In re Venoco LLC

Case Type:
Case Status:
Nos. 20-1061; 20-1062 and 20-1063 (3rd Circuit, May 24,2021) Published
The bankruptcy court had jurisdiction over the State of California and a California commission (the "California Parties") to determine whether the California Parties owed funds to the post-confirmation liquidating trust. The trust's "inverse condemnation" claim against the California Parties invoked the bankruptcy court's "in rem" jurisdiction. The bankruptcy court has jurisdiction, notwithstanding the Eleventh Amendment, under the guidance of Central Virginia Community College v. Katz, 546 U.S. 356 (2006).
Procedural context:
After confirmation of a Chapter 11 plan, the trustee for the post-confirmation liquidating trust commenced an adversary proceeding against California and one of its commissions. In an "inverse condemnation" action, the adversary proceeding alleged that the trust was owed money for the California Parties' taking of an asset of the debtor before plan confirmation. The California parties moved to dismiss the adversary proceeding and argued that the bankruptcy court did not have jurisdiction because the California Parties were entitled to sovereign immunity. The bankruptcy court rejected the California Parties' arguments. The district court allowed an interlocutory appeal of the bankruptcy court's rejection of the California Parties' sovereign immunity defense. The district court affirmed the bankruptcy court's rejection of the California Parties' Eleventh Amendment argument and ruled that the California Parties waived their substantive immunity argument by failing to raise it with the bankruptcy court. The California Parties then appealed to the Third Circuit.
Venoco, LLC and affiliates ("Venoco") became debtors in two sequential chapter 11 bankruptcy cases. Before bankruptcy, Venoco leased a drilling platform off the Santa Barbara, California, coast. The lessor was the Lands Commission of the State of California. Oil and gas extracted from the offshore drilling rig were piped three miles to shore to a facility owned by Venoco. The pipeline failed in 2015. Venoco could not make the pipeline work and filed a chapter 11 petition (its second). The same day as it filed its chapter 11 petition, Venoco quitclaimed (abandoned) its leases on the offshore drilling rig and the associated wells. The California Lands Commission took over decommissioning the rig and plugging the wells. The Lands Commission also agreed to pay Venoco $1.1 million per month to continue operating the offshore and the onshore facilities. In September 2017, a third-party contractor took over operations. Venoco and the Lands Commission entered into a "Gap Agreement," requiring the Lands Commission to pay Venoco $100,000 per month, In October 2017, the Lands Commission filed a proof of claim for contingent claims of $130 million (the filing of the proof of claim was not otherwise discussed in the opinion). Before confirmation of Venoco's chapter 11 plan, the Lands Commission and Venoco tried to negotiate the sale of Venoco's onshore facility to the Lands Commission. The parties failed to agree, and the Lands Commission stopped paying Venoco amounts owed under the Gap Agreement. Venoco's chapter 11 plan was confirmed, and Venoco's assets were transferred to a liquidating trust. The trustee sued the Lands Commission and the State of California for "inverse condemnation," which is the taking of property without compensation.

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