VENOCO, LLC v. ( 2021 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
________________
Nos. 20-1061; 20-1062 and 20-1063
________________
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
Appeal from the United States District Court
for the District of Delaware
(D.C. Civil Action Nos. 1-19-mc-00007; 1-19-mc-00011 and
1-19-cv-00463)
District Judge: Honorable Colm F. Connolly
Argued September 23, 2020
Before: AMBRO, PORTER, and ROTH, Circuit Judges
(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
2
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
3
________________
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 (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 estates 1 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.
1
“Under the Bankruptcy Code . . . a petition ‘creates an estate’
that, with some exceptions, comprises ‘all legal or equitable
interests of the debtor in property as of the commencement of
the case.’” City of Chicago v. Fulton, 141 S. Ct. 585, 589
(2021) (quoting 11 U.S.C. § 541(a)(1)).
4
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
2
The parties do not distinguish the various debtor entities.
5
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-
3
In October 2018, the Commission also filed in the Bankruptcy
Court an “Assertion of Administrative Expense Claim and
Reservation of Setoff Rights,” which sought to preserve the
Commission’s right to “set off its allowable administrative
claim against any claims that have been or may be asserted
[against it] by the [Trustee].” JA 594–610. That document
was withdrawn in September 2019.
6
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, 139 S. Ct. 2162, 2168 (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
4
11 U.S.C. § 105 is an “omnibus provision phrased in such
general terms as to be the basis for a broad exercise of power
in the administration of a bankruptcy case.” 2 Collier on
Bankruptcy ¶ 105.01 (16th ed. 2021).
7
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 non-
final 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 (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.
8
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, 141 S. Ct.
1289 (Mem.) (2021) (quoting P.R. Aqueduct, 506 U.S. at 146).
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
(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 so per valid constitutional authority. See Seminole Tribe of
5
In Hans v. Louisiana, 134 U.S. 1, 10 (1890), the Supreme
Court decided that the Eleventh Amendment also covers suits
by in-state plaintiffs. Thus the Eleventh Amendment “bar[s]
all private suits against non-consenting [s]tates in federal
court.” Lombardo v. Pennsylvania, Dep’t of Pub. Welfare,
540 F.3d 190, 194 (3d Cir. 2008).
9
Fla. v. Florida, 517 U.S. 44, 55 (1996). Also, by ratifying the
U.S. Constitution, states consented to certain waivers of their
sovereign immunity in the “plan of the convention,” including
suits by the federal government against them in federal court.
PennEast, 938 F.3d at 103–04 (quoting Blatchford v. Native
Vill. of Noatak, 501 U.S. 775, 779 (1991)).
Before Katz, courts faced with the assertion of
sovereign immunity in bankruptcy proceedings focused on the
scope of congressional (that is, statutory) abrogation. See
Seminole Tribe, 517 U.S. at 72 n.16 (“[I]t has not been widely
thought that the federal antitrust, bankruptcy, or copyright
statutes abrogated the [s]tates’ sovereign immunity.”);
Hoffman v. Conn. Dep’t of Income Maint., 492 U.S. 96, 104
(1989) (holding that the Bankruptcy Code “did not abrogate
the Eleventh Amendment immunity of the [s]tates”); see also
United States v. Nordic Vill., Inc., 503 U.S. 30, 39 (1992)
(holding that the Bankruptcy Code did not clearly abrogate the
federal government’s immunity from suits for monetary relief).
In these cases, the question was mainly one of statutory
interpretation—whether Congress unequivocally expressed its
intent to end immunity. Seminole Tribe, 517 U.S. at 55;
Hoffman, 492 U.S. at 104 (“[W]e need not address whether
[Congress] had the authority to [abrogate sovereign immunity]
under its [constitutional] bankruptcy power.”).
In 1994, Congress amended the Bankruptcy Code in an
attempt to overrule the decisions in Hoffman and Nordic
Village. See In re Sacred Heart Hosp., 133 F.3d 237, 242 n.8
(3d Cir. 1998). Some circuits, including our own, concluded
that although Congress now “unequivocally expressed its
intent to abrogate the states’ Eleventh Amendment immunity
under the Bankruptcy Code,” the Constitution’s “Bankruptcy
10
Clause [which authorizes Congress to enact “uniform Laws on
the subject of Bankruptcies throughout the United States”] is
not a valid source of abrogation power.” Id. at 243. These
holdings, while never explicitly overturned, were soon
displaced by subsequent Supreme Court case law.
