Petition for Writ of Certiorari — Coastal Petroleum Co. v. Florida Department of Environmental Protection

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FILE

031412 APR 7 - 2004

No.

IN THE

Supreme Court of the United States

Coastal Petroleum Company, Charles E. Arnold, et al., and

Robert W. Clark, et al.,

Petitioners,

¥.

State of Florida, Department of Environmental Protection,

and Board of Trustees of the Internal Improvement Trust

Fund,

Respondents.

Petition for Writ of Certiorari to the District Court of Appeal,

First District, State of Florida

PETITION FOR WRIT OF CERTIORARI

S. CARY GAYLORD ROBERT J. ANGERER™

LORENA H. LUDOVICI ROBERT J. ANGERER, JR.

GAYLORD MERLIN ANGERER & ANGERER

LUDOVICI DIAZ & BAIN Post Office Box 10468

5001 West Cypress Street Tallahassee, Florida 32302

Tampa, Florida 33607 850-576-5982

813-221-9600

Attorneys for Petitioners

“Counsel of Record

entation ii

QUESTIONS PRESENTED

1) Does a property owner’s agreement to comply with

environmental permitting laws operate as an inherent

limitation on the property making it a conditional right,

constitutionally unprotected against a taking before an

environmental permit is granted?

2) Does the possibility that an indefinite government

policy may change in the future preclude a finding that the

policy effects a taking of a lease issued by that government

when the sole use of the lease is prohibited by the application

of the policy?

LIST OF PARTIES TO THE PROCEEDINGS

IN THE COURT BELOW

The parties to the proceedings below were the

Petitioner, Coastal Petroleum Company, the Respondents,

State of Florida, Department of Environmental Protection,

and the Board of Trustees of the Internal Improvement Trust

Fund. Appearing as Intervenors in the proceedings below

and Petitioners here are two groups of individuals herein

referred to as Charles E. Arnold, et al., and Robert W. Clark

et al.

The Charles E. Arnold, et al., Group is comprised of

Charles E. Arnold, Robert L. Arnold, Jr., Julian Arnold, Lolly

Arnold, Lucile C. Amold, Melissa Arnold, Thomas R.

Arnold, William W. Arnold, William W. Arnold, As Trustee,

Alice Lucile Schultz, Jean R. Burn, Joseph L. Carrere, John

F. Carrere, Jr., Michael L. Carrere, Charles R. Cole, George

T. Cole, Richard P. Cole, Almeria T. Cottingham, Leslie L.

De Galbert, Elizabeth Fish Carrere Trust, C. Sheldon Lykes

Eustis, A. L. Geary, Ann H. Goodhue, Jean B. Grace, Grace

A. Graper, H-A Energy, LLC, Joseph H. Hale, Sarah Hale

Eagle, Mary A. Hale, William L. Helfenstein, Carol Mckay

Irvin, Carla Kelly, Estate Of T. Paine Kelly, III, Jean B.

Kelly, T. Paine Kelly, Jr., Helen T. Kerr, Letitia L. Knapp,

Shirley L. Knight, Allison Lykes, Bonnie Lykes, Mija, Ltd.,

Fredrick E. Lykes, Heather Lykes, Joseph T. Lykes, III,

Trustee Of The Anne Chandler Lykes Trust Agmt., M.

Brinton Lykes, Thompson M. Lykes, Timothy Lykes, William

T. Lykes, Andrew K. Macfarlane, Howard P.Macfarlane,

Hugh C. Macfarlane, Trustee Of Jean Stanley Trust, Hugh C.

Macfarlane, Jr., Sue B. Maclay, Charles A. Mckay, Suntrust

Bank As Trustee For Herbert G. Mckay Rev. Trust, Howell

A. Mckay, E.W. Netscher, Kay Perez, John Pinkerton, Tom

L. Rankin, Frederica M. Thompson, Sarah M. Wiley, Cathryn

Ehrlich, Hazel Alexander, and W. T. Morris, Jr..

iii

The Robert W. Clark, et al., Group is comprised of

Robert W. Clark, Carolyn K. Clark, F. Bowie Ducan, II,

Cameron Duncan, Jr., Mayo Lykes, Matilda Webb Brabson,

Stella F. Thayer, H. Tyson Lykes, II, Nancy L. Wooten, Ruth

W. Bierley, Howell L. Ferguson, Mason M. Lykes And

Charles P. Lykes, Jr., as Trustees under Will of Charles P.

Lykes, Charles P. Lykes, Jr., Keenan Kelsey, Richard C.

Colton, Jr., Elizabeth L. Colton, F.E. Lykes Foundation (f/k/a

Aboly Foundation).

Pursuant to Supreme Court Rule 29.6, Coastal

Petroleum Company, as a corporate filer, hereby lists Coastal

Caribbean Oils & Minerals, Ltd. as its parent company.

. : iv

TABLE OF CONTENTS

Page

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ee a cncsscsirucssaccassicortssinidinsousieiheeesanecuaineel Vv

IR IO pscscaicexcndssexscansnccorneausncicauiacesananiaeneconeenas 2

eNO Se ey 3

Constitutional Provisions And Statutes Involved................ 3

I I ois isnndns<occcncsesecicooisescaeadeasanctccasct see 3

PRG Fe CII FI onan scsesssevivcscssssesescncnsecssvosssesess 1]

Permitting. regulations cannot be considered

inherent limitations on title altering the

character of property though ownership never

SONI a iss ctsisssssasensonssinstanscmmagubinemnainaneesiniatrisies 13

Prohibitions on use cannot be used to deny use

and bypass the constitutional compensation

requirement when that is their only purpose.......... 19

IID cseeoceiccasesceneantsnexeucss perc atsactuen cate aan ee 27

TABLE OF AUTHORITIES

Page

CASES:

Andrus v. Allard,

DOG TAD. SEGIDID) vi svisssisiesiisceccsteisesvesrscssecveciv ccs 12

Bass Enterprises Production Co. v. .S..

133 F. 3d 893 (Fed. Cir. 1998)... coccccccccecccee. 21

Beluga Mining Co. v. Alaska Dept. of Nat. Resources,

973 P. 2d 570 (Alaska 1999) ooo... ccccccccccecseee, 20

City of Riviera v. Shillingburg,

659 So. 2d 1174 (Fla. 4th DCA 1995)...............7..25

Coastal Petroleum Co. v. Chiles, .

672 So. 2d 571 (Fla. Ist DCA 1996)....00.0000000..... 2,7

Coastat Petroleum Co. v. Dept. of Environmental

Protection,

649 So. 2d 930 (Fla. Ist DCA 1995) 0000... ye

Coastal Petroleum Co. v. Dept. of Environmental

Protection,

672 So. 2d 574 (Fla. lst DCA 1996)................... 2,7

Coastal Petroleum Co. v. State of Florida, et al.,

864 So. 2d 402 (Fla. 1* DCA 2004)............. 2,11,27

Coastal Petroleum Co. v. Florida Wildlife Federation,

766 So. 2d 226 (Fla. Ist DCA 1999)................ 2,7,8

Eastern Minerals International, Inc. v. United States,

36 Fed. Cl. $41 (1996).o0...... cc ccccccscscccccceee. cee

Florida Wildlife Federation v. Department

of Environmental Protection and Coastal

Petroleum Co.,

21 F.A.L.R. 671 (DEP May 22, 1998) ................ 2,7

Lucas v. South Carolina Coastal Council,

SOS W.B. FOGS CIP IED cscesieseccrecosssesvensvas 912,14,15,17

Lynch v. United States,

298 TG FFE CORE iansinvenarnneneee 22

Miller Brothers v. DNR,

513 N.W. 2d 217 (Mich. App. 1994)................... 21

Palazzolo v. Rhode Tsland,

SIS UF. GOS Ga D cavessssecssscsscsstones 12,13,16,17,25

Penn Central Corp. v. City of New York,

SSB US.. TS CI a vveiccssdtesceeaee 20,25

Pennsylvania Coal v. Mahon,

DOG B.D, SEE CRUE caciccysitinvtecemennne 14,16,17

Tahoe-Sierra Preservation v. Tahoe Regional

Planning Agency,

216 F. 3d 764 (Sth Cir. 2000).............cesscsssscerrsees 21

Tahoe-Sierra Preservation Council v. Tahoe Regional

Planning Agency,

SOS UD. DEE CE acccsinissevinnsiscnss 9,12,14,19,20,21

United States v. Winstar Corp.,

SES UG. SoG CI ossicinnstcknkiscoennnen es 22

United States Trust Co. v. New Jersey,

431 05.6. 1 90 ioncsdccaceeceeeee 22

——e t—<“i—sS

vii

Watson v. Holland, 20 So. 2d 388 (Fla. 1945)........... 4,16

Williamson County Regional Planning Comm'n v.

Hamilton Bank,

pe ey Notice csstrntersaccaecsa 25

CONSTITUTIONAL PROVISIONS:

Article X, § 6, Florida Constitution.................00c000000.0--.. 8

Fifth Amendment, United States Constitution .................. 3

STATUTES:

Chapter 90-72, Laws of Florida (1990) ...0.......cccccccccccccecs. 6

Section 377.24(1), Florida Statutes...............0.ccccccccccseee, 14

Section 377.241, Florida Statutes .............ccccccccccccccceeeeee. 3

ee Ee Bh TE iiisiisitiilitcmiineie ota. 3

OTHER MATERIALS:

Alan Petzet, Coastal lists Smackover, Sunniland

Objectives in Gulf Off Florida,

Oil & Gas J., Sept. 29, 1997.00... PER ONO 18

Jamil Azad, Apalachicola Embayment May Be

Continent’s Last Virgin Oil Basin,

Oil & Gas J., Feb. 8, 1999... cc cceccseseseseeees 18

Anne Reifenberg, U.S. to Pay Oi! Companies $200 Million

To Drop Claims to Some Offshore Leases,

The Wall Street J., Aug. 1, 1995 o0o.o.oocccccccee, 18

IN THE

Supreme Court of the United States

Coastal Petroleum Company, Charles E. Arnold, et al., and

Robert W. Clark, et al.,

Petitioners,

State of Florida, Department of Environmental Protection,

and Board of Trustees of the Internal Improvement Trust

Fund,

Respondents.

Petition for Writ of Certiorari to the District Court of Appeal,

First District, State of Florida

PETITION FOR WRIT OF CERTIORARI

The Petitioners Coastal Petroleum Company and

Charles E. Arnold et al., and Robert W. Clark, et al.,

respectfully pray that a writ of certiorari issue to review the

December 3, 2003, judgment of the First District Court of

Appeal, State of Florida, affirming the November 15, 2002

Final Judgment of the Circuit Court for the Second Judicial

Circuit in and for Leon County, Florida, and the denial of

Coastal’s motion for clarification, rehearing, certification and

request for a written opinion, that the Court denied on

January 9, 2004.

OPINIONS BELOW

The opinion of the First District Court of Appeal,

State of Florida, is reported at 864 So. 2d 402 (Fla. 1* DCA

2004), and is reprinted in the Appendix to this Petition, p. 1.

The November 15, 2002, opinion of the Circuit Court of the

Second Judicial Cizcuit, in and for Leon County, Florida after

trial in case No. 01-101, is unreported, but is reprinted in the

Appendix, p. 2.

The prior October 6, 1999, opinion of the First

District Court of Appeal, State of Florida affirming the denial

of a permit to drill and directing the taking issue to be

resolved in circuit court is reported at Coastal Petroleum Co.

v. Florida Wildlife Federation, 766 So. 2d 226 (Fla. 1st

DCA 1999), and is reprinted in the Appendix, p. 32. That

decision -reviewed the State’s denial of Coastal’s permit to

drill as set out in its final order in Florida Wildlife Federation

v. Department of Environmental Protection and Coastal

Petroleum Co., 21 F.A.L.R. 671 (DEP May 22, 1998) (App.,

p. 36) The Recommended Order rejected in part by the State

in denying the permit follows the final order. (App., p. 55)

Prior opinions concerning the same permit are also reprinted

in the index: Coastal Petroleum Co. v. Dept. of

Environmenta! Protection, 649 So. 2d 930 (Fla. 1st DCA

1995) (App., p. 141). (reversing a permit denial for refusal to

post a $515 bond), Coastal Petroleum Co. v. Chiles, 672 So.

2d 571 (Fla. Ist DCA 1996) (App., p. 133), and Coastal

Petroleum Co. v. Dept. of Environmental Protection, 672 So.

2d 574 (Fla. Ist DCA 1996) (App., p. 139). (reversing a

permit denial for refusal to post $1.9 billion bond)

STATEMENT OF JURISDICTION

The Petitioners seek review of the December 3, 2003,

judgment of the First District Court of Appeal, State of

Florida, affirming the November 15, 2002 Final Judgment of

the Circuit Court for the Second Judicial Circuit in and for

Leon County, Florida. Coastal filed a Motion for

Clarification, Rehearing and Certification and Request for a

Written Opinion and the Court denied that motion on January

9, 2004. Review by the Supreme Court of Florida was not

available because the First District Court of Appeal, State of

Florida did not issue a written opinion and the case did not

otherwise fall within the Supreme Court’s discretionary

jurisdiction. This Court has jurisdiction pursuant to 28

U.S.C. § 1257(a). This Petition is timely filed.

CONSTITUTIONAL AND STATUTORY PROVISIONS

INVOLVED

The Fifth Amendment to the United States

Constitution, stating ".. . nor shall private property be taken

for public use, without just compensation," is involved in this

case, as is Section 377.241, Florida Statutes as is set out in

the Appendix at p. 17.

STATEMENT OF THE CASE

This case addresses the right to protection under the

Takings Clause of an oil and gas lease sold by the State of

Florida to Petitioner, Coastal Petroleum Company.

The origins of this dispute date back to December 27,

1944, and March 27, 1946, when Coastal Petroleum

Company (Coastal) purchased Florida oil and gas Drilling

Leases Nos. 224-A and 224-B from the State of Florida.

Coastal's Leases covered about 4,000,000 acres of State of

Florida offshore sovereign lands. The leased properties ran

from the shoreline to 10.36 miles offshore, and from just west

of Apalachicola, along the Gulf Coast, to just south of

Naples. Lease 224-A is in north Florida extending from

Apalachicola to Pasco County, while Lease 224-B extends

from Pasco County to just south of Naples. This case

concerns Lease 224-A. .

The Leases were issued to Coastal, "for the sole and

only purpose" of drilling for and producing oil and gas from

state offshore lands for so long as Coastal met the drilling

requirements and paid annual rentals or royalties. (App.,

p.147) In return, the State received monetary compensation

at the time the Leases were entered, required Coastal to pay

annual rentals, and reserved a 1/8th royalty for itself, entitling

the State to one barrel of oil out of every eight barrels

produced. The State of Florida, through its land ownership

arm, the Trustees of the Internal Improvement Trust Fund

(Trustees), affirmed in the Leases, that each leasehold

conveyance was in the State's "best interest." (App., p. 164)

In Watson v. Holland, 20 So. 2d 388 (Fla. 1945),

Florida's Attorney General challenged the Leases, but that

challenge was rejected and the Leases held valid by the

Florida Supreme Court. The Court in Watson also held that

oil and gas drilling was not a nuisance. Jd, at 394. Thereafter

Coastal and its partners began exploring Coastal's leasehold

properties and by 1968 had spent more than $16,000,000. A

total of eleven non-producing offshore wells were drilled by

Coastal and its partners on the more than four million acres

covered by the Leases. In 1968 the State again challenged

the validity of these Leases, this time in United States district

court in Miami, Florida. That court too upheld the validity of

the Leases. On January 6, 1976, while the State's appeal was

pending in the Court of Appeals for the Fifth Circuit, Coastal

and the State of Florida agreed to a settlement. That

Memorandum of Settlement (Settlement) was incorporated

into a consent decree entered by the federal court.

(Settlement at App., p. 167).

The Settlement divided the 10.36 mile wide coastal

strip into three lengthwise bands. In the Settlement, Coastal

surrendered all lease rights on the Leases except in the outer

three mile wide band from 7.36 to 10.36 miles offshore where

Coastal retained its lease rights and the State retained its

1/8th royalty. (App., p. 172) The remainder of the

Settlement divided the inner 7.36 mile band of the original

Coastal Leases into two strips. The band running from 4.36

miles to 7.36 miles was returned to the State free and clear of

all leasehold interests. On the inner band running from shore

to 4.36 miles out, Coastal’s leasehold interest was converted

to a 1/16" royalty. Coastal also agreed that its leasehold and

royalty interests oniy covered wells that started production

within 40 years, or before 2016, otherwise they would be

returned to the State at that time. The Settlement also

reduced Coastal’s drilling obligations. :

One of the issues in the case that resulted in the

Settlement was whether the Trustees owed Coastal

compensation for the taking of limestone from areas covered

by another of its Leases. The federal court before settlement

had found that Coastal was not entitled to compensation for

this taking. In the Settlement this holding was modified when

the Trustees agreed that:

Any use of minerals other than oil and gas for a

public purpose by the Trustees or any government

body so authorized by the Trustees may be made

without Coastal's approval and without payment of

any compensation or royalties to Coastal.

(App., p. 170-171) (emphasis added). There was also an

uncertainty as to what permitting regulations governed

drilling under the Leases. Paragraph 6 clarified the

uncertainty:

Coastal shall secure permits from all appropriate State

environmental protection agencies in compliance with

the then existing laws and regulations, prior to any

drilling or mining.

(App., p. 173) It is this paragraph that the trial and the

appeal below turned upon. :

In the late 1980's, after a natural gas discovery by

Chevron off the Florida coast, Coastal sought seismic

exploration permits from the State in order to further explore

its lease areas at new horizons. The State granted such a

permit to Coastal in 1990.

At the same 1990 meeting at which the permit was

granted though, the Florida land Trustees adopted a general

policy prohibiting drilling on offshore sovereign lands,

including those covered by Coastal's leasehold and royalty.

Later that year, the Florida Legislature codified that policy in

Chapter 90-72, Laws of Florida, after noting that the

increased interest by the oil and gas industry in exploring the

outer continental shelf off the Florida Coast could pose

environmental risks to Florida's Coastal waters. (App., p.

176).

On its remaining leasehold interest, in 1992, Coastal

filed an application to drill a well to test an oil prospect eight

miles off St. George Island in Franklin County, Florida,

located on Lease 224-A. The Department of Environmental

Protection (DEP) denied the permit for Coastal's refusal to

post a $515 million bond. That bond was determined to be

illegal and the denial was overturned, Coastal Petroleum Co.

v. Dept. of Environmental Protection, 649 So. 2d 930 (Fla.

