Monday, March 23, 2020

Clean Water Act – Compliance Orders and “Normal Farming Activities”

Overview

Section 404 of the Clean Water Act (makes illegal the discharging of dredge or fill material into the “navigable waters of the United States” without obtaining a permit from the Secretary of the Army acting through the Corps of Engineers (COE). But, over the years, the Environmental Protection Agency (EPA) has used compliance orders to stymie the issuance of Section 404 permits.  Another aspect of Section 404 permitting is the exemption for “normal farming activities.” 

EPA compliance orders and “normal farming activities” – they are the topics of today’s post.

EPA Compliance Orders

As noted above, the EPA has issued "compliance orders" to landowners and other parties when it believes that the land in issue contains wetlands subject to its jurisdictional control. The issuance of a compliance order has the effect of freezing the affected party in place until a Section 404 permit is obtained. EPA has also taken the position that such orders do not give the affected party the right to a hearing or the ability to obtain judicial review because (in EPA's view) such orders are not "final agency action" that carries appeal rights with it. However, in Sackett v. United States Environmental Protection Agency, 566 U.S. 120 (2012), rev'g., 622 F.3d 1139 (9th Cir. 2010), a unanimous Supreme Court held that the CWA does not preclude pre-enforcement judicial review of EPA administrative compliance orders. Preclusion, the Court held, would violate constitutional due process requirements.  

Under the facts of Sackett, the plaintiff had filled-in approximately one-half acre of their property with dirt and rock in preparation to build a house.  The EPA issued a compliance order alleging that the parcel contained a wetland subject to the CWA permit requirements. The plaintiff sought a hearing with the EPA to challenge the finding, but EPA did not grant a hearing.   The EPA continued to assert jurisdiction and the plaintiff sued in federal district court seeking injunctive and declaratory relief. The trial court granted the EPA's motion to dismiss for lack of subject matter jurisdiction because, according to the court, the CWA precludes judicial review of compliance orders before EPA starts enforcement action. The case was affirmed on appeal, but the U.S. Supreme Court reversed, noting that compliance order constitutes "final agency action" under the Administrative Procedure Act, and the landowners did not have an adequate remedy at law.

In 2015, the U.S. Court of Appeals for the Eighth Circuit held that a Corps of Engineers “preliminary determination” that the wetlands at issue on a tract that the owner sought to mine for peat had a “significant nexus” to a navigable river more than 100 miles away constituted a final agency action that could be appealed.  Hawkes Co., Inc., et al. v. United States Army Corps of Engineers, 782 F.3d 994 (8th Cir. 2015), rev’g., 963 F. Supp. 2d 868 (D. Minn. 2013), cert. granted, United States Army Corps of Engineers v. Hawkes, Co., Inc., 136 S. Ct. 615 (2015).  On further review, the U.S. Supreme Court unanimously affirmed. 136 S. Ct. 1807 (2016)The Court noted that the memorandum of agreement between the EPA and the Corps established that jurisdictional determinations are “final actions” that represent the government’s position, are binding on the Government in any subsequent federal action or litigation involving the position taken in the jurisdictional determination. When the landowners received an “approved determination” that meant that the government had determined that jurisdictional waters were present on the property due to a “nexus” with the Red River of the North, located 120 miles away. As such, the landowners had the right to appeal in court after exhausting administrative remedies and the government’s position take in the jurisdictional determination was judicially reviewable. Not only did the jurisdictional determination constitute final agency action under the Administrative Procedure Act, it also determined rights or obligations from which legal consequences would flow. That made the determination judicially reviewable.

Exemption for “Normal Farming Activities”

An exemption from the CWA § 404 permit requirement exists for “normal farming activities” such as plowing, seeding, cultivating, minor drainage, harvesting, upland soil and water conservation projects, construction or maintenance of farm ponds, irrigation ditches, maintenance of drainage ditches and construction or maintenance of farm roads not otherwise impairing navigable waters.  33 U.S.C. § 1344(f)(1).  In general, COE regulations limit the exemption to pre-established  farming activities that do  not bring a new area into farming or require modifications to the  hydrological regime. 33 C.F.R. § 323.4(a)(1)(ii). In addition, the EPA, not the COE, is the final authority to decide the scope of the exemption. 43 Op. Att'y. Gen. 15 (1979).

In general, the courts have narrowly construed the exemption to those situations where the agricultural activity is extremely minimal and no additional areas of “navigable waters” are brought into use.  See, e.g., United States v. Huebner, 752 F.2d 1235 (7th Cir. 1985). As such, the exemption for agricultural activities applies only to prior established and continuing farming activities. For example, the conversion of wetlands to fish farming ponds has been held to constitute a new use that is ineligible for the “normal farming activities” exemption.  Also, filling to stabilize riverbanks and re-channel streambeds has been held not to fall within the scope of the exemption as normal ranching or upland soil and water conservation practices.

Exempt activities are subject to a “recapture” provision that requires a permit if a discharge changes the use of the waters, impairs the waters' flow or circulation, brings an area of navigable waters into a use to which it was not previously subject, or reduces the reach of the waters.   33 U.S.C. § 1344(f)(2).  Thus, only routine activities with relatively minor impacts on waters are exempt and the exemption will be lost if the activity is a new use and the activity reduces the reach or impairs the flow of water.  For  example, in United States v. Brace, 41 F.3d 117 (3d Cir. 1994), the court held that the “normal farming activity” exemption only applied to activities occurring on the particular site in question regardless of the relationship to the activities occurring on the remainder of the land. The site in issue adjoined cropland and was part of the same drainage system. In addition, the court held as irrelevant for CWA purposes a prior SCS classification of the drainage activities as a “commenced conversion.” The court also noted that even if the activities were held to be exempt, they would be subject to the recapture provision.

The same farming operation was still in court over a quarter of a century later over alleged wetland violations concerning their farming operations.  All of the litigation stems from not being able to use the “normal farming activity” exemption.  See United States v. Brace, No. 1:17-cv-00006 (BR), 2020 U.S. Dist. LEXIS 33423 (W.D. Pa. Feb. 27, 2020).

Conclusion

Farmers and ranchers have had to deal with the EPA and the COE for decades.  The Section 404 permitting requirement of the CWA can be a difficult issue for some farming operations.  However, it’s important to know that due process rights must be assured.  It’s also important to understand the scope of the “normal farming activities” exemption from the permit rules.  That can be a very useful exemption when needed. 

March 23, 2020 in Environmental Law | Permalink | Comments (0)

Tuesday, March 3, 2020

Recent Cases of Interest

Overview

The cases and rulings of relevance to agricultural producers, ag businesses and rural landowners continue to churn out.  In today’s post a take a brief look at three of them – a couple of bankruptcy-related cases and a case involving a claim of constitutional takings.

“Shared Responsibility” Payment Is Not a “Tax”

United States v. Chesteen, No. 19-30195 (5th Cir. Feb. 20, 2020), rev’g., No. 18-2077, 2019 U.S. Dist. LEXIS 29346 (E.D. La. Feb. 25, 2019).

In a bankruptcy proceeding, some unsecured creditors receive a priority in payments over other unsecured creditors.  These are termed “priority claims” and they are not subject to being discharged in bankruptcy.  Priority claims are grouped into 10 categories with descending levels of priority.  11 U.S.C. §507(a)(1)-(10).  One of those priority claims is for “allowed unsecured claims of governmental units” to the extent the claims are for “a tax on or measured by income or gross receipts…”.  11 U.S.C. §507(a)(8).  But, does that provision apply to the penalty that had to be paid through 2018 for not having an acceptable form of government-mandate health insurance under Obamacare – the so-called “Roberts Tax”?  The U.S. Court of Appeals for the Fifth Circuit recently answered that question.

In the case, the debtor filed Chapter 13 bankruptcy. The IRS filed a proof of priority claim for $5,100.10, later amending the claim to $5,795.10 with $695 of that amount being an excise tax under I.R.C. §5000A as a result of the debtor’s failure to maintain government mandated health insurance under Obamacare. The debtor objected to the $695 amount being a priority claim that could not be discharged, and the bankruptcy court agreed, finding that the “Roberts Tax” under Obamacare was not a priority claim, but rather a dischargeable penalty in a Chapter 13 case.  On appeal, the federal trial court reversed, holding that the penalty was a tax that was a non-dischargeable priority claim. The trial court noted that the creditor bore the burden to establish that the Roberts Tax was a priority claim and noted that it was the purpose and substance of the statute creating the tax that controlled whether the tax was a tax or a penalty. The trial court noted that a tax is a pecuniary burden levied for the purpose of supporting government while a monetary penalty is a punishment for an unlawful act or omission. On this point, the trial court noted that Chief Justice Roberts, in National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012), upheld the constitutionality of Obamacare on the basis that the “shared responsibility payment” was a tax paid via a federal income tax return and had no application to persons who did not pay federal income tax. The trial court noted that the amount was collected by the IRS and produced revenue for the government. It also did not punish an individual for any unlawful activity and, the trial court noted, the IRS has no criminal enforcement authority if a taxpayer failed to pay the amount.

On further review, the appellate court reversed, reinstating the bankruptcy court’s determination. The appellate court held that the “Roberts Tax” was not entitled to priority in bankruptcy because it was not among the types of taxes listed in the bankruptcy code to have priority treatment under 11 U.SC. §507(a)(8)(E)(i). The appellate court noted that the “Roberts Tax” could not be a priority tax claim in a debtor’s bankruptcy estate because the “tax” applied only when a person failed to buy the government-mandated health insurance, rather than when a transaction was entered into. As such, the “Roberts Tax” was a penalty that could be discharged in bankruptcy. The appellate court also noted that the “tax” zeroed out the “tax” beginning in 2019, thereby nullifying any tax effect that it might have had. 

Cram-Down Interest Rate Determined

In re Country Morning Farms, Inc., No. 19-00478-FPC11, 2020 Bankr. LEXIS 307 (E.D. Wash. Feb. 4, 2020).

Under the reorganization provisions of the Bankruptcy Code (Chapters 11, 12 and 13), a debtor can reorganize debts and pay for most (but not all) secured property by paying the present value of the collateral (what the collateral is presently worth) rather than the entire debt.  The procedure for doing this is commonly known as a “cram down” – the terms of the repayment are forced upon the creditor.  The debtor must pay the present value of the collateral (the creditor’s allowed secured claim) via the reorganization bankruptcy.  Because the repayment of the written-down debt will be paid over time in accordance with the reorganization plan, an interest rate is attached to ensure that the creditor receives the present value of the claim.  But, what is the appropriate interest rate in such a setting and how is it determined?  Over the years, courts struggled in determining the appropriate interest rate to use in a reorganization bankruptcy cram-down setting.  The U.S. Supreme Court settled the waters with a decision in 2004 by using the “Prime Plus” method.  The issue of the appropriate interest rate was again as issue in a dairy bankruptcy case from the state of Washington.

In the case, the debtor filed Chapter 11 bankruptcy and the debtor and the bank could not agree on the appropriate interest rate to be used in the debtor’s reorganization plan. The parties agreed that the “Prime Plus” method set forth in Till v. SCS Credit Corp., 541 U.S. 465 (2004) was the appropriate method to determine the “cram down” interest rate.” The parties agreed that the prime rate was presently 4.75 percent and that an additional amount as a “risk factor” should be added to the prime rate. The debtors proposed a 6 percent interest rate, based on the risk associated with their dairy business. The bank claimed that the appropriate interest rate was 7.75 percent – the highest rate factor under the Till analysis. The bank cited the length of the plan, the volatility of the dairy market, the debtor’s capital structure, and conflicting projections from an expert when determining the appropriate risk factor. The court determined that the appropriate interest rate was 7 percent which raised the interest rate on some of the debtor’s loans and lowered it on others. 

Reversion to Agricultural Use Classification Not a Taking

Bridge Aina Le’a, LLC v. State Land Use Commission, No. 18-15738, 2020 U.S. App. LEXIS 5138 (9th Cir. Feb. 19, 2020).

Sometimes, a governmental body enacts a statute or promulgates a regulation that restricts a private property owner’s use of their property.  The restriction on land use may be so complete that, in effect, the restriction amounts to the government “taking” the property. However, these regulatory restrictions on private property usage do not involve a physical taking of the property but can still give rise to Fifth Amendment concerns and trigger the payment of “just compensation” to the landowner.  The legal issues concerns the point at which a defacto regulatory taking has occurred.

In a key case decided in 1978, the U.S. Supreme Court set forth a multi-factored balancing test for determining when governmental regulation of private property effects a taking requiring compensation. In Penn Central Transportation Co. et al. v. New York City, the 438 U.S. 104 (1978), the Court held that a landowner cannot establish a “taking” simply by being denied the ability to exploit a property interest believed to be available for development. Instead, the Court ruled that in deciding whether particular governmental action effects a taking, the character, nature and extent of the interference with property rights as a whole are the proper focus rather than discrete segments of the owner’s property rights.  Later, the Court determined that the touchstone for deciding when a regulation is a taking is whether the restriction on property usage is functionally equivalent to a physical taking of the property.  Lingle, et al. v. Chevron U.S.A. Inc., 544 U.S. 528 (2005)The issue of a regulatory taking came up in a recent case from Hawaii. 

Under the facts of the recent case, 1,060 acres of undeveloped land on the northeast portion of the Island of Hawaii were designated as conditional urban use. For the 40 prior years, the tract was part of a 3,000-acre parcel zoned for agricultural use. In 1987, the landowner at the time sought to develop a mixed residential community of the 1,060 acres as the first phase of development on the entire 3,000 acres. The landowner petitioned the defendant to reclassify the 1,060 acres as urban. The defendant did so in 1989 on development conditions that ran with title to the land. The land remained undeveloped at the time the plaintiff acquired it in 1999. In 2005, the defendant amended the condition so that fewer affordable housing units needed to be developed. Developmental progress was hampered by the requirement that the plaintiff prepare an environmental impact statement for the development project.

In late, 2008, the defendant ordered the plaintiff to show cause for the nondevelopment. In the summer of 2010, some affordable housing units had been constructed, but upon inspection they were determined to not be habitable. The developer then stated that it lacked the funds to complete the development. In 2011, the defendant ordered the land’s reversion to its prior agricultural use classification due to the unfulfilled representations that the land would be developed. The land was given its conditional urban use classification based on those representations. The plaintiff was one of the landowners and challenged the reversion as illegal, and that it amounted to an unconstitutional regulatory taking of the land. The trial court jury found for the plaintiff on the constitutional claim and the trial court denied the defendant’s motion for a judgment as a matter of law.

On further review, the appellate court reversed The appellate court stated held that no taking had occurred under the multi-factor analysis of Penn Central Transportation Company v. City of New York, 438 U.S. 104 (1978), because the reclassification did not result in the taking of all of the economic value of the property. Rather, the land retained substantial economic value, albeit at a much lesser amount than if it were classified as urban and developed. An expert valued the land at approximately $40 million as developed land and $6.36 million with an agricultural use classification. The appellate court held that the $6.36 million was neither de minimis nor derived from noneconomic uses. Thus, the defendant was entitled to judgment as a matter of law on the issue that a complete economic taking had occurred. It had not. The appellate court also held that the reversion did not interfere substantially with the plaintiff’s investment-backed expectations given that the development conditions were present at the time the plaintiff acquired the property and the plaintiff could expect them to be enforced. The appellate court also determined that the defendant acted properly in protecting the plaintiff’s due process rights by holding hearings over a long period of time. Thus, the appellate court concluded, no reasonable jury could conclude that the reversion effected a taking under the Penn Central factors. The appellate court vacated the trial court’s judgment for the plaintiff and reversed the trial court’s the trial court’s denial of the defendant’s motion for judgment as a matter of law, affirmed the trial court’s dismissal of the plaintiff’s equal protection claim and remanded the case. 

Conclusion

The developments of relevance to agricultural interests keep rolling in.  There will be more discussed in future posts. 

March 3, 2020 in Bankruptcy, Environmental Law, Regulatory Law | Permalink | Comments (0)

Friday, January 17, 2020

Principles of Agricultural Law

Overview

Principles2020springedition400x533The fields of agricultural law and agricultural taxation are dynamic.  Law and tax impacts the daily life of a farmer, rancher, agribusiness and rural landowner practically on a daily basis.  Whether that is good or bad is not really the question.  The point is that it’s the reality.  Lack of familiarity with the basic fundamental and applicable rules and principles can turn out to be very costly.  As a result of these numerous intersections, and the fact that the rules applicable to those engaged in farming are often different from non-farmers, I started out just over 25 years ago to develop a textbook that addressed the major issues that a farmer or rancher and their legal and tax counsel should be aware of.  After three years, the book was complete – Principles of Agricultural Law - and it’s been updated twice annually since that time. 

The 46th edition is now complete, and it’s the topic of today’s post – Principles of Agricultural Law.

Subject Areas

The text is designed to be useful to farmers and ranchers; agribusiness professionals; ag lenders; educational professionals; laywers, CPAs and other tax preparers; undergraduate and law students; and those that simply want to learn more about legal and tax issues.  The text covers a wide range of topics.  Here’s just a sample of what is covered:

Ag contracts.  Farmers and ranchers engage in many contractual situations, including ag leases, to purchase contracts.  The potential perils of verbal contracts are numerous as one recent bankruptcy case points out.  See, e.g., In re Kurtz, 604 B.R. 549 (Bankr. D. Neb. 2019).  What if a commodity is sold under forward contract and a weather event destroys the crop before it is harvested?  When does the law require a contract to be in writing?  For purchases of goods, do any warranties apply?  What remedies are available upon breach? If a lawsuit needs to be brought to enforce a contract, how soon must it be filed?

Ag financing.  Farmers and ranchers are often quite dependent on borrowing money for keeping their operations running.  What are the rules surrounding ag finance?  This is a big issue for lenders also?  For instance, in one recent Kansas case, the lender failed to get the debtor’s name exactly correct on the filed financing statement.  The result was that the lender’s interest in the collateral (a combine and header) securing the loan was discharged in bankruptcy.   In re Preston, No. 18-41253, 2019 Bankr. LEXIS 3864 (Bankr. D. Kan. Dec. 20, 2019). 

Ag bankruptcy.  A unique set of rules can apply to farmers that file bankruptcy.  Chapter 12 bankruptcy allows farmers to de-prioritize taxes.  That can be a huge benefit.  Knowing how best to utilize those rules is very beneficial.

Income tax.  Tax and tax planning permeate daily life.  Deferral contracts; depreciation; installment sales; like-kind exchanges; credits; losses; income averaging; reporting government payments; etc.  The list could go on and on.  Having a basic understanding of the rules and the opportunities available can add a lot to the bottom line of the farming or ranching operation. 

Real property.  Of course, land is typically the biggest asset in terms of value for a farming and ranching operation.  But, land ownership brings with it many potential legal issues.  Where is the property line?  How is a dispute over a boundary resolved?  Who is responsible for building and maintaining a fence?  What if there is an easement over part of the farm?  Does an abandoned rail line create an issue?  What if land is bought or sold under an installment contract? 

Estate planning.  While the federal estate tax is not a concern for most people and the vast majority of farming and ranching operations, when it does apply it’s a major issue that requires planning.  What are the rules governing property passage at death?  Should property be gifted during life?  What happens to property passage at death if there is no will?  How can family conflicts be minimized post-death?  Does the manner in which property is owned matter?  What are the applicable tax rules?  These are all important questions.

Business planning.  One of the biggest issues for many farm and ranch families is how to properly structure the business so that it can be passed on to subsequent generations and remain viable economically.  What’s the best entity choice?  What are the options?  Of course, tax planning is part and parcel of the business organization question. 

Cooperatives.  Many ag producers are patrons of cooperatives.  That relationship creates unique legal and tax issues.  Of course, the tax law enacted near the end of 2017 modified an existing deduction for patrons of ag cooperatives.  Those rules are very complex.  What are the responsibilities of cooperative board members? 

Civil liabilities.  The legal issues are enormous in this category.  Nuisance law; liability to trespassers and others on the property; rules governing conduct in a multitude of situations; liability for the spread of noxious weeds; liability for an employee’s on-the-job injuries; livestock trespass; and on and on the issues go.  It’s useful to know how the courts handle these various situations.

Criminal liabilities.  This topic is not one that is often thought of, but the implications can be monstrous.  Often, for a farmer or rancher or rural landowner, the possibility of criminal allegations can arise upon (sometimes) inadvertent violation of environmental laws.  Even protecting livestock from predators can give rise to unexpected criminal liability.  Mail fraud can also arise with respect to the participation in federal farm programs.  The areas of life potentially impacted with criminal penalties are worth knowing, as well as knowing how to avoid tripping into them.

Water law.  Of course, water is essential to agricultural production.  Water issues vary across the country, but they tend to focus around being able to have rights to water in the time of shortage and moving the diversion point of water.  Also, water quality issues are important.  In essence, knowing whether a tract of land has a water right associated with it, how to acquire a water right, and the relative strength of that water rights are critical to understand.

Environmental law.  It seems that agricultural and the environment are constantly in the news.  The Clean Water Act, Endangered Species Act and other federal (and state) laws and regulations can have a big impact on a farming or ranching operation.  Just think of the issues with the USDA’s Swampbuster rules that have arisen over the past 30-plus years.  It’s good to know where the lines are drawn and how to stay out of (expensive) trouble.

Regulatory law.  Agriculture is a very heavily regulated industry.  Animals and plants, commodities and food products are all subject to a great deal of regulation at both the federal and state level.  Antitrust laws are also important to agriculture because of the highly concentrated markets that farmers buy inputs from and sell commodities into.  Where are the lines drawn?  How can an ag operation best position itself to negotiate the myriad of rules?   

Conclusion

The academic semesters at K-State and Washburn Law are about to begin for me.  It is always encouraging to me to see students getting interested in the subject matter and starting to understand the relevance of the class discussions to reality.  The Principles text is one that can be very helpful to not only those engaged in agriculture, but also for those advising agricultural producers.  It’s also a great reference tool for Extension educators. 

If you are interested in obtaining a copy, you can visit the link here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html

January 17, 2020 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Thursday, January 9, 2020

Top Ten Agricultural Law and Tax Developments of 2019 (Numbers 4 and 3)

Overview

Today’s post continues the walk through the top legal and tax developments in 2019 impacting agriculture.  As can be gathered from the most recent several posts, the legal and tax systems have a major impact on agriculture and agricultural producers.  Agricultural law and taxation is very dynamic and the rules are often different as applied to a “farmer” than when they are applied to a non-farmer. 

In today’s post, I examine the fourth and third most important developments to impact agriculture in 2019.

  1. Regulatory Changes to the Endangered Species Act (ESA)

The ESA establishes a regulatory framework for the protection and recovery of endangered and threatened species of plants, fish and wildlife. 16 U.S.C. § 1531, et seq.  The ESA has the potential to restrict substantially agricultural activities because many of the protections provided for threatened and endangered species under the ESA extend to individual members of the species when they are on private land where many endangered species have some habitat.

In late July of 2018, the U.S. Fish and Wildlife Service (USFWS) and the National Marine Fisheries Service (NMFS) issued three proposed rules designed to modify certain aspects of the ESA. Public comment on the proposed rules was accepted until September 24, 2018.  On August 12, 2019, the agencies announced the finalization of the regulations.

The regulatory modifications to the ESA stem from early 2017 when President Trump signed an executive order (Exec. Order 13777, “Enforcing the Regulatory Reform Agenda”) requiring federal agencies to revoke two regulations for every new rule issued.  The order also required federal agencies to control the costs of all new rules within their budget. In addition, the order barred federal agencies from imposing any new costs in finalizing or repealing a rule for the remainder of 2017 unless that cost were offset by the repeal of two existing regulations.  Exceptions were included for emergencies and national security.  Beginning in 2018, the order required the director of the White House Office of Management and Budget to give each agency a budget for how much it can increase regulatory costs or cut regulatory costs.  The order was touted as the “most significant administrative action in the world of regulatory reform since President Reagan created the Office of Information and Regulatory Affairs (OIRA) in 1981."

The ESA has long been considered critical to species protection, but it has also been one of the most contentious environmental laws largely because of its impact on the usage of private as well as public land.  The judicial and legal costs of enforcing the ESA are quite high, as both environmental and industry groups have historically brought litigation to protect their interests on account of the ESA.  As for private land, about half of ESA listed species have at least 80 percent of their habitat on private lands.  This has given concern to landowners that the presence of a listed species on their land will result in land use restrictions, loss in value, and possible involvement in third-party lawsuits.  

