Davis v. State of California et al
Filing
42
OPINION Signed by Judge Colm F. Connolly on 12/12/2023. (nmf)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
IN RE VENOCO, LLC, et al.,
Chapter 11
Bankr. No. 17-10828 (JTD)
(Jointly Administered)
Debtors.
EUGENE DAVIS, in his capacity
as Liquidating Trustee of the
Venoco Liquidating Trust,
Adv. No. 18-50908 (JTD)
Appellant,
V.
Civ. No. 22-1174 (CFC)
STATE OF CALIFORNIA and
CALIFORNIA STATE LANDS
COMMISSION,
Appellees.
Robert J. Dehney, Andrew R. Remming, Matthew 0. Talmo, MORRIS,
NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Warren W.
Harris, Nancy McEvily Davis, Stephani A. Michel, BRACEWELL LLP, Houston,
Texas
Counsel for Appellant
Rob Bonta, Christina Bull Arndt, Office of the California Attorney General, Los
Angeles, California; Edward K. Black, Delaware Department of Justice,
Wilmington, Delaware; David M. Fournier, Kenneth A. Listwak, TROUTMAN
PEPPER HAMILTON SANDERS LLP, Wilmington, Delaware; Steven S.
Rosenthal, Marc S. Cohen, J.D. Taliaferro, Alicia M. Clough, LOEB & LOEB
LLP, Los Angeles, California;
Counsel for Appellee
OPINION
December 12, 2023
Wilmington, Delaware
CONNOLLY, UNITESTATESDIRICT JUDGE
The Liquidating Trustee of the Venoco Liquidating Trust (the Trustee) has
appealed the Final Judgment (Adv. D.I. 287) 1 and Opinion, In re Venoco, LLC v.
State of California, 2022 WL 3639414 (Bankr. D. Del. Aug. 23, 2022), issued by
the Bankruptcy Court after trial in a post-confirmation adversary proceeding brought
by the Trustee against the State of California and the Californ ia State Lands
Commission (the Commission). The Trustee asserted at trial a so-called "inverse
condemnation" 2 claim under the Takings Clauses of the United States3 and
California4 Constitutions. Adv. D.I. 117 ,r,r 38-44. The Trustee sought at trial
compensation of up to $16 1 million for the alleged unlawful de facto taking by
Defendants of the Ellwood Onshore Facility (the EOF). Defendants have occupied
1
The docket of the Chapter 11 cases, captioned In re Venoco, LLC, No. 17-10828JTD, is cited herein as "B.D.I. _." The docket of the adversary proceeding, Davis
v. State of California, Adv. No. 18-50908-JTD, is cited herein as "Adv. D.I. _."
The appendix (D.I. 31-33) to the Trustee's brief is cited herein as "A_."
2
Inverse condemnation is "a cause of action against a governmental defendant to
recover the value of property which has been taken in fact by the governmental
defendant." United States v. Clarke, 445 U.S. 253,257 (1980) (quoting D. Hagman,
Urban Planning and Land Development Control Law 328 (1971)). It "stands in
contrast to direct condemnation, in which the government initiates proceedings to
acquire title under its eminent domain authority." Knick v. Township ofScott,
Pennsylvania, 139 S. Ct. 2162, 2168 (2019).
3 The Takings Clause of the Fifth Amendment to the federal Constitution, applicable
to the states through the Fourteenth Amendment, provides that private property shall
not "be taken for public use, without just compensation." U.S. Const. amend. V.
4
Article I, section 19, of the California Constitution provides: "Private property may
be taken or damaged for public use only when just compensation, ascertained by a
jury unless waived, has first been paid to, or into court for, the owner."
the EOF for the past five years for the purpose of decommissioning connected oil
and gas wells previously operated by the liquidating debtor, Venoco, LLC (Venoco).
I. BACKGROUND
A.
Venoco and the EOF5
Venoco was an oil and gas company that operated the Platform Holly drilling
rig in area known as the South Ellwood Field located off the coast of Santa Barbara,
California. Venoco held rights, title, and interests to 32 offshore wells in the South
Ellwood Field by virtue of certain leases (the SEF leases) it obtained from Mobil Oil
Company in 1997. The SEF leases were issued by the State of California, acting by
and through the Commission. Venoco processed the oil and gas it obtained from
Platform Holly at the EOF, which sits three miles from the platform on a half-acre
lot on the California coast. The EOF is located between a resort and a golf course
and is near residential communities and a public beach. Venoco held title to the
EOF and the air permits necessary to use the EOF.
