Mitigation Bank Sponsors Beware

January 17, 2018

By: Douglas E. Kahle

The U. S. Army Corps of Engineers (the “Corps”) is proposing to require sponsors of newly established mitigation banks to sign documents that will likely discourage anyone from assuming the substantial financial obligations involved with the creation and maintenance of a mitigation bank. The Corps is requiring all newly established mitigation bank sponsors to sign documents, referred to by the Corps as their proposed (required) “MBI template”, that take away all of the bank sponsors’ legal rights and expectations.

If you read this far then you already know that mitigation banks are the highest ranked source for compensatory mitigation available to offset permitted impacts to Waters of the United States (“WOTUS”) according to federal regulations found in 33 C.F.R. Part 332. (the “Final Rule”--see 33 C.F.R. §332.3(a)(3)(b). The Final Rule explains that since mitigation bank credits cannot be used until the mitigation bank satisfies established criteria, the risk that a bank’s efforts will not be ecologically successful is reduced. The Final Rule also acknowledges at length that the development of a mitigation bank requires the commitment of “significant” financial resources on the part of the bank sponsor.

As the Final Rule notes, mitigation banks are expensive. With few exceptions it begins with a parcel of land that consists of uplands that have varying amounts of commercial value generally depending on its location. At a minimum the property designated as the bank site is generally farmland that is leased if not farmed by the owner. The proposed bank sponsor then commits to physically alter the property in such a manner as to raise the water table, introduce and enhance the growth of wetland vegetation, ultimately creating wetlands.  The sponsor is then required to provide acceptable financial assurances that its efforts will continue to be successful.  In order to ensure the environmental success of the bank the property must be monitored for years to come. Of course, a perpetual conservation easement must be recorded preventing any commercial use, or any other use of the property other than as a mitigation bank. The proposed sponsor then needs to factor in the legal, accounting, engineering, surveying, and environmental consulting costs involved. Hundreds of thousands of dollars, if not more, can be invested in the successful establishment and regulatory approval of a mitigation bank.

According to the Corps the end result of a new mitigation bank sponsor’s substantial expenditures and efforts is the potential approval of the sponsor’s mitigation bank, which “constitutes the regulatory approval required for the subject Bank to be used to provide compensatory mitigation”.  So what assurances does the sponsor receive that the credits generated by his mitigation bank will ever actually be used as compensatory mitigation? Said differently, after incurring significant financial obligations to establish the mitigation bank, what assurance does the sponsor have that the Corps will accept the bank’s credits, much less require credits, as compensatory mitigation for any permitted project, even if the project’s impacts to be compensated are located in the bank’s primary service area? None.

The Corps’ proposed documentation is replete with obligations that the new mitigation bank sponsor “shall” or “must” perform extending years into the future.  By contrast, the documents do not impose any obligation whatsoever on the Corps. One would at least expect the documents to state that the Corps agrees to comply with the compensatory mitigation hierarchy found at 33 C.F.R. §332.3(a)(3)(b) by prioritizing mitigation bank credits as the preferred compensatory mitigation over other forms of compensatory mitigation for a permitted project in the bank’s service area. Not there. For that matter the Corps does not agree to comply with any part of the Final Rule.

The Corps also does not agree to recommend or accept a mitigation bank’s credits as compensation to offset impacts in its primary service area instead of credits from another mitigation bank whose service area does not encompass the impacts. The Corps’ proposed documents do not even obligate the Corps to require any compensatory mitigation for the destruction of wetlands in a mitigation bank’s service area—an action that requires mitigation according to the Final Rule. Lastly, there is nothing in the Corps’ proposed documents preventing the Corps from subsequently, unilaterally changing the terms of an approved mitigation bank’s instrument.   

The proposed documents specify they are “not a contract”, meaning that the Corps owes no legal obligation to the Sponsor, and no obligation to do, or refrain from doing, whatever it chooses to do with the newly formed mitigation bank and its compensatory mitigation credits. If for example, the Corps decides to eliminate a bank’s credits after the credits have been earned and awarded, the bank sponsor has no remedy.