In 2004, the Court set out to resolve a circuit split on the
validity of the Bankruptcy Code’s purported abrogation of
sovereign immunity but ended up avoiding the issue altogether.
In Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440,
448 (2004), it rejected an assertion of sovereign immunity
involving the discharge of student debt guaranteed by an arm
of the State of Tennessee, concluding that when the
“bankruptcy court’s jurisdiction over the res is unquestioned, .
. . the exercise of its in rem jurisdiction to discharge a debt does
not infringe state sovereignty.” Id. (internal citation omitted). 6
The Court did not address the Sixth Circuit’s holding that the
Bankruptcy Code validly abrogated state sovereign immunity.
See id. at 445 (“Because we hold that a bankruptcy court’s
discharge of a student loan debt does not implicate a [s]tate’s
Eleventh Amendment immunity, we do not reach the broader
question addressed by the Court of Appeals.”). To make the
limited reach of its opinion clear, the Court explained that its
decision “is not to say[] a bankruptcy court’s in rem
jurisdiction overrides sovereign immunity . . . . [n]or . . . that
every exercise of a bankruptcy court’s in rem jurisdiction will
6
In the bankruptcy context, the debtor’s estate is often referred
to as the “res” to be administered by the bankruptcy court. See,
e.g., In re Phila. Ent. & Dev. Partners, L.P., 549 B.R. 103, 145
(Bankr. E.D. Pa. 2016); In re Metromedia Fiber Network, Inc.,
299 B.R. 251, 273 (Bankr. S.D.N.Y. 2003) (“The debtor’s
estate is a res.”).
11
not offend the sovereignty of the State.” Id. at 451 n.5 (internal
quotation marks and citation omitted).
B. Katz
The Supreme Court expanded Hood’s narrow holding
two years later in Katz, which clarified federal power over
states in bankruptcy cases. There the liquidating supervisor of
a bookstore that filed for Chapter 11 bankruptcy sought to
recover preferential transfers 7 made to Virginia educational
institutions that were arms of the Commonwealth otherwise
entitled to sovereign immunity. Katz, 546 U.S. at 360. The
Court sided with the supervisor and rejected the assertion of
sovereign immunity. We start with three non-controversial
observations about Katz.
First, under the Constitution’s Bankruptcy Clause,
states are deemed to have waived their sovereign immunity in
certain bankruptcy proceedings. Id. at 378 (“In ratifying the
Bankruptcy Clause, the [s]tates acquiesced in a subordination
of whatever sovereign immunity they might otherwise have
asserted in proceedings necessary to effectuate the in rem
jurisdiction of the bankruptcy courts.”). Thus we look to the
scope of constitutional waiver recognized by Katz instead of
congressional abrogation through the Bankruptcy Code
(though, as a theoretical matter, Congress could still through
7
Preferential transfers are defined in 11 U.S.C. § 547(b). They
are basically payments made by the debtor to a creditor within
a short time before the bankruptcy filing that improve (hence
“prefer”) the creditor’s recovery from what it would otherwise
receive in the bankruptcy.
12
legislation “exempt [states] from operation of [certain
bankruptcy] laws,” id. at 379).
Second, Katz did not foreclose the sovereign immunity
defense in all bankruptcy proceedings. See id. at 378 n.15
(“We do not mean to suggest that every law labeled a
‘bankruptcy’ law could, consistent with the Bankruptcy
Clause, properly impinge upon state sovereign immunity.”). 8
Still, at least one later opinion suggests a broader reading of
8
At least one court has relied on this language to suggest that
Katz only applies to claims “created by the Bankruptcy Code.”
Shieldalloy Metallurgical Corp. v. N.J. Dep’t of Env’t Prot.,
743 F. Supp. 2d 429, 439 (D.N.J. 2010). We disagree because
Katz repeatedly referenced bankruptcy “proceedings.” See
Katz, 546 U.S. at 362; see also Allen v. Cooper, 140 S. Ct. 994,
1002 (2020) (“[W]e held that Article I’s Bankruptcy Clause
enables Congress to subject nonconsenting [s]tates to
bankruptcy proceedings.” (emphasis added)); see also Ralph
Brubaker, Explaining Katz’s New Bankruptcy Exception to
State Sovereign Immunity: The Bankruptcy Power as a
Federal Forum Power, 15 Am. Bankr. Inst. L. Rev. 95, 129
(2007) (suggesting Katz gave Congress the power to “bind
states to[] uniform federal judicial [bankruptcy] process”
(emphasis omitted)). In any event, focusing on claims
“created” by the Bankruptcy Code is an unworkable approach,
considering the Code often incorporates applicable state laws.
