KEVIN GROSS, U.S.B.J.
The issue before the Court is jurisdiction. Does the Court which presided over Debtors'
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
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.
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.
The Defendants make several arguments in support of their position that the Court lacks subject matter jurisdiction over Debtors' adversary proceeding.
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 to the Constitution of the United States provides that:
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
Earlier this year, Chief Judge Christopher S. Sontchi of the Delaware Bankruptcy Court, issued a "scholarly opinion" with "intricate dissection"
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.
The State and the Commission have raised several jurisdiction related defenses which the Court will now address.
Case law has greatly clarified the principles of core — "arising in" and non-core — "related to" jurisdiction. The State and the Commission argue that neither principle applies to them. The Court disagrees. There are many decisions which address the issues. One of the leading decisions on the history of confirmation, releases and jurisdiction can be found in this district from the learned and thorough decisions in In re Millennium Lab Holdings II, LLC, 575 B.R. 252 (Bankr. D. Del. 2017), aff'd, 591 B.R. 559 (D. Del. 2018). In Millenium, the bankruptcy court and the district court on appeal discussed at length bankruptcy jurisdiction and core and non-core jurisdiction and the effectiveness of non-consensual third-party releases. The bankruptcy court and the district court agreed that the
Core versus noncore and "arising in" and "related to" principles were fully addressed by the Third Circuit in Resorts Int'l, Inc. v. Price Waterhouse & Co., LLP (In re Resorts Int'l, Inc.), 372 F.3d 154 (3d Cir. 2004).
1. A core proceeding raises rights which the Bankruptcy Code enumerates or which by their very nature would only arise in a bankruptcy case. Id. at 162-163, citing Torkelson v. Maggio, (In re the Guild and Gallery Plus, Inc.) 72 F.3d 1171, 1178 (3d Cir. 1996). The Third Circuit noted that 28 U.S.C. § 157(b)(2) provides examples of core proceedings, including proceedings that affect the liquidation of assets of the estate. Resorts, 372 F.3d at 162. The Third Circuit further explained that a core proceeding "`invokes a substantive right provided by title 11'" or one that "`by its nature could only arise in the context of a bankruptcy case.'" Id., 372 F.3d at 162-63, quoting In re Guild & Gallery Plus, 72 F.3d at 1178, quoting In re Marcus Hook Dev. Park, Inc., 943 F.2d 261, 264 (3d Cir. 1991).
2. Bankruptcy courts have jurisdiction if the outcome could "conceivably have an effect on the bankruptcy estate. Id. at 164. A matter of this nature is "related to" the bankruptcy case. See Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984). The Third Circuit stated that:
Resorts, 372 F.3d at 163-64, citing Celotex Corp. v. Edwards, 514 U.S. 300, 308, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995) which in turn, quoted Pacor, 743 F.2d at 994. One of these "effects" is a challenge to the fundamental integrity of the bankruptcy process. See Emerald Cap. Advisors Corp. v. Karma Automotive, LLC (In re FAH Liquidating Corp.), 567 B.R. 464 (Bankr. D. Del. 2017), in which the Court found that "arising in" jurisdiction applied because the claims suggested an issue with the integrity of the bankruptcy process.
3. Bankruptcy courts have jurisdiction if the proceeding could "conceivably" have "any effect" on the bankruptcy estate and its administration, quoting Pacor, 743 F.2d at 994.
4. After plan confirmation, jurisdiction is more tenuous but "the essential inquiry appears to be whether there is a close nexus to the bankruptcy plan or proceeding sufficient to uphold bankruptcy court jurisdiction over the matter." Resorts, 372 F.3d at 166-67.
The Trustee argues that the Court has core, "arising in" jurisdiction by virtue of the "intimate connection between this [Adversary] Proceeding and the underlying bankruptcy." Plaintiff's Answering Brief, page 20. For this proposition, the Trustee alleges that: (1) Defendants' actions gave Debtors no option except to protect their estate and (2) Defendants actively participated
The Defendants answer the Trustee's arguments by arguing themselves that the inverse condemnation action (1) belongs in state court, (2) is not a proceeding seeking to enforce or interpret a Plan provision, and (3) is not a counterclaim or in the nature of a counterclaim.
