Takings Law: Issues of Interest to Mineral Property Owners

Chapter 10 Cite as 21 Energy & Min. L. Inst. ch. 10 (2001) Takings Law: Issues of Interest to Mineral Property Owners Judith A. Villines Michele M. Whittington Stites & Harbison Frankfort, Kentucky Synopsis 10.01. Introduction... 373 10.02. General Takings Principles... 374 [1] Development of Physical Takings Law... 375 [2] Early Development of Regulatory Takings Law... 376 [3] Development of Confiscatory Regulatory Takings... 378 [4] Recognition of Per Se or Categorical Takings... 379 10.03. Analytical Framework... 380 [1] Determination of Property Rights... 380 [2] Determination of Taking... 382 [3] Determination of Just Compensation... 383 [4] Interest on Awards of Just Compensation... 386 10.04. Application of Takings Jurisprudence to Mineral Interests... 387 [1] Statutory Prohibitions or Limitations on Mining... 387 [2] Permitting Actions... 391 10.05. Future Takings Cases?... 394 [1] Antiquities Act... 394 [2] Section 522 Designations of Lands Unsuitable for Mining... 395 10.06. Conclusion... 397 10.01. Introduction. The Fifth Amendment Takings Clause, while simple in its statement, has given rise to a complicated array of cases with varying rules that often appear inconsistent at best. This principle is particularly true in mineral cases. The most obvious examples of seemingly inconsistent mineral takings cases are the United States Supreme Court cases of Pennsylvania Coal Co. v. Mahon 1 and Keystone Bituminous Coal Ass n v. 1 Pennsylvania Coal Co. v. Mahon, 260 U.S. 393 (1922).

10.02 ENERGY & MINERAL LAW INSTITUTE DeBenedictis. 2 Although both cases considered the effect of statutes 3 that regulated mining in circumstances that might cause subsidence, in one case (Mahon) the Court found a taking, and in the other (Keystone) it did not. In this instance, as well as other seemingly inconsistent takings cases, the Court has found a basis for distinguishing the cases and applying separate rules despite the seeming similarity of the facts. 4 Consequently, as one Justice noted, even the wisest lawyer has difficulty in discerning the principles of takings law that will be applied by the courts. This chapter attempts to provide an outline of the general principles of current takings law and a framework for analyzing a takings issue in the context of a mineral case. It also identifies the most recent cases that may have an effect on the analysis that will be used by courts in a mineral takings case. 10.02. General Takings Principles. The body of law that has come to be known as takings law derives from the clause of the Fifth Amendment to the United States Constitution which provides in pertinent part :... nor shall private property be taken for public use, without just compensation. 5 This clause is commonly called the Takings Clause although some Justices and courts continue to refer to it as the Just Compensation Clause. 6 The United States Supreme Court has embraced a general fairness and justice standard for the operation of the Clause, declaring that the Clause operates to bar 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. 7 2 Keystone Bituminous Coal Ass n v. DeBenedictis, 480 U.S. 470 (1987). 3 The Kohler Act was at issue in Mahon and the Subsidence Act was at issue in Keystone. 4 Justice Stevens explains in his dissent in Lucas v. South Carolina Coastal Council, 505 U.S. 1003 at 1072-1073 (1992) that [u]nlike the Kohler Act, which simply transferred back to the surface owners certain rights that they had earlier sold to the coal companies, the Subsidence Act affected all surface owners including the coal companies equally. 5 U.S. Const. amend. V. 6 Lucas, 505 U.S. at 1071 (Stevens, J. dissenting). 7 Armstrong v. United States, 364 U.S. 40, 49 (1960). 374

TAKINGS LAW 10.02 While this may be a simple and accurate statement of the overarching purpose of the Clause, it gives no practical guidance as to how fairness and justice is to be determined. That guidance comes only from a review and distillation of the numerous cases the Court has decided pursuant to the Takings Clause and from consideration of the plain language of the Clause. [1] Development of Physical Takings Law. In the early cases decided pursuant to the Takings Clause, the facts usually involved a direct action by the government that either effected a transfer of possession of private property from a private party to the government 8 or effected a dispossession of the owner of the private property. 9 Indeed, the Supreme Court has observed in recent cases that prior to the Court s decision in Pennsylvania Coal Co. v. Mahon, it was generally thought that the Takings Clause reached only a direct appropriation of property, [citations omitted], or a practical ouster of [the owner s] possession. [citation omitted]. 10 Because the government normally effects a transfer of ownership or a practical ouster of possession through its eminent domain powers, 11 the Takings Clause can be considered a defense to a government confiscation when the government should have used its eminent domain powers but did not. In other words, if the government has taken actions for which it would have paid compensation had it properly exercised its eminent domain powers, the Takings Clause requires that just compensation be paid in spite of the government s failure to follow its eminent domain procedures. Because these cases often involved a physical invasion of the property by the 8 Legal Tender Cases, 12 Wall. 457, 551, 20 L. Ed. 287 (1871) cited in Lucas, 505 U.S. at 1014. 9 Pumpelly v. Green Bay Co., 13 Wall. 166 (1872), cited in Transportation Co. v. Chicago, 99 U.S. 635 (1897). 10 Lucas, 505 U.S. at 1014. 11 In First Evangelical Lutheran Church of Glendale v. County of Los Angeles, California, 482 U.S. 304, 316 (1987) the Court observed that a typical taking occurs when the government acts to condemn property in the exercise of its power of eminent domain. 375

