The U.S. District Court for Eastern District of Louisiana recently affirmed the U.S. Bankruptcy Court for the Eastern District of Louisiana’s decision determining that (1) pre-demobilization expenses needed to be actually requested by the debtor in order to be entitled to administrative priority, and (2) the demobilization of an oil rig — the “logical” result of the rejection of a personnel and equipment supply contact — did not benefit a bankruptcy debtor’s estate and thus did not constitute an administrative expense.[1] In In re Whistler Energy II LLC, Nabors Offshore Corp., a creditor of Whistler Energy II, LLC (the debtor), contended that the bankruptcy court erred in disallowing much of its administrative expense priority claim for material and services that it provided to the debtor.
Prior to the bankruptcy proceedings, the debtor and Nabors entered into a contract under which Nabors agreed to provide the equipment and personnel necessary to drill wells and perform auxiliary operations and services for the debtor’s offshore oil and gas platform business. Following a platform accident, the debtor was thrust into an involuntary bankruptcy and requested that Nabors complete work associated with temporarily abandoning a well. Thereafter, the bankruptcy court entered an order rejecting the contract between the debtor and Nabors effective as of the date that Nabors completed the abandonment work. Nevertheless, Nabors still had substantial demobilization work to do with regard to its equipment — which it conducted after its contract was rejected.
Nabors filed a motion for allowance of an administrative claim pursuant to § 503(b) of the Bankruptcy Code for unpaid services, equipment costs and demobilization-related costs. Specifically, Nabors sought 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 rejected much of the pre-demobilization request — finding that many of the services were not actually requested by the debtor. Moreover, the bankruptcy court rejected Nabors’ request for demobilization expenses, finding that the expenses did not benefit the debtor’s estate and were merely a consequence of the rejection of the contract. Pursuant to § 365 of the Bankruptcy Code, the debtor’s rejection of a 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’s administrative priority claim was limited to services that the debtor actually requested and that benefited the estate. Consequently, 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 appealed the bankruptcy court’s order — arguing that its claim should be treated as an administrative priority claim because the services and materials that it provided were necessary and beneficial to the debtor. Under the Bankruptcy Code, administrative expenses include “the actual and necessary costs and expenses of preserving the estate.”[2] In order to qualify, however, the expenses must actually benefit the estate.
The district court affirmed the bankruptcy court — finding that Nabors’s administrative priority claim was limited to those services that the debtor actually requested and that benefited the estate. The district court held that the entirety of the demobilization expenses were not entitled to administrative expense status. The debtor was not obligated under federal statute or applicable regulations to remove Nabors’s equipment, thus the demobilization did not benefit the debtor’s estate. With respect to the pre-demobilization expenses, the district court concluded that most of those expenses were not entitled to administrative expense priority because the debtor had not actually asked Nabors to perform those services. The district court emphasized that benefit to a debtor-in-possession, even if shown, is not sufficient; the services and materials must actually be requested. This is consistent with the policy behind the Bankruptcy Code’s provisions for administrative expenses, which are meant to assist debtors in operating or winding down their businesses.[3] In light of this conclusion, trade creditors should take care when working with a company in bankruptcy to, among other things, document specific requests for services and materials. Creditors should ensure that services and materials provided to a debtor are actually requested and actually benefit the debtor’s estate.
[1] In re Whistler Energy II LLC, No. CV 17-5470, 2018 WL 3528312, at *1 (E.D. La. July 20, 2018).
[2] 11 U.S.C. § 503(b)(1).
[3] In re Whistler Energy II LLC, 2018 WL 3528312, at *7 (“[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.”).