Davis v. State (In re Venoco, LLC)

• Decision Date: 02 January 2019
• Docket Number: Case No. 17-10828 (KG) (Jointly Administered),Adv. Pro. No. 18-50908 (KG)
• Citation: 596 B.R. 480
• Parties: IN RE VENOCO, LLC, et al., Debtors. Eugene Davis, in His Capacity as Liquidating Trustee of the Venoco Liquidating Trust, Plaintiffs, v. State of California, and California State Lands Commision, Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

596 B.R. 480

IN RE VENOCO, LLC, et al., Debtors.Eugene Davis, in His Capacity as Liquidating Trustee of the Venoco Liquidating Trust, Plaintiffs,

v.State of California, and California State Lands Commision, Defendants.

Case No. 17-10828 (KG) (Jointly Administered)

Adv. Pro. No. 18-50908 (KG)

United States Bankruptcy Court, D. Delaware.

Signed January 2, 2019

Andrew R. Remming, Matthew O Talmo, Morris, Nichols Arsht & Tunnell LLP, Wilmington, DE, Plaintiff.

Mitchell Elliott Rishe, California Attorney General's Office, Los Angeles, CA, Kenneth Listwak Pepper Hamilton, LLP Wilmington, DE, for Defendant.

OPINION

KEVIN GROSS, U.S.B.J.

The issue before the Court is jurisdiction. Does the Court which presided over Debtors'¹ Chapter 11 bankruptcy case and entered the Order which confirmed the plan of liquidation have jurisdiction to decide a post-confirmation dispute in an adversary proceeding? Jurisdiction is the seminal question in every case and sometimes the final question. Here, the Court is satisfied that it has jurisdiction, and it will not abstain from hearing the adversary proceeding for reasons which follow.

FACTS ²

The Debtors filed their bankruptcy petitions on April 17, 2017 (the "Petition Date"). The Court entered its Order confirming Debtors' Plan of Liquidation (the "Plan") on May 23, 2018, and the Plan became effective on October 1, 2018. Complaint, ¶¶ 21-23. On October 16, 2018, the day after the Plan became effective, the Liquidating Trustee (the "Trustee") on behalf of the Liquidating Trust (the "Trust"), filed Plaintiff's Original Complaint for Inverse Condemnation (the "Complaint") as an adversary proceeding. The Trustee named as defendants the State of California (the "State") and California State Lands Commission (the "Commission," and collectively with the State, the "Defendants").

Debtor Venoco LLC ("Venoco") was a party to leases with the Defendants for drilling rights in the South Ellwood Field ("SEF") off the coast of California. Venoco owned Platform Holly, an offshore oil platform which it used to conduct drilling operations in the SEF. Id. , ¶ 2. An onshore facility known as the Ellwood Onshore Facility ("EOF")³ , was used to process oil and gas from Platform Holly. Id. , Exhibit E, Attachment 1. The EOF is located on land approximately 2.8 miles north of Platform Holly. Platform Holly and the EOF are integrated components of the oil production in the SEF. Id. , ¶¶ 24-35.

Now, the integrated components are needed to plug and abandon the Platform Holly wells. Id. , Exhibit A, page 2. On April 17, 2017, Debtors quitclaimed the SEF Leases back to the Commission and thereby relinquished all of their right, title and interest in the SEF. The relinquishment included Platform Holly. Id. , ¶ 2. Afterwards, Debtors no longer had an interest in the SEF Leases, the wells or the real property underlying the SEF Leases. Id. The Commission then became responsible for decommissioning Platform Holly and the SEF. Id. The Commission could seek to recover the costs from Debtors' estate, or perhaps from predecessors who had operated the SEF such as ExxonMobil Corporation. Id.

Three days before the quitclaims, Venoco and the Commission entered into a Reimbursement for Temporary Services Agreement ("RTSA") which provided that the Commission would reimburse Venoco for the cost to operate the SEF Leases on an interim basis and the Commission received access and use rights to the EOF. Id. , ¶ 3. The RTSA terminated on September 15, 2017, and Debtors transitioned the operations of the SEF to the Commission's third-party contractor. Id.

After the RTSA terminated, Venoco and the Commission entered into an agreement (the "Gap Agreement") giving the Commission the temporary use of the EOF to continue to decommission Platform Holly and the SEF. Id. , ¶ 4. The Commission agreed to pay Venoco for its use of the EOF. Later, by its terms, Debtors terminated the Gap Agreement, as amended, effective October 15, 2018, and initiated the adversary proceeding the next day. Id. The Defendants have not fully paid Debtors for Defendants' use and occupancy of the EOF, which in part led to Debtors filing the instant adversary proceeding. Id. , Exhibit D.

It appears that any interruption in the maintenance and operation of the EOF is a threat to the public health, safety and the environment. Id. , ¶ 5. The substantive issue in the adversary proceeding is whether the Commission has the right to continue occupying and using the EOF without buying it from or paying rent to Debtors.

