Michael Cobb v. City of Stockton

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN RE CITY OF STOCKTON, No. 14-17269
CALIFORNIA,
Debtor, D.C. No.
12-32118
MICHAEL A. COBB,
Objector-Appellant, OPINION
v.
CITY OF STOCKTON,
Debtor-Appellee.
Appeal from the United States Bankruptcy Court
for the Eastern District of California
Christopher M. Klein, Chief Bankruptcy Judge, Presiding
Argued and Submitted November 14, 2016
Resubmitted December 10, 2018
San Francisco, California
Filed December 10, 2018
2 IN RE CITY OF STOCKTON
Before: Sidney R. Thomas, Chief Judge, and Ronald M.
Gould and Michelle T. Friedland, Circuit Judges.*
Opinion by Chief Judge Thomas;
Dissent by Judge Friedland
SUMMARY**
Bankruptcy
The panel dismissed as equitably moot an appeal from
the bankruptcy court’s order denying an objection to
confirmation of the Chapter 9 plan of adjustment of the City
of Stockton.
The objector had filed an inverse condemnation claim
against the City in state court. The plan classified the claim
as a general unsecured claim.
Agreeing with the Sixth Circuit, the panel dismissed the
appeal as equitably moot because the objector did not seek a
stay of confirmation; the plan had been substantially
consummated; the relief of undoing plan confirmation would
bear unduly on innocent third parties; and the bankruptcy
*
This case was originally submitted to a panel that included Judge
Kozinski. After Judge Kozinski’s retirement, Judge Gould was drawn by
lot to replace him. Ninth Circuit General Order 3.2.h. Judge Gould has
read the briefs, reviewed the record, and listened to oral argument.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
IN RE CITY OF STOCKTON 3
court could not fashion relief without undoing the confirmed
plan.
The panel also affirmed the bankruptcy court’s conclusion
that the objector’s claim—that the Takings Clause exempted
his unsecured claim from reorganization—failed on the
merits. The panel concluded that the objector’s purported
property interest was, in reality, a claim for monetary relief.
Dissenting, Judge Friedland wrote that the objector sought
only to have his claim for just compensation under the
Takings Clause excepted from discharge, and a claim that
falls outside of bankruptcy cannot be subject to the
bankruptcy doctrine of equitable mootness. On the merits,
Judge Friedland wrote that because the objector maintained
a constitutional claim for just compensation, and because that
claim should have been excepted from discharge, the state-
court inverse condemnation action should have been allowed
to proceed.
COUNSEL
Bradford J. Dozier (argued), Atherton & Dozier, Stockton,
California, for Objector-Appellant.
Robert Loeb (argued), Orrick Herrington & Sutcliffe LLP,
Washington, D.C.; Christopher J. Cariello, Orrick Herrington
& Sutcliffe LLP, New York, New York; Lesley M. Durmann,
Patrick B. Bocash, and Marc A. Levinson, Orrick Herrington
& Sutcliffe LLP, Sacramento, California; for Debtor-
Appellee.
4 IN RE CITY OF STOCKTON
OPINION
THOMAS, Chief Judge:
Michael Cobb appeals the bankruptcy court’s order
denying his objection to confirmation of a Chapter 9.
However, he did not seek a stay of confirmation at any stage;
the plan has been substantially consummated; the relief of
undoing plan confirmation would bear unduly on innocent
third parties; and the bankruptcy court could not fashion relief
without undoing the confirmed plan. Therefore, we dismiss
his appeal as equitably moot. His claims also fail on the
merits.
I
A
When it filed its Chapter 9 petition, Stockton became the
largest city in history to seek municipal bankruptcy
protection. The recession had reduced property values by
half, and 22% of Stockton’s residents were unemployed.
Franklin High Yield Tax-Free Income Fund v. City of
Stockton (In re City of Stockton), 542 B.R. 261, 265 (B.A.P.
9th Cir. 2015). The City was unable to pay bondholders, it
had over-committed to public pensions, and its accounting
system was in disarray. Id. Budget cuts left police able to
respond only to emergency calls. Id. at 266, 274. Stockton
ranked 10th in the nation in its violent crime rate, with
homicides at an all-time record. In re City of Stockton,
493 B.R. 772, 780 (Bankr. E.D. Cal. 2013). In a cost-cutting
initiative commenced in 2008, the City workforce decreased
by 25%. Id. The police force was reduced by 20%; the fire
IN RE CITY OF STOCKTON 5
department’s workforce by 30%; and the public works
employee workforce by 38%. Id.Despite these cost-cutting measures, the City projected a
general fund deficit of almost $9 million as of June 2012 and
a deficit of $20 to $30 million in the next fiscal year. Id.;
Franklin, 542 B.R. at 266. The City Council authorized
diversion of money from earmarked funds and intentionally
defaulted on payments for over $2 million of bonds. In re
City of Stockton, 493 B.R. at 781, 789. It also authorized a
neutral evaluation process under California Government Code
§ 53760, a prerequisite to a Chapter 9 bankruptcy filing.
Franklin, 542 B.R. at 266.
Unlike other voluntary bankruptcy petitioners, a Chapter
9 debtor must prove that it is eligible for bankruptcy relief.
11 U.S.C. §§ 109(c), 921(c). One of the statutory
requirements is that the debtor must prove that it is insolvent.
11 U.S.C. § 109(c)(3). Here, the City filed a petition for an
Order for Relief alleging that it was eligible for bankruptcy
and, in fact, was insolvent. After a three-day bench trial, the
bankruptcy court issued an extensive order making factual
findings and determining that the City was eligible for
Chapter 9 relief. As to insolvency, the court examined the
City’s ability to: (1) pay its debts as they matured (commonly
referred to as “cash insolvency”); (2) pay for the costs of
providing services required for the health, safety, and welfare
of the community (commonly called “service delivery
insolvency”); and (3) create a balanced budget (termed
“budget insolvency”). After considering the evidence, the
court found that:
The sum of the evidence establishes that the
City was insolvent by all available measures
6 IN RE CITY OF STOCKTON
when it filed its chapter 9 case. It was cash
insolvent, unable to pay its debts as they came
due as required by § 101(32)(C) and
§ 109(c)(3). That it was service delivery
insolvent confirms that the cash insolvency
was not a mere technical insolvency. That it
was budget insolvent for the long term
confirms that the insolvency would persist
without realignment of revenues and
expenses. Hence, the City satisfied the
insolvency requirement of § 109(c)(3).
In re City of Stockton, 493 B.R. at 790–91.
The ensuing Chapter 9 proceedings were complex, costly,
and contentious. Franklin, 542 B.R. at 266. Pre-petition
settlements were reached with a number of creditors, and
collective bargaining agreements were renegotiated. Id.
Under the guidance of a court-appointed mediator, post-
petition settlements were reached with the California Public
Employees’ Retirement System; the Stockton Police Officers’
Association; the Official Committee of Retirees; Assured
Guaranty Corporation (which insured the City’s pension
bonds); the National Public Finance Guarantee Corporation
(an insurer of almost $100 million in city bonds); Ambac
Assurance Corporation (an insurer of $13.3 million in City
certificates of participation); and Wells Fargo Bank
(indenture trustee for a number of the City’s bond issues). Id.
at 266–67. Eventually, over the objections of some creditors,
including Cobb, Stockton’s plan of reorganization was
confirmed. Id. at 268.
The plan was funded by “a sales tax increase in the
greatest amount and for the longest period permitted by
IN RE CITY OF STOCKTON 7
California law.” Id. at 271 (citation omitted). Under the
plan, City employees and retirees “shared the pain” with the
capital market and bond creditors, losing the pension and
lifetime health benefits around which they had planned their
futures. Id. (citation omitted). The plan provided for
payment of $1.5 billion in claims distributed among
20 classes of creditors.
The plan became effective in February 2015. Id. at 276.
Pursuant to the plan, the City made wire transfers totaling
$13.1 million, including a settlement of heath care benefits to
retirees and payments to institutional creditors. The City
implemented the provisions of the plan, restructuring its
obligations to two other major institutional creditors by
conveying title to 17 parking lots and garages, assigning
leasehold interests, and assigning an option for the purchase
of a city office building. The City has continued to make its
payments pursuant to the plan, with secured creditors
receiving lower payments on the secured debt and unsecured
creditors receiving lesser amounts.
B
So, what was Objector-Appellant Michael Cobb’s part in
all of this? The background is somewhat procedurally
complex. Cobb’s father, Andrew Cobb, owned a parcel of
land in Stockton. In 1998, the Stockton City Council
resolved that the public necessity required the condemnation
of a strip of land across the parcel for the purpose of building
a road.
In California, the power of eminent domain can be
exercised through traditional condemnation proceedings,
where possession is taken at the time of judgment, or through
8 IN RE CITY OF STOCKTON
“quick-take” condemnation where a locality can take
possession upon depositing a probable compensation amount
determined by a qualified expert appraiser. Cal. Const. art. I,
§ 19; Cal. Civ. Proc. Code § 1255.010; see also Mt. San
Jacinto Cmty. Coll. Dist. v. Superior Court of Riverside Cty.,
151 P.3d 1166, 1168 (Cal. 2007). Following the deposit of
funds under the “quick-take” procedure, the government may
move the court for an immediate possession order. Cal. Civ.
