Davis v. State (In re Venoco LLC)

• Decision Date: 24 May 2021
• Docket Number: Nos. 20-1061; 20-1062,20-1063,s. 20-1061; 20-1062
• Citation: 998 F.3d 94
• Parties: IN RE: VENOCO LLC, d/b/a Venoco, Inc., et al., Debtors Eugene Davis, in his capacity as Liquidating Trustee of the Venoco Liquidating Trust v. State of California; California Lands Commission, Appellants
• Court: U.S. Court of Appeals — Third Circuit

998 F.3d 94

IN RE: VENOCO LLC, d/b/a Venoco, Inc., et al., Debtors

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

v.State of California; California Lands Commission, Appellants

Nos. 20-1061; 20-1062

20-1063

United States Court of Appeals, Third Circuit.

Argued September 23, 2020

Opinion filed: May 24, 2021

Edward K. Black, Office of Attorney General of Delaware, Delaware Department of Justice, 820 North French Street, Carvel Office Building, Wilmington, DE 19801, Mitchell E. Rishe (Argued), Office of Attorney General of California, 300 South Spring Street, Suite 1702, Los Angeles, CA 90013, Counsel for Appellant State of California

David M. Fournier, Kenneth A. Listwak, Troutman Pepper LLP, Hercules Plaza, Suite 5100, 1313 Market Street, Wilmington, DE 19899, Steven S. Rosenthal (Argued), Marc S. Cohen, Laura K. McNally, Alicia M. Clough, Loeb & Loeb LLP, 901 New York Avenue, N.W., Suite 300 East, Washington, DC 20001, Counsel for Appellant California Lands Commission

Mark E. Dendinger, Bracewell LLP, 185 Asylum Street, CityPlace I, 34th Floor, Hartford, CT 06371, Warren W. Harris (Argued), Bracewell LLP, 711 Louisiana Street, Suite 2300, Houston, TX 77002, Jason Hutt, Brittany M. Pemberton, Bracewell LLP, 2001 M Street, N.W., Suite 900, Washington, DC 20036, Counsel for Appellee

Before: AMBRO, PORTER, and ROTH, Circuit Judges

OPINION OF THE COURT

AMBRO, Circuit Judge States can generally assert sovereign immunity to shield themselves from lawsuits, but bankruptcy proceedings are one of the exceptions. The Supreme Court held in Central Virginia Community College v. Katz , 546 U.S. 356, 378, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006), that, by ratifying the Bankruptcy Clause of the U.S. Constitution, states waived their sovereign immunity defense in proceedings that further a bankruptcy court's exercise of its jurisdiction over property of the debtor and its estate (called "in rem jurisdiction"). Here, we apply Katz to a bankruptcy adversary proceeding brought by a liquidating trustee for the debtors’ assets seeking compensation from the State of California and its Lands Commission for the alleged taking of a refinery that belonged to the debtors. Because that proceeding asks the Bankruptcy Court to enforce rights in the property of the debtors and their estates¹ and will facilitate the fair distribution of their assets to creditors, it furthers the Court's in rem functions. Katz thus forecloses the assertion of sovereign immunity by both California and its Lands Commission, and we affirm the District Court's order affirming the Bankruptcy Court's decision.

I. FACTS AND PROCEDURAL HISTORY

Venoco, LLC and its affiliated debtors (collectively, "Venoco" or the "Debtors")² operated the Platform Holly drilling rig in the South Ellwood Oil Field (the "Offshore Facility") off the coast of Santa Barbara, California. After extraction, the oil and gas were transported three miles north to the Ellwood Onshore Facility (the "Onshore Facility") for processing and refining. Venoco did not own the Offshore Facility and instead leased it from the State of California (the "State") acting through its Lands Commission (together with the State, the "California Parties"). Unlike the Offshore Facility, Venoco owns the Onshore Facility and holds the air permits to use it.

Following a pipeline rupture in 2015, Venoco could no longer get its oil and gas to the market. It was unable to reactivate the pipeline after it emerged from an initial bankruptcy filing in 2016, and it filed for Chapter 11 bankruptcy again on April 17, 2017 (the latter colloquially known as a "Chapter 22"). That same day, Venoco quitclaimed (i.e. , abandoned) its leases, thereby relinquishing all rights and interests in the Offshore Facility, including the wells and the Platform Holly drilling rig. Concerned about public safety and environmental risks, the Commission took over decommissioning the rig and plugging the abandoned wells. It initially agreed to pay Venoco approximately $1.1 million per month to continue operating the Offshore and Onshore Facilities. In September 2017, a third-party contractor took over operations from Venoco. In place of the previous agreement, the Commission and Venoco entered into a Gap Agreement, under which the Commission agreed to pay $100,000 per month, as well as additional compensation, for access to and use of the Onshore Facility. Meanwhile, the Commission also asserted its rights as Venoco's creditor. In October 2017, it filed an estimated $130 million contingent claim against Venoco for reimbursement of plugging and decommissioning costs, including $29 to $35 million for the cost to operate the Onshore Facility and the rig at the Offshore Facility.³

The Gap Agreement, as its name suggests, was not a permanent solution. For several months before the Bankruptcy Court confirmed the Debtors’ plan of liquidation (the "Plan") in May 2018, Venoco and the Commission negotiated over a potential sale of the Onshore Facility to the Commission. When those negotiations failed, the Commission stopped paying what it owed under the Gap Agreement. Invoking its police powers to take necessary actions to protect the environment and public safety, the Commission argued it could continue using the Onshore Facility without payment.

