Real Estate and Construction Law Blog

Appellate Court Decision Invalidating Unjustified "Affordable Housing In Lieu Fees" Is Now Final

BIACC v. City of Patterson (2009) 171 Cal.App.4th 886

By David P. Lanferman

On June 17, 2009, the California Supreme Court denied the City of Patterson's petition for review of the Court of Appeals decision invalidating the City of Patterson's "affordable housing in lieu fees" and holding that the City violated a development agreement by demanding the new fees from the approved project. The Fifth Appellate District had initially issued its unanimous decision in January, holding that the City had failed to demonstrate that the amount of its new $22,000 per market-rate home fee was reasonably related to any deleterious impacts on the community's need for affordable housing. The appellate court later denied the City's petition for rehearing, slightly modified the text of its decision, and ordered the decision to be published in March. The Supreme Court's recent ruling means the decision now stands as "final" (at least as to the California judicial system).

]]> The Supreme Court also denied several requests that the appellate court decision be "de-published." That denial means that the Court of Appeals decision remains published and citable as legal precedent. The decision has attracted much attention (and some concern) because it is one of the first to clearly hold that "affordable housing" exactions, or fees in-lieu of such subsidized-housing exactions, are subject to the "legal standards" generally applicable to other types of development fees and exactions. The court's decision indicates that "affordable housing" or "below-market-rate" housing exactions and fees may not be valid unless they are shown to be justified by evidence demonstrating a reasonable relationship between the "impacts" of new market rate housing (if any) and the amount of the fees or exactions imposed against a project to fund the community's "needs" for affordable housing -- just like other types of development fees and exactions. The decision may also have more far-reaching significance for other types of development fees and exactions for "soft infrastructure" and community amenities for which governments seek development contributions but which are not traditional "public facilities.”

The prevailing plaintiffs will now be in position to seek recovery of refunds of all of the disputed fees paid "under protest" (plus interest,) and to seek recovery of their legal fees and costs from the City, as provided by the development agreement between the parties.

Authored By:
David P. Lanferman
(415) 774-2996
dlanferman@sheppardmullin.com

Dave Lanferman is a member of the Real Estate, Land Use and Environmental Practice Group in the firm's San Francisco office.

County Outside Counsel Work Product Not Part of CEQA Record Even If Disclosed To Real Party In Interest

California Oak Foundation v. County of Tehama et al. (Del Webb California Corp. et al.), ____ Cal. App. 4th ____ (June 11, 2009, No. CI58258)

By Katharine E. Allen

Four letters sent to the County of Tehama and the Tehama County Board of Supervisors (collectively “Tehama”) and disclosed to real parties in interest by a law firm retained as outside counsel for the purpose of providing advice on compliance with the California Environmental Quality Act (“CEQA”) maintained their privileged status under the attorney-client and work product privileges despite the disclosure and thus did not need to be included in the administrative record. In so holding, the Court of Appeal for the Third Appellate District relied on the common interest doctrine to maintain the privileged status of the letters. The court did, however, reverse the judgment of the Superior Court of Tehama County on a separate issue related to the investigation of the financial feasibility of certain mitigation fees, with directions that the superior court enter a judgment requiring Tehama to reconsider the standard used in determining the economic feasibility of the underlying project.

]]> Background

The project at issue in this case was a specific plan for residential and commercial development on a parcel of approximately 3,320 acres of land adjacent to Interstate Highway 5 (“I-5”) between Red Bluff and Redding known as the Sun City Tehama Specific Plan. The primary impacts of the project were the net loss of roughly 774 acres of blue oak woodlands and the increase in traffic on certain nearby portions of I-5. The Final Environmental Impact Report (“FEIR”) for the project concluded that (i) even with a net loss of 774 acres of blue oak woodlands, the use of a perpetual conservation easement over 1,398 acres of woodlands within the general specific plan area was sufficiently proportionate to the impact and thus no additional mitigation (namely the contribution of money to the Oak Woodlands Conservation Fund) was required, and (ii) given the lack of an established funding program for necessary infrastructure improvements to I-5 to accommodate the increased traffic, there may be impacts if the improvements were not built but increased mitigation fees for the residential portion of the project were not economically feasible. In connection with the later issue, Tehama used a generally applied standard to determine that increasing the traffic impact fees above the existing percentage of each home's sales price would render the project financially infeasible and noted that CEQA does not require mitigation that is financially infeasible. Tehama subsequently approved the project. The California Oak Federation (“COF”) petitioned for a writ of administrative mandamus to overturn approval of the project and the FEIR. When the superior court denied its petition, COF appealed contending that Tehama erred on a number of fronts in its application of CEQA requirements for mitigation and that the superior court also erred in denying COF's motion to include certain letters in the administrative record on the grounds.

Privileged Documents Excluded From Administrative Record

The most pertinent part of the Court of Appeal's decision centered on its consideration of whether the attorney-client and work product privileges under the California Evidence Code were applicable in light of Section 21167.3 of CEQA and, if so, whether those privileges were destroyed by the disclosure of the letters to counsel for the other real parties in interest. COF first asserted that Section 21167.3(e) of CEQA abrogated the applicability of the attorney-client and work product privileges to the letters. COF then claimed that if there was no abrogation of the privileges by CEQA, the privileges were nonetheless rendered inapplicable because the letters had been shared with third parties.

The Court of Appeal rejected COF's claim that Section 21167.3(e) of CEQA eliminated the privileged nature of the letters outright. The court noted that in order to eliminate a recognized evidentiary privilege, CEQA would have to constitute an implied repeal of the existing statute governing the privilege. An implied repeal will only be construed where it is clear that the later statute was intended to supersede the existing law. This in turn only occurs when there is an unavoidable conflict between the two laws. While Section 21167.3(e) of CEQA contains extensive disclosure requirements with respect to items to be included in the administrative record, it does not mention either privilege. As a result, the Court of Appeal found this insufficient to construe an implied repeal of the privileges by CEQA and found the letters to be protected by the privileges.

The Court of Appeal similarly rejected COF's second claim that certain disclosures of the letters to various third parties negated the application of either the attorney-client or work product privileges to the letters. In doing so, the court relied on the common interest doctrine. In particular, it noted that while disclosure to an unnecessary third party would destroy communication, disclosure to a third party to whom the disclosure is reasonably necessary to further the purpose for which the legal representation was initially sought preserved both privileges. The court held that disclosing advice related to compliance with CEQA requirements to codefendants in a joint endeavor to defend an underlying environmental impact report in litigation was reasonably necessary for the purpose for which the legal representation was initially sought, which was to achieve compliance with CEQA. Thus, the privileges were still intact with respect to these letters and they were not required to be made part of the administrative record.

Mitigation of Loss of Blue Oak Woodlands

COF also took issue with the level or required mitigation with respect to the loss of blue oak woodlands. COF claimed that Tehama and the superior court incorrectly relied on Section 21083.4 of the California Public Resources Code to justify not requiring full mitigation of the impact of the project, as was otherwise mandated by Section 21081. The Court of Appeal rejected this argument, finding that there was no indication in the FEIR that Tehama used Section 21083.4 as an exception to the general rule in CEQA to mitigate. On the contrary, Tehama's reasoning, as evidenced by the contents of the FEIR, was that the conservation easement was proportional to the impact, but that the loss of habitat remained a significant unavoidable impact. As such, Tehama found no mitigation measure could avoid a net loss of habitat and thus there was no feasible mitigation to reduce the impact to a less than significant level. The court applauded Tehama's admission of the actual impact of the project in the FEIR as being “true to the spirit of CEQA.”

Mitigation of Impact of Increased Traffic on I-5

COF also contested the findings with respect to the increase in traffic on I-5 under the FEIR. COF claimed that Tehama erred in a number of ways in reaching its determination that these impacts were unavoidable and that mitigation in the form of traffic impact fees must be limited to the amount of such fees that were determined to be financially feasible in the FEIR. In particular, COF claimed that Tehama improperly concluded that a higher traffic mitigation fee was financially infeasible because Tehama: (i) failed to account for the ability of the commercial portion of the project to contribute; (ii) failed to conduct an independent review of financial feasibility and instead relied on information provided by the developer; (iii) improperly relied on a finding that greater fees were financially infeasible because there was no existing funding program in place; (iv) failed to disclose an analysis from the residential developer on financial feasibility; (v) failed to include several financial analyses from the developer in the FEIR; and (vi) failed to disclose doubts by its economic consultant over the use of a commonly used standard to determine feasibility.

The Court of Appeal struck down a number of COF's contentions under the doctrine of exhaustion of administrative proceedings, finding that since certain claims were not raised in the applicable administrative proceedings, they could not be asserted for the first time during judicial review. The court further noted that an agency is not barred from relying on analyses provided by a project's developers if those analyses are otherwise sufficient. However, the court did agree with COF on one assertion and found that Tehama had a duty to conduct a reasonable investigation of the financial feasibility of traffic impact mitigation measures, which included disclosure of any points of contention regarding the standards employed by its consultants. It remanded the case so that Tehama could make such further investigations.