Proc. Code § 1255.410. If the defendant elects to withdraw
the proposed compensation amount, he waives all claims and
defenses to the condemnation, except a claim for greater
compensation. Cal. Civ. Proc. Code § 1255.260.
Stockton elected to use the “quick-take” process. Thus,
pursuant to California Civil Procedure Code § 1255.010, the
City had an expert appraise the parcel to determine the
amount of just compensation owed to Andrew Cobb. The
appraiser valued the parcel at $90,200.00. As required by the
“quick-take” provisions, the City deposited that sum with the
California State Treasurer Condemnation Deposits Fund.
That same day, the City initiated eminent domain proceedings
in the Superior Court of California, County of San Joaquin,
to acquire a permanent easement over the parcel (the
“eminent domain action”).
Later that year, the Superior Court determined the City
had met the requirements of § 1255.010, concluded it had met
the requirements of probable compensation, and issued an
Order for Prejudgment Possession in favor of the City. A
road was then built on the parcel, and the Stockton City
Council passed a resolution in 2000 accepting the
improvements.
IN RE CITY OF STOCKTON 9
In the meantime, Andrew Cobb passed away and his son,
Michael Cobb, inherited the parcel. After Andrew Cobb’s
death, Cobb was substituted in the condemnation action. He
entered into a stipulation with the City allowing him to
withdraw the deposited amount and, in 2000, he withdrew the
entire amount of the deposit. At that point, by operation of
law, he waived all of his defenses and claims to the property,
except a claim for greater compensation. Cal. Civ. Proc.
Code § 1255.260. In other words, Cobb gave up all rights to
the property. He did not assert a counterclaim for greater
compensation in the condemnation proceeding.
Seven years later, Cobb attempted to return the
$90,200.00 to the City—apparently in an attempt to revoke
his earlier waiver—but the City would not accept the funds,
explaining that the withdrawal of probable compensation was
final under California law. Cobb deposited the funds into an
interest-bearing trust account.
In 2007, the Superior Court dismissed the City’s eminent
domain action because it had not been brought to trial within
five years of its commencement, as is required by California
Civil Procedure Code § 583.310. A year later, Cobb filed a
complaint in San Joaquin County Superior Court, seeking
relief for inverse condemnation (the “inverse condemnation
action”). The complaint alleged that because the City failed
to prosecute the eminent domain action, the true market value
of the parcel remained undetermined and thus Cobb had not
received the just compensation due him under the California
Constitution. Over the next several months, Cobb amended
his complaint three times, adding claims for quiet title,
ejectment, trespass, and declaratory relief. The City
demurred to all the amended complaints. The Superior Court
sustained the City’s demurrer as to the inverse condemnation
10 IN RE CITY OF STOCKTON
claim on the grounds that it was barred by the statute of
limitations because the taking occurred more than five years
before the complaint was filed, and it sustained the City’s
demurrer as to the other claims on the grounds that they were
barred by the doctrine of intervening public use.
Cobb appealed the Superior Court’s dismissal of his
inverse condemnation claim solely on statute of limitations
grounds. He did not appeal the dismissal of the quiet title,
ejectment, trespass, or declaratory relief claims. In 2011, the
Court of Appeals reversed the dismissal of Cobb’s inverse
condemnation claim, finding that his claim was timely
because it “did not accrue until the City’s occupation of the
property became wrongful, which did not occur until the
eminent domain proceeding was dismissed.” Thus, what
remained of his state court action was simply an unliquidated
and unsecured monetary damage claim. The merits of his
inverse condemnation claim remain unadjudicated and
unproven. As the bankruptcy court pointed out, given the
various defenses available to the City, “Mr. Cobb has a very
steep hill to climb in his action for greater compensation in
the California courts.”
Thereafter, in 2012, the City petitioned for bankruptcy
protection under Chapter 9. In a Chapter 9 bankruptcy, the
debtor is not required to file schedules and a statement of
financial affairs. Rather, the debtor is required to file a list of
creditors. 11 U.S.C. § 924. Any claim on the debtor’s list is
deemed filed as a proof of claim pursuant to 11 U.S.C. § 501,
unless the debt is listed as contingent, disputed or
unliquidated. 11 U.S.C. § 925.
When it filed its list of creditors in this case, the City
identified Cobb’s claim as an unsecured, disputed liability
IN RE CITY OF STOCKTON 11
claim of an unknown amount. Subsequently, Cobb filed a
proof of claim for $4,200,997.26. Cobb’s claim consisted of
a principal of $1,540,000.00 for the parcel, $2,282,997.26 in
interest on the principal, $350,000.00 in attorney’s fees and
expenses, $13,000.00 in costs of suit, and $15,000.00 in real
estate taxes and maintenance and insurance costs. Cobb did
not assert on his proof of claim that his claim was secured.
In 2013, the City filed its first amended plan for
adjustment of its debts (the “plan”), which listed 19 classes of
claims. The plan included Cobb’s claim in Class 12 as a
general unsecured claim. On February 11, 2014, Cobb filed
an objection to confirmation of the plan, alleging that his
“claims in inverse condemnation are protected by the Fifth
and Fourteenth Amendments to the United States
Constitution and cannot be impaired by the Plan.” He did not
contest the listing of his claim as unsecured.
In 2014, the bankruptcy judge overruled Cobb’s objection
to confirmation of the pending plan of adjustment. The
bankruptcy judge explained that Cobb is left with only a
claim for more money because the road had long since been
built on the parcel and because by withdrawing the probable
just compensation, Cobb had waived by operation of law all
claims except a claim for greater compensation. In an oral
ruling, the bankruptcy judge concluded that “[t]he bankruptcy
clause does permit the adjustment of a debt for greater
compensation,” and “if [the debt] were reduced to judgment,
it would be a general unsecured debt at the moment the
judgment was issued.”
Cobb did not seek a stay of plan confirmation from the
bankruptcy court. Cobb timely appealed the bankruptcy
court’s order overruling his objection to the plan to the
12 IN RE CITY OF STOCKTON
district court for the Eastern District of California. He did not
seek a stay of plan confirmation before the district court.
Cobb and the City both stipulated, pursuant to 28 U.S.C.
§ 158(d)(2)(A), that the appeal warranted proceeding directly
to the Court of Appeals for the Ninth Circuit. On August 7,
2014, the district court certified this appeal to this Court,
pursuant to 28 U.S.C. § 158(d)(2)(B)(ii). A motions panel of
our Court granted Cobb’s motion to appeal directly to this
Court. Cobb did not seek a stay of plan confirmation. The
bankruptcy court confirmed the City’s plan of adjustment and
issued a final judgment. Cobb did not seek a stay following
plan confirmation, and the plan became effective on February
25, 2015.
II
A
Finality is essential to the success of bankruptcy
reorganization plans. A reorganization plan almost always
involves tradeoffs, debt adjustment, partial asset liquidation,
and the infusion of new revenue sources. Both creditors and
the debtor require certainty so that the debtor can return to
economic health, and the creditors can maximize their
recovery within the debtor’s ability to pay. In the case of a
municipal reorganization, the public has an enormous stake
in the outcome so that critical government programs, such as
law enforcement, fire protection, and public works, can be
restored. Thus, if a creditor wishes to challenge a
reorganization plan on appeal, we require the creditor to seek
a stay of proceedings before the bankruptcy court. When a
stay is requested, all affected parties are on notice that the
plan may be subject to appellate review and have an
IN RE CITY OF STOCKTON 13
opportunity to present evidence before the bankruptcy court
of the consequences of a stay. “A confirmed reorganization
plan operates as a final judgment with res judicata effect.”
Unsecured Creditors Comm. v. Southmark Corp. (In re
Robert L. Helms Constr. & Dev. Co.), 139 F.3d 702, 704 (9th
Cir. 1998) (en banc).
If the creditor does not seek a stay, then the creditor risks
dismissal of the appeal on the grounds of equitable mootness.
“An appeal is equitably moot if the case presents transactions
that are so complex or difficult to unwind that debtors,
creditors, and third parties are entitled to rely on the final
bankruptcy court order.” JPMCC 2007-C1 Grasslawn
Lodging, LLC v. Transwest Resort Props., Inc. (In re
Transwest Resort Props., Inc.), 801 F.3d 1161, 1167 (9th Cir.
2015) (quoting Rev Op Grp. v. ML Manager LLC (In re
Mortgs. Ltd.), 771 F.3d 1211, 1215 (9th Cir. 2014)). If there
is a confirmed bankruptcy plan that deserves finality—for
employees, retirees, creditors, taxpayers, and for the future of
the City—it is Stockton’s.
B
We have identified four factors to determine whether an
appeal is equitably moot, namely: (1) whether a stay was
sought; (2) whether the plan has been substantially
consummated; (3) the effect of the remedy on third parties
not before the court; and (4) “whether the bankruptcy court
can fashion effective and equitable relief without completely
knocking the props out from under the plan and thereby
creating an uncontrollable situation for the bankruptcy court.”
