[Cite as State ex rel. AWMS Water Solutions, L.L.C. v. Zehringer, 2019-Ohio-923.]
IN THE COURT OF APPEALS
ELEVENTH APPELLATE DISTRICT
TRUMBULL COUNTY, OHIO
STATE OF OHIO ex rel. AWMS WATER : PER CURIAM OPINION SOLUTIONS, LLC, et al., : Relators, CASE NO. 2016-T-0085 : - vs - : JAMES ZEHRINGER, DIRECTOR OHIO DEPARTMENT OF NATURAL : RESOURCES, et al., : Respondents. :
Original Action for Writ of Mandamus.
Judgment: Petition denied.
Thomas J. Wilson, Comstock, Springer & Wilson Co., L.P.A., 100 Federal Plaza East, Suite 926, Youngstown, OH 44503; Matthew G. Vansuch, Brouse McDowell Co., LPA, 6550 Seville Drive, Suite B, Canfield, OH 44406; and Kyle A. Shelton, Brouse McDowell Co., LPA, 388 South Main Street, Suite 500, Akron, OH 44311 (For Relators).
Dave Yost, Ohio Attorney General, State Office Tower, 30 East Broad Street, 16th Floor, Columbus, OH 43215; W. Scott Myers and Brett A. Kravitz, Assistant Attorneys General, Environmental Enforcement Section, 2045 Morse Road, A-3, Columbus, OH 43229; and Curtis J. Amrosy, Manchester Newman & Bennett, LPA, 144 North Park Avenue, Suite 200, Warren, OH 44481 (For Respondents).
PER CURIAM.
{¶1} Respondents, James Zehringer, Director, Ohio Department of Natural
Resources, et al., have moved this court for summary judgment on the petition for writ of mandamus filed by Relators, AWMS Water Solutions, LLC, et al. Relators seek the
underlying writ to compel Respondents to commence appropriations proceedings based
upon their allegation that Respondents’ regulatory actions have eliminated the
economic viability of certain real property and, as a result, Respondents have
effectuated either a categorical-regulatory taking or a partial-regulatory taking, in
violation of the United States and Ohio Constitutions. Respondents maintain there are
no genuine issues of material fact to be litigated on Relators’ allegations and therefore
they are entitled to judgment as a matter of law. Relators have opposed the motion,
asserting there are issues of material fact to be litigated on both of their takings claims
and, as a result, their petition to compel appropriations on the subject real estate
survives Respondents’ motion.
Factual Background
{¶2} Relator, AWMS Water Solutions, LLC, is a company involved in disposing
waste from oil and gas production sites and drilling sites. Relator, AWMS Holdings,
LLC, is a holding company for a series of wholly-owned subsidiaries that own and
operate brine disposal wells and facilities. Relator, AWMS Rt. 169, LLC, is a company
that is a wholly-owned subsidiary of AWMS Holdings, LLC, and was formed to own and
operate two salt-injection wells in Weathersfield Township, Trumbull County, Ohio.
Respondents are James Zehringer, the Director of the Ohio Department of Natural
Resources (“Director”); the Ohio Department of Natural Resources (“ODNR”); Richard
Simmers, Chief of the Division of Oil and Gas Resources Management (“Chief”); and
the Division of Oil and Gas Resources Management (“Division”).
2 {¶3} Relators secured a lease on property in an industrial area in Weathersfield
Township, which it acquired for the purpose of constructing two salt-water injection
wells. On December 23, 2011, Relators applied to the Division for a permit to construct
the wells, designated AWMS #1 Well and AWMS #2 Well. Also in December 2011, two
seismic events of varying magnitudes were detected in Youngstown, Ohio near the
Northstar #1 injection well, operated by a third party not connected to this matter. The
first, on December 24, 2011, a 2.7 magnitude earthquake was recorded within one mile
of the well. The Division found that Northstar #1 Well likely induced the earthquake
after reviewing the seismic data. One day after the Northstar #1 Well voluntarily ceased
operations at the Division’s request, a 4.0 magnitude event was recorded within one
mile of the well. The Northstar #1 Well is located approximately seven miles from the
AWMS #2 Well. After the second seismic event, the Division temporarily halted the
issuance of permits through November 2012. During the pause in permit issuances, the
Division drafted emergency rules to protect the public health and safety.
