Ninth Circuit Addresses Several CERCLA Issues of First Impression in the Circuit

In AmeriPride Services Inc. v. Texas Eastern Overseas Inc., the Ninth Circuit examined several issues under CERCLA, some of which were issues of first impression in the Circuit, including:

1. whether a district court must apply a specific method of allocating the set-off for settlements between private CERCLA parties, 
2. whether a party’s right to seek contribution for costs paid in third-party settlements requires an independent analysis of whether the settlement costs were “necessary” response costs incurred consistent with the National Contingency Plan (“NCP”), and
3. how to properly determine the date on which prejudgment interest begins to accrue in private party CERCLA cost recovery actions.1

The facts of the case are complicated, but worth reciting because they were essential to the Ninth Circuit’s analysis. The case involved PCE contamination at an industrial site located in Sacramento, California (“Site”). Valley Industry Services (“VIS”) had operated a dry cleaning and laundry business at the Site for 17 years, and had later merged with Texas Eastern Overseas, Inc. (“TEO”), which assumed VIS’s liabilities. During a portion of the time VIS operated at the Site, VIS was a wholly owned subsidiary of Petrolane, Inc. (“Petrolane”).

 

In 1983, Petrolane sold the Site, which eventually came under the ownership of AmeriPride Services Inc. (“AmeriPride”). During AmeriPride’s period of Site ownership, additional PCE was released into soil and groundwater. Contamination spread onto adjacent property owned by Huhtamaki Foodservices (“Huhtamaki”), and contaminated groundwater wells owned by California-American Water Company (“Cal-Am”). Chromalloy American Corporation (“Chromalloy”), a nearby property owner, also contributed to the contamination at the Site.

 

Upon discovering PCE in soil, AmeriPride contacted regulatory authorities and was instructed to conduct sampling and install monitoring wells at the Site. A State agency then took regulatory control of the Site, and AmeriPride incurred costs in connection with Site investigation and remediation under the authority of the State agency.

 

In 2000, AmeriPride filed an action in the District Court for the Eastern District of California against VIS, Petrolane, TEO, and Chromalloy under CERCLA sections 107 and 113. TEO asserted a counterclaim under CERCLA section 113 for contribution. While the litigation was pending, AmeriPride settled with Chromalloy and Petrolane, for $0.5 million and $2.75 million, respectively.
 

Thereafter, Cal-Am and Huhtamaki  separately sued AmeriPride, which settled each matter in exchange for a release of claims. AmeriPride paid Cal-Am $2 million to settle claims for response costs, damages, and other relief relating to well contamination, and paid Huhtamaki $8.25 million to settle claims for cost recovery claims under CERCLA and state law, as well as common law causes of action for nuisance, trespass, and negligence. The district court approved these settlements in an order that noted that it would apply the “proportionate share approach” of the Uniform Comparative Fault Act, (“UCFA”) for purposes of determining how the settlements would impact the nonsettling parties.

 

On summary judgment, the district court found that TEO was responsible for AmeriPride’s response costs under CERCLA section 107 as a matter of law, but required AmeriPride to seek contribution for its settlement amounts paid to Cal-Am and Huhtamaki under CERCLA section 113, and permitted AmeriPride to amend its complaint to assert its claims for those costs under section 113. The district court did not address whether the Cal-Am and Huhtamaki settlements were for necessary response costs incurred consistent with the NCP, although it noted that AmeriPride’s other response costs satisfied that requirement. The district court set a bench trial to resolve remaining issues.

 

Following the bench trial, the district court entered a judgment against TEO, finding that AmeriPride had incurred $15,508,912 in damages, subject to equitable allocation. This amount was calculated by subtracting the $3.25 million in settlement payments AmeriPride received from Chromalloy and Petrolane from a calculated $18,758,912 in total response costs. Next, the district court allocated the $15,508,912 amount equally between AmeriPride and TEO. Following unsuccessful post-trial motions, TEO timely appealed the district court’s judgment.

 

On appeal, TEO first argued that CERCLA requires that district courts apply the “proportionate share approach” of the UCFA  to determine how to credit settlements in cases involving private settlements with a subset of the potentially responsible parties.