In re Transwest Resort Props., Inc., 801 F.3d at 1167–68
(quoting Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In
re Thorpe Insulation Co.), 677 F.3d 869, 881 (9th Cir. 2012)).
14 IN RE CITY OF STOCKTON
1
As to the first factor, there is no doubt. Cobb sought no
stay whatsoever. He did not seek a stay in the bankruptcy
court. He did not seek a stay in the district court. He did not
seek a stay in our Court. While he was appealing the
rejection of his plan objections, he took no action to stay the
plan’s implementation, although confirmation proceedings
were ongoing. He did nothing.
It is “obligatory” that one seeking relief from plan
confirmation “pursue with diligence all available remedies to
obtain a stay of execution of the objectionable order.” Trone
v. Roberts Farms, Inc. (In re Roberts Farms, Inc.), 652 F.2d
793, 798 (9th Cir. 1981). Failure to do so without adequate
explanation should result in dismissal. Id. Seeking a stay
affords the bankruptcy court the opportunity to consider
equitable factors, make a reasoned decision, and provide a
decision and record which an appellate court can review. On
the other hand, excusing a failure to seek a stay before the
bankruptcy court allows a party to play possum, without
consequence, while everyone else has materially changed
positions in reliance on plan confirmation. The first factor
indisputably favors application of equitable mootness.1
2
The second factor is whether the plan has been
substantially consummated, and Cobb does not contest the
1
In Franklin, in which the Bankruptcy Appellate Panel dismissed an
appeal in this bankruptcy as equitably moot, the creditor had a much better
argument than Cobb because it had actually sought a stay in bankruptcy
court. Franklin, 542 B.R. at 275.
IN RE CITY OF STOCKTON 15
fact that it was. As the Bankruptcy Appellate Panel noted,
there is no dispute that this plan was substantially
consummated in February 2015. Franklin, 542 B.R. at 276.
The City wired payment to institutional creditors, transferred
property, and sent checks to former city employees to resolve
pension claims. Id. It conveyed title to numerous parcels of
real property, assigned leasehold interests, and granted
purchase options. The City has now operated under the
reorganization plan for years. The second factor also favors
application of equitable mootness.
3
The third factor is “whether the relief sought would bear
unduly on innocent third parties.” In re Transwest Resort
Props., Inc., 801 F.3d at 1169. In other words, it must be
“possible to [alter the plan] in a way that does not affect third
party interests to such an extent that the change is
inequitable.” Id. (quoting In re Thorpe Insulation Co.,
677 F.3d at 882) (alteration in original).
Here, reversal of the Confirmation Order would
undermine the settlements negotiated with the unions,
pension plan participants and retirees, bond creditors, and
capital market creditors, all of which were built into the
reorganization plan. As the Bankruptcy Appellate Panel
concluded in Franklin, “[t]o reverse the Confirmation Order
at this point would have a potentially devastating impact on
creditor constituencies whose settlements with the City were
incorporated in the Plan and who are not appearing before us
in this appeal.” Franklin, 542 B.R. at 278.
In addition to the creditors, reversal of the Confirmation
Order would have a substantial effect on the citizens of
16 IN RE CITY OF STOCKTON
Stockton, who depend upon the City for the provision of vital
services. The City placed ample evidence in the record of the
serious impact of reversal of plan confirmation, which impact
is confirmed in Franklin.
Cobb argues that his claim is only a monetary one, having
little impact on creditors or the City. Leaving aside the fact
that the remedy he seeks is to reverse plan confirmation,
Cobb is making a multi-million dollar claim which, on its
face, would have a considerable impact on the City. He
suggests, without proof, that the City has the resources to pay
the claim. However, as the City pointed out in Franklin,
allowing such a claim would likely result in revisiting the
City’s Long Range Financial Plan, which provided the basis
for the plan’s feasibility, and “consequently calling into
question the economic underpinnings of the Plan.” 542 B.R.
at 276 (internal quotation marks and citation omitted).
In addition, and most importantly, the only adjudication
of the City’s solvency in the record is the bankruptcy court’s
findings of facts and conclusions of law holding that the City
was insolvent—a finding that was adopted and reiterated at
the time of plan confirmation.2 Cobb did not challenge the
City’s claim of insolvency in the bankruptcy court, nor
dispute the bankruptcy court’s findings. He simply suggests
2
Further, even if Cobb could demonstrate the City’s ability to fund
the claim, the solvent-debtor exception to the stay requirement does not
apply where, as here, there has “been such a comprehensive change in
circumstances as to render it inequitable for the court to consider the
merits of the appeal.” Platinum Capital, Inc. v. Sylmar Plaza, L.P. (In re
Sylmar Plaza, L.P.), 314 F.3d 1070, 1074 (9th Cir. 2002). This rule
makes good sense, as “[b]ankruptcy cases often implicate parties besides
the debtor and its creditors.” In re Mortgs. Ltd., 771 F.3d at 1216.
IN RE CITY OF STOCKTON 17
for the first time on appeal, without support in the record, that
the City is not insolvent.
In sum, the third factor favors application of equitable
mootness.
4
The final factor is whether the bankruptcy court could
fashion equitable relief without completely undoing the plan.
Of course, undoing the plan is precisely the remedy that Cobb
seeks. Cobb argues that he seeks only monetary relief, but
his appeal is of the bankruptcy court’s order overruling
Cobb’s objection to confirmation of the plan of adjustment.
His challenge—and his only challenge—is to the
confirmation of the plan itself. In his objection to the plan
before the bankruptcy court, Cobb argued that the plan could
not be confirmed, and “[w]here a Chapter 9 Plan may not be
confirmed, the remedy appears to be dismissal of the
bankruptcy case.” The Notice of Appeal was taken as to the
bankruptcy court’s order denying his objection to plan
confirmation. On appeal, he reiterated his objection to the
plan and repeated his claim that where a bankruptcy plan
cannot be confirmed, the remedy is dismissal of the
bankruptcy case.
Sustaining Cobb’s objection would mean dismantling the
confirmed reorganization plan, which is the only relief he
seeks. Considering this remedy in Franklin, the Bankruptcy
Appellate Panel concluded that “[r]eversing the Confirmation
Order would ‘knock the props out from under’ the plan and
would leave the bankruptcy court with an unmanageable
situation on remand.” Franklin, 542 B.R. at 278. The plan
provides for 20 different classes of creditors, almost all of
18 IN RE CITY OF STOCKTON
which have been deemed impaired—meaning that the legal,
equitable, or contractual rights of the creditors are affected by
the plan. Plan confirmation adjusted all of these rights. To
reverse the Confirmation Order at this stage would create
chaos and undo years of carefully negotiated settlements.
The fourth factor favors application of equitable mootness.
5
Thus, as it was for the Sixth Circuit in considering a
similar appeal arising out of Detroit’s bankruptcy, “[t]his is
not a close call.” Ochadleus v. City of Detroit (In re City of
Detroit), 838 F.3d 792, 799 (6th Cir. 2016). As with the
situation posed by the Detroit municipal reorganization, the
complex plan has been confirmed, affecting the rights of
thousands of creditors and the public.
The reorganization train has left the station. Cobb did not
pursue any bankruptcy stay remedies, much less pursue them
with the requisite diligence. The plan has long been
substantially consummated. He offers too little, too late.
None of the factors that we consider in deciding whether to
apply the doctrine of equitable mootness favor Cobb. Thus,
his appeal must be dismissed.
III
Cobb’s underlying theory—that the Takings Clause
exempts his unsecured claim from reorganization—is not
viable on this record, and the bankruptcy court properly
concluded that this claim fails on the merits. The Takings
Clause is only implicated in bankruptcy if the creditor has
actual property rights. In other words, the creditor must have
an “in rem right under nonbankruptcy law to look to specific
IN RE CITY OF STOCKTON 19
items of property” in order for the debt to be paid ahead of
unsecured creditors. 4 Collier on Bankruptcy ¶ 506.03 (Alan
N. Resnick & Henry J. Sommer eds., 16th ed. 2017). If the
purported property interest is, in reality, just a contractual or
statutory right for monetary relief, then the debt can be
adjusted in bankruptcy.
A
Distilled to its essence, Cobb’s argument on appeal is that
he has a property interest that cannot be adjusted in
bankruptcy. But that is not what his bankruptcy claim is, or
even what he asserted that his was. As we have noted, both
the City and Cobb classified his claim as an unsecured
monetary claim. Cobb has never challenged the
categorization of the claim as unsecured; nor has he sought,
through 11 U.S.C. § 506 or otherwise, to have his interest
adjudicated otherwise. Indeed, prior state court judgments
against him would have precluded that.
Even assuming that Cobb had asserted a property-based
proof of claim, it failed on the merits to be categorized as
such, as the bankruptcy court found. First, he had
relinquished his property interest in the land more than
15 years before bankruptcy was filed. As we have noted,
under California’s “quick-take” condemnation proceedings,
Stockton properly hired a qualified expert appraiser, who
valued the property. Following the statutory procedure,
Stockton then deposited the funds and moved the superior
court for immediate possession of the property, and the
superior court granted the City immediate possession of the
parcel. Andrew Cobb did not object to the probable just
compensation finding or judgment.