The gas produced by the South Ellwood Field wells contains hydrogen sulfide
(H2S), a toxic gas that even at low levels poses serious threats to human health.
Al 455. Platform Holly lacks the equipment, or even the space for equipment, to
treat that H2S. And, therefore, to prevent H2S from accumulating to dangerous
levels, the H2S that originates in the South Ellwood Field wells is transferred from
5 There appears to be no dispute as to the events leading up to the occupation of the
EOF.
2
Platform Holly by pipeline to the EOF, where it is sent through an iron sponge tower
and ultimately burned off safely in a flare. Because of the toxicity of H2S, the EOF
is equipped with 29 interior detectors and six exterior fence line detectors to notify
personnel of any H2S release. Sufficient staff, certified to work in an H2S
environment, is required to be present on the EOF 24 hours per day for so long as
H2S flows from Platform Holly.
Venoco' s economic demise can be traced to 2015, when a ruptured pipeline
cut off the only conduit for Platform Holly's oil to get to market. In re Venoco,
2022 WL 3639414, at *3. After filing a first bankruptcy in March 2016 and
emerging from that bankruptcy, Venoco again found itself in financial distress by
late March 2017. See id. On March 31, 201 7, Venoco' s legal counsel notified the
Commission that Venoco was considering quitclaiming its Leases and outlined
possible scenarios under consideration, including an April 10 bankruptcy filing:
Venoco' s initial bankruptcy pleadings are expected to
inform the Court about the quitclaim, its commitment to
maintain current operations until April 25 th , and its
expectation that its South Ellwood-related expenditures
will discontinue on April 25 th . . . If no [Temporary
Services Agreement] has been finalized with the
[Commission] or its designated operator by April 25,
Venoco removes all personnel from the South Ellwood
field assets.
Id. at *4. This was followed on April 12, 2017 by an email from Venoco's Chief
Operating Officer to the Commission, stating that Venoco "will soon be unable to
continue meeting its obligations under the [Leases]" and that it was awaiting a board
3
decision whether to quitclaim the Leases "in the near future." Id. The email
asserted that Venoco intended to work with the SLC to facilitate a "safe and
responsible transition" of the Leases, which included "continued operational support
from EOF recognizing that it is operationally necessary for the plugging and
abandonment of the [South Ellwood Field]." Id. The April 12 email concluded that
Venoco would be "willing to maintain current operations for a short transition
period beyond April 30, 2017, provided that an acceptable reimbursement
agreement can be finalized in the near future ... " Id. At trial, a Commission
representative testified that the Commission had been unaware that Venoco was
imposing a deadline on negotiations and that it intended to abandon the South
Ellwood Field and EOF if no agreement were reached. See id. at *5. The
Commission thus turned its attention to obtaining emergency funding to pay
Venoco's staff to continue operating the EOF to safely treat the H$ emanating from
the wells, and began searching for contractors qualified to take over the EOF. Id.
Upon approval of emergency funding, the Commission entered into an
Agreement for Reimbursement of Temporary Services on April 14, 2017. Adv. D.I.
117-1. The reimbursement agreement provided that the EOF was "necessary for the
continued operation and anticipated plugging and abandonment" under the SEF
leases and that the Commission would pay Venoco approximately $1.1 million a
month to operate Platform Holly, the wells, and the EOF in a safe manner until the
new contractor designated by the Commission assumed operational control. See id.
4
On April 17, 2017, Venoco quitclaimed the Leases, including the wells and
Platform Holly (D.I. 30 at 11, 13), and filed for bankruptcy the same day. Adv. D.I.
117 ,r,r 2, 26. The wells will continue to discharge H2 S until their wellbores are
permanently sealed with concrete and reinforced (a process referred to as "plug and
abandon"). Venoco did not plug and abandon the wells or decommission Platform
Holly. Also on April 17, the Commission sent a letter informing Venoco that it was
in receipt of the quitclaim and that: ( 1) the Commission considered Venoco to be in
material breach of its obligations under the Leases; and (2) the law still required
Venoco to comply with its obligation to plug, abandon, and decommission the wells
and the infrastructure associated with the Leases. See id.
On September 15, 2017, a third-party contractor, Beacon West, took over the
decommissioning and plugging operations, and the reimbursement agreement was
terminated. Adv. D.I. 117,r 28. At that point, Venoco and the Commission entered
into a "Gap Agreement" pursuant to which the Commission agreed to pay Venoco
$100,000 per month for the non-exclusive access and use of the EOF. Id. ,r 29; Adv.