When a species is listed as endangered or threatened, the Secretary must consider whether to designate critical habitat for the species.   “Critical habitat” is the specific area within the geographical range occupied by the species at the time of listing that is essential to the conservation of the species. Critical habitat may also include specific areas outside the geographical area occupied by the species at the time it is listed if the USFWS determines that such areas are essential for conservation of the species. However, critical habitat need not include the entire geographical range which the species could potentially occupy.  16 U.S.C. § 1532(5).   In making a critical habitat determination, the USFWS must consider economic impacts and other relevant impacts, as well as best scientific data. See, e.g., New Mexico Cattle Growers Association. v. United States Fish and Wildlife Service, 248 F.3d 1277 (10th Cir. 2001).   The USFWS may exclude any area from critical habitat if the benefits of the exclusion outweigh the benefits of specifying the area as critical habitat, unless the USFWS determines on the basis of best scientific and commercial data available that the failure to designate an area as critical habitat will result in the extinction of the species.

The Final Rules

In general.  The final rules are entitled, “Endangered and Threatened Wildlife and Plants; Revision of the Regulations for Listing Species and Designating Critical Habitat.”  83 Fed. Reg. 35,193 (Aug. 12, 2019).  The final rules will be codified at 50 C.F.R. pt. 424 and clarify the procedures and criteria that are used to add or remove species from the endangered and threatened species lists and how their critical habitat is designated.  The new rules also eliminate the rule that, by default, extended many prohibitions on endangered species to those species that only had threatened stats.  In addition, the final rules further define the procedures for interagency cooperation. 

The listing process.  The final rules modify the ESA listing process.  The final rule allows for economic impacts of the potential listing, delisting or reclassifying of a species to be accounted for.  The findings of anticipated economic impact must be publicly disclosed.  In addition, the Secretary must evaluate areas that are occupied by the species, and unoccupied  areas will only be considered “essential” where a critical habitat designation that is limited only to the geographical areas that a species occupies would be inadequate to ensure conservation of the species.  In addition, for an unoccupied area to be designated as critical habitat, the Secretary must determine that there is a reasonable certainty that the area will contribute to the conservation of the species and that the area contains one or more physical or biological features essential to the conservation of the species.  Also, a “threatened” listing for a species is to be evaluated in accordance with whether the species is likely to become endangered in the “foreseeable future” (as long as a threat is probable). 

The final rules also require any critical habitat for a listed species designation to first take into account all areas that a species occupies at the time of listing before considering whether any unoccupied areas are necessary for the survival or recovery of the species. On that point, a determination must be made that “there is a reasonable likelihood that the area will contribute to the conservation of the species” before designating any unoccupied area as critical habitat.  This is consistent with the U.S. Supreme Court opinion in Weyerhaeuser Co. v. United States Fish & Wildlife Service, 139 S. Ct. 361(2018), where the Court held that an endangered species cannot be protected under the ESA in areas where it cannot survive. 

The “blanket rule.”  The ESA statutory protections, including the prohibition on an “unauthorized take” of a species apply only to endangered species. However, the USFWS has automatically extended those protections to all species listed as threatened through a broad regulation known as the “blanket 4(d) rule.” The final rules remove these automatically provided protections to threatened species that are given to endangered species.  As a result, the USFWS will be required to develop additional regulations for threatened species on a case-by-case basis to extend the protections given endangered species.    

Agency cooperation.  The final rules also provide alternative mechanisms intended to improve the efficiency of ESA consultations conducted by the USFWS and federal agencies. The revisions include a process for expedited consultation in which a federal agency and the USFWS may enter into upon mutual agreement. A 60-day limit is included for completion of informal consultations with the option to extend the consultation to no more than 120 days.

The final regulations are an attempt to inject additional common-sense into the application of the ESA and align it to a greater extent to its original purpose.  Another intended impact is a decreased burden on farmers and ranchers.  Only time will tell if that is actually accomplished. 

  1. Irrigation Return Flows and the Clean Water Act

The CWA bars the discharge of any pollutants into the nation's waters without a permit. The CWA recognizes two sources of pollution. Point source pollution is pollution which comes from a clearly discernable discharge point, such as a pipe, a ditch, or a concentrated animal feeding operation. Point source pollution is the concern of the federal government.  Nonpoint source pollution, while not specifically defined under the CWA, is pollution that comes from a diffused point of discharge, such as fertilizer runoff from an open field. Control of nonpoint source pollution is to be handled by the states through enforcement of state water quality standards and area-wide waste management plans.

Importantly, in 1977, the Congress amended the CWA to exempt return flows from irrigated agriculture as a point source pollutant. Thus, irrigation return flows from agriculture are not considered point sources if those “...discharges [are] composed entirely of return flows from irrigated agriculture.”   See, e.g., 33 U.S.C. §1342(l)(1); 40 C.F.R. §122.3.  See also Hiebenthal v. Meduri Farms, 242 F. Supp. 2d 885 (D. Or. 2002).  This statutory exemption was elaborated in a 1994 New York case, Concerned Area Residents for the Environment v. Southview Farm, 34 F.3d 114 (2d Cir. 1994). In that case, the court noted that when the Congress exempted discharges composed “entirely” of return flows from irrigated agriculture from the CWA discharge permit requirements, it did not intend to differentiate among return flows based on their content.  Rather, the court noted, the word “entirely” was intended to limit the exception to only those flows which do not contain additional discharges from activities unrelated to crop production. 

2019 Case

In Pacific Coast Federation of Fishermen’s Associations v. Glaser, 937 F.3d 1191 (9th Cir. 2019), the plaintiffs (various fishing activist groups) filed a CWA citizen suit action claiming that the defendant’s (U.S. Bureau of Reclamation) Grasslands Bypass Project in the San Joaquin Valley of California was discharging polluted water (water containing naturally-occurring selenium from soil) into a WOTUS via a subsurface tile system under farmland in California’s Central Valley without a CWA permit.  The plaintiffs directly challenged the exemption of tile drainage systems from CWA regulation via “return flows from irrigated water” on the basis that groundwater discharged from drainage tile systems is separate from any irrigation occurring on farms and is, therefore, not exempt.  After the lower court initially refused to grant the government’s motion to dismiss, it later did dismiss the case noting that the parties agreed that the only reason the project existed was to enable the growing of crops requiring irrigation, and that the drainage of contaminated water only occurred due to irrigated agriculture.  The lower court noted that the plaintiffs failed to plead sufficient facts to support a claim that some discharges were unrelated to agricultural crop production.  Later, the plaintiffs retooled their complaint to claim that not all of the irrigated water that was discharged through the tile systems came from crop production. Rather, the plaintiffs claimed that some of the discharges that flowed into groundwater were from former farmlands that now contained solar panels.  It was this “seepage” from the non-farmland that the plaintiffs claimed was discharged in the farm field tile system and caused the system to contain pollutants that didn’t come exclusively from agricultural crop irrigation.  The lower court found the tile system to be within the exemption for “return flows from irrigation,” noting that “entirely” meant “majority” because (in the court’s view) a literal interpretation of the amended statutory language would produce an “absurd result.”  

The appellate court reversed.  The appellate court held that discharges that include irrigation return flows from activities “unrelated” to crop production are not exempt from the CWA permit requirement.  To the appellate court, “entirely” meant just that – “entirely.”  It didn’t mean “majority” as the lower court had determined. 

What’s the impact of the appellate court’s decision?  After all, shouldn’t the appellate court be praised for construing a statute in accordance with what the law actually says?  What was the concern of the lower court of a literal interpretation of the statute?  For starters, think of the burden of proof issue.  Does the appellate court’s decision mean that a plaintiff must prove that some discharges come from non-agricultural irrigation activities, or does it mean that upon an allegation that irrigation return flows are not “entirely” from agricultural crop production that the farmer must prove that they all are?  If the latter is correct, that is a next-to-impossible burden for a farmer.  Such things as runoff from public roadways and neighboring farm fields can and do often seep into a farmer’s tile drainage system. If that happens, at least in the Ninth Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington), a farmer’s discharges will require a CWA permit.  This is the “absurd result” that the lower court was trying to avoid by construing “entirely” as “majority.” 

The appellate court remanded the case to the lower court for further review based on the appellate court’s decision.  However, the point remains that the appellate court determined that the exception for return flows from agriculture only applies when all of the discharges involved comes from agricultural sources.  That’s why the case is important to any farmer that irrigates crops.

Conclusion

In the next post, I will address the two most significant developments of 2019.  What do you think they might be?

January 9, 2020 in Environmental Law | Permalink | Comments (0)

Tuesday, January 7, 2020

Top Ten Agricultural Law and Tax Developments of 2019 (Numbers Six and Five)

Overview

Today I continue the survey of the top ag law and tax developments of 2019.  Up for commentary today are the sixth and fifth most important developments.  Both of them deal with the federal government’s regulation of water and its impact on farming and ranching operations 

The sixth and fifth most important developments in ag law and tax in 2019 – they are the topics of today’s blog post.

  1. SCOTUS Rules on Administrative Agency Deference

A significant amount of governmental regulation of agricultural activities is conducted by and through administrative agencies that promulgate regulations and make decisions.  The rules for and scope of regulations is determined by unelected bureaucrats and often has the force of law.  In addition, much of administrative law involves the administrative agency that developed the regulation at issue serving as judge and jury over disputed matters involving those same regulations.  This raises fundamental questions of fairness. 

In theory, governmental administrative agencies cannot exceed the authority provided by the legislative body.  Ultimately, the courts serve as the check on the exercise of authority.  But, how?  Under what standard do the courts review administrative agency decisions?  It’s an issue that was addressed by the U.S. Supreme Court (SCOTUS) in 2019, and it didn’t turn out the way that many in agriculture had hoped.

Courts generally consider only whether the administrative agency acted rationally and within its statutory authority.  In general, when dealing with administrative appeals from a federal agency such as the USDA, the court generally defers to the agency’s interpretation of its regulations as contained in the agency’s interpretive manuals.  In 1997, the U.S. Supreme Court reiterated the principle of agency deference.  Auer v. Robbins, 519 U.S. 452 (1997).  This so-called “Auer deference” involves a court deferring (or give “controlling weight”) to agency interpretations of its own ambiguous regulations.  Another type of deference, known as “Chevron deference” involves a court deferring to an agency interpretation of ambiguous statutes that the agency administers.  Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). However, the Court, in 2013 criticized the Court’s 1997 decision and suggested that it might be time to reconsider principles of agency deference.  Decker v. Northwest Environmental Defense Center, 133 S. Ct. 1326 (2013).  

In 2019, the U.S. Supreme Court again addressed the issue of deference in Kisor v. Wilkie, 139 S. Ct. (2019)The facts of the case didn’t involve agriculture.  That’s not the important part.  What is important is that the Court again reaffirmed (5-4, thanks to Chief Justice Roberts) Auer deference.  However, the Court did appear to place some limitations on Auer deference for future cases.  I say “appear” because the Court created a new multi-part test for review of agency action that could prove difficult for lower courts to apply and relatively easy for administrative agencies to skirt.  According to the Court, a court that reviews agency action is to review the regulatory language at issue to determine whether the regulation is ambiguous.  If it is, the court is to then apply Auer deference in determining whether the agency reached a reasonable conclusion resulting from the agency’s careful consideration and expertise after giving affected parties reasonable notice of the agency’s interpretation.  From agriculture’s perspective, it was hoped that the Court would jettison Auer deference.  That would have been the approach of Justice Gorsuch who would have eliminated the binding agency deference of Auer.  

So, the battle between agriculture and administrative agencies will continue on numerous fronts, and the arguments over the reasonableness of agency interpretations will continue with the courts largely deferring to agency determinations.  While there might be a dent in Auer deference, it still is a very functional defense to agency action.

  1. Waters of the United States (WOTUS) Definition

The final WOTUS rule was published on October 22, 2019.  84 Fed. Reg. 56626 (Oct. 22, 2019).  The rule became effective on December 23, 2019, and repeals the Obama Administration’s 2015 WOTUS rule that had established a broader set of standards for determining federal jurisdiction over waters subject to regulation under the CWA.  The 2019 final rule restores the regulatory definitions and guidance that were used to make jurisdictional determinations before the implementation of the 2015 WOTUS rule.  The 2015 rule was heavily litigated and resulted in various court decisions that enjoined the rule in 28 states and kept it in force the other states.  The repeal of the 2015 WOTUS rule restores the regulatory definition of a WOTUS that was in force before the effective date of the 2015 rule.  That regulatory definition was based on Justice Kennedy’s concurring opinion in Rapanos v. United States, 547 U.S. 715 (2006).  Thus, jurisdictional determinations will be made on a case-by-case basis using guidance developed following the Rapanos decision, as they were before the 2015 WOTUS rule.

The Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (COE) listed four reasons for their action in repealing the 2015 rule: 1) the 2015 rule misinterpreted and misapplied the “significant nexus” standard developed by Justice Kennedy’s concurring, and controlling, opinion in Rapanos v. United States, 547 U.S. 715 (2006), despite identifying that standard as its touchstone. This error expanded federal jurisdiction beyond what Congress intended; 2) the 2015 rule encroached State authority, violating the Clean Water Act’s express policy to “recognize, preserve, and protect the primary responsibilities and rights of States to prevent, reduce, and eliminate pollution” and “to plan the develop and use … of land and water resources.” 33 U.S.C. 1251(b); 3) the 2015 rule raised serious constitutional questions in the absence of an express Congressional directive to push the envelope of the federal government’s regulatory power; and 4) the 2015 rule had been remanded by the Southern District of Texas for procedural deficiencies under the Administrative Procedure Act.

The repeal of the 2015 rule establishes a path to the development of a new and less stringent jurisdictional rule. Indeed, on December 11, 2018, the EPA and the COE proposed a new WOTUS definition.  That new definition was published in the Federal Register on Feb. 14, 2019.  84 Fed. Reg. 4154 (Feb. 14, 2019).  The proposed definition was subject to a 60-day public comment period that closed on April 15, 2019.  The publication of the new definition was in line with President Trump’s Executive Order of February 28, 2017, that the EPA and the Corps clarify the scope of waters that are federally regulated under the Clean Water Act (CWA). 

Here’s a synopsis of the 2019 proposed rule:

  • Groundwater that drains through a farm field tile system is not a point source pollutant subject to federal control under the CWA’s National Pollution Discharge Elimination System (NPDES).  Also excluded from the WOTUS definition are ephemeral streams (those only temporarily containing water) and diffuse surface runoff that doesn’t enter a WOTUS at a particular discharge point. 
  • Ditches are excluded from the definition of a WOTUS unless the ditch is connected to a tributary of a WOTUS. A tributary is defined as “…a river, stream or similar naturally occurring surface water channel that contributes ‘perennial or intermittent’ flow to a traditional navigable water or territorial sea in a typical year…either directly or indirectly through other jurisdictional waters such as tributaries, impoundments, and adjacent wetlands…”.  Dry channels are not tributaries.     
  • Prior converted (PC) wetland is also not a WOTUS. A prior converted wetland is a wetland that was totally drained before December 23, 1985.  However, farmed wetland can still be subject to regulation by the USDA.  A “farmed wetland” is a wetland that was manipulated before December 23, 1985, but still exhibits wetland characteristics. Drains affecting these areas can be maintained, but the scope and effect of the original drainage system cannot be exceeded.  See, e.g., Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir. 1999).   
  • Areas that are artificially irrigated are not a WOTUS. This is an important exception for rice and cranberry farmers.  Likewise, excluded are artificial lakes and ponds (a waterbody that doesn’t have a natural outflow) that are constructed in upland areas.  This would include such structures as farm ponds, stock watering ponds, water storage reservoirs, settling basins and log cleaning ponds.  If there is no perennial or intermittent flow being contributed by the lake or pond, then the lake or pond is not jurisdictional (at least at the federal level). 
  • Other water-filled depressions (such as those created by mining or construction activity when fill, sand or gravel is excavated) are excluded from the definition of a WOTUS if they are in uplands. They are not excluded if they are created in a wetland area to begin with.
  • “[A] mere hydrological connection from a non-navigable, isolated, intrastate lake or pond…may be insufficient to establish jurisdiction under the proposed rule.” “…[E]cological connections between physically separated lakes and ponds and otherwise jurisdictional waters” are not under federal control.  

Conclusion

In the next post, I move on to commenting on the fourth and third most important developments from 2019.  Stay tuned.

January 7, 2020 in Environmental Law | Permalink | Comments (0)

Friday, January 3, 2020

Top Ten Agricultural Law and Tax Developments of 2019 (Numbers 8 and 7)

Overview

Today, I continue the journey through the most significant legal and tax developments of 2019 to impact the ag sector.  The eighth and seventh biggest developments are in today’s commentary. 

  1. SCOTUS Agrees To Hear Case Involving Groundwater Discharges into a WOTUS

Under the Clean Water Act (CWA), a National Pollution Discharge Elimination System (NPDES) permit is required to discharge a “pollutant” from a point source into the “navigable waters of the United States” (WOTUS).  Clearly, a discharge directly into a WOTUS is covered.  But, is an NPDES permit necessary if the discharge is directly into groundwater which then finds its way to a WOTUS?  Are indirect discharges from groundwater into a WOTUS covered?   If so, does that mean that farmland drainage tile is subject to the CWA and an NPDES discharge permit is required?  The federal government has never formally taken that position, but if that’s the case it’s a huge issue for agriculture. 

In 2018, three different U.S. Circuit Courts of Appeal decided cases on the discharge from groundwater issue. 

  • In Hawai’i Wildlife Fund v. County of Maui, 881 F.3d 754 (9th Cir. 2018), the defendant owned and operated four wells at the Lahaina Wastewater Reclamation Facility (LWRF). Although constructed initially to serve as a backup disposal method for water reclamation, the wells became the defendant’s primary means of effluent disposal into groundwater and, ultimately, the Pacific Ocean.  The defendant injected approximately 3 to 5 million gallons of treated wastewater per day into the groundwater via its wells.  The wastewater seeped into the Pacific Ocean. The U.S. Court of Appeals for the Ninth Circuit held that the wells were point sources requiring NDES permits despite the defendant’s claim that NPDES permits were not required because the wells discharged only indirectly into the Pacific Ocean via groundwater.

 

    • In Upstate Forever, et al. v. Kinder Morgan Energy Partners, LP, et al., 887 F.3d 637 (4th Cir. 2018), the plaintiffs claimed that the defendant violated the CWA by discharging “pollutants” into the navigable waters of the United States without a required discharge permit via an underground ruptured gasoline pipeline owned by the defendant’s subsidiary. The plaintiff claimed that a discharge permit was needed because the CWA defines “point source pollutant” (which requires a discharge permit) as “any discernible, confined and discrete conveyance, included but not limited to any…well…from which pollutants are or may be discharged.”  The U.S. Court of Appeals for the Fourth Circuit determined that a pollutant can first move through groundwater before reaching navigable waters and still constitute a “discharge of a pollutant” under the CWA that requires a federal discharge permit. The discharge, the court concluded, need not be channeled by a point source until reaching navigable waters that are subject to the CWA.  It is sufficient, the appellate court reasoned, that the discharge of pollutants from a point source through groundwater have a direct hydrological connection to navigable waters of the United States.
    • In Tennessee Clean Water Network v. Tennessee Valley Authority, 905 F.3d 436 (6th Cir. 2018), the U.S. Court of Appeals for the Sixth Circuit held that the CWA does not apply to point source pollution that reaches surface water by means of groundwater movement. The appellate court noted that, to constitute a “conveyance” of groundwater governed by the CWA, the conveyance must be discernible, confined and discrete. While groundwater may constitute a conveyance, the appellate court reasoned that it is neither discernible, confined nor discrete. Rather, the court noted that groundwater is a “diffuse medium” that “seeps in all directions, guided only by the general pull of gravity. Thus, it [groundwater] is neither confined nor discrete.” In addition, the appellate court noted that the CWA only regulates pollutants “…that are added to navigable waters from any point source.” In so holding, the court rejected the holdings of the Ninth and Fourth Circuits from earlier in 2018.

After the Ninth Circuit issued its opinion, the EPA, on February 20, 2018, requested comment on whether pollutant discharges from point sources that reach jurisdictional surface waters via groundwater may be subject to Clean Water Act (“CWA”) regulation. Specifically, the EPA sought comment on whether the EPA should consider clarification or revision of previous EPA statements regarding the Agency’s mandate to regulate discharges to surface waters via groundwater under the CWA.  In particular, the EPA sought comment on whether it is consistent with the CWA to require a CWA permit for indirect discharges into jurisdictional surface waters via groundwater. The EPA also sought comment on whether some or all of such discharges are addressed adequately through other federal authorities, existing state statutory or regulatory programs or through other existing federal regulations and permit programs.

After receiving over 50,000 comments, on April 15, 2019, the EPA issued an interpretive statement concluding that the releases of pollutants to groundwater are categorically excluded from the NPDES regardless of whether the groundwater is hydrologically connected to surface water.  The EPA reasoned that the Congress explicitly left regulation of groundwater discharges to the states and that the EPA had other statutory authorities through which to regulate groundwater other than the NPDES.  The EPA, in its statement, noted that its interpretation would apply in areas not within the jurisdiction of the U.S. Circuit Courts of Appeal for the Ninth and Fourth Circuits. 

In 2019, the U.S. Supreme Court agreed to hear the Ninth Circuit opinion.  Hawaii Wildlife Fund v. County of Maui, 881 F.3d 754 (9th Cir. 2018), pet. for cert. granted, County of Maui v. Hawaii Wildlife Fund, 139 S. Ct. 1164 (2019)Boiled down to its essence, the case turns on the meaning of “from.”  As noted above, an NPDES permit is required for point source pollutants – those that originate “from” a point source that are discharged into a navigable water.  But what if the pollutant originates from a point source, travels through groundwater, and then later reaches a WOTUS?  Does the permit requirement turn on a direct discharge into a WOTUS, or simply a discharge that originated at a point source that ultimately ends up in a WOTUS?  Clearly, the wells at issue in the case are point sources – on that point all agree.  But, what about discharges from the wells that aren’t directly into a WOTUS?  Are indirect discharges into a WOTUS via groundwater (which is otherwise exempt from the NPDES) subject to the permit requirement?

The case is very important to agriculture because of the ways that a pollutant can be discharged from an initial point and ultimately reach a WOTUS.  For example, the application of manure or commercial fertilizer to a farm field either via surface application or via injection could result in eventual runoff of excess via the surface or groundwater into a WOTUS.  No farmer can guarantee that 100 percent of a manure or fertilizer application is used by the crop to which it is applied and that there are no traces of the unused application remaining in the soil.  Likewise, while organic matter decays and returns to the soil, it contains nutrients that can be conveyed via stormwater into surface water.  The CWA recognizes this and contains an NPDES exemption for agricultural stormwater discharges. But, if the Supreme Court decides in favor of the environmental group, the exemption would be removed, subjecting farmers (and others) to onerous CWA penalties unless a discharge permit were obtained - at a cost estimated to exceed $250,000 (not to mention time delays).

What about farm field tile drainage systems?  Seemingly, such systems would make it easier for “pollutants” to enter a WOTUS.  Such drainage systems are prevalent in the Midwest and other places, including California’s Central Valley.  Should the law discourage agricultural drainage activities?  Thus, a ruling upholding the environmental group’s position would dramatically change agricultural production.  In addition, while large operations would be better positioned to absorb the increased cost of production activities, many mid and small-sized operations would not be able to adjust based simply on the economics involved.   The Court is expected to issue its ruling in 2020.

  1. Regulatory Takings

The power to “take” private property for public use (or for a public purpose) without the owner's consent is an inherent power of the federal and state governments.  However, the United States Constitution limits the government's eminent domain power by requiring federal and state governments to pay for what is “taken.”  The Fifth Amendment states in part “...nor shall private property be taken for public use without just compensation.” 

Whether a taking has occurred is not an issue when the government physically takes the property, with the only issue being whether the taking is compensable and the amount of compensation due to the landowner.  However, for non-physical (regulatory) takings, the issue is murkier.  At what point does government regulation of private property amount to a compensable taking?  Also, if the taking is by a state or local government, must the landowner “exhaust” state court remedies before seeking compensation for a regulatory taking?  If so, it could result in a landowner having no real access to the federal court system on a constitutional taking claim.  It’s an issue that the SCOTUS addressed in 2019. 

For a landowner that has sustained a state/local regulatory (or physical) taking, can compensation be sought initially in federal court or must legal procedures be first pursued in state court with federal courts only available if compensation is denied at the state level?  The U.S. Supreme Court answered this question in 1985.  In Williamson Regional Planning Commission v. Hamilton Bank of Johnson City, 473 U.S. 172 (1985), the Court held that if a state provides an adequate procedure for seeking just compensation, there is no Fifth Amendment violation until the landowner has used the state procedure and has been denied just compensation.  However, 28 U.S.C. §1738, would then be applied with the resulting effect that the failure to receive compensation at the state level generally meant that there was no recourse in the federal courts because of the preclusive effect of the landowner having already litigated the same issue(s) in the state courts.  See, e.g., San Remo Hotel L.P., v. City and County of San Francisco, 545 U.S. 323 (2005).  This “catch-22” was what the Court examined in 2019.