10.02 ENERGY & MINERAL LAW INSTITUTE government, as in the case of land covered by water after construction of a dam by the government, these kinds of takings are called physical takings. 12 [2] Early Development of Regulatory Takings Law. While the courts in the late 1800s and early 1900s recognized that the Takings Clause applied in cases where the government should have exercised its power of eminent domain, they were more reluctant to apply it when a state government affected property rights through the exercise of its police powers, 13 i.e., those inherent powers in the state relating to the safety, health, morals and general welfare of the public. 14 However, in the 1922 case of Pennsylvania Coal Co. v. Mahon, 15 when presented with a regulation prohibiting the underground mining of coal in certain circumstances in order to protect surface interests, the United States Supreme Court recognized that there are instances when a regulation interferes with property rights to such an extent that it goes too far and violates the takings clause. Such violations are commonly referred to as regulatory takings. For several years thereafter, the Court did little to elaborate on how courts should determine when the government had gone too far in the exercise of its police powers. However, it reiterated its belief that the 12 See FCC v. Florida Power Corp., 480 U.S. 245, 252 (1987)(holding that the government effects a physical taking when it requires a landowner to submit to the physical occupation of his land. ). 13 The United States Supreme Court has explained the concept of police powers as follows: There are... certain powers existing in the sovereignty of each State of the Union, somewhat vaguely termed police powers, the exact description and limitation of which have not been attempted by the courts. Those powers, broadly stated and without, at present, any attempt at a more specific limitation, relate to the safety, health, morals and general welfare of the public. Lochner v. New York, 198 U.S. 45, 53 (1905). 14 The United States Supreme Court rejected attempts to use the Takings Clause in Mugler v. Kansas, 123 U.S. 623 (1887) and Reinman v. Little Rock, 171 (1915) where the government had taken regulatory actions pursuant to their police powers. 15 Pennsylvania Coal, 260 U.S. 393 (1922). 376

TAKINGS LAW 10.02 Takings Clause operates as much as an equitable principle as it does as a property law principle. In United States v. Fuller, 16 the Court declared: The constitutional requirement of just compensation derives as much content from the basic equitable principles of fairness... as it does from technical concepts of property law. 17 In 1978 in Penn Central Transportation Co. v. City of New York, 18 the Court finally expounded upon the regulatory taking concept, explaining that in order to determine whether a government has gone too far a court should consider the following three factors: (1) the economic impact of the regulation on the claimant, (2) the extent to which the regulation has interfered with distinct investment-backed expectations, and (3) the character of the government action. 19 The Court emphasized that these factors should be considered in an ad hoc inquiry in each case and did not establish a set formula for determining a regulatory taking. In subsequent cases the Court has demonstrated that the factors do not establish a set formula or balancing test by focusing on one factor over the others. In particular, the court has often focused on the character of the government action factor of the Penn Central test. Thus, in Agins v. City of Tiburon, 20 the Court stated that a taking would occur if a regulation does not substantially advance legitimate state interests. In Nollan v. California Coastal Comm n, 21 the Court further explained that there must be an essential nexus between the state interest advanced by the government regulatory action and the adverse effect on the private property interest. If there is no relationship between the private property taken and the state interest advanced, there will be a taking. Similarly, in Dolan v. City of Tigard, 22 the Court considered the government action in the context of exactions, i.e. requiring dedication of private property for public use in 16 United States v. Fuller, 409 U.S. 488 (1973). 17 Id. at 490. 18 Penn Central Transportation Co. v. City of New York, 483 U.S. 104 (1978). 19 Id. at 124. 20 Agins v. City of Tiburon, 447 U.S. 255 (1980). 21 Nollan v. California Coastal Comm n, 483 U.S. 825 (1987). 22 Dolan v. City of Tigard, 512 U.S. 374 (1994). 377

10.02 ENERGY & MINERAL LAW INSTITUTE exchange for being allowed to develop other property. The Court held in Dolan that in addition to an essential nexus there must be rough proportionality between the exaction required by the government action and the projected impact of the development. 23 [3] Development of Confiscatory Regulatory Takings. In 1992 in Lucas v. South Carolina Coastal Council, 24 the U.S. Supreme Court announced yet another rule: when a regulation deprives a property owner of all economically viable use of his property, there is a taking even though the regulation serves a very important government interest. Thus, the Lucas Court in essence declared that the economic impact factor will trump the character of the government action factor when the government action has a particularly onerous economic impact on the owner of the property. The Court likened such action to a physical occupation of the property, declaring: Where permanent physical occupation of land is concerned we have refused to allow the government to decree it anew (without compensation) no matter how weighty the asserted public interest involved, [citation omitted] though we assuredly would permit the government to assert a permanent easement that was a preexisting limitation upon the landowner s title.... We believe similar treatment must be accorded confiscatory regulations.... Any limitation so severe cannot be newly legislated or decreed (without compensation), but must inhere in the title itself, in the restrictions that background principles of the State s law of property and nuisance already place upon land ownership. 25 23 In City of Monterey v. Del Monte Dunes, 562 U.S. 687 (1999), the Court limited the rough proportionality test to exaction cases. 24 Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992). 25 Id. at 1028-1029. 378

