 (5th Cir. 2012).
10 11 U.S.C. § 503(b)(1).
11 In re Jack/Wade Drilling, Inc., 258 F.3d 385, 387 (5th Cir. 2001).
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have induced performance from the creditor after the filing of the petition. The
court held then that Nabors was entitled to an administrative priority claim
only for the services specifically requested by Whistler between June 20 and
October 20.
The bankruptcy court made the following findings of fact:
There was lengthy testimony as to the work performed by Nabors
between June 20 and October 20. Exhibit 9, introduced into
evidence, contains all of the reports that detail the services
provided by Nabors beginning on the petition date, March 24,
2016. Nabors states that it performed maintenance services and
assisted other Whistler contractors with the performance of
production duties, which in Nabors’ view constitutes a benefit to
the estate. The court finds that with the exception of the services
specifically requested by the debtor-in-possession during this time
(and which the debtor-in-possession agrees that it asked for and
has agreed to pay for), the services provided are akin to Nabors
being available to provide services, as opposed to Nabors actually
providing services to the debtor-in-possession. Because the
requirement for an administrative priority expense is that the
creditor provide the debtor-in-possession with actual and
necessary services that benefitted the estate, that the services
were induced by the debtor-in-possession, the court finds that
Nabors did not prove at trial that it provided services from June
20 to October 20 such that it is entitled to receive administrative
priority at its day rate during that period.
Although Nabors put on some evidence that it was induced
by the debtor-in-possession to leave its rig on the platform after
the rejection date, the court finds that evidence shows that Nabors
and the debtor-in-possession were simply engaged in post-petition
negotiations that are typical of the bankruptcy process. There were
discussions about trying to classify Nabors as a critical vendor that
did not bear fruit. What is clear to the court is that Nabors was
sufficiently unsure of its position vis-a-vis the debtor-in-possession
that it was motivated to file a motion to assume or reject the
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drilling contract on June 17, 2016. When the debtor-in-possession
filed its response three days later on June 20, 2016 stating that it
planned to reject the Nabors drilling contract, it should have been
clear to Nabors that the contractual relationship would not be
continued. Based on the evidence presented to the court in this
case, after June 20, Nabors was on notice that the debtor-inpossession had chosen to reject the drilling contract but has not
shown that it was induced to stay and perform under the contract
after the June 20, 2016 rejection date. 12
The bankruptcy court held that Nabors’ administrative priority claim was
limited to those services that Whistler actually requested. It found that
Whistler requested use of Nabors’ cranes, two of the living quarters, and
overtime pay for Nabors’ employees and later quantified the claim in the
amount of $897,024. 13 Nabors argues that additional materials and services
should have been included in its administrative priority claim, including the
cost of its personnel, the additional nine living quarters, the generators that
powered the living quarters, demobilization equipment, and the installation of
replacement cranes.
Nabors misconstrues the bankruptcy court’s holding, complaining that it
limited the administrative claim to amounts that Whistler agreed to pay at
trial. To the contrary, however, the bankruptcy court expressly held that,
“Nabors should receive an administrative priority claim for the services
Whistler asked it to provide.” 14 The bankruptcy court correctly stated the law
applicable here. “To serve the policy of the priority, inducement of the creditor’s
Doc. 2-1, p. 328–30.
The fact that this amount is also the amount that Whistler agreed to pay at trial
does not undermine the court’s holding.
14 Doc. 2-1, p. 333.
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performance by the debtor-in-possession [post petition] is crucial to a claim for
administrative priority in the context of the furnishing of goods or services to
the debtor.” 15 Nabors has not pointed this Court to any case or law suggesting
that the finding of an administrative priority claim does not require that the
debtor-in-possession induce performance. Indeed, courts have stated that,
“[B]enefit to the debtor-in-possession alone is not sufficient to warrant
entitlement to an administrative claim priority as it would be contrary to this
policy reason for allowing the priority.” 16
Nabors also has not shown this Court that the bankruptcy court erred in
its factual findings regarding which materials and services were requested by
Whistler after the bankruptcy petition was filed. Nabors has not pointed to any
evidence in the record indicating that Whistler requested the use of Nabors’
materials and services beyond those identified by the bankruptcy court.
Although there is evidence that Nabors provided, and Whistler used,
additional materials and services after the bankruptcy petition was filed, there
is no evidence that Whistler requested their use. Accordingly, the bankruptcy
court did not err in finding that Nabors’ administrative priority claim was
limited to the $897,024 of services and materials that it requested postpetition.
B. Demobilization
Next, Nabors argues that it is entitled to an administrative priority claim
for the cost of demobilization, or the removal of its rig from Whistler’s platform.
In re Jartran, Inc., 732 F.2d 584, 587 (7th Cir. 1984); see In re E. Texas Steel
Facilities, Inc., 117 B.R. 235, 243 (Bankr. N.D. Tex. 1990); In re Mammoth Mart, Inc., 536
F.2d 950, 954 (1st Cir. 1976).
16 In re Enron Corp., 279 B.R. 79, 86 (Bankr. S.D.N.Y. 2002).
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The bankruptcy court rejected this request, holding that although Whistler
requested the demobilization, it was not a benefit to the bankruptcy estate. It
found that demobilization was simply a result of the rejection of the Contract.
The court found that Whistler’s only obligation to make the well safe was
abandoning the well, which had already occurred when demobilization began.
Nabors argues that it should be entitled to an administrative priority
claim for the demobilization because it brought Whistler in compliance with
federal statutes and BSEE regulations. Nabors argues that BSEE regulations
require Whistler to remove the drilling rig from its platform. In making this
argument, Nabors points to the BSEE regulations regarding decommissioning
to argue that upon installation of the drilling rig on its platform, Whistler
incurred a decommissioning obligation to remove the rig. 17
There is no
indication, however, that Whistler was decommissioning or had any plans to
decommission its platform. 18 Indeed, there were still wells on the platform
producing oil and gas. Rather, Nabors was simply demobilizing its equipment
from the platform. Nabors has not shown that Whistler had an obligation to
demobilize Nabors’ equipment from its platform when the platform was not
being decommissioned.
Accordingly, Nabors has not shown that Whistler
benefited from demobilization of the rig. This Court agrees with the
bankruptcy court’s finding that demobilization was simply the logical result of
the rejection of the Contract. The bankruptcy court did not err in finding that
30 C.F.R. § 250.1703.
“Decommissioning is the process of ending offshore oil and gas operations at an
offshore platform and returning the ocean and seafloor to its pre-lease condition.” Frequently
Asked Questions, BUREAU OF SAFETY AND ENVIRONMENTAL ENFORCEMENT,
https://www.bsee.gov/newsroom/library/frequently-asked-questions/Decommissioning%20
FAQs#faq-1.
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the demobilization was not beneficial to the estate and that Nabors was not
entitled to an administrative priority claim for its cost.
CONCLUSION
For the foregoing reasons, the order of the bankruptcy court is
AFFIRMED.
New Orleans, Louisiana this 20th day of July, 2018.
____________________________________
JANE TRICHE MILAZZO
UNITED STATES DISTRICT JUDGE
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