In Knick v. Township of Scott, 139 S. Ct. 2162 (2019), the plaintiff owned a 90-acre farm in Pennsylvania on which she grazed horse and other animals.  The farm includes a small graveyard where ancestors of the plaintiff’s neighbors were buried.  Such “backyard burials” are permissible in Pennsylvania.  In late 2012, the defendant passed an ordinance requiring that “[a]ll cemeteries…be kept open and accessible to the general public during daylight hours.”  The ordinance defined a “cemetery” as “[a] place or area of ground, whether contained on private or public property which has been set apart for or otherwise utilized as a burial place for deceased human beings.”  In 2013, the defendant notified the plaintiff of her ordinance violation.  The plaintiff sued in state court for declaratory and injunctive relief on the basis that the ordinance amounted to a taking of her property, but she did not seek compensation via an inverse condemnation action.

While the case was pending, the defendant agreed to not enforce the ordinance.  As a result, the trial court refused to rule on the plaintiff’s action.  Without any ongoing enforcement of the ordinance, the plaintiff couldn’t show irreparable harm.  Without irreparable harm, the court noted, the plaintiff couldn’t establish what was necessary for the equitable relief she was seeking.  Frustrated at the result in state court, the plaintiff filed a takings claim in federal court.  However, the federal trial court dismissed the case because she hadn’t sought compensation at the state level.  Knick v. Scott Township, No. 3:14-CV-2223st, 2015 U.S. Dist. LEXIS 146861 (M.D. Pa. Oct. 29, 2015).  The appellate court affirmed, citing the Williamson case.  Knick v. Township of Scott, 862 F.3d 310 (3d Cir. 2017). 

In a 5-4 decision, Chief Justice Roberts (joined by Justices Alito, Gorsuch, Kavanaugh and Thomas), writing for the majority, reversed.  He pointed out that there is a distinction between the substance of a right and the remedy for the violation of that right.  It’s the takings clause of the Fifth Amendment that establishes that the government can only take (either physically or via regulation) private property by paying for it. The government’s infringement on private property is what triggers possible compensation.  The Constitutional violation has occurred and a state court decision that makes the landowner financially whole simply remedies that violation.  It doesn’t redefine the property right.  Thus, the majority opinion reasoned, laws confer legal rights and when those rights are violated there must be legal recourse.  See, e.g., Marbury v. Madison, 5 U.S. 137 (1803).  As the majority noted, “a government violates the Takings Clause when it takes property without compensation, and…a property owner may bring a Fifth Amendment claim [in federal court]… at that time.”

The Court’s decision is a significant win for farmers, ranchers, and other rural landowners that are impacted by state and local regulations impacting land use.  A Fifth Amendment right to compensation accrues at the time the taking occurs. 

Conclusion

Next week, I will continue working my way towards the most significant development in ag law and tax.  Stay tuned.

 

January 3, 2020 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Monday, December 30, 2019

The “Almost Top Ten” Ag Law and Ag Tax Developments of 2019

Overview

It’s the time of year again where I sift through the legal and tax developments impacting agriculture from the past year, and rank them in terms of their importance to farmers, ranchers, agribusinesses, rural landowners and the ag sector in general. 

As usual, 2019 contained many legal developments of importance.  There were relatively fewer major tax developments in 2019 compared to prior years, but the issues ebb and flow from year-to-year.  It’s also difficult to pair things down to ten significant developments.  There are other developments that are also significant.  So, today’s post is devoted to those developments that were left on the cutting table and didn’t quite make the “Top Ten” for 2019.

The “almost top ten of 2019” – that’s the topic of today’s post.

Chapter 12 Debt Limit Increase

To be eligible for Chapter 12 bankruptcy, a debtor must be a “family farmer” or a “family fisherman” with “regular annual income.”  A “family farmer” is defined as an individual or individual and spouse who earned more than 50 percent of their gross income from farming either for the taxable year preceding the year of filing or during the second and third tax years preceding filing; have more than 50 percent of their debt be debt from a farming operation that the debtor owns or operates; and, the aggregate debt must not exceed a threshold amount. That threshold amount has only adjusted for inflation since enactment of Chapter 12 in 1986, even though farms have increased in size and capital needs faster than the rate of inflation.  When enacted, 86 percent of farmers were estimated to qualify for Chapter 12.  That percentage had declined over time due to the debt limit only periodically increasing with inflation and stood at $4,411,400 as of the beginning of 2019.  Thus, fewer farmers were able to use Chapter 12 to deprioritize taxes associated with the sale of farm assets used in the farming operation and ultimately put together a reorganization plan that will allow the farmer to stay on the farm to continue production activities, make restructured loan payments and have some debt written off.  However, as of August 23, 2019, the debt limit for a family farmer filing Chapter 12 was increased to $10,000,000 for plans filed on or after that date.  H.R. 2336, Family Farmer Relief Act of 2019, signed into law on Aug. 23, 2019 as Pub. L. No. 116-51.

Which Government Agency Sues a Farmer For a WOTUS Violation?

In 2019, a federal trial court allowed the U.S. Department of Justice (DOJ) to sue a farmer for an alleged CWA dredge and bill permit violation without a specific recommendation from the Environmental Protection Agency (EPA).  The farmer was alleged to have discharged “pollutants” into a “waters of the United States” (WOTUS) as a result of tractor tillage activities on his farmland containing or near to wetlands contiguous to a creek that flowed into a WOTUS.  Staff of the U.S. Army Corps of Engineers (COE) saw the tilled ground and investigated.  The COE staff then conferred with the EPA and referred the matter to the U.S. Department of Justice (DOJ).  The DOJ sued (during the Obama Administration) for enforcement of a CWA §404 permit “by the authority of the Attorney General, and at the request of the Secretary of the Army acting through the United States Corps of Engineers.”  The DOJ alleged that the equipment "constituted a 'point source'" pollutant under the CWA and "resulted in the placement of dredged spoil, biological materials, rock, sand, cellar dirt or other earthen material constituting “pollutants” (within the meaning of 33 U.S.C. § 1362(6)) into waters of the United States. The DOJ alleged that the defendant impacted water plants, changed the river bottom and/or replaced Waters of the United States with dry land, and "resulted in the 'discharge of any pollutant' within the meaning of 33 U.S.C. § 1311(a)."  The farmer moved for summary judgment on the basis that the CWA authorizes only the EPA Administrator to file a CWA §404 enforcement action and that the court, therefore, lacked jurisdiction.  The court disagreed and determined that the defendant could be sued by the U.S. Department of Justice upon the mere recommendation of the COE and without a specific recommendation from the EPA alleging a CWA violation, and in a situation where the CWA did not determine any CWA jurisdiction and only the COE did.  This finding was despite a 1979 Attorney General opinion No. 197 determining that the EPA and not the COE has the ultimate authority to construe what is a navigable WOTUS.  Ultimately, the parties negotiated a settlement costing the farmer over $5 million.  United States v. Lapant, No. 2:16-CV-01498-KJM-DB, 2019 U.S. Dist. LEXIS 75309 (E.D. Cal. May 3, 2019)United States v. Lapant, No. 2:16-CV-01498-KJM-DB, 2019 U.S. Dist. LEXIS 93590 (E.D. Cal. Jun. 3, 2019).

USDA’s Swampbuster “Incompetence”

How does the USDA determine if a tract of farmland contains a wet area that is subject to the Swampbuster rules?  That’s a question of key importance to farmers.  That process was at issue in a 2019 case, and the court painted a rather bleak and embarrassing picture of the USDA bureaucrats.  In fact, the USDA-NRCS was brutalized (rightly so) by the appellate court’s decision for its lack of candor and incompetence.  I will skip the details here (I covered the case in a blog post earlier in 2019), but the appellate court dealt harshly with the USDA.  The USDA uses comparison sites to determine if a particular site is a wetland subject to Swampbuster rules.  In this case, the USDA claimed that 7 C.F.R. § 12.31(b)(2)(ii) allowed them to select a comparison site that was "on the same hydric soil map unit" as the subject property, rather than on whether the comparison site had the same hydrologic features as the subject tract(s).  The appellate court rejected this approach as arbitrary and capricious, noting that the NRCS failed to try an "indicator-based wetland hydrology" approach or to use any of their other tools when picking a comparison site. In addition, the appellate court noted a COE manual specifies that, “[a] hydrologist may be needed to help select and carry out the proper analysis" in situations where potential lack of hydrology is an issue such as in this case.   However, the NRCS did not send a hydrologist to personally examine the plaintiff’s property, claiming instead that a comparison site was not even necessary.  Based on 7 C.F.R. §12.32(a)(2), the USDA claimed, the removal of woody hydrophytic vegetation from hydric soils to permit the production of an agricultural commodity is all that is needed to declare the area "converted wetland."  The appellate court concluded that this understanding of the statue was much too narrow and went against all the other applicable regulatory and statutory provisions by completely forgoing the basis of hydrology that the provisions are grounded in.   Accordingly, the appellate court reasoned that because hydrology is the basis for a change in wetland determination, the removal of trees is merely a factor to determine the presence of a wetland, but is not a determining factor.  In addition, the appellate court pointed out that the NRCS never indicated that the removal of trees changed the hydrology of the property during the agency appeal process – a point that the USDA ignored during the administrative appeal process.  The court’s decision is a step in the right direction for agriculture.  Boucher v. United States Department of Agriculture, 934 F.3d 530(7th Cir. 2019). 

No More EPA “Finger on the Scales”

During 2019, a federal trial court ruled that the EPA has the authority to bar persons currently receiving grant money from the EPA to serve on EPA scientific advisory committees.  That’s an important development for the regulated community, including farmers and ranchers.  The court’s opinion ended an Obama-era EPA policy of allowing EPA advisory committee members to be in present receipt of EPA grants.  At issue in the case was a directive of the Trump-EPA regarding membership in its federal advisory committees.  The directive specified “that no member of an EPA federal advisory committee be currently in receipt of EPA grants.” The directive reversed an Obama-era rule that allowed scientists in receipt of EPA grants to sit on advisory panels.  That rule was resulting in biased advisory committees stacked with committee members that opposed coal and favored an expansive “Waters of the United States” rule among other matters.  In defending its policy change, the EPA explained that “while receipt of grant funds from the EPA may not constitute a financial conflict of interest, receipt of that funding could raise independence concerns depending on the nature of the research conducted and the issues addressed by the committee.” Thus, the change was necessary “to ensure integrity and confidence in its advisory committees.” The trial court found the EPA’s explanation to be within the zone of reasonableness. Based on these findings, the trial court held that the EPA action was rational, considered the relevant factors and was within the authority delegated to the agency.  The court granted the EPA’s motion to dismiss the case. Physicians for Social Responsibility v. Wheeler, 359 F. Supp. 3d 27 (D. D.C. 2019).

Coming-To-The-Nuisance By Staying Put?

Nuisance lawsuits filed against farming operations are often triggered by offensive odors that migrate to neighboring rural residential landowners.  In these situations courts consider numerous factors in determining whether any particular farm or ranch operation is a nuisance.    Factors that are of primary importance are priority of location and reasonableness of the operation.  Together, these two factors have led courts to develop a “coming to the nuisance” defense.  This means that if people move to an area they know is not suited for their intended use, they should be prohibited from claiming that the existing uses are nuisances.  But, what if the ag nuisance comes to you?  Is the ag operation similarly protected in that situation?  An interesting Indiana court case in 2019 dealt with the issue.  In the case, the defendants were three individuals, their farming operation and a hog supplier.  Basically, a senior member of the family retired to a farm home on the premises and other family members established a large-scale confined animal feeding operation (CAFO) on another part of the farm nearby.  The odor issue got bad enough that the retired farmer sued.  However, the court determined that the CAFO was operated properly, had all of the necessary permits, and was within the zoning laws.  The court noted that the plaintiff alleged no distinct, investment-backed expectations that the CAFO had frustrated.  The court upheld the state right-to-farm law and also determined that a “taking” had not occurred because the plaintiff had not sold his home and moved away from the place where he grew up and lived all of his life.  Himsel v. Himsel, No. 18A-PL-645, 2019 Ind. App. LEXIS 181 (Ind. Ct. App. Apr. 22, 2019).

Obamacare Individual Mandate Unconstitutional

In his decision in 2012 upholding Obamacare as constitutional, Chief Justice Roberts hinged the constitutionality of the law on the individual mandate (contained in I.R.C. §5000A) being a tax and, therefore, within the taxing authority of the Congress.  Thus, if the tax is eliminated or the rate of the penalty tax taken to zero is the law unconstitutional?  That’s a possibility now that the tax rate on the penalty is zero for tax years beginning after 2018.  In late 2018, a federal district court noted that the payment was distinct from the individual mandate and determined that the individual mandate was no longer constitutional as of January 1, 2019 because it would no longer trigger any tax. In addition, because the individual mandate was the linchpin of the entire law, the court determined that the provision could not be severed from the balance of the law. As a result, the court reasoned, as of January 1, 2019, Obamacare no longer had any constitutional basis.  Texas v. United States, 340 F.3d 579 (N.D. Tex. 2018).  In 2019, the appellate court affirmed.  Texas v. United States, No. 19-10011, 2019 U.S. App. LEXIS 37567 (5th Cir. Dec .18, 2019).  The appellate court determined that the individual mandate was unconstitutional because it could no longer be read as a tax, and there was no other constitutional provision that justified that exercise of congressional power.  Watch for this case to end up back before the Supreme Court.  The case is of monumental importance not only on the health insurance issue.  Obamacare contained many taxes that would be invalidated if the law were finally determined to be unconstitutional. 

Conclusion

These were the developments that didn’t quite make the “Top 10” of 2019.  In Wednesday’s post, I will start the trek through the Top 10 of 2019.

December 30, 2019 in Bankruptcy, Environmental Law, Income Tax, Regulatory Law | Permalink | Comments (0)

Thursday, November 14, 2019

Groundwater Discharges of Pollutants and the Supreme Court

Overview

In Tuesday’s post, https://lawprofessors.typepad.com/agriculturallaw/2019/11/does-a-pollutant-discharge-from-groundwater-into-a-wotus-require-a-federal-permit.html, I discussed the three U.S. Circuit Court of Appeal decisions from 2018 involving groundwater discharges of pollutants and the Clean Water Act (CWA).  The courts reached opposite conclusions on the issue of whether a CWA permit is required when pollutants originate from a point source but are conveyed to navigable waters by a nonpoint source, such as groundwater.  Last week the U.S. Supreme Court heard oral arguments in the one case of the three decisions mentioned above from 2018. 

The Court’s decision will be of monumental importance to agriculture.  In today’s post, I take a look at last week’s oral argument and explain why agriculture should care.

Framing the Issue

In Tuesday’s post, I laid out the basic requirements of the discharge permit requirements of the CWA.  To restate, the CWA requires a National Pollutant Discharge Elimination System (NPDES) permit for the discharge of pollutants into the navigable waters of the United States (WOTUS) “from” a point source.  The CWA (and the underlying regulations) defines a “point source” as a “discernable, confined, and discrete conveyance[s].”  Discharges not fitting within that definition are nonpoint source discharges and are primarily left up to the states to regulate.  The CWA also states that a “navigable” water is contained in a WOTUS, but groundwater is not. 

In the case presently before the Supreme Court, Hawaii Wildlife Fund v. County of Maui, 881 F.3d 754 (9th Cir. 2018), pet. for cert. granted sub. nom., County of Maui v. Hawaii Wildlife Fund, 139 S. Ct. 1164 (2019), treated wastewater from injection wells ultimately commingled with groundwater and dispersed in a manner that caused at least some of it to flow into the Pacific Ocean in a dispersed manner with no identifiable discharge point.  This had been known to occur since at least 1973 and no federal permit had ever been required.  An environmental group sued, and the trial court granted summary judgment to the group, finding that the indirect discharge of a pollutant into the ocean through a “groundwater conduit” constituted a point source of pollution, and that the CWA classifies groundwater as a “navigable water.”  The U.S. Court of Appeals for the Ninth Circuit affirmed.  The U.S. Supreme Court agreed to hear the case to clear up conflicting opinions on the issue by the Circuit Courts. 

What Does “From” Mean?

Boiled down to its essence, the case turns on the meaning of “from.”  As noted above, an NPDES permit is required for point source pollutants – those that originate “from” a point source that are discharged into a navigable water.  But what if the pollutant originates from a point source, travels through groundwater, and then later reaches a WOTUS?  Does the permit requirement turn on a direct discharge into a WOTUS, or simply a discharge that originated at a point source that ultimately ends up in a WOTUS?  Clearly, the wells at issue in the case are point sources – on that point all agree.  But, what about discharges from the wells that aren’t directly into a WOTUS?  Are indirect discharges into a WOTUS via groundwater (which is otherwise exempt from the NPDES) subject to the permit requirement?

At oral argument last week, the federal Environmental Protection Agency (EPA) took the position that discharges into groundwater are excluded from the NPDES permit requirement. The defendant county also pointed out that the CWA distinguishes point source and nonpoint source pollution, and that including indirect discharges into a WOTUS via groundwater would eliminate that distinction and expose countless businesses (and, I would add, farmers) to fines of $50,000 per day based on an “after-the-fact” traceability analysis (i.e., whether the pollutant can be traced from a navigable water back to the point source).  Justice Breyer along with Justice Kagan and Chief Justice Roberts seemed to reject the county’s rationale.  But Justice Alito posited an example of a homeowner with a septic tank whose contents ended up in discharging into a WOTUS.  Justices Breyer, Kavanaugh, Gorsuch and Chief Justice Roberts joined Justice Alito in expressing concern about the potential impact on such a homeowner.  They seemed to reject the environmental group’s traceability test and/or proximate cause tests.  Justice Breyer pointed out that “virtually every little drop of rain that falls finds its way to the sea” and that scientists are “geniuses” who “can trace all kinds of things.”  Justice Kavanaugh expressed concern that if the position of the environmental group were adopted that the CWA’s regulatory balance between the federal government and the various states would be severely (if not entirely) tilted in the federal government’s favor. 

Implications for Agriculture

The case is very important to agriculture because of the ways that a pollutant can be discharged from an initial point and ultimately reach a WOTUS.  For example, the application of manure or commercial fertilizer to a farm field either via surface application or via injection could result in eventual runoff of excess via the surface or groundwater into a WOTUS.  No farmer can guarantee that 100 percent of a manure or fertilizer application is used by the crop to which it is applied and that there are no traces of the unused application remaining in the soil.  Likewise, while organic matter decays and returns to the soil, it contains nutrients that can be conveyed via stormwater into surface water.  The CWA recognizes this and contains an NPDES exemption for agricultural stormwater discharges. But, if the Supreme Court decides in favor of the environmental group, the exemption would be removed, subjecting farmers (and others) to onerous CWA penalties unless a discharge permit were obtained - at a cost estimated to exceed $250,000 (not to mention time delays).

What about farm field tile drainage systems?  Seemingly, such systems would make it easier for “pollutants” to enter a WOTUS.  Such drainage systems are prevalent in the Midwest and other places, including California’s Central Valley.  Should the law discourage agricultural drainage activities?  Thus, a ruling upholding the environmental group’s position would dramatically change agricultural production.  In addition, while large operations would be better positioned to absorb the increased cost of production activities, many mid and small-sized operations would not be able to adjust based simply on the economics involved. 

Conclusion

What the case boils down to is whether the addition of a pollutant to groundwater that eventually reaches a WOTUS requires an NPDES permit.  If so, an NPDES permit would be required whenever any type of seepage to groundwater might occur that could reach a WOTUS.  That result is virtually always present with common agricultural practices, and an NPDES permit requirement for common agricultural husbandry practices would be most disruptive to food production in the United States.  There is a reason that the Congress left the regulation of nonpoint source pollution up to the states rather than create a blanket rule requiring an NPDES permit in practically all situations.  There is also a reason that Congress created an exemption for agricultural stormwater.  Are those reasons legitimate?  Do public policy concerns now override them?

In addition, a ruling in favor of the environmentalist group would certainly raise the issue of how the regulatory bureaucracy would administer such a massive expansion of the NPDES.

To agriculture, the definition of “from” is suddenly very important.   Sometime next year, the “word peddlers” will tell us what it means.

November 14, 2019 in Environmental Law | Permalink | Comments (0)

Tuesday, November 12, 2019

Does a Pollutant Discharge From Groundwater Into a WOTUS Require a Federal Permit?

Overview

Under the Clean Water Act (CWA), a National Pollution Discharge Elimination System (NPDES) permit is required to discharge a “pollutant” from a point source into the “navigable waters of the United States” (WOTUS).  Clearly, a discharge directly into a WOTUS is covered.  But, is an NPDES permit necessary if the discharge is directly into groundwater which then finds its way to a WOTUS?  Are indirect discharges from groundwater into a WOTUS covered?   If so, does that mean that farmland drainage tile is subject to the CWA and an NPDES discharge permit is required?  The federal government has never formally taken that position, but if that’s the case it’s a huge issue for agriculture. 

Last week the U.S. Supreme Court heard arguments in a case involving these issues.  The Court’s decision will have very significant implications for agriculture. 

CWA Discharge Permit Basics

The CWA recognizes two sources of pollution. Point source pollution is pollution which comes from a clearly discernable discharge point, such as a pipe, a ditch, or a concentrated animal feeding operation.  Under the CWA, point source pollution is the concern of the federal government.  Nonpoint source pollution, while not specifically defined under the CWA, is pollution that comes from a diffused point of discharge, such as fertilizer runoff from an open field.  Control of nonpoint source pollution is to be handled by the states through enforcement of state water quality standards and area-wide waste management plans.

Under 1977 amendments, tile drainage systems were exempted from CWA regulation via irrigation return flows.  See, e.g., Pacific Coast Federation of Fishermen’s Associations, et al. v. Glaser, et al., No. CIV S-2:11-2980-KJM-CKD, 2013 U.S. Dist. LEXIS 132240 (E.D. Cal. Sept. 16, 2013).  They aren’t considered to be point sources.  In addition, several courts have held that the NPDES system only applies to discharges of pollutants into surface water.  These courts have held that discharges of pollutants into groundwater are not subject to the NPDES permit

requirement even if the groundwater is hydrologically connected to surface water.  See, e.g., Umatilla Water Quality Protective Association v. Smith Frozen Foods, 962 F. Supp. 1312 (D. Ore. 1997); United States v. ConAgra, Inc., No. CV 96-0134-S-LMB, 1997 U.S. Dist. LEXIS 21401 (D. Idaho Dec. 31, 1997).  Likewise, in another case, the court determined that neither the CWA nor the EPA covered groundwater solely on the basis of a hydrological connection with surface water.  Village of Oconomowoc Lake v. Dayton Hudson Corporation, 24 F.3d 962 (7th Cir. 1994), cert. denied, 513 U.S. 930 (1994).  See also Rice v. Harken Exploration Co., 250 F.3d 264 (5th Cir. 2001); Cape Fear River Watch v. Duke Energy Progress, Inc., 25 F. Supp. 3d 798 (E.D. N.C. 2014).

But, other courts have taken a different view, finding that the CWA covers pollution discharges irrespective of whether the discharge is directly into a WOTUS or indirectly via groundwater with some sort of hydrological connection to a WOTUS.   See, e.g., Idaho Rural Council v. Bosma, 143 F. Supp. 2d 1169 (D. Idaho 2001); Northern California River Watch v. Mercer Fraser Co., No. 04-4620 SC, 2005 U.S. Dist. LEXIS 42997 (N.D. Cal. Sept. 1, 2005); United States v. Banks, 115 F.3d 916 (11th Cir. 1997), cert. denied, 522 U.S. 1075 (1998); Mutual Life Insurance Co. of New York v. Mobil Corp., No. 96-CV-1781 (RSP/DNH), 1998 U.S. Dist. LEXIS 4513 (N.D. N.Y. Mar. 31, 1998).

2018 Cases

Ninth Circuit case.  Three different U.S. Circuit Courts of Appeal decided cases on the discharge from groundwater issue.  In the first case, Hawai’i Wildlife Fund v. County of Maui, 881 F.3d 754 (9th Cir. 2018), the defendant owned and operated four wells at the Lahaina Wastewater Reclamation Facility (LWRF), which is the principal municipal wastewater treatment plant for a city. Although constructed initially to serve as a backup disposal method for water reclamation, the wells became the defendant’s primary means of effluent disposal into groundwater and, ultimately, the Pacific Ocean. The LWRF received approximately 4 million gallons of sewage per day from a collection system serving approximately 40,000 people. That sewage is treated at LWRF and then either sold to customers for irrigation purposes or injected into the wells for disposal.

