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In re:
) Chapter 11
OBJECTION OF DEBTORS TO MOTION OF MARATHON OIL ALLOWANCE AND PAYMENT OF ADMINISTRATIVE EXPENSE UNDER SECTION S03(b)(I)(A) (DOCKET NO. 1101) PURSUANT TO 11 D.S.C. S02(b) AND FEDERAL RULE OF BANKRUPTCY PROCEDURE 3007
COMPANY FOR
or "Movants") hereby fie this objection (the "Objection") pursuant to 11 U.S.c. 502(b) and
Federal Rule of
Marathon Oil Company for Allowance and Payment of Administrative Expense Under 11 U.S.c.
Section 503(b)(1 )(A) (Docket No. 1101) ("Claim 1101") filed by Marathon Oil Company
("Marathon" or "Claimant") on N ovem ber 5, 2009. Claim 1101 seeks the recovery of an
administrative expense of
Debtors' asserted liability to Marathon for a 31.6% share of postpetition decommissioning and
maintenance obligations association with those interests of
processing offshore platform (known as the Spurr Platform) and any related onshore facilities, oil
the Debtors' federal tax identification The Debtors in these cases, along with the last four digits of each of number, are: Pacific Energy Resources Ltd. (3442); Petrocal Acquisition Corp. (6249); Pacific Energy Alaska
Holdings, LLC (tax J.D. # not available); Cameros Acquisition Corp. (5866); Pacific Energy Alaska Operating LLC (7021); Cameros Energy, Inc. (9487); and Gotland Oil, Inc. (5468). The mailing address for all of the Debtors is 111 W. Ocean Boulevard, Suite 1240, Long Beach, CA 90802.
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and gas drillng, development, production and processing facilities located in Cook Inlet, Alaska
(collectively, the "Spurr Facilities").
JURISDICTION
i. The Court has jurisdiction over this matter pursuant to 28 U.S.c. 157
and 1334. Venue is proper pursuant to 28 U.S.c. 1408 and 1409. This is a core proceeding
pursuant to 28 U.S.c. 157(b)(2)(B).
BACKGROUND
3. On March 9, 2009 (the "Petition Date"), the Debtors commenced these
cases by each fiing a voluntary petition in this Court. The Debtors have continued in the
possession of
their property and have continued to operate and manage their business as debtors
the Petition Date, were engaged in the acquisition, development, and exploitation of oil and gas
properties in the western United States. As of the Petition Date, one of the Debtors, Pacific
Energy Alaska Operating LLC ("PEAO"), and Marathon shared working interests in the Spurr
Facilities. These properties were leased from the State of Alaska. As of
PEAO and Marathon each had a 50% working interest in the Spurr Facilities. Operations at the
Spurr Facilities ceased years prior to the Petition Date; only decommissioning remained to be
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done.
5. At all relevant times, Marathon was the operator of
As of
the Petition Date, PEAO was a party to various contracts with Marathon setting forth the
relationship of
the parties with respect to the Spurr Facilities (the "Contracts"). Under the terms
of
liabilities were no more than 31.6% as to PEAO, and at least 68.4% as to Marathon, of
costs.
6. Recognizing that there could be no conceivable value associated with the
long-defunct Spurr Facilities, the Debtors promptly moved on May 11,2009, to abandon their
interests therein (Docket No. 291) (the "Abandonment Motion"). Marathon objected to
abandonment on June 1, 2009 (Docket No. 371), and then insisted on a series of continuances to
which the Debtors agreed, provided that abandonment would be retroactive at least to the date of
the initial hearing on the Abandonment Motion of June 3, 2009.
7. On October 6,2009, this Court entered its order (Docket No. 975) (the
"Abandonment Order") authorizing and deeming Debtors to have abandoned their interests in the
Spurr Facilities and rejected the Contracts nunc pro tunc to June 3, 2009.
CLAIM 1101
8. On November 5, 2009, Marathon filed Claim 1101, which seeks to have
Spurr Facilities. Marathon expects that such liabilities will range between $21,000,000 and
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$35,000,000). As of
the filing of
Claim 1101,
Marathon had already incurred $2,450,731.07 for "Decommissioning and maintenance obligations" (Claim 1101 at 3, line 4); as a result, Marathon asserts that $774,431.02 (or 31.6%
of $2,450,731.07) of its claim has been liquidated (id. at 3 n.2).
