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In re Whistler Energy II, L.L.C.

United States Court of Appeals, Fifth Circuit

July 26, 2019

In the Matter of: WHISTLER ENERGY II, L.L.C., Debtor
v.
WHISTLER ENERGY II, L.L.C.; APOLLO FRANKLIN PARTNERSHIP, L.P.; APOLLO CENTRE STREET PARTNERSHIP, L.P.; APOLLO SPECIAL OPPORTUNITIES MANAGED ACCOUNT, L.P.; APOLLO CREDIT OPPORTUNITY FUND III AIV I LP; ANS HOLDINGS WE, LIMITED; APOLLO MANAGEMENT, L.P.; OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF WHISTLER ENERGY II, L.L.C., Appellees NABORS OFFSHORE CORPORATION, Appellant

          Appeal from the United States District Court for the Eastern District of Louisiana

          Before OWEN, SOUTHWICK, and HIGGINSON, Circuit Judges.

          STEPHEN A. HIGGINSON, Circuit Judge.

         This appeal arises out of the Chapter 11 bankruptcy proceeding of Whistler Energy II, L.L.C. Whistler owns an oil and gas production platform in the Outer Continental Shelf in the Gulf of Mexico. In 2014, it contracted with Nabors Offshore Corporation to provide a drilling rig and related equipment and services on the Whistler platform. Whistler later entered bankruptcy proceedings and rejected the drilling contract. Nabors's personnel and equipment nonetheless were present on the platform for several months pending the preparation of a demobilization plan and regulatory approval.

         Nabors then sought administrative priority in the bankruptcy proceeding for expenses incurred after the rejection of its contract. The bankruptcy court granted this request in part and denied it in part. Nabors appealed, and the district court affirmed. After clarifying the scope and definition of administrative expenses, we remand for reconsideration.

         I.

         The relationship between Whistler and Nabors had three major phases: (1) the contract period; (2) the pre-demobilization period; and (3) the demobilization period. This dispute centers on the last two time periods.

         A.

         Whistler entered into a drilling contract with Nabors in February 2014, with the goal of drilling two new wells. Under this contract, Nabors provided a drilling rig, engines and generators, a crane, living quarters, and crew members to operate the equipment. The contract was later amended to include additional cranes and living quarters. Nabors charged a daily rate for its equipment and services. Whistler was already producing other oil and gas wells on its platform and these production activities were independent of Nabors's drilling operation.

         Nabors completed the first of two wells for Whistler in October 2015. Work then began on the second well, known as the A-13 well. On March 10, 2016, a Nabors employee died in an accident on the Whistler platform. The U.S. Bureau of Safety and Environmental Enforcement (BSEE) immediately ordered both Nabors and Whistler to stop drilling activity. BSEE permitted Whistler to continue producing its existing wells. BSEE also issued a preservation order requiring Whistler and Nabors to preserve information and physical materials relevant to the accident. Whistler later decided to temporarily abandon the A-13 well, and BSEE approved this decision. Between June 14 and June 20, Nabors undertook the necessary measures to temporarily abandon the A-13 well. Whistler paid Nabors for this work at the contract rate.

         During this same time period, Whistler entered bankruptcy proceedings. On March 24, 2016, several of Whistler's creditors filed an involuntary bankruptcy petition under Chapter 11 of the Bankruptcy Code. Whistler's primary secured creditor is a group of related lenders ("Apollo"). Whistler consented to entry of an order of relief on May 25, and Whistler became the Chapter 11 debtor-in-possession. See 11 U.S.C. § 1101(1). On June 17, Nabors filed a motion in bankruptcy court to compel assumption or rejection of the drilling contract. Whistler responded on June 20, indicating that it was electing to reject the contract. On July 20, the bankruptcy court held that the contract was rejected effective June 20, 2016.

         B.

         With the rejection of the drilling contract, the parties entered the pre-demobilization period. By June 20, Nabors was no longer conducting any drilling operations. Yet Nabors's rig, equipment, and some personnel continued to be present on the Whistler platform. Removing all this equipment from an offshore platform in the Gulf of Mexico was not a simple task. On July 25, Whistler sent a letter to Nabors asking it to provide a demobilization plan. The letter stated that Whistler would "cooperate with Nabors and facilitate an orderly demobilization of the Nabors Rig while ensuring that there is no disruption to Debtor's production operations on the platform." Nabors submitted a demobilization plan on September 8. The bankruptcy court found that this "plan was required by and had to be approved by BSEE."