20 IN RE CITY OF STOCKTON
As we have noted, under California law, if the property
owner elects to withdraw the proposed compensation amount,
he waives all claims and defenses to the condemnation,
except a claim for greater compensation. Cal. Civ. Proc.
Code § 1255.260. Michael Cobb withdrew the deposit,
thereby waiving all claims, except as to a claim for greater
compensation. In other words, Cobb gave up all rights to the
property. He did not assert a counterclaim for greater
compensation in the condemnation proceeding.
Seven years later, he tried to return the money, which the
City declined. His subsequent suit against the City, in which
he sought quiet title and declaratory relief, among other
remedies, was dismissed. In sum, the relief he sought to
enforce property rights or restoration of his property interest
was rejected. That judgment is final and binding. He did not
take an appeal from that decision, except as to the statute of
limitations on his inverse condemnation claim. The
California Court of Appeal granted him relief on that
question. So, what remains of his state court action is simply
an unliquidated and unsecured monetary damage claim.
Thus, the bankruptcy court properly concluded that once
Cobb withdrew the tendered compensation, he waived by
operation of law all claims and defenses in his favor as to the
property, except for a claim for greater compensation, which
is an unsecured monetary debt claim.
Second, Cobb independently relinquished any property
interest he had by allowing the City to construct the road and
open the road to public use. Under California law, if a
property owner allows the government to complete the taking
of the property for public use, he is “denied the right to enjoin
the agency.” Frustuck v. City of Fairfax, 28 Cal. Rptr. 357,
IN RE CITY OF STOCKTON 21
373 (Cal. Dist. Ct. App. 1963). The fact that formal title has
not passed is irrelevant under California law. California ex
rel. Dep’t of Pub. Works v. Peninsula Title Guar. Co.,
301 P.2d 1, 3 (Cal. 1956) (noting that when there has been a
prior physical taking the subsequent title transfer “is merely
a confirmation of the original taking”).
Thus, when the bankruptcy was filed, Cobb did not
possess a right to the property protected by the Fifth
Amendment. It had been extinguished. What remained was
bare legal title—without any other property rights and subject
to defeasance by the prior litigation—and an unsecured
statutory monetary claim for greater compensation.
Cobb’s theory seems to be that an unliquidated, statutory
claim for greater compensation cannot be adjusted in
bankruptcy. But it is purely a monetary claim. As the
bankruptcy court pointed out, if the inverse condemnation
claim had been reduced to a judgment, it would be subject to
adjustment in bankruptcy; therefore, it is not logical to say
that an unliquidated claim for greater compensation cannot be
adjusted in bankruptcy.
Nor does the character of any claim asserting an
unconstitutional taking make it immune from evaluation on
the merits in bankruptcy. Indeed, we have approved the
dismissal of a takings claim in its entirety by a bankruptcy
court. George v. City of Morro Bay (In re George), 322 F.3d
586, 590–91 (9th Cir. 2003) (per curiam). Cobb cannot
implicate the Takings Clause in order to elevate his claim
above other Fifth Amendment-protected property
interests—which are adjustable in bankruptcy—and to escape
procedural requirements. See Bennett v. Jefferson Cty., __
F.3d __, 2018 WL 3892979, at *7 (11th Cir. 2018) (quoting
22 IN RE CITY OF STOCKTON
Henderson v. United States, 568 U.S. 266, 271 (2013))
(“[T]he mere fact that a potential or actual violation of a
constitutional right exists does not generally excuse a party’s
failure to comply with procedural rules for assertion of the
right. A ‘constitutional right, or a right of any other sort, may
be forfeited in criminal as well as civil cases by the failure to
make timely assertion of the right before a tribunal having
jurisdiction to determine it.’”).
Cobb had ample opportunities in the bankruptcy court to
adjudicate the nature of his claim through a variety of
procedural mechanisms. He did not do so. He listed his
claim as unsecured and did not file any proceeding to have
the court determine its secured status. He did not object to
the disclosure statement. He did not seek exemption from
discharge. It would be improper not only to excuse all of
these failures, but to invent for him an entirely new remedy
on appeal. One cannot play possum during bankruptcy
proceedings and then claim some new interest after a plan has
been confirmed. A contrary holding would emasculate
bankruptcy proceedings.
B
Cobb argues that his monetary claim has protected status
because it was originally founded as a constitutional claim.
However, other constitutionally based lawsuits seeking
money damages, such as § 1983 claims, are routinely
adjusted in bankruptcy—and, in fact, were adjusted in this
bankruptcy. Cobb cites Louisville Joint Stock Land Bank v.
Radford, 295 U.S. 555 (1935), for the unremarkable
proposition that the bankruptcy power is subject to the Fifth
Amendment. However, that “does not mean, of course, that
secured creditors are immune from the bankruptcy process.”
IN RE CITY OF STOCKTON 23
4 Collier on Bankruptcy ¶ 506.02. Rather, “in a number of
contexts the Code expressly permits the adjustment of debts
of secured creditors, including lien rights.” Id.Moreover, as the Supreme Court itself suggested in
Helvering v. Griffiths, 318 U.S. 371, 400–01 & n.52 (1943),
the precedential weight of Radford is uncertain in light of
Wright v. Vinton Branch, 300 U.S. 440 (1937), in which the
Court upheld the same act struck down in Radford following
relatively minor amendment. Indeed, the relevant problem
addressed in Radford is “the taking of substantive rights in
specific property acquired by the bank prior to the act.”
Radford, 295 U.S. at 590 (emphasis added). This reading of
Radford presents an easy synthesis with United States v.
Security Industrial Bank, in which the Court held that
constitutional infirmity could be avoided by reading a
bankruptcy statute as not compromising security interests
created before the statute was enacted. 459 U.S. 70, 81
(1982). The Supreme Court has never held that the Takings
Clause renders claims that accrued after the Bankruptcy Code
was enacted immune from the Bankruptcy power, or the
bankruptcy process.3 In short, Radford does not reach as far
as Cobb asserts.
Further, “just compensation” under the Takings Clause is
not equivalent to “full compensation.” United States v.
Norwood, 602 F.3d 830, 834 (7th Cir. 2010). The concept of
“just compensation” requires consideration of “all
circumstances,” including whether the contemplated
3
See, e.g., James Steven Rogers, The Impairment of Secured
Creditors’ Rights in Reorganization: A Study of the Relationship Between
the Fifth Amendment and the Bankruptcy Clause, 96 HARV. L. REV. 973,
974 (1983).
24 IN RE CITY OF STOCKTON
compensation “would result in manifest injustice to owner or
public.” United States v. Commodities Trading Corp,
339 U.S. 121, 123 (1950) (“[T]he dominant consideration
always remains the same: What compensation is ‘just’ both
to an owner whose property is taken and to the public that
must pay the bill?”).
In sum, when Stockton filed its bankruptcy petition, Cobb
did not possess a property interest cognizable as such in
bankruptcy, and he never asserted anything but an unsecured
proof of claim. His unsecured claim for greater compensation
was not tethered to the actual property interest he had when
the bankruptcy was filed. Rather, his claim is for the
purported rights that were extinguished long before the
bankruptcy was filed. What he is left with after bankruptcy
is bare property title and an unliquidated unsecured claim.
Given the circumstances of the case, the bankruptcy court
correctly determined that Cobb’s claim was properly
categorized in the reorganization plan and properly overruled
his objection to plan confirmation.
IV
Stockton’s reorganization plan was confirmed and has
been substantially consummated. Undoing the confirmed
plan would seriously affect the rights of third parties. Cobb
did not take the minimal step of seeking a stay at any
level—not before the bankruptcy court, not before the district
court, and not before us. On the merits, the bankruptcy court
properly rejected his claim. The claim was correctly
categorized as unsecured and adjusted as such.
This appeal is not the first time that the question of
equitable mootness has arisen in the context of this
IN RE CITY OF STOCKTON 25
bankruptcy. In Franklin, the Bankruptcy Appellate Panel
carefully reviewed the challenge of a large capital market
creditor to Stockton’s plan of reorganization. It concluded
that the creditor’s challenge was equitably moot in
consideration of the substantial consummation of the plan, the
effect on third parties, and whether relief could be fashioned
without destroying the plan. Franklin, 542 B.R. at 264–65.
The same considerations apply here, with the same effect.
DISMISSED.
FRIEDLAND, Circuit Judge, dissenting:
The Bill of Rights constrains the powers given to
Congress by Article I of the Constitution. And, in particular,
the Fifth Amendment’s requirement that the government
provide just compensation for any taking of private property
constrains the powers granted to Congress by the Bankruptcy
Clause of Article I. Takings claims should therefore be
excepted from discharge in bankruptcy.
The majority contends that the judge-made bankruptcy
doctrine of equitable mootness is the dominant principle at
issue in this appeal, and that it prevents us from even
adjudicating the constitutional claim to just compensation
asserted by Appellant Michael Cobb (“Cobb”) against the
City of Stockton (“City”). But equitable mootness has no
role to play here. Cobb seeks only to have his claim to just
compensation excepted from discharge—that is, to effectively
be treated as falling outside the City’s bankruptcy adjustment
plan (“Plan”). A claim that falls outside of bankruptcy cannot
be subject to the bankruptcy doctrine of equitable mootness.
