Fracking Bans Are Risky Business for Officials Who Would Be Kings

Fracking Bans - Tom Shepstone ReportsTom Shepstone
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The Wall Street Journal ran a great piece yesterday that should send shivers up the spine of every town anywhere that has banned fracking. Fracking bans carry potentially enormous price tags.

The op-ed article, by Merrill Matthews, from the Institute for Policy Innovation in Dallas, may also be viewed here and articulates what our contributor Bryant La Tourette, said several weeks ago – towns who adopt fracking bans are absconding with the mineral rights of owners and face huge potential lawsuits, especially where those mineral rights represent 100% of the property interests of the aggrieved party. The Delaware River Basin Commission should also pay close attention.

Matthews cites one particular case from Michigan to make his point. It caught my eye because I know one of the principals of the company that successfully brought the case. They’re a great operator and the case was a marvelous demonstration of how to assert one’s property rights in the face of government officials who would be kings.

The Ban on “Any and All” Energy Development

Fracking BanThe case, Miller Bros. v. DNR, was brought originally in 1988 and wasn’t finally resolved until 1995, when the State of Michigan Department of Natural Resources (DNR) settled with the plaintiffs for roughly $95 million. There were several plaintiffs, actually, but Miller Brothers Oil Company (now Miller Energy Company) was the principal aggrieved party, having secured leases to develop the privately-owned minerals lying below approximately 3,500 acres of the Nordhouse Dunes Wilderness. The surface owner was the federal government, and, according to the Michigan Court of Appeals decision in 1994, it owned all the land, including everything below the surface, except what was owned by the mineral rights owners. They had no other uses for those rights if they could not extract the minerals.

The history of the case is, ironically, laid out nicely (although with considerable bias) here and here by the Michigan Land Use Institute (MLUI), a recipient of Park Foundation largesse, having later been drawn into the latter’s web of fracking deceit and undue influence. The Institute recently, in fact, served as a conduit for funding the fractivist organization FLOW which, of course, ignores the case while promoting ordinances that run the same risk.

MLUI, while clearly sympathetic to the DNR position at that time, also noted how badly the DNR Director and the state had acted. Here’s some of what MLUI observed about their behavior after earlier pointing out “Miller Brothers has argued with some merit for nearly a decade that it had prepared a sensitive drilling plan that would not have produced lasting scars in the Nordhouse Dunes and that Mr. Guyer’s order was unreasonable.”

In 1987, when former DNR director Gordon E. Guyer prohibited oil drilling in the magnificent Nordhouse Dunes Wilderness north of Ludington, he was applauded for adding to Michigan’s reputation as a trend setter in natural resource policy…

How this happened, according to some who played instrumental roles, is a case of administrative overreaching and legal blundering…

According to lawyers from the Attorney General’s office and former DNR officials, the state’s response to the lawsuit was marked by consistently missed opportunities.

The first problem was that the lawsuit was a surprise. DNR officials said they wanted to compel Miller Brothers to use directional drilling technology to tap the oil from sites outside the protected area. Mr. Guyer said he expected the company to react to his 1987 order by filing an amended development plan using directional drilling.

Instead, the company’s lawyers took advantage of an opportunity to reap a windfall without a single turn of the drillbit. How? Because Mr. Guyer’s order was unusually specific. It banned “any and all” energy development within the Nordhouse Dunes…

In 1989, Circuit Court Judge Peter D. Houk ruled that Mr. Guyer’s order was a taking of private property. But in his ruling, the Judge also provided the state with an out. He urged the government to modify the order to allow directional drilling.

The Attorney General’s office declined the opportunity…

After a trial in 1991, in which he called into question the competence of the state’s expert witnesses, Judge Houk awarded the plaintiffs $71.5 million. In 1995, the judge increased the takings award to $120.8 million, with interest accruing at about $35,000 a day.

“Judge Houk sent messages to the Attorney General in open court that he would strongly encourage the state to reconsider its strategy and issue some sort of permit,” said an Assistant Attorney General. “At one point he demanded assurances from the lawyers working the case that they had conveyed the message. I don’t know why, but the strategy never changed.”