TAKINGS LAW 10.02 [4] Recognition of Per Se or Categorical Takings. In Lucas the U.S. Supreme Court recognized that there are situations in which the effect of a regulation on the property owner is so complete that the Court need not consider the character of the government interest. When such a situation exists, the courts have characterized the taking as a per se or categorical taking. There are at least two distinct kinds of categorical takings: physical takings (as in Pumpelly) and confiscatory regulatory takings (as in Lucas). For both categories, the Court has recognized that the public interest can never be so great that the property owner can be denied compensation for a categorical taking of property. Thus, the Court has explained in Loretto v. Teleprompter Manhattan CATV Corp. 26 that a regulation that effects a permanent, physical occupation of private property is a per se or categorical taking that is compensable without regard to whether the action achieves an important public benefit or has only minimal economic impact on the owner. 27 This was true in Loretto even though the physical occupation property, placement of a cable box on private property, was arguably a minimal intrusion. There is a third category of per se or categorical takings that is less well recognized. Chief Judge Loren Smith of the Federal Court of Claims characterized these takings as legal takings in Store Safe Redlands Associates v. United States. 28 Such takings occur when an action of the government has totally eliminated a fundamental property right of the property owner. For example in Hodel v. Irving, 29 the Supreme Court held that termination of the right to pass property to one s heirs effects a taking of a property right. Judge Smith has explained that a legal taking shares many commonalities with the so-called physical taking, and that it is probably not important whether this court categorizes legal takings as a subset of the physical taking category or as a separate category. 30 Likewise, such takings share many commonalities with so-called 26 Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982). 27 Id. at 434-35. 28 Store Safe Redlands Assoc. v. United States, 35 Fed. Cl. 726 (1996). 29 Hodel v. Irving, 481 U.S. 704 (1987). 30 35 Fed. Cl. at 730. 379

10.03 ENERGY & MINERAL LAW INSTITUTE confiscatory regulatory takings. In each instance the impact on a right of the property owner is complete. Importantly, once it is determined that an alleged taking would be a per se or categorical taking, the court need not consider the three factors of the Penn Central test. As Judge Smith explained in Store Safe Redlands, in a legal taking context, the plaintiff and the government do not dispute the government s regulatory scheme, but rather they dispute the ownership of the property right. 31 Thus, in a legal taking the plaintiff must first establish ownership of its property rights under state law. 32 Once ownership is established, the next issue is whether government action has actually taken those rights. 33 If the plaintiff establishes ownership of the fundamental property right and further establishes a government action that completely deprives the plaintiff of that right, there has been a categorical or legal taking. 10.03. Analytical Framework. The starting point of any takings analysis must necessarily be the plain words of the clause itself. The United States Supreme Court has recognized that the three critical terms for an analysis of a takings claim are property, taken, and just compensation. 34 Before determining whether there has been a taking and, if so, what compensation is due, a court must determine what property is at issue. [1] Determination of Property Rights. The term property is a term that has both technical and non-technical meanings in a legal sense. When the term is used in a non-legal sense, it often applies to the tangible thing which people can see or touch. From a legal perspective, though, the term property includes rights that are associated with the tangible thing. The United States Supreme Court has 31 Id. at 729. 32 Id. at 730. 33 Id. 34 United States v. General Motors Corp., 323 U.S. 373, 377 (1945). 380

TAKINGS LAW 10.03 given explicit guidance as to how the term must be construed in a takings case, stating: The term property as used in the Takings Clause includes the entire group of rights inhering in the citizen s [ownership]. It is not used in the vulgar and untechnical sense of the physical thing with respect to which the citizen exercises rights recognized by law. [Instead, it] denote[s] the group of rights inhering in the citizen s relation to the physical thing, as the right to possess, use and dispose of it. 35 The Supreme Court has concluded that the constitutional provision is addressed to every sort of interest the citizen may possess. 36 The Court has further observed that takings jurisprudence has traditionally been guided by the understandings of our citizens regarding the bundle of rights that they acquire when they obtain title to property. 37 In keeping with this principle, The Dictionary of Real Estate Appraisal defines real property thus: All interests, benefits, and rights inherent in the ownership of physical real estate; the bundle of rights with which the ownership of the real estate is endowed. 38 Real property rights include the right to use the real estate; the right to sell the real estate; the right to lease the real estate; the right to control access to the real estate; the right to give the real estate away; and the right to choose to exercise all of or none of those rights. 39 The Federal Court of Claims has identified two threshold questions relating to property as the term is used in the Fifth Amendment: [D]o plaintiffs possess a property interest and, if so, what is the proper scope 35 Pruneyard Shopping Center v. Robins, 447 U.S. 74, 82 n. 6 (1980), quoting United States v. General Motors Corp., 323 U.S. 373, 377-378 (1945). 36 General Motors Corp., 323 U.S. at 378. 37 Lucas, 505 U.S. at 1027. 38 Appraisal Institute, The Dictionary of Real Estate Appraisal 294 (3d ed. 1993). 39 Robert F. Reilly & Robert P. Schweichs, Valuing Tangible Assets (1999). 381