26 IN RE CITY OF STOCKTON
I would therefore reach the merits of Cobb’s appeal rather
than dismissing it.
As to the merits, there is no dispute that the City
condemned Cobb’s property.1 And, after that happened,
Cobb took all actions necessary under state law to preserve
his right to just compensation for the taking of that property.
Indeed, his state court action for just compensation would
have proceeded if it had not been stayed in response to the
City’s bankruptcy filing. Because Cobb maintains a
constitutional claim for just compensation, and because that
claim should have been excepted from discharge, I would
hold that Cobb’s state-court inverse condemnation action
should be allowed to proceed.
I.
The majority concludes that any appeal seeking to unravel
the Plan would be equitably moot. Even assuming so,
undoing the confirmed Plan is not on the table in this appeal.
Cobb has been abundantly clear before our court that he seeks
only to except his claim from discharge, and thus to remove
his claim from the Plan altogether. Although Cobb originally
lodged his complaint as an objection to the Plan, which may
1
I note that the fee owner of the parcel is the Andrew C. Cobb 1992
Revocable Trust dated July 16, 1992, for which Cobb serves as trustee.
In that capacity, Cobb has the authority to “prosecute or defend actions,
claims, or proceedings for the protection of trust property.” Moeller v.
Superior Court, 947 P.2d 279, 284 (Cal. 1997) (quoting Cal. Prob. Code
§ 16249). In such actions, “the trustee, rather than the trust, is the real
party in interest.” Id. at 283 n.3. I accordingly refer to Cobb as the
“owner” of the condemned parcel, and the parties have similarly stipulated
that Cobb became the “owner of the [p]arcel by operation of state probate
and trust succession following the death of [his father,] Andrew C. Cobb.”
IN RE CITY OF STOCKTON 27
have seemed to him the only option given the novelty of the
legal issue his situation presented, he has since plainly
disclaimed any intent to “unwind” the Plan. Equitable
mootness considerations are therefore irrelevant here and
should not prevent us from adjudicating Cobb’s argument that
his takings claim was entitled to “pass through [the]
bankruptcy unaffected.” In re Towers, 162 F.3d 952, 953
(7th Cir. 1998).
Equitable mootness “reflects an unwillingness to provide
relief” in cases involving bankruptcy “transactions that are so
complex or difficult to unwind that debtors, creditors, and
third parties are entitled to rely on the final bankruptcy court
order.” In re Transwest, 801 F.3d 1161, 1167 (9th Cir. 2015)
(quoting In re Mortgs. Ltd., 771 F.3d 1211, 1215 (9th Cir.
2014)). I am unaware of any case in which we have applied
an equitable mootness analysis to an individual’s claim that
an asset should have been excepted from discharge and
excluded from bankruptcy proceedings altogether. Indeed, it
makes no sense to extend this judicially created doctrine to
cases like this one. The sole point of this appeal is that Cobb
should have been permitted to pursue his claim outside of the
Plan because his claim should have been excepted from
discharge. See In re Towers, 162 F.3d at 953. Such an appeal
could never undo a plan. If an appellant like Cobb prevails,
his or her claim will survive totally apart from the plan, and
recognition of such survival will in no way change the terms
of the plan. If the appellant does not prevail, then it will have
been appropriate to have discharged his or her claim as part
28 IN RE CITY OF STOCKTON
of the plan, and there will thus be no reason to change the
terms of the plan.2
The majority relies on Franklin High Yield Tax-Free
Income Fund v. City of Stockton, 542 B.R. 261, 265 (B.A.P.
9th Cir. 2015), to conclude that we should dismiss this appeal
because Cobb’s claim might jeopardize the City’s financial
health. In fact, the Bankruptcy Appellate Panel in Franklin
recognized that a claim solely for a monetary remedy—unlike
a claim seeking to undo the Plan—would not necessitate
disturbing the Plan and so would not be moot. Id. at 277. As
a result, the Bankruptcy Appellate Panel concluded that “to
the extent [the creditor] s[ought] through its appeal [from
confirmation of the Plan] only a greater payment on its
unsecured claim . . . an effective remedy [was] theoretically
possible, and that claim [was] not equitably moot.” Id. at
2
And with respect to the first equitable mootness factor—whether a
stay was sought—it would be pointless for parties trying to have their
claims excepted from discharge to be required to seek to stay a plan that
they believe their claims should not be part of in the first place.
Moreover, although Cobb did not seek a stay of the Plan, he was certainly
diligent in pursuing his rights. See In re Thorpe Insulation Co., 677 F.3d
869, 881 (9th Cir. 2012) (holding that “where a party has done nothing by
its own inaction to encourage or permit developments to proceed without
its participation, courts should be cautious about reaching a conclusion of
equitable mootness”). Cobb argued in the bankruptcy court that his
“claims in inverse condemnation are protected by the Fifth and Fourteenth
Amendments to the United States Constitution and cannot be impaired by
the Plan,” and the bankruptcy court held a hearing and then ruled on this
objection. As a result, contrary to the majority’s suggestion, it was
unnecessary for Cobb to seek a stay to afford the bankruptcy court an
opportunity to rule on this issue.
IN RE CITY OF STOCKTON 29
278.3 Franklin thus did not, as the majority suggests, hold
that requiring the City to pay a monetary judgment would
threaten the integrity of the Plan.
Because this appeal in no way threatens the finality of the
Plan, and in fact seeks to allow Cobb’s claim to proceed
totally apart from the Plan, I would fulfill our “virtually
unflagging obligation . . . to exercise the jurisdiction given”
us by ruling on the merits. Colo. River Water Conservation
Dist. v. United States, 424 U.S. 800, 817 (1976).
II.
With respect to the substance of Cobb’s claim, the
majority is persuaded that Cobb has waived all property
rights in the condemned parcel as a matter of California law,
including his right to seek just compensation. And, even if he
has not, the majority appears to conclude that a claim for just
compensation could be reduced in bankruptcy. I disagree on
both counts. Starting with the latter point, as a matter of
constitutional first principles, I believe municipalities are
obligated to provide just compensation for any taking of
private property, regardless of the bankruptcy laws. And
regarding Cobb’s claim in particular, I believe that Cobb has
preserved a constitutional claim for just compensation, and
3
And because Cobb, unlike the creditor in Franklin, seeks to proceed
entirely outside the Plan, the City would be under no obligation to
compensate him within the same timeframe in which it compensates the
creditors covered by the Plan. See infra note 14.
30 IN RE CITY OF STOCKTON
that his claim thus should have been excepted from
discharge.4
A.
“Congress, in common with all branches of the
Government, must exercise its powers subject to the
limitations placed by the Constitution on governmental
action,” including “the relevant limitations of the Bill of
Rights.” Barenblatt v. United States, 360 U.S. 109, 112
(1959). Where, for example, a statute violates the First
Amendment, it is no answer that the statute was properly
enacted pursuant to Congress’s power under the Commerce
Clause. See Cal. Bankers Ass’n v. Shultz, 416 U.S. 21, 77
(1974) (noting that Congress “is of course subject to the
strictures of the Bill of Rights, and may not transgress those
strictures” when enacting legislation). Accordingly, although
Congress has the authority to enact “uniform Laws on the
subject of Bankruptcies,” U.S. Const. art. I, § 8, cl. 4, such
laws must not take away rights guaranteed by the Bill of
Rights. These rights include the Fifth Amendment’s
proscription, operational against the states under the
Fourteenth Amendment, that private property shall not “be
taken for public use, without just compensation,” U.S. Const.
amend. V. See Dolan v. City of Tigard, 512 U.S. 374, 383–84
(1994).
4
I recognize that only a portion of the proof of claim that Cobb
submitted in the bankruptcy proceeding is truly a claim for just
compensation, and I would hold that Cobb’s claim should be excepted
from discharge only to the extent that it seeks just compensation for the
condemned parcel in excess of what he has already been paid. I do not
believe that Cobb is entitled to shield from bankruptcy the portion of his
claim that requests other forms of recovery, such as attorney’s fees or
insurance costs.
IN RE CITY OF STOCKTON 31
In addressing the interplay between these clauses of the
Constitution, the Supreme Court has confirmed that the
Takings Clause of the Fifth Amendment constrains the power
conferred by the Bankruptcy Clause of Article I. The Court
first discussed this principle in Louisville Joint Stock Land
Bank v. Radford, 295 U.S. 555 (1935). Radford held that the
Frazier-Lemke Act, which effectively permitted a debtor to
purchase mortgaged property for less than its fair market
value, was unconstitutional. The Court explained that “[t]he
bankruptcy power, like the other great substantive powers of
Congress, is subject to the Fifth Amendment.” Id. at 589. As
a result, the Act’s impairment of a mortgagee’s rights
violated the Takings Clause:
[T]he Fifth Amendment commands that,
however great the Nation’s need, private
property shall not be . . . taken even for a
wholly public use without just compensation.