Ist DCA 1995) (App., p. 144). Relying upon Paragraph 6 of

the Settlement, the Trustees demanded a larger surety bond

of $1.9 billion and when Coastal refused to post it, DEP

denied the permit a second time. Florida’s First District

Court of Appeal held Lease 224-A to be constitutionally

protected property that could not be impaired by using

Paragraph 6 of the 1976 Settlement, Coastal Petroleum Co.

v. Chiles, 672 So. 2d 571 (Fla. Ist DCA 1996) (App., p.

138), and the permit denial was again overturned. Coastal

Petroleum Co. v. Dept. of Environmental Protection, 672 So.

2d 574 (Fla. lst DCA 1996) (App., p. 140).

On remand and after a three week hearing, an

Administrative Law Judge (ALJ) recommended that the

permit be granted. Florida Wildlife Federation v.

Department of Environmental Protection and Coastal

Petroleum Co., 21 F.A.L.R. 671, 682 (1998). Despite

adopting all of the ALJ’s findings of fact, DEP denied the

permit for the third time by changing its interpretation of

Section 377.241, Florida Statutes, to allow it to balance

“policy interests” to deny the permit for environmental

reasons. (App., p. 53). On appeal, the Florida appellate court

in Coastal Petroleum Co. v. Florida Wildlife Federation, 766

So. 2d 226, 228 (Fla. 1st DCA 1999) (upheld the State’s

third denial of the permit, but said:

With respect to the constitutional challenge to

DEP's interpretation of the statute, the issues of

contract impairment and taking go hand-in-hand.

There is no dispute that the appellant has a viable

contract with the State of Florida to explore for and

extract oil from submerged sovereignty lands. DEP's

interpretation and application of the permitting

statute, based on its determination that there is a

compelling public purpose in not allowing the

appellant to drill off shore, effectively prevents the

appellant from exercising its rights under the

contract. DEP's action would be unconstitutional

only if just compensation is not paid for what is taken.

Fla. Const. Art. X, §6. This is a matter to be resolved

in the circuit court. ...

* * * * . x

ON MOTIONS FOR’ REHEARING,

CLARIFICATION OR CERTIFICATION ...

Whether DEP's denial of the permit

constitutes a taking for which compensation is due is

not before us, and we decline to comment on the

merits of that issue, leaving it to be resolved in the

Circuit court. (citations omitted)

Except as discussed herein, all motions are

denied.

(App., p. 35) (emphasis added). Coastal filed a complaint for

inverse condemnation in the Circuit Court of Leon County,

Florida on January 16, 2001 on that single issue. At trial

Charles Arnold, et al., and Robert W. Clark et al.,

-intervened.!

As a defense at trial, the State claimed that paragraph

6 of the Settlement made the permitting requirement an

inherent limitation in Coastal’s Lease and therefore Coastal

“has no interest compensable by inverse condemnation. Lucas

* Charles Arnold and Robert Clark are representatives of a group of

by Lease 224-A and who intervened as parties to protect their royalty in

the trial-_before the Circuit Court.

v. South Carolina Coastal Council, 505 U.S. 1003, 1027

(1992).” (Defendant DEP’s Amended Motion to Dismiss

Complaint at App., p. 18) The trial court denied the motion

to dismiss and found the case to be ripe (App., p. 13), but

based its decision and final judgment partly on this rationale

which was reasserted by the State in its Answers:

As a result of this 1976 agreement, Coastal assumed

the risk that a drilling permit could be validly denied

based upon future environmental permitting laws.

This condition inheres in and is a limitation upon

Coastal’s right to explore for and produce oil on

Lease 224-A.

(Trustees’ Answer at App., p. 22) (emphasis added).

All valid future permitting requirements by state

environmental agencies thereby became a

background limitation on Coastal’s interest under

the leases.

(DEP Answer at App., p. 25) (emphasis added).

During closing argument, the trial court raised sua

sponte this Court’s decision in 7ahoe-Sierra Preservation

Council v. Tahoe Regional Planning Agency, 535 U.S. 302

(2002), for the proposition that temperary moratoriums do

not result in takings.

THE COURT: What happened to these cases that

came out, Lake Tahoe and some of these other

decisions that the U.S. Supreme Court -- . .

MR. GAYLORD: Well, the most significant

decisions . . . that speak to the issue that is before us

here, Your Honor, are Lucas and Palazzolo.

THE COURT: Wasn't that Lake Tahoe?

MR. GAYLORD: That was a Supreme Court case,

Your Honor. I don't think that has any application to

this case.

THE COURT: It doesn't?

MR. GAYLORD: I don't believe it does, no.

THE COURT: Were there regulations?

MR. GAYLORD: . .... it was a _ temporary

moratorium, Your Honor. It was a different situation

than what we're dealing with here. All I can tell you is

I don't think we cited that in our brief.

THE COURT: I know you didn't, but I just didn't

know if you were familiar with it.

MR. GAYLORD: It's an issue involving temporary

moratorium. So —

THE COURT: Total deprivation for a temporary

period of time?

(App., p. 204-205) No evidence was presented at trial to

support a finding that the policy here is temporary and

Florida's policy was recognized as Governor Bush stated it:

Florida has long held that no oil or gas drilling

should occur within 100 miles of Florida's coast.

My position has been that there should be no such

activity in the entire Eastern Gulf.

(Plaintiff Exhibit 1402 at App., p. 181)(emphasis added).

The trial court ruled that there was no taking of Lease

224-A because the Lease established only a conditional nght.

That is, Coastal only had the right to drill if it could get a

permit from the State to do so. Since the State had denied

the permit, Coastal had no right that could be taken.

Furthermore, the trial court ruled that the denial of one

permit on a lease of 400,000 acres, was not a taking because

even if current policy was to prohibit drilling, that policy

might change in the future.

Coastal appealed the final judgment to the First

District Court of Appeal and the parties briefed the issues of

how this Court’s decisions and federal takings law should be

read and applied. On December 3, 2003, the appellate court

issued a per curiam affirmed decision with no written

opinion, precluding Coastal from seeking review in the

Florida Supreme Court. That decision is published at 864 So.

2d 402 (Fla. 1* DCA 2004). Coastal filed a Motion for

Clarification, Rehearing and Certification and Request for a

Written Opinion and on January 9, 2004, the court denied

that motion and request.

REASONS FOR GRANTING WRIT

This Court has repeatedly resisted the temptation to

establish per se rules in regulatory takings law, yet that is

exactly what the Circuit Court did in this case despite the

specific warnings given by this Court. In finding no taking

here, the Circuit Court found dispositive that there were

predating regulations and that the destruction of all use was

temporary. With those two findings, not only did the Circuit

—————S

Court specifically affect Coastal Petroleum Company

(Coastal), but it has severely damaged both regulatory takings

jurisprudence and property rights. If left unaddressed, it is a

recipe for government to destroy property and bypass the

constitutional requirement to pay compensation. While it

may be tempting to the Court to see the end of the complex

jurisprudence of regulatory takings, the Constitution and

private property rights must not be pushed aside.

This case offers the Court the opportunity to further

define regulatory takings law in a unique way. The property

at issue in this case, Drilling Lease 224-A, has but one use, so

the common quagmire of what other uses may or may not

exist in a regulatory taking case is not present. In most cases

“where an owner possess a full ‘bundle’ of property rights,

the destruction of one ‘strand’ of the bundle is not a taking.”

Andrus v. Allard, 444 U.S. 51, 65-66 (1979). = The only

question in this case is: whether the one “strand” that Coastal

bargained for in its Lease has been denied?

This case invites further definition of areas addressed

by this Court in Lucas v. South Carolina Coastal Council,

505 U.S. 1003, 1027 (1992); Palazzolo v. Rhode Island, 533

U.S. 606 (2001) and TZahoe-Sierra Preservation Council v.

Tahoe Regional Planning Agency, 535 U.S. 302 (2002) as

those precedents have been misapplied here.

This case presents the Court with the opportunity to

speak to regulatory takings involving an interest that is less

than a fee interest. It also involves a private interest covering

public lands sold to Coastal by the State of Florida for a sole

use that the State is now prohibiting, thereby destroying

Coastal’s property.

——

I. Permitting Regulations Cannot Be Considered

Inherent Limitations On Title Altering The Character

Of Property Though Ownership Never Changes.

Nearly every use of property today requires a permit

or authorization of some sort from a government body. The

Circuit Court in this case held that a permitting requirement

became an inherent limitation and made the property

conditional, so that the property owner does not have a right

to use his land in a way until after a permit for that use has

been granted. (App., p. 5, 10) Applying this rationale, if a

property owner gets a permit he can use his property for that

purpose, but if he does not get a permit, he never had the

right to use the property in that way. Furthermore, if he does

not get the permit he can’t claim the right has been taken

because he never had the right in the first place. Thus, a

regulatory body will determine what proprietary rights a

property owner has.

This is an extension of the sort of “Property rights are

created by the State” type reasoning rejected by this Court in

Palazzolo v. Rhode Island, 533 U.S. 606, 626 (2001), in

addressing the rights of “post-enactment purchasers [to]

challenge a regulation under the Takings Clause.” In that

case the Court recognized that while some government

enactments are limiting but reasonable, others “are

unreasonable and do not become less so through passage of

time or title.” Jd at 627. While the Palazzolo case dealt with

passage of title this case deals with the passage of time.

In Palazzolo, this Court described scenarios to show

that considering predating regulations as inherent limitations

on title was unfair and illogical. To apply that same rule to

regulations where there has been no transfer of title further

offends the notions of fairness and logic. The present case

represents the next step toward the worst case scenario of

private property being useless until the government, at its

discretion, allows you a use.

In the Settlement with the State of Florida, that was

incorporated into a federal consent decree, Coastal agreed to

“secure permits from all appropriate environmental protection

agencies in compliance with the then existing laws and

regulations, prior to any drilling or mining.” (App., p. 174)

As the language of the requirement itself recognizes, Coastal

is not required to do anything more than any other person

who wants to drill an oil well in Florida, it must get a permit

in compliance with current laws. This requirement is clearly

set out in the law. See, Section 377.24(1), F.S.. The only

difference in this case is that Coastal expressly agreed to

comply with the law. Applying the logic of the Circuit Court,

a permitting requirement is an inherent limitation in title and

therefore no one has the right to drill for oil regardless of

whether they own a fee or something less, until the State

permits it. If no one has the right to drill, then no one can

complain of being deprived of such a right. The Constitution

has been bypassed without any type of takings analysis.

In effect the decision below takes regulatory takings

back to pre-Mahon status. In Mahon and since it has been

recognized that the question is not whether the use is

regulated, but whether the regulation of the use “goes too

far.” Pennsylvania Coal v. Mahon, 260 U.S. 393, 415

(1922). The necessary assumption is that the regulations were

valid and the question is: whether the effect of the regulations

deprives a property owner of all economically beneficial use

of his land. Lucas v. South Carolina Coastal Council, 505

U.S. 1003, 1030 (1992). The court below has ignored 80

years of precedent based upon a misapplication of this

Court’s recent decision in 7ahoe-Sierra Preservation Council

v. Tahoe Regional Planning Agency, 535 U.S. 302 (2002).

OL Ba IN ee cae a Ae

The importance of an inherent limitation or a

background limitation on title is that it determines whether a

person ever had a right to use property in that way in the first

place. Lucas v. South Carolina Coastal Council, 505 U.S. at

1027. Without a right to use the property to begin with there

could never be a taking of that right, because there was never

a right to be taken. The question of whether such a limitation

exists is an “antecedent inquiry” into the determination of

whether there has been a taking. /d. It is clear that the

limitations discussed in Lucas are “restrictions that

background principles of the State’s law of property and

nuisance already placed on land ownership. “ /d., at 1029. It

is not at all clear that such limitations include all permitting

regulations.

In Lucas, this Court addressed regulations that deny

all economically beneficial use of land and found that:

Any limitation so severe cannot be newly legislated or

decreed (without compensation), but must inhere in

the title itself, in the restrictions that background

principles of the State’s law of property and nuisance

already placed upon land ownership.

* * * * *

When, however, a regulation that declares “off-limits”

all economically productive or beneficial uses of land

goes beyond what the relevant background principles

would dictate, compensation must be paid to sustain

It.

505 U.S. at 1029-1030. Nowhere in the “background

limitations” exception to categorical takings that this Court

set up does it allow new permitting regulations to take

property without compensation. The focus is on nuisance

and common law remedies.

The Florida Supreme Court has already determined

that the act of drilling for oil and gas is not a nuisance,

Watson v. Holland, 20 So. 2d 388, 394 (Fla. 1945). The

State of Florida also made that determination when it first

issued the underlying leases in the 1940s and again in the

1976 Settlement by stating that the Lease was in the “best

interest” of the State. (App., p. 164) The nuisance exception

then does not preclude drilling from being a use Coastal

received through Lease 224-A.

It is absurd to conclude that the one use sold to

Coastal through Lease 224-A, was never really included in

the interest Coastal got from the State to begin with. The

right to explore for oil and gas is the only use Coastal

received in that Lease. The question is: Can the State now

use a permitting requirement as a background limitation to

deny Coastal both the nght to drill and compensation? In

Palazzolo this Court determined that predating regulations

were not limitations when there has been a transfer of title, at

least not to the extent that a per se rule could be established.

Palazzolo, at 630. The logical extension of that reasoning is

that regulations could not become background limitations

with the passage of time and no passage of title.

Of course Coastal is not claiming that the State

cannot prevent drilling now because of the Lease it issued,

but only that there is a cost associated with prohibiting

drilling. The cost is the compensation to Coastal for that

right which the State sold to Coastal and now seeks to

prohibit.

Coastal recognizes that government “could hardly go

on if to some extent values incident to property could not be

diminished without paying for every such change in the

general law.” Mahon, 260 U.S. at 413. However, “while

property may be regulated to a certain extent, if a regulation

goes too far it will be recognized as a taking.” /d., at 415.

The question the Court can address in this case is: whether

denying all use of property through a permit denial “goes too

far” or is merely a determination that the nght never existed

in the first place when the property was acquired? That

question has far reaching implications, beyond this case and

bevond the State of Florida, and it should be addressed by

this Court.

In Lucas, 505 U.S. at 1027 this Court wrote that:

In the case of land, however, we think the notion

pressed by the Council that title is somehow held

subject to the ‘implied limitation’ that the State may

subseqzently eliminate all economically viable use is

inconsistent with the historical compact recorded in

the Takings Clause that has become part of our

constitutional culture.

The same constitutional culture requires the protection of

Leases from state machinations directed toward their

destruction. The flawed logic of the Circuit Court would

apply to Leases and fee simple property alike.

As a practical matter, to allow the State to critically

alter “the nature of the property” by passage of time after

enactment of permitting regulations creates a windfall for the

State. Palazzolo at 627. In this case in particular, the

windfall to the State is not just the annual rentals it continues

to reap from Coastal while not allowing drilling, but the

ability to exploit Coastal’s prospects without Coastal and for

a greater profit. As a requirement of the permitting process,

Coastal was forced to divulge specific informatior of the

great potential for oil on its Lease and that information may

now be used by the State after the Lease expires to extract a

higher price for the nghi to drill in this area.2 There is no

windfall to Coastal if it is allowed to drill or receives

compensation, because it would only be receiving the benefit

for which it continues to pay.

The authoritative Oil & Gas Journal reports that

Coastal believes that extensive amounts of oil could be

extracted from its Lease.* Elsewhere off the Florida coast the

United States government paid oil companies substantial

sums to drop claims to leases that were acquired from the

federal government in environmentally sensitive areas. See

Anne Reifenberg, U.S. to Pay Oil Companies $200 Million

To Drop Claims to Some Offshore Leases, The Wall Street

J., Aug. 1, 1995.

At a time when our energy needs are rising to crisis

levels and reach'ng harrowing costs, the potential value of the

right to drill on Lease 224-A is enormous. That value is not

only measured in monetary benefit to Coastal and the State of

Florida, but in the benefits derived for the United States as a

whole. The fight between property mghts and

environmentalists rarely affects the entire country in the way

this controversy can and has. The NIMBY (Not In My Back

2 In one breath the State insists that there is no oil to be found on the

Lease. In the next breath it seeks to impose sureties of first $515

million, then $1.9 billion, and finally $4.25 billion to cover the costs of

clean up of some hypothetical million barrei spill and natural resource

damage.

3 "St. George Island prospect could hold 2.19 billion bbl in place. At

25% recovery, this would be a field of 618 million bbl ultimate

recovery, requiring six platforms and 109 wells, Coastal said.” AJan

Petzet, Coastal lists Smackover, Sunniland Objectives in Gulf Off

Florida, Oil & Gas J., Sept. 29, 1997, at 101. “Upside are possible

tens of billions of produced oil....". Jamil Azad, Apalachicola

Embayment May Be Continent’s Last Virgin Oil Basin, Oil & Gas J.,

Feb. 8, 1999, at 71.

| ; oO -

Yard) policies of the State are not only preventing the

exploration and development of these valuable resources, bu:

they are dismantling property rights and sidestepping the

Constitution in the process. Environmental ends do not

justify any means necessary to arrive at them.

II. Prohibitions On Use Cannot Be Used To Deny Use

And__Bypass__The Constitutional _Compensation

Requirement When That Is Their Only Purpose.

Courts cannot be allowed to say that because a

current prohibition may someday change that it is temporary

and therefore not a taking. That is precisely what happened

in this case without a shred of evidence to support it. This

Court resisted the temptation to establish a per se rule that

temporary deprivations of all use result in a regulatory taking

and held that “the temporary nature of a land-use restriction .

. . Should not be given exclusive significance one way or the

other.” Tahoe-Sierra, at 535 U.S. at 337. Unfortunately, that

decision has been read by the Circuit Court in this case as

standing for the principle that so long as a total deprivation

can be considered temporary it does not effect a taking. This

gross distortion and misapplication of law must be corrected

by this Court or it will it estabiish a “get out of compensation

free” card to governments across the country.

While per se rules are obviously not favored by the

Court in this area, if there ever was a limited way to put a

ceiling on unreasonable government delay and obstruction,

this is it. The differences between the 7Jahoe-Sierra case and

this case demand a different result. First, unlike in 7ahoe-

Sierra, this case was not brought only under a categorical

taking theory nor as a facial challenge. Coastal believes the

case Clearly qualifies for such treatment, but also alleged that

there was a taking under the ad hoc type of analysis adopted

in Penn Central Transp. Co. v. New York City, 438 U.S. 104

(1978), and which the Circuit Court purported to use.