 

As the Ninth Circuit explained, under the UCFA “proportionate share approach,” when an injured party settles with one of multiple tortfeasors, the settlement reduces the injured party’s claims against the nonsettling tortfeasors by the amount of the settling tortfeasor’s proportionate share of the damages without regard to the dollar amount of the settlement. Under this approach, the nonsettling tortfeasors are responsible only for their proportionate share of the costs, even if the settling tortfeasor settles for less than its fair share of the injury. Therefore, the nonsettling tortfeasor bears the risk of not being fully reimbursed for all of its recoverable costs.

 

In contrast, under the “pro tanto approach” of the Uniform Contribution Among Tortfeasors Act (“UCATA”),  when an injured party settles with one of multiple tortfeasors, the settlement reduces the injured party’s claims against the nonsettling tortfeasors by the dollar amount of the settlement. Under this approach, if a settling tortfeasor settles for less than its proportionate share of the injury, the nonsettling tortfeasors will pay more than their proportionate share of the injury. Similarly, if a settling tortfeasor settles for more than its  proportionate share, the nonsettling tortfeasors may reap a benefit.

 

Consistent with First Circuit jurisprudence, and contrary to Seventh Circuit jurisprudence, the Ninth Circuit held that in allocating liability to a nonsettling defendant in a CERCLA contribution action between two private parties, the district court is not required to apply either the UCFA “proportionate share approach” or the UCATA “pro tanto approach,” but instead enjoys discretion to determine the most equitable method of apportionment. The Ninth Circuit noted that imposing a mandatory directive was contrary to congressional intent behind CERCLA. Specifically, the Court found compelling the fact that CERCLA expressly requires the use of the UCATA “pro tanto approach” when the federal or state government settles with a private party, but is silent on what approach to use with respect to settlements between private parties. The Ninth Circuit interpreted that silence to mean that “Congress did not intend to impose a uniform requirement for a particular approach in private party settlements.

 

Despite the Ninth Circuit’s conclusion that district courts have discretion to determine the method for allocating settlement set-offs in the context of private party settlements under CERCLA , the Court nevertheless vacated the district court’s judgment and remanded the case.  In doing so, the Ninth Circuit reasoned that because the district court first ruled that it was adopting the UCFA “proportionate share approach,” but then effectively applied the UCATA “pro tanto approach,” TEO did not have a reasonable opportunity to present evidence and argument regarding the fairness of the court’s allocation. Therefore,  remand was necessary to give the district court an opportunity to explain how its approach complied with CERCLA section 113 and furthered the goals of CERCLA, whether under the UCFA “proportionate share approach” or the UCATA “pro tanto approach.”  

 

On appeal, TEO also argued that the district court made two other legal errors in calculating the amount subject to equitable allocation, by failing to determine whether AmeriPride’s settlements with Huhtamaki and Cal-Am were solely for “necessary” response costs incurred consistent with the NCP, and by basing the prejudgment interest accrual date on the date the costs were incurred by AmeriPride on the grounds that the interest accrual date was a matter of equity rather than statutory requirement.

 

In accordance with the Tenth Circuit’s jurisprudence and based on “the statutory scheme as a whole,” the Ninth Circuit found that consistency with the NCP is an element of a CERCLA section 113 claim, as is the case with a CERCLA section 107 claim. The Court first examined the structure of CERCLA, noting that section 113 incorporates section 107 to the extent it delineates the nature of recoverable costs. Next, the Court reasoned that allowing a party to recover settlement money in a contribution action without first requiring the party to prove that the settlement reimbursed the recipient for necessary response costs incurred consistent with the NCP could produce incongruous results—as, for example—AmeriPride could successfully defend a 107 action by Huhtamaki or Cal-Am by establishing inconsistency with the NCP, settle with Huhtamaki and Cal-Am for liability under state law, and then seek contribution under CERCLA section 113 against TEO for the settlement monies it paid. Therefore, the Ninth Circuit concluded that the district court erred in failing to determine the extent to which the amounts paid by AmeriPride to Cal-Am and Huhtamaki were incurred for necessary response costs consistent with the NCP.