D.I. 117-2. On October 13, 2017, the Commission filed a proof of claim with the
Bankruptcy Court for an estimated $13 0 million contingent claim against Venoco
for the recovery of amounts that the Commission incurred in plugging the wells and
decommissioning Platform Holly. Adv. D.I. 117 at 9 n.5. The contingent claim
included $29 million to $35 million for the cost to operate and maintain the EOF in
connection with the plugging and decommissioning efforts.
5
The Commission also entered into a settlement agreement with ExxonMobil
on June 29, 2018 (Phase 1 Agreement). The Phase I Agreement required
ExxonMobil to assist with plugging and abandoning the wells. Adv. D.I. 117-5.
But it expressly excluded the maintenance and operation of the EOF from its scope:
This Phase I Agreement shall not cover any of the
following:
(i) The manning, servicing, operation and maintenance in
a safe and secure condition of the EOF, including the
operating systems and safety equipment at the EOF.
(ii) The Decommissioning of the EOF, as may be
required under any applicable Laws and Regulations, or
agreements.
Id. at 7. On May 23, 2018, the Bankruptcy Court entered an order confirming
Debtor's Plan of Liquidation, effective as of October 1, 2018. As part of the Plan
and the Litigation Trust Agreement it incorporates, the Court created a Liquidating
Trust and transferred to that Trust assets (the Liquidating Trust Assets) from the
bankruptcy estate. Those assets include the EOF and any claims Venoco had
against the State Defendants. The Bankruptcy Court appointed the Trustee and
ordered him to "collect[ ], hold[ ] , distribut[ e] and liquidat[e] the Liquidating Trust
Assets for the benefit" of Venoco' s creditors that filed claims against the bankruptcy
estate and "to otherwise administer[ ] the wind-down" of the estate. 6
6
B.D.I. 879-1, Liquidating Trust Agreement at 2; B.D.I. 893, Notice of
Appointment of Liquidating Trustee; B.D.I. 922-1, Combined Disclosure Statement
and Plan, Art. XI.C. (governing "Rights, Powers and Duties of the Debtors and
6
In the months leading up to plan confirmation, Venoco "sought to negotiate
with the [Commission] for a purchase price and ultimate disposition of the EOF, its
equipment, and [environmental] permits." Adv. D.I. 117130. Negotiations were
unsuccessful and unpaid amounts owed to V enoco were accruing under the Gap
Agreement. Id. 1130-31. On August 22, 2018, Venoco notified the Commission
that it intended to terminate the Gap Agreement on October 15, 2018 if certain
conditions, including the payment of $950,000 in past due payments under the Gap
Agreement and "substantial progress towards settlement" of the parties' outstanding
claims against each other were not met. Id. 1 31.
On October 1, 2018, the Plan became effective and the EOF, its permits, and
Venoco' s potential claims against the State Defendants were transferred to the
Liquidating Trust. On October 15, 2018, the Gap Agreement was terminated.
Despite making the outstanding periodic payments due under the Gap Agreement,
the State Defendants informed the Trustee that they intended to remain at the EOF
without further compensation, alleging that they could lawfully do so under their
police power. Id. 1 32. The State Defendants have used the EOF for the five years
during their decommissioning and plugging and abandoning efforts. Id. 133. The
plugging and abandoning work was paused for nearly eighteen months during the
pandemic. The Commission testified at trial that it expected to remain on the site
Liquidating Trustee"); id., Art. XIII.D (governing "Payments and Distributions for
Disputed Claims"); B.D.I. 922, Confirmation Order 1110-11).
7
until completion of the P&A process. In re Venoco, 2022 WL 3639414, at *10. At
that time, the Commission will return the property to the Trustee, who will sell it as
part of the liquidation of the Venoco estate assets. See id.
B.
The Adversary Proceeding
On October 16, 2018, the Trustee filed a Complaint (as amended at Adv. D.I.
117) and thereby initiated this adversary proceeding. The Complaint alleges that the
State Defendants' continued use of the EOF constitutes a taking under the United
States and California Constitutions and that the Liquidating Trust is therefore
entitled to "just compensation, including the fair market value and fair rental value,
for [the State] Defendants' use and occupancy of the EOF, its equipment, its permits
and [the State] Defendants' special use and operations thereon." Adv. D.I. 117,J
40. By the Complaint, the Trustee seeks "to maximize [the] distributable value" of
the EOF, as a Liquidating Trust Asset, "in accordance with" the Plan. Id. ,I 44.