{¶4} Ultimately, on July 18, 2013, the Division issued a drilling permit to AWMS
and, on March 24, 2014, an operational permit was issued. Full commercial operations
of the wells commenced in May and June of 2014. During the time the wells were
operating, AWMS #1 Well represented 5% of total injections between the two wells,
while AWMS #2 Well represented 95% of total injections.
{¶5} On July 28, 2014, a seismic event, measuring a magnitude 1.7, occurred
in Trumbull County in the vicinity of Relators’ wells. On August 31, 2014, another
seismic event occurred in the vicinity of the wells measuring 2.1. The earthquakes were
connected in time and space with injections at AWMS #2 Well and experts agreed that
3 the events were likely induced by Relators’ operations. On September 3, 2014, the
Division issued Chief’s Order No. 2014-372, amended by Chief’s Order No. 2014-374
(“Suspension Order”), ordering relators to: (1) immediately suspend all operations at
AWMS #2 Well, and (2) submit a written plan to the Division for evaluating certain
“seismic concerns associated with the operation of the AWMS #2 salt water injection
well.” The Division also suspended operations at AWMS #1 Well, but subsequently
terminated this suspension after Relators submitted additional information that AWMS
Well #1 did not contribute to the earthquake activity.
{¶6} Relators submitted a plan to restart its operations at AWMS #2; the
Division found, however, that the plan was deficient, that it was “generic and
inadequate,” and did not support terminating the Suspension Order. AWMS #2 Well has
not operated since imposition of the Suspension Order.
{¶7} Relators appealed the Suspension Order to the Ohio Oil & Gas
Commission (“Commission”). A hearing was held and, on August 12, 2015, the
Commission found the Chief’s issuance of the Suspension Order was not unlawful or
unreasonable and affirmed the Division’s issuance of the Suspension Order. On
September 8, 2015, Relators filed an appeal of the Commission’s affirmance of the
Suspension Order to the Franklin County Court of Common Pleas. After various
procedural rulings relating to whether Relators properly filed their notice of appeal, the
administrative appeal proceeded on June 30, 2016. And, on December 23, 2016, the
Court of Common Pleas found that the Suspension Order was lawful, but reversed the
judgment of the Court of Common Pleas, concluding the Order was unreasonable. The
Division appealed this decision to the Tenth District Court of Appeals.
4 {¶8} Meanwhile, on August 26, 2016, Relators filed the instant petition for writ
of mandamus alleging the continued enforcement of the Suspension Order had
substantially interfered with Relators’ property rights by depriving them of all or, at least
partial, economically-viable use of the property. In light of the appeal to the Tenth
Appellate District, this court stayed the underlying proceedings due to the possibility of
rendering an inconsistent ruling contrary to the jurisdictional priority rule.
{¶9} On July 31, 2018, the Tenth District reversed the judgment of the court of
common pleas, concluding, inter alia, the lower court based its decision on
impermissible evidentiary inferences made between experts who testified before the
division and because the trial court drew conclusions regarding the likelihood of seismic
risk without reliable evidentiary support. See Am. Water Mgt Servs., LLC v. Div. of Oil &
Gas Resources Mgt., 10th Dist. Franklin No. 17AP-145, 2018-Ohio-3028. The Tenth
District therefore determined the Suspension Order was reasonable and reinstated the
same. Relators filed a jurisdictional appeal with the Supreme Court of Ohio and, on
November 21, 2018, in Am. Water Mgt. Servs., LLC v. Div. of Oil & Gas Resources
Mgt., 2018-Ohio-3028, the Court declined jurisdiction. And, on December 26, 2018, the
Court denied Relators’ motion for reconsideration. See 2018-Ohio-3028. This court
subsequently lifted the stay and we now consider Respondents’ motion for summary
judgment and Relators’ memorandum in opposition.