 

With respect to the issue of the prejudgment interest accrual date, the Ninth Circuit concluded that because CERCLA section 113 incorporates the liability provisions of section 107, the district court was not free to exercise discretion in determining the methodology for calculating prejudgment interest. Rather, the Ninth Circuit joined the majority of other circuits having addressed the issue and concluded that the 107 prejudgment interest provision—stating that interest accrues from the later of the date of a payment demand or the date of an expenditure—was to be read into the contribution provisions under CERCLA section 113. As a result, on remand, the Ninth Circuit instructed the district court to apply the statutory interest provision in CERCLA section 107 to determine when interest began to accrue on the costs incurred by AmeriPride. 

 

       1  The Ninth Circuit also considered a discrete state law issue—whether the assignment of a party’s causes of action for recovery against its insurers  is proper under California Code of Civil Procedure section 708.510—and concluded that it was not, as that section limits assignments to “all or part of a payment due,” which does not include causes of action.

 

- Rick Coffin, Marc Zeppetello, and Sherry Jackman

 

For more information, contact Rick Coffin at rcc@bcltlaw.com or (415) 228-5420, Marc Zeppetello at maz@bcltlaw.com or (415) 228-5496, or Sherry Jackman at sej@bcltlaw.com or (415) 228-5412.

Federal Government Takes First Steps to Impose Regulation of Hydraulic Fracturing on Public Lands

On March 20, 2015, the Interior Department announced the issuance of a final rule regulating hydraulic fracturing on Federal and American Indian lands. The rule was initially proposed by the Bureau of Land Management (“BLM”) on May 11, 2012, and, on May 24, 2013, the BLM published a supplemental notice of the rulemaking due to significant public interest in the first draft of the rule. After the review of more than 1.5 million public comments, BLM has issued the final rule, which will take effect ninety days after publication in the federal register.

The Rule will regulate the use of hydraulic fracturing on Federal and American Indian lands and mineral estates managed by BLM. The Rule, therefore, will apply to future oil and gas extraction on approximately 700 million acres of sub-surface mineral estate underlying both Federal and non-Federal lands and an additional 56 million acres of American Indian lands. According to BLM, there are already approximately 100,000 oil and gas wells on public lands managed by BLM, and 90% of current wells placed on Federal lands involve the use of hydraulic fracturing.

The new requirements imposed on hydraulic fracturing will augment existing BLM regulations for oil and gas operations specified at 43 C.F.R. § 3162.3-1 and Onshore Oil and Gas Orders 1, 2 and 7. Most of these requirements have been in place for at least 25 years.

Key components of the Rule include:

• Provisions to ensure the protection of groundwater supplies by requiring validation of well integrity prior to hydraulic fracturing in new or any existing wells;
• Requirements to design and implement a casing and cementing program that follows best practices and meets performance standards to protect and isolate usable water (generally defined as those waters containing less than 10,000 parts per million of total dissolved solids). The Rule specifies that best practice includes cement return and pressure testing for surface casing, cement evaluation logs for intermediate and production casing, and remediation plans and cement evaluation logs for any surface casing that does not meet performance standards;
• Requirements to monitor cementing operations during well construction and take remedial action if cementing is inadequate;
• Disclosure of chemicals used in hydraulic fracturing to BLM through the FracFocus website within 30 days of completing the fracturing operations (similar to requirements imposed by several States already, including California). The rule provides limited disclosure exceptions for chemicals demonstrated to BLM, through affidavit, to be trade secrets;
• Specific standards for interim storage of recovered waste fluids from hydraulic fracturing operations. These requirements include management of fluids in “rigid enclosed, covered, or netted and screened above-ground storage tanks” with case-by-case exceptions;
• Measures to lower the risk of cross-well contamination by requiring companies to submit more detailed information on the geology, depth, and location of preexisting wells to allow for detailed assessment by BLM of site characteristics.