10.03 ENERGY & MINERAL LAW INSTITUTE of that interest? 40 Property rights are generally created by state law, 41 therefore the scope of the property interest must be determined in light of state law as it existed at the time the property right was acquired. It was this principle that the court in Lucas undoubtedly had in mind when it considered restrictions inhering in background principles of State property law in determining whether a regulation effected a taking. [2] Determination of Taking. Once the property interest affected has been identified, a court must determine whether the taking is a categorical taking or a Penn Central regulatory taking. If the government action at issue has categorically deprived the property owner of a property interest in any sense, be it deprivation of a distinct property right, physical occupation or destruction of the property, or complete deprivation of all economically beneficial use, the taking can be classified as a per se or categorical taking and the three-factor Penn Central test need not be considered. Therefore, it is to a plaintiff s advantage to characterize the alleged taking as a categorical taking so that the government cannot argue that the Penn Central factors apply. Thus, for example, the Government could not argue that the regulation has not interfered with an investment-backed expectation of the plaintiff s or that the government s need for the regulation is so important to the public interest that it totally outweighs any diminution in value suffered by the plaintiff. Such arguments are necessarily fact-specific and largely subjective. By contrast, the categorical taking is often purely a question of law, as in the case of a legal taking, or at least much less subjective, as in the case of a physical taking. Thus, it is critical to a plaintiff s case that the plaintiff not allow the government to mischaracterize a categorical taking as a regulatory taking. 40 Hage v. United States, 42 Fed. Cl. 249, 250 (1988), citing Store Safe Redlands Assoc. v. United States, 35 Fed. Cl. 726, 734 (1996). 41 Ruckleshaus v. Monsanto Co., 467 U.S. 986, 1001 (1984) quoting Webb s Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155 (1980)( Property interests are created and their dimensions are defined by existing rules or understandings that stem from an independent source such as state law. ). 382

TAKINGS LAW 10.03 If that occurs, the government will focus the court s attention on the government s need for the regulation as balanced against the economic impact on the plaintiff or the plaintiff s investment-backed expectations, when the proper focus should be on the categorical nature of the state s action on the property rights of the plaintiff. Similarly, the government must take care to ensure that a plaintiff does not characterize a true regulatory taking as a categorical taking. In the context of a mining rights case, therefore, in determining whether there has been a categorical taking, the court should first ask, What are mining rights? A recognized definition of mining rights is Upon a specific piece of ground, a right to enter upon and occupy the ground for the purpose of working it, either by underground excavations or open workings, to obtain from it the mineral ores that may be deposited therein. 42 An essential component of mining rights, therefore, is the right commonly referred to as the right of entry. Indeed, this is a fundamental right that is inherent in the property interest known as mining rights. Thus, any government regulation that completely eliminates this fundamental property interest effects a categorical taking for which the property owner must receive just compensation. [3] Determination of Just Compensation. Significantly, the Takings Clause does not prohibit the taking of property; rather it prohibits the government from exercising its legitimate right to take property for public use without paying the property owner for the property taken. The United States Supreme Court has explained that the just compensation requirement was designed to bar 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. 43 The Supreme Court has correctly recognized that the question of just compensation is of critical importance because [i]n any society the fullness and sufficiency of the securities which surround the individual in 42 A.H. Ricketts, American Mining Law with Forms and Precedents (4th ed. 1943). 43 Armstrong v. United States, 364 U.S. 40, 49 (1960). 383

10.03 ENERGY & MINERAL LAW INSTITUTE the use and enjoyment of his property constitute one of the most certain tests of the character and value of the government. 44 The Court has also given guidance on determining what is just compensation. In Monongahela Navigation Co. v. United States, the Court declared that a full and exact equivalent for the taken property must be returned to the owner. 45 The just compensation question has been framed by the Supreme Court in Boston Chamber of Commerce v. City of Boston as What has the owner lost? Not, what has the taker gained? 46 The Court has further recognized in United States v. Miller that just compensation means the full and perfect equivalent in money of the property taken. 47 This equivalent has been defined in terms of market value. In Miller the court declared: The owner is to be put in as good position pecuniarily as he would have occupied if his property had not been taken. It is conceivable that an owner s indemnity should be measured in various ways depending upon the circumstances of each case and that no general formula should be used for the purpose. In an effort, however, to find some practical standard, the courts early adopted, and have retained, the concept of market value. The owner has been said to be entitled to the value, the market value, and the fair market value of what is taken. (Emphasis added.) 48 Thus, in determining just compensation, the courts attempt to ascertain the fair market value of the private property interest that has been taken for public use. In a mining case, the first step in determining fair market value is to determine the amount of mineral present through a reserve study. This study is generally performed by mining engineers who use known mineral 44 Monongahela Navigation Co. v. United States, 148 U.S. 312 (1893). 45 Id. at 324. 46 Boston Chamber of Commerce v. City of Boston, 217 U.S. 189, 195 (1910). 47 United States v. Miller, 317 U.S. 369, 373 (1942). 48 Id. at 373-374. 384