Mandamus
{¶10} In order for a writ of mandamus to issue, Relators must establish a clear
legal right to compel Respondents to initiate appropriation action, Respondents’
corresponding duty to institute the action, and the lack of an adequate remedy for
5 relators in the ordinary course of law. See, e.g., State ex rel. Duncan v. Mentor City
Council, 105 Ohio St.3d 372, 2005-Ohio-2163, ¶10.
{¶11} “[M]andamus is the vehicle for compelling appropriation proceedings by
public authorities where an involuntary taking of private property is alleged.” State ex
rel. Levin v. Sheffield Lake, 70 Ohio St.3d 104, 108 (1994), citing State ex rel. McKay v.
Kauer, 156 Ohio St. 347 (1951), paragraph three of the syllabus. “In such actions, the
court, as the trier of fact and law, must determine whether any property rights of the
owner have been taken by the public authority.” Levin, supra, citing Akron-Seller v.
Akron, 49 Ohio App.2d 128, 130 (9th Dist.1974).
Summary Judgment Standard
{¶12} Pursuant to Civil Rule 56(C), summary judgment is proper when (1) the
evidence shows “that there is no genuine issue as to any material fact” to be litigated;
(2) “the moving party is entitled to judgment as a matter of law;” and (3) “it appears from
the evidence * * * that reasonable minds can come to but one conclusion and that
conclusion is adverse to the party against whom the motion for summary judgment is
made, that party being entitled to have the evidence * * * construed most strongly in the
party’s favor.” Id.
“Takings”
{¶13} Frequently referred to as the “Just Compensation Clause,” the final clause
of the Fifth Amendment to the United States Constitution provides: “nor shall private
property be taken for public use, without just compensation.” The prohibition against
takings applies equally to the states and the federal government. Chicago, B. & Q. Co.
v. Chicago, 166 U.S. 226, 239, 241 (1896). Two forms of regulatory acts are deemed
6 per se unconstitutional takings: (1) governmental actions that cause an owner to
experience a permanent physical invasion of the property. State ex rel. Shelly Materials
v. Clark Co. Bd. of Comm’rs, 115 Ohio St.3d 337, 2007-Ohio-5022 ¶18, citing Loretto v.
Teleprompter Manhattan CATV Corp., 458 U.S. 419, 435-440 (1982); and (2)
governmental regulations that completely deprive the owner of all economically
beneficial use of the property. Shelly, supra, citing Lucas v. South Carolina Coastal
Council, 505 U.S. 1003, 1019 (1992).
{¶14} Beyond these two narrow categories, temporary takings are governed by
the standards set forth in Penn Cent. Transp. Co. v. New York City, 438 U.S. 104
(2005). Shelly, supra. “Penn Cent. recognizes an ad hoc, factual inquiry that requires
the examination of the following three factors to determine whether a regulatory taking
occurred in cases in which there is no physical invasion and the regulation deprives the
property of less than 100 percent of its economically viable use: (1) the economic
impact of the regulation on the claimant, (2) the extent to which the regulation has
interfered with distinct investment-backed expectations, and (3) the character of the
governmental action.” Shelly, supra, at ¶19, citing Penn Cent., supra, at 124.
{¶15} We shall first address Respondents’ arguments that Relators have failed
to establish a clear legal right to relief or Respondents’ concomitant duty to perform the
requested actions as it relates to their categorical taking claim. Relators attached the
transcript of the hearing before the Commission to their original petition. At the hearing,
testimony established that, even though operations of AWMS #2 Well have been
suspended, AWMS #1 Well is operational. Moreover, at the time of the hearing, the
well-site property still processed, stored, recycled, treated, and disposed of brine. As a
7 result, AWMS president Steve Kilper testified at the hearing, the property “generates
revenue.”