There are also several critical factual differences.

Coastal’s right is not a fee simple interest whose value will

simply be restored once a prohibition is over. It is a time

limited lease and the time the prohibition is in place is time

counted against the Lease that Coastal has lost forever. The

Circuit Court’s position on the Lease expiring was:

I think there's a pretty well-known cliché about it ain't

over until it's over. This lease is not over with just

because this current administration has articulated a

position of no -- they're against drilling within a

hundred miles of the coastline.

(App., p. 194). If Coastal waits until the Lease expires to see

-f the State will ever let it drill, Coastal will have lost the right

upon which it could have brought a takings claim. See,

Beluga Mining Co. v. Alaska Dept. of Natural Resources,

973 P. 2d 570, 576 (Alaska 1999).

The State action is different as well, unlike in the

Tahoe-Sierra case, here the State policy against drilling has

no termination date and no evidence was presented to even

suggest that it would end.4 Nor is the purpose of the policy

to preserve the status quo during formulation of a regulatory

plan on how to best develop the area. In fact, while State

rulemaking proceedings on offshore drilling had begun, after

DEP’s denial of Coastal’s permit was affirmed, they were

terminated as unnecessary: “the consensus . . . was that there

was not a need to proceed with rule making. And that was

4 In fact, the State’s case and the Court’s position was that given the

environmental movement Coastal should have known back in 1976 that

it would not be able to get a permit. At trial no evidence was presented

to show any sign of the environmental movement slowing.

the end of that.” (App., pp. 198-200). The State recognizes

there will be no drilling now.

The appeliate decision affirmed by this Court in the

Tahoe-Sierra case described a situation very similar to that in

which Coastal currently finds itself: It stated that “were a

temporary moratorium designed to be in force so long as to

eliminate all present value of a property’s future use we might

be compelled to conclude that a categorical taking had

occurred.” Tahoe-Sierra Preservation v. Tahoe Regional

Planning Agency, 216 F. 3d 764, 781 (9th Cir. 2000). That

reasoning applies a fortiori where: Coastal holds an expiring

lease for years; the prohibition is indefinite; and the

prohibition is not merely a hiatus to maintain the status quo

while formulating a regulatory structure. See, Bass

Enterprises Production Co. v. U.S., 133 F. 3d 893, 895-96

(Fed. Cir. 1998) (temporary taking found where all use of oil

and gas lease was prohibited for a short time where the

begianing and end of prohibition were statutorily set).

Delays in permitting are understandable and an

accepted part of doing business, but delay and obstruction for

the purpose of preventing the very use the government sold is

not acceptable. The obligation of good faith is part of Lease

224-A as it «i: a part of every contract. That obligation

precludes the State’s policy-based utter refusal to grant a

permit, just as it precludes the power of the State to sit and

indulge in "extraordinary delay" in acting on a mining permit

application, which was held to constitute a taking when the

delay rendered plaintiff's leasehold interests valueless. Eastern

Minerals International, Inc. v. United States, 36 Fed. Cl.

541, 549 (1996). See also, Miller Brothers v. DNR, 513

N.W. 2d 217 (Mich. App. 1994)(taking of oil lease where

only use, drilling, was prohibited by environmental

regulation)

This Court should not allow a State to renege on its

contract only to be absolved of its action by its own courts.

In United States v. Winstar Corp., 518 U.S. 839 (1996), this

Court refused to allow the United States to go back on its

promise to count "supervisory good will" toward a bank's

reserve requirements, thereby shutting it down. This Court

noted "even though banking is one of the longest regulated

and most closely supervised of public callings," the United

States had to answer in damages when its shift in regulatory

policy under FIRREA breached its contractual obligations.

Id. 844 The Court relied on United States Trust Co. v. New

Jersey, 431 U.S. 1 (1977), 518 U.S. at 897, n. 41, noting that

"a stricter level of scrutiny applies under the Contract Clause

when a State alters its own contractual obligations." The

Court stressed

that allowing the Government to avoid

contractual liability merely by passing any ‘regulatory

statute,’ would flaunt the general principal that, ‘when

the United States enters into contract relations, its

rights and duties therein are governed by the law

applicable to contracts between private individuals.’

Lynch v. United States, 292 U.S. [571] at 579.

Id. at 895 (Breyer concurring).

In the present case, the Circuit Court recognized the

State’s policy and that it had been applied to deny Coastal’s

permit, but refused to consider the effect of the policy going

forward. Instead the Court speculated that the policy may

someday change and the State would allow drilling. Nothing

but conjecture supported that speculation, and the State

encouraged that conjecture:

MR. MARZULLA.: ... If this country goes to

war with Iraq, if there's a substantial disruption, who

knows what changes might occur?

THE COURT: 1 think that's the --- one of the

most critical issues in this case is that current policy of

the State of Florida to deny a permit for

environmental reasons is going to be a permanent

position or did it change when our current governor's

brother may invade Iraq? In other words, conditions

change. They may very well be drilling in the Gulf of

Mexico. White beaches may not be very important to

the people of this state...

(App., p. 190) The trial judge started with this premise:

THE COURT: But then-existing laws may be

different if one governor gets elected or another

governor.... But this denial of a permit doesn't mean

that if Coastal applied -- if Mr. McBride won the

election or if President Bush invaded Iraq tomorrow

that they couldn't apply again and might be granted

the permit.

(App., p. 187-188). During the trial he found the issue that

someday the policy might change very relevant:

} THE COURT: ... And I think what may happen in

: the future 's likewise something that the Court should

take into consideration. The likelihood of obtaining

oil out there may not be very great right now, but if

the need for oil was much greater, then I suspect the

State of Florida would be encouraging again the

drilling of oil to see whatever can be found. ....

(App., p. 203).

The trial judge required Coastal to prove that no

change in the policy would ever occur to prove the effect of

the policy was a taking: ;

THE COURT: But you have to assume that

for the purpose of your theory here that the

environmental concerns will always be the same as

they are now, they will override the State's desire to

have oil produced there forever. Therefore, you've

lost all potential use of the property.

MR. GAYLORD: That's correct, all

economically viable use, Your Honor.

THE COURT: Regardless of what may take

place in Iraq tomorrow or Iran or Saudi Arabia or any

of the oil-producing countries where we may be

greatly curtailed in our supply of oil and there will be

a big need to explore out here in the Gulf, you still

have to assume that environmental concerns will

always override.

(App., p. 206).

There will always be a scenario a state court or

government agency could dream up that may result in a

prohibition ending. If that is all that is required to preclude

the finding of a regulatory taking, regulatory takings will be

the number one endangered species. Such conjecture and

speculation in a taking case flies in the face of the ripeness

doctrine established by this Court. That doctrine frees

property owners from having to act with futility in order to

satisfy procedural requirements in the face of such clear and

adamant opposition to the use of their property.

There was no need to speculate at all in this case

because the trial judge determined the case was ripe since "a

final agency decision has been made." (App., p. 14)

RSA Ae

ANN RA LG ARIE PI 8 FST SPIRENT Cn

Therefore “the extent of permitted development” was known,

“to a reasonable degree of certainty.” Palazzolo, at 620. This

Court developed the threshold requirement that a taking

claim be ripe before it will be heard in order to assure that a

court is not required to speculate about facts, Williamson

County Regional Planning Comm'n v. Hamilton Bank, 473

U.S. 172 (1985), and to prevent the trial court from making

decisions in the abstract. City of Riviera v. Shillingburg, 659

So. 2d 1174, 1181 (Fla. 4th DCA 1995) (the court "may not

engage in speculation"). The denial of this permit is final

agency action regarding how the State would apply its policy

to all of Lease 224-A.

Here the court determined the case to be ripe and then

limited evidence of the “past history” that clearly showed the

State had reached its final decision as to whether it would

allow drilling. Finally, the court decided that this was only

one permit denial on a large lease and therefore there was no

taking. The future effect of the policy was ignored despite

the acknowledgement of its existence and application by the

State to Lease 224-A to deny Coastal the right to use its

Lease in the only way it could be used.

Florida's actions resulted in a categorical taking of

Lease 224-A, but under the ad hoc test, they have also

destroyed Coastal's "investment-backed expectations." See

Penn Central Corp. v. City of New York, 438 U.S. at 124.

Lease 224-A, and the Settlement incorporated into the federal

consent decree were ordinary bilateral contracts, supported

by consideration and fully enforceable as executory

agreements. The federal consent decree and Settlement

explicitly contemplated a 40-year base period for the

leasehold obligation, which Coastal could, and did, keep fully

alive by making specified annual rental payments pocketed by

the State. The whole point of the 1976 agreement was to

stabilize the expectations of both Florida and Coastal with

respect to their future dealings. It is dangerous to now allow

the State to unilaterally eliminate its obligations under the

agreement without compensation for the property interest it

thereby destroys. Looking backward, it allows the State to

destroy the Lease. Going forward that position senselessly

blocks the State from allowing.drilling. Parties that have paid

for their legal interests have, and should have, a reasonable

expectation that these will receive constitutional protection.

While the Court has avoided per se rules in regulatory

takings cases, there must be limits outside which government

actions are so clearly efforts to skirt the Constitution and

affect property, that they will be considered takings.

Repeated and sustained actions denying drilling on a Lease

the State sold to Coastal for the sole use of drilling is a

taking. No amount of conjecture or speculation excuses the

duty of the State to pay compensation. The Circuit Court’s

decision can affect every piece of property subject to

regulation; it invites governments to engage in hypotheticals;

and it allows courts to speculate in addressing regulatory

takings.

Coastal has a protected real property Lease that

Florida wishes to take without compensation. Florida

justifies its actions by establishing a policy that allows it to

destroy recognized property interests without compensation,

and to repudiate its own grants in bad faith after the fact, and

then offers before its own courts self-serving justifications for

the destruction of these interests without compensation. The

Constitution forbids Florida's effort.

Petitioners respectfully request this Court to accept

the unique opportunity this case presents to further regulatory

takings jurisprudence by clarifying the law on critical issues,

without the restrictions and caveats the normal myriad of

factual “use” questions present.

CONCLUSION

Certiorari should be granted to review the judgment

of the First District Court of Appeal, State of Florida in

Coastal Petroleum Company v. State of Florida, et al., 864

So. 2d 402 (Fla. 1st DCA 2003).

Respectfully submitted,

S. CARY GAYLORD ROBERT J. ANGERER’

LORENA H. LUDOVICI ROBERT J. ANGERER, JR.

GAYLORD MERLIN ANGERER & ANGERER

LUDOVICI DIAZ & BAIN Post Office Box 10468

5001 West Cypress Street Tallahassee, Florida 32302

Tampa, Florida 33607 850-576-5982

813-221-9000

SUSAN W. FOX M. STEPHEN TURNER

| FOX & LOQUASTO MARTIN FITZPATRICK

112 N. Delaware BROAD AND CASSEL

Tampa, Florida 33606 P.O. Box 11300

813-251-6400 Tallahassee, Florida 32301

850-681-6810

ANDREW MACFARLANE

MACFARLANE FERGUSON

& McMULLEN

P.O. Box 1531

Tampa, Florida, 33601 Attorneys for Petitioners

813-273-4200 “Counsel of Record

April 7, 2004

APPENDIX

TABLE OF CONTENTS

Opinion of First District Court of Appeal,

State of Florida (January 9, 2004)............0.0.02.

Final Judgment in Coastal Petroleum Co. v. State

of Florida, et al, Circuit Court of the Second Judicial

Circuit in and for Leon County, Florida,

Case No. 01-101 (November 15, 2002)..............

Order Granting Motion to Strike and Joint Motion for

Protective Order in Coastal Petroleum Co. v. State of

Florida, et al, Circuit Court of the Second Judicial

Circuit in and for Leon County, Florida,

Case No. 01-101 (September 19, 2002)..............

Order on Rehearing before the First District Court

of Appeal, State of Florida.............0.. eee

OCH 577.241, PIMCIES GOD oes ccesciccccesevesssccvnrsnee,

Excerpts of DEP’s Amended Motion to Dismiss ...........

Excerpts of Trustees’ ANGWET ......66000..:s0c0ccesecssrsscesences

IG Gr ee 6 POE iii sissies ns

Excerpts of Coastal’s Initial Brief on Appeal.................

Excerpts of Coastal’s Reply Brief on Appeal.................

Coastal Petroleum Co. v. Florida Wildlife Federation,

166 So. 2d 226 (Fla. Ist DCA 1999) .......cceceese:

me:

Florida Wildlife Federation v. Department

of Environmental Protection and Coastal

Petroleum Co., Final Order

21 F.A.L.R. 671 (BP May 22, 1999)..............000 36

Florida Wildlife Federation v. Department

of Environmental Protection and Coastal

Petroleum Co., Recommended Order

21 F.A.L.R. 682 (DOAH April 8, 1998)............... 55

Coastal Petroleum Co. v. Chiles,

672 So. 2d 571 (Fla. Ist DCA 1996).......00000000... 133

Coastal Petroleum Co. v. Dept. of Environmental

Protection,

672 So. 2d 574 (Fla. lst DCA 1996).......0.0....... 139

Coastal Petroleum Co. v. Dept. of Environmental

Protection,

649 So. 2d 930 (Fla. Ist DCA 1995)... 141

te TN TI iyi rinrcsessticcctsncooncaentaneee 145

Memorandum of Settlement .....................cccccccsseceeceeeeees 167

Chapter 90-72, Laws of Florida (1990).........0.............. 176

Pe wis iciccivisictinacasenctedaenmeanacteee eee 180

Hemel THOM EMCOIIOS... 5... scseecesscevcdscecrecsecsessaaun 183

ae RE TN ER es es IE OEE DLS wad R HH i ei ON

COASTAL PETROLEUM COMPANY, a Florida

corporation, Appellant,

Vv.

STATE OF FLORIDA, DEPARTMENT OF

ENVIRONMENTAL PROTECTION, and THE BOARD OF

TRUSTEES OF THE INTERNAL IMPROVEMENT

TRUST FUND, Appellees.

Case No. 1D02-4712.

District Court of Appeal of Florida, First District.

Opinion filed December 5, 2003.

An appeal from the Circuit Court for Leon County, Judge

L. Ralph Smith.

S. Cary Gaylord, Tampa; Robert J. Angerer, Tallahassee;

M. Stephen Turner, Tallahassee; Susan W. Fox and Charles

W. Pittman, of MacFarlane Ferguson & McMullen, Tampa,

for Appellant.

Charles J. Crist, Jr., Attorney General, Robert I. Scanlan,

Assistant Attorney General, Tallahassee; Parker Thomson, of

Hogan & Hartson; Roger J. Marzulla, of Marzulia &

Marzulla, Washington, D.C.; L. Linton Morgan, of

Breazeale, Sachse & Wilson, Mandeville, LA; Teri L.

Donaldson, John W. Costigan, Andrew J. Baumann, and

Maureen Malvern, Office of General Counsel, Tallahassee,,

for Appellees.

PER CURIAM.

AFFIRMED.

~ARFIELD, ALLEN, and DAVIS, JJ., CONCUR.

IN THE CIRCUIT COURT OF THE SECOND JUDICIAL

CIRCUIT IN AND FOR THE LEON COUNTY, FLORIDA

CASE NO. 01-101

COASTAL PETROLEUM CCMPANY, a

Florida Corporation,

Plaintiff,

STATE OF FLORIDA, DEPARTMENT

OF ENVIRONMENTAL PROTECTION;

and BOARD OF TRUSTEES OF THE

INTERNAL IMPROVEMENT TRUST

FUND,

Defendants.

FINAL JUDGMENT

This action was tried before the court from

September 30, 2002 to October 8, 2002, on the inverse

condemnation complaint of the Plaintiff, Coastal Petroleum

Company (Coastal) against Defendants, State of Florida,

Department of Environmental Protection (the “Department”’)

and Board of Trustees of the Internal Improvement Trust

Fund (the “Trustees”). Plaintiff alleged that as a result of the

Department’s denial of Coastal’s application for Dnilling

Permit 1281 its 400,006 acre Drilling Lease No. 224-A, as

modified (“Lease 224A”) had been taken without the

payment of compensation required by Article X, Section 6,

of the Florida Constitution.

Based on the prior decisions of the First District

ods orieell

Pte Ns eS i had ate

Court of Appe =! in Coastal Petroleum Company v. Chiles,

656 So. 2d 284 (Fla. 1* DCA 1995), Coastal Petroleum

Company v. Chiles, 701 So. 2d 619 (Fla. 1* DCA 1997), and

Coastal Petroleum Company v. Florida Wildlife Federation,

Inc., 766 So. 2d 226 (Fla. 1* DCA 2000), the task of this

Court was to hold an evidentiary hearing to determine the

nature of the Plaintiff's property interest, the extent of

Defendants’ interference with that property interest, and

whether the facts of the case, taken as a whole, constitute a

taking. In particular, the Court was to consider the

circumstances surrounding the execution of the 1976

Memorandum of Settlement between Coasial and the

Trustees in the case styled Coastal Petroleum Company v.

Secretary of the Army, and the expectations of the parties at

the time they entered into the settlement. Having heard

seven days of testimony, considered the substantial

documentary evidence of over 200 exhibits, and weighed the

credibility of the witnesses, the Court makes the following

findings of facts and conclusions of law:

Findings of Fact

:. Coastal and the Trustees entered into Drilling

Lease 224A, as modified, on February 27, 1947. Lease

224A gave Coastal the exclusive right to explore for and

produce oil and gas from the sovereignty lands in the Gulf of

Mexico within three leagues (10.36 miles) of the coast of

Florida, extending from Franklin County into Pasco County.

Under the terms of the lease and controlling statutory

requiremeats, Coastal had an obligation to engage in certain

drilling operations to explore for oil and gas in order to

maintain the validity of the lease.

2. Lease 224A was amended, limited, and

modified by the January 6, 1976, Memorandum of

Settlement between Coastal and the Trustees, later

incorporated into a Conseni Decree, which resolved the case

styled Coastal Petroleum Company v. Secretary of the Army.

The principal issues in the Secretary of the Army litigation

were: 1) Coastal's claim that it was entitled to receive a

permit from the federal permitting agency to mine in Lake

Okeechobee and was not obligated to obtain permits from

any state agency; 2) Coastal's claims for damages for inverse

condemnation and conversion; and 3) the Trustees’ challenge

to the validity of the leases based on Coastal's failure to drill

the number and depth of wells imposed by the lease and

controlling statutory provisions.