See, e.g., 11 U.S.C. § 544(b)(1) (permitting the trustee to
recover transfers that are voidable under state laws); In re
DBSI, Inc., 463 B.R. 709, 718 (Bankr. D. Del. 2012)
(explaining that, when applying Katz, “[t]he fact that various
state laws are implicated is no ground for constitutional
concern”).
13
Katz. In Allen v. Cooper, 140 S. Ct. 994, 1002 (2020), the
Supreme Court held that the Constitution’s Intellectual
Property Clause 9 did not authorize Congress to abrogate states’
Eleventh Amendment immunity from copyright infringement
suits. To distinguish that case from Katz, the Court
emphasized that the Bankruptcy Clause was unique among
Article I’s grant of authority, explaining that “[i]n bankruptcy,
we decided[] sovereign immunity has no place,” as “the
Bankruptcy Clause embraced the idea that federal courts could
impose on state sovereignty.” Id. However, we do not think
that dictum in Allen means sovereign immunity can never be
asserted before a bankruptcy court, for Katz was clear that it
was deemed waived in some but not all bankruptcy
proceedings.
Finally, while Katz discussed the bankruptcy court’s in
rem jurisdiction as the historical underpinning for waiving
state sovereign immunity, it does not require a proceeding to
be technically in rem. 546 U.S. at 370. Indeed, although the
preference action in Katz was not squarely in rem, sovereign
immunity still could not be asserted where any court order
issued in the action would be “ancillary to and in furtherance
of the court’s in rem jurisdiction, [even if it] might itself
involve in personam process.” Id. at 372. The focus is on
function and not form, the benefit being that courts do not need
to struggle with the “blurred distinctions and perplexing case
law [that confuse] in rem, ancillary to in rem, and even in
9
Congress has the power “[t]o promote the Progress of Science
and useful Arts, by securing for limited Times to Authors and
Inventors the exclusive Right to their respective Writings and
Discoveries.” U.S. Const. art. I, § 8, cl. 8.
14
personam proceedings in many respects.” In re DBSI, Inc.,
463 B.R. 709, 714 (Bankr. D. Del. 2012).
We therefore summarize Katz’s holding as follows:
States cannot assert a defense of sovereign immunity in
proceedings that further 10 a bankruptcy court’s in rem
jurisdiction no matter the technical classification of that
proceeding.
C. Analytical Framework for Applying
Katz
Katz did not define the range of proceedings that further
a bankruptcy court’s in rem jurisdiction, but it did tell us
bankruptcy’s three critical functions: “[1] the exercise of
exclusive jurisdiction over all of the debtor’s property, [2] the
equitable distribution of that property among the debtor’s
creditors, and [3] the ultimate discharge that gives the debtor a
‘fresh start’ by releasing him, her, or it from further liability for
old debts.” In re Diaz, 647 F.3d 1073, 1084 (11th Cir. 2011)
(quoting Katz, 546 U.S. at 363–64). We agree with the
Eleventh Circuit and several bankruptcy courts that “[t]hese
guidelines provide a useful starting point.” Id.; see, e.g., In re
Univ. of Wis. Oshkosh Found., Inc., 586 B.R. 458, 465 (Bankr.
E.D. Wis. 2018); In re Odom, 571 B.R. 687, 695 (Bankr. E.D.
Pa. 2017). Indeed, at oral argument counsel for the Trustee and
10
At various places the Katz opinion described proceedings
where sovereign immunity is deemed waived as “merely
ancillary to,” “in furtherance of,” or “necessary to effectuate”
the bankruptcy court’s in rem jurisdiction. 546 U.S. at 371–
72, 378. We think these are similar concepts and use “further”
as a shorthand to summarize Katz’s holding.
15
the Commission agreed that the proper framework analyzes
whether a proceeding furthers any of these three functions.
Oral Arg. Tr. 7:19–23, 24:4–9; accord Diaz, 647 F.3d at 1084.