{¶16} Although Relators ceased operations of the AWMS #1 Well in 2015, this
does not imply the property is without value. Mr. Kilper testified during deposition that
certain third parties had expressed an interest in using the property, but no agreement
was finalized. This suggests the property could be sub-let to other parties and thus
revenue could be passively earned, despite the voluntary shutdown of AWMS #1 Well
and the regulatory shutdown of AWMS #2 Well.
{¶17} Moreover, Andrew Adgate, Underground Injection Control Manager of
Division of Oil and Gas Resources Management, submitted a report on potential
alternative uses of Relators’ property. Mr. Adgate opined that the property and its
existing structures could be used to operate waste facilities to store, treat, process, or
dispose of brine or other substances associated with oil and gas operations.
Accordingly, even though Relators voluntarily ceased operations of AWMS #1 well, they
have not been completely deprived of all economically beneficial use of the property.
The foregoing demonstrates that, notwithstanding the order suspending operations of
AWMS #2 Well, there has not been a complete elimination of the property’s value.
Viewing the evidence in Relators’ favor, there is no genuine issue of material fact
relating to their categorical taking claim. As such, they are not entitled to require
Respondents to commence appropriation proceedings on this basis and Respondents
are therefore entitled to judgment as a matter of law on that issue.
8 {¶18} We shall next address Respondents’ position that the Suspension Order
did not result in a partial regulatory taking and thus Relators are not entitled to relief in
mandamus on that issue.
{¶19} Penn Cent. requires a court to consider three factors in evaluating whether
a partial regulatory taking has occurred; to wit (1) the economic impact of the regulation
on Relators, (2) the extent to which the regulation has interfered with Relators distinct
investment-backed expectations, and (3) the character of the governmental action.
See Id. We shall first consider the character of the government action.
Character of the Suspension Order
{¶20} Respondents note that the Division is vested with the statutory authority to
regulate oil and gas activities, including the disposal of brine, to promote public health,
safety, and welfare. Moreover, Respondents note neither they, nor Relators were
aware the injection well site was within 1,000 feet of an earthquake fault line when
Relators obtained their permit. They emphasize, however, that “changed circumstances
may make what was previously permissible no longer so. So also does the fact that
other landowners, similarly situated, are permitted to continue the use denied to the
claimant.” Lucas v. S.C. Coastal Carolina, 505 U.S. 1003, 1031 (1992). Respondents
additionally cite to the Tenth Appellate District’s decision which upheld the Suspension
Order as reasonable and engaged in a lengthy discussion of the character of the order.
In light of these points, Respondents maintain, the character of the order militates
heavily against Relators’ request for writ of mandamus.
{¶21} Relators contend that even though Respondents’ actions are purportedly
premised upon public health and safety, these concerns do not automatically negate
9 their taking claim. Relators maintain they have complied with all requirements and
conditions placed upon them and Respondents have failed to work with them in re-
initiating operations. Relators assert they have proposed conditions to restart
operations that are consistent with Respondents’ policies and practices; Relators claim,
however, Respondents have ignored their proposals. They contend the delay has been
unreasonable and the Suspension Order is tantamount to a complete termination of
operations. In their view, the character of the order is unreasonably onerous and, as a
result, they assert there are genuine issues of material fact on this point precluding
summary judgment.
{¶22} In evaluating the character of the Suspension Order, we emphasize that
the issue of the reasonableness of the Suspension Order has been fully litigated and
the Tenth District’s opinion has preclusive effect on that point. The doctrine of res
judicata covers two related concepts: claim preclusion and issue preclusion, traditionally
known as collateral estoppel. O’Nesti v. DeBartolo Realty Corp., 113 Ohio St.3d 59,
2007-Ohio-1102, ¶6. As relevant to our case, issue preclusion “serves to prevent
relitigation of any fact or point that was determined by a court of competent jurisdiction
in a previous action between the same parties or their privies.” Fort Frye Teachers
Assn., OEA/NEA v. State Emp. Relations Bd., 81 Ohio St.3d 392, 395 (1998).