TAKINGS LAW 10.03 seam measurements to map the mineral seams by plotting isopachs (lines representing seam thicknesses) on topographic maps. For coal reserve studies the United States Geological Survey (USGS) methodology for classifying coal reserves is often, though not always, employed. The three USGS reserve classification categories ( measured, indicated, and inferred ), representing varying levels of probability that the mapped coal is actually present, is used to estimate in-place tonnage from which recoverable tonnage is calculated. Once the reserve study is completed, the fair market value of the mineral can be determined by a mineral appraiser using one of two generally accepted methods. The most frequently used method is the comparable sales approach. 49 Comparable sales have been defined as sales to a willing buyer of similar property in the vicinity at or about the same time [as the taking]. 50 The comparability of certain sales to the property taken is determined by three factors: (1) characteristics of the properties; (2) the proximity of the time of the sales; and (3) the properties geographic proximity to one another. 51 Comparability of properties is a factual issue to be determined by the trial court. 52 The second recognized method for determining fair market value in a takings case is the royalty income stream valuation method, also known as the capitalization of income method. [The third generally recognized method for valuing property in general, the replacement cost method, is not used in mineral cases because mineral reserves are depletable resources that cannot be reproduced.] Because of the difficulty in finding precisely comparable mineral properties for an appraisal, the capitalization of income approach is used more and more often, and in some circumstances, is the preferred approach. 53 49 Whitney Benefits v. United States, 18 Cl. Ct. 394, 408 (1989). 50 U.S. v. 320.0 Acres of Land, 605 F.2d 762, 798 (5th Cir. 1979)(citation omitted). 51 Id. 52 See United States v. 819.98 Acres, 78 F.3d 1468 (9th Cir. 1996). 53 See Foster v. United States, 2 Cl. Ct. 426, 448 (1983)( The capitalization of income approach has become acceptable in recognition of situations where income producing potential is a key element for both buyer and seller in many negotiations in arriving at a fair price. ). 385

10.03 ENERGY & MINERAL LAW INSTITUTE The capitalization of income appraisal methodology has three steps beyond the reserve estimate. First, an evaluation of planned and/or reasonably projected production from the properties is performed by a mining engineer. Second, the appraiser determines the royalty cash flow likely result from the property s development using coal leasing practices in effect as of the date of the valuation. Third, an appropriate discount rate, based on the appraiser s assessment of risks associated with the property, is used to determine the present value of the cash flow. [4] Interest on Awards of Just Compensation. In the vast majority of cases, a great deal of time passes between the date of a taking and the final decision awarding compensation. During this period, the owner of the affected property is deprived of its property and consequently, is deprived of the income that might be derived from that property. Accordingly, the U.S. Supreme Court has consistently recognized that just compensation for property taken by government action consists of both an amount equivalent to the fair market value of the property and interest on that amount from the date of the taking to the date of payment. 54 However, the question of whether simple or compound interest should be awarded is a matter largely within the discretion of the trial court. 55 The trend in mineral takings cases has been to award compound interest. 56 As the court explained in Whitney Benefits v. United States, 57 mineral properties are generally commercial properties from which the plaintiffs expect to receive a return on their investment. Accordingly, simple interest fails to fully compensate the property owner for its losses: Where the government has taken plaintiff s property and returns a payment worth an identical amount at a subsequent date, the 54 United States v. Thayer-West Point Hotel Co., 329 U.S. 585 (1947). 55 Hughes Aircraft Co. v. United States, 86 F.3d 1566, 1575 (Fed. Cir. 1996), vacated and remanded on other grounds, 520 U.S. 1183 (1997). 56 See Whitney Benefits v. United States, 30 Fed. Cl. 411 (1994); Eastern Minerals Int l, Inc. v. United States, 39 Fed. Cl. 621 (1997). 57 Whitney Benefits v. United States, 30 Fed. Cl. 411 (1994). 386

TAKINGS LAW 10.04 plaintiff still suffers an economic loss. Such a conclusion follows from the fact that when the government merely returns an identical sum as compensation, the plaintiff loses the opportunity to earn interest on the principal. In addition, the existence of inflation suggests that mere repayment of principal fails to adequately compensate the plaintiff as the returned principal has less buying power than the principal had when taken. Thus, to be made whole for the taking of their property, the plaintiffs must be compensated for the time value of their property and the inflation rate. The market does this through compound interest. 58 10.04. Application of Takings Jurisprudence to Mineral Interests. The Fifth Amendment s Taking Clause has formed the basis for a number of suits by mineral owners or lessors whose mining rights have been affected by government actions. In particular, the provisions of the Surface Mining Control and Reclamation Act of 1977 59 (SMCRA) and the actions of the Office of Surface Mining Reclamation and Enforcement taken pursuant to SMCRA 60 have given rise to a number of suits seeking compensation for mineral rights allegedly taken as a result of SMCRA s regulatory scheme. A sampling of these cases is discussed below. [1] Statutory Prohibitions or Limitations on Mining. SMCRA contains a number of provisions that prohibit or restrict surface coal mining operations 61 in certain designated areas. These provisions have formed the basis for a number of takings claims by mineral 58 Whitney Benefits, 30 Fed. Cl. at 413. 59 30 U.S.C. 1201 et seq. (West 1986). 60 Section 201 of SMCRA establishes the Office of Surface Mining (OSM) and vests the agency with the authority to implement and enforce SMCRA s provisions. 30 U.S.C.A. 1211 (West 1986). 61 As used in SMCRA, the term surface coal mining operations includes both surface or strip mining and the surface effects of underground mining. 30 U.S.C.A. 1291(28)(West 1986). 387