The State Defendants filed motions to dismiss to the Complaint, arguing that
the claims were barred by the State Defendants' sovereign immunity. Adv. D.I. 9,
10. The Bankruptcy Court denied their motions to dismiss, basing its decision in
part on its conclusion that "the in rem jurisdiction of the bankruptcy court defeats a
claim of sovereign immunity." In re Venoco, LLC, 596 B.R. 480 (Banla. D. Del.
2019). On appeal, this Court and the Third Circuit affirmed. In re Venoco, LLC,
610 B.R. 239 (D. Del. 2020), aff'd 998 F .3d 94 (3d Cir. 2021 ).
On December 23, 2021, the State Defendants filed a motion for summary
8
judgment as to both counts of the Complaint, and the Trustee filed a Cross-Motion.
Adv. D.I. 134, 157. On March 7, 2022, the Bankruptcy Court granted summary
judgment in favor of State Defendants with respect to Count II of the Complaint,
which sought compensation for use of the EOF pursuant to§ 105(a) of the
Bankruptcy Code. Adv. D.I. 261. On March 7-11, 2022, the Bankruptcy Court held
a trial with respect to the Count I inverse condemnation claims. Adv. D.I. 270-274.
C.
The Decision
On August 23, 2022 the Bankruptcy Court issued its Decision in favor of the
State Defendants. The Bankruptcy Court found that "Venoco created an emergency
when it threatened to leave unmanned a facility that required constant monitoring to
ensure public safety" and that "in assuming operations of the EOF, the Commission
was acting to avert harm to both the public and the environment." In re Venoco,
2022 WL 3639414, at* 14, *22. In the Court's words:
When Venoco informed the Commission that it could no
longer afford to operate the EOF - which operations are
necessary to ensure that H2S gas does not build up and
leak into the atmosphere - it created the need for the
Commission to step in and operate the facility itself. The
Commission's use of the EOF to assist in the plugging
and abandoning of the Wells was and is the most
reasonable way to permanently eliminate the risk of an
H2S leak, or other environmental catastrophes originating
from the Wells.
Id. at * 14. Based on these fact findings, the Bankruptcy Court concluded that "the
Commission's assumption of operations at the EOF and the commencement of work
9
to permanently seal the Wells w[ere] both necessary and appropriate," and that,
therefore, those "actions were a reasonable exercise of [the Commission's] police
power" and not compensable under the Takings Clauses of the United States and
California Constitutions. Id. at *20. On September 6, 2022, the Trustee filed a
timely notice of appeal of the Final Judgment. D.I. 1. The appeal is fully briefed.
D.I. 30, 34, 35, 40. On April 26, 2023, the Court held oral argument. D.I. 39.
II.
JURISDICTION AND STANDARD OF REVIEW
The Court has jurisdiction over this appeal from the Bankruptcy Court under
28 U.S.C. § 158. On appeal from an order issued by the Bankruptcy Court, a district
court "review[s] the Bankruptcy Court's factual findings under a clearly erroneous
standard and exercise[s] plenary review over legal issues." In re Trans World
Airlines, Inc., 145 F.3d 124, 130 (3d Cir. 1998) (noting that both the district court
and the Third Circuit "review the bankruptcy court's legal determinations de novo,
its factual findings for clear error and its exercise of discretion for abuse thereof.").
The Trustee's main argument on appeal is that the police power exception
applies only in an "emergency" and that the Bankruptcy Court erred in concluding
that such an emergency existed. D.I. 30 at 20. Notwithstanding the Trustee's
attempts to reframe this as an appeal of one of more erroneous legal determinations,
the existence of an emergency is a factual determination reviewed for clear error.
Under the clearly erroneous standard, the Court accepts the Bankruptcy
Court's findings of fact "unless that determination either is completely devoid of
10
minimum evidentiary support displaying some hue of credibility or bears no rational
relationship to the supportive evidentiary data." Fellheimer, Eichen & Braverman v.
Charter Tech.., 57 F.3d 1215, 1223 (3d Cir. 1995). Findings may also be deemed
clearly erroneous where there may be some evidence to support them, but the
reviewing court is left with "the definite and firm conviction that a mistake has been
made." Haines v. Liggett Group, Inc., 975 F.2d 81, 92 (3d Cir. 1992) (quoting U.S.
v. U.S. Gypsum Co., 333 U.S. 364,395 (1948)). "The Bankruptcy Court is best
positioned to assess the facts, particularly those related to credibility and purpose."