Issue preclusion applies even if the causes of action differ. Id. The character of the
order has been deemed reasonable as a matter of law and that judgment was issued in
an action between the same parties. Collateral estoppel therefore bars Relators from
challenging the reasonableness of the underlying order.
10 {¶23} Notwithstanding the preclusive effect of the Tenth District’s opinion on the
issue, a few additional points underscoring the reasonable character of the order bear
emphasis. Relators’ expert, Michael Hasting, a geophysicist, as well as the Chief
agreed that the seismic events in 2014 were likely caused by the injection activities of
AWMS #2 Well. And, in his December 2017 report, which addressed the Division’s
actions in relation to Relators suspension, the Chief stated:
{¶24} When the Division reviews an application for an injection well, the location and known faults in the immediate area are considered. The Division was not aware of known faults in the immediate area and pre-injection seismic monitoring detected no nearby events. After two seismic events in close proximity to the AWMS #2 injection well, the Division now has evidence of a fault in the immediate area. The Division does not know the size or energy contained in the fault, but in other similar instances, the energy of the seismicity has increased substantially from one event to another. The urban setting of the AWMS #2 injection well increases the potential for damage resulting from continued seismicity. Nine schools and multiple neighborhoods are located within close proximity of the AWMS #2 injection well. (Emphasis added.)
{¶25} During his testimony at the hearing before the Commission, the Chief
specifically stated that schools, neighborhoods, various forms of infrastructure, as well
as the Niles Fire Department are within a two-mile radius of Respondents’ operation.
And, after discovering the active fault line in light of the seismic events, which were
strongly linked to Respondents’ injection activities, the Chief asserted the Division’s risk
assessment changed such that it was unclear that any injection activities could be safe.
This was so especially in light of the likelihood that any future induced seismic event
would be incrementally more severe than the previous events.
{¶26} Relators nevertheless contend that, regardless of the various
circumstances surrounding the Suspension Order, Respondents have acted in an
11 unreasonably dilatory fashion in addressing what conditions must be satisfied to
reinitiate operations of AWMS #2 Well. At the hearing before the Commission, the
Chief detailed the highly-involved process in creating a state-wide policy. He stated:
{¶27} We’re in the process of trying to develop those criteria. We’re not there yet. Back in September of 2013, I approached the executive director of the Interstate Oil and Gas Compact Commission, which is a commission of state governors for oil and gas-producing states. Ohio is a member state. I represent our governor in that organization.
{¶28} And I also approached the executive director of Ground Water Protection Council. That’s a national organization where states that run injection programs are for the most part members of that organization, and it’s probably the leading organization for groundwater protection and injection activities in general.
{¶29} So I approached those directors and asked them if they would help me get a group going through what they have as states’ first initiatives. They pull states together to help states decide how states should address and handle problems like induced seismicity. So in September I approached them. In March of 2014, we held our first face-to-face meeting. Mr. Warstal and I flew to Oklahoma. We met with our counterparts from Oklahoma, Kansas, Texas, and Arkansas, and we began the group.
{¶30} * * *
{¶31} The risk assessment. Part of the group is creating, how do we communicate the seismic data? How do we make it available to people so they can review it as well? How do we communicate the seismic event? Essentially what we’re creating is a toolbox of scientific methodology to evaluate the technical and risk-based issues associated with this. We’re creating a process where all these experts from all around the country are saying, like on the seismic equipment, here are the types of seismic equipment, here’s its limitations, here’s its advantages, here are costs, here’s where I would use it, here’s where I wouldn’t use it, so that people like me can make better decisions when we evaluate these problems.
