Ninth Circuit Finds Oakland’s Attempt to Block Coal Shipments Violated Development Agreement

In a decision announced on May 26, 2020, the Ninth Circuit Court of Appeals held that the City of Oakland could not enforce regulations that would have prohibited the shipping and handling of coal through the City.  The City Council adopted the regulations in the form of an anti-coal ordinance, along with a resolution specifically applying the ordinance to the Oakland Bulk & Oversized Terminal currently under construction on the former Oakland Army Base near the San Francisco-Oakland Bay Bridge.  The opinion from the Ninth Circuit panel upheld an earlier District Court decision blocking enforcement of the resolution and ordinance against the terminal project. The Ninth Circuit’s decision in Oakland Bulk & Oversized Terminal, LLC v. City of Oakland (16-cv-07014-VC) can be found here.

The case is not a typical land use matter, in part because both the appellate court and the lower court treated the issue as a breach of contract claim, rather than a matter of administrative law, although the remedy sought by the developer was the invalidation of the regulations rather than an award of damages.  By a 2-1 majority, the appellate panel agreed with the lower court judge in holding that the City’s attempt to enforce the resolution violated the underlying development agreement (“DA”) for the project.  Under the DA, the City could only impose new regulations on the project if the City first determined, based on “substantial evidence and a public hearing,” that failure to apply the regulations would place “existing or future occupants or users of the Project, adjacent neighbors, or any portion thereof, or all of them, in a condition substantially dangerous to their health or safety.”

Prior to adopting the ordinance and the resolution, the City Council held the required hearing where the Council heard extensive public commentary, and also considered a 160-page report prepared for the City by a national environmental consultant firm that has prepared a number of environmental impact analyses and other reports for the City.  The court, however, found that the environmental analyses and other commentary failed to meet the required substantial evidence test, primarily due to significant assumption errors and other flaws in the environmental report.

Although both the lower and appeals court treated the issue as a breach of contract claim, both courts agreed that the validity of the City Council’s action depended on whether the evidence in the administrative record was sufficient to support the Council’s action, as is the case with more typical land use litigation.  In this case, however, the lower court allowed the proponent of the terminal to present evidence at trial questioning the validity and adequacy of the evidence in the administrative record, although the court noted that this extra-record evidence was relevant “to a limited extent” to the court’s ruling.  Based primarily on this departure from the norm, the dissenting justice on the appeals court argued that the evidence actually before the City Council as part of the administrative record was adequate to support the Council’s action, and would have upheld the City’s action.

Another interesting angle on this case relates to the attempt by the Sierra Club and San Francisco Baykeeper to intervene on the City’s behalf to uphold the coal regulations.  These intervenors argued that the language in the DA prohibiting the imposition of new “regulations” applied only to land use regulations.  Under this argument, the City’s coal regulations would be permissible since they regulate issues not strictly related to land use.  The district and appeals courts both easily dismissed this argument, finding that the language of the DA evidenced a clear intent to apply to and block all new regulations that did not meet the substantial evidence test, not merely land use regulations.

The intervenors’ other argument was more nuanced, but was not addressed on the merits by either court.  The intervenors argued that the DA’s prohibition on new regulations beyond land use issues was contrary to Government Code section 65866.  This statute, part of the Article generally permitting and regulating development agreements, controls jurisdictions’ abilities to impose new regulations.  The intervenors argued that the applicable DA provision restricted the City’s hands more than the Government Code allowed, and was accordingly against public policy.  The lower court, however, held that the intervenors had no right to raise the issue in this case, since their participation in the matter was limited to attempting to help the City of Oakland, and thus they could not “seek to invalidate a provision of an agreement that Oakland entered into.”  The lower court’s opinion is available here.

It is worth nothing that this decision does not necessarily mean that the coal terminal will be part of the proposed bulk terminal.  The City of Oakland has threatened to terminate the ground lease for the terminal site, alleging that the developer has failed to meet certain performance standards, leading the developer to file a separate action in December of 2018 alleging that the City has breached its obligations under the lease for the terminal site.  That suit, in which the developer is seeking damages and attorneys’ fees from the City, is still pending in Alameda County Superior Court.  In addition, the Utah-based company that is interested in using the site for coal deliveries is in bankruptcy proceedings, and media reports have questioned their ability to raise the required funding.

Wendel Rosen LLP attorneys are available to answer any questions you may have regarding these matters.