Operators with leases on Federal lands must comply both with the new BLM requirements and with any state operating requirements, including permitting and notice requirements to the extent they do not conflict with BLM regulations. The rule provides a variance option to states and tribes where equal or more protective regulations applicable to hydraulic fracturing have been adopted locally.

BLM has estimated that the cost of compliance with the new requirements imposed by the Rule will amount to less than one-fourth of 1 percent of the cost of drilling a new well.

The Rule does not adopt new enforcement or penalty requirements. In response to comments, BLM stated that these issues were outside the scope of the rulemaking and already addressed in existing regulations. Compliance with the rule, and enforcement for any violation of the new requirements, will be covered by existing regulations in 43 C.F.R. Subpart 3163. BLM’s remedies for an operator’s non-compliance with the new regulations are provided by the already existing 43 C.F.R. § 3163.1, and include written notices of violation, assessments, and the shut-down of operations. Repeated or continued non-compliance can result in civil penalties and possible lease cancellation pursuant to 43 C.F.R. § 3163.2. Finally, BLM notes in the rulemaking that criminal penalties may be sought for certain false statements made to the government in public land matters, whether sworn or unsworn, pursuant to 18 U.S.C. § 1001 and 43 U.S.C. § 1212.

This may be only the first iteration in the regulation of hydraulic fracturing on Federal lands, with BLM stating that it will evaluate the adequacy of the rulemaking seven years after the date of publication to ensure that the standards are adequately addressing emerging technological developments and providing acceptable protection for human health and the environment.

The final rule can be viewed here. 

- Tom Boer

For more information, contact J. Tom Boer at jtb@bcltlaw.com or (415) 228-5413.

California Appellate Court Agrees with Defendants on Prop. 65 Exposure Averaging

In one of the most significant appellate decisions interpreting California’s Prop. 65, the California Court of Appeal on March 17 ruled that, for purposes of establishing the Prop. 65 “safe harbor” defense, exposure to a listed chemical, such as lead, may be determined by averaging exposures over time and averaging concentrations of the chemical over multiple lots. The First Appellate District in Environmental Law Foundation v. Beech-Nut Nutrition Corp. is the first appellate court to address the issue of averaging exposure under Prop. 65--an issue that had been a point of contention ever since Prop. 65 was first enacted over 25 years ago. In affirming the judgment of the Alameda County Superior Court, the Court of Appeal’s conclusion in Beech-Nut is a direct rejection of the position that has long been advocated by both the Attorney General and the private plaintiffs’ bar, contending that a single, one-time exposure to lead that exceeds the safe harbor threshold is enough to require a warning.

In a thoroughly reasoned statement of its decision, the trial court in 2013 found that the language of Prop. 65 and its regulations, as well as the statement of reasons published by the Office of Environmental Health Hazard Assessment’s (OEHHA) when that agency listed lead as a Prop. 65 chemical, all support a conclusion that averaging exposures over time and over multiple lots was permissible. The trial court’s decision was also supported by expert testimony and analysis introduced by the defendants, which the court found “far more persuasive” than that of the plaintiff. The Court of Appeal affirmed, reviewing the trial court’s ruling under a substantial evidence standard of review.

It remains to be seen whether the California Supreme Court will ultimately weigh in on this case. In addition, OEHHA has suggested that it may attempt to limit the effect of the court’s decision, and invoke its regulatory authority over the issue of determining exposure in a Prop. 65 “safe harbor” defense. What appears certain is that this issue is far from settled.

A copy of the Court of Appeal’s opinion is available here.

- Joshua Bloom and Samir Abdelnour

For more information, contact Joshua Bloom at (415) 228-5406 or jab@bcltlaw.com, or Samir Abdelnour at (415) 228-5443 or sja@bcltlaw.com.

DTSC Invites Public Comments on Proposed Supplemental Environmental Projects Policy

This month, the California Department of Toxic Substances Control (“DTSC”) issued a Public Notice proposing a Supplemental Environmental Projects (“SEP”) Policy (“Policy”). DTSC is seeking public comment on the Policy through April 16, 2015. The final Policy will provide an option to perform a SEP in exchange for a reduction in the cash penalty paid to DTSC in response to environmental enforcement actions and, therefore, will be relevant to any party negotiating a settlement with DTSC in the future.