3. The federal court determined the inverse

condemnation and most other issues adversely to Coastal,

but declared the leases valid. The Trustees appealed to the

Fifth Circuit, which certified state law questions concerning

the leases' validity to the Florida Supreme Court.

4. At the time of the 1975 negotiations which

led to the 1976 Memorandum of Settlement, the issue of the

validity of Coastal’s leases had been argued and submitted

to the Florida Supreme Court. During the negotiations the

parties several times requested that the Florida Supreme

Court withhold issuance of an opinion while they

endeavored to reach a settlement. Both parties were

uncertain as to how the Florida Supreme Court would rule.

The parties negotiated the settlement with each side

assessing the chances of winning or losing as a 50/50

proposition. As a result of this assessment, both parties were

motivated to negotiate a settlement.

5. _The negotiated Memorandum of Settlement

contains the following provision in paragraph 6 of the

“surrender of rights’ section:

Coastal shall secure permits from all

appropriate State environmental protection

agencies in compliance with the then existing

laws and regulations, prior to any drilling or

mining.

This provision is of particular importance to the issues

presented in this case.

6. The Court finds, based upon the testimony of

the negotiators as well as the documentary evidence, that

Paragraph 6 of the Memorandum of Settlement was intended

to ensure that Coastal’s right to drill for oil and gas would be

a conditional right, so that it would only possess a right to

drill for and take oil and gas if it could obtain siate permits to

do so under the then existing laws, and would only be able to

obtain such permits if it could satisfy environmental

concerns. “

7 Based upon the testimony of the negotiators

as well as the documentary evidence, the Court specifically

rejects Coastal’s contention that Paragraph 6 adds nothing to

the Memorandum of Settlement and that it is mere

boilerplate to the effect that Coastal must comply with the

law like everyone else.

8. The Court finds that its interpretation of the

effect and intent of Paragraph 6 is reasonable based upon the

following findings concerning the circumstances surrounding

the negotiation of the 1976 Memorandum of Settlement:

a. Both parties negotiated ‘n good faith

but negotiated with different objectives in mind. In

negotiating the settlement, the parties did not intend that

Coastal surrender or be denied its exclusive right to explore

for and drill for oil and gas on Lease 224A.

b. Over the course of the 30 years

Coastal owned the leases it experienced difficulty in meeting

its drilling obligations as evidenced by the Trustees’

allegations in the Secretary of Army case. At the time of the

settlement agreement, Coastal was incapable of drilling oil

and gas wells on its own because it had virtually no income

and was experiencing serious financial difficulties. Coastal

would also have difficulty in keeping its existing partner or

= ‘

PA SIS ae DAA ER 8g ELITR SOE TL LCR EA RR DR Aad

a te

‘ —

finding new partners to meet drilling obligations because of

recent exploration failures in adjacent federal waters and

adjacent uplands, as well as the dry holes drilled on its own

leases.

c. If the Trustees had won the Secretary

of Army case, Coastal would have lost the lease. If Coastal

had won, Coastal would have retained the leases, bu: also

retained the burden of meeting the lease’s rigorous drilling

obligations. Given the existing financial circumstances of

Coastal, Coastal would then likely have lost the lease

anyway due to its inability to comply with drilling

obligations. The objective of Coastal was to retain the lease,

but get out of the financially onerous drilling obligations. In

the Memorandum of Settlement, the Trustees agreed to

waive any drilling obligations set forth in the lease. The

provision waiving the drilling obligations also benefitted the

State, since there would be no obligatory oil or gas drilling

on State owned submerged lands, but it benefitted Coastal

more.

d. On the other hand, the Trustees’

objectives focused on environmental concerns. During the

late 1960's and through all of Governor Askew’s

administration, the State of Florida was undergoing a change

in philosophy concerning environmeiiia! matters.

Constitutional, statutory, and regulatory provisions were

changing. At the urging of Governor Askew, the State of

Florida was very much concerned with environmental factors

in protecting the properties of the State for the citizens of

State of Florida. This concern did not relate only to oil and

gas exploration. It related to mining of minerals and to the

dredging and filling of submerged lands of the State. Coastal

was well aware of these dramatic changes.

e. The primary objective of the State in

pressing for the provisions of what became Paragraph 6 of

the Memorandum of Settlement was to ensure that any future

activities on Coastal’s leases would have to comply with all

state environmental requirements applicable at the time of

the activity and that unless Coastal could obtain state permits

in compliance with these environmental requirements that it

would have no right to drill on state owned submerged lands.

f. The placement of Paragraph 6 in the

“surrender of rights” section of the Memorandum of

Settlement was the decision of Coastal’s counsel. The

paragraph represents a surrender of Coastal’s arguable claim,

made prior to and during the Secretary of Army litigation,

that it had the right to drill for oil and gas without applying

for state permits since its right to explore for and produce oil,

gas and other minerals was fixed by the 1947 lease and could

not be altered by subsequently enacted rules or legislation.

g. Coastal’s opinion was that its post-

settlement position was preferable to its pre-settlement

position. The leases were no longer subject to the onerous

’ obligatory oil drilling requirements, Coastal retained the

; exclusive conditional right to drill for and produce oil and

gas on more than 800,000 offshore acres and 450,000 acres

underlying Lake Okeechobee, Coastal obtained a royalty

interest on 2.3 million acres of lands which had formerly

been under the lease, which produced the potential for future

rewards without cost, and its lease interests served as the

basis for extensive phosphate conversion claims that were

subsequently brought against various phosphate companies

shortly after the signing of the Memorandum of Settlement.

9. The Court finds that Coastal had no

reasonable expectation that it could drill for oil without a

permit on Lease 224A, and no reasonable expectation that

the State could not deny such a permit based upon the then

existing law.

10. The Court finds that Coastal has failed to

prove by the greater weight of the evidence that the value of

the lease was less after the 1998 permit denial than it was

before that denial. Therefore, the Court finds that there has

been no diminution in value of Lease 224A as a result of the

MONIT a PUR A Nt oN galls FP

denial of Permit 1281.

11. Since the time of the 1976 Memorandum of

Settlement, Coastal has been unable to find any company

willing to make the substantial investment necessary to

explore the lease. The Court finds credible the expert

testimony this Court elicited from Mr. Bunch that there is

insufficient available data to determine if there is a drillable

oil and gas prospect at the location of the site of Permit 1281,

and further, that no oil and gas company would spend money

to partner the drilling of a well at this location.

12. The evidence presented at the trial on this

matter suggests that there has been a change in the manner in

which the Department applies the law and interpreted the

provisions of Section 377.241, Florida Statutes, up to the

time that Permit 1281 was denied in 1998. In affirming the

denial of the application for Permit 1281, the District Court

of Appeal made a specific finding that the Department had

the right to change its mind about how to interpret the

provisions of the oil and gas permit statute, that its new

interpretation stressing environmental concerns was valid,

and that the application for Permit 1281 was properly denied

based upon a weighing of the statutory criteria after factoring

in these environmental concerns. This valid interpretation of

the permitting statute constitutes “then-existing law” as that

phrase is used in Paragraph 6 of the Memorandum of

Settlement.

13. The Court finds that Coastal has not been

denied all of its economically beneficial use of its property

and that the denial of an application to drill on one location

within a 400,000 acre lease does not constitute a taking.

14. The Court further finds that the denial of

Permit 1281 did not curtail any reasonable investment

backed expectations that Coastal had of drilling, exploring,

and producing oil or gas from the lease because it does not

appear to the Court, based upon the Court’s evaluation of the

evidence and the credibility of the witnesses, that Coastal

vr rms mninannranmactcncnescnt oanarnnssnnnts

cannot have reasonably held such expectations.

15. It appears from the evidence presented to this

Court that the Department could properly have denied a

permit to drill based upon lack of proof on the statutory

factor which requires an analysis of the indicated likelihood

of the presence of oil or gas or related minerals in such

quantities as to warrant exploration and extraction of such

products on a commercially profitable basis.

16. ‘In the permitting proceeding, the Department

did not make its determination on this “commercial

prospectiveness” factor based upon the evidence presented at

this trial. If the same evidence presented to this Court had

been presented on the application for a permit, the permit

would properly be denied based upon a failure of proof on

that one factor alone.

a7. In refusing to allow Coastal to drill on Lease

224A, the State has exercised a contractual right under

Paragraph 6 of the Memorandum of Settlement, and has not

exercised the sovereign power of eminent domain.

Conclusions of Law

Based upon the above findings and the many facts in

the record which provide additional credible support for

these findings, it is the opinion of this Court that the Plaintiff

has not established by the greater weight of the evidence that

there has been a taking of Lease 224A.

The legal framework for analyzing this case is set

forth in Coastal Petroleum Company v. Chiles, 701 So. 2d

619, 623-24 (Fla. 1* DCA 1997):

In determining whether a property owner has

a right to recover damages pursuant to an

action for inverse condemnation based on an

enactment of a governmental regulation, it is

necessary to determine (1) the nature and

extent of the property interest held by the

plaintiff; (2) whether that property interest is

one which will entitle the landowner to

protection pursuant to the laws of inverse

condemnation; (3) the extent that the

government's regulation interferes with the

plaintiff's enjoyment of the protected property

right; and (4) whether the governmental

regulation effects a taking of property

pursuant to the dictates of Graham v. Estuary

Properties, 399 So.2d 1374 (Fla. 1981).

(Citation added.)

Here, Coastal's sole property interest is defined in

black and white by the terms of Lease 224A as that lease was

amended by the 1976 Memorandum of Settlement. Coastal

agreed in Paragraph 6 of the Memorandum of Settlement that

its right to drill for oil and gas under the lease would be

conditioned upon its ability to secure environmental permits

under the then existing laws. Since Permit 1281 was validly

denied, Coastal has no present right to drill which would be

protected by the laws of inverse condemnation. The State

has not interfered with Coastal’s property interest by denying

Permit 1281, it has merely exercised it’s contractual right to

insist that Coastal secure permits under the then existing

environmental laws prior to having the right to explore for

and produce oil and gas from Lease 224A.

Further, Coastal has failed to meet any of the six

criteria set forth in Graham v. Estuary Properties:

. Whether there is a physical invasion of the

property. This case does not involve an allegation of a

physical trespass of Coastal’s property.

2. The degree to which there is a diminution in

value of the property. Or stated another way, whether the

regulation precludes all economically reasonable use of the

“a ell

CE a rT ne ee ee ee Ne er ee es ee

i online Bein ela StS

property. The evidence shows no diminution in value in the

lease as a result of this denial of one permit application on a

400,000 acre lease.

3. Whether the regulation confers a _ public

benefit or prevents a public harm. The balancing test set

forth in Section 377.241, Florida Statutes, for issuance of a

permit to drill for oil or gas, balances the applicant’s interests

with the interest of the State in preventing the public harm of

the pollution of Florida’s waters and beaches and protection

of the State’s marine environment.

4. Whether the regulation promotes the health,

safety, welfare, or morals of the public. The balancing test

in Section 377.241, Florida Statutes, which requires

consideration of the environmental consequences of oil and

gas drilling promotes the health, safety and welfare of the

public.

>. Whether the regulation is arbitrarily and

capriciously applied. In affirming the final order denying

Coastal’s permit application, the First District Court of

Appeal held the denial was a valid application of Section

377.24, Florida Statutes.

6. The extent to which the regulation curtails

investment-backed expectations. Coastal’s post-settlement

agreement expectations could only reasonably be that it

could drill only if it received a permit, and that such a permit

might in fact be denied. Therefore, DEP’s denial of Permit

1281 does not frustrate any reasonable expectation of

Coasial’s. Further, as set forth above, Coastal’s expectation

of drilling for and producing oil and gas was not reasonable

based upon the lack of proof on the statutory factor of

“commercial prospectiveness” at the site of Permit 1281.

IT IS ADJUDGED that Plaintiff, Coastal Petroleum

Company take nothing by this action. Defendants, State of

Florida, Department of Environmental Protection, and the

Board of Trustees of the Internal Improvement Trust Fund,

shall be awarded costs upon appropriate motion and order.

ORDERED and ADJUDGED at Tallahassee, Leon

County, Florida, on the

Copy furnished to:

Monica K. Reimer

Jonathan A. Glogau

Office of the Attorney

General

PL-01, The Capitol

Tallahassee, FL 32399

Teri L. Donaldson

Thomas M. Beason

Maureen M. Malvern

Department of

Environmental Protection

3900 Commonwealth

Boulevard, M.S. # 35

Tallahassee, Florida

32399-3000

S. Cary Gaylord

Gaylord Merlin Ludovici

Diaz & Bain 777 S.

Harbour Island Blvd.

Suite 900

Tampa, Florida 33602

Susan W. Fox

Macfarlane Ferguson

Post Office Box 1531

Tampa, Florida 33601

day of October, 2002.

L. RALPH SMITH, JR.

Circuit Judge

Robert J. Angerer

Robert J. Angerer, Jr.

Angerer & Angerer

Post Office Box 10468

Tallahassee, Florida

32302

M. Stephen Turner

Broad and Cassel

P.O. Box 11300

Tallahassee, Florida

32301

Parker D. Thomson

Hogan & Hartson

Barclays Financial Center

1111 Brickell Avenue,

Suite 1900

Miami, Florida 33131

Roger J. Marzulla

Marzulla & Marzulla

1350 Connecticut

Avenue, N.W. Suite 410

Washington, DC 20036

mete idgthts. Aah baie Sscsatges.

SBE EDO Pe Ling NA £E RAE pel DT GIR

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SVAN ieteta eS Yt SS

IN THE CIRCUIT COURT OF THE SECOND JUDICIAL

CIRCUIT IN AND FOR LEON COUNTY, FLORIDA

CASE NO.: 01-10]

COASTAL PETROLEUM COMPANY,

Plaintiff.

VS.

STATE OF FLORIDA, DEPARTMENT

OF ENVIRONMENTAL PROTECTION,

and BOARD OF TRUSTEES OF THE

INTERNAL IMPROVEMENT FUND,

Defendants.

ORDER GRANTING MOTION TO STRIKE and

JOINT MOTION FOR PROTECTIVE ORDER

THIS CAUSE came before the Court upon the

Defendant’s Motion to Strike several paragraphs from

Plaintiff's complaint. Having considered the complaint,

motions, memoranda and relevant case law, the court finds

as follows:

Plaintiff has filed a complaint alleging that the denial

of a drilling permit constitutes a taking of its property. Both

Plaintiff and Defendants agree that the permit denial

constitutes final agency action sufficient to vest this Court

with jurisdiction pursuant to sections 253.763 and 403.90,

‘orida Statutes. The parties also agree, based upon a

finding by the First District Court of Appeal, the permit

denial was proper.

Defenuants have argued that by including paragraphs

6, 18-19, 24-32, 34-62, 64-65, 67-71, 74-75, and 82-86, in its

complaint, Plaintiff is attempting to reargue the propriety of

the permit denial. The rationale for the underlying decision

is irrelevant to the determination of whether a taking has

occurred. See, Manatee County v. Estech General

Chemicals Corp., 402 So. 2d 75 (Fla. 2d DCA 1981). Thus,

striking the objectionable paragraphs is proper.

Plaintiff argues that these allegations are necessary to

establish the futility of any future permit applications. While

the past conduct of tie Agency could be relevant to a

determination of futility, Plaintiff is not required to establish

futility to state a cause of action. See, Devon Energy Corp.

v. United States, 45 Fed. Cl. 519 (1999), South Florida

Blood Bank, Inc. v. Futch, 764 So. 2d 724 (Fla. 4" DCA

2000). Futility is an exception to the ripeness doctrine when

a plaintiff has not received a “final” decision. See, Gardens

Country Club v. Palm Beach County, 712 So. 2d 398 (Fla.

4" DCA 1998). Once there has been final agency action, a

party may proceed directly to circuit court. See, Bowen v.

Florida Department of Environmental Regulation, 448 So.

2d $46 (Fla. 2d DCA 1984).

Based upon the parties agreement that a final agency

decision has been made, the action is ripe and the

objectionable paragraphs are unnecessary to _ establish

standing and should be stricken.

The Court further finds that discovery of facts related

to the objectionable allegations are outside the scope of

allowable discovery in this case.

IT IS THEREFORE ORDERED and ADJUDGED as

follows:

Se ay ee ee

PO ee ee ee

oe ee

Defendants’ Motion to Strike is hereby

GRANTED.

Defendants’ Motion for Protective Order is

hereby GRANTED.

Plaintiff may file a Motion to Amend the

Complaint to allege facts material and relevant to

the issues of ripeness and futility within 20 days

- of the date this Order is entered.

Discovery is hereby STAYED pending a ruling

on any Motion filed by Plaintiff in accordance

herewith.

DONE AND ORDERED this 19" day of September, 2001.

/s/

L. RALPH SMITH, JR.

Circuit Judge

Copies to all counsel of record

DISTRICT COURT OF APPEAL OF FLORIDA, FIRST

DISTRICT

Tallahassee, Florida 32399-1850

Telephone No. (850) 488-6151

Lacan nei

January 9, 2004 Case No. 1D02-4712

L.T. No.: 01-101

Coastal Petroleum Co., a State Of Florida, Dept. Of v.

Florida corporation, Environmental Etc.etai,

Appellant/Petitioner(s), Appellee/Respondent(s).

BY ORDER OF THE COURT:

Appellant’s motion filed December 18, 2003, for

clarification, rehearing, certification and request for written

opinion is denied.

I HEREBY CERTIFY that the foregoing is (a true

copy of) the original court order.

Served:

Lorena Hart Ludovici Parker D. Thomson

R. Adam Carnegie Gino Luzietti

M. Stephen Turner Charles S. Stratton

Monica Reimer, A.A.G. Susan W. Fox

Roger J. Marzulla Robert J. Angerer, Jr

L. Linton Morgan Robert I. Scanlan, A.A.G.

Robert J. Angerer, Sr. Teri L. Donaldson

S. Cary Gaylord Maureen Malvern

Charles W. Pittman Jonathon Glogau, A.A.G.

a /s/ seal

JON S. WHEELER, CLERK

PAS ALE KE

377.241 Criteria for issuance of permits. —

The division, in the exercise ef its authority to issue permits

as hereinafter provided, shall give consideration to and be

guided by the following criteria:

(1) The nature, character and location of the lands involved;

whether rural, such as farms, groves, or ranches, or urban

property vacant or presently developed for residential or

hsiness purposes or are in such a location or of such a

aiature as to make such improvements and developments a

probability in the near future.

(2) The nature, type and extent of ownership of the

applicant, including such matters as the length of time the

applicant has owned the rights claimed without having

performed any of the exploratory operations so granted or

authorized.

