Affirming Bankruptcy Judge John T. Dorsey, a district judge in Delaware held that California’s takeover and use of a debtor’s plant did not result in a “reverse condemnation” entitling the debtor to damages, because failure to act would have “presented an imminent threat to the public and the environment.”
The debtor operated offshore oil and gas wells leased from the State of California. Onshore, the debtor owned and operated a plant that safely captured and removed toxic hydrogen sulfide gas produced in the wells.
The debtor filed a chapter 11 petition and purported to quitclaim the wells back to the state. To prevent the toxic gas from escaping, the state initially paid the debtor to occupy and operate the onshore property to prevent gas from escaping. Until the wells were decommissioned and plugged, the state was required to continue operating the plant.
The State No Longer ‘Rents’ the Property
Around the time that the debtor confirmed a chapter 11 plan, the state notified the debtor that it would no longer “rent” the property but continued using the property to remove the toxic gas as an exercise of the state’s police powers.
The debtor’s confirmed chapter 11 plan that created a litigation trust. The trust sued the state under the state and federal constitutions for $161 million, representing damages for the inverse condemnation and taking of the onshore plant.
In total, the state used the plant for five years during the decommissioning and plugging of the wells. On completion of the plugging, the state returned the plant to the debtor to be sold along with other estate assets.
Bankruptcy Judge Dorsey granted the state’s motion for summary judgment, dismissing the condemnation claim. The trust appealed but lost again in a December 12 opinion by District Judge Colm F. Connolly of Delaware.
Bankruptcy Judge Dorsey had found that the debtor created an “emergency” when it threatened to shut down the plant, which required 24 hour monitoring, seven days a week. He found that taking over the plant was a “reasonable” exercise of police powers and was not compensable under the Takings Clauses of the state and federal constitutions.
On appeal, the trust contended that the takeover was not an “imminent threat” and that the police power exception only applies to an “imminent threat.”
Police Powers Can Prevent a Taking
Judge Connolly said that Supreme Court authority going back to 1887 “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 compensable taking under the Fifth Amendment.” He also said that the Court “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.”
Again citing the Supreme Court, Judge Connolly said that deciding whether a governmental action was a compensable taking or a noncompensable exercise of police powers is “highly dependent” on the facts of a particular case.
Judge Connolly reviewed Judge Dorsey’s findings under a “clearly erroneous” standard and found “ample support” for the bankruptcy judge’s findings that the debtor created an emergency when it threatened to leave the plan unmanned. Addressing the idea that the threat to public health and safety must be imminent, he found support in the record for the idea that the state was acting “to avert public peril.”
Even though the bankruptcy court may not have used the words “imminent” or “impending,” Judge Connolly found support in the record for “a finding that the emergency presented just such a peril.”
Judge Connolly affirmed the judgment by Bankruptcy Judge Dorsey, ruling that his findings were not clearly erroneous and that “the record supports a finding that the emergency presented an imminent threat to the public and the environment.”
Affirming Bankruptcy Judge John T. Dorsey, a district judge in Delaware held that California’s takeover and use of a debtor’s plant did not result in a “reverse condemnation” entitling the debtor to damages, because failure to act would have “presented an imminent threat to the public and the environment.”
The debtor operated offshore oil and gas wells leased from the State of California. Onshore, the debtor owned and operated a plant that safely captured and removed toxic hydrogen sulfide gas produced in the wells.
The debtor filed a chapter 11 petition and purported to quitclaim the wells back to the state. To prevent the toxic gas from escaping, the state initially paid the debtor to occupy and operate the onshore property to prevent gas from escaping. Until the wells were decommissioned and plugged, the state was required to continue operating the plant.