{¶32} We have a goal, and I’m extremely confident we will meet this goal. In May, the Interstate Oil and Gas Compact Commission has its business meeting. We’re going to present a draft document to them that has all this information in it, all this advice to regulatory
12 programs. In September, the Ground Water Protection Council and Interstate Oil and Gas Compact Commission are having a combined meeting. We hope to present a final document to those two organizations to be used as a reference by all regulatory programs, including us.
{¶33} From that, and in parallel with that development, we in Ohio will develop the Ohio-specific version of that document. That will then turn into an Ohio Specific guideline. It will be a guideline for industry. It will be a guideline for our staff. It will make things known and more predictable. And then we will wrap a policy around that that says this is how we’re going to implement it and this is what it means.
{¶34} The foregoing demonstrates that the procedure for developing a state-
wide policy for seismic regulation is a complicated and time-consuming process. It
involves meeting with various regulatory bodies and information sharing with officials
from other states. After working with various state regulators, industry experts, and
consultants, the Chief, in his December 2017 report, stated the Division’s knowledge
relating to induced seismicity increased significantly. As a result of this increased
knowledge, the Division determined that a policy on induced seismicity for injection
wells could not be applied on a statewide basis. In lieu of the policy, the Division
elected to treat each injection-well site on a case-by-case basis. Given this decision,
the Chief maintained that operations of AWMS #2 Well should not be resumed until the
Division received and approved of a detailed plan, drafted by AWMS, that would include
risk assessment criteria. The Chief recognized that AWMS had previously submitted a
plan to resume operations, but, after reviewing the plan, the Division found it to be
overly generic and inadequate. As of the December 2017 report, our record does not
indicate AWMS had submitted an alternative plan that meets the criteria set forth in the
Chief’s report.
13 {¶35} In light of the process detailed by the Chief relating to interstate
cooperation and information sharing on induced seismicity and the ultimate decision to
evaluate each well on an individual basis, as well as Relators’ failure to submit a more
comprehensive plan, we fail to see how the Division has acted in an unreasonably or
unnecessarily dilatory fashion.
{¶36} Next, Relators assert that they are being treated unfairly because similarly
situated operations in Washington County have been allowed to continue despite
consistent seismic events and those wells’ proximity to the city of Marietta, a relatively
populated area.
{¶37} At the hearing before the Commission, the Chief testified that, in its
investigations of the Washington County seismic activity, the Division concluded the
operations were not inducing seismicity. Alternatively, upon evaluating the activity
occurring near Relators’ operations, the Division, along with the Geologic Survey and a
separate consultant, concluded there was strong evidence that Relators’ Well #2
induced the seismic events. The Chief noted that the proximity of well construction to
the Precambrian basement rock in the earth’s crust is an important factor in evaluating
whether injection induces seismicity. He stated that the Washington County site had
just under a one-mile separation from the Precambrian rock, whereas AWMS #2 Well
was significantly closer, less than 500 feet from the Precambrian rock. And, in his
December 2017 report, the Chief stated that the Division’s actions are consistent with
responses to other incidents of seismicity. To wit, he observed:
{¶38} Comparing AWMS’s events to others like Washington County and Northstar [Well #1, Youngstown] events, reveals that the Division’s approach is consistent given the circumstances of each case. In both the AWMS and Northstar incidents, the injection wells
14 penetrate the deepest formation above the Precambrian basement rock, inject through an open-hole well construction, and detected events occurred in an escalating nature at depths within the Precambrian basement rock. This can be contrasted with the incident in Washington County, where the injection well is completed as perforations through casing in a formation separated from the basement by more than 5050 feet.
{¶39} According to the Chief, the relative depths of the wells in question and
their proximity to the Precambrian basement are pivotal factors for the Division’s risk
assessment and the measures it takes to regulate the operations. Pursuant to statute,
“[t]he division has sole and exclusive authority to regulate the permitting, location, and
spacing of oil and gas wells and production operations within the state.” R.C. 1509.02.