(3) The proven or indicated likelihood of the presence of

oil, gas or related minerals in such quantities as to warrant

the exploration and extraction of such products on a

commercially profitable basis.

History. — s. 1, ch. 61-299; ss. 25, 35, ch. 69-106.

IN THE CIRCUIT COURT OF THE SECOND JUDICIAL

CIRCUIT IN AND FOR LEON COUNTY, FLORIDA

CASE NO.: 01-101

COASTAL PETROLEUM COMPANY,

Plaintiff, -

VS.

STATE OF FLORIDA, DEPARTMENT

OF ENVIRONMENTAL PROTECTION,

and BOARD OF TRUSTEES OF THE

INTERNAL IMPROVEMENT FUND,

Defendanits.

DEFENDANT DEP’S AMENDED MOTION 710

DISMISS COMPLAINT

* * * * *

FAILURE TO STATE CLAIM: NO PROPERTY

INTEREST COMPENSABLE BY INVERSE

CONDEMNATION

* * * * *

The complaint should be dismissed because it fails to

allege a property interest compensable by _ inverse

condemnation. In determining whether a complaint states a

taking claim, the “logically antecedent inquiry” is whether

the restriction complained of inheres in plaintiff's property

interest. If so, plaintiff has no interest compensable by

inverse condemnation. Lucas v. South Carolina Coastal

Council, 505 U.S. 1003, 1027 (1992); Coastal Petroleum v.

Chiles, 701 So. 2d 619, 623 (Fla. 1* DCA 1997) (focusing

on “the nature and extent” of the plaintiff's property interest

in denying a taking claim). Not every property interest

recognized by law is compensable in an_ inverse

condemnation proceeding. Corn v. City of Lauderdale

Lakes, 95 F.3d 1066, 1074, 1075 (11™ Cir. 1996) (stating

“property” as used in Just Compensation Clause is defined

much more narrowly than in Due Process Clause).

In addition to the reasons given in the Trustees’

motion, Coastal’s interest is insufficient for a taking claim

because it was granted subject to the very restrictions now

claimed to be a “taking” of plaintiffs property. A right

granted subject to discretionary limitations by the

government is not compensable in inverse condemnation.

See Democratic Central Committee v. Washington

Metropolitan Area Transit Comm'n, 38 F.3d 603, 608 (D.C.

Cir. 1994) (holding rights created by a court-approved

settlement agreement were not compensable because the

court retained discretionary control). When a governmental

entity acts to create property rights, but retains the power to

alter those rights, exercise of the retained power is not a

“taking” for purposes of the Fifth amendment. /d. At 606:

see also Glenn P. Sugameli, Lucas v. South Carolina Coastal

Council: The Categorical and Other “Exceptions” to

Liability for Fifth Amendment Takings of Private Property

Far Outweigh the “Rule,” 29 Envtl. L. 939, 945 (1999) (no

taking if restriction is inherent in title to property).

* * * * >*

Respectfully submitted this 12 day of April, 2001.

/s/

Teri L. Donaldson, General Counsel

Florida Bar No. 784310J

John W. Costigan, Deputy General Counsel

Florida Bar No. 189320

Maureen M. Malvern, Senior Assistant General Counsei

Florida Bar No. 660922

Andrew J. Baumann, Senior Assistant General Counsel

Florida Bar No. 0070610

Office of General Counsel, Department of Environmental

Protection

3900 Commonwealth Blvd. — MS 35

Tallahassee, Florida 32399-3000

Phone: (850) 488-9314

Fax: (850) 414-1228

fin el ee aed

IN THE CIRCUIT COURT FOR THE SECOND JUDICIAL

CIRCUIT IN AND FOR LEON COUNTY, FLORIDA

COASTAL PETROLEUM COMPANY,

Plaintiff,

VS.

STATE OF FLORIDA, DEPARTMENT OF

ENVIRONMENTAL PROTECTION, and BOARD OF

TRUSTEES OF THE INTERNAL IMPROVEMENT

TRUST FUND,

Defendants.

CASE NO. 01-101

BOARD OF TRUSTEES’

ANSWER AND AFFIRMATIVE DEFENSES

* * * * *

AFFIRMATIVE DEFENSES

* * * * *

AFFIRMATIVE DEFENSE V:

Compromise and Settlement

In the case styled Coastal Petroleum Co. v. Secretary

of the Army, Case Nos. 68-951-CA and 69-699 Div.-CA

(consolidated), U.S. District Court of the Southern District of

Florida, there was a dispute between the Trustees and

Coastal as to the validity of Coastal’s drilling leases and the

nature and extent of the parties’ obligations under those

leases. In 1976, Coastal and the Trustees entered into a

Memorandum of Settlement which evidences those parties’

mutual intent to effect a settlement of the dispute by a

superceding agreement. he Trustees recognized the

validity of Coastal’s right to drill for and produce oil on the

leases’ reduced working interest areas as described in the

1976 agreement, and in return Coastal agreed, among other

things, that it could exercise its right to explore for and

produce oil only after securing permits from all State

environmental protection agencies in compliance with the

then existing laws and regulations. Memorandum of

Settlement, J6 [A copy of the 1976 Memorandum of

Settlement is attached as Exhibit A]. As a result of this 1976

agreement, Coastal assumed the risk that a drilling permit

could be validly denied based upon future environmental

permitting laws. This condition inheres in and is a limitation

upon Coastal’s right to explore for and produce oil on Lease

224-A. The First District has found that Coastal’s drilling

permit was properly and validly denied by DEP, a state

environmental permitting agency, under the then existing

laws controlling issuance of such permits. Coastal has no

right to drill for oil on Lease 224-A which can be taken,

because it does not have the permit which it agreed to obtain

pursuant to the 1976 Memorandum of Settlement. Further,

Coastal’s claim that it has an absolute right to drill for and

produce oil which has been taken is barred by the

Memorandum of Settlement, because Coastal’s alleged right

to drill without obtaining permits from State environmental

agencies was extinguished by the 1976 agreement.

RESPECTFULLY SUBMITTED this 2lst day of May,

2001.

ROBERT A. BUTTERWORTH

ATTORNEY GENERAL

ER EN he

/s/

Jonathan A. Glogau

Special Counsel

Fla. Bar No. 371823

Monica K. Reimer

Assistant Attorney General

Fla. Bar No. 0090069

OFFICE OF THE ATTORNEY GENERAL

PL-01, The Capitol

Tallahassee, FL 32399-1050

(850) 414-3300, ext. 4817 or 4814

COUNSEL FOR THE TRUSTEES

IN THE CIRCUIT COURT FOR THE SECOND JUDICIAL

CIRCUIT IN AND FOR LEON COUNTY, FLORIDA

COASTAL PETROLEUM CO.,

Plaintiff,

VS.

FLORIDA DEPARTMENT OF ENVIRONMENTAL

PROTECTION and BOARD OF TRUSTEES

OF THE INTERNAL IViIPROVEMENT TRUST

FUND OF THE STATE OF FLORIDA,

Defendants.

CASE NO. 01-101

ANSWER AND AFFIRMATIVE DEFENSES OF

FLORIDA DEPARTMENT OF ENVIRONMENTAL

PROTECTION

* * * * *

AFFIRMATIVE DEFENSES

* * * * .

Compromise and Settlement

The 1976 Settlement Agreement between Coastal and

the Trustees, here attached, resolved litigation between

Coastal and the Trustees regarding the validity of Coastal's

leases. In return for the Trustees’ acceptance of the validity

of Coastal's three drilling leases and the Trustees' concession

that 1941 law would govern the number of wells required to

be drilled under the leases, Coastal and its privies agreed to

reduce the area covered by the leases and to be bound by all

future permitting requirements imposed by _ state

environmental agencies. All valid future permitting

requirements by state environmental agencies thereby

became a background limitation on Coastal's interest under

the leases. Coastal assumed the risk that future permits

might be denied. Under the settlement agreement, obtaining

an environmental permit became a specific and express

condition precedent for exercise of Coastal's contractual right

to drill under the three leases. Since Coastal agreed that its

right to drill would be contingent on future environmentally

permitting requirements, no property interest was taken from

it by DEP's denial of a permit.

RESPECTFULLY SUBMITTED this 21" day of

May, 2001.

/s/

Teri L. Donaldson

General Counsel

Fla. Bar No. 784310

Thomas M. Beason

Chief Dep. General Counsel

Fla. Bar No. 178766

Maureen M. Malvern

Sr. Ast. General Counsel

Fla. Bar No. 660922

DEPARTMENT OF

ENVIRONMENTAL

PROTECTION

3900 Commonwealth Blvd.

M.S. 35

Tallahassee, FL 32399-3000

Tel. (850) 488-9314

Fax (850) 414-1228

Roger J. Marzulla

Marzulla & Marzulla

1350 Connecticut Ave. N.W.

Suite 410

Washington, D.C. 20036

Tel. (202) 822-6760

Fax (202) 822-6774

COUNSEL FOR THE DEP

IN THE FIRST DISTRICT COURT OF APPEAL

STATE OF FLORIDA

CASE NO.:1D02-4712

COASTAL PETROLEUM COMPANY,

a Florida corporation,

Appellant/Cross Appellee,

CHARLES E. ARNOLD, et al., and

ROBERT W. CLARK, et al.,

Appellants/Cross-Appellants

VS.

STATE OF FLORIDA, DEPARTMENT OF

ENVIRONMENTAL PROTECTION, and BOARD OF

TRUSTEES OF THE INTERNAL IMPROVEMENT

TRUST FUND,

Appellees.

INITIAL BRIEF OF APPELLANT

COASTAL PETROLEUM COMPANY

* * . * *

POINT II

THE TRIAL JUDGE ERRED IN HOLDING

THAT LEASE 224-A WAS NOT TAKEN

x x * x x

(

]

ae ee ete

C. THIS COURT MAY PROPERLY

DECLARE THAT LEASE 224-A WAS TAKEN AND

RETURN THE CASE FOR A JURY TRIAL ON THE

ISSUE OF VALUATION.

Government action may be' found to be a regulatory

taking either as a categorical taking or through an ad hoc

factual analysis. A categorical taking requires

“compensation without the usual case-specific inquiry ...

where the regulation ‘denies all economically beneficial or

productive use of land.’ ” Keshbro, Inc. v. City of Miami,

801 So. 2d 864, 869 (Fla. 2001) (quoting Lucas v. South

Carolina Coastal Council, 505 U.S. 1003, 1015 (1992)).

Where a categorical taking does not exist, the court may find

a taking through an ad hoc factual analysis considering a

number of factors. See, Penn Central Transp. Co. v. City of

New York, 438 U.S. 104 (1978) and Graham v. Estuary

Properties, Inc., 399 So. 2d 1374 (Fla. 1981) cert. den.,

Taylor v. Graham, 454 U.S. 1083 (1981). The record before

this Court establishes both types of takings and the Court

should declare the denial and application of the policy was a

taking of Lease 224-A. .

* * * * *

Respectfully Submitted,

/s/

ROBERT J. ANGERER, SR., ESQUIRE

Florida Bar No. 178546

ROBERT J. ANGERER, JR., ESQUIRE

Florida Bar No. 995381

ANGERER & ANGERER

Post Office Box 10468

Tallahassee, Florida 32302

Tel: 850-576-5982

S. CARY GAYLORD, ESQUIRE

Florida Bar No. 0180538

LORENA H. LUDOVICI, ESQUIRE

Florida Bar No. 847062

R. ADAM CARNEGIE, ESQUIRE

Florida Bar No. 0998346

GAYLORD MERLIN LUDOVICI DIAZ & BAIN

777 S. Harbour Island Blvd., Ste. 900

Tampa, FL 33602

Tel: (813) 221-9000

Attorneys for Appellant

COASTAL PETROLEUM COMPANY

IN THE FIRST DISTRICT COURT OF APPEAL

STATE OF FLORIDA

CASE NO.:1D02-4712

COASTAL PETROLEUM COMPANY,

a Florida corporation,

Appellant/Cross Appellee,

CHARLES E. ARNOLD, et al., and

ROBERT W. CLARK, et al.,

Appellants/Cross-Appellants

VS.

STATE OF FLORIDA, DEPARTMENT OF

ENVIRONMENTAL PROTECTION, and BOARD OF

TRUSTEES OF THE INTERNAL IMPROVEMENT

TRUST FUND,

Appellees.

REPLY BRIEF OF APPELLANT

COASTAL PETROLEUM COMPANY

* *x x x x

‘. THE TRIAL JUDGE ERRED IN

FAILING TO CONCLUDE LEASE 224-A

IS COMPENSABLE PROPERTY.

The State fails to cite a single case justifying denial

of a proprietary right without compensation because of a

regulatory permitting requirement. There is no pre-existing

limitation on Coastal’s lease making it conditional or

noncompensable property. Though Coastal thought the 1976

MOS was reasonable, that was as Coastal read and

understood it, not as it is now being construed and contorted.

The State’s pre-existing limitation argument is based upon

Lucas v. South Carolina Coastal Council, 505 U.S. 1003,

1029 (1992), where the right to prohibit nuisances was found

to be a pre-existing limitation. Coastal’s exploration and

production right is not a nuisance and no one asserts it Is.

No State case addresses permit denials, or removal of

constitutional protection based on permit denials, or holds

that a permitting requirement is a pre-existing limitation.

* * * * *

The State also cites cases on federal drilling leases.

Federal drilling leases contain completely different

contractual provisions from Lease 224-A, are tied to a very

specific statutory structure and do not confer a right as great

as Coastal’s. Secretary of the Interior v. California, 464 U.S.

312, 339-340 (1984). For instance, on a federal lease, an

exploration or production plan must be denied if it would

probably cause serious harm to the environment, after which

lease may be canceled, entitling the lessee to

compensation. /d., at 339. Coastal presented evidence of

the federal government buying back drilling leases that were

thwarted for environmental reasons, but the trial judge

dismissed those rights, saying: “It may be evidence of a great

waste of money.” TV 4 P 450

* * * * *

Respectfully Submitted,

/s/

ROBERT J. ANGERER, SR., ESQUIRE

Florida Bar No. 178546

ROBERT J. ANGERER, JR., ESQUIRE

Florida Bar No. 995381

se ee Pea oe

ANGERER & ANGERER

Post Office Box 10468

Tallahassee, Florida 32302

Tel: 850-576-5982

S. CARY GAYLORD, ESQUIRF

Florida Bar No. 0180538

LORENA H. LUDOVICI, ESQUIRE

Florida Bar No. 847062

R. ADAM CARNEGIE, ESQUIRE

Florida Bar No. 0998346

GAYLORD MERLIN LUDOVICI DIAZ & BAIN

777 S. Harbour Island Blvd., Ste. 900

Tampa, FL 33602

Tel: (813) 221-9000

Attorneys for Appellant

COASTAL PETROLEUM COMPANY

COASTAL PETROLEUM COMPANY, Appellant,

FLORIDA WILDLIFE FEDERATION, INC.;SIERRA

CLUB, FLORIDA CHAPTER; FLORIDA AUDUBON

SOCIETY, INC.; ROBERT A. BUTTERWORTH,

ATTORNEY GENERAL; ST. GEORGE ISLAND CIVIC

CLUB; and DEPARTMENT OF ENVIRONMENTAL

PROTECTION, Appellees.

No. 98-1998

District Court of Appeal of Florida, First District

Opinion filed October 6, 1999

Opinion on Rehearing June 26, 2000

An appeal from an order of the Division of Administrative

Hearings.

John K. Aurell of Ausley & McMullen, Tallahassee, Susan

W. Fox of Macfarlane, Ferguson & McMullen, Tampa, and

Robert J.Angerer and Robert J. Angerer, Jr. of Angerer &

Angerer, Tallahassee, for Appellant.

David G. Guest, and S. Ansley Samson, Earthjustice Legal

Defense Fund, Tallahassee, for appellees Florida Wildlife

Federation, Inc., Sierra Club, Florida Chapter, and Florida

Audubon Society, Inc.

Barbara Sanders, Apalachicola, for appellee St. George

Island Civic Club.

Maureen M. Malvern, Senior Assistant General Counsel, and

Andrew J. Baumann, Senior Assistant General Counsel,

— EEE

Office of General Counsel, and Jonathan A. Glogau,

Assistant Attorney General, for appellee Department of

Environmental Protection.

Monica K. Reimer, Assistant Attorney General, Tallahassee,

for appellee Robert A. Butterworth, Attorney General.

BARFIELD, C.J.

In what may be one of the final chapters in the

continuing saga of the appellant's quest to extract oil from

beneath the Gulf of Mexico, it challenges an order of the

Florida Department of }invironmental Protection (DEP)

denying its application for a drilling permit, ostensibly

because oil extraction is potentially too dangerous to the

environment. The appellant contends that the order must be

reversed because DEP's interpretation of the applicable

statute will result in an unconstitutional taking of its

property. We affirm the order.

The decision in this case turns on the interpretation of

section 377.241 Florida Statutes (1997):

Criteria for issuance of permits. The division, in the

exercise of its authority to issue permits as hereinafter

provided, shall give consideration to and be guided by the

following criteria:

(1) The nature, character and location of the lands

involved, whether rural, such as farms, groves, or ranches,

or urban property vacant or presently developed for

residential or business purposes or are in such a location

or of such a nature as to make such improvements and

developments a probability in the near future.

(2) The nature, type and extent of ownership of the

applicant, including such matters as the length of time the

applicant has owned the nights claimed without having

performed any of the exploratory operations so granted or

authorized. :

(3) The proven or indicated likelihood of the presence

of oil, gas or related minerals in such quantities as to

warrant the exploration and extraction of such products on

a commercially profitable basis.

The appellant asserts that in the past, DEP has issued permits

when each criterion of section 377.241 "has been met," but

that when DEP announced its intention to issue a drilling

permit in this case, a group of environmental organizations

challenged the decision, arguing that DEP was wrongly

interpreting the statute, which requires the agency to "weigh"

the criteria of section 377.241 balancing environmental

interests against the right to explore for oil. Following an

evidentiary hearing and the issuance of an order in which the

hearing officer recommended granting the permit with a

multi-million dollar surety, DEP reconsidered its past

practice and agreed with the environmental petitioners that

"meeting" each criterion was not legally sufficient. It then

"balanced" the criteria and determined that issuance of a

drilling permit was too dangerous to the coastal environment.

The appellant contends that DEP cannot "change its

mind" about how to interpret the law without notice and

rulemaking procedures, especially when the result is an

unconstitutional taking of its property. We find that the

appellant had adequate opportunity to be heard on the issue

of the proper interpretation of section 377.241. DEP

correctly determined that its previous practice was not

consistent with the proper interpretation of the permitting

statute and adequately explained its determination. Section

120.68(12), Fla. Stat. (1997). Cf Dept .of Administration v.

