VENOCO, LLC v.

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. at

362–64)).

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