Given the above points, we conclude there are sufficient differences between Relators’
operations and the Washington County operations to reasonably justify the Division’s
different treatment of the relative injection sites.
{¶40} In light of (1) the Tenth Appellate District’s legal conclusion that the
Suspension Order is reasonable as a matter of law; (2) the temporal and spatial
relationship of the seismic events and Relators’ activities; (3) the proximity of the
operations to an actual fault line and the Precambrian basement rock; (4) the views of
the experts, including the Chief, regarding the causal relationship between Relators’
operations and the seismic events (induced seismicity); (5) the empirical likelihood that
induced seismic activity could amplify if operations are continued; (6) the proximity of
the injection sites to populated urban areas; and (7) the Chief’s proclamation that the
Division would work with AWMS if it provided a sufficiently detailed, scientific plan to re-
initiate operations, we conclude the character of the Suspension Order is neither unfair
nor arbitrary. Thus, considering the totality of the circumstances, there is no genuine
15 issue of material fact that the character of the order at issue protects the public’s health
and safety from the realistic potential of increased induced seismicity resulting from
injection activities on AWMS #2 Well.
Distinct Investment-Backed Expectations
{¶41} Relators, in their memorandum in opposition, acknowledge the distinct-
investment-backed-expectations analysis encompasses two prongs. The first looks at
Relators’ actual expectation, i.e., an expectation “would not really be ‘investment-
backed’ unless they actually believed in a certain outcome and entered the program in
reliance on it.” Cienega Gardens v. United States, 331 F.3d 1319, 1346 (Fed.Cir.
2003). The second is whether those expectations are objectively reasonable. CCA
Associates v. United States, 667 F.3d 1239, 1247 (Fed. Cir. 2011).
{¶42} In this matter, Relators have established they actually had a subjective
expectation their operations would make a profit. And, after obtaining the necessary
permits and adhering to all conditions imposed by the Division, they reasonably
expected to earn an economic return on their investments. The issue therefore turns on
whether their subjective expectations, in light of the surrounding circumstances that
existed at the time they sought investors as well as the circumstances that developed
once operations commenced, were objectively reasonable.
{¶43} In 2011, a near-4.0 event occurred at the Northstar Well #1, near
Youngstown. This well was approximately seven miles from Relators’ injection site.
Although this event was not in the immediate vicinity of Relators’ property, it placed
Relators on notice that some significant seismic activity had occurred within the region.
16 {¶44} In a Confidential Offering Memorandum submitted by AWMS Holdings,
LLC to prospective investors in September 2013, Relators identified “risk factors”
emphasizing that the securities at issue “involve a high degree of risk” and prospective
investors should be aware of these risks. The Memorandum highlights the “continuing
risk” of “seismic events similar to the one that occurred in the Youngstown, Ohio area.”
Relators were consequently not only aware that, even though their site was not adjacent
to the Youngstown-event site, there were dangers posed by the operations and,
significantly, that such dangers were sufficiently foreseeable that they must be
disclosed.
{¶45} The Memorandum also noted that, due to the inherent risks of operating a
well site, there is a possibility that well operations could be suspended and/or
terminated by the OEPA and/or the ODNR. Relators were thus aware that their
business investment was subject to heightened oversight and regulation. And, by
investing in the business, investors were assuming an acknowledged and significant
risk.
{¶46} Furthermore, the Memorandum also outlined certain geologic risks. It
stated that AWMS had performed no “subsurface testing.” As a result, the
Memorandum disclosed that the adequacy of the geology and the suitability of the wells
“will only be known upon drilling, completion, and operation of the wells.” This indicates
that AWMS had no ability to predict that the well site(s) would be viable; in effect,
investors would have to have “faith,” in light of the significant risks, that after
construction and commencement of operations, the wells would perform without a
potentially environmentally catastrophic incident.