The Policy proposes an official framework for the incorporation of SEPs into administrative and civil settlements with DTSC. The Policy’s proposed SEP definition is virtually identical to the SEP definition contained within the U.S. EPA’s Supplemental Environmental Projects Policy issued in 1998 (“EPA Policy”), which is referenced by DTSC as one of several foundational documents supporting the development of the Policy. The DTSC Policy, however, departs from the EPA Policy in several key respects, including the maximum penalty deduction credited to a defendant for agreeing to implement a SEP (as described in greater detail below).

The Policy provides the following definitions and associated key terms:

• A “Supplemental Environmental Project” means an environmentally beneficial project that a defendant/respondent agrees to undertake or fund in settlement of an enforcement action, which the defendant/respondent is not otherwise legally required to perform. . . .
• “Environmentally beneficial” means a SEP must improve, protect, or reduce risks to public health or the environment at large. While in some cases a SEP may provide an alleged defendant/respondent with certain benefits, there must be no doubt that the project primarily benefits public health and/or the environment.
• “In settlement of an enforcement action” means: (1) DTSC has the opportunity to shape the scope of the project before it is implemented; and (2) the project is not commenced until after DTSC has identified a violation(s), e.g., issued a notice of violation, administrative order, or complaint. Expenditures for a SEP may, in effect, be substituted in part for a penalty as part of a settlement.
• “Not otherwise legally required to perform” means the SEP is not required by any federal, state, or local law or regulation or previous administrative or judicial order.

In the Policy, DTSC proposes guidance on the prioritization and categorization of SEPs:

• Environmental justice is listed as a priority under the Policy. DTSC will prioritize the use of SEPs that benefit a community in which potential or actual harm from the alleged violations may have occurred. A community identified within the top 25% highest scoring census tracts of the most current version of CalEnviroScreen will receive the highest priority for SEPs.
• Categories of acceptable SEPs include those relating to Public Health, Pollution Prevention, Pollution or Hazardous Waste Reduction, Environmental Restoration and Protection, Assessment and Audits, Environmental Compliance Promotion, Enforcement Enhancement, and Emergency Planning and Preparedness. Seven of these eight categories are identical to those contained within the federal EPA Policy; the sole departure is the inclusion of the “Enforcement Enhancement” category which DTSC defines as a SEP providing for the training of enforcement and compliance staff or paying for government acquisition of surveillance equipment. Under the Policy, DTSC will also consider SEPs that do not fit into the listed categories, provided they are consistent with all other provisions of the Policy.
• Examples of unacceptable SEPs provided by DTSC include general educational or public environmental awareness projects that lack a nexus to the community or environmental impacts identified through the enforcement action, and projects which, though beneficial to a community, are unrelated to environmental protection.

Provided that a proposed SEP is approved by DTSC in conjunction with a settlement, the Policy states that DTSC will allow a reduction of up to 25% of the monetary settlement that would otherwise be paid as a penalty (exclusive of any enforcement costs recovered by DTSC). In contrast, the existing EPA Policy permits a potentially greater credit for the performance of a SEP, as long as a defendant satisfies the minimum penalty requirement (the minimum penalty under the EPA Policy must be the greater of (i) the economic benefit of noncompliance plus 10% of the gravity calculation, or (ii) 25% of the gravity calculation). To illustrate, if the initial penalty for settlement of an alleged violation is $100,000, but the settling party wished to achieve the maximum deduction available via performance of a SEP:

