Gap Period Claim Not Allowed Because of Force Majeure Clause

By: Daniel Ishoo

St. John’s Law Student

American Bankruptcy Institute Law Review Staff     

Section 303 of the Bankruptcy Code allows creditors to initiate an involuntary case by filing a petition with the court.[1] However, until a judge allows the bankruptcy to proceed by entering an order of relief, “the business debtor may continue to operate . . . as though the involuntary case concerning” its debt does not exist.[2] This period of continued operation is generally referred to as the “gap period,” and any debts that the debtor incurs in the ordinary course of business during this time are allowed under section 502(f) of the Bankruptcy Code.[3]

In In re Whistler Energy II, LLC, a bankruptcy court in Louisiana sustained a debtor’s objection to a gap period claim because a force majeure event spanned the entirety of the gap period.[4]  On February 25, 2014, Whistler Energy (“Debtor”) entered into a contract with Nabors Offshore Corporation (“Nabors”) that allowed Nabors to place an oil-drilling rig on Debtor’s drilling platform.[5]  Less than a month later, one of Nabors’ employees died on site, and as a result the United States Bureau of Safety and Environmental Enforcement (“BSEE”) shut down drilling operations on the rig.[6] The governmental shutdown triggered a force majeure clause in the contract that initiated a zero dollar per day rate.[7] Shortly thereafter, several of the debtor’s creditors filed an involuntary bankruptcy petition against the debtor.[8]  The debtor continued to operate during what became an approximately two-month gap period before it consented to the entry of an order for relief under chapter 11 of the Bankruptcy Code.[9] The force majeure event – the shutdown – was in effect for the entire gap period.[10]  Nabors thereafter requested payment of $2,264,690.88 for amounts allegedly due under the contract, which would have been paid before general unsecured claims.[11] However, the court employed the contracted for zero dollar per day force majeure rate.[12]  Consequently, Nabors was owed nothing and the court denied Nabors’ request.

Under section 502(f) of the Bankruptcy Code, gap period claims are entitled to priority status over most other claims.[13]  Presently, the Bankruptcy Court for the Eastern District of Louisiana is the only court to opine on a matter involving both a force majeure clause and a gap period. Thus, this decision may serve as persuasive authority for other courts adjudicating similar matters in the future.

[1] 11 U.S.C. § 303(a) (2012).

[2] 4 Collier on Bankruptcy ¶ 502.07[1] (16th ed. 2010).

[3] See id.

[4] See In re Whistler Energy II, LLC, 571 B.R. 199, 201 (Bankr. E.D. La. 2017).

[5] See id.

[6] See id.

[7] See id.

[8] See id.

[9] See id.

[10] See id.

[11] See id.

[12] See id. at 206.

[13] See 4 Collier on Bankruptcy ¶ 502.07[1] (16th ed. 2010).