Under this framework, courts must focus on function
and not form when testing a proceeding’s connection to the
bankruptcy court’s in rem jurisdiction. The first function asks
whether the proceeding decides and affects interests in the res,
the property of the debtor and its estate. Unsurprisingly, courts
in our Circuit have already been asking this question when
applying Katz. See, e.g., In re La Paloma Generating Co., 588
B.R. 695, 730 (Bankr. D. Del. 2018) (Sontchi, J.) (“[A]
bankruptcy court's in rem jurisdiction would still need to
focus[] on adjudications of interests in the underlying res.”); In
re Phila. Ent. & Dev. Partners, L.P., 549 B.R. 103, 123 (Bankr.
E.D. Pa. 2016), aff’d, 569 B.R. 394 (E.D. Pa. 2017), rev’d on
other grounds, 879 F.3d 492 (3d Cir. 2018) (asking whether
the claims “[i]mplicate an [i]dentifiable [r]es”). Relying on the
first function, courts have found that states are deemed to
waive sovereign immunity in most (i) turnover actions, 11 see
Philadelphia Entertainment, 549 B.R. at 123 (holding
“sovereign immunity [is] generally inapplicable to turnover
actions”); In re Kids World of America, Inc., 349 B.R. 152,
165–66 (Bankr. W.D. Ky. 2006) (same), (ii) fraudulent transfer
actions, 12 see DBSI, 463 B.R. at 713–15 (explaining the clear
11
Under 11 U.S.C. §§ 542 and 543, anyone in possession of
the debtor’s property may be required to return it—that is, turn
it over—to the debtor or its trustee.
12
Fraudulent transfers are defined in 11 U.S.C. § 548 and
involve transfers made (1) with the intent to defraud creditors
or (2) while the debtor was insolvent and for which the debtor
did not receive “reasonably equivalent value.” See 11 U.S.C.
16
parallels between preferences and fraudulent transfers), and
(iii) contract disputes, see In re DPH Holdings Corp., 448 F.
App’x 134, 138 (2d Cir. 2011) (unpublished) (“The contracts,
which include potential liabilities and responsibilities . . . , are
part of [the debtor’s] estate.”). 13
The second function captures proceedings where the
connection to a specific piece of property may be lacking, but
there is broader effect on the equitable distribution of the
debtor’s property. A violation of the automatic stay, where one
creditor seeks to enforce remedies against the debtor’s property
despite the injunctive bar of the bankruptcy filing, is one such
example due to the disruptive effects on orderly administration
of the estate. See Diaz, 647 F.3d at 1086 (“[W]e have no
difficulty concluding that contempt motions alleging that a
creditor has violated the automatic stay generally qualify as
‘proceedings necessary to effectuate the in rem jurisdiction of
the bankruptcy courts.’” (emphasis in original) (quoting Katz,
546 U.S. at 378)). Of course, there is also significant overlap
between the first two functions. Id. at 1085–86 (explaining that
the automatic stay implicates both functions).
§ 548(a)(1)(B)(i). 11 U.S.C. § 544(b)(1) also incorporates state
fraudulent transfer laws. The principal goal is to prevent the
debtor from “stiffing” creditors by giving away its property
before filing for bankruptcy.
13
To be clear, a sovereign immunity defense is not
categorically foreclosed in those proceedings. See, e.g., Phila.
Ent., 549 B.R. at 124 (explaining that a fraudulent transfer
action relating to revocation of a slot machine license does not
further a bankruptcy court’s in rem jurisdiction because the
license is not the debtor’s property).
17
The third function simply acknowledges the holding of
Hood that “[s]tates, whether or not they choose to participate
in the [bankruptcy] proceeding, are bound by a bankruptcy
court’s discharge order no less than other creditors.” See Hood,
541 U.S. at 448; see also People v. Irving Trust Co., 288 U.S.
329, 333 (1933) (holding that states must comply with
deadlines to file claims like other creditors because,
“otherwise, orderly and expeditious proceedings would be
impossible and a fundamental purpose of [bankruptcy] would
be frustrated”).
Courts thus analyze correctly if they ask whether a
proceeding directly relates to one or more of these three
functions. See Diaz, 647 F.3d at 1084 (“At a minimum, then,
a proceeding must directly relate to one or more of these
functions.”). We do not offer a one-size-fits-all test because
claims and proceedings in bankruptcy are varied and fact-
specific.