Albanese, 445 So.2d 639 (Fla. Ist DCA 1984) (Agency

possesses only such authority as is specifically delegated to it

We a lke Se tnt tans Saa

by statute and cannot- promulgate rules that go beyond that

grant of authority or are contrary to the intent of the

legislature).

With respect to the constitutional challenge to DEP's

interpretation of the statute, the issues of contract impairment

and taking go hand-in-hand. There is no dispute that the

appellant has a viable contract with the State of Florida to

explore for and extract oil from submerged sovereignty

lands. DEP's interpretation and application of the permitting

statute, based on its determination that there is a compelling

public purpose in not allowing the appellant to drill off

shore, effectively prevents the appellant from exercising its

rights under the contract. DEP's action would be

unconstitutional only if just compensation is not paid for

what is taken. Fla. Const. Art. X, § 6. This is a matter to be

resolved in the circuit court.

AFFIRMED., BOOTH and WOLF, JJ., CONCUR.

ON MOTIONS FOR REHEARING, CLARIFICATION OR

CERTIFICATION

PER CURIAM. ...

Whether DEP's denial of the permit constitutes a

taking for which compensation is due is not before us, and

we decline to comment on the merits of that issue, leaving it

to be resolved in the circuit court. Tampa-Hillsborough

County Expressway Authority. v. A.G.W.S. Corporation, 640

So.2d 54 (Fla. 1994); State, Department of Environmental

Protection v. Burgess, 667 So.2d 267 (Fla. 1st DCA 1995).

Except as discussed herein, all motions are denied.

BARFIELD, C.J., BOOTH and WOLF, JJ., CONCUR.

STATE OF FLORIDA, DEPARTMENT OF

ENVIRONMENTAL PROTECTION

FLORIDA WILDLIFE FEDERATION, INC.; SIERRA

CLUB, FLORIDA CHAPTER; and FLORIDA AUDUBON

SOCIETY, INC.,

Petitioners, and

ROBERT A. BUTTERWORTH, ATTORNEY GENERAL,

Intervenor,

VS.

DEPARTMENT OF ENVIRONMENTAL PROTECTION

and COASTAL PETROLEUM COMPANY,

Respondents

ST. GEORGE ISLAND CIVIC CLUB,

Petitioner,

and

ROBERT A. BUTTERWORTH, ATTORNEY GENERAL,

Intervenor,

VS.

DEPARTMENT OF ENVIRONMENTAL PROTECTION,

Respondent.

2 ar

See eee ee ee eee

OGC CASE NOS. 96-2521, 96-2962

DOAH CASE NOS. 96-4222, 96-5039

FINAL ORDER

On April 8, 1998, an Administrative Law Judge with

the Division of Administrative Hearings (hereafter "DOAH")

submitted her Recommended Order to the Department of

Environmental Protection (hereafter "Department") . The

Recommended Order indicates that a copy thereof was

furnished to counsel for the parties. A copy of the

Recommended Order is attached hereto as Exhibit A.

On April 23, 1998, Petitioners Florida Wildlife

Federation, Inc.; Sierra Club, Florida Chapter; Florida

Audubon Society, Inc. (hereafter "Environmental

Petitioners"); and Petitioner St. George Island Civic Club,

jointly with Intervenor Robert A. Butterworth, Attorney

General, (hereafter collectively "Petitioners") timely filed

with the Department Joint Exceptions to the Recommended

Order. Also on April 23, 1998, Respondent Coastal

Petroleum Company (hereafter "Coastal") filed Exceptions to

the Recommended Order. On May 4, 1998, Coastal filed its

Response to the Joint Exceptions. Also on May 4, 1998,

Petitioners filed a Joint Response to Coastal's Exceptions,

and the Department filed a Response to Coastal's Exceptions.

The matter is now before me for final agency action.

BACKGROUND

Coastal filed Application no. 1281 on March 16,

1992, to drill an exploratory oil and gas well on sovereign

submerged lands leased by it nine miles south of St George

Island, Florida. On August 16, 1996, the Department

notified Coastal of its intent to issue Permit no. 1281 and

required Coastal to publish notice of this intent. On August

30, 1996, the Environmental Petitioners timely filed a

verified petition for formal administrative hearing pursuant

to section 403.412(5), Florida Statutes (1997). Petitions in

Opposition to the permit were also timely filed by the St.

George Island Civic Club and by the St. George Island

Plantation Owners’ Association, Inc., but the Association's

petition was later voluntarily withdrawn. The petitions were

referred to DOAH, Administrative Law Judge Mary Clark,

and consolidated (Case Nos. 96-4222 and 96-5038).

Coastal petitioned the First District Court of Appeal

(Case No. 96-3226), asserting that it was entitled to a permit

from the Department without further administrative

proceedings and without a requirement that it publish notice

of the Department's intent to issue the proposed permit.

Over the Petitioners' objection, on October 3, 1996, the

Administrative Law Judge (hereafter "ALJ") granted

Coastal's request for stay of the administrative proceedings

pending disposition of the appellate issues. On February 10,

1997, the District Court of Appeal denied Coastal's Petition

for writ of certiorari | Coastal published notice of the

Department's Intent to Issue on March 20, 1997.

No additional parties filed petitions in response to the

published notice. A Petition to Intervene by Attorney

General Robert A. Butterworth was granted on July 30,

1997, without objection.

Pursuant to section 377.2425, Florida Statutes (1997),

the Governor and Cabinet, acting as the Administration

Commission, imposed surety requirements recommended by

the Department as a condition of the permit. Coastal filed

petitions with the Department and the Administration

Commission protesting the surety requirements. These

petitions were also referred to DOAH (Case Nos. 97-4362

and 97-4591) and consolidated with cases 96-4222 and 96-

5038.

The DOAH final hearing of these consolidated cases

took place in Tallahassee from October 20, 1997, through

November 6, 1997, except for a one day public hearing in

- i ee ee eS

Apalachicola. A total of 37 witnesses were heard, in

addition to public testimony in Apalachicola, and numerous

exhibits were received.

The hearing transcript was filed on January 29 and

30, 1998, and the parties’ proposed recommended orders

were filed on March 2 and 3, 1998. The ALJ'S

Recommended Order was addressed to both the Department

(as to the permit application) and the Administration

Commission (as to the amount of surety) . Each agency is

issuing a separate final order.

STANDARD OF REVIEW

A reviewing agency is authorized to reject or modify

an administrative law judge's Conclusions of Law without

limitation. § 120.57(1) (j), Fla. Stat. (1997); MacPherson v.

School Bd. of Monroe County, 505 So. 2d 682, 683 (Fla. 3d

DCA 1987); Siess v. Department of Health & Rehab. Servs.,

468 So. 2d 478, 478 (Fla. 2d DCA 1985); Alles v.

Department of Prof. Reg., 423 So. 2d 624, 626 (Fla. Sth

DCA 1982).

The Findings of Fact of an administrative law judge

(formerly "hearing officer"), however, may not be rejected or

modified by a reviewing agency, "unless the agency first

determines from a review of the entire record, and states with

particularity in the order, that the findings of fact were not

based upon competent substantial evidence." § 120.57(1) (j),

Fla. Stat. (1997); Belleau_v. Department of Envtl.

Protection, 695 So. 2d 1305, 1307 (Fla 1st DCA 1997);

Martuccio v. Department of Prof. Reg., 622 So. 2d 607, 609

(Fla. lst DCA 1993)

Petitioners have filed exceptions only to Conclusions

of Law, challenging the ALJ'S interpretation of section

377.241, Florida Statutes (1997). The Department reviews

these exceptions de novo because it has the responsibility to

interpret the statutes it administers. Public Employees

Relations Comm' n v. Dade County Police Benevolent Ass'n,

467 So. 2d 987, 989 (Fla. 1985) (upholding agency's

authority to overrule hearing officer's interpretation of law);

Alles, 423 So. 2d at 626 (holding that the agency need not

defer to a hearing officer's interpretation of legislative

intent).

GOVERNING STATUTE

This case turns on the meaning of the following statutory

criteria for issuance of a permit for oil and gas exploration:

377.241. Criteria for issuance of permits.--The

division, in the exercise of its authority to issue

permits as_ hereinafter provided, shall give

consideration to and be guided by the following

criteria:

(1) The nature, character and location of the

lands involved; whether rural, such as farms, groves,

or ranches, or urban property vacant or presently

developed for residential or business purposes or are

in such a location or of such a nature as to make such

improvements and developments a probability in the

near future.

(2) The nature, type and extent of ownership of

the applicant, including such matters as the length of

time the applicant has owned the rights claimed

without having performed any of the exploratory

operations so granted or au.horized.

(3)The proven or indicated likelihood of the

presence of oil, gas or related minerals in such

quantities as to warrant the exploration and extraction

of such products on a commercially profitable basis.

§ 377.241, Fla. Stat. (1997) (emphasis added)

The specific examples in section 377.241(1) refer to

SO a ae ee ee

uplands rather than to submerged sovereignty lands.

However, this section should be construed in harmony with

the rest of chapter 377 and with other laws affecting

submerged sovereignty lands.’ Unruh v. State, 669 So. 2d

242, 245 (Fla. 1996) (courts should "construe related

Statutory provisions in harmony with one another"); V.C.F.

v. State, 569 So. 2d 1364, 1365 (Fla. Ist DCA 1990) (courts

should read all provisions in a chapter in pari materia)

Section 377.24 prohibits any well from being drilled

without a permit, while specifying locations (including

submerged lands leased after specified dates) where the

legislature has removed the Department's discretion to issue

permits. Because Coastal's lease was executed before 1991,

the Department retains discretion to make permitting

decisions with regard to sovereign submerged lands covered

by Coastal's lease, guided by the criteria in section 377.241.

In addition, the Department's interpretation of statutes

governing its authorization of oil and gas wells should be

consistent with state policies declared in the Florida Air and

Water Pollution Control Act and the Florida Constitution:

Pollution of air and waters constitutes a menace to public

welfare and to aquatic life, § 403.021, Fla. Stat. (1997), and

"[i]t shall be the policy of the state to conserve and protect its

natural resources and scenic beauty," Art. IL, § 7(a), Fla.

Const. Laws should be construed "with reference to the

' As noted by Petitioners, the law enacting section 377.241 contained a

section expressly stating that its provisions "shall be cumulative and

supplemental to all other provisions contained in chapter 377, Florida

Statutes, on the same subject" and also "cumulative and supplemental to

all other provisions of law relating to submerged or sovereignty lands or

relating to the powers of the trustees of the internal improvernent fund."

Ch. 61-299, § 1, at 595, Laws of Fla. This provision was "repealed as

being redundant" in 1977, Ch. 77-104, § 120, Reviser's Note, at 288,

Laws of Fla., but its original presence corroborates the legislative intent

that in pari materia principles apply to section 377.241.

constitution and the purpose designed to be accomplished,

and in connection with other laws in pari materia, though

they contain no reference to each other." American Bakeries

Co. v. Haines City, 131 Fla. 790, 801, 180 So. 524, 528

(1938).

RULINGS ON PETITIONERS' EXCEPTIONS

Exception to Conclusion of Law 187

Petitioners challenge the introductory language in

Conclusion of Law 187 ("[a]fter the three criteria of section

377.121 [sic] have been satisfied"), asserting that the term

"satisfied" incorrectly interprets section 377.241 as a

checklist of requirements to be passed or failed.” Petitioners

correctly point out that section 377.241 does not constitute a

pass-fail checklist, but rather guidelines for balancing

interests. The statute "should be interpreted as calling for a

weighing process where each criterion is evaluated and then

weighed against the other factors." (Joint Exceptions at 2.)

By its own terms as well as in the context of other

sections of chapter 377, section 377.241 charges the

Department with balancing the interests of the fee simple

Owner against the interests of the mineral rights lessee. The

title of the enacting legislation describes the statute as

"relating to," among other matters, "the protection of surface

rights of landowners" and "providing criteria . . . to issue

permits for drilling or exploring and extracting through well

holes." Ch. 61-299, at 591. The preamble also refers to

> By implication, Petitioners also challenge the last sentence of

Conclusion of Law 180, which states that Coastal "has met" its burden of

establishing entitlement to the permit it seeks.

> Coastal argues that the purpose of the law was to protect landowners

from strip-mining, versus exploration through a well hole. (Coastal's

Response to Joint Exceptions, Attachment C, unnumbered page 10.)

FBR tad ah Sp Ran dit hat

concerms of "the owners of the fee simple title" that mineral

rights grantees not "unduly interfere with" the fee simple

owners’ use of their lands and "deems it to be in the public

interest" to provide a remedy for the absence of "any system

for the orderly determination" as to whether drilling or other

operations should be permitted. Ch. 61-299, at 592, Laws of

Fla.

The terms "give consideration to," "be guided by,"

and "criteria" also indicate that section 377.241 calls for

balancing interests rather than simply checking off

requirements. § 377.241. These terms imply a greater

degree of discretion than do terms such as "condition,"

"shall," or "must," which the legislature uses to indicate

specific requirements for permits. § 377.2424, Fla. Stat.

(1997).

A similar balancing of interests is suggested by

section 377.06, which declares, in pertinent part, that it is the

public policy of the state "to provide for the protection and

adjustment of the correlative rights of the owners of the land

wherein [oil and gas] lie and the owners and producers of oil

and gas resources," as well as "to safeguard the health,

property, and public welfare of the citizens" of Florida. §

377.06, Fla. Stat. (1997).

For the above reasons, Petitioners’ exception to the

introductory language of Conclusion of Law 187 is granted.

Exception to Conclusion of Law 181

The first criterion to be considered by the Department

is the "nature, character, and location of the lands involved."

§ 377.241, Fla. Stat. (1997). This criterion focuses on the

Protection against strip-mining was one of the law's purposes, but the

language of the law itself, the title, and the preamble also express the

legislature's intent to protect landowners against the drilling of unduly

burdensome wells.

interests of the fee simple owner. In this case, the fee simple

owner is the Board of Trustees of the Internal Improvement

Trust Fund of the State of Florida (hereafter "the Trustees") .

The Trustees hold title to the lands and resources of Florida

"in trust for all the people." Art. X, § 11, Fla. Const.; §

253.03, Fla. Stat. (1997).

The ALJ found that Coastal's proposed oil and gas

well would be drilled "in the Gulf of Mexico within waters

of the State of Florida, approximately nine miles south of St.

George Island in Franklin County." (Finding of Fact 8.) She

found that the impact of the drilling rig on the immediate site

would be minimal. ‘Findings of Fact 11, 32, and 34.)

The ALJ also found that "[t]he obvious threat to St. George

and other sensitive barrier islands, to Apalachicola Bay (a

special management area), to the world-renown[ed] beaches,

and to the commercially and envirormentally treasured lands

along the Florida panhandle coast, would be from an oil

spill." (Finding of Fact 37.) The ALJ noted that special

management areas are designated because of their unique

habitats, living resources, recreational use, aesthetic

importance, and other ecological, educational, consumptive,

intrinsic, scientific, and economic values, (Finding of Fact

125), and that "[mJost of the area in question is within some

form of special management area as defined by statute,"

(Finding of Fact 126). She also found that nursery and

breeding habitats are sensitive to even small amounts of oil.

(Finding of Fact 167.)

The ALJ further found that "the chance of a

damaging spill from drilling the proposed exploratory well is

extremely remote," (Finding of Fact 38), that blowouts are

rare, but they do happen, (Finding of Fact 92), and that a

hypothetical discharge, although originating outside of any

special management area, will impact natural resources

within the Apalachicola Bay special management area,

(Finding of Fact 168).

These Findings of Fact are unchallenged. However,

Petitioners challenge the ALJ's Conclusion of Law 181,

which reads as follows:

181. The first criterion, on its face, has a

more limited application than that proposed by the

Environmental Petitioners. The legislature's intent to

preclude drilling in coastal waters is effectuated not

in section 377.241, Florida Statutes, but in section

377.242, Florida Statutes, which includes a specific

exception for leases entered prior to June 7, 1991. As

found above, Coastal's permit meets the first

criterion.

This Conclusion of Law discounts or overlooks the

importance of the first statutory criterion of section 377.241,

the "nature, character and location of the lands involved."

The effect of Coastal's exclusion from the prohibitions of

section 377.242 is simply to leave the Department's

permitting decision subject to the criteria of section 377.241.

As discussed above, these criteria are not tests to be "met,"

but considerations to guide the Department's discretion in

determining whether to grant or deny a permit.

Apparently the ALJ reaches her conclusion that

Coastal's permit "meets" the first criterion on the basis that

the chance of an oil spill is remote. (Finding of Fact 38.)

However, Petitioners correctly point out that the relevant

criterion is not the chance of a blowout, but the nature of the

lands involved.

The generality of the term "lands involved" suggests

that the Department should look beyond the immediate

footprint of the drilling rig. § 377.241(1). Moreover, as

noted above, the overall purpose of the statute was to

institute a permit process in order to protect landowners from

undue burdens from mineral leases. Ch. 61-299, at 592,

Laws of Fla. This remedial purpose should be liberally

construed. Conner v. Division of Elections, 643 So. 2d 75,

77 (Fla. lst DCA 1994) (remedial statutes "should be

liberally construed so as to suppress the evil identified by the

legislature, and to advance the remedy intended")

The "evil identified" by the legislature was the lack

of a permitting process, leaving landowners under a threat

that mineral rights lessees might "unduly interfere with" the

"proper and appropriate use as might be indicated by the

character or location of the land."* Ch. 61-299, at 592. The

policies enunciated in Chapter 403 of the Florida Statutes

and in Article II, Section 7(a) of the Florida Constitution, as

discussed above, also suggest that the Department should

consider lands and waters potentially impacted by pollution.

Unruh, 669 So. 2d at 245 (construing related statutory

provisions harmoniously)

The special characteristics of the lands involved, as

noted in Findings of Fact 37, 125, 126, 167, and 168, are

crucial to evaluation of the first permit criterion, the

landowner's interest. The public trust interest in these

special lands weighs heavily against issuance of a drilling

permit. The Department grants Petitioners’ exception to

Conclusion of Law 181.

Exception to Conclusion of Law 182

On the other hand, the second and third criteria to be

* Coastal attempts to exclude environmental considerations from the

statute by restricting the Department from considering land uses other

than those specifically enumerated in section 377.241(1) (eg...

agricultural, urban, residential). (Coastal's Response to Joint Exceptions,

Attachment C, unnumbered page 12.) However, this interpretation would

thwart application of the statute: to submerged lands held in public trust.