The defendant injected approximately 3 to 5 million gallons of treated wastewater per day into the groundwater via its wells.  The defendant conceded, and its expert confirmed that wastewater injected into wells 1 and 2 enters the Pacific Ocean. In addition, in June 2013 the EPA, the Hawaii Department of Health, the U.S. Army Engineer Research and Development Center, and researchers from the University of Hawaii conducted a study on wells 2, 3 and 4. The study involved placing tracer dye into Wells 2, 3, and 4, and monitoring the submarine seeps off Kahekili Beach to see if and when the dye would appear in the Pacific Ocean. This study, known as the “Tracer Dye Study,” found that 64 percent of the treated wastewater from wells 3 and 4 discharged into the ocean. The plaintiff sued, claiming that the defendant was in violation of the Clean Water Act (CWA) by discharging pollutants into navigable waters of the United States without a CWA National Pollution Discharge Elimination System (NPDES) permit. The trial court agreed, holding that an NPDES permit was required for effluent discharges into navigable waters via groundwater.

On appeal, the appellate court held that the wells were point sources that could be regulated through CWA permits despite the defendant’s claim that an NPDES permit was not required because the wells discharged only indirectly into the Pacific Ocean via groundwater. Specifically, the appellate court held that “a point source discharge to groundwater of “more than [a] de minimis” amount of pollutants that is “fairly traceable from the point source . . . such that the discharge is the functional equivalent of a discharge into a navigable water” is regulated under the CWA.” The appellate court reached this conclusion by citing cases from other jurisdictions that determined that an indirect discharge from a point source into a navigable water requires an NPDES discharge permit. The defendant also claimed that its effluent injections are not discharges into navigable waters, but rather were disposals of pollutants into wells, and that the CWA categorically excludes well disposals from the permitting requirements. However, the appellate court held that the CWA does not categorically exempt all well disposals from the NPDES requirements because doing so would undermine the integrity of the CWA’s provisions. Lastly, the defendant claimed that it did not have fair notice because the state agency tasked with administering the NPDES permit program maintained that an NPDES permit was unnecessary for the wells. However, the appellate court held that the agency was actually still in the process of determining if an NPDES permit was applicable. Thus, the appellate court found the lack of solidification of the agency’s position on the issue did not affirmatively demonstrate that it believed the permit was unnecessary as the defendant claimed. Furthermore, the court held that a reasonable person would have understood the CWA as prohibiting the discharges, thus the defendant’s due process rights were not violated. 

EPA seeks input.  After the Ninth Circuit issued its opinion, the EPA, on February 20, 2018, requested comment on whether pollutant discharges from point sources that reach jurisdictional surface waters via groundwater may be subject to Clean Water Act (“CWA”) regulation. Specifically, the EPA sought comment on whether the EPA should consider clarification or revision of previous EPA statements regarding the Agency’s mandate to regulate discharges to surface waters via groundwater under the CWA.  Some courts have taken the view that Congress intended the CWA to regulate the release of pollutants that reach “waters of the United States” regardless of whether those pollutants were first discharged into groundwater. However, other courts, have taken the view that neither the CWA nor the EPA’s definition of waters of the United States asserts authority over groundwater based solely on a hydrological connection with surface waters. EPA has not stated that CWA permits are required for pollutant discharges to groundwater in all cases. Rather, EPA’s position has been that pollutants discharged from point sources that reach jurisdictional surface waters via groundwater or other subsurface flow that has a direct hydrologic connection to the jurisdictional water may be subject to CWA permitting requirements. As part of its request, the EPA sought comment by May 21, 2018, on whether it should review and potentially revise its previous positions. In particular, the EPA sought comment on whether it is consistent with the CWA to require a CWA permit for indirect discharges into jurisdictional surface waters via groundwater. The EPA also sought comment on whether some or all of such discharges are addressed adequately through other federal authorities, existing state statutory or regulatory programs or through other existing federal regulations and permit programs.

Fourth Circuit case.  Approximately two months after the Ninth Circuit issued its opinion, the Fourth Circuit issued its opinion in Upstate Forever, et al. v. Kinder Morgan Energy Partners, LP, et al., 887 F.3d 637 (4th Cir. 2018)The plaintiffs, a consortium of environmental and conservation groups, brought a citizen suit under the CWA claiming that the defendant violated the CWA by discharging “pollutants” into the navigable waters of the United States without a required discharge permit via an underground ruptured gasoline pipeline owned by the defendant’s subsidiary. The plaintiff claimed that a discharge permit was needed because the CWA defines “point source pollutant” (which requires a discharge permit) as “any discernible, confined and discrete conveyance, included but not limited to any…well…from which pollutants are or may be discharged.”  The trial court dismissed the plaintiffs’ claim for lack of standing.

On appeal, the appellate court determined that the trial court did have subject matter jurisdiction under the CWA’s citizen suit provision because the provision covered the discharge of “pollutants that derive from a ‘point source’ and continue to be ‘added’ to navigable waters.” Thus, even though the pipeline was no longer releasing gasoline, it continues to be passing through the earth via groundwater and continued to be discharged into regulable surface waters. This finding was contrary to the trial court’s determination that the court lacked jurisdiction because the pipeline had been repaired and because the pollutants had first passed through groundwater. As such, the appellate court determined that, in accord with the Second and Ninth Circuits, that a pollutant can first move through groundwater before reaching navigable waters and still constitute a “discharge of a pollutant” under the CWA that requires a federal discharge permit. The discharge need not be channeled by a point source until reaching navigable waters that are subject to the CWA.  It is sufficient, the appellate court reasoned, that the discharge of pollutants from a point source through groundwater have a direct hydrological connection to navigable waters of the United States. 

The appellate court did, however, point out that a discharge into groundwater does not always mean that a CWA discharge permit is required. A permit in such situations is only required if there is a direct hydrological connection between groundwater and navigable waters. In the present case, however, the appellate court specifically noted that the pipeline rupture occurred within 1,000 feet of the navigable waters. The appellate court also noted that the defendant had not established any independent or contributing cause of pollution. 

Sixth Circuit Case

In the fall of 2018, the Sixth Circuit decided Tennessee Clean Water Network v. Tennessee Valley Authority, 905 F.3d 436 (6th Cir. 2018).  The case involved a utility that burned coal to produce energy.  As a part of that production process, coal ash is produced.  The coal ash is discharged into man-made ponds. The plaintiffs, environmental activist groups, claimed that the chemicals from the coal ash in the ponds leaked into surrounding groundwater where it was then carried to a nearby lake that was subject to regulation under the Clean Water Act (CWA). They claimed that the contamination of the lake without a discharge permit violated the CWA and the Resource Conservation and Recovery Act (RCRA).

The trial court had dismissed the RCRA claim but the appellate court reversed that determination and remanded the case on that issue. On the CWA claim, the trial court ruled as a matter of law that the CWA applies to discharges of pollutants from a point source through groundwater that is hydrologically connected to navigable waters where the connection is "direct, immediate, and can generally be traced." The trial court held that the defendant’s facility was a point source because it "channel[s] the flow of pollutants . . . by forming a discrete, unlined concentration of coal ash," and that the Complex is also a point source because it is "a series of discernible, confined, and discrete ponds that receive wastewater, treat that wastewater, and ultimately convey it to the Cumberland River." The trial court also determined that the defendant’s facility and the ponds were hydrologically connected to the Cumberland River by groundwater. As for the defendant’s facility, the court held that "[f]aced with an impoundment that has leaked in the past and no evidence of any reason that it would have stopped leaking, the Court has no choice but to conclude that the [defendant’s facility] has continued to and will continue to leak coal ash waste into the Cumberland River, through rainwater vertically penetrating the Site, groundwater laterally penetrating the Site, or both." The trial court determined that the physical properties of the terrain made the area “prone to the continued development of ever newer sinkholes or other karst features." Thus, based on the contaminants flowing from the ponds, the court found defendant to be in violation of the CWA. The trial court also determined that the leakage was in violation of the defendant “removed-substances” and “sanitary-sewer” overflow provisions.

The trial court ordered the defendant to "fully excavate" the coal ash in the ponds (13.8 million cubic yards in total) and relocate it to a lined facility. On further review, the appellate court reversed. The appellate court held that the CWA does not apply to point source pollution that reaches surface water by means of groundwater movement. The appellate court rejected the plaintiffs’ assertion that mere groundwater is equivalent to a discernable point source through which pollutants travel to a CWA-regulated body of water. The appellate court noted that, to constitute a “conveyance” of groundwater governed by the CWA, the conveyance must be discernible, confined and discrete. While groundwater may constitute a conveyance, the appellate court reasoned that it is neither discernible, confined nor discrete. Rather, the court noted that groundwater is a “diffuse medium” that “seeps in all directions, guided only by the general pull of gravity. Thus, it [groundwater] is neither confined nor discrete.” In addition, the appellate court noted that the CWA only regulates pollutants “…that are added to navigable waters from any point source.” In so holding, the court rejected the holdings of the Ninth and Fourth Circuits from earlier in 2018.

EPA interpretive statement.  After receiving over 50,000 comments, on April 15, 2019, the EPA issued an interpretive statement concluding that the releases of pollutants to groundwater are categorically excluded from the NPDES regardless of whether the groundwater is hydrologically connected to surface water.  The EPA reasoned that the Congress explicitly left regulation of groundwater discharges to the states and that the EPA had other statutory authorities through which to regulate groundwater other than the NPDES.  The EPA, in its statement, noted that its interpretation would apply in areas not within the jurisdiction of the U.S. Circuit Courts of Appeal for the Ninth and Fourth Circuits. 

Conclusion

Earlier this year, the U.S. Supreme Court agreed to hear the Ninth Circuit opinion.  Last week, the Court heard oral arguments in the case.  The specific question before the Court is whether the CWA requires a permit when pollutants originate from a point source but are conveyed to navigable waters by a nonpoint source, such as groundwater.  The EPA, in its April 15, 2019, interpretive statement stated that once the U.S. Supreme Court issues its opinion in the matter that the EPA may take further action, if necessary.

How the Supreme Court answers the question has critical implications for agriculture.  In Thursday’s post, I will review the oral argument and the implications for agriculture. 

November 12, 2019 in Environmental Law | Permalink | Comments (0)

Friday, October 11, 2019

Regulatory Takings – Pursuing a Remedy

Overview

The power to “take” private property for public use (or for a public purpose) without the owner's consent is an inherent power of the federal and state governments.  However, the United States Constitution limits the government's eminent domain power by requiring federal and state governments to pay for what is “taken.”  The Fifth Amendment states in part “...nor shall private property be taken for public use without just compensation.” 

Whether a taking has occurred is not an issue when the government physically takes the property, with the only issue being whether the taking is compensable and the amount of compensation due to the landowner.  However, for non-physical (regulatory) takings, the issue is murkier.  At what point does government regulation of private property amount to a compensable taking?  In a previous post I addressed U.S. Supreme Court guidance on how to determine the property that the landowner claims has been taken. 

If the taking is by a state or local government, must the landowner “exhaust” state court remedies before seeking compensation for a regulatory taking?  If so, it could result in a landowner having no real access to the federal court system on a constitutional taking claim.  It’s an issue that the U.S. Supreme Court addressed late in its last term this past June.  It’s also the topic of today’s post – pursuing a “takings” remedy in federal court for a state/local-level regulatory taking

Regulatory (Non-Physical) Takings

A non-physical taking may involve the governmental condemnation of air space rights, water rights, subjacent or lateral support rights, or the regulation of property use through environmental restrictions.  How is the existence of a regulatory taking determined?  There are several approaches that the Supreme Court has utilized.

Multi-factor balancing test.  In a key case decided in 1978, the U.S. Supreme Court set forth a multi-factored balancing test for determining when governmental regulation of private property effects a taking requiring compensation.  In Penn Central Transportation Co. et al. v. New York City, 438 U.S. 104 (1978), the Court held that a landowner cannot establish a “taking” simply by being denied the ability to exploit a property interest believed to be available for development.  Instead, the Court ruled that in deciding whether particular governmental action effects a taking, the character, nature and extent of the interference with property rights as a whole are the proper focus rather than discrete segments of the owner’s property rights.  In 2005, the Court confirmed the multi-factor test and noted that the touchstone for deciding when a regulation is a taking is whether the restriction on property usage is functionally equivalent to a physical taking of the property.  Lingle, et al. v. Chevron U.S.A., Inc., 544 U.S. 528 (2005).  

Total regulatory taking.  In Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992), the landowner purchased two residential lots with an intent to build single-family homes.  Two years later, the state legislature passed a law prohibiting the erection of any permanent habitable structures on the Lucas property.  The law's purpose was to prevent beachfront erosion and to protect the property as a storm barrier, a plant and wildlife habitat, a tourist attraction, and a “natural health environment” which aided the physical and mental well-being of South Carolina's citizens.  The law effectively rendered the Lucas property valueless.  Lucas sued the Coastal Council claiming that, although the act may be a valid exercise of the state's police power, it deprived him of the use of his property and thus, resulted in a taking without just compensation.  The Coastal Council argued that the state had the authority to prevent harmful uses of land without having to compensate the owner for the restriction.

The Supreme Court ruled for Lucas and opined that the state's interest in the regulation was irrelevant since the trial court determined that Lucas was deprived of any economically viable alternative use of his land.  The Lucas case has two important implications for environmental regulation of agricultural activities.  First, the Lucas court focused solely on the economic viability of the land and made no recognition of potential noneconomic objectives of land ownership.  However, in the agricultural sector land ownership is typically associated with many noneconomic objectives and serves important sociological and psychological functions.  Under the Lucas approach, these noneconomic objectives are not recognized.  Second, under the Lucas rationale, environmental regulations do not invoke automatic compensation unless the regulations deprive the property owner of all beneficial use.

Under the Lucas approach, an important legal issue is whether compensation is required when the landowner has economic use remaining on other portions of the property that are not subject to regulation.

Unconstitutional conditions.  In Nollan v. California Coastal Commission,483 U.S. 825 (1987), the plaintiff owned a small, dilapidated beach house and wanted to tear it down and replace it with a larger home.  However, the defendant was concerned about preserving the public's viewing access over the plaintiff's land from the public highway to the waterfront.  Rather than preventing the construction outright, the defendant conditioned the plaintiff's right to build on the land upon the plaintiff giving the defendant a permanent, lateral beachfront easement over the plaintiff's land for the benefit of the public.  Thus, the issue was whether the state could force the plaintiffs to choose between their construction permit and their lateral easement.  The Court held that this particular bargain was impermissible because the condition imposed (surrender of the easement) lacked a “nexus” with, or was unrelated to the legitimate interest used by the state to justify its actions - preserving the view.  The Court later ruled similarly in Dolan v. Tigard, 512 U.S. 374 (1994).  These cases hold that the government may not require a person to give up the constitutional right to receive just compensation when property is taken for a public use in exchange for a discretionary benefit that has little or no relationship to the property. The rule of the cases does not apply to situations involving impact fees and other permit conditions that do not involve physical invasions, but it would apply to monetary exactions where none of the plaintiff’s property is actually taken.  See, e.g., Koontz v. St. Johns River Water Management District, 133 S. Ct. 2586 (2013).

State/Local Takings – Seeking a Remedy

For a landowner that has sustained a state/local regulatory (or physical) taking, can compensation be sought initially in federal court or must legal procedures be first pursued in state court with federal courts only available if compensation is denied at the state level?  The U.S. Supreme Court answered this question in 1985.  In Williamson Regional Planning Commission v. Hamilton Bank of Johnson City, 473 U.S. 172 (1985), the Court held that if a state provides an adequate procedure for seeking just compensation, there is no Fifth Amendment violation until the landowner has used the state procedure and has been denied just compensation.  However, 28 U.S.C. §1738, would then be applied with the resulting effect that the failure to receive compensation at the state level generally meant that there was no recourse in the federal courts because of the preclusive effect of the landowner having already litigated the same issue(s) in the state courts.  See, e.g., San Remo Hotel L.P., v. City and County of San Francisco, 545 U.S. 323 (2005).  This “catch-22” was what the Court examined earlier this year.

The 2019 Case

In Knick v. Township of Scott, 139 S. Ct. 2162 (2019), the plaintiff owned a 90-acre farm in Pennsylvania on which she grazed horse and other animals.  The farm includes a small graveyard where ancestors of the plaintiff’s neighbors were buried.  Such “backyard burials” are permissible in Pennsylvania.  In late 2012, the defendant passed an ordinance requiring that “[a]ll cemeteries…be kept open and accessible to the general public during daylight hours.”  The ordinance defined a “cemetery” as “[a] place or area of ground, whether contained on private or public property which has been set apart for or otherwise utilized as a burial place for deceased human beings.”  In 2013, the defendant notified the plaintiff of her violation of the ordinance.  The plaintiff sued in state court for declaratory and injunctive relief on the basis that the ordinance amounted to a taking of her property, but she did not seek compensation via an inverse condemnation action.

While the case was pending, the defendant agreed to not enforce the ordinance.  As a result, the trial court refused to rule on the plaintiff’s action.  Without any ongoing enforcement of the ordinance, the plaintiff couldn’t show irreparable harm.  Without irreparable harm, the court noted, the plaintiff couldn’t establish what was necessary for the equitable relief she was seeking.  Frustrated at the result in state court, the plaintiff filed a takings claim in federal court.  However, the federal trial court dismissed the case because she hadn’t sought compensation at the state level.  Knick v. Scott Township, No. 3:14-CV-2223st (M.D. Pa. Oct. 29, 2015).  The appellate court affirmed, citing the Williamson case.  Knick v. Township of Scott, 862 F.3d 310 (3d Cir. 2017). 

In a 5-4 decision, Chief Justice Roberts (joined by Justices Alito, Gorsuch, Kavanaugh and Thomas), writing for the majority, reversed.  He pointed out that there is a distinction between the substance of a right and the remedy for the violation of that right.  It’s the takings clause of the Fifth Amendment that establishes that the government can only take (either physically or via regulation) private property by paying for it. The government’s infringement on private property is what triggers possible compensation.  The Constitutional violation has occurred and a state court decision that makes the landowner financially whole simply remedies that violation.  It doesn’t redefine the property right.  Thus, the majority opinion reasoned, laws confer legal rights and when those rights are violated there must be legal recourse.  See, e.g., Marbury v. Madison, 5 U.S. 137 (1803).  As the majority noted, “a government violates the Takings Clause when it takes property without compensation, and…a property owner may bring a Fifth Amendment claim [in federal court]… at that time.”

Conclusion

The Court’s decision is a significant win for farmer’s, ranchers, and other rural landowners that are impacted by state and local regulations impacting land use.  A Fifth Amendment right to compensation accrues at the time the taking occurs.  It’s also useful to note that the decision would not have come out as favorably without the presence of Justices Gorsuch and Kavanaugh on the Court.  That’s a point that agricultural interests also note.   

 

October 11, 2019 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Wednesday, October 9, 2019

Ag Law in the Courts

Overview 

Agricultural law issues in the courts are many.  On a daily basis, cases involving farmers, ranchers, rural landowners and agribusinesses are decided.  Periodically, on this blog I examine a few of the recent court decisions that are of particular importance and interest.  Today’s post is one such post.

Proving water drainage damage; migrating gas and the rule of capture; and suing for Clean Water Act (CWA)  – these are the topics of today’s post.

The Case of the Wayward Water

In Kellen v. Pottebaum, 928 N.W.2d 874 (Iowa Ct. App. 2019), the defendant installed a drain pipe that discharged water from the defendant’s land to the plaintiffs’ land. The plaintiff sued alleging that the pipe caused an unnatural flow of water which damaged the plaintiff’s farmland and sought damages and removal of the pipe. The defendant counterclaimed arguing that the plaintiff’s prior acts and/or inaction regarding the flow of the water caused damage to the defendant’s property. The trial court determined that neither party had established their claims and dismissed each claim with prejudice.

The appellate court affirmed.  As for the sufficiency of the evidence, the appellate court noted that the defendant owned the dominant estate and the plaintiff owned the servient estate. As such, if the plaintiff could prove that the installation of the pipe considerably increased the volume of water flowing onto the plaintiff’s land or substantially changed the drainage and actual damage resulted, the plaintiff would be entitled to relief. However, most of the evidence presented to the court was the observations of lay witnesses rather than measured water flow. Accordingly, the appellate court agreed with the trial court that the plaintiff did not prove by a preponderance of the evidence that installation of the pipe caused the increased water flow. The appellate court noted that a “reasonable fact finder” could attribute the additional water on the plaintiffs’ property to the increased rain fall during the years at issue. The appellate court also determined that the plaintiffs did not prove by preponderance of the evidence that installation of the pipe substantially changed the drainage. The water did not flow in a different direction on the plaintiff’s property. Rather, the defendant altered the flow of water across his property in a natural direction towards the plaintiff’s drainage, which is permissible under state (IA) law. Thus, the plaintiff did not prove harm by a preponderance of the evidence. The appellate court also concluded that the trial court did not abuse its discretion excluding some of the plaintiff’s evidence. 

Ownership of Migrated Gas

In Northern Natural Gas Co. v. ONEOK Field Servs. Co., LLC, No. 118,239, 2019 Kan. LEXIS 324 (Kan. Sup. Ct. Sept. 6, 2019), the plaintiff operated an underground gas storage facility, which was certified by the proper state and federal commissions. The defendants were producers with wells located two to six miles from the edge of the plaintiff’s certified storage area. Stored gas migrated to the defendants’ wells and the defendants captured and sold the gas as their own. The plaintiff sued for lost gas sales and the defendants moved for summary judgment on the grounds that the Kansas common law rule of capture allowed the gas extraction. The trial court granted the defendants’ motion. Two years later, the plaintiff received certification to expand the storage area into the areas with the defendants’ wells. Another dispute arose as to whether the defendants could capture the gas after the plaintiff’s storage area was expanded. The trial court held that the defendants could under the common law rule of capture.

On review, the Kansas Supreme Court reversed and remanded on the basis that the rule of capture did not apply. That rule, the Court noted, allows someone that is acting within their legal rights to capture oil and gas that has migrated from the owner’s property to use the migrated oil and gas for their own purposes. The rule reflects the application of new technology such as injection wells and applies to non-native gas injected into common pools for storage. However, the Court reasoned, the rule does not apply when a party (such as the plaintiff) is authorized to store gas and the storage is identifiable. The Court determined that state statutory law did not override this recognized exception to the application of the rule of capture. The Court remanded the case for a computation of damages for the lost gas. 

Jurisdiction Over CWA §404 Permit Violations – Who Can Sue?

A recent case involving a California farmer has raised some eyebrows.  In the case, the trial court allowed the U.S. Department of Justice (DOJ) to sue the farmer for an alleged CWA dredge and bill permit violation without a specific recommendation from the Environmental Protection Agency (EPA).  The farmer was alleged to have discharged “pollutants” into a “waters of the United States” (WOTUS) as a result of tractor tillage activities on his farmland containing or near to wetlands contiguous to a creek that flowed into a WOTUS.  Staff of the U.S. Army Corps of Engineers (COE) saw the tilled ground and investigated.  The COE staff then conferred with the EPA and then referred the matter to the U.S. Department of Justice (DOJ).  The DOJ sued (during the Obama Administration) for enforcement of a CWA §404 permit “by the authority of the Attorney General, and at the request of the Secretary of the Army acting through the United States Corps of Engineers.”  The DOJ alleged that the equipment "constituted a 'point source'" pollutant under the CWA and "resulted in the placement of dredged spoil, biological materials, rock, sand, cellar dirt or other earthen material constituting “pollutants” (within the meaning of 33 U.S.C. § 1362(6) into waters of the United States. The DOJ alleged that the defendant impacted water plants, changed the river bottom and/or replaced Waters of the United States with dry land, and "resulted in the 'discharge of any pollutant' within the meaning of 33 U.S.C. § 1311(a)." 

