Upholding a decision by Bankruptcy Judge Jerry A. Brown, a district judge in New Orleans established a high standard for an allowable administrative expense claim in the oil and gas industry after the debtor has announced its intention to reject an executory contract.
The debtor was the owner of an offshore drilling and production platform. Before bankruptcy, the debtor hired the creditor to install a drilling rig and associated equipment on the platform and provide workers to drill a new well from the platform.
Also before bankruptcy, a worker was killed in an accident on the platform. Federal regulators then shut down the drilling project. Two weeks later, creditors filed an involuntary petition against the owner of the platform.
In chapter 11, the debtor in possession paid the creditor to abandon the well. When abandonment was completed, the debtor filed a motion to reject the contract with the creditor.
The bankruptcy court granted the rejection motion, effective as of the day when abandonment had been completed.
Four months after abandonment, regulators approved a plan for the creditor to remove the drilling rig and its other equipment from the platform.
The creditor filed an administrative claim for about $8 million, covering the period from the effective date of rejection until the creditor had removed its equipment from the platform.
Bankruptcy Judge Brown allowed an administrative claim for only $900,000 in round numbers, holding that the creditor was entitled to a priority claim only for services specifically requested by the debtor after the effective date of rejection. District Judge Jane Triche Milazzo upheld Judge Brown on July 20.
When the debtor filed the contract-rejection motion, Judge Milazzo said “it should have been clear to [the creditor] that the contractual relationship would not be continued.” Based on the evidence adduced in bankruptcy court, the creditor, she said, “had not shown that it was induced to stay and perform under the contract after” the effective date of rejection.
Citing a bankruptcy court in New York, Judge Milazzo said that benefit to the debtor in possession is not enough in itself to warrant an administrative claim. Although the creditor used equipment and provided additional services after rejection, she said there was no evidence that the debtor requested the services, she said.
Consequently, Judge Milazzo found no error in granting an administrative claim for approximately $900,000, covering the period from the effective date of rejection to the date when the creditor began removing its equipment from the platform.
The bankruptcy judge also denied an administrative claim for the time when the creditor was removing its equipment and personnel from the platform.
The creditor argued that the claim was entitled to administrative status because removing the equipment brought the debtor into compliance with federal statutes and regulations.
The bankruptcy judge rejected the argument, finding that removal of the equipment did not benefit the debtor but was “simply a result of” contract rejection, Judge Milazzo said. The debtor’s only obligation was to make the well safe, which had been accomplished by the debtor’s having paid the creditor for abandoning the well.
Judge Milazzo upheld denial of an administrative claim in connection with removal of the equipment because the creditor had not shown that the debtor had any obligation to remove the equipment and because the creditor had shown no benefit to the debtor from removal of the equipment.
Judge Milazzo said she agreed “with the bankruptcy court’s finding that demobilization was simply the logical result of rejection of the contract” and did not confer benefit on the estate.