Cf. Smalley Transp. Co. v. Moed's Transfer Co., 373 So. 2d 55, 57 (Fila.

Ist DCA 1979) (warning that the "Expressio unius" maxim should be

used with caution to avoid thwarting legislative intent, for "it is not of

universal application")

considered by the Department both address the interest of the

owner of the mineral rights. The second criterion directs the

Department to consider "the nature, type and extent of

ownership of the applicant, including such matters as the

length of time the applicant has owned the rights claimed

without having performed any of the exploratory operations

so granted or authorized." § 377.241(2).

Rather than recounting in detail the "50 + years'

history" of Coastal's leases, the ALJ refers to factual

narratives in court opinions such as Watson v. Holland, 20

So. 2d 388 (Fla. 1945), and Coastal Petroleum v. Chiles, 701

So. 2d 619 (Fla. Ist DCA 1997), review denied~ 707 So. 2d

1123 (Fla. 1998). (Findings of Fact 46, 49.) The original

lease to Coastal's predecessor was executed in 1944.

Watson, 20 So. 2d at 389. It was not a disposition of title,

but "the granting of a limited right to take [minerals] from

the lands or water bottoms owned by the State." Id. at 392.

Between 1947 and 1968, Coastal conducted geologic and

seismic studies and drilled 22 wells, finding nothing except

in one inland site. Coastal, 701 So. 2d at 622. In a 1976

settlement agreement Coastal surrendered all but the

outermost portion of its lease area. (Finding of Fact 49.) In

1992 Coastal submitted five offshore drilling applications to

the Department, later reduced to one. (Finding of Fact 13.)

The ALJ found that Coastal had not abandoned oil

exploration in favor of a "greenmail" attempt to incite the

State to buy its leases. (Finding of Fact 50.) "For many of

the 50 years, litigation has eclipsed oil, gas and mineral

exploration in the vast leases," but not all of the litigation

was initiated by Coastal and none was found to be frivolous.

(Id.)

These Findings of Fact are likewise unchallenged.

However, Petitioners challenge Conclusion of Law 182,

which reads as follows:

182. Coastal's lease 224-A includes

requirements for lease payments and for certain

minimal drilling or exploration activity. As found

above, Coastal has satisfied those requirements and

there is no competent evidence that it has abandoned

its drilling rights under the lease. Coastal's permit

meets the second criterion.

This interpretation oversimplifies the governing

statute. Certainly abandonment of the lease would weigh

heavily against issuance of the permit, but again this is not a

simple pass-fail test. Facts well short of "abandonment" are

also relevant. The ALJ correctly points out that "[nJothing in

the text of the three criteria require[s] consideration of the

applicant's ‘motive. (Conclusion of Law 184.) However,

the fact that for many years the applicant held its lease

without exercising its exploration rights, (Finding of Fact

50), is expressly made relevant to the second criterion. §

373.241(2), Fla. Stat. This criterion weighs somewhat

against issuance of the permit. To this extent, the

Department grants the Petitioners' Exception to Conclusion

of Law 182.

Exceptions to Conclusions of Law 183 and 186

Like the second criterion, the third criterion also

evaluates the applicant's interest in oil and gas rights: "The

proven or indicated likelihood of the presence of oil, gas or

related minerals in such quantities as to warrant the

exploration and extraction of such products on a

commercially profitable basis." § 377.241(3), Fla. Stat.

The ALJ makes extensive Findings relevant to the

third criterion: The target of exploration is an anticipated

structure within the Jurassic Smackover and Norphlet

formations, which provide commercially-viable oil

production in the Jay field in northwest Florida, (Findings of

Fact 9 and 59); in the experience of one witness, the standard .

industry expectation is a one in ten chance in a frontier well

such as this "wildcat" well (a well drilled outside of a

producing field), (Finding of Fact 51); the Department has

rarely used this criterion to deny an application, (Finding of

Fact 52); Department statistics show a success rate for

wildcat wells throughout Florida of about 2-3 %, (F inding of

Fact 53); Department staff determined that the siting of

permit 1281 was reasonable, and this determination was

supported by the evidence, (Findings of Fact 54, 66):

"Coastal presented sufficient evidence of the anticipated

commercial profitability of the well," (Finding of Fact 55);

geologists agree that "the only way we can determine

whether oil is present is to dig a hole," (Finding of Fact 56):

the contour lines interpreted by Coastal's experts "show a

promising geologic structure at the site of Permit no 1281"

and contribute to their credible opinions that the site is

commercially viable, (Findings of Fact 58, 76); the process

of determining whether the essentials for an oil field exist

requires acquisition of data from prior wells, including dry

wells, (Finding of Fact 64); magnetic, seismic, and gravity

testing also yields valuable data, and the more data available

the more accurate the map, but prospects have been drilled

without expensive and possibly subjective site-specific tests,

(Findings of Fact 64, 65).

- Again these Findings of Fact are unchallenged.

However, Petitioners challenge Conclusion of Law 183.

which reads as follows:

183. The third criterion does not suggest

that the prospect for finding oil must be a sure thing.

Every expert testifying on this issue in_ this

proceeding agreed that petroleum exploration is a

risky business. Even in a proven productive field, dry

holes are drilled. Petroleum geologists rely on data

obtained from a variety of sources to select a drilling

site, but only the drilling itself can determine with

certainty what lies beneath that site. A wealth of

credible evidence was presented by the parties on this

issue. No evidence could utterly foreclose the

possibility that Phillip Ware's prospect is all that he

predicts. The greater weight of the evidence

establishes that it is a[t] least worth a look.

Petitioners also take exception to Conclusion of Law 186,

which states in part: "Mere speculation that oil exists or does

not exist does not offend the third criterion in the grant of a

drilling permit."

Although otherwise well-founded, these Conclusions

of Law again misread the statutory criterion as a pass-fail

test. Certainly, if the Department were simply checking off a

list of requirements Coastal would have met this

requirement. However, the Department is charged instead

with balancing interests, and Petitioners correctly point out

that "at least worth a look," (Conclusion of Law 183), rates

fairly low on the statutory scale of "proven or indicated

likelihood," § 377.241(3). (Joint Exceptions at 9) To this

extent, the Department grants Petitioners' Exceptions to

Conclusions of Law 183 and 186.

Exception to Conclusion of Law 184

Petitioners’ final exception is to Conclusion of Law 184,

which reads as follows:

184. Nothing in the text of the three criteria

require consideration of the applicant's "motive." If

the Environmental Petitioners are correct in their

apprehension of "Greenmail" by Coastal to induce

the state to buy its lease or to support a claim of

inverse condemnation or "taking," the surest way to

dissipate those motives is to vermit the drilling.

Petitioners contend instead that "one of the harms" that

section 377.241 is intended to prevent "is the issuance of oil

drilling permits to persons whose motive is to use the permit

as a device to force the surface owner to purchase oil and

mineral rights." (Joint Exceptions at 3.) However, the

Department agrees with the ALJ that nothing in the language

or history of the statute suggests that the Department should

consider the applicant's motive. Instead, as discussed above,

the statute charges the Department with balancing the

interest of the landowner against the interest of the owner of

mineral rights, looking to specific, relatively objective

factors. For these reasons, Petitioners' Exception to

Conclusion of Law 184 is denied.

RULINGS ON COASTAL'S EXCEPTIONS

Exception to Findings of Fact 16 and 75, Conclusion of Law

_ 1738

Coastal's Exception no. 4 challenges Findings of Fact

16 and 75 and Conclusion of Law 178, which address permit

conditions imposed by the Department in addition to the

surety: a magnetometer and sidescan survey, a_ spill

trajectory analysis, an inventory of oil spill equipment, and a

hydrogen sulfide dispersion model.” (F indings of Fact 73-74;

Coastal's Exceptions at 6.) The ALJ found that the agency

"had a sound rational basis to require each item" and that the

issue is moot since Coastal has already complied with the

conditions. (Finding of Fact 75.) She concluded that "[t]he

conditions imposed by DEP on Coastal's permit are well

within the ambit" of the agency's statutory authority.

: Coastal's challenges to the surety (Exceptions 1-3) are addressed by the

Governor and Cabinet sitting as the Administration Commission and are

not addressed in the Department's Final Order.

(Conclusion of Law 178.)

Coastal's Exception no. 4 is without merit. The

Department is authorized to issue orders "governing all

phases of" oil and gas exploration in order to minimize

damage. § 377.22(2), Fla. Stat. (1977). Statutory language

such as “appropriate safety equipment," § 377.22(2) (c),

prevention of "injury to neighboring . . .property," §

377.22(2) (i), and minimiz[ing] the impact on hydrology and

biota of the area," § 377.22(2) (v), indicate the

appropriateness of the required conditions, and the record

provides support for the ALJ's Conclusion that the conditions

were appropriate. (Tr., Vol. 25, at 3311-15.) In addition, the

issues concerning permit conditions are moot for the reasons

given by the ALJ. Therefore, Coastal's Exception no. 4 (to

Findings of Fact 16 and 75, Conclusion of Law 178) is

denied.

Exception to Finding of Fact 172

Coastal challenges Finding of Fact 172, in which the

ALT denies both Petitioners’ and Coastal's requests for costs

and attorney's fees. The ALJ states that "[t]his lengthy

proceeding, competently and diligently tried by all parties,

yields no evidence of bad faith or improper purpose or any

other basis for award of fees cognizable under Chapter 120."

(Finding of Fact 172.) Review of the entire record indicates

no basis to overturn this Finding. Additionally, the

Petitioners have become the prevailing party in this Final

Order. Coastal's Exception no. 5 (to Finding of Fact 172) is

denied.

CONCLUSION

Applying the statutory criteria of section 377.241 to

the facts determined by the ALJ, the Department must

balance the Trustees’ interest in lands they hold in public

a. * . >» oe ae =

trust against the interest of the applicant. On the one hand,

the "lands involved" include sensitive barrier islands,

Apalachicola Bay (a special management area), world-

renowned beaches, and "commercially and environmentally

treasured lands along the Florida panhandle coast." (Finding

of Fact 37.) On the other hand, the applicant's mineral rights

were unexercised over a long period, (Findings of Fact 49,

50), and are speculative, (Findings of Fact 51, 53, 56;

Conclusions of Law 183, 186).

Weighing evidence is the province of the trier of fact,

but balancing policy interests is the province of the agency.

Cross v. Department of Health & Rehab. Servs., 658 So. 2d

1139, 1143 (Fla. Ist DCA 1995) ("Striking the proper

balance between . competing policy considerations" is a

decision to be made by an agency, as guided by the

legislature); Fl w V.

Reg., 638 So. 2d 545, 546 (Fla. Ist DCA), review denied,

650 So. 2d 149 (Fla. 1994) (affirming DER's determination

"that the public interest in the extent of the impact on the

environment .. . was a policy matter for its determination

and not a question of fact to be resolved by the hearing

officer") . In the present case, the balance tips against

issuance of a permit to drill an exploratory well nine miles

south of St. George Island.

It is therefore ORDERED:

A. The ALJ's Findings of Fact are adopted in their

entirety and incorporated herein by reference.

B. The ALJ's Conclusions of Law 180, 181, 182,

183, 186 and 187 are rejected or modified as indicated

above. Conclusions of Law 173-79 and 184-85 are adopted

and incorporated herein by reference °

C. The Notice of Intent to Issue Permit issued by the

Department on August 16, 1996, is REVERSED.

° Conclusions of Law 188-202 concern issues regarding the surety to be

imposed and are not addressed in the Department's Final Order.

D. Coastal's application filed with the Department

requesting issuance of a permit in connection with their

proposed drilling of a well for exploration of oil and gas,

Permit no. 1281, is DENIED.

Any party to this proceeding has the right to seek

judicial review of the Final Order pursuant to section 120.68,

Florida Statutes, by the filing of a Notice of Appeal pursuant

to Rule 9.110, Florida Rules of Appellate Procedure, with

the clerk of the Department in the Office of General Counsel,

3900 Commonwealth Boulevard, M.S. 35, Tallahassee,

Florida 32399-3000; and by filing a copy of the Notice of

Appeal accompanied by the applicable filing fees with the

appropriate District Court of Appeal. The Notice of Appeal

must be filed within 30 days from the date this Final Order is

filed with the clerk of the Department.

DONE AND ORDERED this 22nd day of May,

1998, in Tallahassee, Florida.

STATE OF FLORIDA DEPARTMENT

OF ENVIRONMENTAL PROTECTION

/s/ by Kirby B. Green, I

for VIRGINIA B. WETHERELL

Secretary

Marjory Stoneman Douglas Building

3900 Commonwealth Boulevard

Tallahassee, Florida 32399-3000

FILING AND ACKNOWLEDGMENT FILED, ON THIS

DATE, PURSUANT TO §120.52 FLORIDA STATUTES,

WITH THE DESIGNATED DEPARTMENT CLERK,

RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED

/s/ 5/22/98

CLERK

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

Case No. 96-4222, Case No. 96-5038,

Case No. 97-4362, Case No. 97-4591

FLORIDA WILDLIFE FEDERATION, INC.:

SIERRA CLUB, FLORIDA CHAPTER: and

FLORIDA AUDUBON SOCIETY, INC.,

Petitioners,

and

ROBERT A. BUTTERWORTH, ATTORNEY

GENERAL,

Intervenor,

VS.

DEPARTMENT OF ENVIRONMENTAL

PROTECTION and COASTAL PETROLEUM

COMPANY,

Respondents.

ST. GEORGE ISLAND CIVIC CLUB,

Petitioner,

and

ROBERT A. BUTTERWORTH,

ATTORNEY GENERAL,

Intervenor,

VS.

DEPARTMENT OF ENVIRONMENTAL

PROTECTION,

Respondent.

COASTAL PETROLEUM COMPANY,

Petitioner,

VS.

ADMINISTRATION COMMISSION,

Respondent.

COASTAL PETROLEUM COMPANY,

Petitioner,

VS.

ADMINISTRATION COMMISSION,

Respondent.

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative

Hearings, by its duly designated Administrative Law Judge,

Mary Clark, held a formal hearing in the above-styled

consolidated cases beginning on October 20, 1997, and

continuing until completed on November 6, 1997. The

hearing was held in Tallahassee, Florida, with the exception

of the public hearing on October 29, 1997, in Apalachicola,

Florida.

APPEARANCES

For Environmental Petitioners:

David Guest, Esquire

S. Ansley Samson, Esquire

Earthjustice Legal Defense Fund

Post Office Box 1329

Tallahassee, Florida 32302-1329

For St. George Island Civic Club:

Barbara Sanders, Esquire

St. George Island Civic Club

Post Office Box 157

Apalachicola, Florida 32320-0157

For Department of Environmental Protection:

Andrew J. Baumann, Esquire

John W. Costigan, Esquire

Tony Ettore, Esquire

Department of Environmental Protection

3900 Commonwealth Boulevard

Tallahassee, Fiorida 32399-3000

For Administration Commission:

s Michael Takac, Esquire

. Room 209, The Capitol

Tallahassee, Florida 32399-0001

For Attorney General of Florida:

Denis Dean, Esquire

Monica Reimer, Esquire

Department of Legal Affairs

The Capitol, Plaza Level 01

Tallahassee, Florida 32399-1050

For Coastal Petroleum Company:

Robert J. Angerer, Sr., Esquire

Robert J. Angerer, Jr., Esquire

Post Office Box 10468

Tallahassee, Florida 32302-0468

STATEMENT OF THE ISSUES

The issues in these consolidated cases are whether

Coastal Petroleum Company is entitled to an oil and gas

exploration permit (Permit no. 1281) and, if so, what

conditions should attach, including a reasonable surety

amount.

PRELIMINARY STATEMENT

On August 16, 1996, the Department of

Environmental (DEP) notified Coastal Petroleum Company

(Coastal) of its intent to issue Permit no. 1281. On August

30, 1996, Florida Wildlife Federation, Inc., Sierra Club,

Florida Chapter, and Florida Audubon Society, Inc.

(Environmental Petitioners), filed a verified petition for

formal administrative hearing pursuant to Section

403.412(5), Florida Statutes, disputing the intended permit.

Petitions in opposition to the permit were also filed

ica

by the St. George Island Civic Club and by the St. George

Island Plantation Owners' Association, Inc. When the

petitions were forwarded to the Division of Administrative

Hearings (DOAH) for conduct of a formal evidentiary

hearing, the cases were assigned numbers 96-4222, 96-5038

and 96-5047, respectively, and were consolidated. Later, the

St. George Island Plantation Owners' Association, Inc.,

voluntarily withdrew its petition and the file in Case No. 96-

5047 was closed.

In the meantime, Coastal filed a Petition for Review

of Nonfinal Agency Action (Case No. 96-3226) and an

alternative Notice of Appeal (Case No. 96-3227) in the First

District Court of Appeal asserting that it was entitled to a

permit from DEP without further administrative proceedings

and without a requirement that Coastal publish notice of the

proposed permit.

Over the objection of the Environmental Petitioners,

the Administrative Law Judge granted Coastal's request for

stay of the administrative proceedings pending disposition of

the appellate issues (order entered October 3, 1996). In a

letter dated March 17, 1997, counsel for Coastal informed

‘the Administrative Law Judge that its Writ of Certiorari and

Motion for Clarification had been denied and that Coastal

would publish notice of DEP's Intent to Issue on March 20,

1997.

No additional parties filed petitions in response to the

published notice and in an order entered April 30, 1997, the

Administrative Law Judge set the formal hearing to

commence on September 29, 1997.

A Petition to Intervene by Attorney General Robert

A. Butterworth was granted on July 30, 1997, without

objection.

The hearing was continued until October 20, 1997,

after DEP and the Governor and Cabinet acting as the

Administration Commission applied newly-enacted Chapter

97-49, Laws of Florida (codified as Section 377.2425(1)(c),

Florida Statutes) and required as a condition of Permit No.

1281 that Coastal provide surety of $4,249,637,886. In

response to the surety action Coastal filed two petitions for

formal hearing, one directed to the Administration

Commission (referred to DOAH and assigned Case No. 97-

4362) and the other directed to DEP, which had calculated

-and recommended the surety amount (referred to DOAH and

assigned Case No. 97-4591). These petitions were

consolidated with the pending cases and all four proceeded

to hearing as described above.

The parties filed their prehearing stipulation on

October 16, 1997. At the commencement of the hearing the

Environmental Petitioners were permitted to amend their

petition to clarify some issues, to delete others, and to add a

request for attorney's fees.

