Business / Economy

Oil company sues San Benito County

Formal filing follows $1.2 billion claim against county filed after passage of Measure J

The County of San Benito must legally defend Measure J against Citadel Exploration Inc., an oil extractor suing the local government in the wake of alleged violations of the United States Constitution.

Citadel, a Newport Beach company, filed suit Feb. 27 in San Benito County Superior Court, across the street from the administrative building where the Board of Supervisors regularly holds public meetings. In a statement to BenitoLink Friday, the courthouse confirmed the civil lawsuit.

The case marks the first against the county stemming from its ban of high-intensity petroleum operations put into effect when voters approved Measure J in November 2014. Litigation follows a $1.2 billion claim Nov. 6, 2014, by Citadel — a relatively small company among several others threatening legal action — alleging damages as result of regulation approved two days earlier by the majority of voters.

Supervisor Margie Barrios told BenitoLink Mar. 4 that amid litigation, the county had decided not to engage in public commentary on the matter.

Catherine Engberg, an attorney with Shute, Mihaly & Weinberger LLP and a supporter of Measure J, said in a statement Mar. 2 to BenitoLink that she was confident that "the courts will uphold the County voters’ right to enact Measure J."

"Local jurisdictions have long since banned oil and gas uses in certain zones, and the courts have upheld this right," said Engberg. "There’s nothing in state oil and gas law to suggest that local land use authority is preempted. Just the opposite, the state law carves out so many holes for local land use authority, it’s like Swiss cheese."

Andy Hsia-Coron — a resident of San Benito County and co-founder of San Benito Rising, a fundamental supporter of Measure J — provided additional perspective in a statement Mar. 2 to BenitoLink.

"The people of our county have spoken clearly about what they want and what they don't want," said Hsia-Coron. "They have in a hard fought campaign made a decision about what kind of future they want here in San Benito County. They voted by almost 59 percent to pass Measure J and ban fracking and other environmentally threatening drilling methods in an election with a remarkably high turnout of 58 percent of the electorate. It is unfortunate that Citadel Exploration does not respect the will of the people and the people's authority over land use and zoning decisions. But, we are confident that the courts will uphold that authority and defend the rights of the people."

Citadel CEO Armen Nahabedian said in a statement to BenitoLink Mar. 2 that Citadel will avoid participation in public discussion concerning some of the specifics of the lawsuit.

"We are not going to comment about the meaning of what has been said nor can we get into the details of our complaint now that court has become the arena," said Nahabedian. "What should be mentioned that is really important is very simple. A local judge can with a single blow make all the problems for the county go away with the right decision on our case. The county would be foolish to appeal, but foolish has been their specialty to date."

In the lawsuit, Citadel alleges that the county "intends on regulating down-hole operations via Ordinance no. 930, which implements Measure J, and such regulations would compel the Plaintiff to submit to an illegal local statutory scheme" to continue development of oil production in San Benito County.

Some critics of Measure J have expressed concern that the initiative and its ordinance for implementation expose the county to legal risk. "In the event a property owner contends that application of this initiative effects an unconstitutional taking of property," according to the balloted measure, county supervisors could grant an exemption, whose process calls for their legal judgment over an alleged violation of a constitutional right.

While the Board of Supervisors potentially could excuse an individual or a company from the voter-approved ban of high-intensity petroleum operations, the Supremacy Clause of the U.S. Constitution ensures that federal rules, such as the Bill of Rights, remain the supreme law of the land.

Public records detail constitutional concern

In documents obtained Feb. 19-20 by BenitoLink under the California Public Records Act, lawyers, county officials and oil producers addressed potential risks of Measure J both before and after its passage.

Latham & Watkins LLP, a California law firm that consistently ranks among the world's largest, expressed doubt over the initiative's exemption process, according to a memorandum in December 2014 in response to the county's request for such insight.

"A court likely would find that this provision is an unconstitutional delegation of judicial authority," claimed Richard Bress and Wayne Flick, attorneys with Latham & Watkins. "Courts would decide for themselves whether Measure J has caused a taking."

In response to the memorandum by Latham & Watkins, Shute, Mihaly & Weinberger told the county that "contrary to Latham's assertions," Measure J will not constitute a regulatory taking.

"Contrary to Latham's 'unconstitutional delegation' argument, courts have expressly upheld local agencies' constitutional power to provide administrative relief in these contexts," said Engberg and Peter Broderick with Shute, Mihaly & Weinberger. "Measure J undoubtedly authorizes the Board of Supervisors to hold hearings, determine facts, and apply law to facts in considering the exemption requests."

A per se taking under the Fifth Amendment — according to the opinions of the Supreme Court in Lucas v. South Carolina Coastal Council, Penn Central Transp. Co. v. New York City and Lingle v. Chevron — is defined as a regulation that deprives an owner of all "economically beneficial use" of his or her property. The nation's highest court held since 1978 that "the economic impact of the regulation on the claimant," along with the particular "extent to which the regulation has interfered with distinct investment-backed expectations," also could constitute unconstitutional regulation.

Constitutional protection against such regulation extends to the states through the Fourteenth Amendment. Citadel in its lawsuit seeks judicial intervention over whether state law in whole or in part preempts Measure J and its ordinance for implementation.

According to the documents obtained by BenitoLink, San Benito County Assistant County Counsel Barbara Thompson confirmed in an email message Dec. 2, 2014, that at some point, a court may decide whether Measure J constitutes a regulatory taking. Before that, according to Thompson, an applicant must exhaust administrative remedies.

"The County has provided a procedure for applicants to request exemptions to Measure J in order to avoid unconstitutional takings," said Thompson. "Under both Measure J and the Implementing Ordinance, the County has the authority to determine whether to grant an exemption to Measure J."

In an emailed response Feb. 2 to California Resources Corp., which also had expressed concern in writing to the county over Measure J, Thompson told Russell Ledbetter, a minerals and an exploration manager with the spin-off of Occidental Petroleum Corp., that "if the California Resources Corporation wishes to obtain a determination about whether a project is exempt from the provisions of Measure J, CRC will need to submit an application for an exemption to the County's Planning Department along with the necessary supporting documentation."

Thompson provided similar detail in a letter Nov. 21, 2014, to an attorney who represented Citadel.

"In its determination, the County will limit its evaluation to focus on the specific question of whether the County is required to grant Citadel an exemption from the provisions of Measure J to avoid an unconstitutional taking, and will not conduct a broader inquiry concerning the approval of or merits of Citadel's development project."

In a legal settlement in February between the Center for Biological Diversity and San Benito County, the Board of Supervisors approved a total payment of $262,500, a legal charge stemming from a decision by California Superior Court Judge Thomas W. Wills. The judge decided last year that the county had not sufficiently done an environmental review of Citadel's Project Indian in the Bitterwater area. Before a court-ordered shutdown of the pilot program, which previously received the approval of county supervisors, a test well there reportedly produced the first oil on the site in more than 100 years.

The lease, according to Citadel, dates back to John D. Rockefeller.

Details from the lawsuit were added to this story at 12:15 p.m. and 12:39 p.m. Mar. 2. Quotes by Catherine Engberg and Andy Hsia-Coron were added above at 7:35 p.m. and 11:30 p.m. Statement from Nahabedian was added at 10:53 p.m. Comment from Supervisor Barrios was added at 4:23 p.m. Mar. 4.

Jason McCormick

Jason McCormick is a journalist taking a break from news and now running mcormc corporation, a data driven digital marketing agency in Redding, Calif.