The Corps’ proposed document goes further. In the event a court determines that the document actually is a contract, the Corps requires the bank sponsor to waive any right to claim monetary damages as a result of the Corps’ breach of the contract.

The Corps’ requirement that newly established mitigation bank sponsors agree that their mitigation bank documents do not constitute contracts with the Corps is a response to the earlier decision rendered by the United States Court of Federal Claims’ to the contrary. In the matter of Davis Wetlands Bank, LLC v. The United States, the Court specifically found that the mitigation banking instrument was a contract that was legally binding on the Corps. With the implementation of its proposed documentation, the Corps will be able to act with impunity, without concern for any contractual obligations on its part, as it deals with newly formed mitigation banks.

The take away is that no informed individuals are likely to undertake to establish a new mitigation bank. Existing mitigation banks, unaffected by the Corps’ newly required documentation, will eventually sell their remaining bank credits leaving only in-lieu fee (“ILF”) programs and permittee-responsible mitigation projects as the available forms of compensatory mitigation. Of these two forms of compensatory mitigation to offset permitted destruction of WOTUS, the ILF programs, despite their shortcomings, are prioritized over permittee-responsible projects. The historical frequent lack of success with permittee-responsible mitigation projects achieving their desired goal is often cited as the reason this source of mitigation is ranked as the lowest priority.

ILF programs are administered by tax-exempt organizations and usually involve the sale of “advance credits” to a CWA Section 404 permit applicant. The purchase of these credits satisfies the permit applicant’s mitigation requirements and shifts the burden of providing compensatory mitigation to the tax exempt organization.  The tax exempt organization does not actually provide any actual compensatory mitigation as it takes the permit applicant’s money. Instead the tax-exempt organization merely assumes responsibility for providing the compensatory mitigation, promising that it will secure the requisite mitigation within three growing seasons, by acquiring suitable land and performing physical and biological improvements to it in order to create actual compensatory mitigation.

The problem with the tax exempt organizations’ “promises” is best illustrated by the status of The Conservation Fund (“TCF”) in Alaska.  Since 1998, TCF has been selling ILF advance credits in Alaska, collecting over $15,000,000 from Clean water Act Section 404 permit applicants in the process, obligating itself to provide actual compensatory to offset the destruction of Alaska’s wetlands within three years of taking the applicants’ money. TCF’s ILF program was subsequently administered pursuant to a 2013 agreement with the Corps. (“TCF’s 2013 Agreement”).

In February, 2017, the Corps’ Alaska District notified TCF that it was in default of its obligation to timely provide compensatory mitigation in Alaska’s Southcentral service Area. The Corps also warned TCF about upcoming performance deadlines with respect to TCF’s promise to provide compensatory  mitigation for the permitted destruction of approximately two thousand (2,000) acres of Alaskan wetlands. The Corps noted that it had been in discussions with TCF regarding its need to comply with the Final Rule on multiple occasions over the previous two years.

In October 2017, the Corps took action against TCF for its “failure to fulfill the compensatory mitigation obligations assumed in accordance with federal time requirements”. The Corps terminated TCF’s ability to sell ILF advance credits in Alaska.

If other tax-exempt organizations follow TCF’s unprecedented reneging on  its obligation to provide compensatory mitigation with the funds they take from permit applicants, then permittee-responsible mitigation  projects could end up as the primary (only?) form of compensatory mitigation available. Possibly those previously inclined to establish mitigation banks will redirect their resources and efforts to assist Section 404 permit applicants implement successful permittee-responsible mitigation projects. However, permittee-responsible mitigation projects are fraught with their own perils in light of the ongoing legal exposure and risks related to the permittees’ obligation to monitor and maintain the project to ensure that the project continues to satisfy established ecological criteria or years. 

Meanwhile, sponsors of existing mitigation banks with bank credits available for sale should be able to do well given the Corps’ apparent intention to discourage the formation of new, competing wetland mitigation banks.