In re Myers, 491 F.3d 120, 126 (3d Cir. 2007). "Where there are two permissible
views of the evidence, the factfinder' s choice between them cannot be clearly
erroneous." Anderson v. City ofBessemer, 470 U.S. 564, 574 (1985)).
III.
ANALYSIS
A.
The Police Power Exception
As the Decision explains, "[w]hile a physical invasion of private property will
usually amount to a per se taking, no taking will be found where the government is
acting to enforce pre-existing background restrictions on property rights." In re
Venoco, 2022 WL 3639414, at *13. Quoting the Supreme Court, the Bankruptcy
Court explained:
These background limitations [] encompass traditional
common law privileges to access private property. One
such privilege allowed individuals to enter property in the
event of public or private necessity. See Restatement
(Second) a/Torts§ 196 (1964) (entry to avert an imminent
11
public disaster); § 197 (entry to avert serious harm to a
person, land, or chattels) [ ] .
Id. (quoting Cedar Point Nursery v. Hassid, 141 S. Ct. 2063, 2079 (2021)). "The
government's right to regulate private property in this manner is often referred to as
its police power." Id. (citing 1 Nichols on Eminent Domain, § 1.42 (defining police
power as the government's inherent power to "prevent persons under its jurisdiction
from conducting themselves or using their property to the detriment of the general
welfare.")). And, as the Decision notes, "deeply rooted [in] Supreme Court
precedent, beginning with Mug/er v. Kansas, 123 U.S. 623, 665 (1887)," is the
principle that "where the State acts to preserve the 'safety of the public' the State 'is
not, and consistent with the existence and safety of organized society, cannot be
burdened with the condition that the society must compensate such individual
owners for pecuniary losses they may sustain ... '" Id. at* 11 (quoting Mug/er, 123
U.S. at 668-69).
This rule recognizes a distinction between the state's exercise of eminent
domain to acquire private property for public use and its exercise of the police
power to prevent injury to the public. In widely different contexts, the Supreme
Court since Mug/er has held that the government's exercise of the police power with
respect to real property for the protection of the public does not give rise to a
12
compensable taking under the Fifth Amendment. 7 "The distinction between an
exercise of the police power and a constitutional taking has been characterized since
Mug/er as whether the governmental action operates to secure a benefit for or
prevent a harm to the public." Patty v. United States, 136 Fed. Cl. 211,214 (Fed.
Cl. 2018) (internal quotes omitted). The "[p]olice power should not be confused
with eminent domain, in that the former controls the use of property ... for the
public good, authorizing its regulation and destruction without compensation,
whereas the latter takes property for public use and compensation is given for
property taken, damaged and destroyed." In re Venoco, 2022 WL 3639414, at *13
(quoting Lamm v. Volpe, 449 F.2d 1202, 1203 (10th Cir. 1971)).
As the Bankruptcy Court further observed, "An attempt to define the reach or
outer limits of the police power has been said to be 'fruitless, for each case must
1
Keystone Bituminous Coal Ass 'n. v. DeBenedictis, 480 U.S. 470, 485-86 (1987)
(quoting Mug/er) (no taking of property where the government prohibits mining of
coal from portions of land due to risk of subsidence damage); Nat'/ Bd. ofY.MC.A.
v. U.S., 395 U.S. 85, 92 (1969) (no liability for damage caused by rioters to
buildings occupied by troops acting primarily in defense of the buildings); Goldblatt
v. Hempstead, 369 U.S. 590, 592-93 (1962) (quoting Mug/er) (the "exercise of the
town's police powers" to prohibit excavation on property as a safety measure,
preventing all productive use of the property, did not confiscate property without
compensation); Miller v. Scheone, 276 U.S. 272, 279-80 (1928) (citing Mug/er)
(permitting cutting cedar trees because of threat presented of spreading disease to
apple orchards); see also, Chi., B. & Q. Ry. Co. v. Illinois, 200 U.S. 561, 593-94
( 1906) ("[T]he clause prohibiting the taking of private property without just
compensation is not intended as a limitation of the exercise of the police powers
which are necessary to the tranquility of every well-ordered community, nor of the
general power over private property which is necessary for the orderly existence of
all governments.") (internal citations and quotations omitted).