Authored By:

Katharine E. Allen
(415) 774-2903
kallen@sheppardmullin.com

California Adopts First Low-Carbon Fuel Standard to Reduce Greenhouse Gas Emissions from Transportation Fuels

By Randolph C. Visser & Michael Cato

On April 23, 2009, the California Air Resources Board (CARB) approved the first low-carbon fuel standard (LCFS) in the nation. Designed to help meet the greenhouse gas emission (GHG) targets established by the Global Warming Solutions Act (AB 32), beginning in 2011, the regulation requires producers and importers of transportation fuel to reduce the average carbon content of fuel sold in California on an annual basis, with a total reduction of at least 10 percent by 2020.

]]> Fuels and Providers Subject to the Regulation

The LCFS applies to most types of transportation fuels sold in California, including gasoline, diesel, biofuels, natural gas, hydrogen, and electricity. Specific alternative fuels that inherently meet the applicable standards through 2020, including electricity and hydrogen, are not required to meet the LCFS requirements, but producers or importers can opt into the LCFS in order to obtain the right to generate credits under the regulation. Certain research fuels and low volume niche fuels are exempt entirely.

As a general rule, the LCFS regulates upstream producers and importers, not downstream distributors and fueling stations. However, in certain circumstances, a regulated party can transfer its compliance obligations, together with the right to generate and sell credits, to another party.

Compliance Obligations

The LCFS goes into effect in 2010, but the first year is a reporting year only. According to CARB, this "break in" year is designed to allow regulated parties and staff time to adjust to the technical requirements of the LCFS and identify aspects of the LCFS that require improvement.

Beginning in 2011, regulated parties must meet an average declining carbon intensity standard. Separate standards are established for gasoline and diesel, with reformulated gasoline mixed with corn-derivative ethanol at 10 percent by volume the baseline for gasoline and low sulfur diesel fuel the baseline for diesel. The carbon intensity of biofuels, natural gas, hydrogen and electricity will be measured against either the gasoline or diesel standard, depending on the vehicles such alternative fuels are used in.

Regulated parties can comply with the LCFS by demonstrating that the average carbon intensity of the mix of fuel they produce or supply in California during a particular year does not exceed the LCFS standard for that year, or by applying LCFS credits acquired during previous years or from other regulated parties within the LCFS market. The development of a market for trading such credits is seen as an opportunity to promote the development of low-carbon fuels in California through market-based incentives.

The carbon intensity standards are back-loaded, with gradual reductions in the early years, and accelerating reductions as 2020 approaches. CARB noted that this approach will allow for the development of new technologies to satisfy the LCFS requirements over time, but some critics have suggested that such new technologies may not prove viable alternatives, and that regulated parties will have no option to comply with the LCFS without a significant increase in fuel costs in California.

Determination of Carbon Intensity Values

In order to compare the carbon content of the various regulated fuels, the LCFS establishes carbon intensity values, which measure of GHG emissions per unit of fuel energy delivered. Since the goal of the regulation is to reduce overall GHG emissions, the carbon intensity values are determined on a "lifecycle" basis – also known as "well-to-wheels" for petroleum-based fuels, and "seed-to-wheels" for biofuels – which considers GHG emissions associated with each step of the production, transportation and use of the fuel.

One of the more controversial aspects of the LCFS, this lifecycle analysis considers not only direct emissions during the full lifecycle, but also significant indirect emissions. While CARB notes the possibility that most or all transportation fuels generate varying levels of indirect GHG emissions, CARB staff has identified only one indirect effect as a significant contributor to GHG emissions: land use changes triggered by increasing demand for biofuels. According CARB, increased dedication of farmland to biofuel production leads to the conversion of non-farmland for agricultural production, which in turn leads to increased GHG emissions from lost cover vegetation and disturbed soils.

Some industry groups have objected that the indirect land use component unfairly penalizes certain biofuel producers – particularly corn-based ethanol producers – by inaccurately estimating GHG emissions from land use changes associated with biofuel production. Meanwhile, some environmental groups have argued that the estimate of GHG emissions from such land use changes are actually understated.

As a result of the controversy surrounding the indirect land use component, CARB directed staff to form an expert workgroup to assist in evaluating and refining the land use and indirect effect analysis on an accelerated basis. This review could result in changes to the indirect analysis before reductions are required, beginning in 2011.

Potential Impact on other Jurisdictions

The newly-adopted LCFS may have impacts far outside California's borders. A coalition of Northeastern states have agreed to develop a plan to adopt a low-carbon fuel standard by the end of the year, and a group of Midwestern states are also considering similar policies. A federal standard is also possible. The environmental group at Sheppard Mullin is well positioned to help you understand the potential impacts on your business, in California and beyond.

Authored By:

Randolph C. Visser

(213) 617-4144

RVisser@sheppardmullin.com

and

Michael Cato

(858) 720-8938

MCato@sheppardmullin.com

SB 375: Lion or Mouse?

By Judy V. Davidoff, Daniel P. Bane, & Rafael Muilenberg

The rules governing regional planning changed dramatically when Governor Schwarzenegger signed Senate Bill 375 (SB 375) into law last year. Whatever the ultimate outcome, interested parties throughout California—from regional transportation agencies to local governmental agencies to land developers—will need to work in this dramatically new world and make the best of it together. This article addresses some of the key elements of SB 375, discusses potential issues, and describes the opportunities presented to interested parties and stakeholders to get involved in the process to protect their interests at an early stage.

]]> Click here to read more.

Authored By:

Judy V. Davidoff

(415) 774-2993

JDavidoff@sheppardmullin.com

and

Daniel P. Bane

(714) 424-8246

DBane@sheppardmullin.com

and

Rafael Muilenberg

U.S. Supreme Court Holds Superfund's Traditional Joint and Several Liability and Arranger Liability Have Their Limits: Bar May Be Lowered For Demonstrating Apportionment Liability

By Randolph C. Visser, Jeffrey W. Forrest, & Michael Hansen

On May 4, the U.S. Supreme Court handed down its 8 to 1 decision in the much anticipated case of Burlington Northern & Santa Fe Railway Co., et al v. United States et al. (556 U.S.___ (2009)), which challenged the traditional notion of joint and several liability under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund") and challenged a new, expansive notion of arranger liability under CERCLA. The Supreme Court overturned the Ninth Circuit Court of Appeals' broad interpretation of arranger liability and may have lowered the bar for how Potentially Responsible Parties ("PRPs") can demonstrate apportionment liability, therefore avoiding CERCLA's expansive joint and several liability scheme.

]]> No Arranger Liability

This case involved the contamination of an agricultural chemical distribution facility owned by a now-insolvent company, Brown & Bryant, Inc. ("B&B"), which had purchased chemical products from Shell Oil Company ("Shell"). Some of the chemicals spilled onto B&B's 3.8-acre parcel and on a 0.9-acre adjacent parcel leased from Burlington Northern & Santa Fe Railway Co. and Union Pacific Railroads Co. ("Railroads"). After EPA and the California Department of Toxic Substances Control ("DTSC") spent over $8 million cleaning up the contaminated site, it sought reimbursement from the Railroads and Shell, as PRPs that EPA and DTSC believed had profited from B&B's operations and were liable under CERCLA's broad liability scheme. The Railroads had already spent $3 million remediating contamination of their parcel.

EPA alleged Shell was liable because it arranged for disposal of a hazardous waste through its selection of common carriers to transport its hazardous product and its requirement that B&B purchase the hazardous product in bulk, which Shell knew would require the transfer of the chemicals from trucks to storage tanks, where spills and leaks were common. As such, EPA contended that even though Shell was not a "traditional" arranger of hazardous waste disposal, one who intentionally contracts with another party to dispose of hazardous waste, Shell was still liable under this expansive interpretation of arranger liability. EPA alleged this even though Shell shipped the chemicals FOB destination, which means that B&B took responsibility for the chemicals once they arrived at the facility.

Overturning the Ninth Circuit Court of Appeals, the Supreme Court held that Shell could not be held liable as an arranger of disposal of hazardous waste, where the evidence failed to show that Shell took any intentional steps to dispose of its hazardous sales product during the transfer of its product from a common carrier to B&B's storage tanks. Shell's selection of the common carrier and mere knowledge of continued accidental spills during the transfer process did not constitute a plan for intentionally arranging for the disposal of a hazardous waste, particularly where Shell took intentional steps to reduce accidental spills through issuing instructions and providing financial incentives for B&B to reduce the likelihood of transfer spills.

The Supreme Court affirmed that the determination of "arranger liability" remains a fact-specific, case-by-case determination and that an entity's knowledge that its product will be leaked, spilled, dumped, or otherwise discarded may provide evidence of the entity's intent to dispose of its hazardous waste. However, mere knowledge is not sufficient to prove that the entity "planned for" disposal, particularly when it is the accidental by-product of the sale of an unused and useful product. Therefore, a practical consequence of this case is that Courts are less likely to find "arranger liability" for entities that make intentional efforts to reduce accidental spills of unused, useful product. In addition, fewer entities with "arranger liability" will mean greater shares of liability for PRPs, which may cause more heated disputes between PRPs for the remaining liability.

No Joint and Several Liability

EPA alleged that the Railroads were owners of a portion of the facility during the period of time when the hazardous releases occurred, making the Railroads strictly liable for cleanup costs. This fact was not in dispute before the Supreme Court, but the Railroads disputed the Ninth Circuit's finding that the Railroads' liability should also be joint and several, thus making the Railroads liable for portions of the cleanup costs that were not their fault. Joint and several liability allows the EPA to sue a single PRP for the cost of the entire cleanup, leaving that PRP with the burden of locating and suing other PRPs for their fair share contribution of the cleanup costs under a contribution claim.