IV. APPLICATION
With the framework for analysis set, we apply it here
and conclude the California Parties cannot assert sovereign
immunity in the Adversary Proceeding.
A. The Adversary Proceeding Furthers
Two of Bankruptcy’s Critical Functions.
At the outset, the Adversary Proceeding furthers the
Bankruptcy Court’s exercise of jurisdiction over property of
the Debtors and their estates, as it seeks a ruling on rights in
the Onshore Facility. The California Parties repeatedly
emphasize that the inverse condemnation claim is primarily
18
one for money damages. But that alone is irrelevant, for even
if the action “may resemble money damage lawsuits in form, it
is their function that is critical.” Diaz, 647 F.3d at 1085(internal quotations and citation omitted) (emphases in
original). And while the Adversary Proceeding may not be
clearly in rem in form, its function is to decide rights in
Venoco’s property. See United States v. Sid-Mars Rest. &
Lounge, Inc., 644 F.3d 270, 286 (5th Cir. 2011) (Dennis, J.,
dissenting) (“Although I have not found cases explicitly
declaring that inverse condemnation suits are in rem
proceedings, . . . they are substantially equivalent to
condemnation actions and essential to the self-executing
constitutional protection of private property owners from
governmental takings without just compensation.”). At its
core, the Adversary Proceeding is about whether the California
Parties can use Venoco’s property for free. See JA 129,
Complaint ¶ 37 (“Plaintiff is entitled to just compensation,
including the fair market and fair rental value of the [Onshore
Facility].”); R & J Holding Co. v. Redevelopment Auth., 670
F.3d 420, 433 n.10 (3d Cir. 2011) (explaining that seeking
“compensation for . . . inability to fully utilize, develop, and
sell their property . . . . are rights inhering in the property
itself” (emphasis added)).
The Adversary Proceeding also furthers the second
critical function—facilitating equitable distribution of the
estate’s assets. The Onshore Facility is a significant asset for
Venoco and its creditors. Indeed, the Plan’s liquidation
analysis acknowledged the Commission was “receiving
significant value from the use of the Debtors’ assets” and that
the “value of the use of those assets [was] being negotiated
between the parties.” JA 589. Further, the Commission is a
major creditor and filed a proof of claim against Venoco, so the
19
California Parties have a stake in how the Trust’s assets are
liquidated and distributed. And consider the consequences: If
the California Parties could assert sovereign immunity in the
Adversary Proceeding, they would have a win-win—able to
recover from the Trust on account of their claims against
Venoco while preventing any judicial scrutiny over whether
they can use the Onshore Facility without payment. And they
would improve their status vis-à-vis other creditors solely
owing to their status as a state that can invoke sovereign
immunity, just the kind of result Katz wanted to avoid. See
DBSI, 463 B.R. at 713 (“[The aim of equitable distribution of
the res], and the desire for uniform application of the
bankruptcy laws, would be jeopardized if the states were able
to draw resources from the res or retain estate property when
other creditors were unable to do so.” (citing Katz, 546 U.S. at362–64)).
The California Parties urge that sovereign immunity is
fundamental to our constitutional design and the exercise of
eminent domain power is especially central to their
sovereignty. Though true as a general matter, bankruptcy is a
different ball game, and the effect on state sovereignty is not
the focus of our analysis. The focus is instead on ensuring that
sovereign immunity will not interfere with the bankruptcy
court’s jurisdiction over the estate’s property as well as its
orderly administration. The driving principle of the Katz
decision is that the Bankruptcy Clause has a “unique history”
and is “sui generis . . . among Article I’s grants of authority,”
the result being “that federal courts could impose on state
sovereignty” in bankruptcy proceedings. Allen, 140 S. Ct. at
1002 (internal citations omitted).
20
We are also unpersuaded that we must consider that the
Adversary Proceeding is a type of action both “anomalous and
unheard of when the Constitution was adopted.” Fed.