13
tum on its own facts.'" Id. at * 14 (quoting Berman v. Parker, 348 U.S. 26, 32
( 1954)). "Public safety, public health, morality, peace and quiet, law and order these are some of the more conspicuous examples of the traditional application of
the police power to municipal affairs. Yet they merely illustrate the scope of the
power and do not delimit it." Id. (quoting Berman, 348 U.S. at 32). "Determining
whether a particular government action constitutes a compensable 'Taking' or a
noncompensable exercise of police powers is therefore highly dependent on the
facts and circumstances of each case." Id.
B.
The Record Supports the Bankruptcy Court's Factual Finding that
an Emergency Existed
The Trustee argues that the police-powers exception "applies only where
there is an 'imminent' threat of harm and 'unforeseen' circumstances calling for
immediate action" and that "[n]o such imminent threat or unforeseen circumstances
existed here." D.I. 30 at 2. According to the Trustee, "[t]he lack of an emergency is
clearly demonstrated by the fact that when the alleged emergencies arose,
Defendants decided not to seize the facility" but "[i]nstead ... weighed their
options, entered into contracts to pay for their use of the property, and then
retroactively declared an emergency when they no longer wished to pay for that
use." Id. at 2-3.
The record here, however, provides ample support for the Bankruptcy Court's
finding that "Venoco created an emergency when it threatened to leave unmanned a
14
facility that required constant monitoring to ensure public safety," that the
emergency would exist indefinitely until the wells were permanently plugged and
abandoned, and that "in assuming operations of the EOF, the Commission was
acting to avert harm to both the public and the environment" In re Venoco, 2022
WL 3639414 at *22. Specifically, the Bankruptcy Court found that "there was
extensive evidence presented at trial regarding the toxic nature of H 2S gas, its
presence at Platform Holly, and the need for the around-the-clock operation of the
EOF to manage it." Id. at* 15. This finding was supported by testimony that the
concentrations of H2S gas reaching the EOF "fall within the 'immediately lethal'
range." Id. In addition to the risk to human life and health, unmanaged H2S at these
concentrations "increases the risk of an equipment failure that could result in
contamination to the surrounding environment and wildlife." Id.
Because the release of H2S gas is so hazardous, the Bankruptcy Court found,
the EOF and Platform Holly are staffed 24 hours a day. Id. at * 16. "In fact, as even
the Trustee admits, the facilities have been able to operate safely for decades in spite
of the presence of high levels of H2S because of the constant monitoring and
maintenance of the facilities by skilled personnel." Id. It further found that,
although the Commission had believed Venoco was maintaining the wells while
they were out of production, when the Commission assumed possession of the wells,
it learned "that the majority of the Wells were in bad shape." Id. at* 17. The
Commission's production engineer and project coordinator testified that given the
15
state of wells at the time, "doing nothing in response to Venoco's termination of the
Gap Agreement was out of the question." Id. Thus, "the uncontroverted evidence
... demonstrated that the EOF was and is the only way to ensure that H2S gas did
not build up to dangerous levels and pose a risk to human life." Id.
The Bankruptcy Court further found "that by mid-April of 2017, the
Commission believed there was a real risk that Venoco would leave the EOF and
Platform Holly unmanned and acted with the sole intent of protecting public health
and safety," by assuming operation of both facilities. Id. The Decision details the
facts underlying the Commission's belief that Venoco may be abandoning the EOF
after April 30, 201 7 and its concerns about the ongoing risk to the public health and
safety from the potential release of H2S gas if the EOF was not continuously
manned and operated, including contemporaneous funding requests and
notifications to state and local representatives and the public. Id. at* 18-19. "Th[at]
evidence of the Commission's intent and purpose in taking over operation of the
EOF was uncontroverted and establishes both that the Commission believed there
was a real risk that Venoco would cease operating the EOF and that it was
motivated only by a need to protect public health and safety." Id. at * 19.
Lastly, the Bankruptcy Court found that "[w]hile the immediate need was
simply to protect the public from exposure to toxic H2S gas by keeping the EOF up
and running, the only permanent solution to that problem was to plug and abandon
the Wells. Id. "As Venoco indicated it had no intention of doing so, the
16
Commission had no choice but to do so itself." Id. Based on the foregoing findings,
the Bankruptcy Court concluded that, "Given the severity of the harm that could
have occurred _from the continuing buildup of the H2S gas at the Wells the
Commission's assumption of operations at the EOF and the commencement of work
to permanently seal the Wells was both necessary and appropriate. I therefore find
such actions were a reasonable exercise of its police power." Id. at *20. The
Bankruptcy Court's finding of the existence of an emergency is rationally related to
the evidence presented by the entire record, and thus it is not clearly erroneous.