The Supreme Court overturned the Ninth Circuit's finding of joint and several liability for the Railroads and affirmed the factors the District Court used as its reasonable basis for apportioning and limiting the Railroads' liability to 9% of the total $8 million clean up costs – (1) the fact that the Railroads' parcel comprised only 19 percent of the B&B facility; (2) that B&B operated on the Railroads parcel only 45 percent of the time; (3) that B&B released 10 times more hazardous chemicals from its property than were released from the Railroads' property; and (4) that only two of the three hazardous substances representing two-thirds of the overall site contamination were released in sufficient quantities from the Railroads' parcel. Using these factors, the District Court multiplied 0.45 by 0.19 by 0.66 to arrive at 6% liability and added another 3% liability (50% of the 6% base liability) to account for estimates for a total of 9% liability.

The Supreme Court was willing to overlook the Ninth Circuit's objections that the District Court only used estimated figures, did not account for the degree of harm caused by each type of pollutant, and failed to demonstrate that the two types of pollutants released from the Railroads' parcel really accounted for two-thirds of the volume of hazardous waste because the District Court's apportionment calculation appears to have been conservative. Even though the record lacked evidence that the two pollutants represented two-thirds of the volume of waste, the record showed that 90 percent of the volume came from the B&B parcel. In addition, the 50% upward adjustment in base liability essentially rendered the unsupported two-thirds volume assumption harmless because if the volume of the waste had been 100%, then the base liability would have been 9% (0.19 times 0.45 times 1.0 rounded to 9%).

There is good reason to believe that this case signals a new openness to apportionment liability arguments. The Supreme Court has limited time to hear appeals and is not obligated to hear most appeals. Therefore, according to the Justices, they often hear appeals to establish a lasting precedent. Furthermore, the District Court went to extraordinary lengths to make its apportionment findings. Because Shell and the Railroad focused their arguments on why they should not be liable at all, a gamble that paid off for Shell, the District Court was left to fill in the gaps. It drafted an opinion spanning 185 pages with detailed findings to support its apportionment. Therefore, a practical consequence of this case is that when it is fairly clear that a PRP falls within CERCLA's liability scheme, the PRP should provide the Court with a reasonable basis for apportionment liability. This will likely focus future Superfund disputes on the whether there is a "reasonable basis" for apportionment.

Another potential consequence may be a push to restore the expired Superfund business tax on the chemical industry. If fewer parties qualify as "arrangers", some PRPs are insolvent, other PRPs can reasonably apportion their liability, and general revenues pay for the orphan share of the clean up costs, instead of revenues from the Superfund tax, then the financial burden for the clean up costs falls on the general taxpayer, instead of the chemical industry and its customers. Indeed, in this case, with Shell having no arranger liability, B&B's insolvency, and the Railroads having only 9% liability, EPA and the State of California are left to pay 91% of the cleanup costs unless they can find additional PRPs. High profile cases like this, along with a filibuster-proof majority in the Senate looking for sources of revenue to finance the President's budget plan, could create momentum to revive the Superfund tax.

After almost three decades and thousands of cases interpreting CERCLA, the legal community had almost resigned itself to the inevitability of joint and several liability once a client was found to be a PRP. Spreading the pain of liability on others through contribution claims was the prevailing wisdom. This week, the Supreme Court reminded everyone that even retroactive, strict, and joint and several liability statutes can evolve. With new life breathed into how CERCLA is being interpreted, it is essential for CERCLA defense strategies to evolve with it. Affected businesses should carefully weigh their strategic options when a PRP letter arrives. The Sheppard Mullin team has specialized knowledge and experience in environmental law and is well-equipped to advise clients on CERCLA and other evolving environmental issues in a wide variety of practice areas.

Authored By:

Randolph C. Visser

(213) 617-4144

RVisser@sheppardmullin.com

and

Jeffrey W. Forrest

(619) 338-6502

JForrest@sheppardmullin.com

and

Michael Hansen

(619) 338-6590

MHansen@sheppardmullin.com

Randolph C. Visser is a partner in the Construction, Environmental, Real Estate and Land Use practice group in the firm's Los Angeles office. Jeffrey W. Forrest & Michael Hansen are associates in the Real Estate, Land Use and Natural Resources, and Environmental Practice Groups in the firm's San Diego office.

Construction Manager Not Required to be Licensed pursuant to the Contractors' State License Law

The Fifth Day, LLC v. James P. Bolotin, et al., ___ Cal.App.4th ___(March 27, 2009, No KC047712)

By Jon E. Maki & Bram Hanono

The California Court of Appeal for the Second Appellate District determined that an entity which provided construction management services to a private owner developing commercial real property was not required to be licensed as a contractor pursuant to the Contractors' State License Law ("CSLL") (opinion by Acting Presiding Justice Armstrong, concurrence by Justice Krieger). In a lengthy dissent, Justice Mosk disagreed, highlighting that the intent of the CSLL is to protect consumers from unqualified and unlicensed contractors and predicted that the decision on a case of first impression creates a loophole in the license requirements by allowing unlicensed contractors to call themselves "construction managers."

]]> Background

The plaintiff entered into a Development Management Agreement ("DMA") with defendant to provide certain "industrial real estate development and construction project management" services. Plaintiff sued defendant for compensation alleged to be due for services rendered by plaintiff. The trial court granted summary judgment in favor of defendant on the grounds that plaintiff was acting as a contractor required to be licensed pursuant to Business and Professions Code section 7026, which barred plaintiff's claim for compensation under section 7031(a) since plaintiff was not licensed. On appeal, plaintiff contended that it was not a "contractor" within the meaning of section 7026. The Court of Appeal agreed with plaintiff and reversed the trial court's judgment.

Discussion

The case turned on whether plaintiff performed services which required it to be licensed as a contractor. The services at issue were summarized by the Court as follows:

to assist, on behalf of the Owner, in coordinating the activities of the various workers to enable them to complete their assigned tasks in an organized and efficient manner, on time and on budget; to maintain records such as insurance certificates, as well as the financial books and records for the project; to keep the Owner apprised of the status of the project; to be the on-site "point person" to respond to issues as they arose; and generally to act as the Owner's agent with respect to the various parties connected with the development of the project.

In a fairly brief opinion, the majority concluded that plaintiff had no responsibility to perform any construction on the project or enter into any contract for such performance. In a rather literal and narrow reading of section 7026, the Court found that plaintiff did not contract with the owner to "perform any of the activities listed in the section 7026's definition of a contractor."

Additionally, the Court was persuaded by the fact that defendant had hired a general contractor to oversee the construction of the project, which indicated that the DMA did not contemplate that plaintiff would perform construction services. The Court also noted that the Legislature specifically provided that construction managers on public works projects are required to the licensed architects, engineers or general contractors. Therefore, the Court concluded that the absence of a similar statute regarding privately owned development projects "strongly suggests that the Legislature determined that licensure of construction managers was not necessary in that arena."

Dissent

Justice Mosk, in his dissent, interpreted the definition of a "contractor" under section 7026 more broadly and argued that the plaintiff was a contractor under the CSLL, whether or not its primary duty was to act as a "construction manager." He analyzed plaintiff's services in the DMA and concluded that "plaintiff acted in the capacity of a contractor by undertaking to perform such services as the coordination of work and supervision of other licensed construction professionals." Justice Mosk also concluded that section 7026.1 does not designate the only circumstances in which a consultant to an owner-builder must hold a contractor's license and that the use of the term "includes" indicates a non-exclusive list of such circumstances.

Additionally, Justice Mosk focused on the intent of the CSLL in general, which he summarized as providing strict licensing rules to protect people from "unqualified, unscrupulous and unlicensed contractors." Requiring the licensing of construction managers who undertake to supervise the work of other licensed contract professionals is consistent with the CSLL according to the Justice Mosk. Justice Mosk predicts that this decision has created a loophole for unlicensed contractors who merely call themselves "construction managers."

Authored By:

Jon E. Maki

(858) 720-8962

JMaki@sheppardmullin.com

and

Bram Hanono

(858) 720-7461

BHanono@sheppardmullin.com

Jon Maki is a senior associate in the Intellectual Property Litigation and Technology Transactions Practice Group in the firm's Del Mar office. Bram Hanono is an associate in the Business Trial Practice Group in the firm's Del Mar and San Diego offices.

Modifications of home loans under government program will not adversely affect REMICs

By Matthew Richardson

The IRS recently issued "safe harbor" guidance that home loans modified under the Home Affordable Modification Program (HAMP) will not adversely affect real estate mortgage investment conduits (REMICs). Without this guidance, payments from the US government to lenders and servicers of home loans under HAMP may have resulted in a 100% penalty tax and may have jeopardized the securitization vehicle's tax-advantaged classification as a REMIC.

]]> According to the Treasury Department, HAMP will help up to 4 million at-risk homeowners avoid foreclosure by allowing modifications to eligible mortgages through a matching program and various incentive payments, thereby reducing homeowners' monthly mortgage payments.

Authored by:

Matthew Richardson

(213) 617-4222

MRichardson@sheppardmullin.com

Matthew Richardson is a partner in the Tax and Estate Planning Practice Group in the firm's Los Angeles office.