If the public interest requires, and permits, the
taking of property of individual mortgagees in
order to relieve the necessities of individual
mortgagors, resort must be had to proceedings
by eminent domain.
Id. at 602. In short, Radford teaches that the Takings Clause
prohibits the impairment in bankruptcy of “substantive rights
in specific property,” such as the rights of a mortgagee in real
property.5 Id. at 590.
5
The Supreme Court later upheld the constitutionality of the amended
Frazier-Lemke Act in Wright v. Vinton Branch of Mountain Trust Bank,
300 U.S. 440 (1937). Contrary to the majority’s assertion, Wright does
not undermine the Court’s holding in Radford that the bankruptcy power
is subject to the Takings Clause. Rather, Wright turned on the
32 IN RE CITY OF STOCKTON
Similarly, in the Regional Rail Reorganization Act Cases,
419 U.S. 102 (1974), the Court expressed concern that a
bankruptcy statute might unconstitutionally leave a taking
uncompensated, though it concluded that a mechanism
existed to provide just compensation, alleviating that concern.
Id. at 149, 155. Those cases involved a challenge to the
constitutionality of the Regional Rail Reorganization Act,
under which railroad creditors would receive securities of
then-unknown value to compensate them for the conveyance
of the railroads’ property. Id. at 117–18. The Court
recognized that the reorganization “might raise serious
constitutional questions” absent a method to challenge the
amount of compensation received, because the properties
were to be transferred before it was clear whether the
securities would satisfy the requirement of just compensation.
Id. at 149, 155. But because the creditors had “recourse to a
Tucker Act suit in the Court of Claims for a cash award to
cover any constitutional shortfall,” the Court held that the
reorganization provided “adequate assurance that any taking
w[ould] be compensated.” Id. at 155.
The Court subsequently reconfirmed in United States v.
Security Industrial Bank, 459 U.S. 70 (1982), that “[t]he
bankruptcy power is subject to the Fifth Amendment’s
prohibition against taking private property without just
compensation.” Id. at 75. There, the Court considered a
determination that the new Act had no significant impact on property
rights at all. 300 U.S. at 457, 470; see also Rodrock v. Sec. Indus. Bank,
642 F.2d 1193, 1197–98 (10th Cir. 1981) (explaining that while
subsequent cases “may well refine the rule of Radford, . . . they do not
destroy the fundamental teaching of Radford that Congress may not under
the bankruptcy power completely take for the benefit of a debtor rights in
specific property previously acquired by a creditor”), aff’d sub nom.
United States v. Sec. Indus. Bank, 459 U.S. 70 (1982).
IN RE CITY OF STOCKTON 33
Takings Clause challenge to the Bankruptcy Code exemption
in 11 U.S.C. § 522(f)(2), which permits individual debtors to
avoid liens on certain personal property, such as household
goods or appliances, in bankruptcy proceedings. Id. at 71–73.
Holders of non-purchase-money, non-possessory liens on
such property argued that retroactive application of § 522(f)
to their liens would exact a taking. Id. at 73. The Court
agreed that retroactive application of the statute would raise
serious constitutional questions, because the provision “could
be read literally to divest property interests which had been
created before it was enacted.” Id. at 80. Emphasizing “‘the
absence of a clear expression of Congress’ intent to’ apply”
the provision to preexisting liens, the Court invoked the
doctrine of constitutional avoidance to hold that the statute
did not apply retroactively, thus averting the possibility that
§ 522(f) might result in a taking. Id. at 78–82 (quoting NLRB
v. Catholic Bishop of Chi., 440 U.S. 490, 507 (1979)).6
6
The majority attempts to limit this line of cases to situations in
which the government retroactively divests creditors of their property
interests. But, even if it should be so limited, that is exactly the situation
facing Cobb. To begin, there is no question that a taking occurred that
divested Cobb of his interest in real property. He had an undisputed right
to just compensation until the City filed for bankruptcy and attempted to
eliminate that right retroactively.
Moreover, the majority fails to recognize the important distinction
between the rights of land owners and the rights of secured creditors.
Applying § 522(f) prospectively in Security Industrial Bank did not
implicate constitutional concerns because the property interests of secured
creditors are themselves “defined by reference to existing law.” See
James Steven Rogers, The Impairment of Secured Creditors’ Rights in
Reorganization: A Study of the Relationship Between the Fifth Amendment
and the Bankruptcy Clause, 96 Harv. L. Rev. 973, 987 (1983). When a
creditor “enter[s] into [a] security arrangement, he kn[ows] . . . that his
rights [a]re circumscribed by the federal legislation.” Id. By contrast,
legislation restricting rights in real property could never be entirely
34 IN RE CITY OF STOCKTON
These decisions underscore that Congress’s bankruptcy
powers do not allow it to infringe upon rights guaranteed by
the Takings Clause. Where a taking has occurred, just
compensation is owed and cannot be reduced—bankruptcy
notwithstanding. Accordingly, a municipality may not nullify
its obligation to pay just compensation for seized property
through a chapter 9 proceeding. Rather, claims for just
compensation should be excepted from discharge, such that
they survive any bankruptcy intact.7
B.
Unlike the majority, I believe Cobb took all the steps
necessary to preserve his constitutional claim for just
compensation. When Cobb’s property was condemned by the
prospective. Id. at 987 n.59. In other words, “there can . . . be new
security arrangements,” but there “can be no new land.” Id. Accordingly,
Cobb’s claim implicates the same concerns that led the Supreme Court to
limit retroactive application of the bankruptcy laws.
7
I note that the majority’s contrary approach is at odds with the only
other federal court that has addressed this question. The bankruptcy court
adjudicating Detroit’s municipal bankruptcy held that the Takings Clause
prohibits the discharge in bankruptcy of pending claims for just
compensation arising from already completed takings. In re City of
Detroit, 524 B.R. 147, 270 (Bankr. E.D. Mich. 2014). There, creditors
were slated to receive a fraction of their takings claim under Detroit’s
chapter 9 plan. Id. at 267. Because the proposed plan denied those
creditors their constitutionally owed just compensation, the court held that
it would violate the Fifth Amendment if confirmed. Id. at 270. The
bankruptcy court thus provided in its confirmation order that the takings
claims were excepted from discharge. Id.IN RE CITY OF STOCKTON 35
City, he obtained a constitutional right to just compensation.8
He retained this right by filing an inverse condemnation
action and pursuing it in accordance with the appropriate state
procedures. That action is still pending in state court, having
been stayed when the City filed its bankruptcy petition. As
a result, Cobb maintains a claim for just compensation that
should now be allowed to proceed.
The majority instead holds that Cobb has forfeited all
property rights in the condemned parcel under California law,
and that his pending claim is “simply” a statutory claim for
monetary damages. But the statutory character of Cobb’s
8
This case presents a separate issue from cases adjudicating whether
a taking has in fact occurred. The majority cites In re George, 322 F.3d
586 (9th Cir. 2003), for the proposition that we have approved a
bankruptcy court’s dismissal of a takings claim on the merits. There, we
considered the application of 11 U.S.C. § 365(d)(4), which requires a
bankruptcy trustee to assume or reject an “unexpired lease of
nonresidential real property” within a particular timeframe to avoid having
to surrender the property. 322 F.3d at 589 n.2 (quoting 11 U.S.C.
§ 365(d)(4)). We had previously clarified that, because the statute allows
the debtor either to assume or to reject the lease, the statute does not itself
result in an unconstitutional taking. See In re Ariz. Appetito’s Stores, Inc.,
893 F.2d 216, 220 (9th Cir. 1990) (explaining that where a debtor does not
move to assume a lease, it is the debtor’s “own conduct” that results “in
the rejection of the lease and the loss of its interest in the building”—not
operation of the bankruptcy statute). In In re George, the debtors were
required to surrender the leased property after they failed to take action
during the relevant timeframe. 322 F.3d at 589. We concluded that there
was no cognizable taking because, following the surrender, “the debtors
ha[d] no valid right to possess or develop the property.” Id. at 590.
Accordingly, the debtors had “no right to be compensated at all, let alone
justly.” Id. at 591. Contrary to the majority’s characterization, there was
therefore no colorable takings claim for the bankruptcy court to have any
impact on one way or the other. Here, by contrast, there is no question
that a taking occurred that entitled Cobb to compensation.
36 IN RE CITY OF STOCKTON
claim does not diminish its constitutionally protected
status—indeed, a constitutional claim for just compensation
is a statutory claim for monetary damages under California
law.
And Cobb did not forfeit his right to just compensation by
either withdrawing the probable just compensation funds or
permitting the public to use the road. The California
Supreme Court has in fact explained that the constitutionality
of the state’s quick-take scheme rests in part on its allowing
a continuing claim for greater compensation after deposited
funds are withdrawn. Cf. Mt. San Jacinto Cmty. Coll. Dist. v.
Superior Court, 151 P.3d 1166, 1175 (Cal. 2007). I thus
disagree that Cobb has completely relinquished his interest in
the property.
1.