         On October 4, Whistler notified BSEE that it planned to remove the Nabors rig from the platform and requested that the preservation order be waived or terminated to permit demobilization. That same day, BSEE released Whistler and Nabors from the preservation order, except as to certain documents related to the accident. On October 5, Whistler sought a "production shut-in departure" from BSEE. This departure, or waiver, was necessary to allow Whistler to continue producing oil and gas from its existing wells while demobilization was in progress.[1] BSEE approved the waiver on October 20, and demobilization commenced that day.

         As a result of this lengthy pre-demobilization process, Nabors remained on the Whistler platform for several months after the rejection of its contract. The bankruptcy court explained that, during this time, "Nabors' personnel were on the rig maintaining Nabors' equipment, although there was no drilling activity being performed." Further, the bankruptcy court found that Whistler "used some services provided by Nabors," including "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." According to Nabors, its personnel also attended daily meetings presided over by Whistler and drafted daily reports for Whistler's approval. Whistler contends, however, that these daily reports reflect that Nabors's crew members spent most of their time waiting and maintaining their own equipment.

         C.

         On October 20, Nabors began the demobilization process. The bankruptcy court found that, by this time, the work needed to temporarily abandon the A-13 well was completed and the well was in compliance with BSEE regulations. Demobilization primarily involved dismantling and removing the Nabors rig and other equipment from the Whistler platform. Nabors asserts that it also installed Whistler's cranes and demobilized third-party contractor equipment at Whistler's request. Whistler represents that it agreed to pay Nabors for the crane installation, and that the third-party contractors were responsible for their own costs. Demobilization was completed by December 13, 2016.

         D.

         Unsurprisingly, this complex undertaking came at considerable expense. Hoping to recover its costs on a priority basis, Nabors asked the bankruptcy court to classify its pre-demobilization and demobilization expenses as administrative expenses under 11 U.S.C. § 503(b)(1)(A). This statutory provision grants priority status to certain necessary expenses incurred after the filing of a bankruptcy petition that benefit the bankruptcy estate. Id.; § 507(a)(2). Nabors requested administrative priority for $4.32 million in pre-demobilization expenses and $2.65 million in demobilization costs. Whistler, Apollo, and the Official Committee of Unsecured Creditors objected to the majority of Nabors's request, although Whistler acknowledged that Nabors was entitled to administrative priority for the cost of certain specific services that Whistler requested and used during the pre-demobilization period.

         The bankruptcy court held a four-day hearing and heard extensive testimony regarding Nabors's claim for administrative expenses. In its order, the court found it "clear that at a minimum, Nabors has a general unsecured claim against the bankruptcy estate in the amounts it seeks." But the bankruptcy court rejected Nabors's argument that this entire amount was entitled to administrative priority. With regard to the pre-demobilization period, the court reasoned that "administrative priority status only applies to a claim based on the portion actually used by the debtor-in-possession." The bankruptcy court then found 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), the services provided are akin to Nabors being available to provide services, as opposed to Nabors actually providing services to the debtor-in-possession." The court further concluded that Whistler did not induce any other pre-demobilization performance by Nabors.

         The bankruptcy court denied any priority to Nabors's demobilization expenses, explaining that demobilization was simply the consequence of the rejection of the contract and did not benefit the bankruptcy estate. Nabors ultimately received an administrative priority claim in the amount of $897, 024 and a general unsecured contract rejection damages claim in the amount of $6, 070, 902. Nabors filed a motion for reconsideration, which the bankruptcy court denied. The district court affirmed the bankruptcy court's order, noting that "[a]though there is evidence that Nabors provided, and Whistler used, additional materials and services after the bankruptcy petition was filed, there is no evidence that Whistler requested their use." The district court also rejected Nabors's argument that demobilization was necessary to ensure compliance with Whistler's regulatory obligations. Nabors now appeals.

         II.

         "We review the decision of the district court by applying the same standard to the bankruptcy court's findings of fact and conclusions of law as the district court applied." In re Jack/Wade Drilling, Inc., 258 F.3d 385, 387 (5th Cir. 2001). "Acting as a second review court, we review a bankruptcy court's legal conclusions de novo and its findings of fact for ...


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