• Under DTSC’s Policy, an acceptable SEP could provide a credit of up $25,000. In other words, a defendant could perform a SEP valued at up to $25,000 and pay a penalty to DTSC of $75,000. Thus, the total cost to the defendant for the SEP and the penalty would be $100,000.
• Under the EPA Policy a greater SEP credit would likely be available, but the calculation is more complex and depends upon the relative economic benefit and gravity components of the assessed penalty and an evaluation of what percent of the SEP cost EPA will allow to be credited to a settling party. Assuming that the penalty consisted of a $25,000 economic benefit component and a $75,000 gravity component, the “minimum penalty” that must be paid to EPA would be $32,500. Thus, performance of a SEP could provide a credit offsetting the penalty paid to EPA in an amount up to $67,500 ($100,000 minus $32,500). Under the EPA Policy, however, EPA does not provide dollar-for-dollar credit for the cost of a SEP and instead allows a credit for a maximum of 80% of the cost of a SEP. As a result, the actual penalty paid to EPA would have to be in excess of $32,500 under this example (if, e.g., the settling party spent only $67,500 on the SEP), or the cost of the SEP would have to be in excess of $67,500 to provide the maximum available reduction in the penalty as a result of the performance of a SEP.

In the Policy, DTSC provides guidance on how SEPs must be implemented following approval of a settlement:

• SEPs may be performed in three different ways: (1) directly by the defendant; (2) by a payment made by the defendant directly to CalEPA’s 14300 Environmental Enforcement and Training Account Program or CalEPA’s Environmental Justice Small Grant Program; and/or (3) by a third party using funds provided by the defendant/respondent.  Under the third option, DTSC may approve a non-governmental organization or nonprofit to oversee the completion of the SEP provided that, among other things, administrative expenses do not exceed 10% of the cost of the SEP.
• The Policy provides that orders or judgments authorizing a SEP must require periodic reporting to DTSC, include a schedule for project implementation, contain or reference performance standards, and provide for payment of DTSC oversight costs.
• The Policy contains a number of provisions relating to project payment, tracking, reporting and oversight. The provisions require submission of a SEP completion report to DTSC declaring the completion of the SEP and addressing how the expected outcome or performance standards of the project were met.

DTSC has invited the public to submit comments on the draft Policy through April 16, 2015. To encourage public participation, DTSC will be hosting a series of public workshops on March 18, 19, and 26 at locations throughout California.

--Tom Boer and Sherry Jackman

For more information, contact Tom Boer at (415) 228-5413 or jtb@bcltlaw.com, or Sherry Jackman at (415) 228-5412 or sej@bcltlaw.com.

CEQA Alert UPDATE: Petitions for Review Filed in Greenhouse Gas and ICCTA Preemption Cases

As previously reported, two decisions by California’s Fourth Appellate District in late 2014 highlighted CEQA compliance challenges facing local governments charged with implementing state and local greenhouse gas emissions reduction mandates.

Update: Petitions for review with the California Supreme Court were subsequently filed in both cases. On March 11, 2015, the California Supreme Court granted the petition for review filed by the San Diego Association of Governments and the San Diego Association of Governments Board of Directors in Cleveland National Forest Foundation v. San Diego Association of Governments. The issue to be briefed and argued is limited to the following question: Must the environmental impact report for a regional transportation plan include an analysis of the plan's consistency with the greenhouse gas emission reduction goals reflected in Executive Order No. S-3-05 to comply with the California Environmental Quality Act (Pub. Resources Code, § 21000 et seq.)? A petition for review in Sierra Club v. County of San Diego is pending, with the time allotted for the Supreme Court to grant or deny review extended until April 3, 2015.

We also previously reported on the Surface Transportation Board’s (STB’s) December 12, 2014 decision in which it found that the Interstate Commerce Commission Termination Act categorically preempts CEQA with respect to the 114-mile passenger rail line that the Authority is constructing between Fresno and Bakersfield as part of its High-Speed Train System.

Update:  On December 29 and December 30, 2014, two petitions for reconsideration of the STB’s December 12, 2014 decision were submitted to the STB - one by a California resident and the other by a group that included Kern and King Counties, the City of Shafter, and several organizations. The STB has not yet ruled on those petitions.

On February 9, 2015, two separate petitions for review of the STB’s December 12, 2014 decision were filed in the Ninth Circuit and D.C. Circuit Courts of Appeal. The D.C. Circuit challenge was filed by the California nonprofit corporation, Dignity Health, one of the parties that filed the December 29, 2014 petition for reconsideration with the STB. The Ninth Circuit challenge was filed by a subset of the other parties to the December 29, 2014 petition for review, including Kings County, Kern County, and several nonprofit corporations. The STB filed motions to dismiss for lack of jurisdiction in both of the federal court actions in early March. The STB argued that the federal courts lack jurisdiction because the STB’s decision is not a final order as it has not yet ruled on the petitions for reconsideration filed at the administrative level.