The defendant moved for summary judgment on the basis that the CWA authorizes only the EPA Administrator to file a CWA §404 enforcement action and that the court, therefore, lacked jurisdiction.  The court disagreed with the defendant on the basis that 28 U.S.C. §1345 conferred jurisdiction.  That statute states, “Except as otherwise provided by Act of Congress, the district courts shall have original jurisdiction of all civil actions, suits or proceedings commenced by the United States or by any agency or officer thereof expressly authorized to sue by Act of Congress.  The court rejected the defendant’s claim that 33 U.S.C. §1319(b) and 33 U.S.C. §1344(s)(3) authorized only the EPA to sue for violations of the CWA, thereby limiting the jurisdiction conferred by 28 U.S.C. §1345.  Those provisions provide that the EPA Secretary is the party vested with the authority to sue for alleged CWA violations.  The court determined that there is a “strong presumption” against implied repeal of federal statutes, especially those granting jurisdiction to federal courts.  In addition, the court determined that the defendant failed to show that the general grant of jurisdiction was irreconcilable with either of the statutes the defendant cited.  Accordingly, the court determined that the defendant could be sued by the U.S. Department of Justice upon the mere recommendation of the COE and without a specific recommendation from the EPA alleging a CWA violation, and in a situation where the CWA did not determine any CWA jurisdiction and only the COE did.  This finding was despite a 1979 Attorney General opinion No. 197 determining that the EPA and not the COE has the ultimate authority to construe what is a navigable WOTUS.

Ultimately, the parties negotiated a settlement. The settlement included $1,750,000 civil penalty. The land which the farmer’s acts occurred will be converted to a conservation reserve and a permanent easement will run with the land to bar any future disturbance.  The settlement also specified that the farmer would spend $3,550,000 "to purchase vernal pool establishment, re-establishment, or rehabilitation credits from one or more COE-approved mitigation banks that serve the [applicable] area . . . .".  The settlement also included other enforcement stipulations, including fines and the civil penalty for noncompliance.  No comments on the settlement were received during the public comment period, after which the settlement was submitted to the court for approval.  The court approved the settlement ad consent decree on the basis that it was fair, reasonable, properly negotiated and consistent with governing law.  The court also determined that the settlement satisfied the goals of the CWA in that it permanently protected the Conservation Reserve (which contained between 75 and 139 acres of WOTUS); fixed damage caused by unauthorized discharges; applied a long-term pre-clearance injunction; required off-site compensatory mitigation and recouped a significant civil penalty.  The case is United States v. Lapant, No. 2:16-CV-01498-KJM-DB, 2019 U.S. Dist. LEXIS 75309 (E.D. Cal. May 3, 2019)United States v. Lapant, No. 2:16-CV-01498-KJM-DB, 2019 U.S. Dist. LEXIS 93590 (E.D. Cal. Jun. 3, 2019).

Conclusion

The three cases summarized today further illustrate the various legal battles that involve farmers, ranchers and rural landowners.  They also illustrate the need to legal counsel that is well-versed in agricultural issues.  That’s what we are all about in the Rural Law Program at Washburn Law School – providing high-level training in agricultural legal and tax issues and then getting new graduates placed in rural areas to represent farmers and ranchers. 

October 9, 2019 in Environmental Law, Real Property, Water Law | Permalink | Comments (0)

Tuesday, September 17, 2019

Irrigation Return Flows and the Clean Water Act

Overview

The Clean Water Act (CWA) has often been in the agricultural news in recent years.  Most of that attention has focused on the Waters of the United States” (WOTUS) rule, including the recent regulatory redefinition of the rule.  But there’s another issue that’s been lurking in the background, and it involves farm field drainage.

Are return flows to a watercourse from agricultural drainage activities exempt from the CWA permit requirements?  It’s the topic of today’s post.

Background

With the enactment of the federal water pollution control amendments of 1972 (more commonly known as the CWA, the federal government adopted a very aggressive stance towards the problem of water pollution. 

The CWA essentially eliminates the discharge of any pollutants into the nation's waters without a permit. The CWA recognizes two sources of pollution. Point source pollution is pollution which comes from a clearly discernable discharge point, such as a pipe, a ditch, or a concentrated animal feeding operation. Point source pollution is the concern of the federal government.  Nonpoint source pollution, while not specifically defined under the CWA, is pollution that comes from a diffused point of discharge, such as fertilizer runoff from an open field. Control of nonpoint source pollution is to be handled by the states through enforcement of state water quality standards and area-wide waste management plans.

Importantly, in 1977, the Congress amended the CWA to exempt return flows from irrigated agriculture as a point source pollutant. Thus, irrigation return flows from agriculture are not considered point sources if those “...discharges [are] composed entirely of return flows from irrigated agriculture.”   See, e.g., 33 U.S.C. §1342(l)(1); 40 C.F.R. §122.3.  See also, Hiebenthal v. Meduri Farms, 242 F. Supp. 2d 885 (D. Or. 2002).  This statutory exemption was elaborated in a 1994 New York case, Concerned Area Residents for the Environment v. Southview Farm, 34 F.3d 114 (2d Cir. 1994). In that case, the court noted that when the Congress exempted discharges composed “entirely” of return flows from irrigated agriculture from the CWA discharge permit requirements, it did not intend to differentiate among return flows based on their content.  Rather, the court noted, the word “entirely” was intended to limit the exception to only those flows which do not contain additional discharges from activities unrelated to crop production. 

Current Case

In Pacific Coast Federation of Fishermen’s Associations v. Glaser, No. 17-17310, 2019 U.S. App. LEXIS 26938 (9th Cir. Sept. 6, 2019), the plaintiffs (various fishing activist groups) filed a CWA citizen suit action claiming that the defendant’s (U.S. Bureau of Reclamation) Grasslands Bypass Project in the San Joaquin Valley of California was discharging polluted water (water containing naturally-occurring selenium from soil) into a WOTUS via a subsurface tile system under farmland in California’s Central Valley without a CWA permit.  The plaintiffs directly challenged the exemption of tile drainage systems from CWA regulation via “return flows from irrigated water” on the basis that groundwater discharged from drainage tile systems is separate from any irrigation occurring on farms and is, therefore, not exempt.  After the lower court initially refused to grant the government’s motion to dismiss, it later did dismiss the case noting that the parties agreed that the only reason the project existed was to enable the growing of crops requiring irrigation, and that the drainage of contaminated water only occurred due to irrigated agriculture.  The lower court noted that the plaintiffs failed to plead sufficient facts to support a claim that some discharges were unrelated to agricultural crop production.  Later, the plaintiffs retooled their complaint to claim that not all of the irrigated water that was discharged through the tile systems came from crop production. Rather, the plaintiffs claimed that some of the discharges that flowed into groundwater were from former farmlands that now contained solar panels.  It was this “seepage” from the non-farmland that the plaintiffs claimed was discharged in the farm field tile system and caused the system to contain pollutants that didn’t come exclusively from agricultural crop irrigation.  The lower court found the tile system to be within the exemption for “return flows from irrigation,” noting that “entirely” meant “majority” because (in the court’s view) a literal interpretation of the amended statutory language would produce an “absurd result.”

The appellate court reversed.  The appellate court held that discharges that include irrigation return flows from activities “unrelated” to crop production are not exempt from the CWA permit requirement.  To the appellate court, “entirely” meant just that – “entirely.”  It didn’t mean “majority” as the lower court had determined. 

Conclusion

What’s the impact of the appellate court’s decision?  After all, shouldn’t the appellate court be praised for construing a statute in accordance with what the law actually says?  What was the concern of the lower court of a literal interpretation of the statute?  For starters, think of the burden of proof issue.  Does the appellate court’s decision mean that a plaintiff must prove that some discharges come from non-agricultural irrigation activities, or does it mean that upon an allegation that irrigation return flows are not “entirely” from agricultural crop production that the farmer must prove that they all are?  If the latter is correct, that is a next-to-impossible burden for a farmer.  Such things as runoff from public roadways and neighboring farm fields can and do often seep into a farmer’s tile drainage system. If that happens, at least in the Ninth Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington), a farmer’s discharges will require a CWA permit.  This is the “absurd result” that the lower court was trying to avoid by construing “entirely” as “majority.”  

The appellate court remanded the case to the lower court for further review based on the appellate court’s decision.  However, the point remains that the appellate court determined that the exception for return flows from agriculture only applies when all of the discharges involved comes from agricultural sources.  That’s why the case is important to any farmer that irrigates crops and should be paid attention to.

September 17, 2019 in Environmental Law | Permalink | Comments (0)

Thursday, September 5, 2019

Regulatory Changes to the Endangered Species Act

Overview

The Endangered Species Act (ESA) establishes a regulatory framework for the protection and recovery of endangered and threatened species of plants, fish and wildlife. 16 U.S.C. § 1531, et seq.  The ESA has the potential to restrict substantially agricultural activities because many of the protections provided for threatened and endangered species under the ESA extend to individual members of the species when they are on private land where many endangered species have some habitat.

In late July of 2018, the U.S. Fish and Wildlife Service (USFWS) and the National Marine Fisheries Service (NMFS) issued three proposed rules designed to modify certain aspects of the ESA. Public comment on the proposed rules was accepted until September 24, 2018.  On August 12, 2019, the agencies announced the finalization of the regulations.

The ESA regulatory changes and their relevance to agriculture – that’s the topic of today’s post.

Background

The regulatory modifications to the ESA stem from early 2017 when President Trump signed an executive order (Exec. Order 13777, “Enforcing the Regulatory Reform Agenda”) requiring federal agencies to revoke two regulations for every new rule issued.  The order also required federal agencies to control the costs of all new rules within their budget. In addition, the order barred federal agencies from imposing any new costs in finalizing or repealing a rule for the remainder of 2017 unless that cost were offset by the repeal of two existing regulations.  Exceptions were included for emergencies and national security.  Beginning in 2018, the order required the director of the White House Office of Management and Budget to give each agency a budget for how much it can increase regulatory costs or cut regulatory costs.  The order was touted as the “most significant administrative action in the world of regulatory reform since President Reagan created the Office of Information and Regulatory Affairs (OIRA) in 1981."

The ESA has long been considered critical to species protection, but it has also been one of the most contentious environmental laws largely because of its impact on the usage of private as well as public land.  The judicial and legal costs of enforcing the ESA are quite high, as both environmental and industry groups have historically brought litigation to protect their interests on account of the ESA. 

As for private land, about half of ESA listed species have at least 80 percent of their habitat on private lands.  This has given concern to landowners that the presence of a listed species on their land will result in land use restrictions, loss in value, and possible involvement in third-party lawsuits.  

Under the ESA, “fish and wildlife” species are defined as any member of the animal kingdom, including without limitation any mammal, fish, bird...amphibian, reptile, mollusk, crustacean, arthropod, or other invertebrate. 16 U.S.C. § 1532(8). “Plants” are defined as any member of the plant kingdom. 16 U.S.C. § 1532(14).  An “endangered species” is a species which is in danger of extinction throughout all or a significant part of its range other than a species determined by the USFWS to constitute a pest whose protection under the provisions of the Act would present an overwhelming and overriding risk to humans. 16 U.S.C. § 1532(6). A “threatened species” is a species which is likely to become endangered within the foreseeable future throughout all or a significant portion of its range. 16 U.S.C. § 1532(20).  The term “species” includes any subspecies of fish or wildlife or plants and any distinct population segment of any species of vertebrate fish or wildlife which interbreeds when mature. 16 U.S.C. § 1532(16).

The Secretary of the Interior (Secretary) determines when a species is to be listed as either threatened or endangered.  Presently, there are about 1,700 species listed under the ESA as either endangered or threatened.  The listing decision historically has been made on the basis of the best available scientific and commercial data without reference to possible economic or other impacts after the USFWS conducts a review of the status of the species. 16 U.S.C. § 1533(b)(1)(A); 50 C.F.R. 424.11. There is, however, no statutory threshold definition or quantification of the level of data necessary to support a listing decision. Indeed, the information supporting a listing decision need not be credible; only the “best available.”

The USFWS considers species for listing on its own initiative, but the ESA also provides a listing petition process for “interested persons” to force evaluation and listing of a species. Within 90 days of receiving a petition for listing, the USFWS must determine whether the petition presents substantial information to warrant listing of the species.  If the USFWS concludes that the petitioned action is warranted, it then conducts a review of the species' status and must determine within one year of the receipt of the petition whether to propose formally the species for listing. The Secretary's decision to list a species as endangered or threatened is based upon the presence of at least one of the following factors; (1) the present or threatened destruction, modification, or curtailment of a species' habitat or range; (2) the over-utilization for commercial, sporting, scientific or educational purposes; (3) disease or predation; (4) the inadequacy of existing regulatory mechanisms; or (5) other natural or manmade factors affecting a species' continued existence. The USFWS may decline to list a species upon publishing a written finding either that listing is unwarranted or that listing is warranted, but that the USFWS lacks the resources to proceed immediately with the proposal.  Under the ESA, all USFWS decisions to decline listing a species are subject to judicial review.

When a species is listed as endangered or threatened, the Secretary must consider whether to designate critical habitat for the species.   “Critical habitat” is the specific area within the geographical range occupied by the species at the time of listing that is essential to the conservation of the species. Critical habitat may also include specific areas outside the geographical area occupied by the species at the time it is listed if the USFWS determines that such areas are essential for conservation of the species. However, critical habitat need not include the entire geographical range which the species could potentially occupy.  16 U.S.C. § 1532(5).   In making a critical habitat determination, the USFWS must consider economic impacts and other relevant impacts, as well as best scientific data. See, e.g., New Mexico Cattle Growers Association. v. United States Fish and Wildlife Service, 248 F.3d 1277 (10th Cir. 2001).   The USFWS may exclude any area from critical habitat if the benefits of the exclusion outweigh the benefits of specifying the area as critical habitat, unless the USFWS determines on the basis of best scientific and commercial data available that the failure to designate an area as critical habitat will result in the extinction of the species.

The Final Rules

In general.  The final rules are entitled, “Endangered and Threatened Wildlife and Plants; Revision of the Regulations for Listing Species and Designating Critical Habitat.”  83 Fed. Reg. 35,193 (Aug. 12, 2019).  The final rules will be codified at 50 C.F.R. pt. 424 and clarify the procedures and criteria that are used to add or remove species from the endangered and threatened species lists and how their critical habitat is designated.  The new rules also eliminate the rule that, by default, extended many prohibitions on endangered species to those species that only had threatened stats.  In addition, the final rules further define the procedures for interagency cooperation. 

The listing process.  The final rules modify the ESA listing process.  The final rule allows for economic impacts of the potential listing, delisting or reclassifying of a species to be accounted for.  The findings of anticipated economic impact must be publicly disclosed.  In addition, the Secretary must evaluate areas that are occupied by the species, and unoccupied  areas will only be considered “essential” where a critical habitat designation that is limited only to the geographical areas that a species occupies would be inadequate to ensure conservation of the species.  In addition, for an unoccupied area to be designated as critical habitat, the Secretary must determine that there is a reasonable certainty that the area will contribute to the conservation of the species and that the area contains one or more physical or biological features essential to the conservation of the species.  Also, a “threatened” listing for a species is to be evaluated in accordance with whether the species is likely to become endangered in the “foreseeable future” (as long as a threat is probable). 

The final rules also require any critical habitat for a listed species designation to first take into account all areas that a species occupies at the time of listing before considering whether any unoccupied areas are necessary for the survival or recovery of the species. On that point, a determination must be made that “there is a reasonable likelihood that the area will contribute to the conservation of the species” before designating any unoccupied area as critical habitat.  This is consistent with the U.S. Supreme Court opinion in Weyerhaeuser Co. v. United States Fish & Wildlife Service, 139 S. Ct. 361(2018), where the Court held that an endangered species cannot be protected under the ESA in areas where it cannot survive. 

The “blanket rule.”  The ESA statutory protections, including the prohibition on an “unauthorized take” of a species apply only to endangered species. However, the USFWS has automatically extended those protections to all species listed as threatened through a broad regulation known as the “blanket 4(d) rule.” The final rules remove these automatically provided protections to threatened species that are given to endangered species.  As a result, the USFWS will be required to develop additional regulations for threatened species on a case-by-case basis to extend the protections given endangered species.    

Agency cooperation.  The final rules also provide alternative mechanisms intended to improve the efficiency of ESA consultations conducted by the USFWS and federal agencies. The revisions include a process for expedited consultation in which a federal agency and the USFWS may enter into upon mutual agreement. A 60-day limit is included for completion of informal consultations with the option to extend the consultation to no more than 120 days.

Conclusion

The ESA has been termed the “pit bull” of environmental law.  It has a history since its enactment in 1973, and the landmark Supreme Court case of Tennessee Valley Authority v. Hill, 437 U.S. 153 (1978), of being the nation’s most controversial environmental law because of its impact on landowners and others.   The final regulations are an attempt to inject additional common-sense into the application of the ESA and align it to a greater extent to its original purpose.  Another intended impact is a decreased burden on farmers and ranchers.  Only time will tell if these goals are actually accomplished. 

September 5, 2019 in Environmental Law | Permalink | Comments (0)

Friday, August 16, 2019

Court Decision Illustrates USDA’s Swampbuster “Incompetence”

Overview

The conservation-compliance provisions of the 1985 Farm Bill introduced the concept of “swampbuster.” Swampbuster was introduced into the Congress in January of 1985 at the urging of the National Wildlife Federation and the National Audubon Society. It was originally presented as only impacting truly aquatic areas and allowing drainage to continue where substantial investments had been made. Thus, there was virtually no opposition to Swampbuster.

But, the “dirt is in the details” as it is often said.  Just how does the USDA determine if a tract of farmland contain a wet area that is subject to regulation?  That’s a question of key importance to farmers.  That process was also the core of a recent court opinion, in which the court painted a rather bleak and embarrassing picture of the USDA bureaucrats. 

Swampbuster and the USDA’s process for determining land subject to the Swampbuster rules – that’s the topic of today’s post.

Swampbuster Rules

The legislation charged the soil conservation service (SCS) with creating an official wetland inventory with a particular tract being classified as a wetland if it had (1) the presence of hydric soil; (2) wetland hydrology (soil inundation for at least seven days or saturated for at least 14 days during the growing season); and (3) the prevalence of hydrophytic plants under undisturbed conditions. In other words, to be a wetland, a tract must have hydric soils, hydrophytic vegetation and wetland hydrology.  The presence of hydrophytic vegetation, by itself, is insufficient to meet the wetland hydrology requirement and the statute clearly requires the presence of all three characteristics. B&D Land & Livestock Co. v. Schafer, 584 F. Supp. 2d 1182 (N.D. Iowa 2008).  

Under the June 1986 interim rules, wetland was assumed to be truly wet ground that had never been farmed. In addition, “obligation of funds” (such as assessments paid to drainage districts) qualified as commenced conversions, and the Fish and Wildlife Service (FWS) had no involvement in ASCS or SCS decisions. In September of 1986, a proposal to exempt from Swampbuster all lands within drainage districts was approved by the chiefs of the ASCS, SCS, FmHA, FCIC and the Secretary of Agriculture. However, the USDA proposal failed in the face of strong opposition from the FWS and the EPA.

The final Swampbuster rules were issued in 1987 and greatly differed from the interim rules. The final Swampbuster rules eliminated the right to claim prior investment as a commenced conversion. Added were farmed wetlands, abandoned cropland, active pursuit requirements, FWS concurrence, a complicated “commenced determination” application procedure, and special treatment for prairie potholes. Under the “commenced conversion” rules, an individual producer or a drainage district is exempt from Swampbuster restrictions if drainage work began before December 23, 1985 (the effective date of the 1985 Farm Bill). If the drainage work was not completed by December 23, 1985, a request could be made of the ASCS on or before September 19, 1988, to make a commencement determination. Drainage districts must satisfy several requirements under the “commenced conversion” rules. A project drainage plan setting forth planned drainage must be officially adopted. In addition, the district must have begun installation of drainage measures or legally committed substantial funds toward the conversion by contracting for installation or supplies.

The final rules defined “farmed wetlands” as playa, potholes, and other seasonally flooded wetlands that were manipulated before December 23, 1985, but still exhibited wetland characteristics. Drains affecting these areas can be maintained, but the scope and effect of the original drainage system cannot be exceeded. 7 C.F.R. § 12.33(b).  Prior converted wetlands can be farmed, but they revert to protected status once abandoned. Abandonment occurs after five years of inactivity and can happen in one year if there is intent to abandon.  A prior converted wetland is a wetland that was totally drained before December 23, 1985. Under 16 U.S.C. §3801(a)(6), a “converted wetland” is defined as a wetland that is manipulated for the purpose or with the effect of making the production of an agricultural commodity possible if such production would not have been possible but for such action.   See, e.g., Clark v. United States Department of Agriculture, 537 F.3d 934 (8th Cir. 2008).  If a wetland was drained before December 23, 1985, but wetland characteristics remain, it is a “farmed wetland” and only the original drainage can be maintained.

Identifying a Wetland – The Boucher Saga

The process that the USDA uses to determine the presence of wet areas on a farm that are subject to the Swampbuster rules (known as the “on-site” wetland identification criteria) are contained in 7 C.F.R. §12.31.   The application of the rules was at issue in the most recent opinion in a case involving an Indiana farm family’s longstanding battle with the USDA. 

Facts and administrative appeals.  The facts of the litigation reveal that the plaintiff (and her now-deceased husband) owned the farm at issue since the early 1980s. The farmland has been continuously used for livestock and grain production for over 150 years. The tenants that farm the land participated in federal farm programs. In 1987, the plaintiffs were notified that the farm might contain wetlands due to the presence of hydric soils.  This was despite a national wetland inventory that was taken in 1989 that failed to identify any wetland on the farm.  In 1991, the USDA made a non-certified determination of potential wetlands, prior converted wetlands and converted wetlands on the property. In 1994, the plaintiff’s husband noticed that passersby were dumping garbage on a portion of the property. To deter the garbage-dumping, the plaintiff’s husband cleaned up the garbage, cleared brush, and removed five trees initially and four more trees several years later.  The trees were upland-type trees that were unlikely to be found in wetlands, and the tree removal impacted a tiny fraction of an acre.  The USDA informed the landowners that the tree removal might have triggered a wetland/Swampbuster violation and that the land had been impermissibly drained via field tile (which it had not). 

Because the land at issue was farmed, the USDA’s Natural Resources Conservation Service (NRCS) used an offsite comparison field to compare with the tract at issue for a determination of the presence of wetland.  The comparison site chosen was an unfarmed depression that was unquestionably a wetland.  In 2002, an attempt was made to place the farm in the Conservation Reserve Program, which triggered a field visit by the NRCS. However, a potential wetland violation had been reported and NRCS was tasked with making a determination of whether a wet area had been converted to wetland after November 28, 1990. The landowners requested a certified wetland determination, and in late 2002 the NRCS made a “routine wetland determination” that found all three criteria for a wetland (hydric soil, hydrophytic vegetation and hydrology) were present by virtue of comparison to adjacent property because the tract in issue was being farmed. The landowners were notified in early 2003 of a preliminary technical determination that 2.8 acres were converted wetlands and 1.6 acres were wetlands.  The NRCS demanded that the landowners plant 300 trees per acre on the 2.8 acres of “converted wetland.”

The landowners requested a reconsideration and a site visit. Two separate site visits were scheduled and later cancelled due to bad weather. The landowners also timely notified NRCS that they were appealing the preliminary wetland determination and requested a field visit, asserting that NRCS had made a technical error. A field visit occurred in the spring of 2003 and a written appeal was filed of the preliminary wetland determination and a review by the state conservationist was requested. The appeal claimed that the field visit was inadequate.  The husband met with the State Conservationist in the fall of 2003.  No site visit occurred, and a certified final wetland determination was never made.  The landowners believed that the matter was resolved.

The husband died, and nine years later a new tenant submitted a “highly erodible land conservation and wetland conservation certification” to the FSA. Permission was requested from the USDA to remove an old barn and house from a field to allow farming of that ground. In late 2012, the NRCS discovered that a final wetland determination had never been made and a field visit was scheduled for January of 2013 shortly after several inches of rain melted a foot of snow on the property.  At the field visit, the NRCS noted that there were puddles in several fields.  The NRCS used the same comparison field that had been used in 2002, and also determined that underground drainage tile must have been present (it was not).   

Based on the January 2013 field visit, the NRCS made a final technical determination that one field did not contain wetlands, another field had 1.3 acres of wetlands, another field had 0.7 acres of converted wetlands and yet another field had 1.9 acres of converted wetlands. The plaintiff (the surviving spouse) appealed the final technical determination to the USDA’s National Appeals Division (NAD).   At the NAD, the plaintiff asserted that either tile had been installed before the effective date of the Swampbuster rules in late 1985 or that tiling wasn’t present (a tiling company later established that no tiling had been installed on any of the tracts); that none of the tracts showed water inundation or saturation; that none of the tracts were in a depression; and that the trees that were removed over two decades earlier were not hydrophytic, were not dispositive indicators of wetland, and that improper comparison sites were used.  The NRCS claimed that the tree removal altered the hydrology of the site.  The USDA-NAD affirmed the certified final technical determination.  The plaintiff appealed, but the NAD Director affirmed.  The plaintiff then sought judicial review.    

