Industry Challenging County and Municipal Bans on Multiple Fronts

Municipalities and counties have joined forces with environmental groups to halt hydraulic fracking and related well stimulation techniques. Environmental groups have filed suits under the National Environmental Policy Act (NEPA) and analogous state statutes to halt enhanced recovery of oil and gas. Municipalities and counties have also enacted moratoriums and outright bans on hydraulic fracturing. The result of these ad hoc bans is a checkerboard of regulations that make the development of natural resources more costly. Oil and gas interests initially challenged these bans on preemption grounds, arguing that the local ordinances conflicted with state statutes governing oil and gas operations, and were “impermissible intrusions on the exclusive powers granted to the state. This argument has met with mixed success. As such, oil and gas interests are fashioning and asserting arguments based upon the protections afforded private parties under the Fifth Amendment to the U.S. Constitution, which prohibits the government from “taking” private property without “just compensation.”

One of the first cases to do so was Colorado Oil& Gas Assoc.v. Longmont, Case No. 2012-cv-960 (Colo. Dist. Ct. Dec. 17, 2012) (“defacto drilling ban is a taking of private property for public use by inverse condemnation and violates the Colorado Constitution, Art. II, §15”). Opponents of the bans have asserted that the bans amount to a takings claim under the Fifth Amendment to the U.S. Constitution. TheFifth Amendment provides, in part, that “private property taken for public use [by the federal Court] shall not be taken without just compensation.” TheTakings Clause was adopted to prevent the government “from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.” Armstrongv. United States, 364 U.S. 40, 49 (1960). The Fourteenth Amendment to the Constitution expanded the takings protections to state governments.

In California, Citadel Exploration has filed suit against SanBenito County asking for $1.2billion in damages for banning fracking and oil extraction on land within the county. Citadel argues that the ban constitutes a regulatory taking and that it is entitled to the value lost, which it says amounts to 20–40million barrels of oil and a profit of $1.2billion. On December 17, 2014 New York Governor Andrew Cuomo announced that his administration would ban hydraulic fracturing in New York State. Governor Cuomo recognized the implications of the ban in a news conference saying, “There’s going to be a ton of lawsuits, I’m sure, every which way from Sunday.”

Takings come in two basic forms: physical and regulatory.

The simplest form of a taking is through permanent physical occupation of private property by the state, known as a “physical taking.” See Lorettov. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982). This form of taking is often referred to as eminent domain. In these cases, the state on formal ground takes title to any ownership of the property. The property owner is compensated for the “fair market value” of the real property.

A more subtle form of takings was recognized by the Supreme Court in Penn Coal Co.v. Mahon, 260U.S. 393, 413 (1922). This second category of taking is known as a “regulatory taking,” and is one in which the state or federal government deprives an owner of the use of his or her property through regulation, rather than taking ownership.

The seminal “regulatory” takings case is Lucasv. South Carolina Coastal Council, 505 U.S. 1003, 1019 (1992). In Lucas,South Carolina’s Coastal Zone Management Act (1977) required owners of coast land in “critical areas” near beaches to obtain permits from South Carolina Coastal Council before committing the land to new uses. The Court found that the regulation deprived Lucas of value that had to be returned in the form of public compensation. The Lucas Court held that a regulatory taking occurs if the regulation deprives the property holder of all economically beneficial use of his or her property, or satisfies a three-part balancing test set out by the Court in Penn Central Transportation Co.v. New York City, 438 U.S. 104, 124 (1978) (“economic injuries caused by public action [should] be compensated by the government, rather than remain disproportionately concentrated on a few persons.”)

Under the Lucas rule, a taking occurs when a regulation destroys all economically beneficial use of an owner’s private property. Locally, within the context of a fracking ban, the private property in question is natural gas or oil. Those who own the rights to minerals under their land and those who have leased those minerals contend that a ban on fracking destroys the economic value of their natural gas deposits. The inability to hydraulically fracture or “acidize” the reservoir prevents the economic recovery of the natural resources. However, even when a regulation impacts the economic value of private property, incertain cases the regulation may still not be a taking. Applying the Lucas rule, the ban may not be considered a taking if other state statutes would prohibit the use of hydraulic fracturing. By way of example, if the location of a well violated land use regulations or CC&Rs, the ban may not rise to the level of a taking even though the ban prevents the resource from being extracted.