EPA May Use Cost-Benefit Analysis In Setting "Best Technology Available" Standards Under Clean Water Act

Entergy Corp. v. Riverkeeper, Inc., 556 U.S. ____, No. 07-1355 (2009)

By Robert J. Uram, Ella Foley-Gannon and James Rusk

On April 1st, the Supreme Court held that the federal Clean Water Act (the “Act”) allows the Environmental Protection Agency (the “EPA”) to use cost-benefit analysis in setting the performance standards that power plants must meet to reduce the impact of cooling water intakes on aquatic organisms. Entergy Corp v. Riverkeeper, Inc., 556 U.S. ____ (2009), reverses a decision of the Second Circuit that held the EPA had unlawfully weighed the costs of environmental remediation measures against their benefits in setting “best technology available” standards for existing facilities. The opinion has major implications because the challenged regulations apply to facilities that account for more than half of the nation’s electricity generating capacity and may allow those facilities to avoid billions of dollars annually in increased compliance costs. The Court’s reasoning also may open the door to use of cost-benefit analysis under the Act in other contexts, such as storm water regulation, where it is not currently considered.

]]> Discussion

The Entergy opinion concerns regulations for power plant cooling water intake structures that EPA promulgated under section 316(b) of the Act. Intake structures, which draw in water to cool power plants during operation, can cause harm to aquatic organisms by crushing them against intake screens (“impingement”) or trapping them in the cooling system (“entrainment”). To address these environmental impacts, section 316(b) directs the EPA to promulgate standards that require cooling water intake structures to “reflect the best technology available for minimizing adverse environmental impact.” 33 USC § 1326(b).

In 2001, EPA adopted regulations under section 316(b) that established standards for new facilities having cooling water intake structures with intake flow greater than 10 million gallons per day (the “Phase I rules”). The Phase I rules require restriction of water inflow to levels attainable by closed-cycle recirculating cooling systems. Alternatively, a facility may demonstrate that the technology used will reduce adverse environmental impacts to levels comparable to those of closed-cycle systems. See 40 CFR §§125.80-125.84. Closed-cycle systems recirculate water within the cooling system and thus take in less water, reducing impingement and entrainment. The Second Circuit largely upheld the Phase I rules against challenge. Riverkeeper, Inc., v. EPA, 358 F.3d 174 (2004).

In 2004, the EPA adopted the regulations at issue in Entergy, which govern existing power plants with cooling water intake of more than 50 million gallons per day (the “Phase II rules”). 69 Fed. Reg. 41576 (2004). The Phase II rules apply to more than 500 facilities, which collectively represent about 53% of the nation’s electricity generating capacity and remove more than 214 billion gallons of water each day from the nation’s waterways. The Phase II rules require most facilities to reduce impingement mortality for fish and shellfish by 80% to 95% compared to the “calculation baseline.” Some facilities also must reduce entrainment mortality by 60% to 90%. See 40 CFR §§ 125.93, 125.94(b)(1)-(2). These targets are based on the improvements attainable through use of technologies the EPA deemed “commercially available and economically practicable.” 69 Fed. Reg. 41602.

Counting the Cost—EPA Rejects Closed-Loop Systems As Too Expensive

In setting the Phase II standards, the EPA declined to require the adoption of closed-cycle cooling systems, or equivalent reductions in impingement and mortality, even though it found that closed-cycle systems could reduce mortality by up to 98% compared to the calculation baseline. 69 Fed. Reg. 41601. While closed-cycle systems could produce greater environmental benefits, the cost of converting existing facilities to closed-cycle systems would be nine times the cost of achieving the Phase II standards as adopted. EPA estimated the collective cost of compliance with the Phase II standards at $389 million annually, as compared with $3.5 billion annually to employ closed-loop systems or comparable technology at all affected facilities. Use of closed-cycle systems also could reduce plant efficiency by 2.4% to 4.0%, which might require the construction of new plants to replace lost generating capacity. The EPA concluded that the benefits of the Phase II rules as adopted “can approach those of closed cycle recirculating at less cost with fewer implementation problems [than closed-cycle systems].” 69 Fed. Reg. 41601-41606.

The Phase II rules also allow site-specific variances from the performance standards if a facility can show that its costs of compliance would be “significantly greater” than the costs the EPA considered in setting the standards, or that its costs would be “significantly greater than the benefits of complying” with the standards. In such cases, the facility must use measures that produce results “as close as practicable” to the standards. 40 CFR § 125.94(a)(5)(i)-(ii).

The Second Circuit, considering a challenge to the Phase II rules, took issue with the EPA’s apparent balancing of costs and environmental benefits. The Second Circuit held that EPA is permitted under CWA section 316(b) to consider costs in determining whether the cost of a given standard can be “reasonably borne” by the industry,” and in determining which technologies are the most cost-effective. But it concluded that section 316(b) prohibits the use of cost-benefit analysis, which compares the costs and benefits of various approaches and chooses the approach with the best combination of the two. See slip op. at 6. That court thus found unlawful the provisions of the Phase II rules allowing site-specific variances for facilities where the cost of compliance would be significantly greater than the benefits. The court also remanded the regulations to the EPA to clarify whether the agency had relied on cost-benefit analysis in setting the performance standards themselves (or only on the permissible cost-effectiveness analysis).

Chevron Analysis Now a Single Step?

The Supreme Court reversed the Second Circuit, holding that the EPA’s use of cost-benefit analysis was based on a reasonable construction of the Act and therefore was permissible under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). The Court’s application of Chevron was unorthodox, however. Chevron calls for a two-step analysis in evaluating an agency’s interpretation of a statute: a court first must consider whether Congress spoke clearly to the issue at hand. If it did, that is the end of the analysis, and the court must apply Congress’s expressed intent. But if the statute is ambiguous, the agency’s interpretation is entitled to deference and must be upheld if “reasonable.” Chevron at 842-843.

In analyzing EPA’s interpretation of section 316(b), the Court did not explicitly address the first step in the Chevron analysis. Instead, it appeared to begin with step two, asking whether the EPA’s interpretation of section 316(b) was reasonable in light of the language and structure of the Act. In a footnote, the Court suggested that its approach rendered step one unnecessary, because “surely if Congress had directly spoken to an issue then any agency interpretation contradicting what Congress has said would be unreasonable.” Slip op. at 7 n. 4.

Sometimes the ‘Most Good’ Is Not the ‘Best’

The Court began its analysis of the EPA’s interpretation by looking to the language of section 316(b), which calls for standards that require the “best technology available for minimizing adverse environmental impact.” The Court acknowledged that “the ‘best technology’ . . . may well be the one that produces the most . . . reduction in adverse environmental impact.” In the Court’s view, however, “‘best technology’ may also describe the technology that most efficiently produces some good . . . even if it produces a lesser quantity of good than other available technologies.” Likewise, “minimizing environmental impact” does not necessarily mean “reducing to the smallest amount possible,” because “‘minimize’ is a term that admits of degree.” Slip op. at 8. Under the Court’s reading, therefore, the language of section 316(b) “does not unambiguously preclude cost-benefit analysis” in setting performance standards. Slip op. at 9.

Agency Discretion Grows Within the Sound of Congressional Silence

The Court next rejected the argument that cost-benefit analysis was clearly precluded by the structure of the Act. In addition to the “best technology available” (“BTA”) standard found in section 316(b), the Act contains four other standards for pollution control technologies that apply, or did apply at one time, to various classes of pollutants and pollutant sources. These are best practicable control technology (“BPT”), best available technology economically achievable (“BATEA”), best conventional-pollutant control technology (“BCT”) and best available demonstrated control technology (“BADT”). For each of these four standards, Congress provided various factors for EPA to consider in implementing the standards, including costs. For BPT and BCT, the Act explicitly authorizes cost-benefit analysis, while for BATEA and BADT it authorizes consideration of cost but does not mention consideration of the cost-benefit relationship. Slip op. at 10-11. In contrast, the Act does not provide any factors to guide EPA’s implementation of the BTA standard under section 316(b). Slip op. at 10-11.

Riverkeeper argued that Congress’s failure to authorize cost-benefit analysis for the BATEA and BADT standards, when it had done so explicitly for the BPT and BCT standards, indicated that Congress did not intend to allow the use of cost-benefit analysis for the former standards. Likewise, because Congress did not authorize any consideration of cost for the BTA standard (or otherwise provide guidance), it must have intended to forbid the use of cost-benefit analysis there as well.

The Court rejected this inference from Congressional silence. Even if cost-benefit analysis is not permissible under the BATEA and BADT standards, the BTA test need not be interpreted the same as those standards, the Court held. According to the Court, Congress’s decision to leave the BTA test “unencumbered by specified statutory factors . . . can reasonably be interpreted to suggest that the EPA is accorded greater discretion in determining its precise content.” Slip op. at 11. The EPA’s decision to use cost-benefit analysis was a reasonable use of that discretion and was therefore entitled to deference.

Opinion May Signal Openness to Use of Cost-Benefit Analysis In Other Areas

Significantly, the Court also suggested that it was “not obvious” that cost-benefit analysis is not permitted in implementing the BATEA and BADT standards. The Court did not pursue this issue, in light of its conclusion that the BAT standard need not be treated like the BATEA and BADT standards. But the Court’s comment suggests that the EPA may have the discretion to weigh costs against benefits in applying the BATEA and BADT standards, if it chose to do so. Slip op. at 11. Readers should note, however, that in approving the EPA’s interpretation of the BTA standard the Court also relied in part on the EPA’s longstanding interpretation of section 316(b) as not “requiring use of technology whose cost is wholly disproportionate to the environmental benefit to be gained.” Slip op. at 14. Thus, the Court’s openness to use of cost-benefit analysis under other standards may be influenced by the EPA’s existing practices in those areas.