Maritime Comm’n v. S.C. State Ports Auth., 535 U.S. 743, 755
(2002) (internal quotation and citation omitted). This simply
asks for a duplicative and unnecessary historical analysis. Katz
explained that the “Framers would have understood that laws
‘on the subject of Bankruptcies’ included laws providing, in
certain limited respects, for more than simple adjudications of
rights in the res . . . . More generally, courts adjudicating
disputes concerning bankrupts’ estates historically have had
the power to issue ancillary orders enforcing their in rem
adjudications.” 546 U.S. at 370. Thus we do not need to
analyze whether the exact proceeding existed at the Founding,
for Katz already concluded that drawing the line at whether a
proceeding furthers the bankruptcy court’s in rem jurisdiction
is consistent with the historical understanding of the scope of
sovereign immunity waiver. Id.; cf. Hood, 541 U.S. at 452–53.
B. The Deemed Waiver of Sovereign
Immunity in Katz Can Apply to Post-
Confirmation or Post-Effective Date
Claims.
The California Parties also argue that the Adversary
Proceeding relates only to claims after the Plan was confirmed
and became effective, 14 when the Debtors’ estate ceased to
14
The parties often use the terms “confirmation date” and
“effective date” interchangeably, but there is a meaningful
difference. Typically “the debtor’s estate ceases to exist once
confirmation [of a plan] has occurred.” In re Resorts Int’l, Inc.,
372 F.3d 154, 165 (3d Cir. 2004) (citation omitted); see also
21
exist, so there is no res for the bankruptcy court’s jurisdiction
to attach. The Trustee disputes this premise, explaining that,
due to the nature of the Gap Agreement, the Adversary
Proceeding also seeks to recover amounts owed for the
improper taking of the Onshore Facility before the effective
date. We do not need to decide whether the Adversary
Proceeding only pertains to post-effective date claims, as we
reject the California Parties’ argument even if it were true.
The California Parties essentially ask us to read Katz
narrowly to carve out all claims that occurred after Venoco’s
estate was vested in the Trust. We decline to do so. In In re
Resorts International, Inc., 372 F.3d 154, 166 (3d Cir. 2004),
we held that a bankruptcy court could have jurisdiction over a
proceeding even when the “estate” no longer technically exists,
so long as the proceeding has a “close nexus to the bankruptcy
plan or proceeding.” To refresh, the issue of bankruptcy
statutory jurisdiction is not before us because the District Court
11 U.S.C. § 1141(b) (“Except as otherwise provided in the plan
or the order confirming the plan, the confirmation of a plan
vests all of the property of the estate in the debtor.”). However,
that is not the case here where the order confirming the Plan
provided that Venoco’s assets were vested in the Trust as of
the Plan’s effective date, not the confirmation date. See JA
459. While the effective date typically occurs shortly after
confirmation, there was a nearly five-month delay here
between confirmation in May 2018 and the Plan going
effective in October 2018. Thus the relevant date for the
California Parties’ argument is the effective date, not the
confirmation date, though this distinction does not affect the
result we reach.
22
did not grant leave to the California Parties to appeal it. Still,
the reasoning of Resorts International is of aid. There, we
followed our precedent in Pacor, Inc. v. Higgins, 743 F.2d 984,
994 (3d Cir. 1984), which held bankruptcy courts have
statutory jurisdiction over a proceeding “related to” bankruptcy
if the outcome could affect “the estate being administered in
bankruptcy.” In that context, we refused to apply the “‘effect
on the bankruptcy estate’ test so literally as to entirely bar post-
confirmation bankruptcy jurisdiction.” Resorts Int’l, 372 F.3d
at 165.
Here, the Bankruptcy Court’s critical in rem functions
did not end when the Plan became effective, as the Trust exists
primarily to facilitate the “equitable distribution of [the
debtor’s property] among the debtor’s creditors.” Katz, 546
U.S. at 364. Indeed, the Bankruptcy Court retained substantial
control over the Trust assets, which were in essence a
continuation of the estate. 15 As the Plan was one of liquidation,
15
The Confirmation Order states that the Trustee “has been
fully disclosed in the” Trust Agreement in compliance with
Bankruptcy Code § 1129(a)(5), which requires debtors to
“disclose[] the identity and affiliations of any individual
proposed to serve, after confirmation of the plan, as . . . a
successor to the debtor under the plan.” JA 448; see 11 U.S.C.
§ 1129(a)(5). The Trust Agreement further appointed Davis
“as a representative of the Contributing Debtors’ Estates
pursuant to sections 1123(a)(5), (a)(7), and (b)(3)(B),” JA 302,
and authorized him to “[a]llow, settle, object to or reconcile
any Claims against the Contributing Debtors’ Estates.” JA
305. The Confirmation Order provides that the Court retained
jurisdiction over, inter alia, actions “[t]o recover all assets of
the Debtors and property of the Debtors’ Estates, which shall
23
there was no reorganized debtor that continued to do business,
the Debtors did not receive a discharge, see 11 U.S.C.
