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Summarizing by Shane Ramsey

Nabors Offshore Corporation v. Whistler Energy II, LLC

Case Type:
Case Status:
Affirmed in part and Reversed in part
18-30940 (5th Circuit, Jul 26,2019) Published
When can post-rejection damages be allowed as administrative expenses? The Court clarified: Claimant can prove "necessity" through "evidence of either a direct request from the debtor-in-possession or other inducement via the knowing and voluntary post-petition acceptance of desired goods and services." Further, "when a debtor-in-possession induces availability and the bankruptcy estate derives a benefit from it, the ordinary cost of ensuring such availability qualifies as an administrative expense." But where costs are mere consequences of rejection, they are not allowed priority expenses.
Procedural context:
Appeal from the U.S. District Court for the Eastern District of Louisiana, which affirmed the Bankruptcy Court's decision denying most of the administrative expense claim sought by Nabors Offshore Corporation for costs incurring during the delayed pre-mobilization period and post-mobilization period. On appeal, the Court of Appeals reversed and remanded the decision with respect to the pre-mobilization period, holding that the lower courts must make further findings in light of the clarified standards. With respect to the post-mobilization costs, the Court of Appeals affirmed the lower courts' denials, concluding that post-mobilization work to remove Nabors' equipment from the debtor's platform was a consequence of the debtor's rejection of the pre-petition contracts. Such costs were general unsecured non-priority rejection damages.
Debtor Whistler Energy II, LLC owned a gas platform on the Outer Continental Shelf in the Gulf of Mexico. In 2014, Whistler entered into drilling contracts with Nabors to supply equipment and related services for the platform. After a drilling accident, BSEE ordered Nabors and Whistler to cease drilling operations of one of the wells pending its investigation. Whistler subsequently decided to abandon that well, which the BSEE approved. Then, on May 25, 2016, Whistler became a debtor in a chapter 11 bankruptcy. One month later, on June 20, 2016, Whistler rejected its pre-petition contracts with Nabors. Rejection of the Nabors contracts meant Nabors would be required to remove its equipment from the platform. This was no simple task, and the bankruptcy court divided the work into two categories: (1) the pre-mobilization period and (2) the post-mobilization period. First, Debtor Whistler asked Nabors to submit a mobilization plan for the removal of the equipment, so that the plan could be submitted to the BSEE with a request for a waiver to ensure Whistler's ongoing drilling efforts on the platform were not disrupted. Nabors submitted such a plan on September 8, 2016, and the plan (and requested waiver) were approved by the BSEE on October 20, 2016. However, during this "pre-mobilization period" (from the June 20 rejection date until the October 20 approval date), Nabors' equipment and various crew remained on Whistler's platform, waiting for approval and maintaining its equipment pending such approval. During this time, Nabors contended that it incurred $4.32 million in pre-mobilization expenses. Then, once the mobilization period began on October 20, 2016, Nabors incurred an additional $2.65 million to remove its equipment from the platform. Nabors sought an administrative expense for both pre- and post-mobilization expenses. The bankruptcy court denied all such costs, except for approximately $900,000 of costs that Whistler acknowledged it specifically requested. On appeal, the District Court affirmed. Nabors appealed to the Fifth Circuit. On appeal, the Fifth Circuit clarified its standards for administrative expenses. Based on such clarifications, the case was remanded for the bankruptcy court to determine: (1) whether Whistler induced Nabors to stay on the platform; (2) the length of time Nabors stayed on the platform because of Whistler's post-petition needs; and (3) the actual and necessary costs of staying on the platform during this time period.
Higginson, Owen, Southwick

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