Authored By:

Robert J. Uram

(415) 774-3285

RUram@sheppardmullin.com

and

Ella Foley-Gannon

(415) 774-2977

EFoleygannon@sheppardmullin.com

and

James Rusk

(415) 774-3232

JRusk@sheppardmullin.com

Robert J. Uram and Ella Foley-Gannon are partners in the Real Estate, Land Use and Environmental Practice Group in the firm’s San Francisco office. James Rusk is an associate in the Real Estate, Land Use and Environmental Practice Group in the firm’s San Francisco office.

City Not Required To Identify Specific Location For Off-Site Mitigation Under CEQA Because Standards Sufficient

California Native Plant Society v. City of Rancho Cordova, ____ Cal. App. 4th _____ (March 24, 2009, No. C057018)

By Elizabeth S. Anderson

The California Court of Appeal for the Third Appellate District determined that the City of Rancho Cordova did not improperly defer mitigation under the California Environmental Quality Act ("CEQA") when it adopted a mitigation measure that required the applicant to develop (1) a habitat mitigation and monitoring plan for off site mitigation pursuant to standards which would ensure no net loss of habitat as a result of on site construction; and (2) a wetland avoidance/mitigation plan to address the potential impacts of any off-site creation activities contemplated in the habitat mitigation and monitoring plan. In reversing the trial court's holding on this point, the court found that the habitat mitigation and monitoring plan did not need to identify specific off-site locations for mitigation. The court did, however, affirm the trial court's holding that the City's approval of the entitlements was inconsistent with a General Plan policy that required the City to design mitigation "in coordination with" other public agencies because the City merely solicited, considered, and responded to the agencies' comments on the EIR. Although the holding on this latter issue may require public agencies that use this language in their general plan to "cooperate with" the specified agencies, the court upheld the principle that a project need not be in "perfect conformity" with every general plan policy. Rather, a project would be consistent with the general plan if it would "further the objectives and policies of the general plan and not obstruct their attainment."

]]> The project in this case involved development of approximately 530 acres with residential, commercial, office, park, school, and other uses in the City. The Project Environmental Impact Report ("EIR") concluded that the project would result in the direct loss of, and indirect adverse effects on, vernal pool crustacean habitat and other aquatic features. To mitigate these impacts, the EIR required that the applicant complete and implement a habitat mitigation and monitoring plan that would compensate for the loss of acreage, functions, and values of the impacted resources by preserving two acres of existing habitat or creating one acre of new habitat for each acre of habitat impacted by the project. The plan had to include: (1) target areas for creation, restoration, and preservation; (2) biological assessments of the existing resources on the target areas; (3) specific creation and restoration plans for each target area; and (4) performance standards to measure the success of the mitigation and monitoring plan. In response to comments on the Draft EIR by the Society that this mitigation measure would also have environmental impacts, the City added a new mitigation measure in the Final EIR to address potential impacts of the proposed off-site creation activities. The new measure required the applicant to develop a wetland avoidance/mitigation plan that had to include: (1) the location of proposed habitat to be created to ensure no net loss of off site acreage, values, and functions; (2) a monitoring plan to ensure the new wetlands functioned properly; and (3) a maintenance plan to ensure the wetlands were maintained in perpetuity.

The Society alleged that the City had improperly deferred mitigation by failing to describe where off-site vernal pool and wetland creation would occur and by failing to describe the potential effects of such off-site mitigation. The court relied upon three cases to conclude that the City had not improperly deferred mitigation. The court interpreted Sundstrom v. County of Mendocino, 202 Cal. App. 3d 296 (1988), and Gentry v. City of Murrieta, 36 Cal. App. 4th 1359 (1995), to stand for the proposition that "the determination of whether a project will have significant environmental impacts, and the formulation of measures to mitigate those impacts, must occur before the project is approved." However, the court interpreted Sacramento Old City Association v. City Council, 229 Cal. App. 3d. 1011 (1991), to stand for the proposition that when a public agency has evaluated the potentially significant impacts of a project and has identified measures to mitigate those impacts, "the agency does not have to commit to any particular mitigation measure in the EIR, as long as it commits to mitigating the significant impacts of the project" and "the details of exactly how mitigation will be achieved under the identified measures can be deferred pending completion of a future study."

Therefore, the City had not improperly deferred mitigation because the City had evaluated the potentially significant impacts of the project, concluded that the project would result in a loss of habitat, and determined that preservation or creation of replacement habitat off-site in a specific ratio to the habitat lost would mitigate that impact. The City was not required "to commit to any particular mitigation measure in the EIR, as long as it commit[ted] to mitigating the significant impacts of the project."

The Society further alleged that the City had violated CEQA by failing to provide substantial evidence to support its finding that the proposed mitigation would reduce the impacts of the project to a less than significant level. The Society relied upon comments from the agencies with ultimate expertise and jurisdiction over the resources that the proposed mitigation would result in significant impacts to, and loss of, listed species and habitat. The court held that this evidence did not demonstrate that there was insufficient evidence in the record to support the City's finding and explained that "[p]ointing to evidence of a disagreement with other agencies is not enough to carry the burden of showing a lack of substantial evidence to support the City's finding." To meet its burden, the Society needed to set forth all of the evidence that the City had used to support its finding and demonstrate that such evidence could not have reasonably supported the City's finding.

The court also considered the Society's claim that the City had violated the State Planning and Zoning Law because approval of the project was inconsistent with certain General Plan policies. The court agreed with the Society with respect to one General Plan policy--that is, a General Plan policy that required the City to design mitigation "in coordination with" the United States Fish and Wildlife Service and the California Department of Fish and Game. In defining "coordination" to require some measure of cooperation, the court found that the City did not "coordinate with" these agencies by soliciting, considering, and responding to their comments on the EIR.

Finally, the court did not consider the merits of several of the Society's claims because the Society failed to exhaust its administrative remedies with respect to those claims. To reach this decision, the court relied upon the language of the CEQA Guidelines section 21177, which requires any person to raise the alleged grounds for noncompliance with CEQA prior to the close of the public hearing on the project in order to raise the claim in a later legal challenge.

Authored By:

Elizabeth S. Anderson

(415) 774-2948

EAnderson@sheppardmullin.com

How a U.S. Climate Change Bill Could Lead to Trouble at the WTO

By Neil A.F. Popović

As if legal efforts to address climate change weren’t complicated enough, a recently released study by the Peterson Institute for International Economics warns that U.S. Congressional efforts to reduce climate change could run afoul of international trade rules under the General Agreement on Tariffs and Trade (GATT), leading to years of legal disputes in the World Trade Organization.

]]> Here is the problem: all the major climate change bills introduced in the U.S. Congress include some form of restriction on the emission of greenhouse gases, with the restrictions becoming more stringent over time. Most of the bills rely on a cap‑and‑trade program, whereby the government would establish maximum carbon (CO2 equivalent) emission levels and allocate and/or auction emission allowances. Holders of allowances could then trade them on the open market. Many have expressed concern that regulating greenhouse gas emissions will increase the cost of production in the United States, putting U.S. producers at a competitive disadvantage. This, as the Peterson Institute report notes, could lead to “leakage” of production and jobs to countries that do not have comparable emissions controls.

Unless, that is, the new climate law includes “competitiveness provisions” that equalize things at the border. Such provisions, also referred to as border measures, help level the playing field between U.S. enterprises and presumptively less regulated foreign entities. Border measures include import bans, import taxes, export subsidies and comparability measures. Such measures might help with the leakage problem, but they might also violate international trade rules, subjecting the U.S. to costly and time consuming WTO litigation and, depending on the outcome of such litigation, possible trade sanctions, which could impede access by U.S. companies to foreign markets.

According to the Peterson Institute report, the trade rules implicated by border measures include GATT Article I (most favored nation), which prohibits treating products from some countries different than “like” products from other countries; Article II (tariff schedules), which prohibits charges equivalent to internal taxes applied to imports; Article III (national treatment), which prohibits application of internal taxes and regulations in a way that protects domestic products; and Article XI (quantitative restrictions), which prohibits quotas. In addition, the agreement on Technical Barriers to Trade requires that regulations—including environmental regulations—be based on international standards in most cases. The Agreement on Subsidies and Countervailing Measures (ASCM) prohibits export subsidies, limits the use of subsidies in general, and regulates the application of countervailing measures.

Border measures would not necessarily violate the GATT, but a foreign government could challenge U.S. measures to the extent they put the foreign government and its commercial actors at a disadvantage. For example, there is room for debate, and for the law to develop, on issues such as whether products with different carbon footprints qualify as “like” products under the GATT, or whether carbon allowances allocated free of charge by the government amount to subsidies.

Even if a border measure otherwise violates the GATT, however, it might still be permissible under GATT Article XX, which allows measures “necessary to protect human, animal or plant life or health” or “relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption,” and the measures “are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade.” U.S. measures to protect sea turtles from harmful shrimping practices, for example, have survived challenges at the WTO based on Article XX. But even if a U.S. climate change law ultimately passes muster with the WTO, that would not avoid disruptive legal challenges, with the attendant uncertainty and potential delays in effective implementation of important (perhaps necessary) climate protection measures.