C.
The Emergency Presented an Imminent Threat
The Trustee attempts to reframe this appeal as one involving an erroneous
legal determination rather than a factual finding, arguing that under both federal and
California law, the police powers exception applies only in an emergency "that
constitutes an imminent threat to the public's health and safety." D.I. 30 at 21
(emphasis added). The Trustee essentially argues that there can be an emergency
which is not imminent. 8 The Trustee cites US. v. Caltex, which acknowledged that
8
It is unclear how an "emergency" could involve anything other than an "imminent"
risk or result. Black's Law Dictionary defines "emergency" as "[a] sudden and
serious event or an unforeseen change in circumstances that calls for immediate
action to avert, control, or remedy harm" or "[a]n urgent need for relief or
help." Black's Law Dictionary (11th ed. 2019); see also Merriam-Webster Online
Dictionary, https://www.merriamwebster.com/dictionary/emergency (last visited
Oct. 25, 2023) (defining "emergency" as "an unforeseen combination of
circumstances or the resulting state that calls for immediate action"). Black's Law
Dictionary defines "imminent" as "threatening to occur immediately," "dangerously
impending" or "about to take place." Black's Law Dictionary (11th ed. 2019); see
17
"in times of imminent peril-such as when fire threatened a whole community-the
sovereign could, with immunity, destroy the property of a few that the property of
many and the lives of many more could be saved." D.I. 30 at 21 (quoting U.S. v.
Caltex, 344 U.S. 149, 154 (1952) (emphasis added)). The Trustee further cites the
applicable California legal standard, House v. L.A. County Flood Control District,
which states that the police-powers exception applies "under the pressure of public
necessity and to avert impending peril." Id. (quoting House v. L.A. Cnty. Flood
Control Dist., 153 P.2d 950, 953 (Cal. 1944) (emphasis added)).
The Trustee does not dispute that the actions of the Commission were taken in
furtherance of "public necessity." See D.I. 30 at 22-35 (challenging only whether
the Commission was acting to address an "imminent threat"). Rather, the Trustee
spends the entirety of his "emergency" argument on whether the State Defendants'
actions addressed an "impending peril." In so doing, the Trustee ignores that the
word "avert" modifies "impending peril" in the House decision. The record
supports the Bankruptcy Court's conclusion that, in assuming operations of the
EOF, the Commission was acting to avert public peril. See https://www.merriamwebster.com/dictionary/avert, last visited Oct. 25, 2023 (defining "avert" as "to see
coming and ward off'); see also https://www.merriam-webster.com/thesaurus/
also Merriam-Webster Online Dictionary, https://www.merriamwebster.
com/dictionary/imminent (last visited Oct. 25, 2023) (defining "imminent" as
"ready to take place," "happening soon," or "near").
18
averting, last visited Oct. 25, 2023 (averting is "to keep from happening by taking
action in advance"). Venoco notified the Commission that it may not be able to
operate the EOF, and as a result would not be able to monitor and treat the
"immediately lethal" H2S gas that existed at the EOF. See In re Venoco, 2022 WL
3639414, at *18. The "emergent situation [on the EOF and at Holly] ... had the
potential to jeopardize the health and safety of [California] citizens." Id. at* 19.
The Bankruptcy Court may not have used the terms "imminent" or "impending," but
the record supports a finding that the emergency presented just such a peril. 9
D.
The Trustee Has Failed to Establish Clear Error
The Trustee has failed to demonstrate that the Bankruptcy Court's finding of
an emergency was "completely devoid of minimum evidentiary support displaying
some hue of credibility" or bears "no rational relationship to the supportive
evidentiary data," as required to show clear error. According to the Trustee, several
9 The
Trustee further argues that an "emergency" justifying application of the police
powers exception exists only where there are "unforeseen circumstances calling for
immediate action." D.I. 30 at 2, 22-34. As the State Defendants point out, the
factors added by Trustee, including "unforeseen situation" and "immediate action,"
are taken from inapplicable cases. See D.I. 34 at 41-44. As the Bankruptcy Court
observed, "[t]he Trustee seems convinced that the government may only rely on its
police powers to respond to an active and ongoing emergency, but not to prevent
one, essentially arguing that the government must wait until catastrophe strikes
before it can assert its police powers." In re Venoco, 2022 WL 3639414, at *22.