Trial court decision.  The trial court affirmed the NAD Director’s decision and granted summary judgment to the government.   Boucher v. United States Department of Agriculture, No. 1:13-cv-01585-TWP-DKL, 2016 U.S. Dist. LEXIS 23643 (S.D. Ind. Feb. 26, 2016). The court based its decision on the following:

  • The removal of trees and vegetation had the “effect of making possible the production of an agricultural commodity” where the trees once stood and, thus, the NRCS determination was not arbitrary or capricious with respect to the converted wetland determination.
  • The NRCS followed regulatory procedures found in 7 C.F.R. §12.31(b)(2)(ii) for determining wetland status on the land that was being farmed by comparing the land to comparable tracts that were not being farmed.
  • Existing regulations did not require site visits during the growing season.
  • “Normal circumstances” of the land does not refer to normal climate conditions but instead refers to soil and hydrologic conditions normally present without regard to the removal of vegetation.
  • The ten-year timeframe between the preliminary determination and the final determination did not deprive the plaintiff of due process rights.

Appellate Decision

The appellate court reversed the trial court decision and remanded the case for entry of judgment in the plaintiff’s favor and award her “all appropriate relief.”  Boucher v. United States Dep’t of Agric., No. 16-1654, 2019 U.S. App. LEXIS 23695 (7th Cir. Aug. 8, 2019).  On the comparison site issue (the USDA’s utilization of the on-site wetland identification criteria rules), the USDA claimed that 7 C.F.R. § 12.31(b)(2)(ii) allowed them to select a comparison site that was "on the same hydric soil map unit" as the subject property, rather than on whether the comparison site has the same hydrologic features as the subject tract(s).  The appellate court rejected this approach as arbitrary and capricious, noting that the NRCS failed to try an "indicator-based wetland hydrology" approach or to use any of their other tools when picking a comparison site. In addition, the appellate court noted a COE manual specifies that, “[a] hydrologist may be needed to help select and carry out the proper analysis" in situations where potential lack of hydrology is an issue such as in this case.   However, the NRCS did not send a hydrologist to personally examine the plaintiff’s property, claiming instead that a comparison site was not even necessary.  Based on 7 C.F.R. §12.32(a)(2), the USDA claimed, the removal of woody hydrophytic vegetation from hydric soils to permit the production of an agricultural commodity is all that is needed to declare the area "converted wetland."

The appellate court concluded that this understanding of the statue was much too narrow and went against all the other applicable regulatory and statutory provisions by completely forgoing the basis of hydrology that the provisions are grounded in.   Accordingly, the appellate court reasoned that because hydrology is the basis for a change in wetland determination, the removal of trees is merely a factor to determine the presence of a wetland, but is not a determining factor.  In addition, the appellate court pointed out that the NRCS never indicated that the removal of trees changed the hydrology of the property during the agency appeal process – a point that the USDA ignored during the administrative appeal process.   The appellate court rather poignantly stated, “Rather than grappling with this evidence, the hearing officer used transparently circular logic, asserting that the Agency experts had appropriately found hydric soils, hydrophytic vegetation, and wetland hydrology…”.

Conclusion

The USDA-NRCS was brutalized (rightly so) by the appellate court’s decision for its lack of candor and incompetence.  Those same agency characteristics were also illustrated in the Eighth Circuit decision of Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir. 1999).  Perhaps much of the USDA/NRCS conduct relates to the bureaucratic unilateral decision in 1987 to change the rules to include farmed wetland under the jurisdiction of Swampbuster.   That decision has led to abuse of the NAD process and delays that have cost farmers untold millions.  Hopefully, the clean-out of some USDA bureaucrats as a result of the new Administration that began in early 2017 will result in fewer cases like this in the future.  

August 16, 2019 in Environmental Law, Regulatory Law | Permalink | Comments (1)

Monday, June 17, 2019

Eminent Domain and Agriculture

Overview

Eminent domain is the power of a state to take private property for public use consistent with the state’s constitution.  In many states, the power has been legislatively delegated to municipalities, government subdivisions, as well as private persons and private corporations.  Sometimes, the exercise of eminent domain intersects with agriculture, particularly when a pipeline is being put in or a wind energy company wants to erect industrial wind towers and landowners object.

How broad is the power of eminent domain?  How do the federal and state constitutions protect private property?  What does “public use” mean?  Can a private company exercise eminent domain? 

The exercise of eminent domain at the state level and the impact on agriculture – that’s the focus of today’s post.

The Power to “Take” Property

The power to “take” private property for public use (or for a public purpose) without the owner's consent is an inherent power of the federal and state government. However, the United States Constitution limits the government's eminent domain power by requiring federal and state governments to pay for what is “taken.”  U.S. Const. 5th Amend.  The “takings” clause of the Fifth Amendment has been held to apply to the states since 1897. Chicago, Burlington and Quincy Railroad Co., v. Chicago, 166 U.S. 226 (1897).

The Fifth Amendment states in part “...nor shall private property be taken for public use without just compensation.” Just compensation” equals fair market value, generally in cash. For partial takings, “severance damages” may be awarded in addition to compensation for the part taken. See, e.g., Sharp v. United States, 191 U.S. 341 (1903).  The clause has two prohibitions: (1) all takings must be for public use; and (2) even takings that are for public use must be accompanied by compensation. 

What Does “Public Use” Mean?

Historically, the “public use” requirement operated as a major constraint on government action. For many years, the requirement was understood to mean that if property was to be taken, it had to be used by the public – the fact that the taking was “beneficial” was not enough. Eventually, however, courts concluded that a wide range of uses could serve the public even if the public did not, in fact, have possession. Indeed, so many exceptions were eventually built into the general rule of “use by the public” that the rule itself was abandoned. In 1954 and again in 1984, the U.S. Supreme Court demonstrated its willingness to define expansively “public use,” and confirmed the ability of a state to use eminent domain power to transfer property outright to a private party, so long as the exercise of the eminent domain power was rationally related to a conceivable public purpose.

In recent years, however, state courts have split on the issue of whether the government’s eminent domain power can be exercised to take private homes and businesses for the development of larger businesses by private companies. The argument is that the larger businesses enhance “economic development” that increases jobs and tax revenue in the area and that this satisfies the Fifth Amendment’s “public use” requirement.  However, in Bailey v. Myers, 206 Ariz. 224, 76 P.3d 898 (Ariz. Ct. App. 2003), the court determined that the condemnation of private property for redevelopment and sale to private parties was unconstitutional because the proposed use of the property was not public.  Similarly, the Michigan Supreme Court has ruled that the exercise of the eminent domain power is proper only if (1) the private entities involved are public utilities that operate highways, railroads, canals, power lines, gas pipelines, and other instrumentalities of commerce; (2) the property remains under the supervision or control of a governmental entity; or (3) the public concern is accomplished by the condemnation itself (i.e., blighted housing has become a threat to public health and safety). County of Wayne v. Hathcock, 684 N.W.2d 765 (Mich. 2004).

 In 2005, the Supreme Court clarified the difference among the states by again ruling that the eminent domain power can be exercised on behalf of a private party for economic development that benefits the public by increasing jobs and the tax base in the area. Kelo, et al. v. City of New London, 545 U.S. 469 (2005)Thus, if the exercise of eminent domain for a private party is done in conjunction with a development plan and does not involve obvious corruption, the taking will be allowed (and compensation will have to be paid).  While the Supreme Court’s Kelo decision was a landmark one, the Court clearly deferred to states on the issue.  At the federal level, if the condemnation of property is rationally related to a legitimate purpose of government (rather low hurdle to overcome) the taking will be approved.  But, any particular state could restrict the exercise of eminent domain on behalf of private parties if they so desired. 

In the wake of Kelo, several states either amended the state statutory process for proceedings involving condemnation of private property, or have amended the state constitution. Shortly after the Kelo decision, the Ohio Supreme Court has held that a taking providing nothing other than an economic benefit violates the Ohio constitution. City of Norwood v. Horney, 853 N.E.2d 1115 (Ohio 2006). The Ohio Supreme Court has previously held that Ohio landowners have a property interest in the groundwater underlying their land such that governmental interference with that right can constitute a taking. McNamara v. City of Rittman, 838 N.E .2d 640 (Ohio 2005)

What Does “Property” Mean?

The term “property” in the context of eminent domain, connotes all types of ownership interests – fee simple; partial interests; future interests; surface interests and even, perhaps, sub-surface interests.  For example, in The Edwards Aquifer Authority, et al. v. Day, et al. 369 S.W.3d 814 (Tex. Sup. Ct. 2012), the Texas Supreme Court unanimously held, on the basis of oil and gas law, that landownership in TX includes interests in in-place groundwater.  As such, water cannot be taken for public use without adequate compensation guaranteed by Article I, Section 17(a) of the TX Constitution. In the case, the plaintiffs were farmers that sought permit to pump underground water for crop irrigation purposes. The underground water at issue was located in the Edwards Aquifer and the plaintiffs' land was situated entirely within the boundaries of the aquifer. A permit was granted, but water usage under the permit was limited to 14 acre-feet of water rather than 700 acre-feet that was sought because the plaintiffs could not establish "historical use." The Court determined that the plaintiff's practice of issuing permits based on historical use was an unjustified departure from the Texas Water Code permitting factors.

Recent Case – The Dakota Access Pipeline

A recent opinion issued by the Iowa Supreme Court involving a pipeline seeking to exercise eminent domain, illustrates the intersection of the concept with agriculture.  In Puntenney, et al. v. Iowa Utilities Board, No. 17–0423, 2019 Iowa Sup. LEXIS 69 (Iowa Sup. Ct. May 31, 2019), the Court was faced with the Dakota Access Pipeline that sought to use eminent domain against farmland owners so that its pipeline could be completed.  The pipeline was piping oil from the oil fields of northwest North Dakota to southern Illinois. In 2014, the pipeline company filed documents with the Iowa Utilities Board (IUB) signifying its intent to lay a pipeline. The pipeline would traverse Iowa from the northwest corner to the southeast corner of the state, passing through eighteen counties over approximately 343 miles. At the end of 2014, the pipeline company held meetings in all eighteen counties.

In 2015, the pipeline company petitioned the IUB to start construction and sought “the use of the right of eminent domain for securing right of way for the proposed pipeline project” due to several landowners in the path of the pipeline refusing to grant an easement. The pipeline asserted such authority as a “common carrier” (a public or private entity that carries goods or people). In November and December of 2015, the IUB held hearings on the petition. Hundreds of people were present to give testimony for both sides. On March 10, 2016, the IUB issued a 159-page final decision and order. This order found that the pipeline would promote the public convenience and necessity, involve a capital investment in Iowa of $1.35 billion, and generate $33 million in Iowa sales tax during construction and $30 million in property tax in 2017. The order also noted that the pipeline had utilized a software program to lay the pipeline’s path to avoid critical areas, and that state law gave the pipeline the power to exercise eminent domain where necessary. After the IUB’s issuance of the order, several motions for clarification and rehearing were filed, which the IUB denied. Numerous parties sought judicial review of the order, and the parties were consolidated into a single case. On February 15, 2017, the trial court denied the petitions for judicial review.

On further review, Iowa Supreme Court addressed numerous issues. The Court determined that the Iowa Chapter of the Sierra Club had standing under state law on behalf of its affected members.  Those members, the Court noted under Iowa law, did not need to be landowners, just aggrieved or adversely affected by “agency action.”  On the legal issues, the Court looked at the standing of the parties. While the pipeline had already largely been constructed, the Court determined that the matter was not moot because the IUB retained the authority to impose other “terms, conditions, and restrictions” in the petitioners’ favor. On the IUB’s authority to issue a construction permit to the pipeline company based on the promotion of public convenience and necessity, the Court determined that the IUB’s decision to grant the permit was not “[b]ased upon an irrational, illogical, or wholly unjustifiable application of law” and its factual determinations were supported by “substantial evidence.” The Court noted that the evidence showed that the pipeline would reduce oil transport costs which would provide a lower price for petroleum products; transport oil more safely than rail; and provide secondary economic benefits to the citizens of Iowa. However, the Court did conclude that private economic development, by itself, is not a valid “public use.”  Thus, the Court rejected the U.S. Supreme Court’s holding in Kelo - joining Illinois, Michigan, Ohio and Oklahoma. The Court also did not find any violation of the statutory limit on the use of eminent domain with respect to farmland because the pipeline company was a common carrier under the IUB’s jurisdiction – an entity not statutorily limited on the use of eminent domain on farmland. Thus, the Iowa Constitutional provision on the use of eminent domain was not violated, nor was the Fifth Amendment of the U.S. Constitution. The Court also upheld the IUB’s determination that the pipeline route was proper and need not be rerouted based on speculative surface development, but did conclude that the pipeline be laid under existing field drainage tile where necessary.

Conclusion

The use of eminent domain at the state level and taking of private property at the federal level is a significant concern for many farmers and ranchers.  Certainly, the government must pay for what it takes (the issue of compensation is a topic for another day), but the extent to which a public use must be present is a key issue.  The recent Iowa decision sheds some light on the question – at least in Iowa. 

June 17, 2019 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Wednesday, June 5, 2019

Public Trust vs. Private Rights – Where’s the Line?

Overview

Centuries ago, the seas were viewed as the common property of everyone -  they weren’t subject to private use and ownership.  This concept was later adopted in English law, the Magna Carta, and became part of the common (non-statutory) law in the United States.  Over the years, the doctrine has been primarily applied to access to the seashore and intertidal waters, but it can also be applied with respect to natural resources.  A recent case involving seaweed involved the application of the public trust doctrine.

The public trust doctrine and the right to harvest seaweed – that’s the topic of today’s post.

In General

The U.S. Supreme Court’s first application of the public trust doctrine was in 1842 in Martin v. Lessee of Waddell, 41 U.S.367 (1842). In the case, the issue was who had the right to submerged land and oyster harvesting off the coast of New Jersey.  The Court, largely based on the language in the charter granted by the King to a Duke to establish a colony and for policy and economic reasons, determined that the land area in issue belonged to the state of New Jersey for the benefit of the people of the state.  The Court dealt with the issue again in 1892 in a case involving a railroad that had been granted a large amount of the Chicago harbor. Illinois Central Railroad Company v. Illinois, 146 U.S. 387 (1892).  The Court determined that the government cannot alienate (interfere with) the public’s right to access land under waters that are navigable in fact except for situations where the land involved wouldn’t interfere with the public’s ability to access the water or impair navigation. 

As generally applied in the United States (although there are differences among the states), an oceanfront property owner can exclude the public below the mean high tide (water) line.  See e.g., Gunderson v. State, 90 N.E. 3d 1171 (Ind. 2018)That’s the line of intersection of the land with the water's surface at the maximum height reached by a rising tide (e.g., high water mark).  Basically, it’s the debris line or the line where you would find fine shells.  However, traceable to the mid-1600s, Massachusetts and Maine recognize private property rights to the mean low tide line even though they do allow the public to have access to the shore between the low and high tide lines for "fishing, fowling and navigation.  In addition, in Maine, the public can cross private shoreline property for scuba diving purposes.  McGarvey v. Whittredge, 28 A.3d 620 (Me. 2011). 

Other applications of the public trust doctrine involve the preservation of oil resources, fish stocks and crustacean beds.  Also, many lakes and navigable streams are maintained via the public trust doctrine for purposes of drinking water and recreation. 

Recent Case

The public trust doctrine was invoked recently in a Maine case.  In Ross v. Acadian Seaplants, Ltd., 2019 ME 45 (2019), the defendants harvest rockweed with skiffs in the intertidal zones of Maine. Rockweed is a perennial plant that attaches to the rocks in the intertidal zones. Rockweed regulates the temperature of the area where it is located and is home to many organisms. Commercially, rockweed is used for fertilizer and feed. To harvest Rockweed, the defendant uses skiffs, rakes, and watercraft without physically stepping foot on the intertidal zone. The defendant annually harvests the statutory maximum 17 percent of eligible harvestable rockweed biomass in Cobscook Bay. The plaintiff, an intertidal landowner, sued seeking (1) a declaratory judgment that the plaintiff is the exclusive owner of the rockweed growing on and affixed to his intertidal property; and (2) injunctive relief that would prohibit the defendant from harvesting rockweed from the plaintiff’s intertidal land without his permission. The defendant sought a judgment declaring that harvesting rockweed from the intertidal water is a public right as a form of "fishing" and "navigation" within the meaning of the Colonial Ordinance. The trial court granted summary judgment for the plaintiff on the declaratory judgment claim, and on the defendants’ counterclaim. The trial court denied the defendant’s counterclaim.

On appeal, the state Supreme Court affirmed, holding that rockweed that is attached to and growing on rocks in the intertidal zone is private property owned by the adjacent landowner.  The Court noted that the English common law tradition vested both “title” to and “dominion” over the intertidal zone in the crown.  While title belonged to the crown, however, it was held subject to the public’s rights of “navigation,” “commerce,” and “fishing.”  After the American colonies gained independence, the ownership of intertidal land devolved to the particular state where the intertidal area was located.  See, e.g., Phillips Petroleum Co. v. Mississippi, 484 U.S. 469 (1988)But, the Court noted the uniqueness of rockweed.  It takes specialized equipment and skills to harvest it, and harvesting didn’t “look like” the usual activities in the water of fishing and navigation. Instead, it was more like the other uses in the intertidal zone that have been held to be outside the public trust doctrine.  Thus, the Court concluded that the harvesting of rockweed was not within the collection of rights held by the State for use by its citizens – the public couldn’t engage in rockweed harvest as a matter of right.  The Court stated that, "rockweed in the intertidal zone belongs to the upland property owner and therefore is not public property, is not held in trust by the State for public use, and cannot be harvested by members of the public as a matter of right."

Conclusion

The application of the public trust doctrine has the potential to be quite broad.  Environmental activists and others opposed to various agricultural activities often attempt to get courts to apply the doctrine in an expansive manner well beyond public access to that of preservation in general.  The potential application of the doctrine can be rather expansive – nonpoint source pollution from farm field runoff; wetlands; dry sand areas; cattle ranching in areas of the West, etc.  See, e.g., Mathews v. Bay Head Improvement Association, 471 A.2d 355 (N.J. 1984).  The issue is acute in California where a private party can bring an independent action against a state agency under the public trust doctrine when that agency allegedly doesn’t follow the public trust in the conduct of its duties.  See Citizens for Biological Diversity, Inc. v. FPL Group, Inc., 83 Cal. Rptr. 3d 588 (Cal Ct. App. 2008); San Francisco Baykeeper, Inc. v. State Lands Commission, 29 Cal. App. 5th 562, 240 Cal. Rptr. 3d 510 (2018)

In the recent Maine case, the public trust doctrine was not used to unnecessarily erode private property rights.  The Court balanced the public’s rights against those of private property owners.  It wasn’t enough for the plaintiff to simply assert the public trust doctrine. 

Maybe there’s hope that the public trust doctrine will be properly balanced against the rights of private landowners.  The recent Maine case weighs in on that side of the scale. 

June 5, 2019 in Civil Liabilities, Environmental Law, Real Property | Permalink | Comments (0)

Tuesday, April 16, 2019

Does Soil Erosion Pose A Constitutional Issue?

Overview

When we think of the Constitution, we tend to think of freedom of religion or freedom of the press.  Maybe due process or equal protection comes to mind.  Hardly ever does the right to not have soldiers quartered in our homes during peace time without consent ever cross one’s mind.  Neither does soil erosion.    But, is there a connection?

Soil erosion and the Constitution – that’s the topic of today’s post.

Soil Erosion

In terms of quantity, sediment - the soil or mineral material transported by water and deposited in streams or other bodies of water - is the worst pollutant of the nation's waters. While the non-farm media tends to pin the blame on agriculture, and it is true that a significant portion of it results from soil erosion of farmland, much of the sediment comes from nonagricultural activities.  In either situation, the most effective way of controlling soil erosion is by the use of proper soil conservation practices and techniques.  The nation’s farmers and ranchers are to be commended for utilizing them.  The few “bad apples” that exist give a bad rap to the vast majority who carefully and thoughtfully utilize good husbandry practices. 

Federal regulation.  The federal government has long been concerned with the problem of soil erosion. Two major agencies within the United States Department of Agriculture (USDA) that have substantial soil erosion responsibilities are the Natural Resource Conservation Service (NRCS) and the Farm Service Agency (FSA). In general, the federal soil conservation programs are limited to conservation incentives in the form of technical assistance and cost sharing. The Soil Conservation Service (SCS) was created in 1935 to be the primary federal agency involved in soil erosion control. Its programs, consisting mainly of technical assistance, are administered in cooperation with local soil and water conservation districts. The Agricultural Stabilization and Conservation Service (forerunner of the FSA) was created at approximately the same time as the SCS, but for a different purpose. The original purpose of the ASCS was to be the vehicle for administering the Agricultural Adjustment Act (AAA) of 1938, an act that provided for a series of direct payments to farmers in exchange for their participation in acreage reduction programs.  When the initial acreage reduction program was held unconstitutional in United States v. Butler, 297 U.S. 1 (1936), a temporary program was instituted to provide payments to farmers for planting cover crops to conserve soil, a backdoor means of lowering the production of certain agricultural commodities, and thereby increasing crop prices. That program was continued in the Soil Bank and continues presently in the form of the Conservation Reserve Program . 

State regulation.  Many states also have soil erosion and sediment control statutes that require landowners to take certain actions designed to minimize soil erosion. In some states, such as Kansas, the burden is placed upon local county commissioners to take action designed to minimize soil erosion.

Constitutional issue? 

1979 Iowa case.  Landowners occasionally have challenged the validity of state soil erosion laws on the basis that the statutes are an unconstitutional exercise of the state's police power.  In an Iowa case, Woodbury County Soil Conservation District v. Ortner, 279 N.W.2d 276 (Iowa 1979), one landowner filed a complaint against an adjacent landowner with the plaintiff (county soil conservation district) claiming that his farm was being damaged by water and soil erosion from the defendant’s land.  Ultimately, complaint was settled without the plaintiff taking any action.  However, the next year the same landowner filed another complaint claiming similar damage.  This time the county soil conservation district investigated in accordance with state law and found that the soil loss on both adjoining farms exceeded the statutory limit.  The plaintiff ordered both landowners to remedy the situation within six months and gave them two options:  1) seed the land to permanent pasture or hay; or 2) terrace the land.  They did nothing, and the county soil conservation district sued to enforce its order.  It was undisputed that terracing would cost the defendant about $12,000 and the adjoining landowner approximately $1,500.  In addition, some of each landowner’s farmland would become untillable.  While seeding the ground to pasture or hay was less expansive, some of the farmland would be removed from crop production.  There was a dispute concerning whether either alternative would decrease the value of the land.  The defendant challenged the soil conservation statute under which the county soil conservation district acted as unconstitutional – it amounted to a taking of private property without just compensation as the Fifth Amendment required.  The defendant also claimed that the state law was an unreasonable and illegal exercise of the state’s “police power.”  

The trial court agreed with the defendant and struck the state statute down.  The law, the trial court said, placed an unreasonable burden on the defendant that was unduly oppressive and deprived them of their rights under the Fifth and Fourteenth Amendments of the U.S. Constitution and comparable provisions of state law. 

On appeal, the Iowa Supreme Court reversed.  The Supreme Court noted that the state had a vital interest in protecting its soil “as the greatest of natural resources” and that it has a right to do so based on the declared purpose of the statute at issue.  Under that language, it is the duty of each landowner to establish and maintain soil and water conservation practices or erosion control practices, in accordance with soil conservation district regulations.  Ultimately, the Supreme Court determined that the sate law was reasonably related to carrying out its announced purpose of soil control, and that control of soil erosion was a proper exercise of the state’s police power.  The Supreme Court also noted that the state was willing to cost-share with the landowners to the tune of about three-fourths of the total bill.  The Supreme Court said that the fact that a person must incur substantial expenditures to comply with valid regulations did not raise a constitutional issue.  The defendants still had the use and enjoyment of their property.     

The Iowa Supreme Court's opinion in Ortner upheld the neighbor's private property right to be free from damage caused by an adjacent farm's excessive water and soil erosion. In essence, the state can enact legislation to prevent a nuisance resulting from excessive soil and water erosion. 

Recent Case

In Brown v. United States, No. 18-801L, 2019 U.S. Claims LEXIS 231 (Fed. Cl. Mar. 15, 2019), the plaintiff operated a sod farm on land the plaintiff owned in Oklahoma along a river.  The river is south of a lake.  In 1974, the federal government completed the lake dam, which has a spillway that releases water when it floods. The spillway discharges water and sediment downstream, directly across from plaintiff’s property. Since 1986 (the first use of the spillway) the spillway has been used 17 times. In 1990 the plaintiffs first complained of the water from the spillway eroding their property where they operate a sod farm. The plaintiff contacted the U.S. Army Corps of Engineers (COE) in 2003, 2004, 2007, 2008, 2009, 2011, 2015, and 2016 concerning the erosion. The COE continually maintained that it "will not—and cannot—mitigate the erosion," explaining that "there is no program that authorizes the “COE” to directly address the [plaintiff’s] situation.”