-- Don Sobelman and Nicole Martin

For more information, contact Don Sobelman at des@bcltlaw.com or (415) 228-5445, or Nicole Martin at nmm@bcltlaw.com or (415) 228-5435.

California’s Fracking Preemption Battle Moves Forward in San Benito County

Oil company Citadel Exploration, Inc. has reportedly filed a lawsuit against San Benito County, arguing that the County’s voter-sponsored ban on various types of well stimulation—often referred to generally as hydraulic fracturing or “fracking”—is preempted by state law.

Measure J, which was approved by San Benito County voters in November of last year, purports to create a county-wide ban on hydraulic fracturing and other types of secondary and tertiary oil recovery methods. Citadel had reportedly planned to develop up to 1,000 wells in San Benito County that would have employed cyclic steaming, one of the practices subject to the ban.

This fight has been a long time coming. As grass-roots efforts to ban fracking have increased over the last few years, industry representatives have consistently maintained that (1) regulation of “down-hole” activities is explicitly under the jurisdiction of the Department of Oil, Gas, and Geothermal Resources (DOGGR), and therefore cannot be regulated at the local level; and (2) local bans on fracking are preempted by the comprehensive state regulatory scheme prescribed by SB 4, passed in 2013. To that end, Citadel’s complaint against the County reportedly contends that “regulation of down-hole operations is exclusively a State function and that the defendant lacks the power and authority to regulate down-hole operations.”

In November, Citadel filed a $1.2 billion administrative claim against the County, a prerequisite to filing a lawsuit, covered here. Previous coverage of SB 4 is available here and here.

--Kathryn Oehlschlager

UPDATE - April 7, 2015: Citadel Exploration has abandoned its legal challenge to San Benito County’s Measure J, a voter-sponsored initiative that banned several enhanced recovery methods of extracting oil and gas, including hydraulic fracturing and cyclic steaming. Citadel’s plan to develop oil wells in a remote area of San Benito County are currently undergoing environmental review, and it filed a lawsuit last month seeking $1.2 billion in damages. Its motives for abandoning the claim are not clear.

For more information, contact Kathryn Oehlschlager at klo@bcltlaw.com or (415) 228-5458.

CEQA Alert: California Supreme Court Issues Long-Awaited Guidance on the “Unusual Circumstances” Exception to CEQA’s Categorical Exemptions

In its March 2 decision in Berkeley Hillside Preservation v. City of Berkeley (SC Case No. S201116), the California Supreme Court provides critical guidance to CEQA lead agencies and practitioners regarding the proper application of the so-called “unusual circumstances” exception to CEQA’s categorical exemptions. This issue had previously generated a large number of Court of Appeal decisions over the course of several decades, resulting in a conflicting and confusing body of law. The Supreme Court’s decision finally puts the issue to rest.

The case involved a challenge to the City of Berkeley’s approval of a permit application to build a 6,478-square-foot house and 3,394-square-foot, 10-car garage. In approving the application, the City relied on two of CEQA’s categorical exemptions: (1) A “Class 3” Categorical Exemption, which includes “construction and location of limited numbers of new, small facilities or structures,” including “[o]ne single-family residence, or a second dwelling unit in a residential zone” (14 Cal. Code Regs. § 15303); and (2) “Class 32” which “consists of projects characterized as in-fill development” meeting certain requirements specified in the Guidelines (14 Cal. Code Regs. § 15332). The City also determined that the “unusual circumstances exception” in CEQA Guidelines Section 15300.2(c) did not apply. That exception provides that “[a] categorical exemption shall not be used for an activity where there is a reasonable possibility that the activity will have a significant effect on the environment due to unusual circumstances.”