The authors of the Peterson Institute report recommend development of a new Code of Good WTO Practice on greenhouse gas emission controls, coupled with a two to four year “peace period” in which WTO member states would delay implementation of border measures. Another possibility, already being incorporated into the legislative process, is the careful drafting of climate laws that factor in GATT/WTO issues. In addition, the WTO members themselves could address climate related border measures directly in any revival of the Doha round of trade negotiations. And finally, participating governments can try to address trade related issues as they negotiate a post Kyoto climate change regime, starting with this year’s meetings, scheduled for December 2009 in Copenhagen. Indeed, Pascal Lamy, the Director General of the WTO, has said that an international accord on climate change should come before national governments try to address the problem individually.

Authored By:

Neil A.F. Popović

(415) 774-3156

NPopovic@sheppardmullin.com

Supreme Court Tightens Standing Requirements For Recreational Users Challenging Forest Service Actions

Summers v. Earth Island Institute,___U.S. ___(March 3, 2009, Case No. 07-463)

By Elizabeth S. Anderson

On March 3, 2009, the United States Supreme Court determined that Respondents, a group of organizations dedicated to protecting the environment, did not have standing to challenge certain United States Forest Service (“Service”) regulations respecting salvage timber sales. In reversing the Ninth Circuit, the Court held that while Respondents’ affidavit of a member’s recreational use was sufficient to establish standing initially, once a settlement was reached, the affidavit was insufficient to provide standing to proceed, even though the trial court proceeded to adjudicate the merits of Respondents’ challenge. The Court also held that Respondents’ affidavit that a member had suffered injury in the past from development on Service land, had visited many National Forests, and had plans to visit several unnamed National Forests in the future was insufficient because it failed to allege that “any particular timber sale or other project claimed to be unlawfully subject to the regulations will impede a specific and concrete plan of [the affiant] to enjoy the National Forests.”

]]> In the summer of 2002, a fire burned a significant portion of the Sequoia National Forest. In September 2003, the Service issued a decision memorandum approving the “Burnt Ridge Project,” a salvage sale of timber on 238 acres. The 1992 Forest Service Decision-Making and Appeals Reform Act required the Service to establish a notice, comment, and appeal process for certain Service actions. The Service regulations implementing the Act, however, exempt from these requirements projects that the Service consider categorically excluded from the requirement to file an environmental impact assessment or environmental assessment. In this case, the Service determined that the salvage timber sale was categorically excluded from the requirement to file an environmental impact assessment or environmental assessment; therefore, the Service did not provide notice, a public comment period, or an appeal process.

Respondents filed a complaint in the Eastern District of California in December 2003 challenging the Service’s regulations. The District Court granted a preliminary injunction against the salvage timber sale and shortly thereafter the parties settled their dispute over the Burnt Ridge Project. Nonetheless, the District Court proceeded to adjudicate the merits of Respondents’ claim and invalidated the regulations. The Ninth Circuit affirmed on this point and the Service sought review as to whether Respondents had standing to challenge the regulations.

The Court explains that “standing” is one of several doctrines that reflect the fundamental limitation of courts to “redress or prevent actual or imminently threatened injury.” The doctrine of standing requires the plaintiff to allege a personal stake in the outcome of the controversy. To seek injunctive relief, as is the case in this dispute, Respondents were required to show that they were “under threat of suffering ‘injury in fact’ that is concrete and particularized; the threat must be actual and imminent, not conjectural or hypothetical; it must be fairly traceable to the challenged action of the defendant; and it must be likely that a favorable judicial decision will prevent or redress injury.”

To meet this standard, Respondents relied upon their members’ recreational interests in the National Forests. Specifically, Respondents provided two affidavits. The first was from a member that asserted that he repeatedly visited the Burnt Ridge site, had plans to do so again, and believed his interests in viewing the forest would be harmed if the salvage sale went forward without incorporating his ideas, which he would have suggested had the Service had a public comment period. The second affidavit was from a member that asserted that he had suffered injury in the past from development on Service land, had visited many National Forests, and had plans to visit several unnamed National Forests in the future. The Court determined that neither affidavit met the requisite standard to establish standing.

With respect to the first affidavit, the Court determined that although it was sufficient to originally establish standing, Respondents’ injury in fact was remedied when the parties settled their differences and, therefore, Respondents did not thereafter retain standing to challenge the basis for the allegedly unlawful action. With respect to the second affidavit, the Court determined that it failed to allege that “any particular timber sale or other project claimed to be unlawfully subject to the regulations will impede a specific and concrete plan of [the affiant] to enjoy the National Forests” and that it therefore fails to meet the requirement that Respondents show a concrete, particularized injury in fact.

Four justices joined in a dissenting opinion.

Authored By:

Elizabeth S. Anderson

(415) 774-2948

EAnderson@sheppardmullin.com

Global Climate Change and Endangered Species Act Practices

By Aaron Foxworthy

Effects to plant and wildlife species and habitat attributed to global climate change have implications for how the federal government administers and complies with the Endangered Species Act. Two recent administrative actions taken by the U.S. Fish and Wildlife Service and National Marine Fisheries Service present the latest examples of how those agencies grapple with how, or whether, to address anthropogenic greenhouse gas (GHG) emissions and climate change-related effects under the ESA.

Click here to read more.

Public-Private Partnerships: P3s and Competitive Bidding Laws (Part III)

This article is part three of a series of three articles by the author regarding public-private partnerships.

By Edward B. Lozowicki

In the United States, public contracts are generally subject to the competitive bidding process as a matter of public policy. This is considered the best way to serve the public interest, if for no other reason than to save the taxpayer money by securing construction services at the lowest possible cost. With the growth of P3s, however, local governments are more likely to apply alternative approaches for procurement, which in turn face criticism, and challenges in court.

]]> In American Recycling Company, for example, the county procurement code allowed for an exception to the standard competitive bidding process, such that at the county's discretion, a contract could be entered into by a competitive proposal method.[1] In the proposal method, the contract would be awarded to the offeror whose proposal was most advantageous to the county, and not necessarily the one who presented the lowest bid price.[2] The developer in American Recycling submitted a proposal to the county for a design-build-operate project, was awarded the position of lowest proposal, but then was not awarded the contract. The developer sued the county for breach of contract and on due process claims, challenging the county's discretionary procurement method. The court upheld the method, and stated that no contract existed where, as in this case, the code specifically distinguished between an award of a bid and award of a contract; "by accepting the bid, the . . . county, as a matter of law, is not accepting the bidder's offer."[3]

One of the criticisms of procurement methods that differ from the competitive bidding process, such as competitive proposals or single-source procurement[4] that are frequently used in P3 arrangements, is that they give too much discretion to the government entity.[5] Where price is not a controlling factor, there is concern that the government is less accountable for its decisions, more open to favoritism or corruption in the award of "discretionary" contracts.[6] The benefit of such alternative procurement methods, however, is that they permit the execution of a single contract for multiple phases of the design-build process, rather than requiring a series of competitively bid contracts, thus shortening the procurement process.[7] Additionally, design and construction can proceed concurrently, which shortens project duration.[8] And importantly, discretionary contract awards allow the government to consider other factors than price, such as the experience and expertise of the various design-build team members and how they relate to each other, all of which is crucial in putting together a productive and efficient design-build team, and one that will best serve the needs of the public.

Conclusion

With many states experiencing infrastructure deficits, P3s are one tool governments may use to create public infrastructure projects. They are attractive in that they allow for streamlining of the procurement process by bringing together all facets of a project into one team; they shift construction and financial risks to the private sector, while allowing the public to maintain control of the project; and, in some cases, they may be structured to avoid the liabilities that could arise from purely public works. Criticisms of P3s include that they may allow public entities to avoid regulations specifically imposed on public works as a matter of public policy, such as prevailing wage laws; and that discretionary or single-procurement contract awards may leave government bodies open to corruption and favoritism, leading to increased costs to the taxpayer. These arguments appear to be based on policy or politics, rather than legal defects. It appears that the trend toward more P3 projects nationwide continues. More than half the states now have P3-enabling legislation, and P3s are being considered as the structure for a greater variety of infrastructure projects.[9]

Authored By:

Edward B. Lozowicki

(415) 774-3273

ELozowicki@sheppardmullin.com

Edward B. Lozowicki is a partner in the Business Trials Practice Group in Sheppard Mullin's San Francisco office. He has over 35 years' experience in construction law and litigation, renewable energy cases, and complex commercial litigation, on diverse public and private projects.

[1] American Recycling Co. v. County of Manatee, 963 F. Supp. 1572 (M.D. Fla. 1997).

[2] Id. at 1574.

[3] Id. at 1582.

[4] See, e.g., Sloan v. Greenville County, 590 S.E.2d 338, 343 (S.C. Ct. App. 2003).

[5] Id. at 344 ("Critics espouse that design-build vests too much discretion with the governing body regarding when and to whom public contracts are awarded.").

[6] Id.

[7] Id. at 343.

[8] Id.

[9] Deloitte at 7.

