610 B.R. 239 (D.Del. 2020), 17-10828-JTD, In re Venoco, LLC

Docket Nº:Bankr. 17-10828-JTD (Jointly Administered)
Citation:610 B.R. 239
Opinion Judge:CONNOLLY, UNITED STATES DISTRICT JUDGE
Party Name:IN RE VENOCO, LLC, et al., Debtors. v. Eugene Davis, in his capacity as Liquidating Trustee of the Venoco Liquidating Trust, Appellee. State of California, Appellant, California State Lands Commission, Appellant, v. Eugene Davis, in his capacity as Liquidating Trustee of the Venoco Liquidating Trust, Appellee. Civ. Nos. 19-mc-07-CFC, 19-mc-11-CFC
Attorney:David M. Fournier, Pepper Hamilton LLP, Wilmington, DE, Alicia M. Clough, Donald A. Miller, Marc S. Cohen, Steven S. Rosenthal, for Appellant. Robert J. Dehney, Andrew R. Remming, Matthew Talmo, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, DE, Brittany M. Pemberton, Jason B. Hutt, Mark E. De...
Case Date:January 03, 2020
Court:United States District Courts, 3th Circuit, District of Delaware

Page 239

610 B.R. 239 (D.Del. 2020)

IN RE VENOCO, LLC, et al., Debtors.

State of California, Appellant,

v.

Eugene Davis, in his capacity as Liquidating Trustee of the Venoco Liquidating Trust, Appellee.

California State Lands Commission, Appellant,

v.

Eugene Davis, in his capacity as Liquidating Trustee of the Venoco Liquidating Trust, Appellee.

Bankr. No. 17-10828-JTD (Jointly Administered)

Civ. Nos. 19-mc-07-CFC, 19-mc-11-CFC

United States District Court, D. Delaware

January 3, 2020

Page 240

David M. Fournier, Pepper Hamilton LLP, Wilmington, DE, Alicia M. Clough, Donald A. Miller, Marc S. Cohen, Steven S. Rosenthal, for Appellant.

Robert J. Dehney, Andrew R. Remming, Matthew Talmo, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, DE, Brittany M. Pemberton, Jason B. Hutt, Mark E. Dendinger, Robert G. Burns, Ryan Eletto, for Appellee.

MEMORANDUM OPINION

CONNOLLY, UNITED STATES DISTRICT JUDGE

Page 241

The Liquidating Trustee of the Venoco Liquidating Trust filed this post-confirmation adversary proceeding in the Bankruptcy Court against the State of California and the California State Lands Commission (collectively, "the State Defendants"). The two-count Complaint alleges "inverse condemnation" claims under the Takings Clauses of the United States and California Constitutions (Count I) and § 105(a) of the Bankruptcy Code, 11 U.S.C. § 105(a) (Count II). Adv. D.I. 1 ¶¶ 35-41.1 Inverse condemnation is "a cause of action against a governmental defendant to recover the value of property which has been taken in fact by the governmental defendant." United States v. Clarke, 445 U.S. 253, 257, 100 S.Ct. 1127, 63 L.Ed.2d 373 (1980) (quoting D. Hagman, Urban Planning and Land Development Control Law 328 (1971)). It "stands in contrast to direct condemnation, in which the government initiates proceedings to acquire title under its eminent domain authority." Knick v. Township of Scott, Pennsylvania, __ U.S. __, 139 S.Ct. 2162, 2168, 204 L.Ed.2d 558 (2019).

The State Defendants moved to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and Federal Rule of Bankruptcy Procedure 7012(b). Adv. D.I. 8; Adv. D.I. 12. In support of their motions, they argued, among other things, that the claims were barred by the State Defendants’ sovereign immunity. The Bankruptcy Court denied their motions to dismiss. In re Venoco, LLC, 596 B.R. 480 (Bankr. D. Del. 2019).

The sole issue in this appeal is whether the Bankruptcy Court erred in rejecting the State Defendants’ sovereign immunity arguments. By separate Memorandum Order, I denied the State Defendants’ requests for leave to appeal on an interlocutory basis the other rulings made by the Bankruptcy Court in denying the motions to dismiss. Civ. No. 19-463-CFC, D.I. 37.

I have jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a)(3) and Puerto Rico Aqueduct and Sewer Authority v. Metcalf & Eddy, Inc., 506 U.S. 139, 143-44, 113 S.Ct. 684, 121 L.Ed.2d 605 (1993) (holding that Eleventh Amendment sovereign immunity is an immunity from suit, the denial of which is appealable as a collateral order). As I am assessing the merits of a Rule 12(b)(6) motion to dismiss, I accept as true all factual allegations in the Complaint and view those facts in the light most favorable to the Liquidating Trustee. See Umland v. PLANCO Fin. Servs., 542 F.3d 59, 64 (3d Cir. 2008). I have considered in addition to the Complaint only "document[s] integral to or explicitly relied upon" in the Complaint, Schmidt v. Skolas, 770 F.3d 241, 249 (3d Cir. 2014) (internal quotation marks omitted); any "undisputedly authentic document" attached as an exhibit to the motions to dismiss if the Trustee’s claims are based on the document,

Page 242

Pension Ben. Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993); and "any matters incorporated by reference or integral to the claim[s], items subject to judicial notice, [and] matters of public record," Buck v. Hampton Twp. Sch. Dist., 452 F.3d 256, 260 (3d Cir. 2006). I have ignored the substantial portions of both sides’ briefing in which facts not set forth in documents meeting these criteria are recited and argued. See In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997) (A district court "may not consider matters extraneous to the pleadings" when ruling on a motion to dismiss.).

I. BACKGROUND

Venoco was the principal debtor in the Chapter 11 case from which this adversary proceeding arose. The other debtors were affiliates of Venoco. As the parties do not distinguish Venoco from the other debtors either individually or collectively, I will refer to the debtors collectively as Venoco.

Venoco was an oil and gas company that operated the Platform Holly drilling rig in the South Ellwood Oil Field off the coast of Santa Barbara, California. It held rights, title, and interests to wells in the South Ellwood Field by virtue of certain leases (the SEF leases) it obtained from Mobil Oil Company in 1997. The SEF leases were issued by the State of California, acting by and through the Lands Commission.

Venoco processed the oil and gas it obtained from Platform Holly at the Ellwood Onshore Facility (the EOF), which sits on a half-acre lot on the California coast about three miles north of the platform. Venoco held title to the EOF and the air permits necessary to use the EOF.

Venoco’s economic demise can be traced to 2015, when a ruptured pipeline cut off the only conduit for the Platform Holly’s oil to get to market. Adv. D.I. 1 ¶ 26. The pipeline rupture and subsequent refusal of the Land Commission to allow Venoco to pursue alternative means to extract and process oil from the South Ellwood Field led to Venoco’s filing for bankruptcy on April 17, 2017. Id. That same day, Venoco quitclaimed its SEF leases, thereby relinquishing its rights, title, and interests in the South Ellwood Field, including its ownership of the Platform Holly. Id. ¶ 2. As a result of that relinquishment, the Land Commission became responsible for decommissioning the Platform Holly and plugging the abandoned wells in the South Ellwood Field. Id.

The decommissioning of an oil platform and the plugging of offshore wells are expensive undertakings fraught with safety and environmental...

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