Jerry A. Brown, U.S. Bankruptcy Judge.
This matter came before the court on December 12, 13, 19 and 28, 2016 as a hearing on Nabors Offshore Corporation's ("Nabors") Motion for Allowance of Administrative Expense Claim (P-354), and the objections thereto. At the same time Apollo Franklin Partnership L.P., Apollo Centre Street Partnership, Apollo Special Opportunities Managed Account, LP, Apollo Credit Opportunity Fund III AIV I LP, ANS Holdings (WE), Ltd., and Apollo Management, LP's ("Apollo) Objection to Claim 48 by Nabors Offshore Corporation (P-438) was heard. Considering the testimony and evidence presented by the parties, and for the reasons set forth below, the court finds that Nabors is entitled to an administrative priority claim for a part of its post-petition services. Nabors is also entitled to a general unsecured claim in the amount of $6,967,925.98. Nabors has not shown that it is entitled to a gap period claim.
The debtor in this case, Whistler Energy II, LLC (referred to alternatively as "Whistler", the "debtor", or the "debtor-in-possession" as the case may be), owns a platform for oil and gas production in the Gulf of Mexico known as Green Canyon 18. On February 25, 2014 the debtor and Nabors entered into a drilling contract whereby Nabors placed a drilling rig, MODS 201, on the debtor's platform.
Nabors seeks a gap period claim in the amount of $2,264,690.88, an administrative priority claim for work performed prior to demobilization in the amount of $4,320,364.78, and an administrative priority claim for the demobilization in the amount of $2,647,561.20.
The gap period in this case is the time between March 24, 2016 when the involuntary petition was filed, and May 25, 2016 when the order for relief was entered. Section 507(a)(3) gives a second priority to claims "arising in the ordinary course of the debtor's business or financial affairs after the commencement of the case but before the earlier of the appointment of a trustee and the order for relief."
Whistler, Apollo and the UCC contend that the entire gap period claim is governed by the force majeure language in the contract. Whistler, Apollo and the UCC argue that the force majeure provision of the contract went into effect right after the accident of March 10, 2016 that resulted in the death of Nabors' employee. There are two clauses in the contract that pertain to a force majeure event. The first, at paragraph 7.7 states:
The second clause, which is at paragraph 13.3 states:
At trial, the court was under the impression that all parties agreed that the Force Majeure clause went into effect on March 11, 2016, after the accident, and that after the ten days specified in the Force Majeure clause expired on March 21, 2016, no day rate was to be charged. In its post-trial brief, however, Nabors argues for the first time, that no force majeure rate was ever in effect because Whistler did not timely notify Nabors that a force majeure event had occurred. The parties also disagree as to when the force majeure event ended.
First the court will address Nabors' newly raised argument that the force majeure notice was not timely. The court rejects this argument for several reasons: 1) both parties were unarguably aware of the incident on March 10, 2016 resulting in the death of Nabors' employee and the almost immediate orders from BSEE shutting down the drilling operations—the basis of the force majeure declaration; 2) Whistler issued the written notice of force majeure after it received its Notification of Incident(s) of Non-Compliance ("INC") from BSEE notifying Whistler that it would not be able to resume drilling operations; 3) the language of the contract at paragraph 13.3 requiring the notice in writing to the other party states that the notice shall be given "as promptly as possible"; and 4) Nabors' own invoice dated April 4, 2016 clearly states that the force majeure rate went into effect on March 11, 2016 and ended on March 21, 2016.
The incident causing the death of Nabors' employee occurred on March 10, 2016, and resulted in an almost immediate shutdown of the drilling rig. On March 11, 2016 BSEE issued a Preservation Order requiring the debtor and its, "employees, officers, directors, agents, affiliates, contractors, and subsidiary and parent companies" to take all necessary action to "identify, retain, and preserve" all potentially relevant information related to the incident.
The argument by Nabors that the notice of force majeure was untimely on March 30, 2016 is a stretch. The language in the contract states that notice shall be given "as promptly as possible." Of course it's possible that Whistler could have given notice the day after the incident, but it does not seem unreasonable to this court that following the death of a person on its platform, giving notice of force majeure to Nabors was not at the top of the Whistler's to-do list. Nabors was very much aware on March 11, 2016 that the drilling operations had been shut down by BSEE, and at trial Nabors did not show any prejudice that it suffered as a result of the time between the incident on March 10 and the written notice it received on March 30.
Finally, in an invoice dated April 4, 2016, issued well before Nabors formulated its legal argument that the force majeure clause could not be invoked because of untimely notice, Nabors billed Whistler for services at the force majeure rate from March 11 to March 20. This suggests that initially, Nabors did not contest the invocation of the force majeure clause immediately after the March 10
The court finds, in view of the facts known to all parties, that Whistler sent the written notice of force majeure in a timely manner in compliance with the drilling contract.