The majority’s conclusion that Cobb’s inverse
condemnation action somehow became untethered from the
Takings Clause is both inconsistent with California law and
fundamentally at odds with the Fifth Amendment. To
demonstrate why this is so, it is necessary to describe the
constitutional nature of Cobb’s pending inverse
condemnation action under California law.
Because the Fifth Amendment “proscribes takings without
just compensation, no constitutional violation occurs until
just compensation has been denied.” Williamson Cty. Reg’l
Planning Comm’n v. Hamilton Bank of Johnson City,
473 U.S. 172, 194 n.13 (1985). The Fifth Amendment does
not require payment of just compensation “in advance of, or
contemporaneously with, the taking; all that is required is that
a ‘reasonable, certain and adequate provision for obtaining
IN RE CITY OF STOCKTON 37
compensation’ exist at the time of the taking.” Id. at 194(quoting Reg’l Rail Reorg. Act Cases, 419 U.S. at 124–25).
Accordingly, “if a State provides an adequate procedure for
seeking just compensation, the property owner cannot claim
a violation of the Just Compensation Clause until it has used
the procedure and been denied just compensation.” Id. at
195.
California provides such a process by making available an
action for inverse condemnation. See Regency Outdoor
Advert., Inc. v. City of Los Angeles, 139 P.3d 119, 123 (Cal.
2006) (“Inverse condemnation actions provide a vehicle for
property owners to obtain ‘just compensation.’”); Adam Bros.
Farming v. Cty. of Santa Barbara, 604 F.3d 1142, 1147–48
(9th Cir. 2010) (noting that the procedure for seeking just
compensation in California is an inverse condemnation
action). An inverse condemnation action enables a property
owner to enforce his constitutional right to just compensation,
Baker v. Burbank-Glendale-Pasadena Airport Auth.,
705 P.2d 866, 868 (Cal. 1985), when a municipality “has
taken private property for public use without following the
requisite condemnation procedures,” Customer Co. v. City of
Sacramento, 895 P.2d 900, 905 (Cal. 1995).
An inverse condemnation action became available to
Cobb when the City failed to prosecute its eminent domain
action to final judgment and thus did not complete the
condemnation procedures required under California law to
compensate Cobb and to secure title for the City.9 See Redev.
9
To the extent the majority faults Cobb for not asserting a
counterclaim for greater compensation in the eminent domain proceeding,
the majority is mistaken. Because an eminent domain action will
necessarily determine the compensation due to the property
38 IN RE CITY OF STOCKTON
Agency v. Gilmore, 700 P.2d 794, 802 (Cal. 1985) (explaining
that title to condemned property does not pass until a final
order of condemnation has been recorded, including in a
quick-take case); accord Cal. Civ. Proc. Code § 1268.030(c).
The majority misunderstands the significance under state law
of Cobb’s retention of title. Where, as here, a municipality
takes possession of property using the quick-take process,
title to the property does not vest in the municipality until
there has been a jury determination of just compensation, the
full amount of that compensation has been paid, a final
judgment has been entered in the eminent domain action, and
a final order of condemnation has been recorded. Cal. Const.
Art. 1, § 19; Cal. Civ. Proc. Code § 1268.030(a), (c).
Because the City failed to pursue its eminent domain claim to
completion, no jury determination of just compensation
owner—indeed, that is the purpose of the action—a property owner is not
required to separately counterclaim for more than the probable just
compensation funds. In fact, the value of the probable just compensation
funds “may not be given in evidence or referred to in the trial of the issue
of compensation” during an eminent domain proceeding in California
court. Cal. Civ. Proc. Code § 1255.060(a). This state procedural rule
would make no sense if a property owner had to bring a counterclaim to
request compensation in excess of the deposited funds. Moreover, the
City has never asserted that Cobb was required to bring a counterclaim for
his requested compensation. Even assuming such a requirement existed,
then, the City has forfeited any argument that Cobb failed to meet it.
Finally, as the California Court of Appeal explained in concluding that
Cobb’s inverse condemnation action was still timely, a property owner is
not required to bring an inverse condemnation action until the dismissal
of the eminent domain proceeding. If Cobb had been required to assert a
counterclaim for greater compensation, he would not have had a viable
inverse condemnation claim that could even potentially have been time
barred. The fact that the Court of Appeal held that Cobb’s inverse
condemnation action could proceed shows that the court implicitly
concluded that Cobb was not required to bring a counterclaim in the
eminent domain action.
IN RE CITY OF STOCKTON 39
occurred, Cobb’s takings claim was never finally adjudicated,
and title to his property never passed to the City. See Redev.
Agency, 700 P.2d at 802; Prop. Reserve, Inc. v. Superior
Court, 375 P.3d 887, 907–08 (Cal. 2016) (observing that,
under California law, condemnation requires “a jury
determination of just compensation”). As a result, although
the majority is correct that Cobb could not now eject users of
the road from the land, Cobb’s title is meaningful because it
demonstrates that he has an outstanding constitutional claim
for just compensation. See id.Cobb’s efforts to pursue that claim were halted when the
City’s bankruptcy filing led to a stay of Cobb’s inverse
condemnation proceeding. To this day, Cobb remains the
legal owner of the property with an outstanding claim for just
compensation.10
10
People ex rel. Department of Public Works v. Peninsula Title
Guaranty Co., 301 P.2d 1 (Cal. 1956), is not to the contrary. The majority
invokes Peninsula Title for the proposition that formal title passage is not
required to effect a change of ownership “[w]here there has been a prior
physical ‘taking.’” Id. at 3. But the question in Peninsula Title was
whether a property owner who retains legal title remains liable for certain
taxes after a public entity has already taken the property. Id. at 3–4. The
California Supreme Court held that, under those circumstances, lack of a
formal transfer of title should not operate to impose continued tax liability
on a property owner who has already experienced “a divestiture for all
practical purposes.” Id. at 3. The issue in Peninsula Title was thus
whether a property owner should continue to bear the burdens of
ownership throughout the lengthy eminent domain process despite having
effectively lost the property, not whether a property owner is deprived of
the only benefit remaining to him at that point—the constitutional right to
seek just compensation. The City has not cited any cases that support the
latter proposition, nor has the majority. And, indeed, Cobb has continued
to pay taxes on the parcel.
40 IN RE CITY OF STOCKTON
2.
The majority recasts Cobb’s effort to enforce his
constitutional right to just compensation as a mere monetary
claim that is based on California’s statutory scheme rather
than the United States Constitution. As a preliminary matter,
of course Cobb’s claim takes the form of a statutory claim for
money. The Fifth Amendment requires that states provide a
mechanism for compensating land owners for their
condemned property, so such takings claims will generally be
brought in accordance with procedures laid out in state
statutes. Takings claims arising in California do not somehow
lose their constitutional status merely because California’s
procedures for seeking just compensation were codified by
statute rather than solely through caselaw. And all actions for
just compensation could be characterized as claims for
money; that is the nature of the claim. Cf. Lucree v. United
States, 117 Fed. Cl. 750, 752 (2014) (“A claim for just
compensation [under federal law] is a claim for money
damages cognizable under the Tucker Act.”).11 The fact that
Cobb’s claim takes the form of a statutory claim for money
damages, therefore, does not render it something other than
a claim for just compensation arising out of the Fifth
Amendment.
Additionally, Cobb’s claim for just compensation did not
lose its constitutional mooring when Cobb withdrew the
11
For these reasons, and contrary to the majority’s assertion, Cobb’s
inverse condemnation claim should have been exempted from discharge
even if it had already been reduced to judgment. Whether someone has
an outstanding claim for just compensation or a judgment awarding him
just compensation, he has a constitutional right to just compensation that
neither a city nor Congress through its bankruptcy powers may extinguish.
IN RE CITY OF STOCKTON 41
probable just compensation funds. Cobb undeniably waived
certain rights by withdrawing the funds, including his ability
to challenge the City’s “right to take” and “any claim as to
lack of a public purpose.” See Clayton v. Superior Court,
78 Cal. Rptr. 2d 750, 752 (Ct. App. 1998). But the plain
language of California Civil Procedure Code § 1255.260
preserves Cobb’s right as the owner of the property to seek
“greater compensation.”
And try as the majority might to reframe a claim for
“greater compensation” as some monetary claim unrelated to
the property owner’s constitutional right to just compensation
for taken property, the California Supreme Court has equated
a claim for greater compensation following a quick take
procedure with the constitutional right to just compensation.
See Mt. San Jacinto Cmty. Coll. Dist., 151 P.3d at 1175(rejecting a party’s argument that California’s quick-take
procedures deprive property owners of their constitutional
right to just compensation on the ground that “section
1255.260 does not require waiving a claim for greater
compensation with withdrawal of the deposit”). Under
California law, a claim for “greater compensation” comprises
Cobb’s ability “to litigate the issue of adequate
compensation,” Clayton, 78 Cal. Rptr. at 753, that is, the
“amount of ‘just compensation’ to which [he] [i]s entitled,”
Contra Costa Water Dist. v. Vaquero Farms, Inc.,
68 Cal. Rptr. 2d 272, 274–75 (Ct. App. 1997) (rejecting the
argument that a condemnee waived the ability to argue that
just compensation had not yet been paid by withdrawing the
probable just compensation deposit under section 1255.260).