At the hearing Coastal presented the following

witnesses:

Phillip W. Ware, president of Coastal, a professional

geologist and an expert in petroleum exploration; Ed

Garrett, the DEP employee and professional geologist

who processes applications for drilling permits;

Anthony Randazzo, Ph.D., an expert in geology and

educational geology; Ed Shell, an expert in design

and implementation of drilling, casing and cementing

programs; Jim Rushing, an expert in offshore

environmental considerations of drilling fluids; Tom

Herbert, Ph.D., an expert in environmental planning,

operation and response, and a professional geologist;

Lawrence David Curry, the DEP oil and gas section

administrator who reviews applications for drilling

permits and is a professional geologist; William

61 -

Sackett, Ph.D., an expert in marine geochemistry,

with emphasis in oil in the sea, inputs and fates:

Harry Roberts, Ph.D., an expert in oil and gas seeps

and vents in the sea; Charles Wilson, Ph.D., an

expert in fisheries and oil and gas platforms; Nick

Stratus, Ph.D., the DEP economist who calculated the

surety amount; John Supan, Ph.D., an expert

biologist with emphasis on oysters; Irving

Mendelssohn, Ph.D., an expert in coastal plant

ecology, with extensive experience in coastal

marshes related to oil spills and cleanup of oil spills;

Shea Penland, Ph.D., an expert in coastal

geomorphology, marine science, and the effects and

cleanup methods of oil spills on coastal habitats of

the Gulf of Mexico; Kenneth Shaw Thompson, an

expert in cleanup of oil spills; Dagmar Etkin, Ph.D.,

an expert in oil spill information, analysis and

Statistics; William H. Colona, a_ professional

geologist and representative of Woodward Clyde

Consultants, an environmental consulting firm;

Philip Sorensen, Ph.D., an expert in oil and gas

economics, viability of rates of return and economic

consequences of oil spills; Theodore Bourgoyne, Jr.,

Ph.D., an expert petroleum engineer with extensive

experience in well control and historic well control

events, Deborah French, Ph.D., an expert in oil spill

trajectory modeling and oil spill events; Jacqueline

Michel, Ph.D., an expert in cil spill response,

specifically determining the resources at risk,

developing protection priorities, and _ shoreline

cleanup decision-making; Bruce D. Graham, an

expert in preparation of photodocumentation surveys,

visual analysis and quality control of data collection

and photodocumentation; Janet Voorhees, an expert

in the area of information on oil and planning; Mike

NeSmith, a vice president of Noble Drilling, the

contractor who plans to drill the well and an expert in

offshore drilling; Clay Durham, Ph.D., an expert in

petroleum exploration education and petroleum

exploration; Jamil Azad, an expert in petroleum

exploration and geophysics; Charles Morrison, an

expert in seismic interpretation, geophysics and the

Smackover formation; Barry Faulkner, an expert in

petroleum exploration geology, generation and

evaluation of oil and gas prospects, and in estimating

the geologic risks and reserves of a prospect; Al

Shannon, an expert in oil and gas field development

planning and estimating the costs of such

development; George C. Hite, an expert petroleum

engineer, with experience in field development

planning, cost and viability of prospects; Samuel O.

Sugiyama, Ph.D., an expert in risk assessment; and

by deposition on rebuttal, Doug Smith, Ph.D., an

expert in geophysics and the basement structure of

Florida.

The Environmental Petitioners and Attorney General

presented the following:

James Thompson, an expert geophysicist with

expertise in interpreting seismic lines and identifying

petroleum and hydrocarbon bearing structures; Mike

Cheeseman, an expert in evaluating oil prospects and

an oil exploration geologist; and Murphy Ellen

Chandler, .a paralegal with experience in title

searching.

The DEP presented the following witnesses:

William Gambrell, a DEP employee who is an expert

in the area of flow rates from oil wells; Erie

Barnett, a DEP employee who is an expert in natural

resource damage assessments; George Henderson, a

DEP employee who is an expert in marine biology,

——————EE__i_a_aaaE

Florida marine habitats and resources, and impacts of

hydrocarbon releases on same; and Walter Schmidt,

Ph.D., the chief of the Florida Geological Survey, the

State Geologist, and an expert in geology, Florida

geology, Florida stratigraphy and petroleum geology.

The St. George Island Civic Club witnesses testified

at the public hearing conducted in Apalachicola, Florida.

The Administration Commission did not present

evidence.

The following exhibits were received in evidence:

Coastal's Exhibits no. 2, 3, 7-9, 12, 14, 16, 17, 20, 22-25, 30,

32-34, 36, 37, 39, 42-46, 48, 49, 51, 55, 56, 58-76, 84, 87-96,

99, 101, 105, 108, 113, 115-119, 123, 131-134, 140, 141,

143, 145(a) and (b), 147, 149, 151, 153, 155, 157, 159, 161,

163, 164, 167, 169, 171, 174, 176, 180, 182, 185, 186, 189,

193, 195, 197, 199-201, 204, 205, 206, 208, 211, 214, 215,

227, 228, 230-233, 238, 241, 242, 244, 248, 254, 255, 257,

259, 264-267, 271, 273-281, 283, 284, 295, 296, 299-303,

306, 319, 334, 335, 355-359, 361-379, 383, 384, 388, 391,

392, 394, 395, 400-405, 407, 408, 416, 426, 434, 444-459,

462, 465, 470-472, 474(1-g), 475(a-c), 480-483, 494, 495,

503-505, 509, 513, 514, 517-524, 527, 528, 531-537, 539-

583, 585, 594-597, 604, and 606; DEP Exhibits no. 1, 1-14,

16-32, 34, 35, 37, 40, 46, 47, 49, 51, 52, 57-59, and 61:

Environmental Petitioners' Exhibits no. 7, 10, 12, 13, 15, 16,

21, 29, 30(a-q), 35, 78-83, 85, 117, 128, 131, 135-138, 140-

142, 146, 152-154, and 156, and Attorney General's Exhibits

no. 1, 3, 6, and 26.!

By stipulation executed on October 1, 1992, the

parties agreed that certain proprietary geophysical data

(primarily seismic profiles covered by a license agreement

between Coastal and Western Geophysical) would be

presented at hearing as demonstrative exhibits and would be

COO

returned to Coastal. One exhibit, Environmental Petitioners’

no. 142A, is part of the record in this proceeding, but is

confidential and sealed pursuant to Section 377.2409(1),

Florida Statutes.

The 26-volume transcript of hearing was filed on

January 29 and 30, 1998; the parties' proposed recommended

orders, briefs and written argument were filed on March 2

and 3, 1998.

Because there are two agencies with final order

authority in this proceeding, DEP (as to permit applications)

and the Administration Commission (as to amount of surety),

this recommended order is submitted to both agencies. The

record (transcript and exhibits) is being forwarded to DEP.

FINDINGS OF FACT

Parties

1. The applicant Coastal Petroleum Company,

(Coastal) is an oil and gas company originally named Amold

Oil Exploration Company, formed in 1941 as a Florida

corporation. Its majority owner is Coastal Caribbean Oils

and Minerals, Ltd., a company publicly traded on the Boston

Stock Exchange. Phillip Ware is president of Coastal,

having been elected to that position in 1985.

2. The Department of Environmental Protection

(DEP) is the agency of the state responsible for

implementing laws and regulations governing oil and gas

permits. DEP was created pursuant to Section 20.255,

Florida Statutes, as the successor agency to the Florida

Department of Environmental Regulation and Department of

Natural Resources.

3. The Environmental Petitioners are the Florida

Wildlife Federation, Inc., Sierra Club, Florida Chapter, and

Florida Audubon Society, Inc. Florida Wildlife Federation

and Florida Audubon Society are non-profit Florida

corporations and citizens of the state.

4. The St. George Island Civic Club is an

organization formed by and on behalf of property owners

and residents of St. George Island, Franklin County, Florida.

5. The Administration Commission is a collegial

body composed of the Governor and Cabinet of the State of

Florida, pursuant to Section 14.202, Florida Statutes.

6. The Attorney General of the State of Florida has

intervened in this proceeding pursuant to Section 403.412(5),

Florida Statutes.

7. The Attorney General, Environmental Petitioners

and St. George Island Civic Club oppose the grant of Permit

no. 1281 to Coastal and support a surety requirement in at

least the amount established by the Administration

Commission on the recommendation by DEP. (DOAH

Cases Nos. 96-4222 and 96-5038.) Coastal supports the

intended grant of its permit except for certain conditions

which it claims are without authority; Coastal opposes the

surety recommended by DEP and set by the Administration

Commission. (DOAH Cases Nos. 97-4362 and 97-459] )

The Project

8. The activity that is the subject of the application at

issue (Permit no. 1281) is Coastal's drilling of a single

exploratory oil and gas well in the Gulf of Mexico within

waters of the State of Florida, approximately nine miles

south of St. George Island in Franklin County.

9. The target of the exploration is an anticipated

structural oil trap within the Jurassic Smackover and

Norphlet geological formations. These are the same

formations which provide commercially-viable oil

production in the Jay field in northwest Florida. The

anticipated well depth is 13,000 to 15,600 feet but the permit

would allow drilling to the basement or 18,000 feet,

whichever occurs first.

10. Coastal's drilling contractor, Noble Drilling

Company, has drilled wells all over the world since 1925. It

has been responsible for approximately 10 percent of all the

wells drilled in the Gulf of Mexico, or about 190 wells a

year, for both major and small independent oil companies.

11. If permitted, Noble will install a portable drilling

rig, the Paul Wolff, or similar sister rig, with three columns

and footing that will sit on the relatively featureless sea

bottom at Coastal's offshore site. The rig will be staffed by a

trained Noble crew and will be operated in a zero-discharge

mode. That means nothing will be allowed to escape from

the rig into the water, including drill cuttings, sewage

treatment water, garbage or rain water. Surrounding the rig

will be a high seas oil fence with locks, a cleanup crew and

vessel, and an evacuation vessel.

12. When drilling is completed, the rig will be

removed and the well either abandoned or transferred to

production mode with a production platform. With the

exception of a 90-day test period covered by the initial

drilling permit, all production-related activity must be

permitted under a separate application which is not the

subject of this proceeding.

The Application Process

13. On March 16, 1992, Coastal submitted 5

offshore drilling applications to the DEP, Bureau of

Geology. Assigned numbers 1277-1281, two proposed sites

were offshore of Franklin County, and three were offshore of

southwest Florida. Later, applications 1277-1280 were

withdrawn and only Permit no. 1281 proceeded through

review to a Notice of Intent to Issue.

14.__ As required, Coastal submitted DEP's one-

page Form 3 and included a location plat and filing fee. The

application form is only for drilling an exploratory well and

not for any oil or gas production.

15. The application's number "1281" denotes that

1280 drilling applications have preceded it since the 1940's

when DEP's predecessor agency began formal review. Not

all of these proceeded through complete review; many were

withdrawn, but most were approved.

16. Coastal's was not a routine application. Since

the 1940's, leases and activities related to offshore oil and

gas exploration in Florida have been the subject of

continuous legal disputes. Most applications are for on-

shore drilling and DEP's regulations and review process are

more relevant to those land- based operations. The review of

Coastal's application therefore, by DEP staff, Ed Garrett, and

others, was a commonsense extrapolation from their

checklist and other sources reasonably, but not directly,

related to the application at hand, for example, federal rules

governing outer continental shelf (OCS) drilling.

o7, On April 8, 1992, Ed Garrett detailed in a

letter to Phillip Ware the following information needed to

complete the application:

a) A professional ecological/biological survey and

report and photodocumentation of the proposed drill site to

permit staff review of the bottom areas and potential impact

on natural resources;

b) An assessment of ambient conditions in the

vicinity of the well site, including potential impacts on

coastal habitats, air quality, endangered and threatened

species, marine mammals, birds, commercial fishing,

recreational resources and archeological resources;

c) A zero discharge policy for offshore drilling

consistent with the policy established in 1982 when the DEP

issued a drilling permit to Getty Oil for drilling in East Bay;

d) An oil spill response plan for recapture of escaped

pollutants;

e) A description of the offshore drilling rig to be

used;

f) A hurricane response plan, also an item related to

the prior Getty drilling permit;

g) A surety in the amount of $15,000,000, to be

recommended by staff to the Governor and Cabinet (a sum

of $50,000,000 for all 5 wells was also addressed);

h) Description of how the rig design will account for

potential Karst collapse;

i) Description of helicopter activity associated with

field operations;

j) Description of support locations and facilities to be

used with the drill site, including proposed plan for transport

of crude cil;

k) a casing program;

1) A cementing program;

m) List of proposed drilling muds and their chemical

components;

n) A hydrogen sulfide contingency plan; and

0) A blowout prevention plan.

18. Mr. Ware addressed each of _ these

requirements in a response dated November 24, 1992. In

lieu of the surety, he enclosed a check to the Petroleum

Exploration and Production Bond Trust Fund in the amount

of $4,000 pursuant to Section 376.40, Florida Statutes. His

response included detailed attachments describing the

proposed drilling operation.

19. DEP furnished copies of the application and

additional materials to interested parties, including the Big

Bend Sierra Club and Florida Audubon Society, on

November 25, 1992. The Sierra Club had previously sent a

letter concerning Coastal's permit application. On December

18, 1992, a meeting was held to consider the materials

furnished by Coastal.

20. A letter dated January 11, 1993, from Jeremy A.

Craft, Director of the Division of Resource Management, to

Phillip Ware addresses deficiencies in the November 1992

submittal specifically related to the site-specific

photodocumentations survey, environmental conditions and

assessment of impacts, hydrogen sulfide contingency plan,

zero discharge requirement, and oil spill contingency plan.

The letter also states that the agency completed its own

natural resource damage assessment using the schedule

prescribed in Section 376.121, Florida Statutes, and data

submitted by Coastal, and staff determined that, in addition

to joining the Petroleum Exploration and Production Trust

Bond Fund, security of $500,000,000 would be required to

cover potential liability for damages and $15,000,000 would

be needed to cover cleanup costs.

21. Phillip Ware responded by the January 15, 1993,

deadline, providing additional information and agreeing that

the following would be performed as a condition of the

permit: magnetometric and side sonar surveys of the drill

site, hydrogen sulfide dispersion model, and oil spill

trajectory analysis. Protesting the requirement for additional

surety, Coastal offered the value of its leases as evidence of

its ability to pay for any damages and cleanup costs.

22. Walter Schmidt, Chief of the Florida

Geological Survey, with other agency staff, reviewed the

latest submittals and recommended denial of Coastal's

permit, primarily based on failure to provide liquid financial

surety of sufficient value "to cover any and all potential

damages to the environment."

23. On February 22, 1993, the Florida

Department of Natural Resources issued its final order

memorializing the January 26, 1993, decision of its head, the

Governor and Cabinet, denying Coastal's permit application.

Consistent with the notice of rights included in the order,

Coastal timely filed a petition for a formal hearing, and later

requested an informal administrative hearing on the issue of

the agency's authority to require additional surety.

24. Individuals with royalty interest in the

potential oil and gas production petitioned and were granted

leave to intervene in the administrative proceeding. No other

parties intervened.

25. On December 17, 1993, the assistant secretary

of DEP, acting as hearing officer in the informal proceeding,

entered his Final Order denying Coastal's petition and

adopting the order previously entered on February 22, 1993,

as the agency final order. Coastal appealed.

26. On February 9, 1995, the First District Court

of Appeal reversed denial of Coastal's application, holding

that the Department had no authority to require surety in

excess of that authorized by statute. See Coastal Petroleum

Company v. Department of Environmental Protection, 649

So. 2d 930 (Fla. Ist DCA 1995), cert. denied, 660 So. 2d 772

(Fla. 1995).

27. During the remand to the Department, the

Board of Trustees of the Internal Improvement Trust Fund

voted to require a $1,900,000,000 bond as a condition of the

lease and DEP again denied Coastal's application for failure

io provide this additional surety. On April 26, 1996, the

First District Court of Appeal again reversed the denial of

Coastal's application, again holding that the Department had

no authority to require surety in excess of that authorized by

statute. See Coastal Petroleum Company v. Department of

Environmental Protection, 672 So. 2d 574 (Fla. lst DCA

1996) and Coastal Petroleum Co. v. Chiles, 672 So. 2d 571

(Fla. lst DCA 1996).

28. On August 16, 1996, DEP Officially notified

Coastal that it had prepared and was ready to issue Permit

no. 1281, but required Coastal to publish a Notice of Intent

to Issue Permit. Permit no. 1281, according to the Intent to

Issue, included the following special conditions:

a) Coastal shall conduct a magnetometer and side

Scan sonar survey;

b) Coastal shall complete comprehensive spill

trajectory analyses;

¢) Coastal shall complete an inventory of oil spill

equipment to be stored on the drilling rig, service boats and

at the Apalachicola staging location; and

d) Coastal shall prepare a hydrogen sulfide

dispersion model with site specific runs.

29. On May 7, 1997, during the pendancy of this

proceeding on DEP's Intent to Issue, Chapter 97-49, Laws of

Florida, became law and provided authority to require

additional surety for certain drilling operations in coastal

waters. The new law provided that the Administration

Commission would determine the amount of such surety at

the recommendation of DEP. On August 11, 1997, DEP

applied the new law to Permit no. 1281 and recommended

the amount of the surety should be set at $4,249, 637,886.

On September 9, 1997, the Administration Commission

voted and gave Notice and Order of Intent to Set Surety in

the amount of $4,249 63 7,886 for Permit no. 1281.

30. In determining that Coastal was entitled to its

re — ee

permit, DEP staff considered the three criteria found at

Section 377.241, Florida Statutes. Those criteria are

addressed separately from the surety requirement in the

findings of fact, below.

Permit Criteria and Conditions

a) The nature, character and location of lands

involved. (Section 377.241(1), Florida

Statutes)

31. The proposed drill site is south of St. George

Island, Franklin County, within the outer limits of the

jurisdictional waters of the state in the Gulf of Mexico. At

this site the ocean floor is below approximately 40 feet of

water.

32. A photodocumentation survey provided by

Coastal reveals the condition of the immediate site as mostly

barren sand with very sparse animal and plant life, mostly

echinoderms such as sand dollars and sea stars, and algae.

Impact by a drilling rig set here on the ocean floor would be

minimal due to low diversity and low density of biota, the

majority of which is mobile and able to avoid direct impact.

33. The magnetometer and side scan sonar

programs required by DEP and provided by Coastal reveal

no geological hazards, deep-seated faults, archeologic

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