The Court turns to decisional law and concludes that the adversary proceeding is core. The Resorts decision backs the Court's conclusion. Surely the adversary proceeding is not collateral to the bankruptcy case, it is directly relevant to the Defendants' proof of claim. Resorts decided that the proceeding in question was not core because it would have only an incidental effect on the reorganized debtor. Resorts, 372 F.3d at 169. Here, the Defendants' proof of claim and the adversary proceeding have an enormous affect on Debtors' estate. Further, and unlike Resorts, although the potential to add to the Trust's assets "does not necessarily create a close nexus sufficient to confer `related to' bankruptcy court jurisdiction post-confirmation," (id. at 170), the adversary proceeding certainly and strongly bears weight on the Defendants' proof of claim. Although the quoted language refers to non-core "related to" jurisdiction, the point to be made also applies to "arising in" jurisdiction.
The adversary proceeding will not simply increase the Trust's assets if successful. Instead, the Trustee seeks either to compel a resolution of the ownership of the EOF or as a counter to Defendants' proof of claim. Estate counterclaims against persons filing claims is a category enumerated as providing core "arising in" jurisdiction. In Penson Technologies LLC v. Schonfeld Grp. Holdings LLC (In re Penson Worldwide), 587 B.R. 6, 12-13 (Bankr. D. Del. 2018), a matter recently decided, a creditor filed a proof of claim based on a contract, to which the debtor filed an adversary proceeding. The creditor-defendant asked the court "to dismiss the matter, enforce a forum selection clause, abstain or otherwise transfer the case to a court in New York." 587 B.R. at 8. The court held that an adversary proceeding based on the same contract was a core proceeding under 28 U.S.C. § 157(b)(2)(C) and quoted the Supreme Court, which had written that, "He who invokes the aid of the bankruptcy court by offering a proof of claim and demanding its allowance must abide the consequences of that procedure." Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 2616, 180 L.Ed.2d 475 (2011). It is clear that Defendants have sought the bankruptcy court's assistance and therefore should answer to the Complaint in Delaware bankruptcy court.
In ResCap Liq. Trust v. PHH Mortg. Corp., 518 B.R. 259, 264 (S.D.N.Y. 2014), the district court ruled that an adversary proceeding which the debtor filed in response to a creditor's proof of claim was a counterclaim even though it was based on state — not bankruptcy — law and was not related to the proof of claim.
It is for these reasons that the Court deems the adversary proceeding to "arise in" the bankruptcy case and that the Court has jurisdiction. The adversary proceeding draws on rights which in the context of the case could arise only in bankruptcy, has a significant affect on the administration of the estate and, finally, is a counterclaim to Defendants' proof of claim.
If the Court is mistaken and it does not have core "arising in" jurisdiction, it assuredly has "related to" jurisdiction. The concept of a matter sustaining "related to" jurisdiction is very important in the instant case. If the Trustee is successful in his suit and obtains a judgment, it would assuredly impact the outcome of the Defendants' proof of claim proceeding and any distribution to creditors, thus establishing that the adversary proceeding bears a close nexus to the Plan and to the administration of the estate. The test for "related to" jurisdiction is that a close nexus exists between the adversary proceeding and the bankruptcy plan. Resorts, 372 F.3d at 166-67. The Third Circuit has ruled that a close nexus exists when the matter at hand affects "the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement." Id. at 168-69. Here, a decision on the Trust's claims in the Complaint will assuredly affect the administration of the Plan and Trust Agreement. In fact, there is a stark difference between Resorts in which the Third Circuit found there was no "related to" jurisdiction and the present adversary proceeding. The litigation trustee filed the malpractice action in Resorts almost seven years after the debtor's plan went effective. In the adversary proceeding, the Trustee filed the case within one month of the Plan going effective, which leads the Court to believe that a close nexus exists between the adversary proceeding and the Plan.
In addition, helpful in the Court's thinking is the Supreme Court's decision in Executive Benefits Insurance Agency v. Arkison, 573 U.S. 25, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014). There, a bankruptcy trustee sued under a fraudulent transfer theory to recover commissions paid to a noncreditor. The issue the Supreme Court addressed was how courts should proceed when they encounter a non-core claim. In discussing the differences between core and non-core claims, the Supreme Court ruled that with respect to noncore claims, a bankruptcy court can adjudicate such claims provided it issues proposed findings of fact and conclusions of law which a district court then reviews de novo. In other words, even a bankruptcy court's proposed findings of fact and conclusions of law in a non-core proceeding can be rectified by the district court's review and treatment of a decision as proposed findings of fact and conclusions of law. Id., 573 U.S. at 39-40, 134 S.Ct. 2165.
Defendants make other arguments why the Trustee's adversary proceeding is futile.