10.04 ENERGY & MINERAL LAW INSTITUTE owners whose operations have been prohibited or severely restricted as a result. Section 522 of SMCRA 62 prohibits (with some exceptions) surface mining on certain public and private lands and has thus formed the basis for a number of takings claims. However, many of these claims have been rejected (at least initially) because the mineral owners have failed to seek a determination from OSM as to their eligibility for one of the exceptions to Section 522 s prohibitions. In Otter Creek Coal Co. v. United States, 63 the plaintiff held mineral rights underlying surface property that was designated as part of the Otter Creek Wilderness Area subject to the Wilderness Act of 1964. 64 In addition to the prohibitions against mining contained in the Wilderness Act, Section 522(e) specifically prohibits surface mining within the boundaries of the National Wilderness Preservation System, subject to valid existing rights. 65 Nevertheless, the Court of Claims (now the Court of Federal Claims) rejected the plaintiff s claim that the enactment of the legislation resulted in a taking of its property and held that under the doctrine of primary jurisdiction, the mineral owner was required to first seek a determination from the agencies as to whether the property could be mined. 66 The plaintiffs in Burlington Northern Railroad v. United States 67 and Ainsley v. United States 68 faced similar hurdles in their attempts to obtain compensation for their mineral reserves. Burlington Northern owned 62 30 U.S.C.A. 1272 (West 1986). 63 Otter Creek Coal Co. v. United States, 224 Ct. Cl. 697 (1980). 64 16 U.S.C.A. 1131 et seq. (West 1986). 65 30 U.S.C.A. 1272(e)(West 1986). 66 The court required the plaintiff to take these steps despite its observation that the company s efforts were probably for naught: We have difficulty imagining that any now or future Secretaries of Agriculture and Interior will ever permit removal of the coal involved, and if they were willing, that the alert, zealous, and well financed environmental organizations could not and would not promptly obtain injunctions. Otter Creek Coal Co. v. United States, 224 Ct. Cl. 697, 699 (1980). 67 Burlington Northern Railroad v. United States, 752 F.2d 627 (Fed. Cir. 1985). 68 Ainsley v. United States, 8 Cl. Ct. 394 (1985). 388

TAKINGS LAW 10.04 substantial mineral reserves underlying federal and privately-owned land within the Custer National Forest. Section 522(e)(2)(B) of SMCRA 69 specifically prohibits surface mining within that forest, again subject to valid existing rights. Ainsley s coal property was overlain by surface that was designated as part of a national historic site and made part of the National Park System. Surface mining operations within the park system are also prohibited by Section 522(e)(1). 70 In both cases, the courts held that the mineral owners claims were untimely because the parties had failed to first seek a valid existing rights determination from OSM, despite the fact that under the existing regulations it did not appear that either mineral owner would be able to meet OSM s test for valid existing rights. The case of Whitney Benefits v. United States 71 provides an example of a statutory provision that on its face prohibits mining and thus may immediately give rise to a takings claim. Whitney Benefits owned coal underlying an alluvial valley floor in Wyoming. SMCRA Section 510(b) 72 prohibits surface coal mining operations west of the 100th meridian west longitude that would interrupt, discontinue or preclude farming on alluvial valley floors. 73 Given the fact that Whitney Benefits coal could only be mined by surface mining methods, 74 there was very little question 75 but that Section 510(b) on its face prohibited Whitney Benefits from mining its coal. The court applied the three-prong Penn Central test 76 and found 69 30 U.S.C.A. 1272(e)(2)(B) (West 1986). 70 30 U.S.C.A. 1272(e)(1) (West 1986). 71 Whitney, 18 Cl. Ct. 394 (1989), aff d 926 F.2d 1169 (Fed. Cir. 1991). 72 30 U.S.C.A. 1260(b) (West 1986). 73 Id. 74 Whitney Benefits, 18 Cl. Ct. at 405. 75 The court rejected the United States assertions that the coal could have been mined by underground methods, finding that it would have been exceedingly difficult, if not impossible to utilize underground mining methods. Id. 76 The court found that SMCRA s enactment destroyed all economically viable use of the Whitney Benefits coal which, under the Lucas test discussed supra at 10.02[3] would constitute a categorical taking. However, the Whitney Benefits case was decided prior to the Lucas case, so the court analyzed the case under the three-prong Penn Central test. 389