RELIEF REQUESTED
9. Pursuant to section 502(b) of
3007, the Debtors object to Claim 1101 on three grounds. First, insofar as Claim 1101 is
asserted against any of
the Debtors other than PEAO, it is asserted against the wrong debtor
because only PEAO shared a working interest in the Spurr Facilities with Marathon and was a
party to the Contracts. Second, insofar as Claim 1101 asserts a claim for future
decommissioning expenses, Claim 1101 should be disallowed because it is a contingent claim of
a co-debtor under section 502( e) of the Bankruptcy Code. Third, Claim 1101 in its entirety is not
entitled to administrative priority because the amounts expended by Marathon have not benefited
the Debtors' estates, but solely Marathon itself. 2
A. Claim 1101 Should Be Disallowed in Its Entirety Against All Debtors Other Than
PEAO 10. While Marathon conclusorily asserts in paragraph 10 of Claim 1101 that
"Each of the Decommissioning and maintenance obligations that were incurred by Marathon
were incurred while the Debtors owned the property or are a result of state law obligations that
2 Debtors reserve the right to subsequently and separately contest the amount of Claim i 101 should that prove
necessary.
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the Debtors remain liable for despite abandonment" (at 4, lines 12-15, emphases added), it was
only PEAO that prior to the entry of
working interest in the Spurr Facilities with Marathon and was a party to the Contracts.
Admittedly, all of
the Debtors joined in the Abandonment Motion; but this was expressly stated
wrong Debtors and should be disallowed against such Debtors on that basis alone.
B. Claim 1101 Should Be Disallowed as to Future Decommissionin2; Expenses
12. Except as to $774,431.02 that Marathon alleges has been actually incurred
the
Bankuptcy Code, the claimant must assert a (i) contingent claim, (ii) for reimbursement of a
debt, (iii) for which the debtors and the claimant are co-liable. All three elements must be
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satisfied for the claim to be disallowed." In re RNI Wind Down Corp., 369 B.R. 174, 181
(Bankr. D. DeI. 2007) (citing In re Pinnacle Brands Inc. 259 B.R. 46, 55 (Bank. D. DeI. 2001)).
Further, section 502( e)(1 )(B) applies to postpetition claims as well as prepetition claims. Juniper
Dev. Group v. Kahn (In re Hemmingi.lIay Transport, Inc.), 993 F.2d 915, 930 (1 st Cir. 1993).
14. Here, the Future Costs portion of Claim 1101 should be disallowed under
section 502( e)(1 )(B) as the contingent claim of a co-debtor (Marathon) for another creditor (State
of Alaska). The State of Alaska (the "State") fied claim number 449 against PEAO and
amended claim number 465 against PERL,3 each of
$80,000,000 and contingent environmental claims. Although the Debtors believe that a portion
of
the State's claims have been satisfied through the sale of certain of PEAO's Alaska assets, the
State has informed the Debtors that it continues to assert all available claims. Hence, all three
elements (co-liability, contribution, and contingency) are met for disallowance of
the Future
Costs portion of Claim 1101 under section 502( e)( 1 )(B) of the Bankruptcy Code.
15. First, Marathon and PEAO are co-liable to the State for decommissioning
expenses associated with the Spurr Facilities. In Claim 1101, Marathon asserts at least two
sources (contract and statute) for Marathon's and PEAO's co-liability to the State for
decommissioning obligations associated with the Spurr Facilities. Claim 110 1 ~ 4.
Amended claim number 465 amended claim number 447 against PERL. In addition to claim number 449 against PEAO, the State fied claim number 448 against PEAO, which is an unliquidated claim for at least $4,000,000 for environmental clean-up.
I 7066.3
16. Second, Marathon admits that it wil have a "contribution" claim against
PEAO for the unpaid share of costs associated with decommissioning the Spurr Facilities. Claim
1101 ~ 10 ("if Marathon completes the Decommissioning, then Marathon is entitled to
reimbursement from the Debtors because of indemnification and contribution liability that may
arise under Alaska law").
accrued and is ... dependent upon some future event that may never happen. ", RNI, 369 B.R. at
182. For instance, bankuptcy courts have concluded that environmental clean-up obligations are
contingent until actually incurred and funded. See, e.g., Norpak Corp. v, Eagle-Picher Indus.,
Inc. (In re Eagle-Picher Indus" Inc.), 177 B.R. 869, 871 (Bankr. S.D. Ohio 1995) (the debtor
remained obligated to a government for environmental clean-up even after paying a co-obligor because the co-obligor might not actually do the clean-up or the co-obligor might do the clean-up
in a way that the government did not find satisfactory), aff'd, 131 F.3d 1185 (6th Cir. 1997);
RNI, 369 B.R. at 190 (purpose of section 502( e)(1 )(B) is to preclude double payment and is
directed at the diffculty of administering an estate while contingent claims exist); In re APCO
Liquidating Trust, 370 B.R. 625, 636 (Bankr. D. DeI. 2007) (section 503(e)(1)(B) encourages
cleanup because contingent claim for contribution for debtor that is co-liable is disallowed unless
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amounts are incurred); In re Kaiser Group Int 'I, 289 B.R. 597, 608 (Bankr. D. DeI.