17 {¶47} Ultimately, after the two events had occurred in 2014 on Relators’ site,
Respondents determined there was a fault line in the immediate area. As the
Memorandum recognized, Relators did not conduct any subsurface testing and
additionally acknowledged that the suitability of the wells would be known after
operations commenced. Upon commencement of AWMS #2 Well, the events occurred,
Respondents (along with Relators’ expert) acknowledged that the events were likely
induced by the operations, and suspended operations. Each of these eventualities
were foreseen in the Memorandum and duly noted as “risk factors.”
{¶48} Relators must demonstrate they had a reasonable investment-backed
expectation that they would not be subject to the restraints imposed upon them when
they commenced their enterprise by leasing the property. Given the acknowledgements
in the Memorandum, in conjunction with the Chief’s explanation for entering the
Suspension Order, we conclude they could not have possessed such expectations.
Relators knew they were embarking on a business venture that is highly regulated,
pursuant to Ohio statute, and designed to protect the health and safety of the public.
Their disclosures in the Memorandum demonstrate they did not expect they would be
free from regulatory oversight with regard to seismic events. And, because they had
conducted no subsurface testing, they recognized the suitability of the wells and, by
implication, the investment, depended upon how the geology of the area responded to
their actual drilling. Of course, Relators hoped that, after obtaining the permits, their
operations would persist free of further regulation. This hope, however, was a
speculative possibility, not an objectively reasonable expectation. See Guggenheim v.
Goleta, 638 F.3d 1111, 1120 (9th Cir.2010) (“Speculative possibilities of windfalls do not
18 amount to ‘distinct investment-backed expectations.’”); see also Rith Energy, Inc. v.
United States, 247 F.3d 1355, 1365 (Fed. Cir.2001) (Coal lessee could not show
reasonable investment-backed expectation that it would not be subject to type of
regulation imposed when it acquired leases.); M & J Coal Co. v. United States, 47 F.3d
1148, 1154 (Fed.Cir.1995), (Mining company “knew or should have known that it could
not mine in such a way as to endanger public health or safety and that any state
authorization it may have received was subordinate to the national standards that were
established by SMCRA[, the Surface Mining Control and Reclamation Act] and enforced
by OSM[, the United States Department of Interior].” See generally Good v. United
States, 189 F.3d 1355, 1362 (Fed.Cir.1999) (holding that the property owner had no
reasonable investment-backed expectations because he “had both constructive and
actual knowledge that either state or federal regulations could ultimately prevent him
from building on the property”); Creppel v. United States, 41 F.3d 627, 632
(Fed.Cir.1994) (stating that one who buys with knowledge of regulatory restrictions on
the use of property “assumes the risk of economic loss.”)
{¶49} Although the materialization of the business risks (of which Relators were
aware upon seeking investors) may have interfered with their subjective expectations
for profit, the manifestation of the risks cannot provide a basis for the inference that
Relators’ reasonable investment-backed expectations were thwarted by regulations
designed to ameliorate the dangers caused by such risks. We therefore conclude
Relators have failed to demonstrate a genuine issue of material fact that they
possessed reasonable investment-backed expectations that they would not be subject
19 to restraints, in the form of regulations, that could foreseeably cause their operations to
be suspended, perhaps indefinitely, due to induced seismic activity.
{¶50} In light of the foregoing analysis, even assuming the economic impact of
the regulation has been severe, Relators have failed to demonstrate (1) the character of
the regulation, in light of the circumstances, was unreasonable or unfair; and (2) that the
regulation interfered with Relators’ objectively reasonable investment-backed
expectations. We therefore conclude that no genuine issue of material fact remains to
be litigated in mandamus. Relators are not entitled to require Respondents to initiate
appropriations proceedings as a matter of law.
{¶51} It is hereby ordered and adjudicated that Respondents are entitled to
summary judgment on Relators’ petition for writ of mandamus.
THOMAS R. WRIGHT, P.J., CYNTHIA WESTCOTT RICE, J., TIMOTHY P. CANNON, J., concur.