§ 1141(d)(3), and the Bankruptcy Court continued to oversee
the Trust’s administration and distribution of the estate’s assets
under the Plan, see 11 U.S.C. § 1142(b). See also In re Boston
Reg’l Med. Ctr., Inc., 410 F.3d 100, 107 (1st Cir. 2005) (“[A]
liquidating debtor exists for the singular purpose of executing
an order of the bankruptcy court.”).
Our holding is limited, and we do not try to define the
entire scope of the Bankruptcy Court’s in rem jurisdiction,
which the Katz Court described as “premised on the debtor and
his estate.” 546 U.S. at 370 (quoting Hood, 541 U.S. at 447).
We only hold that, in this case, the Bankruptcy Court’s in rem
jurisdiction extends to the estate’s property transferred to the
Trust for the purpose of liquidation and distribution to
Venoco’s creditors, and over which the Bankruptcy Court
retained substantial control under the Plan. And, contrary to
the California Parties’ parade of horribles, our conclusion does
not mean sovereign immunity is waived in every bankruptcy
be for the benefit of the Liquidating Trust, wherever located.”
JA 473. Moreover, the Trust Agreement provides that the
Bankruptcy Court has jurisdiction over the Trust and Trustee,
JA 316; requires court approval before selling or abandoning
trust assets, JA 305; and states that “[a]ll funds in the
Liquidating Trust shall be deemed in custodia legis [in the
custody of the law] until” they are paid out, “and no
Beneficiary . . . can bind, pledge, encumber, execute upon,
garnish, or attach the Liquidating Trust Assets or the
Liquidating Trustee in any manner or compel payment from
the Liquidating Trustee except by order of the Bankruptcy
Court,” JA 317.
24
proceeding brought by a post-confirmation trustee. A court
must still undertake the proper analysis under Katz, and it must
also have statutory jurisdiction over the proceeding under
Resorts International.
C. The California Parties Cannot Assert
Eleventh Amendment Immunity or
State-Law Substantive Immunity from
Liability.
As the Adversary Proceeding is the type of bankruptcy
proceeding where states are deemed to waive their sovereign
immunity, does that waiver extend to both defenses raised by
the California Parties? To refresh, they assert Eleventh
Amendment immunity and state-law substantive immunity
from liability. In Lombardo, 540 F.3d at 199, we explained the
difference between these two defenses. The first bars all
private suits against non-consenting states in the federal
courts. See U.S. Const. amend. XI; Seminole Tribe, 517 U.S.
at 72–73; Hans v. Louisiana, 134 U.S. 1, 10 (1890). Second,
seeing that the Eleventh Amendment does not define the entire
scope of sovereign immunity, states may also have substantive
immunity from liability defined under their own law. See
Lombardo, 540 F.3d at 195. As the District Court aptly
summarized, “[t]he question raised by substantive immunity
from liability is whether the state has agreed to subject itself to
liability. The question raised by Eleventh Amendment
immunity is whether the state has consented to be sued in a
federal court.” In re Venoco, LLC, 610 B.R. 239, 247 (D. Del.
2020). The parties here do not dispute that Katz reaches a
state’s assertion of Eleventh Amendment immunity, so the
California Parties’ defense of Eleventh Amendment immunity
25
fails. As explained below, we also reject their assertion of
state-law substantive immunity from liability.
At the outset, we agree with the District Court that the
California Parties forfeited the argument they have immunity
from liability when they failed to raise it in the Bankruptcy
Court. See In re Kaiser Grp. Int’l Inc., 399 F.3d 558, 565 (3d
Cir. 2005) (noting the “general rule that when a party fails to
raise an issue in the bankruptcy court, the issue . . . may not be
considered by the district court on appeal”). The California
Parties argue that the immunity-from-liability defense is
jurisdictional and therefore can be raised at any time. We reject
this view, as “[a] defense rooted in state law cannot define the
jurisdiction of the federal courts, which derives from the
Constitution and acts of Congress.” Green v. Graham, 906
F.3d 955, 964 (11th Cir. 2018). The California Parties’
reliance on Edelman v. Jordan, 415 U.S. 651, 678 (1974), is
also misplaced, for that case only discussed Eleventh
Amendment immunity, which “sufficiently partakes of the
nature of a jurisdictional bar so that it need not be raised in the
trial court.” Id. And the Supreme Court never even decided
“that Eleventh Amendment immunity is a matter of subject-
matter jurisdiction,” see Wis. Dep’t of Corrs. v. Schacht, 524
U.S. 381, 391 (1998), and certainly never suggested that the
immunity-from-liability defense could be jurisdictional.
