CASE: Matter of Whistler Energy II, LLC, 931 F.3d 432 (5th Cir. 7/26/2019)
QUESTION: May a creditor who did work for the Debtor continuously before and after bankruptcy, classify some or all of its expenses as “administrative claims,” thereby gaining priority over prepetition claims of other creditors?
ANSWER: It all depends upon the facts surrounding each particular expense.  In Matter of Whistler Energy II, LLC, 931 F.3d 432 (5th Cir. 7/26/2019), the Fifth Circuit reversed both the bankruptcy court and district court’s ruling that some of the expenses were entitled to administrative priority and remanded for further proceedings, holding that a creditor can establish that its expenses are attributable to the actions of the bankruptcy estate through evidence of either a direct request from the Debtor or other inducement via the knowing and voluntary postpetition acceptance of desired goods or services.
FACTS: The Debtor, Whistler Energy II LLC, owned an oil-and-gas platform in the Gulf of Mexico.  Prior to bankruptcy, the Debtor contracted with Nabors Offshore Corp. (“Nabors”) to run its drilling operations using Nabors’ equipment.  Following the death of a Nabors employee, a federal regulatory agency ordered the Debtor to shut down its drilling operations. Two weeks later, creditors filed an involuntary Chapter 11 petition against the Debtor, and the U.S. Bankruptcy Court for the Eastern District of Louisiana allowed the case to proceed with the company as debtor-in-possession. The court allowed the Debtor to reject the Nabors’ contract effective about three (3) months after the bankruptcy filing.  Nabors then handled a demobilization plan, approved by the federal regulatory agency, to remove its drilling equipment from the platform. Nabors filed a motion in the bankruptcy asserting an administrative expense claim of more than $6 million for maintaining drilling equipment and demobilizing the well. The Bankruptcy Code gives priority to postpetition administrative expense claims and requires they be paid in full. Section 503(b)(1)(A) of the code defines administrative expenses as “the actual, necessary costs and expenses of preserving the estate.”  A committee of unsecured creditors and several other creditors objected to Nabors’ claim. The Bankruptcy Court said Nabors failed to show that all services provided during the Chapter 11 case were necessary to preserving the bankruptcy estate.   The bankruptcy court gave administrative priority to $900,000 of Nabors’ claim, the value of specific services the Debtor requested after the contract rejection. The U.S. District Court for the Eastern District of Louisiana affirmed on appeal, and Nabors appealed to the Fifth Circuit.  In a July 26, 2019, opinion, a three-judge panel of the Fifth Circuit reversed the ruling and remanded for further factfinding.   Go here for a copy of this reported case.
DISCUSSION: Although rejection of a prepetition executory contract gives rise to a breach of contract claim that qualifies as a general prepetition claim, the contract counterparty (Nabors here) sometimes may recover on an administrative claim basis from the bankruptcy estate if it can show that the Debtor benefited from its postpetition performance in some way.  Although the bankruptcy court held a four-day hearing and heard extensive testimony regarding Nabors’ claim, the Fifth Circuit found that the “bankruptcy court did not make determinative factual findings as to each party’s responsibility for the length of the pre-demobilization period,” and refused to do so on appeal.  The Fifth Circuit vacated the lower courts’ ruling and remanded so that the bankruptcy court could determine whether the Debtor induced Nabors to keep its equipment on the platform, and to consider the specific costs incurred by Nabors in keeping it there.  Parties to rejected executory contracts that are involved in postpetition complexities with a chapter 11 Debtor may be interested in studying the Fifth Circuit’s detailed analysis in Whistler closely.