The Court of Appeal for the First Appellate District disagreed and invalidated the City’s approval. In making this ruling, the Court held that the fact that a proposed activity may have a significant effect on the environment is, in and of itself, an “unusual circumstance” within the meaning of Section 15300.2(c), such that the lead agency may not rely on a categorical exemption for that activity. The Court of Appeal further determined that the standard of review applicable to the determination of whether the “unusual circumstances exception” applies is whether the record contains substantial evidence of a fair argument that the proposed project may have a significant impact on the environment.

The California Supreme Court disagreed with the Court of Appeal on both counts. The Court held that a potentially significant effect is not enough on its own to trigger the “unusual circumstances exception”:

In listing a class of projects as exempt, the Secretary has determined that the environmental changes typically associated with projects in that class are not significant effects within the meaning of CEQA, even though an argument might be made that they are potentially significant. The plain language of Guidelines section 15300.2, subdivision (c), requires that a potentially significant effect must be “due to unusual circumstances” for the exception to apply. The requirement of unusual circumstances recognizes and gives effect to the Secretary’s general finding that projects in the exempt class typically do not have significant impacts.

Furthermore, the Court held that a party challenging a lead agency’s determination that a categorical exemption applies bears the burden of producing evidence supporting the applicability of the “unusual circumstances exception.” Although the Court notes that “to establish the unusual circumstances exception, it is not enough for a challenger merely to provide substantial evidence that the project may have a significant effect on the environment,” it also concludes that “evidence that the project will have a significant effect does tend to prove that some circumstance of the project is unusual” (emphasis in original).

According to the Supreme Court, an “unusual circumstance,” within the meaning of Section 15300.2(c), may be established “without evidence of an environmental effect, by showing that the project has some feature that distinguishes it from others in the exempt class, such as its size or location. In such a case, to render the exception applicable, the party need only show a reasonable possibility of a significant effect due to that unusual circumstance.” Alternatively, an “unusual circumstance” may be established “with evidence that the project will have a significant environmental effect. That evidence, if convincing, necessarily also establishes ‘a reasonable possibility that the activity will have a significant effect on the environment due to unusual circumstances.’”

With respect to the standard of review, the Court held that Public Resources Code Section 21168.5 applies, such that reversal of the City’s permitting action is appropriate only if (a) the City, in finding the proposed project categorically exempt, did not proceed in a manner required by law, or (b) substantial evidence fails to support that finding. Specifically, the Court adopted the following bifurcated approach to the standard of review:

The determination as to whether there are “unusual circumstances” [ ] is reviewed under section 21168.5’s substantial evidence prong. However, an agency’s finding as to whether unusual circumstances give rise to “a reasonable possibility that the activity will have a significant effect on the environment” [ ] is reviewed to determine whether the agency, in applying the fair argument standard, “proceeded in [the] manner required by law.”
…
Accordingly, when there are “unusual circumstances,” it is appropriate for agencies to apply the fair argument standard in determining whether “there is a reasonable possibility of a significant effect on the environment due to unusual circumstances.” (Guidelines, §15300.2, subd. (c).)  As to this question, the reviewing court’s function “is to determine whether substantial evidence support[s] the agency’s conclusion as to whether the prescribed ‘fair argument’ could be made.”

The Court remanded to the Court of Appeal to apply the principles summarized above and provided the following additional guidance:  (1) a lead agency has the discretion to consider conditions in the vicinity or particular neighborhood of the proposed project when evaluating whether environmental effects are “unusual or typical”; and (2) a finding of environmental impacts must be based on the proposed project as actually approved and not based on unapproved activities that opponents assert will be necessary because the project, as proposed, cannot be built.

Justice Chin wrote the majority opinion, in which Justices Cantil-Sakauye, Corrigan, Baxter (retired, sitting by assignment), and Boren (sitting by assignment) concurred. Justice Liu penned a concurring opinion, joined by Justice Werdegar, that essentially rejected the majority’s view regarding the proper application of the “unusual circumstances exception.”

-- Don Sobelman and Nicole Martin

For more information, contact Don Sobelman at des@bcltlaw.com or (415) 228-5456, or Nicole Martin at nmm@bcltlaw.com, or (415) 228-5435.