Army Corps Properly Limited Scope of NEPA Review of Section 404 Permits to Impacts of Filling Jurisdictional Waters

Ohio Valley Environmental Coalition v. U.S. Army Corps of Engineers, No. 07-1355 (4th Cir. 2009)

by Robert J. Uram, Aaron Foxworthy, and James Rusk

The Fourth Circuit Court of Appeals recently reversed a District Court decision and upheld a decision by the Army Corps of Engineers (the "Corps") to prepare Environmental Assessments and mitigated FONSIs under the National Environmental Policy Act ("NEPA") for four Clean Water Act section 404 permits issued for mountaintop removal coal mining projects in West Virginia. In Ohio Valley Environmental Coalition v. U.S. Army Corps of Engineers, No. 07-1355 (4th Cir. 2009), the court held that the Corps did not err in focusing its NEPA review on the impact of the filling of jurisdictional waters of the United States, and excluding from consideration the impacts on surrounding upland areas from associated mining activities. This decision highlights the ability of the Corps to focus its NEPA review of Section 404 permits on the impacts associated with the fill of jurisdictional waters, rather than on the larger project necessitating the permit.

]]> Discussion

The Ohio Valley case involved four mountaintop removal coal mining projects in West Virginia. Mountaintop removal mining results in the deposit of large amounts of "overburden"—excess rock and soil blasted from the mountaintops—in nearby valleys. In this manner, valley fill buries intermittent and perennial streams located in the valleys. The mining projects as a whole are subject to the jurisdiction of the West Virginia Department of Environmental Protection ("WVDEC"), pursuant to the federal Surface Mining Control and Reclamation Act of 1977 ("SMCRA"). The streams also fall within the Corps' regulatory jurisdiction under the Clean Water Act ("CWA"), and the projects therefore required section 404 permits to fill the streams. See slip op. at 12-14.

Collectively, the four projects sought section 404 permits that would allow impacts to more than 13 miles of jurisdictional streams. To satisfy NEPA environmental review requirements, the Corps prepared an environmental assessment (an "EA") for each of the four permits. In each case, the Corps determined that the permitted activity would not result in significant environmental impacts, taking into account required mitigation measures. The Corps therefore issued a mitigated finding of no significant impact (a mitigated "FONSI") for each permit. Slip op. at 14.

The plaintiffs challenged the FONSIs, arguing that the Corps had inadequately assessed the environmental impacts of the projects and was required to prepare an environmental impact statement (an "EIS") before issuing each of the permits. Among other things, the plaintiffs charged that the Corps had arbitrarily and capriciously restricted its NEPA analysis to the projects' impacts on jurisdictional waters. The plaintiffs argued that because the valley fill projects could not proceed without the permits, the environmental effects of the larger projects were essentially products of the Corps' permit actions. According to the plaintiffs, the Corps therefore retained control and responsibility for the valley fill activities and, under the Corps' own NEPA regulations, should have considered the broader impacts of the entire valley fill projects in its NEPA analysis of the section 404 permits. In addition, the plaintiffs alleged that the Corps failed to comply with CWA regulatory requirements (the 404(b)(1) guidelines) for determining the adverse individual and cumulative impacts to aquatic ecosystems affected by the Section 404 permits. The district court agreed with the plaintiffs and rescinded the permits, remanding them to the Corps for further action. Slip op. at 14-15.

The Corps Properly Excluded Upland Fill Activities From Its Scope of Review Because It Lacked 'Control and Responsibility' Over Those Activities

The Fourth Circuit reversed the district court's decision, holding that the Corps did not act arbitrarily or capriciously in limiting the scope of NEPA analysis to impacts on jurisdictional waters. The court viewed OVEC's suit as a challenge to the Corps' interpretation of its NEPA implementing regulations, found at 33 C.F.R. Part 325 Appendix B. As the Court stated, judicial review is highly deferential to agencies' interpretations of their own regulations, and an agency's interpretation should be upheld unless "plainly erroneous or inconsistent with the regulation." Slip op. at 24-25.

The Corps' NEPA regulations state that the scope of analysis under NEPA should address the "specific activity requiring a [Corps] permit and those portions of the entire project over which the [Corps] has sufficient control and responsibility to warrant Federal review." 33 C.F.R. pt. 325 App. B § 7(b)(1). Addressing those regulations, the Ohio Valley court first determined that the "specific activity" for which the Corps issued the section 404 permits was "the filling of jurisdictional waters . . .." The court next determined that the Corps lacked sufficient "control and responsibility" over other portions of the valley fill projects to warrant review of those actions under NEPA. Slip op. at 26.

The court acknowledged that the fill of the valleys as a whole could not occur if the Corps did not issue Section 404 permits for the fill of the streams within those valleys. The court disagreed, however, that this in itself gave the Corps' "control and responsibility" over the entire valley fill projects. The court observed that WVDEP retained regulatory control over all aspects of the valley fills and mining operations beyond the fill of jurisdictional waters pursuant to SMCRA. To require the Corps to undertake review of the entire valley fill project as a part of the Section 404 permit action would render WVDEP's review under SMCRA "at best duplicative, and, at worst, meaningless." Slip op. at 29. This interpretation would "effectively read out of the equation the elaborate congressionally mandated schema for the permitting of surface mining operations prescribed by SMCRA." Id at 28.

Having made this determination, the court followed the holding in Department of Public Transportation v. Public Citizen, 541 U.S. 752 (2004), that proximate causation, rather than "but for" causation, is the relevant measure of the causal relationship between agency action and environmental effects. In these circumstances, the Corps' permitting action could not be considered the "proximate cause" of the entire valley fill project because WVDEP had ultimate control and responsibility over all aspects of the valley fill projects beyond the waters of the United States. Slip. op. at 30. Thus, activity beyond the filling of jurisdictional waters was not within the control and responsibility of the Corps, and "under the plain language of the [Corps'] regulation," it was not required to be included in the scope of the Corps' NEPA review. Id at 31. Furthermore, the Corps' interpretation of its NEPA regulations as requiring a limited scope of analysis in this case was "reasonable" and therefore entitled to deference even if the regulation was ambiguous. Consequently, the Corps did not act arbitrarily or capriciously in limiting the scope of its NEPA analysis. Slip op. at 30-32.

The Corps' Analysis of Impacts and Mitigation Measures Was Adequate

In reversing the district court's decision, the Fourth Circuit also held that the Corps adequately analyzed the effects of the stream fills on the "structure and function" of the aquatic ecosystem and organisms, as required by the CWA section 404(b)(1) Guidelines. See 40 C.F.R. § 230.11(e). The district court had found that the Corps failed to satisfy the Guidelines because it did not use a "functional assessment" methodology to analyze stream functions at the proposed fill sites. Instead, the Corps used stream structure as a surrogate for functional assessment. Emphasizing that the Corps was owed substantial deference in choosing a methodology for analysis, the appellate court held that the Corps' use of structure as a proxy for stream function did not violate either the Guidelines or Corps guidance. Slip op. at 32-38.

The appellate court likewise reversed the district court's finding that the permits contained inadequate mitigation measures to justify a FONSI. The Corps allowed the applicants to mitigate the destruction of "headwater" streams through enhancement, restoration and creation of downstream waters. The district court found this mitigation inadequate, based on the testimony of plaintiffs' experts that headwater streams play a unique role in the aquatic ecosystem and that stream creation is an unproven mitigation technique. The Fourth Circuit panel, however, rejected these conclusions. The appellate court held (1) that the Corps was not required to differentiate between headwater and other stream types in determining mitigation measures, and (2) that the Corps was entitled to deference in assessing the adequacy of mitigation measures—an area within its "special expertise." Slip op. at 39-46.

Finally, the appellate court reversed the district court's finding that the Corps inadequately considered the cumulative impacts of the proposed project. The district court found that the Corps' cumulative impact analysis was inadequate because the Corps improperly relied on mitigation as the basis for its conclusion. Citing the recent Fifth Circuit opinion in O'Reilly v. U.S. Army Corps of Engineers, 477 F.3d 225 (2007), the district court stated that the mitigation of individual impacts to insignificance does not in itself demonstrate that the project will not lead to cumulatively significant impacts when combined with the effects of other actions. Slip op. at 58.

The Fourth Circuit acknowledged this point but found that the Corps' analysis did not rely on mitigation "in the same perfunctory, conclusory way" as the Corps' analysis in O'Reilly. In Ohio Valley, the Corps' findings regarding cumulative impacts were based in part on the CWA section 401 water quality certification issued for the project by WVDEP, which the Corps viewed as "satisfying the water quality portion of cumulative impact analysis." The Corps' conclusion also relied on the SMCRA permitting process for the projects, which included an assessment of cumulative impacts on the "hydrologic balance" in the area of the mines. Slip op. at 59. Overall, the Corps found that the proposed action and mitigation measures actually would "improve the overall health of the [affected] watershed" because they would help mitigate the impacts of previous mining projects. C.f. Bering Strait Citizens for Responsible Resource Development v. U.S. Army Corps of Engineers, 524 F.3d 938 (9th Cir. 2008) (reaching a similar conclusion regarding the cumulative impacts of gold mining on wetlands near Nome, Alaska). The court thus concluded that the Corps had adequately addressed the issue of cumulative impacts and articulated a rational basis for its conclusion that the impacts would not be significant. Slip op. at 60-61.