DISCUSSION

On their face, the Defendants' motions to dismiss misleadingly appear to be straightforward and uncomplicated. The plaintiff is the post-confirmation Trustee who is asserting the Trust's state law claims of inverse condemnation.⁴ Further, the defendants are the State of California, which appears to be clothed in sovereign immunity, and one of its agencies. The Court would readily dismiss the adversary proceeding were it not for the facts that the adversary proceeding is an in rem matter and that the Commission, on behalf of the State, has filed a proof of claim with the Court seeking approximately $ 130 million. The Trustee is seeking "just compensation" for the taking of the EOF and, by necessity, the proof will require a fair market valuation. Further, the adversary proceeding is an in rem proceeding. See , e.g. , U.S. v. 6.45 Acres of Land , 409 F.3d 139, 145-46 (3d Cir. 2005) (condemnation proceedings are in rem ). Therefore, a closer look is warranted.

The Defendants make several arguments in support of their position that the Court lacks subject matter jurisdiction over Debtors' adversary proceeding.

1. The Court does not have jurisdiction over the State because of the Eleventh Amendment to the Constitution of the United States (the "Constitution") and sovereign immunity.

2. The Court lacks "arising" in or "related to" jurisdiction.

3. Jurisdiction is lacking for "just compensation" under the Fifth Amendment to the Constitution and Section105(a) of the Bankruptcy Code.

4. The Trustee failed to complete his state law remedies.

5. The Court should decline to exercise jurisdiction.

Finally, if they do not prevail on the jurisdiction defenses, Defendants argue that the Complaint fails to state a claim.

The Court is satisfied that it has subject matter jurisdiction, sovereign immunity does not apply or Defendants have waived sovereign immunity, the other defenses are unremitting and Debtors have stated a claim in the Complaint. The Court will discuss those issues and others within. First, the Court will address Defendants' Eleventh Amendment arguments.

The Eleventh Amendment – Sovereign Immunity

The Eleventh Amendment to the Constitution of the United States provides that:

The 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, or by Citizens or Subjects of any Foreign State.

U.S. Const. amend. XI. The principal modern case which addresses the Eleventh Amendment and sovereign immunity held that a statute which permitted Indian tribes to sue states in federal court was unconstitutional. Seminole Tribe of Florida v. Florida , 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996). The Supreme Court held that "[e]ven when the Constitution vests in Congress complete law-making authority over a particular area, the Eleventh Amendment prevents congressional authorization of suits by private parties against unconsenting states." Id. at 72, 116 S.Ct. 1114. Should Congress wish to enact a statute to end sovereign immunity that a state enjoys, it must do so by an unequivocal expression that it intended to overturn immunity, and must be acting pursuant to a valid grant of power in the Constitution. Seminole Tribe , 517 U.S. at 72-73, 116 S.Ct. 1114.

Section 106 of the Bankruptcy Code provides that "sovereign immunity is abrogated as to a governmental unit" with respect to many sections of the Bankruptcy Code. While it would appear that Section 106 defeats many claims of sovereign immunity, the Third Circuit disagrees. In a carefully written opinion, the Third Circuit ruled that Section 106 is unconstitutional. See Sacred Heart Hospital v. Dep't of Public Welfare (In re Sacred Heart Hospital ), 133 F.3d 237, 243 (3d Cir. 1998). Accordingly, Section 106 is unavailable to support Debtors' case against the State.

Earlier this year, Chief Judge Christopher S. Sontchi of the Delaware Bankruptcy Court, issued a "scholarly opinion" with "intricate dissection"⁵ of the law in which he clarified the intersection of bankruptcy law and sovereign immunity. See In re La Paloma Generating Company , 588 B.R. 695 (Bankr. D. Del. 2018). The Court reads La Paloma and Chief Judge Sontchi's careful analysis of Supreme Court and Third Circuit precedents to stand for the proposition that the in rem jurisdiction of the bankruptcy court defeats a claim of sovereign immunity. Id. , 588 B.R. at 727-32. The condemnation case is an in rem proceeding to which the Court's jurisdiction attaches. Peduto , 878 F.2d at 728.

There are several other reasons which cause the Court at the motion to dismiss stage to deny dismissal on account of sovereign immunity. First, the Commission and the State are both at risk for liability because the Commission was acting on behalf of the State.⁶ At this early stage before there has been any discovery, the Court views the State and the Commission as one and the actions of the Commission are attributable to the State. Second, the Commission filed a $ 130 million proof of claim in the bankruptcy case for matters related to the Defendants' abandonment of Platform Holly and the EOF. It is impossible to make sense of proceeding with the Defendants' claim in Delaware and the inverse condemnation case proceeding across the country in California. Third, this is an inverse condemnation case. Governmental bodies (and often states) are natural parties in...