A second area where the parties disagree, is when the force majeure event ended. Whistler, Apollo and the UCC contend that the force majeure ended on June 14, 2016 when BSEE lifted the drilling suspension order and approved the Performance Improvement Plan ("PIP") it had required Whistler and Nabors to provide. Nabors contends that the force majeure ended on April 15, 2016. Nabors argues that even though the BSEE order suspending drilling was still in effect on April 15, 2016 the debtor should have been able to get the suspension order lifted by then because at that point the PIP should have been developed to such an extent that BSEE could have approved it, and the failure to get it approved by April 15 rested entirely on Whistler. The court finds that the evidence and testimony presented at trial do not support Nabors' conclusion.
After the accident, Whistler received an INC from BSEE on March 25, 2016.
The force majeure clause states that if compliance with the contract is hindered or prevented by an order of governmental authority, then the obligations of the party giving notice (in this case Whistler) shall be suspended during the continuance of any inability so caused except that the Operator shall be obliged to pay to Contractor the Force Majeure Rate.
The court finds that the force majeure event ended on June 14, 2016. Because the force majeure event was in effect for the entire gap period, there is no gap period claim for Nabors.
The central question at issue with respect to the administrative priority claims in this case is difficult to pin down. It lies somewhere at the intersection of the law governing the rejection of executory contracts under § 365, and the law governing administrative claims under § 503 of the Bankruptcy Code. Nabors states that it is seeking an administrative claim only and that it is not seeking post-rejection breach of contract damages;
Nabors asks for an administrative priority in the amount of $4,320,364.78 from May 25 (the date the order for relief was entered) to October 20, 2016 (the date demobilisation began), which is calculated using the contract rate of $45,000 per day that was in effect when the involuntary petition against Whistler was filed. Nabors does use a reduced daily rate of $28,000 per day for some of this time, because after July 20, it reduced the number of its personnel on the rig.
Nabors filed a motion to compel assumption or rejection of the drilling contract with the court on June 17, 2016.
Section 365 of the Bankruptcy Code covers the assumption and rejection of executory contracts and unexpired leases. It allows the trustee in a bankruptcy case to assume or reject any executory contract or unexpired lease of the debtor subject to court approval. It further states:
Essentially, if a trustee (or debtor-in-possession in a Chapter 11 case) elects to reject a contract between the debtor and a third party, then that act constitutes a breach of the contract immediately before the date of the filing of the petition; this leaves the other party to the contract with a general unsecured claim against the bankruptcy estate. It is clear that at a minimum, Nabors has a general unsecured claim against the bankruptcy estate in the amounts it seeks.
Understandably, Nabors would much prefer to have an administrative priority claim rather than a general unsecured claim. An administrative expense priority is allowed to certain expenses incurred by the debtor-in-possession after the order for relief is entered in a Chapter 11 case. Section 503(b) provides that, "[a]fter notice and a hearing, there shall be allowed, administrative expenses, ... including—(1)(A) the actual, necessary costs and expenses of preserving the estate...."
The United States Fifth Circuit Court of Appeal stated in Matter of Trans-American Natural Gas Corp., 978 F.2d 1409 (1992) that:
The Fifth Circuit has held that the burden of proving a claim is for "actual, necessary costs and expenses of preserving the estate" falls on the creditor making the claim for an administrative expense.
In re Enron Corp., 279 B.R. 79 (Bankr.S.D.N.Y. 2002) holds that where there is partial use of a creditor's property, administrative priority status only applies to a claim based on the portion actually used by the debtor-in-possession.
In this case, after June 20 (the contract rejection date), until October 20 (when the rig demobilisation began) Nabors's rig was still located on the debtor's platform, and Nabors' personnel were on the rig maintaining Nabors' equipment, although there was no drilling activity being performed. During this period, the debtor-in-possession used some services provided by Nabors. Whistler does not believe that the amount due under the contractual daily rate for this whole time period should be elevated to an administrative priority claim. Rather, Whistler argues that Nabors should receive an administrative priority claim for the services the debtor-in-possession actually used. These services included, among other things, the use of the crane and the crane operator, the living quarters supplied by Nabors for the use of Whistler's crew, and labor charges for tasks Whistler requested the Nabors' crew perform.
Nabors argues that it is entitled to its daily rate under the contract for this entire time its rig was on the debtor-in-possession's platform. In support of its argument Nabors argues that its rig and personnel remained on the platform after its contract had been rejected because the debtor and Apollo had asked it to remain. This is what constitutes the inducement in Nabors' view. Not surprisingly, Whistler, Apollo and the UCC disagree.
At trial, the following facts were established: Nabors and Whistler signed the drilling contract on February 25, 2014; the drilling contract stated that Whistler "desires to have offshore well drilled or worked over in the Operating Area and to have performed or carried out all auxiliary operations and services detailed in the Appendices hereto or as Operator may require."