In short, Defendants argue that the Trustee has failed to state a claim because the State and the Commission are separate entities and he has not pleaded a taking or
The Court finds that the Trustee has borne the burden which the Supreme Court established in Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) and the Third Circuit in Fowler, 578 F.3d at 210. The Trustee has stated in short and plain statements the plausible claim that Defendants are responsible for the inverse condemnation of the EOF such that discovery may establish the elements that Defendants complain do not appear in the Complaint. Further, the Third Circuit stated in a two-part test in applying Iqbal:
Fowler, 578 F.3d at 210-11. The Trustee has adequately stated plausible claims and is entitled to establish the validity of the claims through discovery and, if necessary, through trial.
Defendants argue that the Trustee cannot pursue his claim for just compensation, citing Williamson County Regional Planning Comms'n v. Hamilton Bank of Johnson City, 473 U.S. 172, 195, 105 S.Ct. 3108, 87 L.Ed.2d 126 (1985). The Supreme Court held on the facts of Williamson County that until a land owner used a state's procedure, he could not claim the absence of just compensation. But as the Trustee counters, Williamson County
The State argues that the California Police Powers Doctrine bars the adversary proceeding because a valid exercise of the State's police powers often (not always) does not require compensation even if the State damages the property. The State cites Customer Co. v. City of Sacramento, 10 Cal.4th 368, 383, 41 Cal.Rptr.2d 658,
The judicially created doctrine of "abstention" dictates that a federal court will decline to exercise its jurisdiction and will defer to a state court which will then have the opportunity to decide the issue. The Court recognizes that abstention is an extraordinary exception to its responsibility to rule on matters before it. The Court is therefore generally reluctant to abstain from a case properly before it. The instant matter represents a unique set of facts upon which the Court bases its decision not to abstain.
The applicable statute is 28 U.S.C. § 1334(c)(1) which states:
The Court considers twelve factors in determining whether or not to abstain. The factors are:
DHP Holdings II Corp. v. Peter Skop Industries, Inc., (In re DHP Holdings II Corp.) 435 B.R. 220, 223-24 (Bankr. D. Del. 2010). Evaluating the factors is not "merely a mathematical exercise." Id. at 234, quoting from Trans World Airlines, Inc. v. Karabu Corp. (In re Trans World Airlines, Inc.) 196 B.R. 711, 715 (Bankr. D. Del. 1996). Of the twelve factors, most important are (1) the effect on the administration of the estate, (2) whether the claim involves only state law issues, and (7) whether the proceeding is core or non-core. See, e.g., Fruit of the Loom, Inc. v. Magnetek, Inc. (In re Fruit of the Loom,
In evaluating the factors, it is clear to the Court that some of the factors favor the Trustee while others favor Defendants. The Court will not just mathematically add the factors to determine the party which has the most factors in their column. Instead, the Court will take into consideration and discuss what it considers to be the more important factors in this case.
This factor clearly weighs in the Trust's favor and against abstention. The Defendants have a claim pending and the Trustee has the adversary proceeding which, if successful, will negate some or all of the claim.
Clearly, state law issues predominate, which favors the Defendants. The Court is, however, very accustomed to deciding state law issues which somewhat reduces the significance of this factor.
The Court has found that the adversary proceeding is core which therefore gives the advantage to Debtors. However, even if the adversary proceeding is non-core, the relationship to the Chapter 11 case is such strength that the advantage remains with Debtors.
There is a close relationship between the adversary proceeding and the main bankruptcy case, which favors not abstaining.
The Court is of the view that many, if not most, filings involve forum shopping. Parties file cases where they think they will do best. Here, however, the Court is satisfied that the Trustee filed the adversary proceeding in the bankruptcy court because there was a case and a proof of claim already present here. The Court finds that the Trustee did not forum shop when he filed here. This factor favors the Trustee.
It is not clear that the right to a jury trial of the adversary proceeding exists because it is a core proceeding. If, however, the District Court should withdraw the reference, it is beyond a mere possibility that the District Court would direct the Court to oversee pretrial matters. This factor is a draw.
The Court will not abstain. After analyzing all of the twelve factors and especially the factors it considers most important, the Court concludes that it would be inappropriate to abstain. The Penson court stated the Court's conclusion very aptly when it wrote:
Penson, 587 B.R. at 24. The Court could not state its conclusion any better.
The Court finds that it has jurisdiction over the adversary proceeding. The Court will also not abstain. The parties should commence their discovery promptly, because the Court has scheduled trial to begin on March 19, 2019.