Once the Plan became effective on October 1, 2018, the estates’ assets, including the Onshore Facility, were transferred to a liquidation trust (the "Trust"). Eugene Davis, the court-appointed liquidation trustee (the "Trustee"), became responsible for collecting, holding, liquidating and distributing the Trust's assets for the benefit of Venoco's creditors.

After the Gap Agreement was terminated on October 15, 2018, the Trustee filed in the Bankruptcy Court an adversary proceeding against the California Parties (the "Adversary Proceeding"). It is primarily a claim for inverse condemnation, "a cause of action against a governmental defendant to recover the value of property which has been taken in fact by the governmental defendant." Knick v. Twp. of Scott , ––– U.S. ––––, 139 S. Ct. 2162, 2168, 204 L.Ed.2d 558 (2019) (citation omitted). It "stands in contrast to direct condemnation, in which the government initiates proceedings to acquire title under its eminent domain authority." Id. The Trustee argues that, under the U.S. and California Constitutions as well as § 105 of the Bankruptcy Code,⁴ the Trust is entitled to just compensation for the taking of its property by the California Parties. While the Trustee's claims are primarily against the Commission, he also sued the State "out of an abundance of caution." Trustee's Br. at 40.

The California Parties filed motions to dismiss, claiming, among other things, they as sovereigns are immune from suits. The Bankruptcy Court denied the motions. The District Court granted leave for the California Parties to appeal only the Bankruptcy Court's ruling on their sovereign immunity defense and did not allow interlocutory appeal of other issues. It affirmed the Bankruptcy Court's rejection of the California Parties’ assertion of Eleventh Amendment sovereign immunity and held that they forfeited their argument on state law immunity from liability (often called "substantive immunity") when they failed to raise the argument before the Bankruptcy Court. The California Parties appeal to us, arguing they can assert both Eleventh Amendment and substantive immunity defenses.

II. JURISDICTION AND STANDARD OF REVIEW

The District Court had jurisdiction under 28 U.S.C. § 158(a)(3) over the appeal of the Bankruptcy Court's decision. For the appeal to our Court, the denial of a claim of sovereign immunity is "immediately appealable under the collateral order doctrine [which permits appeals of some nonfinal orders], imbuing us with jurisdiction under 28 U.S.C. § 1291." See Maliandi v. Montclair State Univ. , 845 F.3d 77, 82 (3d Cir. 2016) ; see also P.R. Aqueduct & Sewer Auth. v. Metcalf & Eddy, Inc. , 506 U.S. 139, 141, 113 S.Ct. 684, 121 L.Ed.2d 605 (1993). We exercise plenary review of the Bankruptcy and District Courts’ legal determinations, see In re Goody's Family Clothing Inc. , 610 F.3d 812, 816 (3d Cir. 2010), which includes their denial of governmental immunity, see Maliandi , 845 F.3d at 82.

III. LEGAL BACKGROUND

This case reduces to one question: Under Katz , can the California Parties assert a defense of sovereign immunity in the Adversary Proceeding? Given disagreement on the scope of proceedings covered by Katz , we first summarize how the case law developed and then distill the analytical framework.

A. Case Law Before Katz

In our constitutional structure, states "maintain certain attributes of sovereignty, including sovereign immunity." In re PennEast Pipeline Co. , 938 F.3d 96, 103 (3d Cir. 2019), cert. granted , PennEast Pipeline Co. v. New Jersey , ––– U.S. ––––, 141 S. Ct. 1289, 209 L.Ed.2d 22 (Mem.) (2021) (quoting P.R. Aqueduct , 506 U.S. at 146, 113 S.Ct. 684 ). This includes, but is not limited to, their immunity from suit in federal court recognized by the Eleventh Amendment, which reads in part that "[t]he Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State." U.S. Const. amend. XI.⁵ This shelter from suit is a "fundamental aspect of the sovereignty which the [s]tates enjoyed before the ratification of the Constitution, and which they retain today." PennEast , 938 F.3d at 103 (quoting Alden v. Maine , 527 U.S. 706, 713, 119 S.Ct. 2240, 144 L.Ed.2d 636 (1999) ).

However, the sovereign immunity states enjoy is not absolute. They can expressly consent to suit in federal court by voluntarily invoking the jurisdiction of federal courts. See Lombardo v. Pennsylvania, Dep't of Pub. Welfare , 540 F.3d 190, 196 (3d Cir. 2008). Congress can abrogate states’ immunity from suit by unequivocally expressing its intent to do...