Following the incident resulting in the death of Nabors' employee, BSEE almost immediately ordered that the drilling operations stop. BSEE did not order that the production operations stop, and production operations did not stop. There were lengthy discussions of how to implement proper safety measures between BSEE, Whistler, and Nabors after the initial oral order stopping the drilling. BSEE had several requirements that Whistler and Nabors had to fulfill before BSEE would lift its orders as discussed infra in the force majeure portion of this opinion. Eventually, BSEE allowed Whistler to temporarily abandon the well. It was not completely clear to the court whether the decision to temporarily abandon the well was made because Whistler no longer wished to complete the well because of the bankruptcy, because of market conditions, or because of some other reason, but that distinction does not seem to be important.
The work required to temporarily abandon the well took place between June 14 and June 20, 2016, and Whistler paid for that work. On June 17, Nabors filed a motion with this court to compel Whistler to assume or reject the drilling contract. On June 20, Whistler filed a reply stating that it wished to reject the contract. A hearing was held, and on July 20, 2016 the court granted the motion and ordered that the rejection was effective as of June 20, 2016.
On July 25, 2016, Whistler requested that Nabors provide it with a demobilisation plan. The plan was required by and had to be approved by BSEE. Nabors did not submit the plan until September 8, and it took until October 4, 2016 for BSEE to approve the plan. This was at least in part because care had to be taken not to interfere with Whistler's ongoing production operations. Once approval was obtained, Whistler commenced on October 20 to dismantle and remove its rig from Whistler's platform, and the demobilisation was completed by the end of the trial.
There was lengthy testimony as to the work performed by Nabors between June 20 and October 20. Exhibit 9, introduced into evidence, contains all of the reports that detail the services provided by Nabors beginning on the petition date, March 24, 2016. Nabors states that it performed maintenance services and assisted other Whistler contractors with the performance of production duties, which in Nabors' view constitutes a benefit to the estate. The court finds that with the exception of the services specifically requested by the debtor-in-possession during this time (and which the debtor-in-possession agrees that it asked for and has agreed to pay for),
Although Nabors put on some evidence that it was induced by the debtor-in-possession to leave its rig on the platform after the rejection date, the court finds that evidence shows that Nabors and the debtor-in-possession were simply engaged in post-petition negotiations that are typical of the bankruptcy process. There were discussions about trying to classify Nabors as a critical vendor that did not bear fruit.
Once Nabors began demobilisation on October 20, 2016, it was actually providing services that were requested by the debtor-in-possession. Thus the court must determine whether the demobilisation services provided a benefit to the estate. There are several cases cited by Nabors that have found that services or funds that help a debtor-in-possession to fulfill its environmental obligations under state or federal law can qualify as administrative priority expenses.
In Matter of H.L.S. Energy Co., Inc., 151 F.3d 434 (5
The court finds that these cases are not on point with the case before this court. Here, Whistler worked with BSEE to come to the decision that the well should be temporarily abandoned; the work required to temporarily abandon the well was performed by Nabors and paid for by Whistler. According to the testimony of Todd Fox, a Nabors' vice president, that was the end of Whistler's obligation to make the well safe.
The demobilisation of Nabors' rig is an entirely separate matter from the environmental obligations that existed in the cases cited by Nabors. Demobilisation is simply the removal of Nabors' rig from Whistler's platform. It is a consequence of the debtor-in-possession's decision to reject the drilling contract. Once the contract was rejected, there was no longer a need for the rig to occupy space on Whistler's platform. The contract itself, provides for demobilisation at the end of the contract. Although rejection of a contract does not terminate the contract, it does mean that the debtor-in-possession has made a decision that it is not in its best interest to continue the contractual relationship. Thus, the parties to the contract should wind up their business relationship and part ways. This particular business relationship entailed the placement of large and heavily regulated equipment on a platform in the Gulf of Mexico. The removal of that equipment, also subject to heavy regulation, is of course a lengthy and expensive process, but that does not necessarily confer administrative priority on the demobilisation process. The contract did call for payment for the demobilisation process, and Nabors is entitled to a claim against the bankruptcy estate in the amount of what the contract calls for, but that claim is a general unsecured claim, not an administrative priority claim. Nabors has not shown that it is entitled to be paid ahead of Whistler's other creditors for the demobilisation costs.
After the petition date, Whistler requested the use of Nabors' crane and crane operator, Whistler used Nabors' living quarters to house its crew, and Whistler incurred other expenses that it agrees are entitled to administrative priority. The exact amount of the cost of these services and whether some of them have already been paid is not entirely clear to the court. In the post trial briefs, Apollo states that Nabors is owed $897,024 for these services
Whistler agrees that Nabors should get an administrative priority claim for the services Whistler requested and actually used. Whistler uses the rates in the contract to calculate the amount it thinks it owes.
For these reasons, the court finds that Nabors is allowed a general unsecured claim in the amount of $6,967,925.98. The motion for allowance of an administrative claim is granted as to those limited services that Whistler actually requested after March 24, 2016, with the exact amount yet to be determined. The motion for allowance of the gap period claim is denied. The court denies Whistler's claim for set-off against Nabors.