Had we reached the merits, the California Parties would
still not have prevailed, for it is well settled they can be sued in
California courts for the alleged violation of the Takings
Clause under the U.S. or California Constitutions; so they are
not actually immune from liability under California law. See
U.S. Const. amend. V (“[P]rivate property [shall not] be taken
for public use, without just compensation.”); Cal. Const. art. 1,
26
§ 19 (“Private property may be taken or damaged for a public
use and only when just compensation, ascertained by a jury
unless waived, has first been paid to, or into court for, the
owner.”). The Supreme Court recognizes that the Takings
Clause of the Fifth Amendment is “self-executing” without
statutory recognition, so “states [must] provide a specific
remedy for takings in their own courts.” See Seven Up Pete
Venture v. Schweitzer, 523 F.3d 948, 954 (9th Cir. 2008)
(citing First Eng. Evangelical Lutheran Church v. County of
Los Angeles, 482 U.S. 304, 315 (1987)). Similarly, the
California Constitution’s takings provision is also self-
executing without the need for more state legislation, meaning
the State already indicated its consent to be sued when
adequate payment to an owner did not follow a taking. See
Rose v. State, 123 P.2d 505, 513 (Cal. 1942) (“[I]f no statute
exists, liability still exists.”).
Indeed, the California Parties as much as conceded they
are not categorically immune from liability under California
law and argue only that any suit against the State alleging an
unconstitutional taking must be litigated in its own
courts. Comm’n’s Op. Br. at 53 n.21. But this is an argument
about the forum for suit and not liability. To the extent they
are invoking a third defense—a state law immunity-from-suit
defense—we and other circuits have not recognized it. See
Lombardo, 540 F.3d at 194; see also Meyers ex rel. Benzing v.
Texas, 410 F.3d 236, 250–55 (5th Cir. 2005). Further,
allowing the California Parties to assert a state law immunity-
from-suit defense separate from Eleventh Amendment
immunity would make the decision in Katz a dead letter. If that
argument prevails, state legislation can easily end-run the
deemed waiver of state sovereign immunity effected by the
Bankruptcy Clause and recognized in Katz. Tellingly, Katz
27
never limited its reach to only Eleventh Amendment
immunity. 546 U.S. at 378 (“In ratifying the Bankruptcy
Clause, the [s]tates acquiesced in a subordination of whatever
sovereign immunity they might overwise have asserted.”
(emphasis added)); id. at 377 (“States agreed . . . not to assert
any sovereign immunity defense they might have had.”
(emphasis added)). 16
Thus the California Parties’ assertion of substantive
immunity from liability under state law also fails. Because we
reject the asserted sovereign immunity defenses, we do not
reach whether the Commission also waived its sovereign
immunity defenses by filing a proof of claim in the Bankruptcy
Court and whether that waiver can be attributed to the State.
* * * * *
State sovereign immunity is a critical feature of the U.S.
Constitution, but it is not absolute. When they ratified the
Constitution, states waived their sovereign immunity defense
in bankruptcy proceedings that further a bankruptcy court’s
exercise of its in rem jurisdiction. We have such a proceeding
16
We do not go as far as holding that the substantive-
immunity-from-liability defense is deemed waived in every
proceeding where sovereign immunity is rejected under Katz.
We hold off because the California Parties do not have
immunity from liability here, and there may be potential
daylight between the two defenses when applying Katz to a
state-law cause of action. See Brubaker, supra, at 132
(describing potential complications with applying Katz to
state-law causes of action).
28
here, which seeks a ruling on rights in the Debtors’ property
and will affect the distribution of assets to the Debtors’
creditors. We affirm the District Court’s affirmance of the
Bankruptcy Court’s ruling and reject the California Parties’
assertion of sovereign immunity in the Adversary Proceeding.
29