A municipal or county government can use its police and zoning/land use power to restrict and prohibit uses that it considers to be detrimental to the community. The exercise of these powers does not necessarily constitute a “taking.” See Tahoe-Sierra Preservation Council, Inc.v. Tahoe Regional Planning Agency, 535U.S. 302 (2002) (Moratorium not a regulatory taking); Palazzolov. Rhode Island, 533 U.S. 606 (2001) (Property retained some value, therefore not a total taking); Linglev. Chevron U.S.A., 125 S. Ct. 2655 (2005) (Touchstone is whether the regulation is “so onerous that its effect is tantamount to a direct appropriation or ouster”).

An important and likely critical legal precept in determining whether a ban rises to the level of a regulatory taking was set forth by the U.S. Supreme Court in Palazzolo, which found that “The regulatory regime in place at the time the claimant acquires the property at issue helps to shape the reasonableness of those [investment-backed] expectations.”

If a total taking has not occurred, a property owner may still bring a partial takings claim under the Penn Central ruling. This type of claim requires the court to consider essentially ad hoc factual inquiries, such as whether the governmental regulation has decreased the value of an owner’s land or otherwise interfered with the property owner’s “distinct investment-backed expectations.”

In the context of a fracking ban, “distinct investment-backed expectations” basically means that the exploration companies will have to demonstrate that when they entered into an oil and gas lease within county or municipal limits they had a reasonable expectation they would be allowed to drill and use “enhanced recovery” techniques to recover the natural resources.

Inhighly regulated activities like drilling, a court may assume that the landowner/lessor/lessee invested in the mining rights with knowledge that future rule changes could limit his or her ability to maximize profits.

Courts have intimated that land use regulation that could deny all economic benefit from a lease might be a taking if the recovery methods allowed do not meet the “investor expectations.” As the lessee’s entire interest is its lease, a ban on developing the leased resources may make it impossible for a lessee to profit from the lease and thereby be considered a government-imposed restriction on the economically beneficial use of his or her property interest.

While property can be regulated to a certain extent, if a regulation goes too far it will be deemed a taking. There is no precise rule as to when property has been taken by government regulatory action. In First English Evangelical Lutheran Church of Glendalev. LosAngeles County, 482 U.S. 304 (1987), the Supreme Court confirmed the two-part rule that a regulatory taking occurs when (1)a regulation does not substantially advance legitimate state interests, or (2)denies an owner substantially all economically viable use of the owner’s land. In 1992, the Court also held that where a government action deprives a landowner of “all economically beneficial use of property,” the action constitutes a per se regulatory taking. Lucasv. South Carolina Coastal Council, 505 U.S. 1003 (1992). The Court has long held that where a regulation works an economic detriment on property owners and interferes with their “distinct investment-backed expectations,” the property owners must receive just compensation. Penn Central Transp. Co.v. New York City, 438 U.S. 104 (1978).

Public Nuisance Exception

A property owner does not by virtue of ownership have the right to create and maintain a common law nuisance. Government actions that abate common law nuisances are per se not takings. Courts have acknowledged that there are inherent limits on landowner rights, required by common law nuisance and property statutes. Thus the state can prohibit deleterious uses even to the point of total takings.

The “public nuisance” exception has been reaffirmed by the U.S. Supreme Court on numerous occasions. “[C]ourts have consistently held that a State need not provide compensation when it diminishes or destroys the value of property by stopping illegal activity or abating a public nuisance.” Keystone Bituminous Coal Ass’nv. DeBenedictis, 480U.S. 470, 492 (1987).

Prohibitions upon the use of property for purposes that are deemed to be injurious to the health, morals, or safety of the public are not a taking or an appropriation of property for the public benefit. Such legislation does not divert the owner in the control or use of his or her property for lawful purposes, nor restrict his or her right to dispose of it, but is only a declaration by the state that its use by any one, for certain forbidden purposes, is prejudicial to the public interests. Goldblattv. Hempstead, 369 U.S. 590, 593 (1962).

Personal or Real Property

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