The Court agrees that the "Trustee's suggestion that the Commission did not have
the right to assert its police powers until Venoco packed up its employees and left
the EOF unmanned is not well taken." Id.
19
facts controvert the Bankruptcy Court's finding that an emergency existed prior to
the Commission's occupation of the EOF. The Trustee argues that, in response to
the March and April 201 7 emails, the Commission did not seize the EOF, but rather
negotiated a reimbursement agreement obligating Venoco to maintain operations at
the EOF until its agent could take over. D.I. 30 at 25. The Trustee further asserts
available alternatives to occupation of the EOF, including requiring ExxonMobil, as
Venoco's predecessor-in-interest, to perform the plugging, abandoning, and
decommissioning of the Wells and Platform Holly. Id. at 44-49. Finally, even
assuming there was an emergency, the Trustee asserts, an emergency implicating the
police power ceased to exist when Beacon West began operating the EOF. Id. at 35.
Even assuming support for each contention in the record, none of these facts
or circumstances can establish clear error. The fact that the Commission negotiated
with Venoco for a period of time, to prevent Venoco from leaving the EOF
unmanned and therefore avert peril, did not obviate the continuing risk that the EOF
presented. The existence of possible alternatives to assuming control of the EOF did
not obviate the risk either. The Commission's ability to compel ExxonMobil to
operate the privately-owned EOF and is unsupported by the record, as is the
Trustee's speculation that ExxonMobil might have reached a commercial
arrangement with Venoco in time to avert an emergency. Finally, it is unclear how
Beacon West's operation of the EOF requires a different outcome. Only agents
certified to work in an H 2 S environment could operate the EOF. The State
20
Defendants assumed control of the EOF to avert public harm; while their agent's
occupation and operation of the EOF was required to manage the threat, it did not
end the threat. "While there may be evidence and inferences to the contrary, we
cannot say that the findings are devoid of credible evidentiary support or that they
lack a rational relationship to the evidentiary data." DiFederico v. Rolm Co., 201
F.3d 200,208 (3d Cir. 2000). The Trustee's remaining arguments are rejected. 10
IV.
CONCLUSION
In assuming operations of the EOF, the State Defendants acted to avert harm
10
The Trustee's reply brief raised the argument that the EOF's occupation was not a
valid exercise of police power because the EOF itself did not pose a threat to the
public's health or safety. See D.I. 35 at 9, 14-16. Rather, Trustee asserts, the gas
posing a risk emanates from the Wells owned by the State Defendants. The Trustee
cites testimony by Beacon West's representatives that H2S "does not occur naturally
at [the] EOF," that it must "be brought to the EOF for it to be present" there
(A0349), and that the EOF does not "generate emissions if it is not running"
(A0225). Thus, the State Defendants did not occupy the EOF "to remedy a risk to
human health, safety, or the environment emanating therefrom," the Trustee argues;
rather, "[t]hey took the EOF to remedy a potential risk emanating from their own
property." Id. at 14. According to the Trustee, the State Defendants cite no case
holding that the government can exercise its police power to occupy one property
for the purpose of abating a hazard emanating from a different property. Id. at 16.
At oral argument, the court inquired as to whether this argument was presented to
the Bankruptcy Court. See D.I. 39 at 26: 15-25:2. Counsel to the Trustee responded:
"all the underlying facts were presented" and "it's undisputed that these are two
separate properties." Id. at 27:5-7. Counsel further indicated that the argument
"was raised more in the summary judgment papers." Id. at 27:23-25. The Court did
not locate this argument in the summary judgment briefing or elsewhere in the
record. Adv. D.I. 135, 168, 182, 185,218, & 237. See In re Natale, 280 Fed. App'x
227,229 (3d Cir. 2008) (issue not raised below waived on appeal). Nor was it
raised in the Trustee's opening brief on appeal. In re Revstone Indus., LLC, 690
Fed. App'x 88, 90 (3d Cir. 2017) (arguments raised for first time in a reply brief are
waived on appeal). Accordingly, the argument is waived.
21
to both the public and the environment, a valid exercise of police power. The
Trustee's argument that there was no emergency presenting an imminent threat fails.
The Bankruptcy Court's finding that "Venoco created an emergency when it
threatened to leave unmanned a facility that required constant monitoring to ensure
public safety emergency" is not clearly erroneous, and the record supports a finding
that the emergency presented an imminent threat to the public and the environment.
The Court will issue a separate Order consistent with this Opinion affirming Final
Judgment in favor of the State Defendants.
22
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