The amount of just compensation is precisely the matter at
issue in Cobb’s inverse condemnation action.
42 IN RE CITY OF STOCKTON
Nor did Cobb relinquish his interest in just compensation
by, as the majority puts it, “allowing the City to construct a
road and open it to public use.”12 In support of the contention
that he did, the majority cites Frustuck v. City of Fairfax,
28 Cal. Rptr. 357 (Ct. App. 1963), which held that “where a
property owner permits the completion by a . . . public agency
of the work which results in the taking of private property for
a public use he will be denied the right to enjoin the agency.”
Id. at 373. But Frustuck speaks to a landowner’s right to
enjoin, not his ability to seek just compensation, and thus has
no applicability here. See id. Indeed, the very next sentence
of Frustuck following the passage quoted by the majority
states: “[The property owner’s] only remedy under such
circumstances is a proceeding in inverse condemnation to
recover damages.” Id. Frustuck thus does not stand for the
proposition that intervening public use deprives a condemnee
of all property rights. Frustuck merely clarifies that, instead
of injunctive relief, the appropriate remedy in such
circumstances is to seek just compensation in an inverse
condemnation action—the very course Cobb pursued.13
12
I note that the Cobb family permitted the City to build a road only
in the sense that they did not challenge the City’s action for prejudgment
possession. See Cal. Civ. Proc. Code § 1255.410(c). The Cobbs did not
otherwise have a choice as to whether the City could proceed with
construction.
13
It is irrelevant that Cobb did not appeal the Superior Court’s
rejection of his quiet title, ejectment, and trespass claims. Those claims
seek relief that would essentially prohibit the City from continuing to use
the land for a public road; such relief is no longer available to Cobb, see
Frustuck, 28 Cal Rptr. at 373, and the Superior Court accordingly held
that the doctrine of intervening public use barred those claims. But
Frustuck makes clear that Cobb can still pursue just compensation in an
inverse condemnation action, see id., and he appealed the Superior Court’s
dismissal of that claim.
IN RE CITY OF STOCKTON 43
Accordingly, Cobb has not relinquished his right to seek
just compensation under California law. Cobb’s right to just
compensation arose when the City seized his property for
public use nearly 20 years ago, and he has adequately pursued
that right ever since.
3.
Finally, the majority places great weight on Cobb’s
failure to contest the unsecured classification of his claim
within the Plan. But the Constitution’s mandate that takings
claims be excepted from discharge does not depend on
whether those claims were initially classified in any
bankruptcy proceeding as secured or unsecured; the whole
point of nondischargeability is that nondischargeable claims
pass through bankruptcy unaffected, see In re Grynberg,
986 F.2d 367, 370 (10th Cir. 1993). And the Bankruptcy
Code does not require a creditor with a claim that is excepted
from discharge to file a proof of claim in the bankruptcy
proceeding to preserve that claim in its entirety. Id.(describing how a “holder of a nondischargeable debt” is
“free to pursue the debtor outside bankruptcy”); see also In re
Kolstad, 928 F.2d 171, 174 (5th Cir. 1991) (recognizing that
if a creditor with a nondischargeable claim “elected not to
participate in the bankruptcy case and not to file a claim, the
debtor would remain burdened by that debt following
bankruptcy”).14 Instead, the Federal Rules of Bankruptcy
14
Of course, where a creditor with a nondischargeable claim elects to
sit out the bankruptcy entirely, the creditor loses the opportunity to
participate in voting on or distribution under the plan. Grynberg, 986 F.2d
at 370; see also Fed. R. Bankr. P. 3003(c)(2) (explaining that a creditor
who does not file a proof of claim in a chapter 9 or chapter 11 proceeding
“shall not be treated as a creditor with respect to such claim for the
purposes of voting and distribution” (emphasis added)). And “[c]reditors
44 IN RE CITY OF STOCKTON
Procedure plainly state that a complaint seeking exception
from discharge “may be filed at any time.”15 Fed. R. Bankr.
P. 4007(b). As a result, the classification of Cobb’s claim
within the Plan is irrelevant here.
Moreover, while Cobb may not have challenged his
claim’s specific classification, he unequivocally maintained
throughout the bankruptcy proceeding that his claim for just
compensation was “protected by the Fifth and Fourteenth
Amendments to the United States Constitution and c[ould
not] be impaired by the Plan” or treated as a mere “‘general
unsecured’ claim.” This line of reasoning plainly
encompasses the argument that his claim should have been
excepted from discharge. Cobb has now also clearly
expressed to our court that the remedy he requests is to
preserve his takings claim. Given that the parties had an
opportunity to address all of the relevant issues, I see no
reason to fault Cobb for failing to challenge the
categorization of his claim as unsecured. After all, “the
bankruptcy law is not supposed to function merely as a
procedural gauntlet that only the most adroit or best
represented creditors can overcome.” Kolstad, 928 F.2d at
173.
holding nondischargeable debts who do not participate in the distribution
of the debtor’s estate under the plan take a large risk that the debtor will
have nothing left after bankruptcy proceedings are concluded, and that
although the debt has not been discharged, meaningful recovery will be
postponed indefinitely.” Grynberg, 986 F.2d at 370 n.4.
15
The only exception to the lack of a time limit—not applicable
here—is for complaints filed under 11 U.S.C. § 523(c), which relates to
debt incurred from fraud or willful and malicious injury. In re Coleman,
560 F.3d 1000, 1004 n.6 (9th Cir. 2009); see also 11 U.S.C.
§ 523(a)(3)(B).
IN RE CITY OF STOCKTON 45
III.
Contrary to the majority’s suggestions, the sky will not
fall if Cobb is allowed to pursue his claim for just
compensation. I am not blind to the City’s herculean task of
pulling itself out of bankruptcy, but a ruling for Cobb would
not topple the Plan, or somehow throw the City back into
bankruptcy. The City has presented no evidence that Cobb
cannot be compensated for his condemned property while the
City carries out its Plan. The City has not, for example,
argued that it would have to claw back distributions under the
Plan to pay Cobb. Indeed, the City has not even claimed that
it is currently insolvent.16 And, because Cobb seeks to
proceed entirely outside of the Plan, the City would be under
no obligation to compensate him within the same timeframe
in which it compensates creditors under the Plan. See supra
note 14.
In addition, as the majority itself notes, just compensation
does not necessarily mean full compensation. United States
16
To argue otherwise, the majority relies on facts from the
Bankruptcy Appellate Panel’s decision in a different challenge to the
City’s bankruptcy, Franklin High Yield Tax-Free Income Fund v. City of
Stockton, 542 B.R. 261 (B.A.P. 9th Cir. 2015). There is no basis for
incorporating statements—absent from the record here—that were made
in a separate litigation in which Cobb was not a party. See United States
v. Joyce, 511 F.2d 1127, 1132 (9th Cir. 1974) (explaining that “the facts
found in one case are not evidence of those same facts in another case”).
That the majority found it necessary to do so demonstrates the lack of
evidence presented on the issue in this appeal. And, in fact, the
bankruptcy court in the Franklin proceeding noted that with the City’s
“finances on more stable footing,” it was possible that “additional funds
could be made available to [creditors] . . . and that could be done without
disturbing in any way the payments to retirees.” Franklin, 542 B.R. at
277.
46 IN RE CITY OF STOCKTON
v. Norwood, 602 F.3d 830, 834 (7th Cir. 2010). I agree with
the majority that a determination of just compensation
requires considering whether the compensation “would result
in manifest injustice to owner or public.” United States v.
Commodities Trading Corp., 339 U.S. 121, 123 (1950). But
the analysis of what just compensation entails must take place
under the Fifth Amendment, rather than through the lens of
the Bankruptcy Code.
Moreover, recognizing the protected nature of Cobb’s
claim would have implications only for other takings claims,
and thus would not leave the City vulnerable to a slew of new
liabilities arising from other sorts of constitutional claims.
The import of Cobb’s claim is not merely that he has a
constitutional right—it is that he has a constitutional right to
just compensation.17 The Takings Clause stands alone among
constitutional provisions in requiring a specific compensatory
remedy. By contrast, nothing in the Constitution expressly
guarantees compensation for a violation by a city of, for
example, the Equal Protection Clause of the Fourteenth
Amendment. See In re City of Detroit, 524 B.R. 147, 265
(Bankr. E.D. Mich. 2014) (concluding that, in contrast to the
Takings Clause, “the Fourteenth Amendment does not
provide a substantive constitutional right to compensation for
damages”). The majority’s observation that other
constitutional claims are routinely reduced during bankruptcy
proceedings misses this crucial distinction.
17
Because of this distinction, the majority’s reliance on Bennett v.
Jefferson Cty., 899 F.3d 1240 (11th Cir. 2018), is unwarranted. In
Bennett, the Eleventh Circuit held that equitable mootness may bar
consideration on appeal of constitutional challenges to a chapter 9 plan,
but the challenges the court considered related to voting rights and
procedural due process, not the Takings Clause. Id. at 1243, 1250–51.
IN RE CITY OF STOCKTON 47
IV.
For the foregoing reasons, I respectfully but adamantly
dissent.