Co-author Lydia Webb

Nabors Offshore Corp. v. Whistler Energy II LLC  is the rare bankruptcy case where the outcome was consistent with the realities of operating in the oil patch rather than the artificial constraints of the Bankruptcy Code. The Fifth Circuit balanced the debtor’s interest in minimizing the costs of administering its estate with a counterparty’s economic interest in its property sitting idle in the debtor’s possession. The counterparty was not made to eat the costs for the time its equipment sat unused after rejection of their contract. 

The Facts

Whistler owned a production platform in the Gulf of Mexico and contracted with Nabors for a drilling rig and related equipment and services.  After a worker was killed in an accident, federal regulators shut down the project.  Whistler filed bankruptcy, abandoned the well, and rejected the contract.  It took four months after rejection for regulators to approve a demobilization plan and another two months for Nabors to remove the rig from the platform.  Nabors filed a $7 million administrative expense claim for costs incurred during the six months post-rejection when  its equipment sat idle on the platform.  Whistler objected on the basis that it neither requested nor used Nabors’ services post-rejection, and thus, Nabors provided no benefit to the estate.

Administrative claims and priority status

Administrative claims are claims that arise post-bankruptcy and constitute “the actual, necessary costs and expense of preserving the estate.”  The expenses must also benefit the estate.  Administrative claims must be paid in full before general unsecured claims are paid.  Upon rejection of a contract, neither the debtor nor the counterparty are compelled to perform.  To the extent the counterparty provided the debtor with goods and services between the petition date and the rejection date, the counterparty is generally entitled to an administrative claim. 

The question

What administrative priority status, if any, is a counterparty entitled to post-rejection when the debtor has taken steps to cease continued incurrence of obligations under the contract?

A win for the counterparty

The court held that at least a portion of Nabors’ claim was entitled to administrative priority status, despite that Whistler did not specifically request those services.  An administrative claim can be based on a direct request by the debtor or by “the knowing and voluntary post-petition acceptance [by the debtor] of desired goods or services.”  A debtor cannot rent equipment and later disclaim liability as an administrative expense “by asserting that it did not end up needing the equipment.” The court wisely recognized that “conducting business as usual often requires that certain goods or services be available, even if ultimately not used.”

For the four months post-rejection that Nabors’ equipment sat unused on Whistler’s platform awaiting regulatory approval for removal, Nabors was entitled to a priority claim “for the actual and necessary cost of its presence on the platform for the period of time required to satisfy [the debtor’s] logistical and regulatory requirements.”  “Actual and necessary” includes both the costs of remaining on the platform and “the full and ordinary costs of providing a service, including overhead costs and other indirect expenses.” 

However, Nabors was not entitled to administrative priority “for any time attributable to its own unnecessary delay” or for demobilization costs incurred during the two months it took to actually remove the equipment from the platform. Demobilization “was simply to consequence of [the debtor’s] rejection of the contract.” Those expenses were not actual and necessary and did not benefit Whistler’s estate. 

Musical interlude 

Lady singers … from the past, as in deceased … and very much in the present.