Fourth Circuit's Reasoning Is Consistent with Wetlands Action Network

The Fourth Circuit's reasoning in Ohio Valley, with its emphasis on the "overlapping federal and state regulatory schemes" of the Corps and WVDEP, is consistent with the leading case on this issue and reinforces the ability of the Corps to limit the scope of its NEPA review in California, where projects are subject to robust state and local regulation under the California Environmental Quality Act and other state laws. The Ohio Valley opinion relies on Wetlands Action Network, a Ninth Circuit case from California holding that the NEPA analysis for a permit to fill sixteen acres of wetlands need not include the entirety of a development project covering hundreds of acres. Wetlands Action Network v. U.S. Army Corps of Engineers, 222 F.3d 1105 (9th Cir. 2000). The Ohio Valley opinion notes that, in Wetlands Action Network, state regulations already controlled the project design, and the larger project was subject to extensive state environmental review.

The Ohio Valley opinion likewise distinguishes the Ninth Circuit case Save Our Sonoran, in which the court found that the proper scope of NEPA analysis for a Corps permit included the entirety of a development site in the Arizona desert that was crisscrossed by ephemeral washes. Save Our Sonoran, Inc. v. Flowers, 408 F.3d 1113 (9th Cir. 2005). According to the Fourth Circuit, Save Our Sonoran did not involve the "problem of overlapping federal and state regulatory schemes" found in Ohio Valley. Slip op. at 30-31 n. 11. Ohio Valley therefore provides additional support for the proposition that the Corps generally should limit the scope of its NEPA analyses to activities that occur in jurisdictional waters, especially when issuing section 404 permits for projects in California.

Authored By:

Robert J. Uram

(415) 774-3285

ruram@sheppardmullin.com

and

Aaron Foxworthy

(415) 774-2995

afoxworthy@sheppardmullin.com

and

James Rusk

(415) 774-3232
jrusk@sheppardmullin.com

Robert Uram is a partner in the Real Estate, Land Use and Environmental Practice Group in the firm's San Francisco office. Aaron Foxworthy and James Rusk are associates in the Real Estate, Land Use and Environmental Practice Group in the firm's San Francisco office.

Public-Private Partnerships: Potential Conflicts With Prevailing Wage Laws (Part II)

This article is part two of a series of three articles by the author regarding public-private partnerships.

By Edward B. Lozowicki

The advent of public-private partnership agreements in turn gives rise to potential conflict with other statutes regulating procurement of public works projects. For example, is the P3 infrastructure project a "public work," and are "public funds" used to fund the project? If the answer to one or both of these questions is yes, then the private entity may incur liability if the design, construction and/or operation of the project would result in the violation of any local regulations pertaining to public works. For example, a "public work" could be subject to state prevailing wage laws, whereas a privately funded work would not.[1] Thus, the definition of "public work" and "public funds" as applied to P3s may lead to litigation if not addressed up front.

]]> For example, in the case of Greystone Homes, Inc. v. Cake, the determination of whether the project was a public work and hence subject to California's prevailing wage law turned on the definition of "publicly funded."[2] Although not specifically a P3 case, it is illustrative of the care that must be taken when structuring funding for private-public works, and may be analogous in the context of P3s. In that case the appellate court held that the development at issue, although built on land purchased with public funds, was not a public work under state law. The holding of the case turned on the definition of "construction," which, under the law at the time of the developer agreement (former California Labor Code § 1720(a) (amended 2000 and 2001)), did not include pre-construction design efforts, but "only the actual physical act of building the structure."[3] Because "construction" by the private developer, as was then legally defined, did not begin until after conveyance of the property from the public sector to the developer, no public funds were used in construction, the development was not a "public work," and hence no liability for prevailing wages accrued to the developer.

Subsequent to the amendment of California Labor Code § 1720(a) [4] and at the time of this writing, the issue whether there was public funding of pre-construction efforts of a P3 or otherwise private project (thus making it subject to prevailing wage laws) has been little litigated in California. City of Long Beach is one case in which the public agency's financial contribution to the project was limited to pre-construction expenses, in this case design and architecture.[5] The case was litigated after amendment of § 1720(a) and its broadening of the definition of "construction." Based on the public funding of pre-construction expenses, the appellate court held that the project was a public work, and hence subject to the prevailing wage law.[6] However, the Supreme Court of California reversed. Similar to the project in Greystone, the Supreme Court held that this project was not a public work as defined by the statute in effect at time of the conveyance of public funds. Because no publicly funded construction was involved, the court reasoned that the project was not subject to the prevailing wage law.[7]

Clearly, companies considering a P3 agreement in California today must take note that the term "construction" now encompasses the pre-building phases of a project. If funding of the Greystone and City of Long Beach projects were at issue today, under the current statute their respective holdings might be different. One might argue that "construction" of the Greystone project, for example, began at conveyance of public land to the developer ("pre-construction phase"), thus turning it into a "public work" for purposes of prevailing wage laws. And the project in City of Long Beach initially was held to be subject to the prevailing wage law, but was ultimately held not subject to that law because the public funding occurred before the amendment was enacted. Query whether the private developer of a California P3 agreement that includes project design could be subject to prevailing wage liability if design efforts or land conveyance is publicly funded, even where the actual construction is privately funded.

Public funding

As demonstrated above, careful structuring of a P3 transaction may be needed to avoid the possible creation of statutory "public funding" for a project and the liability this entails. San Antonio Bldg. and Constr. Trades Council v. City of San Antonio illustrates the point.[8] In this case, the city created a non-profit finance corporation to issue bonds, including some tax-exempt, expressly "for the purpose of financing a portion of the costs required to construct . . . a privately-owned hotel . . . ."[9] Proceeds of the bonds were loaned to a private developer, who entered into a design-build-operate-lease agreement with the city for a convention center hotel. During the lease term, possession of all improvements on the premises would remain with the tenant developer, but would revert to the city at expiration of the lease.[10]

The San Antonio hotel project was challenged as a public work, based on its being partially funded through bonds issued by a local government corporation, and thus subject to Texas' prevailing wage law. The wage law applied "only to the construction of a public work . . . paid for in whole or in part from public funds . . . ."[11] The court held that the funds from bonds raised for hotel construction by a local government corporation were not "public funds," mainly because the government did not remain liable for repayment to bondholders if the corporation defaulted[12], and no funds from the state or city were used to secure or pay the bonds.[13] Because no public funds (as the court interpreted the term) were used in this project, it was not a "public work"; thus, the prevailing wage law did not apply.[14]

However, the dissent in this case would have viewed the arrangement in question as one that did involve public funding; thus the project was, in its view, a public work and subject to the prevailing wage law. The dissent strongly criticized the majority's definition of public funding as "very restrictive,"[15] and the majority's holding as against public policy in Texas.[16] In the dissent's opinion, the arrangement between the city and developer was a P3, the hotel project was publicly funded, and the city was merely seeking to avoid the reach of the prevailing wage statute through an artfully crafted contract.[17]

In a similar case in Pennsylvania, the court came to the opposite conclusion from that of the San Antonio majority. In Lycoming County Nursing Home Assoc., Inc. v. Commw. of Pa., Dep't of Labor & Indus., Prevailing Wage Appeal Board, county commissioners set up a non-profit corporation to build and operate a project, in this case a nursing facility.[18] The county authorized the issuance of bonds, loaned the proceeds to the newly established corporation to develop the facility, and the corporation contracted with a developer to construct the facility. The court held that the project was a public work for purposes of the prevailing wage law[19], because the project was paid for, at least in part, with public funds.[20]

The primary rationale for the Lycoming court's determination that public funds were used in the project at issue was that the county remained liable on the bonds if the non-profit corporation defaulted.[21] In San Antonio, however, no political subdivision of the state would have been liable for default.[22]

The take-home message from Lycoming and San Antonio is that P3 agreements must be carefully drafted, with an eye to the legal ramifications of the funding structure selected; and even then, the definition of what makes a work "public" may be open to interpretation and subject to skilful advocacy.

Authored By:

Edward B. Lozowicki

(415) 774-3273

ELozowicki@sheppardmullin.com

Edward B. Lozowicki is a partner in the Business Trials Practice Group in Sheppard Mullin's San Francisco office. He has over 35 years' experience in construction law and litigation, renewable energy cases, and complex commercial litigation, on diverse public and private projects.

[1] See, e.g., Cal. Lab. Code § 1771 ("[N]ot less than the general prevailing rate of per diem wages . . . shall be paid to all workers employed on public works.")

[2] 135 Cal. App. 4th 1, 3 n.1 (2005).

[3] Id. at 9 (citing City of Long Beach v. Dep't of Indus. Rel., 34 Cal. 4th 942, 950 (2004)).

[4] Cal. Lab. Code § 1720(a)(1) (2002) ("'[C]onstruction' includes work performed during design and preconstruction phases of construction including, but not limited to, inspection and land surveying work.").

[5] City of Long Beach at 948.

[6] Id. at 949.

[7] Id. at 954.

[8] 224 S.W.3d 738 (Tex. App. 2007).

[9] Id. at 741 (quoting Ordinance No. 100685).

[10] Id.

[11] Id. at 746 (quoting Tex. Gov't Code Ann. § 2258.002 (Vernon 2000)).

[12] Id. at 747.

[13] Id. at 749.

[14] Id. at 751.

[15] Id. at 752.

[16] Id. at 751.

[17] Id. (The hotel project as "a prime example of a public-private venture" wherein, "[t]hrough artfully crafted project documents, the City [sought] to avoid application of the prevailing rate statute . . . on publicly-funded public projects.").

[18] 627 A.2d 238 (Pa. Commw. Ct. 1993).

[19] 43 P.S. § 165-3.

[20] Lycoming at 243.

[21] Id.

[22] San Antonio at 749.