The Reverberations of Fracking Bans (and Drilling Bans)

fracking bansThe DNR Director at that time, in other words, thought he was king and had no obligation to be reasonable or to compromise, even after being all but ordered by the judge to do so. He appears to have been one of those “what part of “no” don’t you understand?” bureaucrats who believe public service is a matter of lording it over the public. If you didn’t like his “no” or his ban on “any and all” you were apparently, by act of divination, supposed to know he really wanted drilling, just not that sort of drilling.

The DNR, therefore, got exactly what it deserved and, the Court of Appeals agreed, disagreeing only on the value of the taking, which ultimately got resolved by an act of the Legislature in settlement. Here is some of what the court said (citations and footnotes deleted, emphasis added):

Both our federal and state constitutions mandate that when private property is taken for public use, its owner must receive just compensation. In the regulatory context, a compensable taking occurs when the government uses its power to so restrict the use of property that its owner has been deprived of all economically viable use.

Plaintiffs’ mineral interests in the Nordhouse Dunes Area had one, and only one, economically viable use: the extraction of any oil or gas that might be found under the land. To extract oil and gas from the land, a well is needed. To be able to drill a well, a permit issued by the Supervisor of Wells is required. The director of the DNR is the Supervisor of Wells. The director’s administrative action made it clear that no permits would be issued for drilling in the protected area. The director’s action prevents plaintiffs from extracting any oil or gas from the land. Consequently, by the exercise of its regulatory power, the government had so restricted the use of plaintiffs’ property rights that plaintiffs had been deprived of all economically viable use.

The parties dispute whether the order prohibited directional drilling to get at oil and gas in the protected area from drilling sites located outside the protected area…If allowed, directional drilling could not be used to extract all the oil and gas there may be under the protected area. Consequently, the director’s action completely deprived plaintiffs of all use of at least some portion of their property holdings in the protected area

It is also immaterial that all but one plaintiff have extensive property holdings outside the protected area. This case is not similar to the cases defendants cite wherein development of a portion of a parcel of land was limited or restricted. In this case, development of thousands of acres of property was totally prohibited.

The state contends that plaintiffs’ lawsuits were premature, that they should have been required to apply for drilling permits or appeal the director’s decision before claiming that their property had been taken. Again, we disagree. Applying for individual drilling permits would have been a futile gesture. Plaintiffs are not required to pursue futile remedies. The director’s decision was final and absolute. As Supervisor of Wells, the director is the person empowered to decide whether to issue drilling permits; his decisions are final. They are not rendered less final because they are appealable…

The state contends that, even if a taking did occur, it need not pay compensation because development within the protected area could have been enjoined under nuisance law. We disagree. Under nuisance law, plaintiffs could have been ordered to keep their activities from having a detrimental effect on adjoining property. However, the director expressly stated that his action was necessary in order to protect the surface owner’s property. Plaintiffs could not have been ordered to refrain from exercising their rights to extract oil and gas merely because it might have had some detrimental effect on the surface property: the surface owner had a contractual duty to allow plaintiffs to exercise their rights to extract oil and gas, even if it caused some harm to the surface property.

The decision is written in plain language that’s easy to grasp and astute readers will note it touches on every angle and excuse cited by fractivists, whether they be from: Longmont, Colorado where another ban just got overturned; Denton, Texas; West Bloomfield, Michigan; or the Village of Oxford, New York, which thinks it could evade a potential lawsuit by just banning surface development. Answer: it cannot if directional drilling cannot be used to extract all the oil and gas there may be there.

The Implications of Fracking Bans

Obviously, every case is unique. This one involved an usually obstinate state agency (at that time) but it illustrates that, regardless whether or not communities are legally entitled to enact fracking bans, they remain vulnerable to takings lawsuits if they do so and, in the process, restrict the use of property rights to the point the owners are deprived of all economically viable use. This is clearly the case where the mineral rights are owned separately.

Enterprising investors who purchase those rights, therefore, have an opportunity to profit from either drilling or a takings suit. You can’t simply steal someone’s property. Sooner or later there will be another successful lawsuit. Will it be against one the above-named towns? Will it be the Joint Landowners Coalition of New York’s suit against New York State, now an appeal? Will it be a case against the DRBC? Whichever case it is, expect this Michigan case to be cited. It’s that important.