10.04 ENERGY & MINERAL LAW INSTITUTE that Whitney Benefits mining rights had been taken as of the date of SMCRA s enactment, August 3, 1977. 77 The United States asserted that Whitney Benefits property could not have been taken until the company s mining permit was actually denied; however, the court rejected this argument, noting: It makes little sense for Congress to pass SMCRA with the intention that it apply to plaintiffs property and then for defendant to require plaintiffs to obtain an official determination that SMCRA applied to their property before a taking could occur. 78 The Otter Creek, Burlington Northern and Ainsley cases illustrate the difficulty that a mineral owner faces in attempting to advance a takings claim in the face of what appears to be a clear prohibition against mining. While a claimant is not required to exhaust its administrative remedies where resort to those remedies would be futile, 79 the courts are generally reluctant to apply this exception unless it is clear on the face of the statute or regulation that mining will be prohibited, as in Whitney Benefits. If there is any question as to the applicability or meaning of the relevant provisions, the courts will not intervene until the agency has been given an opportunity to formally review a proposed mining operation under its interpretation of the statute. While this approach may avoid the need for a trial on a takings claim, it may also place the mineral owner in the difficult position of being forced to obtain an agency determination before the statute of limitations expires for filing an inverse condemnation action. 80 Thus, a mineral owner who believes that its mining rights may be taken by a new regulation or by the designation of the overlying property as protected public lands should take prompt action to evaluate its claim 77 Whitney Benefits, 18 Cl. Ct. at 406-407. 78 Whitney Benefits, 18 Cl. Ct. at 407. In fact, SMCRA s legislative history revealed that Congress specifically intended to prohibit mining of the Whitney Benefits coal. Id. 79 Cf. Conant v. United States, 12 Cl. Ct. 689, 692 (1987) cited in Whitney Benefits v. United States, 18 Cl. Ct. 394, 407 (1989). 80 The Court of Federal Claims has exclusive jurisdiction over most inverse condemnation actions against the United States. 28 U.S.C.A. 1491 (West Supp. 2000). All claims must be brought within six years after the claim first accrues. 28 U.S.C.A. 2501 (West 1994). 390

TAKINGS LAW 10.04 and the need to exhaust any administrative remedies while evaluating the need to file a takings claim. [2] Permitting Actions. A number of takings cases have arisen in connection with SMCRA s permitting process. In these cases, the agency s reason for denying the permit is critical in determining whether the mineral owner s property has been taken without just compensation. If denial of the permit is required to protect the public health and safety, it is unlikely that a takings claim will be successful. If, however, the permit denial represents the choice of one land use over another (as in the Whitney Benefits case), a compensible taking will likely be found to have occurred. The case of Rith Energy v. United States 81 is illustrative of the first principle. In that case, the plaintiff alleged that OSM s denial of a permit to mine its coal resulted in a regulatory taking of its mineral rights. Rith Energy planned to strip mine two seams of coal in Tennessee, and in the process, to mine through the rock strata overlying the aquifer that supplied a local community with its drinking water. 82 During the permitting process, it was determined that the overburden was extremely acidic and thus had a high potential to produce acid mine drainage. The company submitted to OSM a number of toxic materials handling plans that it alleged would adequately protect the hydrologic balance; however, each of these plans was rejected by OSM. 83 Eventually, Rith Energy filed an inverse condemnation action in the Court of Federal Claims, alleging that the permit denial effectuated a taking of its coal rights. The court analyzed Rith Energy s claim under the nuisance exception discussed in Lucas v. South Carolina Coastal Council. 84 The Lucas court noted that when a regulation to deprive property of all 81 Rith Energy v. United States, 44 Fed. Cl. 108 (1999). 82 Rith Energy, 44 Fed. Cl. at 110. 83 The administrative law judge who heard Rith Energy s appeal of OSM s permit denial found that the company s plans failed to prevent damage to the hydrologic balance and thus were properly rejected by OSM. Rith Energy, Inc., No. NX 89-1-PR at 27 (U.S. Dep t of Interior, Office of Hearing and Appeals, March 28, 1989). 84 Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1027-1029 (1992). 391

10.04 ENERGY & MINERAL LAW INSTITUTE economically viable use, compensation to the property owner can be avoided only if the logically antecedent inquiry into the nature of the owner s estate shows that the proscribed use interests were not part of his title to begin with. 85 Thus, a regulation that deprives a property owner of all economically viable use of his or her property will not support a takings claim if the limitations contained in the regulation are based in the restrictions that background principles of the State s law of property and nuisance already place upon land ownership. 86 Utilizing these principles, the Rith Energy court looked to Tennessee nuisance law and determined that the company s operations could have been enjoined under the Tennessee Water Quality Control Act of 1977. 87 Accordingly, under the Lucas nuisance exception, OSM s denial of Rith Energy s permit achieved the same result as could have been obtained under background principles of Tennessee law, and no compensable taking occurred. In another case involving Tennessee property, Eastern Minerals Int l v. United States, 88 OSM did not issue a permit to a company for very different reasons than those found in the Rith Energy case. Eastern Minerals planned to develop coal reserves that were located near a Tennessee state park. The company s attempts to obtain a permit were opposed by the state, which was concerned about the impacts that the proposed mining operations would have on the park. Two years after the company first submitted its application, OSM denied the permit, allegedly because of the adverse impact to the state park of the noise from the mining operations and because of hydrological impacts. On appeal, however, the administrative law judge discounted the noise issue and found that OSM had no support for its allegations regarding hydrologic impacts. Accordingly, the administrative law judge ordered OSM to promptly determine what hydrologic information was necessary in order to issue 85 Lucas, 505 U.S. at 1027. 86 Lucas, 505 U.S. at 1029 cited in Rith Energy, 44 Fed. Cl. at 113. 87 Tenn. Code Ann. 69-3-102 69-3-131 (1995 and Supp. 1998). The Tennessee statute prohibits, inter alia, the permitting authority from issuing permits for activities that would cause water pollution. Rith Energy, 44 Fed. Cl. at 114. 88 Eastern Minerals Int l v. United States, 39 Fed. Cl. 621 (1997). 392