2003)(creditor's "claim must be disallowed (under section 502(e)(1)) to the extent that it seeks to
recover future costs."). See also Juniper Dev. Group v. Kahn (In re Hemmingway Transport,
Inc.), 126 B.R. 656, 662 (D. Mass. 1991) (unpaid future response costs are contingent within the
meaning of section 502( e)(1 )(B) notwithstanding that the co-liable creditor received an agency
notice letter naming it as a potentially responsible party), aff'd in relevant part, 993 F.2d 915,
930930 (1 st Cir. 1993); Syntex Corp. v. Charter Co. (In re Charter Co.), 862 F.2d 1500, 1504
(11th Cir. 1989) (section 502( e)(1 )(B) encourages clean-up under CERCLA because expenses
The law is clear that "(t)he contingency contemplated by (section) 502( e)(1 )(B) relates to both payment and liability." Therefore, a claimant's "claim is contingent until their liability is established... and the co-debtor has paid the creditor."
APCO Liquidating Trust, 370 B.R. at 636 (citations omitted). Plugging and abandonment
obligations in particular have been determined by at least one bankruptcy court as contingent
obligations until actually funded. In re Tri-Union Dev. Corp., 314 B.R. 611, 617 (Bankr. S.D.
Tex. 2004) ("Because the (government) has yet to call on any of
P&A Obligations, the P&A Obligations remain unfunded, and are thus contingent as envisioned
by 502(e).").
20. Here, Marathon admits that the Future Costs portion of Claim 1101 have
not yet been incurred. Claim 110 1 ~ 6. The Future Costs portion of Claim 1101 is therefore
68773-002\DOCS_LA:217066.3
contingent. As the claim is also one for contribution (and reimbursement) for which PEAO is
co-liable, the Future Costs portion of Claim 1101 must be disallowed under section 502( e)(1 )(B).
C. Any Portion of Claim 1101 That Is Not Disallowed Should Be Reclassified As General Unsecured
expenses included under section 503(b)(1 )(A) is to provide an incentive for creditors and others
Resources v Tri-State Clinical Laboratories, 178 F.3d 685,691 (3d Cir. 1999) ("(T)hose who
continue to transact business with the debtor during the Chapter 11 case, and who would suffer
financially as a result, are entitled to priority over other creditors who have not affrmatively
assumed such risk").
23. For a debt to qualify as an administrative expense, it must satisfy a two-
prong test: "the claimant must establish that its expense arose (1) from a postpetition transaction
with the debtor and (2) that the transaction accorded an actual benefit to the estate." In re Insilco
Tech., Inc., 309 B.R. 111, 114 (Bankr. D. DeI. 2004) (citing Calpine Corp. v. O'Brien Envtl
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Energy, Inc, (In re O'Brien Envtl Energy, Inc.), 181 F.3d 527, 532-533 (3d Cir. 1999); In re
Unidigital, Inc., 262 B.R. 283, 288 (Bankr. D. DeL. 2001).
24. Under the express terms of section 503(b)(1)( a), for a postpetition liability
post-petition benefit to the estate.") (citing In re CM Holdings, Inc., 264 B.R. 141,
149 (Bankr. D. DeL. 2000) (administrative expense claims are equitable in nature and are valued
at the amount of
25. The claimant carries the "heavy burden of demonstrating that the costs and
fees for which it seeks payment provided an actual benefit to the estate and that such costs and
expenses were necessary to preserve the value ofthe estate assets." 0 'Brien, 181 F.3d at 533
(emphasis added); see also Goody's Family Clothing Inc, v Mountaineer Property Co. II (In re
Goody's family Clothing, Inc.), 401 B.R. 656, 663-664 (Bankr. D. DeI. 2009). "Since the
affording of priority status to one creditor has an impact upon other creditors of
the debtor's
estate and conflicts with the goal of bankruptcy to provide creditors with an equal distribution of
entitled to first priority under (503(b)(1)(A)), the debt must arise from a transaction with the
10
debtor-in-possession ... (and) the consideration supporting the right to payment (must be)
beneficial to the debtor-in-possession in the operation of
27. Here, given that the Future Costs have yet to be spent, no "actual benefit"
and of
itself
precludes such costs from being awarded administrative expense status. See Insilco, 309 B.R. at
114 n.8 (concluding that the mere fact costs had not been actually expended "alone could be a
sufficient ground upon which to deny administrative expense status to the... claim forfuture
investigation and
28. Further, as noted by this Court in Insilco: "(i)n general, only those costs
incurred to cleanup property which an estate has an interest in or owns may qualify as
administrative expenses." 309 B.R. at 114. PEAO has no interest in the Spurr Facilities by
virtue of
the Abandonment Order. See In re Kent, 411 B.R. 743, 752 (Bankr. M.D. Fla. 2009)
the Bankruptcy ceases to be property of
the
estate and rights to the property are treated as if no bankruptcy petition was filed).
