Delaware Bankruptcy Court Denies Preliminary Injunction Seeking to Compel Plugging and Abandonment

What Happened

Venoco, LLC was the operator of an oil- and gas-producing well site located in Beverly Hills, California on a .73 acre segment of a 7.8 acre property, adjacent to Beverly Hills High School. Venoco acquired its rights through a transfer and assumption of an oil and gas lease, which terminated automatically on December 31, 2016 and obligated Venoco to restore the Well Site to its original condition as required under applicable state law after 90 days (by March 31, 2017).

Upon termination of the Lease, on December 31, 2016, Venoco ceased operating the Well Site. Venoco no longer held any possessory interest in or rights to drill, operate, maintain, or control the Well Site and its fixtures. In April 2017, Venoco filed for bankruptcy relief and announced its intent to vacate the Well Site, after which it would “no longer have employees or contractors in Beverly Hills,” in apparent disregard for applicable state law requiring restoration and continued maintenance of the Well Site. Although Venoco did not restore the Well Site, it flushed the oil tanks and left the Well Site in “good order” and with premises monitoring.

In May 2017, the City of Beverly Hills, California and the California Department of Conservation, Division of Oil, Gas, and Geothermal Resources issued orders that, as a general matter, directed Venoco to comply with its obligations to plug, abandon, and decommission the Well Site.

Venoco filed a motion before the Bankruptcy Court to abandon the Well Site and to reject associated contracts and leases. (The hearing to consider Venoco’s motion to abandon the Well Site and to reject associated contracts and leases is set for June 20, 2017.) In response, the City and the Beverly Hills Unified School District filed an adversary proceeding to direct Venoco to maintain the Well Site and create a financial reserve to ensure compliance with the Orders.

Key Analysis

Judge Gross’s decision denying the preliminary injunction addresses each of the elements for obtaining a preliminary injunction:

• The likelihood that the moving party will succeed on the merits;
• The extent to which the moving party will suffer irreparable harm without injunctive relief;
• The extent to which the nonmoving party will suffer irreparable harm if the injunction is issued;
• The public interest

The failure to satisfy any one of the elements, Judge Gross explained, “compels denial” of such “extraordinary relief.”

Likelihood of Success on the Merits

To show a reasonable probability of prevailing on the merits, the Plaintiffs relied on cases involving the release or threatened release of hazardous waste. The court, however, distinguished those cases and explained:

Venoco is making certain that the surrounding community is protected from harm which the [Well] Site might pose. Venoco has not put public health at risk or refused to respond or reimburse for response costs. Venoco has also made it clear that it intends to remain at the [Well] Site until a replacement entity is installed.

Judge Gross addressed the Supreme Court decision, Midlantic Nat. Bank v. New Jersey Dep’t of Envtl. Prot. There, the trustee sought to abandon waste facilities and discontinue safety features required under applicable law — circumstances that posed a risk to the public health and safety. The Supreme Court held that a trustee may not abandon property in “contravention of a state statute or regulation that is reasonably designed to protect the public health or safety from identified hazards.” Judge Gross found it noteworthy that the Supreme Court narrowed its ruling and, therefore, cited the influential Midlantic footnote:

[t]his exception to the abandonment power vested in the trustee by § 554 is a narrow one. It does not encompass a speculative or indeterminate future violation of such laws that may stem from abandonment. The abandonment power is not to be fettered by laws or regulations not reasonably calculated to protect the public health or safety from imminent and identifiable harm.

Judge Gross distinguished Midlantic from the case presented to him. Specifically, Judge Gross explained that 1) “Venoco remains at the site only in a monitoring role” and “no longer possesses or operates the site”; and 2) the Well Site is in “good order,” which is unlike the “toxic material harm [that] already existed” in Midlantic. Accordingly, Judge Gross concluded that the “narrow exception” to a trustee’s right to abandon assets described in Midlantic is not applicable.

Finally, Judge Gross rejected the Plaintiffs’ argument that “Venoco must remove the ‘fixtures’ at the [Well] Site.” Fixtures that are not owned by Venoco, Judge Gross explained, are not property of Venoco’s estate.

Irreparable Harm

To emphasize the need to show “irreparable and unique” injury or harm, Judge Gross explained that a “[p]ure economic injury, which is compensable in money damages,” by itself, “is not an irreparable injury.” According to Judge Gross, “the Plaintiffs’ request for the reserve is an admission that money damages would be sufficient which defeats the Plaintiffs’ claims of irreparable harm.” Judge Gross made it a point that “financial harm is something the Court deals with every day.” The remedy for the Plaintiffs, Judge Gross explained, is to “assert a claim for damages” arising out of the need to “hire a third-party contractor to monitor” and decommission the Well Site.

Harm to Venoco

In balancing the harms, Judge Gross explained that “Venoco cannot be held in suspension” and “must be allowed to liquidate its estate.” Accordingly, Judge Gross held that “Venoco and its estate will suffer substantial irreparable harm if the Court grants injunctive relief.”

Public Interest

Venoco’s “transition of the monitoring process,” Judge Gross explained, eliminates any “threat to the public’s health or safety.” Accordingly, Judge Gross held that “[i]njunctive relief will not serve the public interest.”

Takeaway

Debtors with substantial plugging and abandonment obligations can look to this decision for guidance that courts will require a showing of “imminent and identifiable harm” to public health and safety before issuing injunctive relief. As Judge Gross noted, the harm the Plaintiffs “seek to alleviate is financial harm,” which is “something the court deals with every day” and “can be addressed through the claims process.”