TAKINGS LAW 10.04 the permit. Over the next four years, OSM expressed dissatisfaction with any information submitted by the company and ordered that a number of additional studies be performed. In fact, the court found that OSM s real policy was to prohibit Eastern Minerals from proceeding with its plans to mine without taking a final action that could be appealed by the company. 89 During the course of the permitting saga, Eastern Minerals lease expired, meaning that it had lost the right to mine the property. Finally, the permit was denied and Eastern Minerals filed an inverse condemnation action, alleging that OSM s unjustified delay in making the permit determination had taken Eastern Minerals mining rights. While the Eastern Minerals case arose under a regulatory scheme, the court did not employ the three-part Penn Central test to determine whether a taking had occurred. Instead, the court found that OSM had requisitioned Eastern Mineral s mining rights and proceeded to determine the amount of just compensation to be awarded. 90 Sounding the fairness and justice theme found in Armstrong v. United States, 91 the court noted: The Government waged a war of attrition against Eastern. Eastern could not afford to retain an expensive leasehold when it knew that state and federal authorities would never renew its permit. The Fifth Amendment does not permit the Government to avoid liability for a taking merely because it has the resources to outlast a property owner. Equity is the compelling force driving just compensation. 92 Although not specifically stated in the opinion, the court apparently found that the taking in this case was in the nature of either a physical taking or a legal taking, thus eliminating the need to evaluate the criteria necessary for a determination that a regulatory taking had occurred. 93 89 Eastern Minerals, 39 Fed. Cl. at 625. 90 Eastern Minerals, 39 Fed. Cl. at 626. 91 Armstrong v. United States, 364 U.S. 40 (1960), discussed supra at 10 02. 92 Eastern Minerals, 39 Fed. Cl. at 625. 93 Eastern Minerals lessor has a takings case now pending before the Court of Federal Claims. Cane Tennessee v. United States, No. 96-237 L (Fed. Cl.). 393

10.05 ENERGY & MINERAL LAW INSTITUTE Most permitting decisions made by OSM under SMCRA are defensible as actions designed to protect the environment or public health, and thus cannot form the basis for a takings claim. In some cases, however, the statute or the permitting decision will reflect not an attempt to protect the environment, but rather an attempt to give preference to another land use over mining. These cases may give rise to a takings claim, either for a regulatory taking or, as in the Eastern Minerals case, for a physical or legal taking of mining rights. 10.05. Future Takings Cases? The United States continues to take actions that may deprive a property owner of the right to exercise its mineral rights and thus may give rise to new mineral takings cases in the future. [1] Antiquities Act. The Antiquities Act of 1906 94 authorizes the President of the United States to declare by proclamation certain landmarks, structures or other objects of historic or scientific interest to be national monuments. 95 Federal lands that are so designated are generally withdrawn from availability for sale or lease. In some cases, however, the mineral rights underlying the land may have already been leased to a company for development. Absent compensation from the United States for these mineral rights, the lessee may have a takings claim. On September 18, 1996, President Clinton designated approximately two million acres in Utah as the Grand Staircase-Escalante National Monument. 96 As a result, literally billions of tons of coal were eliminated as potential sources of development. 97 Included in this acreage was approximately 35,000 acres that had been leased by Andalex Resources, 94 16 U.S.C.A. 431 et seq. (1993). 95 16 U.S.C.A. 431 (1993). 96 Proclamation No. 6920, 50 Fed. Reg. 50,223 (1996). 97 Utah Geological Survey, Summary of the Coal Resources of Kaiparowits Plateau and Its Value (1996). 394

TAKINGS LAW 10.05 which was planning a massive mine project for the area. 98 After negotiations between the United States and Andalex, and the threat of an inverse condemnation action by the company, the United States agreed to pay Andalex $14 million to compensate the company for its investments to date in the project. 99 President Clinton again utilized the Antiquities Act in January of 2000 to create the Grand Canyon-Parashant National Monument in Arizona and California, thus removing an additional one million acres from development. 100 While not all such proclamations will give rise to takings claims, a holder of mineral rights that has invested money in mine development may, like Andalex, be faced with the prospect of either negotiating a settlement with the United States or filing a claim for a taking of its mining rights. [2] Section 522 Designations of Lands Unsuitable for Mining. In addition to the Congressional prohibitions on mining in certain designated areas discussed in Section 10.04[1], Section 522(a) of SMCRA authorizes state and federal regulatory agencies to designate areas as unsuitable for all or some types of surface coal mining operations if certain specified criteria are met. 101 OSM has made two such designations in the past several years that have removed millions of tons of coal from production, and one has already spawned an inverse condemnation action. In September of 1996, OSM designated approximately 3,780 acres of land in the Fern Creek watershed, located in Claiborne County, 98 The Utah Geological Survey estimated that Andalex would mine approximately 72 million tons from its proposed Smokey Hollow mine over a 30-year period. Id. 99 Jim Woolf, Andalex Accepts $14M From Feds in Coal-Mine Deal, Salt Lake Tribune Oct. 2, 1999. 100 Proclamation No. 7265, 65 Fed. Reg. 2,825 (2000). 101 30 U.S.C.A. 1272(a)(West 1986). An area may be designated as unsuitable if mining operations would: (1) be incompatible with existing land use plans; (2) affect fragile or historic lands; (3) have an adverse impact on renewable resource lands, including aquifers and aquifer recharge areas; or (4) affect natural hazard lands that are subject to frequent flooding or where the geology is unstable. Id. 395