29. As for the portion of Claim 1101 relating to past decommissioning costs,
the first element to establishing an administrative claim is that it must arise from a post
petition
transaction with the debtor. '''It is only when the debtor-in-possession's actions themselves. . .
give rise to a legal
liability that the claimant is entitled to the priority of a cost and expense of
administration. ", Bachman v, Commercial Fin. Servs. Inc, (In re Commercial Fin. Servs., Inc.),
246 F.3d 1291, 1294 (lOth Cir. 2001) (quoting Cramer v. Mammoth Mart, Inc, (In re Mammoth
Mart, Inc.), 536 F.2d 950, 954 (1 st Cir. 1976)). '''A debt is not entitled to priority simply
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2 I
7066.3
11
because the right to payment arises after the debtor in possession has begun managing the
estate. '" In re Mid-A
mer. Waste Sys., Inc" 228 B.R. 816, 821 (Bank. D. DeI. 1999).
abandon PEAO's interests therein. The Spurr Facilities have been a liability from the start of
this case and the Debtors have done nothing but try to abandon their interests therein as soon as
possible. The Spurr Facilities have provided no benefit, and never had the potential to provide
any benefit to these estates. Marathon is therefore not entitled to any administrative claims
relating to the Spurr Facilities, particularly for any charges that may have been incurred after
June 3, 2009, the effective date of
RESERVATION OF RIGHTS
31. The Movants expressly reserve the right to amend, modify or supplement
this Objection, and to file additional objections to any other claims (filed or not) that may be
asserted against the Debtors. Should one or more of
Objection be overruled, the Movants reserve their right to object to the Claimant's claims in this
bankruptcy case on any other ground that bankptcy and nonbankruptcy law permits.
32. Further, notwithstanding anything contained in this Objection shall be
construed as a waiver of any rights that Debtors or their estates may have (a) to bring avoidance
actions under the applicable sections of
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12
setoff
against Marathon
WHEREFORE, the Movants respectfully request that the Court enter an order
disallowing or reclassifying Claim 1101 for the reasons set forth herein.
* S
I a . Kharasch (CA Bar No.1 09084)
Maxim B. Litvak (CA BarNo. 215852) James E. O'Neill (Bar No. 4042)
919 North Market Street, 17th Floor
Email: ikharasch(gpszilaw.com
i hunter(gpszilaw .com
mlitvak(gpszi law.com
ioneil(gpszi law. com
68773-002\DOCS_LA:217066J
13
In re:
) Chapter 11
)
) Case No. 09-10785 (KJC) )
) Related Docket No.1 101
)
Hearing Date: April 19,201 Oat 3:00 p.m.
FOR
NOTICE OF HEARING ON MOTION OF MARATHON OIL COMPANY ALLOWANCE AND PAYMENT OF ADMINISTRATIVE EXPENSE UNDER 11 U.S.c. SECTION S03(b)(1)(A) rnOCKET NO. 11011
TO: The United States Trustee for the District of Delaware, all affected claimants, and all
parties on the Rule 2002 Service List.
The above captioned Debtors (the "Debtors") have filed the attached Objection to
Motion of Marathon Oil Company for Allowance and Payment of Administrative Expense
Under 11 U.S.c. Section 503(b)(1)(A) Docket No. 1101) Pursuant to 11 U.S.c. 502(b) and
Payment of Administrative Expense Under 11 U.S.C. Section 503(b)(1)(A) (Docket No. 1101) is
scheduled to be held on April
Delaware, 824 N.
Holdings, LLC (tax J.D. # not available); Cameros Acquisition Corp. (5866); Pacific Energy Alaska Operating LLC
(7021); Cameros Energy, Inc. (9487); and Gotland Oil, Inc. (5463). The mailing address for all of
the Debtors is
68773-002\DOCS_LA:216614.2
/l~ ~ 0J ki
Jame .T. Hunter (CA Bar No. 73369) Maxim B. Litvak (CA Bar No. 215852)
James E. O'Neil (Bar No. 4042)
919 North Market Street, 17th Floor P.O. Box 8705 Wilmington, DE 19899-8705 (Courier 19801)
Telephone: (302) 652-4100
Facsimile: (302) 652-4400
Emai1: ikharasch(gpszilaw.com
ihunter(apszilaw.com
mli tvak(gpszi law .com
ioneil(gpszi law.com
Counsel for Debtors and Debtors in Possession
68773-002\DOCS_LA:216614.2