In 2015, the erosion rendered the plaintiff’s center pivot inoperable. The plaintiff spent approximately $10,000 on new irrigation equipment to continue business operations and approximately $15,000 on riprap to prevent further erosion. In 2018, the plaintiff filed sued, claiming that over eight acres of the plaintiff’s land had been lost due to erosion from the water released from the spillway.  The plaintiff sought compensation under the Fifth Amendment as a compensable taking of their property.

The Government moved to dismiss this claim, but the court denied the motion on the basis that the “continuing claims” doctrine applied.  Under that doctrine, the court concluded, each release of water through the spillway constituted a discreet takings claim. The Government claimed that the court lacked subject matter jurisdiction on the basis that the plaintiffs’ claim was barred by the statute of limitations as it accrued in 1990 when the plaintiffs first noticed the erosion. However, the plaintiffs asserted that the statute of limitations did not begin to run until 2015 when their operation had to be altered because of the erosion. Further, the plaintiffs asserted that the “continuing claims” doctrine should extend their claim because each use of the auxiliary spillway constituted a new breach of duty by the Government.

The court agreed with the plaintiff, and also pointed out that erosion-type takings involve an act of “taking” that occurs over a long period of time. Thus, the statute of limitations does not begin to run until the situation “stabilizes.” Ultimately, the court held that the record had not been developed sufficiently for the court to determine when the erosion stabilized. Hence, the Government’s motion to dismiss was denied for further development of the record. 

Conclusion

 

Soil erosion issues loom large in agriculture.  Sometimes, the Constitution gets involved in the mix.  When it does, some interesting issues are involved. 

April 16, 2019 in Environmental Law | Permalink | Comments (0)

Tuesday, February 19, 2019

Big EPA Developments – WOTUS and Advisory Committees

Overview

In the past few days, two big developments of importance to agriculture have occurred. Both involve the Environmental Protection Agency (EPA).  Last week, the EPA published its proposed rule redefining “waters of the United States” (WOTUS), triggering a 60-day comment period.  In another development, a federal trial court ruled that the EPA has the authority to bar persons currently receiving grant money from the EPA to serve on EPA scientific advisory committees.  Both of these developments are important to agriculture.

Recent EPA developments of importance to agriculture – that’s the topic of today’s post.

WOTUS Redefined

In prior posts over the past couple of years, I have detailed the continuing saga of the WOTUS rule – first as proposed by the Obama Administration’s EPA in 2015; the subsequent court battle; the new proposal by the Trump Administration’s EPA in 2017; more court litigation; and now a revised proposed definition that attempts to clarify what waters are subject to federal jurisdiction under the Clean Water Act (CWA). 

On December 11, 2018, the EPA and the U.S. Army Corps of Engineers (COE) proposed a new WOTUS definition.  That new definition was published in the Federal Register on Feb. 14, 2019.  82 FR 34899 (Feb. 14, 2019).  The proposed definition is subject to a 60-day public comment period that will close on April 15, 2019.  The publication of this new definition is in line with President Trump’s Executive Order of February 28, 2017, that the EPA and the Corps clarify the scope of waters that are federally regulated under the CWA. 

Drainage tile and ephemeral streams.  Under the newly proposed WOTUS definition, groundwater that drains through a farm field tile system is not a point source pollutant subject to federal control under the CWA’s National Pollution Discharge Elimination System  (NPDES).  This specificity shuts the door on the argument set forth in and rejected by the Iowa Supreme Court (construing Iowa law) in a 2017 decision.  See Board of Water Works Trustees of the City of Des Moines v. Sac County Board of Supervisors as Trustees of Drainage Districts 32, 42, 65, 79, 81, 83, 86, et al., No. C15-4020-LTS, 2017 U.S. Dist. LEXIS 39025 (N.D. Iowa Mar. 17, 2017)Also excluded from the WOTUS definition are ephemeral streams (those only temporarily containing water) and diffuse surface runoff that doesn’t enter a WOTUS at a particular discharge point.  

Ditches, PC wetland and farmed wetland.  The proposed rule also excludes ditches from the definition of a WOTUS unless the ditch is connected to a tributary of a WOTUS.  A tributary is defined as “…a river, stream or similar naturally occurring surface water channel that contributes ‘perennial or intermittent’ flow to a traditional navigable water or territorial sea in a typical year…either directly or indirectly through other jurisdictional waters such as tributaries, impoundments, and adjacent wetlands…”.   What is a “typical year”?  For starters, it doesn’t include periods of drought or extreme flooding.  It is one that is within the “normal range of precipitation” over a rolling 30-year period for a “particular geographic area.”  Tributaries “…do not include surface features that flow only in direct response to precipitation, such as ephemeral flows, dry washes, and similar features.”  In other words, dry channels are not “tributaries.”  There must be more than an insubstantial water flow to support federal jurisdiction as a tributary to a WOTUS.

Prior converted (PC) cropland is also not a WOTUS under the proposed WOTUS definition.  A prior converted wetland is a wetland that was totally drained before December 23, 1985.  However, farmed wetland can still be subject to regulation by the USDA.  A “farmed wetland” is a wetland that was manipulated before December 23, 1985, but still exhibits wetland characteristics. Drains affecting these areas can be maintained, but the scope and effect of the original drainage system cannot be exceeded.  See, e.g., Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir. 1999).    

One unanswered question is whether the EPA will accept federal farm program wetland mappings.  It would be nice if the new WOTUS definition would include the same standard as USDA on this issue.  If not, on this issue, farmers will be subject to two distinct federal agencies with two distinct standards.  

Artificial irrigation, lakes and ponds.  The proposed WOTUS definition also would exclude areas that are artificially irrigated.  This is an important exception for rice and cranberry farmers.  See, e.g., United States v. Johnson, 467 F.3d 56 (1st Cir. 2006).  Likewise, excluded are artificial lakes and ponds (a waterbody that doesn’t have a natural outflow) that are constructed in upland areas.  This would include such structures as farm ponds, stock watering ponds, water storage reservoirs, settling basins and log cleaning ponds.  This follows the rationale of a U.S. Supreme Court opinion in 2006.  See Rapanos v. United States, 547 U.S. 715 (2006).  The only catch is if they are covered under other sections of the proposed rule.  For example, a lake or a pond that is “susceptible” to use in interstate or foreign commerce or is subject to a tide’s ebb and flow is deemed to be a WOTUS.  See 33 C.F.R. §328.3.  Likewise, a lake or a pond that contributes “perennial or intermittent flow” to navigable waters of the United States is deemed to be a WOTUS.  What does that mean?  It would appear to mean that only those lakes and ponds that actually have some material influence on navigable waters satisfies the definition of a WOTUS.  Id. If there is no perennial or intermittent flow being contributed by the lake or pond, then the lake or pond is not jurisdictional (at least at the federal level).  But, what about headwater streams that are made artificially perennial by subsurface drainage systems?  Are those to be excluded from the WOTUS definition?  Also, how are ditches that have been excavated into groundwater to be treated if they don't receive perennial surface flows?  Hopefully these two questions will be clarified.

In addition, other water-filled depressions (such as those created by mining or construction activity when fill, sand or gravel is excavated) are excluded from the definition of a WOTUS if they are in uplands.  They are not excluded if they are created in a wetland area to begin with.

Hydrological connections.  The proposed definition says that “[a] mere hydrological connection from a non-navigable, isolated, intrastate lake or pond…may be insufficient to establish jurisdiction under the proposed rule.”  While that seems to be a bit vague, the proposal does state that flooding that occurs once in 100 years into a WOTUS does not trigger federal jurisdiction.  What is clear, however, is that “…ecological connections between physically separated lakes and ponds and otherwise jurisdictional waters” are not under federal control.  This is a major point concerning the proposed WOTUS definition. 

EPA Advisory Committees

A recent federal court decision, Physicians for Social Responsibility v. Wheeler, No. 1:17-cv-02742 (TNM), 2019 U.S. Dist. LEXIS 22276 (D. D.C. Feb. 12, 2019), ended an Obama-era EPA policy of allowing EPA advisory committee members to be in present receipt of EPA grants.  When President Trump took office, he nominated Scott Pruitt to be head of the EPA.  After Senate confirmation, Secretary Pruitt issued a directive regarding membership in its federal advisory committees specifying “that no member of an EPA federal advisory committee be currently in receipt of EPA grants.” The directive reversed an Obama-era rule that allowed scientists in receipt of EPA grants to sit on advisory panels.  That rule was resulting in biased advisory committees stacked with committee members that opposed coal and favored an expansive “Waters of the United States” rule among other matters. The plaintiffs were a group of individuals and organizations who were receiving EPA research grants, and were either serving on an EPA advisory committee or hoped to serve on a committee. They claimed that the new directive illegally barred grant recipients from being members of the advisory committees, and filed suit to invalidate the directive. The EPA claimed that appointment policy was reserved to agency discretion, and that the plaintiffs failed to allege a violation of any specific statutory provision.

The trial court agreed with the EPA’s position, finding that when making appointments to the committees, agency heads have complete discretion “unless otherwise provided by statute, Presidential directive, or other established authority.” One such restriction on their discretion, the trial court noted, is the applicable ethics rules, found in 18 U.S.C. §208, and the accompanying regulation that dictate that a grant recipient can participate on an EPA advisory committee without incurring liability. However, the court reasoned that while someone may serve on an advisory committee without incurring liability under the conflict of interest statute, that does not dictate that an agency must appoint him as a member.  In other words, the conflict of interest rules function as a floor, not a ceiling, for acceptable government service.

The plaintiff also claimed that the EPA failed to adequately explain its change in policy, and challenged it as arbitrary and capricious. However, the trial court determined that the arbitrary and capricious standard cannot be enough, by itself, to provide a meaningful standard for the court. Instead, the court explained that, “When an agency departs from its prior policy, it must display awareness that it is changing position, and it ‘must show that there are good reasons for the new policy.’ But it need not establish ‘that the reasons for the new policy are better than the reason for the old ones; it suffices that the new policy is permissible under the statute, that there are good reasons for it, and that the agency believes it to be better...’” This “reasonable and reasonably explained’ standard is deferential, so long as the agency’s action – and the agency’s explanation for that action – falls within a zone of reasonableness.” In defending its policy change, the EPA explained that “while receipt of grant funds from the EPA may not constitute a financial conflict of interest, receipt of that funding could raise independence concerns depending on the nature of the research conducted and the issues addressed by the committee.” Thus, the change was necessary “to ensure integrity and confidence in its advisory committees.” The trial court found the EPA’s explanation to be within the zone of reasonableness. Based on these findings, the trial court held that the EPA action was rational, considered the relevant factors and within the authority delegated to the agency, and granted the EPA’s motion to dismiss the case. 

Conclusion

The newly proposed WOTUS rule is designed to clarify just exactly what constitutes waters over which the federal government has regulatory authority.  It is a tighter definition in many respects than the 2015 version was.  Public hearings will be held during the 60-day comment period.  For those in the Midwest and Great Plains, public hearing will be held at the EPA building in Kansas City, KS on February 27 and 28.  For those wishing to submit written comments by the April 15 deadline, the comments should be identified by Docket ID No. EPA-HQ-OW-2018-0149 and submitted to the Federal Rulemaking Portal at: https://www.regulations.gov 

In addition, removing potential bias from EPA advisory committees is another step in the right direction.  Both developments have big implications for agriculture.

February 19, 2019 in Environmental Law | Permalink | Comments (0)

Thursday, January 10, 2019

Top Ten Agricultural Law and Tax Developments of 2018 – Numbers 3, 2 and 1

Overview

Since the blog post on December 31, I have been surveying the biggest developments in agricultural law and taxation of 2018.  The first post looked at those developments that were not quite big enough to make the Top 10.  Subsequent posts have examined developments 10 through 4.  That brings us to today – the biggest three developments of 2018 in agricultural law and taxation. 

Number 3 – The 2018 Farm Bill

In general.  In late 2018, a new Farm Bill passed the Congress and was signed into law.  As for cost, the total estimated price tag for the Farm Bill is $867 billion (a large portion of that total is devoted to Food Stamps) and it didn’t address the estimated $32 billion in in cost overruns on price loss coverage (PLC) and agriculture risk coverage (ARC) of the prior Farm Bill.

The Farm Bill, like prior law, doesn’t treat all entities that are similarly taxed the same under the attribution rules.  In other words, an entity must either be a general partnership or a joint venture to not be limited in payment limits at the entity level.   Also remaining the same is the $900,000 AGI limitation to be eligible to participate in federal farm programs.  The general $125,000 payment limit also remains the same.     

Crop reference prices.  Reference prices (for PLC) will be the greater of the current reference price; or 85 percent of the average of the marketing year average price for the most recent five-year period, excluding the high and low prices.  If base acres were not planted to a covered crop from 2009-2017, the base acres will be maintained but won’t be eligible for any PLC or ARC payments.  The old reference price will be used or the “effective reference price” (ERP).  The ERP is used each year and used in determining if there will be a PLC payment.  The ERP will never be lower than the current reference price and can never be higher than 115% of the current reference price (from the 2014 Farm Bill).  That means that it is possible for the reference price to increase when prices decrease.   The ERP will be calculated annually based on 85 percent of the Olympic Average of the mid-year average prices for the last five crop years (eliminating the highest and lowest prices).  If this number is higher, it is then compared to 115 percent of the current reference price.  If it is lower, it will be the effective reference price for that crop year.  If it is higher than the 115 percent, it will be limited to 115 percent.  Presently, most major crops are not close to any adjustment to the reference price for at least the next couple of years. 

The Farm Bill give participating producers a one-time opportunity to update program yields.  The update is accomplished by means of a formula.  The formula takes 90 percent of the average yield for crops from 2013-2017 and reduces it by a ratio that compares the 2013-2017 national average yields with the average for 2008-2012 crops.  That producers a “yield update factor” that determines the portion of the initial 90 percent that can be used to update program yields.  The update factor will vary from crop to crop.   

As for ARC, it will be based on physical location of the farm and RMA data will have priority.  If a farm crosses county lines, ARC payments will be computed on a pro-rata basis in accordance with the acres in each county with irrigated and non-irrigated payments being calculated for each county.  Also, the USDA, with respect to ARC, will use a yield plug of 80 percent of the “transitional yield” and will calculate a trend-adjusted yield that will be used in benchmark calculations.

Other features.  The Farm Bill contains numerous other provision of importance.  The following is a bullet-point list of a few of the more significant ones:

  • While a producer is locked into either PLC or ARC for 2019-2020, an annual election can be made to change the election beginning in 2021.
  • The dairy margin program has been enhanced significantly such that smaller scale dairy producers are major beneficiaries under the Farm Bill.
  • The CRP acreage cap is increased from 24 million acres to 27 million acres by 2023 (with CRP rental rates limited to 90 percent of the county average rental rate for land enrolled via the continuous enrollment option, and 85 percent of the county average for general enrollments). Two million acres are reserved for grasslands.
  • The Conservation Stewardship Program (CSP) is reauthorized, but eliminated is the acre-based funding cap and the $18/acre national average payment rate. Spending is also capped at $1 billion annually. 
  • The Environmental Quality Incentives Program (EQIP) gets enhanced funding (by $.25 billion) with half of the increase pegged for livestock.
  • Farm direct ownership loans are increased from $300,000 to $600,000, and guarantees are enhanced from $700,000 to $1,750,000.
  • The Farm Bill increases loan rates by 13-24 percent for grains and soybeans. The new loan rates are$2.20 for corn; $6.20 for soybeans; $3.38 for wheat; $2.20 for sorghum; $2.50 for barley; $2.00 for oats.
  • Base acres that were planted entirely to grass and pasture from 2009-2017 will not be eligible for farm program payments, but will be eligible for a five-year grassland incentive contract with the “rental amount” set at $18/acre.
  • Crop insurance is not significantly changed, but modifications to crop insurance are designed to incentivize the use of cover crops.
  • Hemp is added as an “agricultural commodity” eligible for taxpayer subsidies and it is removed from the federal list of controlled substances.
  • Nieces nephews and first cousins can qualify for payments without farming;
  • Work is not required to get food stamps;
  • New taxpayer subsidies are proved for hops and barley.
  • The Farm Bill codifies many changes to the National Organic Standards Board and how the Board represents the public and the USDA on matters concerning organic crops.

Number Two - Waters of the United States (“WOTUS”) Developments

In general.  The Clean Water Act (CWA) makes illegal the discharging of dredge or fill material into the “navigable waters of the United States” (WOTUS) without first obtaining a permit from the Secretary of the Army acting through the Corps of Engineers (COE).  Unfortunately, just exactly what is a WOTUS that is subject to federal regulation has been less than clear for many years and that uncertainty has resulted in a great deal of litigation.  In 2006, the U.S. Supreme Court had a chance to clarify the matter but failed.  Rapanos v. United States, 547 U.S. 715 (2006).  In subsequent years, the Environmental Protection Agency (EPA) attempted to exploit that lack of clarity by expanding the regulatory definition of a WOTUS. 

2014 proposed regulation.  In March of 2014, the EPA and the COE released a proposed rule defining “waters of the United States” (WOTUS) in a manner that would significantly expand the agencies’ regulatory jurisdiction under the CWA. Under the proposed rule, the CWA would apply to all waters which have been or ever could be used in interstate commerce as well as all interstate waters and wetlands. In addition, the proposed WOTUS rule specifies that the agencies’ jurisdiction would apply to all “tributaries” of interstate waters and all waters and wetlands “adjacent” to such interstate waters. The agencies also asserted in the proposed rule that their jurisdiction applies to all waters or wetlands with a “significant nexus” to interstate waters.

Under the proposed rule, “tributaries” is broadly defined to include natural or man-made waters, wetlands, lakes, ponds, canals, streams and ditches if they contribute flow directly or indirectly to interstate waters irrespective of whether these waterways continuously exist or have any nexus to traditional “waters of the United States.” The proposed rule defines “adjacent” expansively to include “bordering, contiguous or neighboring waters.” Thus, all waters and wetlands within the same riparian area of flood plain of interstate waters would be “adjacent” waters subject to CWA regulation. “Similarly situated” waters are evaluated as a “single landscape unit” allowing the agencies to regulate an entire watershed if one body of water within it has a “significant nexus” to interstate waters.

The proposed rule became effective as a final rule on August 28, 2015 in 37 states and became known as the “2015 WOTUS rule.”

2015 court injunction and 2016 Sixth Circuit ruling.  On October 9, 2015, the U.S. Court of Appeals for the Sixth Circuit issued a nationwide injunction barring the rule from being enforced anywhere in the U.S. Ohio, et al. v. United States Army Corps of Engineers, et al., 803 F.3d 804 (6th Cir. 2015). Over 20 lawsuits had been filed at the federal district court level. On February 22, 2016, the U.S. Court of Appeals for the Sixth Circuit ruled that it had jurisdiction to hear the challenges to the final rule, siding with the EPA and the U.S. Army Corps of Engineers that the CWA gives the circuit courts exclusive jurisdiction on the matter. The court determined that the final rule is a limitation on the manner in which the EPA regulates pollutant discharges under CWA Sec. 509(b)(1)(E), the provision addressing the issuance of denial of CWA permits (codified at 33 U.S.C. §1369(b)(1)(E)). That statute, the court reasoned, has been expansively interpreted by numerous courts and the practical application of the final rule, the court noted, is that it impacts permitting requirements. As such, the court had jurisdiction to hear the dispute. The court also cited the Sixth Circuit’s own precedent on the matter in National Cotton Council of America v. United States Environmental Protection Agency, 553 F.3d 927 (6th Cir. 2009) for supporting its holding that it had jurisdiction to decide the dispute. Murray Energy Corp. v. United States, Department of Defense, No. 15-3751, 2016 U.S. App. LEXIS 3031 (6th Cir Feb. 22, 2016). 

2017 – The U.S. Supreme Court jumps in and the “suspension rule.”  In January of 2017, the U.S. Supreme Court agreed to review the Sixth Circuit’s decision. National Association of Manufacturers v. Department of Defense, et al., 137 S. Ct. 811 (2017). About a month later, President Trump issued an Executive Order directing the EPA and the COE to revisit the Clean Water Rule and change their interpretation of waters subject to federal jurisdiction such that it only applied to waters that were truly navigable – the approach taken by Justice Scalia in Rapanos v. United States, 547 U.S. 715 (2006). The EPA and Corps later indicated they would follow the President’s suggested approach, and would push the effective date of the revised Clean Water Rule to two years after its finalization and publication in the Federal Register. In November of 2017, the EPA issued a proposed rule (the “suspension rule”) delaying the effective date of the WOTUS rule until 2020.

2018 developments.  In January of 2018, the U.S. Supreme Court ruled unanimously that jurisdiction over challenges to the WOTUS rule was in the federal district courts, reversing the Sixth Circuit’s opinion. National Association of Manufacturer’s v. Department of Defense, No. 16-299, 2018 U.S. LEXIS 761 (U.S. Sup. Ct. Jan. 22, 2018). The Court determined that the plain language of the Clean Water Act (CWA) gives authority over CWA challenges to the federal district courts, with seven exceptions none of which applied to the WOTUS rule. In particular, the WOTUS rule neither established an “effluent limitation” nor resulted in the issuance of a permit denial. While the Court noted that it would be more efficient to have the appellate courts hear challenges to the rule, the court held that the statute would have to be rewritten to achieve that result. Consequently, the Supreme Court remanded the case to the Sixth Circuit, with instructions to dismiss all of the WOTUS petitioners currently before the court. Once the case was dismissed, the nationwide stay of the WOTUS rule that the court entered in 2015 was removed, and the injunction against the implementation of the WOTUS rule entered by the North Dakota court was reinstated in those 13 states.

This “suspension” rule that was issued in November of 2017 was published in the Federal Register on February 6, 2018, and had the effect of delaying the 2015 WOTUS rule for two years. In the interim period, the controlling interpretation of WOTUS was to be the 1980s regulation that had been in place before the 2015 WOTUS rule became effective.  The “suspension rule” was challenged in court by a consortium of environmental and conservation activist groups.  They claimed that the rule violated the Administrative Procedures Act (APA) due to inadequate public notice and comment, and that the substantive implications of the suspension were not considered which was arbitrary and capricious, and improperly restored the 1980s regulation.

In June of 2018, the federal district court for the southern district of Georgia entered a preliminary injunction barring the WOTUS rule from being implemented in 11 states - Alabama, Florida, Georgia, Indiana, Kansas, Kentucky, North Carolina, South Carolina, Utah, West Virginia and Wisconsin. Georgia v. Pruitt, No. 2:15-cv-79, 2018 U.S. Dist. LEXIS 97223 (S.D. Ga. Jun. 8, 2018).  A prior decision by the North Dakota federal district court had blocked the rule from taking effect in 13 states – AK, AZ, AR, CO, ID, MO, MT, NE, NV, NM, ND, SD and WY. North Dakota v. United States Environmental Protection Agency, No. 3:15-cv-59 (D. N.D. May 24, 2016).

In July of 2018, the COE and the EPA issued a supplemental notice of proposed rulemaking. The proposed rule seeks to “clarify, supplement and seek additional comment on” the 2017 congressional attempt to repeal the Obama Administration’s 2015 WOTUS rule.  Repeal would mean that the prior regulations defining a WOTUS would become the law again. The agencies are seeking additional comments on the proposed rulemaking via the supplemental notice. The comment period was open through August 13, 2018.

In August of 2018, the court issued its opinion in the “suspension rule” case. The court agreed with the plaintiffs, determining that the content restriction on the scope of the public comments that the agencies levied during the rulemaking process violated the APA, and enjoined the suspension rule on a nationwide basis. South Carolina Conservation League, et al. v. Pruitt, No. 2-18-cv-330-DCN, 2018 U.S. Dist. LEXIS 138595 (D. S.C. Aug. 16, 2018).

In September of 2018, another federal court entered a preliminary injunction against the implementation of the Obama-era WOTUS rule.  This time the injunction applied in Texas, Louisiana and Mississippi, and applied until the court resolved the case on the issue pending before it. The court specifically noted that the public’s interest in having the Obama-era WOTUS rule preliminarily enjoined was “overwhelming.” Texas v. United States Environmental Protection Agency, et al., No. 3:15-CV-00162 (S.D. Tex. Sept. 12, 2018).

