Mitigation Banks’ Uncertain Future

April 26, 2016


Developments across the country in recent years put into question the financial viability of establishing mitigation banks that provide compensatory mitigation for unavoidable impacts to waters of the United States that are permitted under Section 404 of the Federal Clean Water Act. (33 U.S.C. §1252, et seq.)(the “CWA”).

Anyone reading this article knows that the CWA requires offsetting mitigation for authorized impacts to waters of the United States, which includes wetlands and certain streams. And mitigation bank sponsors understand that federal regulations found in Title 33 of the Code of Federal Regulations, Part 332, also known as the “Final Rule”, specifies that mitigation banks are highest ranked, most favored, form of mitigation. Which makes one wonder why the United Sates Corps of Engineers (“Corps”) regularly acts to undermine existing mitigations banks and breach the terms of mitigation bank instruments (“MBI’s”) issued to mitigation banks?

Unfortunately, the Corp’s lack of concern about the significant costs and efforts expended by bank sponsors is demonstrated across the country. The Corps’ position is that MBI’s are merely regulatory tools for the Corps’ benefit as it issues CWA §404 permits. The Corps appears to give little thought to the bank sponsors’ legitimate, contractual expectations.

 Virginia

The sponsor of Davis Wetlands Bank began work in Chesapeake, Virginia in 1998, restoring 139.5 acres of croplands back to their natural wetland condition, blocking the outfalls and planting over thirty-two thousand (32,000) bare root tree seedlings.  In the process, after perpetually protecting the property with a conservation easement, considerable costs and efforts were expended. The sponsor’s efforts were extremely successful, receiving praise and acknowledgement from the Corps’ Norfolk District.

Unfortunately, the Corps’ appreciation of a job well done did not translate into respect for the sponsor’s financial investment and economic expectations. The bank’s MBI stated that its credit composition would be reevaluated and adjusted to reflect maturation of the tree seedlings; allowing for the award of additional, more valuable palustrine bank credits as the trees matured. However, when the sponsor asked the Corps to modify its MBI to reflect the creation of 139 acres of palustrine wetlands the Corps refused. The Corps denied it had any obligation to comply with any of the provisions of the MBI. Although the Corps freely admitted that former agricultural fields had matured into successful 12-14 year old forested wetland areas, the Corps took the position, contrary to the clear language in the MBI, that it had no obligation to award the credits. .

Alaska

In 2011, personnel from the Corp’s Alaska District convinced the owner of two readily developable tracts of land, containing non-jurisdictional, isolated wetlands, to encumber his property with conservation easements and establish a preservation mitigation bank. The land owner was assured that the Corps would require a substantial railroad project to buy all of its mitigation from his mitigation bank.  The land owner agreed, preserved his property rather than develop it, and signed an MBI with the Corps that awarded 178.82 palustrine wetland credits to the Pioneer Reserve Mitigation bank that it could then sell as mitigation.

However, on the eve of issuance of the railroad’s CWA §404 permit the Corps decided to change its mind. The Corps unilaterally eliminated virtually all of Pioneer’s palustrine credits, claiming there had been a non-existent mapping error when the MBI was finalized. The railroad ended up buying its mitigation from an out-of-service area bank and an in-lieu fee program. The Corps subsequently admitted that it caused Pioneer to lose the opportunity to sell $12 million dollars of mitigation credits to the railroad, but refused to make amends.

After Pioneer’s sponsor exhausted all efforts to work something out with the Corps, he filed a lawsuit against the Corps, claiming breach of contract, in the United States Court of Federal Claims. (“Claims Court”) He had been promised that the litigation would not affect the ongoing working relationship. Unfortunately, this promise was soon forgotten. As retaliation for the litigation, Pioneer has been effectively “black-balled”. When a sizable Alaska road project came along in 2015, permanently destroying 8¼ acres of palustrine wetlands located in Pioneer’s primary service area, the Corps’ Alaska District decided no mitigation whatsoever would be required rather than create the opportunity for Pioneer to sell some of its credits.

Texas

A stream mitigation bank was formed in Texas in 2012. The sponsors of this stream mitigation bank expended significant finds and performed the agreed-upon restoration and enhancement work. They were awarded several thousand stream mitigation credits consisting of  a combination of Perennial, Intermittent, and Ephemeral Riparian Stream credits. When the bank’s MBI was signed, the Corps agreed that when time came for it to evaluate the issuance of CWA §404 permits for projects that would impact streams, it would categorize the impacts, and require offsetting mitigation, using existing Corps’ protocol.  The Corps’ protocol in place in 2012 required offsetting mitigation in the form of either Perennial, Intermittent, or Ephemeral Riparian Stream Credits as mitigation–the types of stream credits awarded to the bank.

However, in 2013 the Corps changed the rules and created two new categories of stream credits; “In-Channel Credits” and “Stream Credits”, and started requiring prospective CWA §404 permittees to satisfy at least 50% of their mitigation with these newly created stream credit types. The result was financially devastating to existing Texas stream mitigation banks whose credits had suddenly become worthless.

MBI’s are Contracts

The Corp’s actions in Virginia resulted in filing the lawsuit titled Davis Wetlands Bank, LLC v. United States, 114 Fed. Cl. 113 (2013) which was filed in the Claims Court.  In Alaska, the bank sponsor filed Pioneer Reserve, LLC v. United States, 119 Fed. Cl. 201 (2014) in the Claims Court.  For the first time in the history of mitigation banking, the Judge in the Davis Wetlands case ruled that its MBI with the Corps was a binding contract and that the Corps would be answerable for its breach.

In 2014, the Claims Court followed-up in the Pioneer Reserve case and reiterated that MBI’s which reflect an intention to bind the parties to specified obligations, are contracts that are enforceable against the Corps.

 The Corps’ July 9, 2014 Mandate

In response to the Claims Court’s decisions in the Davis Wetlands and Pioneer Reserve cases, on July 9, 2014, the Corps announced a new policy.  The Corps’ national headquarters directed that beginning effective immediately, any new MBI’s and any amendments to MBI’s, must contain language that disavow contract status and disclaim any right to monetary damages in the event of a breach by the Corps.  Going forward the Corps clearly believes land owners will make financial commitments and subject their lands to perpetual conservation easements even though the Corps wants to retain the right to change any and all of the terms of the agreement as set forth in the MBI at its discretion, regardless of the financial consequences to the bank sponsor.

Conclusion

Properly drafted mitigation banking instruments are contracts that are binding on the Corps.  They establish valuable, enforceable rights in favor of the sponsors. Bank sponsors have made significant financial investments in order to create their mitigation banks and have the legal right to require the Corps to honor their contractual commitments.

Be aware of your contractual rights, and do not agree to abandon these rights without understanding the consequences. While the Corp’s post July 9, 2014 position with respect to newly formed MBI’s  will clearly discourage the formation of new mitigation banks, those of you with existing banks are able to assert and protect your financial investments.

Douglas E. Kahle, Esq. represented the bank sponsors in the Davis Wetlands and Pioneer Reserve court cases. Mr. Kahle’s legal representation of these two mitigation bank sponsors follows more than 20 years of protecting landowners’ rights in litigation against the Corps.