Now, for the real irony. Miller Energy Company and Michigan’s other oil and gas companies are funding DNR through something called the Michigan Natural Resources Trust Fund.  This source of public revenue has been so successful, the fund has periodically reached its constitutionally mandated cap of $500 million and produced excess funds that helped pay for other conservation programs.

fracking bans

This program, largely financed from Michigan oil and gas development, has allowed the state to give out over $1 billion through over 2,100 grants throughout all of Michigan since it began in 1976. Today’s DNR is not same DNR that Miller Brothers confronted and no one should suppose it is, but isn’t is amazing that the king’s empire was built with funds provided by the entities with whom he wouldn’t compromise? Such arrogance deserved a rebuke and he learned fracking bans (gas drilling bans in that case) are risky business indeed. May some others learn as well.

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10 thoughts on “Fracking Bans Are Risky Business for Officials Who Would Be Kings

  1. Even though NY is a “home rule” state, my question is: Can the County, State or even Federal governments issue permits on/under those lands since they are supposedly “exempt” from local zoning laws? Also, if lands are transferred to an Indian tribe, are they also exempt since they only answer to the EPA and not the state?

  2. there is no logical reason why surface + minerals owners in NY have not also been severely financially harmed. indeed it would add insult to injury if only sub-surface and often non-resident speculators were eventually rewarded. those of us in viable shale territory have been subjected to a partial taking- a once in a lifetime opportunity thus far destroyed by propagandists and Albany politicians. let’s hope Cuomo finally gets what he deserves with his Moreland meddling.

  3. furthermore, landowners in NY have practically no chance of ever receiving a fair and impartial hearing or favorable ruling on these matters in NY Courts. history has already shown the extent to which judges here will ignore laws, legislate from the bench, and flat out dismiss suits with the appalling rationale that NO ONE has standing to sue the State over its flagrant political stonewalling. only a Federal Court will be able to remediate our suffering.

  4. At Parish NY I gave a lecture on NG Protesting and the extremisim being called for by so called environmental factivist showing Stiengrabers speech at Senneca lake. When I opened for q&a several questions evolved around Cuomo’s Moreland commission and if I thought he should be held accountable? I answeed yes but then I suggested what he did by confiscating 327 million dollars from the victims of Hurricane Sandy to run tax free zone commercials several members of the audience from other states said they were being bombarded with these adds and were very upset to hear that. There were 121 people who signed in at the lecture and many had guest. What I took from those who did not live in NY was they thought NY was being run by a coward listening to a fool {Kennedy} and they have been watching NY and the fracking fight suggesting that we here in NY represent the biggest joke in America.

  5. Interesting questi0on. I would think that for both Dryden and Middlefield there would be sufficient information available to support a claim. In Dryden, the Norse leases have some sort of value. True, the underlying minerals may be unproven (or maybe not), but in a free market, the leases could have been sold to another company. Happens all the time. Thus, the millions in potential sales revenue from having the leases rendered worthless by the law seem rife for judgement. And if there was sufficient seismic or geologic evidence to suggest that there were, say, xxx MMCF of gas recoverable though those leases, that could be added in as well.

    In Middlefield, since there were permits underway, and drilling ready to commence, it seems much the same – the company must have data to suggest that there was a recoverable amount of gas on the farm, and thus the town has taken the revenue both from Jennifer H. and the company.

    I’d also guess that none of this was worth pursuing until the Court of Appeals rendered their decision; if the appeal had gone the other way drilling could commence, and the Norse leases woulld have some value once again.

    I am not a lawyer, nor do I play one on TV.

  6. On the west side of Seneca Lake we have a very similar situation to Michigan. The owner wants-to be able to realize value of “mined-out holes in the ground” that the property was specifically purchased-for. To that end, many millions of $ have been devoted already.

    But that planned and ready-to-be-permitted course is being road-blocked by Cuomo et al, for no technical reason whatsoever — just NY politics.

    How long do you wait before NYS DEC “consideration” (that we know was completed in April 2013, after slowly-deliberating and asking foolish questions over 2 years), becomes a “taking” under the Constitution?

    The state could well be on the hook for 100s of millions of $ in this case, enough to make it a very attractive case for owners and lawyers. And woe-be to the taxpayers of NY!

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