diff --git a/nova/compute/manager.py b/nova/compute/manager.py
index 727249fa6d37..0c27fd49715b 100644
--- a/nova/compute/manager.py
+++ b/nova/compute/manager.py
@@ -3525,7 +3525,6 @@ class ComputeManager(manager.Manager):
         except Exception:
             # Catch all here because this could be anything.
             LOG.exception('set_admin_password failed', instance=instance)
-            self._set_instance_obj_error_state(context, instance)
             # We create a new exception here so that we won't
             # potentially reveal password information to the
             # API caller.  The real exception is logged above
diff --git a/nova/tests/unit/compute/test_compute_mgr.py b/nova/tests/unit/compute/test_compute_mgr.py
index ad52ca152f2f..7578fd18fdd3 100644
--- a/nova/tests/unit/compute/test_compute_mgr.py
+++ b/nova/tests/unit/compute/test_compute_mgr.py
@@ -3545,14 +3545,9 @@ class ComputeManagerUnitTestCase(test.NoDBTestCase):
                               instance=instance,
                               new_pass=None)
 
-            if (expected_exception == exception.SetAdminPasswdNotSupported or
-                    expected_exception == exception.InstanceAgentNotEnabled or
-                    expected_exception == NotImplementedError):
+            if expected_exception != exception.InstancePasswordSetFailed:
                 instance_save_mock.assert_called_once_with(
                     expected_task_state=task_states.UPDATING_PASSWORD)
-            else:
-                # setting the instance to error state
-                instance_save_mock.assert_called_once_with()
 
             self.assertEqual(expected_vm_state, instance.vm_state)
             # check revert_task_state decorator
@@ -3570,7 +3565,7 @@ class ComputeManagerUnitTestCase(test.NoDBTestCase):
         exc = exception.Forbidden('Internal error')
         expected_exception = exception.InstancePasswordSetFailed
         self._do_test_set_admin_password_driver_error(
-            exc, vm_states.ERROR, None, expected_exception)
+            exc, vm_states.ACTIVE, None, expected_exception)
 
     def test_set_admin_password_driver_not_implemented(self):
         # Ensure expected exception is raised if set_admin_password not