On December 11, 2018, the EPA and the COE proposed a new WOTUS definition that is narrower than the 2015 WOTUS definition, particularly with respect to streams that have water in them only for short periods of time.  Once the new proposed rule is published in the Federal Register, a 60-day comment period will be triggered.  That publication date (and comment period and subsequent hearing) has now been delayed by the partial government shutdown.

Whew!  What a trek through the WOTUS landscape!

Number 1 - I.R.C. §199A (and the proposed regulations)

In general. At the top of the list for 2018 stands the qualified business income deduction (QBID) of new I.R.C. §199A as created by the Tax Cuts and Jobs Act (TCJA).  The QBID is a 20 percent deduction for sole proprietorships and pass-through businesses on qualified business income effective for years 2018-2025.  The new deduction makes tax planning and preparation more complex - much more complex and it impacts all farm and ranch businesses in terms of how to structure the business and tax planning to take advantage of the deduction. In addition, a complex formula applies to taxpayers that are deemed “high income” under the provision.  The formula causes a re-computation of the deduction and injects additional planning concerns.  In addition, a separate computation applies to agricultural cooperatives and their patrons.  The wide application of the new provision throughout the economy and the agricultural sector cannot be understated.

Proposed regulations.  On August 8, 2018, the Treasury issued proposed regulations concerning the QBID.  While some aspects of the proposed regulations are favorable to agriculture, other aspects create additional confusion, and some issues are not addressed at all. One favorable aspect is an aggregation provision that allows a farming operation with multiple businesses (e.g., row-crop; livestock; etc.) and common ownership to aggregate the businesses for purposes of the QBID.  This is, perhaps, the most important feature of the proposed regulations with respect to agricultural businesses because it allows a higher income farming or ranching business to make an election to aggregate their common controlled entities into a single entity for purposes of the QBID. 

Similar to the benefit of aggregation, farms with multiple entities can allocate qualified W-2 wages to the appropriate entity that employs the employee under common law principles.  This avoids the taxpayer being required to start payroll in each entity.  Likewise, carryover losses that were incurred before 2018 and that are now allowed in years 2018-2025 will be ignored in calculating qualified business income (QBI) for purposes of the QBID.  This is an important issue for taxpayers that have had passive losses that have been suspended under the passive loss rules. 

Other areas of the proposed regulations need clarification in final regulations.  As for aggregation and common ownership of the entities to be aggregated, the proposed regulations limit family attribution to just the spouse, children, grandchildren and parents.  In other words, common ownership is limited to lineal ancestors and descendants.  It would be helpful if the final regulations included siblings in the relationship test.  Also, one of the big issues for farmers and ranchers operating as sole proprietorships or as a pass-through entity is whether land rental income constitutes QBI.  One of the unclear issues under the proposed regulations is whether income that a landlord receives from leasing land to an unrelated party (or parties) under a cash lease or non-material participation share lease may qualifies for the QBID.  It may not.  Clarity is needed.    

The proposed regulations appear to take the position that gain that is “treated” as capital gain is not QBI. This would appear to exclude I.R.C. §1231 gain (such as is incurred on the sale of breeding livestock) from being QBI-eligible.  Clarity is needed on this point also.  Other areas needing clarification include the treatment of losses and how to treat income from the trading in commodities.  In addition, clarification is needed with respect to various issues associated with a trusts and estates. 

Conclusion

2018 was another incredibly active year on the ag law and tax front.  2019 looks like it will continue the pace.  Stay dialed in to the blog, website, seminars, TV and radio programs to keep up with the developments as they occur.

January 10, 2019 in Environmental Law, Income Tax, Regulatory Law | Permalink | Comments (0)

Tuesday, January 8, 2019

Top Ten Agricultural Law and Tax Developments of 2018 – Numbers 6, 5 and 4

Overview

This week I continue the trek through the Top Ten ag law and tax developments of 2018 with the top six developments.  Today’s post goes through numbers six, five and four.  On Thursday I will turn attention to the remaining top three developments

Number 6 – U.S. Supreme Court Says States Can Collect Sales Tax on Remote Sellers

South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018)

In 2018, the U.S. Supreme Court handed South Dakota a narrow 5-4 win in its quest to collect taxes from online sales.  The Court held that the Constitution’s Commerce Clause did not bar South Dakota from statutorily requiring remote sellers without a physical presence in the state to collect and remit sales tax on goods and services that are sold to buyers for delivery inside the state of South Dakota.  In so doing, the Court overruled 50 years of Court precedent on the issue. 

Historical precedence.  In 1967, the U.S. Supreme Court determined that the Commerce Clause grants “exclusive authority [to] Congress to regulate trade between the States” in holding that Illinois could not subject a mail order seller located in Missouri to use tax where the seller had no physical presence in Illinois.  National Bellas Hess, Inc. v. Illinois Department of Revenue, 386 U.S. 753 (1967).  In holding the law unconstitutional, the Court reasoned that subjecting the seller’s interstate business to local “variations in rates of tax…and record-keeping requirements” would violate the purpose of the Commerce Clause “to ensure a national economy free from…unjustifiable local entanglements.” 

Twenty-five years later, the Court reaffirmed the limitations of the Commerce Clause on state regulatory authority in Quill Corporation v. North Dakota, 504, U.S. 298 (1992).  In Quill, the Court held that a mail order house with no physical presence in North Dakota was not subject to North Dakota use tax for “property purchased for storage, use, or consumption within the State.”  The Court followed closely its holding in National Bellas Hess, Inc. because doing so “encourage[d] settled expectations and …foster[ed] investment by businesses and individuals.”  As applied to internet sales, Quill (which predated the internet) does not exempt all internet sales from state sales taxes – just sales by sellers who don’t have a physical presence in a particular state.  National retailers have a presence in many states.

More recently, the Court examined a Colorado “tattletale” law that required out-of-state sellers with no physical presence in the state “to notify…customers of their use tax liability and to report” sales information back to Colorado.  Direct Marketing Association v. Brohl, 135 S. Ct. 1124 (2013).  The trial court enjoined enforcement of the law on Commerce Clause grounds.  On appeal, the Tenth Circuit held that it couldn’t hear the challenge to the law because the Tax Injunction Act (28 U.S.C. §1341) divested it of jurisdiction and the matter belonged in state court and, ultimately, the U.S. Supreme Court.  The Tenth Circuit remanded the case for dismissal of the Commerce Clause claims and dissolution of the permanent injunction.  The U.S. Supreme Court reversed and remanded the decision of the Tenth Circuit on the jurisdiction issue and, on remand, the Tenth Circuit, invalidated the Colorado law on Commerce Clause grounds.  Direct Marketing Association v. Brohl, 814 F.3d 1129 (10th Cir. 2016). 

South Dakota Legislation.  S.B. 106 was introduced in the 2016 South Dakota legislative session.  It requires the collection of sales taxes from certain remote sellers – those with “gross revenue” from sales in South Dakota of over $100,000 per calendar year or with 200 or more “separate transactions” in the state within the same timeframe.  After S.B. 106 was signed into law, the state Department of Revenue soon thereafter began issuing notices to sellers that it thought were in violation of the law.  Several out-of-state sellers that received notices did not register for sale tax licenses as the law required, and the state took legal action against them.  The result was that the South Dakota Supreme Court invalidated S.B. 106 on Commerce Clause grounds based on the U.S. Supreme Court precedent referenced above.  The U.S. Supreme Court agreed to hear the case.

U.S. Supreme Court decision.  Article I, Section 8 of the U.S. Constitution says that, “The Congress shall have the power...to regulate commerce…among the several states…”.  That was the key point of the Court’s 1967 Bellas Hess, Inc. decision.  As noted above, in that case the Court stated that the Commerce Clause grants “exclusive authority [to] Congress to regulate trade between the States.”  Apparently, that is not the case anymore, at least according to the majority in Wayfair – Justices Kennedy, Thomas, Ginsburg, Alito and Gorsuch.  Under the new interpretation of the Commerce Clause, states can impose sale tax obligations on businesses that have no physical presence in the state.  But is that completely true?  Can the Court’s opinion be construed as giving the states a “blank check” to tax out-of-state businesses?  Maybe not.

In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), the Court ruled that a state tax would be upheld if it applied to an activity having a substantial nexus with the state; was fairly apportioned; did not discriminate against interstate commerce; and, was fairly related to the services that the state provided.  Later, in the Quill case, the Court determined that a physical presence in the taxing jurisdiction was what satisfied the Brady “substantial nexus” requirement. 

In Wayfair, the Court determined that a “substantial nexus” could be present without the party subjected to tax having a physical presence in the taxing jurisdiction.  But, the key point is that the “substantial nexus” test of Brady remains.  Likewise, the other three requirements of Brady remain – fair apportionment; no discrimination against interstate commerce, and; fairly related to services that the state provides.  In other words, taxing a business without a physical presence in the state cannot unduly burden interstate commerce.  The Wayfair majority determined that the South Dakota law satisfied these tests because of the way it was structured – limited application (based on transactions or dollars of sales); not retroactive; the state was a member of the Streamlined Sales and Use Tax Agreement; the sellers at issue were national businesses with a large online presence; and South Dakota provided tax software to ease the administrative burden. 

Implications.  Presently, 23 states are “full members” of the Streamlined Sales and Use Tax Agreement.  For those states, the Wayfair majority seemed to believe that had the effect of minimizing the impact on interstate commerce.  Also, it would appear that any state legislation would have to have exceptions for small businesses with low volume transactions and sales revenue.  That’s an important point for many rural businesses that are selling online.  Whether a series LLC (in some states such as Iowa) or subsidiaries of a business could be created, each with sales below the applicable threshold, remains to be seen.

Post Wayfair, where will the line be drawn?  Wayfair involved state sales tax.  Will states attempt to go after a portion of business income of the out-of-state business via income tax?  That seems plausible.  However, the Interstate Income Act of 1959 (15 U.S.C. §381-384), requires that a business (or individual) have some sort of connection with a state before its income can be taxed (at least with respect to the solicitation of orders for tangible personal property).  Is that legislation now unconstitutional too? Or, is there a distinction remaining between taxing receipts as opposed to income?  Only time will tell.

Number 5 - Discharges of “Pollutants” To Groundwater

Hawai’i Wildlife Fund v. Cty. of Maui, 881 F.3d 754 (9th Cir. 2018); Upstate Forever, et al. v. Kinder Morgan Energy Partners, LP, et al., 887 F.3d 637 (4th Cir. 2018); Tennessee Clean Water Network v. Tennessee Valley Authority, 905 F.3d 436 (6th Cir. 2018), 

Background.  2018 saw a great deal of litigation on the issue of whether the discharge of a “pollutant” into groundwater requires a discharge permit under the Clean Water Act (CWA). Often, the courts have deferred to the EPA position that a point source discharge of a pollutant to groundwater that is hydrologically connected to a “Water of the United States” (WOTUS) is subject to the CWA.  However, some courts take the position that a discharge, to be subject to the CWA, must be directed from a point source to a WOTUS.  It’s a big issue for agriculture, particularly irrigation crop agriculture. 

Ninth Circuit opinion.  Early in the year, the U.S. Court of Appeals for the Ninth Circuit said that at least some discharges into groundwater are a CWA-covered event.  In the case, the defendant owned and operated four wells at the Lahaina Wastewater Reclamation Facility (LWRF), which is the principal municipal wastewater treatment plant for a city. Although constructed initially to serve as a backup disposal method for water reclamation, the wells have since become the defendant’s primary means of effluent disposal into groundwater and, ultimately, the Pacific Ocean. The LWRF receives approximately 4 million gallons of sewage per day from a collection system serving approximately 40,000 people. That sewage is treated at LWRF and then either sold to customers for irrigation purposes or injected into the wells for disposal. The defendant injects approximately 3 to 5 million gallons of treated wastewater per day into the groundwater via its wells. The defendant conceded, and its expert, confirmed that wastewater injected into wells 1 and 2 enters the Pacific Ocean. In addition, in June 2013 the EPA, the Hawaii Department of Health, the U.S. Army Engineer Research and Development Center, and researchers from the University of Hawaii conducted a study on wells 2, 3 and 4. The study involved placing tracer dye into Wells 2, 3, and 4, and monitoring the submarine seeps off Kahekili Beach to see if and when the dye would appear in the Pacific Ocean. This study, known as the Tracer Dye Study, found that 64% of the treated wastewater from wells 3 and 4 discharged into the ocean.

The plaintiff sued, claiming that the defendant was in violation of the Clean Water Act (CWA) by discharging pollutants into navigable waters of the United States without a CWA National Pollution Discharge Elimination System (NPDES) permit. The trial court agreed, holding that an NPDES permit was required for effluent discharges into navigable waters via groundwater.

On appeal, the appellate court held that the wells were point sources that could be regulated through CWA permits despite the defendant’s claim that an NPDES permit was not required because the wells discharged only indirectly into the Pacific Ocean via groundwater. Specifically, the appellate court held that “a point source discharge to groundwater of “more than [a] de minimis” amount of pollutants that is “fairly traceable from the point source . . . such that the discharge is the functional equivalent of a discharge into a navigable water” is regulated under the CWA.” The appellate court reached this conclusion by citing cases from other jurisdictions that determed that an indirect discharge from a point source into a navigable water requires an NPDES discharge permit. The defendant also claimed its effluent injections are not discharges into navigable waters, but rather were disposals of pollutants into wells, and that the CWA categorically excludes well disposals from the permitting requirements. However, the appellate court held that the CWA does not categorically exempt all well disposals from the NPDES requirements because doing so would undermine the integrity of the CWA’s provisions. Lastly, the plaintiff claimed that it did not have fair notice because the state agency tasked with administering the NPDES permit program maintained that an NPDES permit was unnecessary for the wells. However, the court held that the agency was actually still in the process of determining if an NPDES permit was applicable. Thus, the court found the lack of solidification of the agency’s position on the issue did not affirmatively demonstrate that it believed the permit was unnecessary as the defendant claimed. Furthermore, the court held that a reasonable person would have understood the CWA as prohibiting the discharges, thus the defendant’s due process rights were not violated.

EPA action.  After the Ninth Circuit issued its opinion, the EPA, on February 20, 2018, requested comment on whether pollutant discharges from point sources that reach jurisdictional surface waters via groundwater may be subject to Clean Water Act (“CWA”) regulation. Specifically, EPA seeks comment on whether EPA should consider clarification or revision of previous EPA statements regarding the Agency’s mandate to regulate discharges to surface waters via groundwater under the CWA. A number of courts have taken the view that Congress intended the CWA to regulate the release of pollutants that reach “waters of the United States” regardless of whether those pollutants were first discharged into groundwater. However, other courts, have taken the view that neither the CWA nor the EPA’s definition of waters of the United States asserts authority over ground waters, based solely on a hydrological connection with surface waters. EPA has not stated that CWA permits are required for pollutant discharges to groundwater in all cases. Rather, EPA’s position has been that pollutants discharged from point sources that reach jurisdictional surface waters via groundwater or other subsurface flow that has a direct hydrologic connection to the jurisdictional water may be subject to CWA permitting requirements. As part of its request, EPA sought comments on whether it should review and potentially revise its previous positions. In particular, the EPA sought comment on whether it is consistent with the CWA to require a CWA permit for indirect discharges into jurisdictional surface waters via groundwater. The EPA also seeks comment on whether some or all of such discharges are addressed adequately through other federal authorities, existing state statutory or regulatory programs or through other existing federal regulations and permit programs.

Fourth Circuit opinion.  Later in 2018, the U.S. Court of Appeals for the Fourth Circuit largely followed the Ninth Circuit’s approach in a case involving somewhat similar facts.  The court held that an ongoing addition of pollutants to navigable waters was sufficient for CWA citizen -suit cases.  The plaintiffs, a consortium of environmental and conservation groups, brought a citizen suit under the Clean Water Act (CWA) claiming that the defendant violated the CWA by discharging “pollutants” into the navigable waters of the United States without a required discharge permit via an underground ruptured gasoline pipeline owned by the defendant’s subsidiary. The plaintiff claimed that a discharge permit was needed because the CWA defines “point source pollutant” (which requires a discharge permit) as “any discernible, confined and discrete conveyance, included but not limited to any…well…from which pollutants are or may be discharged.” The trial court dismissed the plaintiffs’ claim.

On appeal, the appellate court held that the court had subject matter jurisdiction under the CWA’s citizen suit provision because the provision covered the discharge of “pollutants that derive from a ‘point source’ and continue to be ‘added’ to navigable waters.” Thus, even though the pipeline was no longer releasing gasoline, it continues to be passing through the earth via groundwater and continued to be discharged into regulable surface waters. This finding was contrary to the trial court’s determination that the court lacked jurisdiction because the pipeline had been repaired and because the pollutants had first passed through groundwater. As such, the appellate court determined that, in accord with the Second and Ninth Circuits, that a pollutant can first move through groundwater before reaching navigable waters and still constitute a “discharge of a pollutant” under the CWA that requires a federal discharge permit. The discharge need not be channeled by a point source until reaching navigable waters that are subject to the CWA. The appellate court did, however, point out that a discharge into groundwater does not always mean that a CWA discharge permit is required. A permit in such situations is only required if there is a direct hydrological connection between groundwater and navigable waters. In the present case, however, the appellate court noted that the pipeline rupture occurred within 1,000 feet of the navigable waters. The court noted that the defendant had not established any independent or contributing cause of pollution. 

Sixth Circuit opinion.  After the Ninth Circuit and Fourth Circuit decisions, the U.S. Court of Appeals for the Sixth Circuit issued another opinion in 2018 on the groundwater/CWA issue.  The Sixth Circuit, in concluded that groundwater is not a point source of pollution under the CWA.  The defendant in the case was a utility that burns coal to produce energy.  It also produced coal ash as a byproduct. The coal ash was discharged into man-made ponds. The plaintiffs, environmental activist groups, claimed that the chemicals from the coal ash in the ponds leaked into surrounding groundwater where it was then carried to a nearby lake that was subject to regulation under the Clean Water Act (CWA). The plaintiffs claimed that the contamination of the lake without a discharge permit violated the CWA and the Resource Conservation and Recovery Act (RCRA).

The trial court had dismissed the RCRA claim, but the appellate court reversed that determination and remanded the case on that issue. On the CWA claim, the trial court ruled as a matter of law that the CWA applies to discharges of pollutants from a point source through hydrologically connected groundwater to navigable waters where the connection is "direct, immediate, and can generally be traced." The trial court held that the defendant’s facility was a point source because it "channel[s] the flow of pollutants . . . by forming a discrete, unlined concentration of coal ash," and that the Complex is also a point source because it is "a series of discernible, confined, and discrete ponds that receive wastewater, treat that wastewater, and ultimately convey it to the Cumberland River." The trial court also determined that the defendant’s facility and the ponds were hydrologically connected to the Cumberland River by groundwater. As for the defendant’s facility, the trial court held that "[f]aced with an impoundment that has leaked in the past and no evidence of any reason that it would have stopped leaking, the Court has no choice but to conclude that the [defendant’s facility] has continued to and will continue to leak coal ash waste into the Cumberland River, through rainwater vertically penetrating the Site, groundwater laterally penetrating the Site, or both." The trial court determined that the physical properties of the terrain made the area “prone to the continued development of ever newer sinkholes or other karst features." Thus, based on the contaminants flowing from the ponds, the court found defendant to be in violation of the CWA. The trial court also determined that the leakage was in violation of the defendant “removed-substances” and “sanitary-sewer” overflow provisions. The trial court ordered the defendant to "fully excavate" the coal ash in the ponds (13.8 million cubic yards in total) and relocate it to a lined facility.

On further review, the appellate court reversed. The appellate court held that the CWA does not apply to point source pollution that reaches surface water by means of groundwater movement. The appellate court rejected the plaintiffs’ assertion that mere groundwater is equivalent to a discernable point source through which pollutants travel to a CWA-regulated body of water. The appellate court noted that, to constitute a “conveyance” of groundwater governed by the CWA, the conveyance must be discernible, confined and discrete. While groundwater may constitute a conveyance, the appellate court reasoned that it is neither discernible, confined, nor discrete. Rather, the court noted that groundwater is a “diffuse” medium that “travels in all directions, guided only by the general pull of gravity.” In addition, the appellate court noted that the CWA regulates only “the discharge of pollutants ‘to navigable waters from any point source.’” In so holding, the court rejected the holdings of the Ninth Circuit and the Fourth Circuit.   

That different conclusion by the Sixth Circuit could prove to be very important for irrigation crop agriculture.  It may also mean that the U.S. Supreme Court could be asked to clear up the discrepancy. 

Number 4 - Air Emission Reporting for Livestock Operations

Fair Agricultural Reporting Method Act (Farm Act) and Subsequent Litigation

Background.  Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Emergency Planning and Community Right-to-Know Act (EPCRA), the federal government is to be notified when large quantities of hazardous materials are released into the environment. Once notified, the Environmental Protection Agency (EPA) has discretion to take remedial actions or order further monitoring or investigation of the situation. In 2008, the EPA issued a final regulation exempting farms from the reporting/notification requirement for air releases from animal waste on the basis that a federal response would most often be impractical and unlikely. However, the EPA retained the reporting/notification requirement for Confined Animal Feeding Operations (CAFOs) under EPCRAs public disclosure rule.

Various environmental groups sued, challenging the exemption on the basis that the EPA acted outside of its delegated authority to create the exemption. On the other hand, agricultural groups claimed that the retained reporting requirement for CAFOs was also impermissible. The environmental groups claimed that emissions of ammonia and hydrogen sulfide (both hazardous substances under CERCLA) should be reported as part of furthering the overall regulatory objective. The court noted that there was no clear way to best measure the release of ammonia and hydrogen sulfide, but determined that continuous releases are subject to annual notice requirements. The court held that the EPA’s final regulation should be vacated as an unreasonable interpretation of the de minimis exception in the statute. As such, the challenge brought by the agriculture groups to the CAFO carve out was mooted and dismissed. Waterkeeper Alliance, et al. v. Environmental Protection Agency, 853 F.3d 527 (D.C. Cir. 2017).

The court’s order potentially subjected almost 50,000 farms to the additional reporting requirement. As such, the court delayed enforcement of its ruling by issuing multiple stays, giving the EPA additional time to write a new rule. However, on March 23, 2018, President Trump signed into law the Consolidated Appropriations Act of 2018, H.R. 1625. Division S, Title XI, Section 1102 of that law, entitled the Fair Agricultural Reporting Method Act (FARM Act), modifies 42 U.S.C. §9603 to include the EPA exemption for farms that have animal waste air releases. Specifically, 42 U.S.C. §9603(e) is modified to specify that “air emissions from animal waste (including decomposing animal waste) at a farm” are exempt from the CERCLA Sec. 103 notice and reporting requirements. “Animal waste” is defined to mean “feces, urine, or other excrement, digestive emission, urea, or similar substances emitted by animals (including any form of livestock, poultry, or fish). The term animal waste “includes animal waste that is mixed or commingled with bedding, compost, feed, soil or any other material typically found with such waste.” A “farm” is defined as a site or area (including associated structures) that is used for “the production of a crop; or the raising or selling of animals (including any form of livestock, poultry or fish); and under normal conditions, produces during a farm year any agricultural products with a total value equal to not less than $1,000.”

2018 litigation.  Relatedly, in late 2018, various environmental groups filed suit in the Federal District Court for the District of Columbia to overturn a USDA/FSA regulation that was issued in 2016 that exempts medium-sized (as redefined) CAFOs from environmental review under the National Environmental Policy Act (NEPA) before receiving FSA loans or loan guarantees. The groups claim that proper procedures were not followed when the rule was developed, and seek to have the rule rescinded and reissued after a determination of the potential impacts of the exemption is made with the reissued rule made subject to a public comment period.

Before the regulation was issued in 2016, the FSA performed Environmental Impact Statement (EIS) reviews to assess the impact of a government loan or loan guarantee to a medium-sized CAFO – defined as a facility holding 350 dairy cows, 500 feedlot cattle, 1250 hogs, 27,500 turkeys, and 50,000 chickens.  For those facilities meeting the definition of a medium-sized CAFO, the FSA would undertake an EIS before loans or loan guarantees were approved. The results of the EIS were provided to the public before the USDA/FSA dispersed funds.  The EIS process could take many months.  Under the 2016 regulation, an EIS is not required unless a particular farm/facility has more than 699 dairy cows, 999 fat cattle, 2,499 hogs, 54,999 turkeys, and 124,999 chickens. 

Conclusion

Next time I will go through the biggest three developments in ag law and tax.  What do you think they might be?

January 8, 2019 in Environmental Law, Income Tax, Regulatory Law | Permalink | Comments (0)