Natural Resources Com'n v. Amax Coal Co.

Citations: 638 N.E.2d 418; 39 ERC (BNA) 1358; 1994 Ind. LEXIS 95; 1994 WL 400734Docket: 49S04-9408-CV-684, 49S04-9408-CV-684

Court: Indiana Supreme Court; August 3, 1994; Indiana; State Supreme Court

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AMAX Coal Company and AMAX Industries, Inc. filed a petition for judicial review of actions taken by the Natural Resources Commission (NRC) of the Indiana Department of Natural Resources (DNR). The Marion Superior Court ruled in favor of AMAX, remanding the case to the NRC for compliant proceedings. Concurrently, B. LS Contracting, Inc. and Shand Mining, Inc. filed a complaint against the DNR and its Director, seeking relief from agency actions, also winning an injunctive relief from the same court. Jack L. Jarrett appealed the decision favoring AMAX, while the NRC and DNR appealed both trial court rulings. The Court of Appeals consolidated and affirmed both cases. The NRC/DNR and Jarrett sought transfer to the Indiana Supreme Court, which was granted, vacating the appellate court's opinion.

The federal Surface Mining Control and Reclamation Act of 1977 (F-SMCRA) acknowledges the importance of coal mining for energy while recognizing its environmental and public health impacts. Indiana's Surface Mining Control and Reclamation Act (I-SMCRA) parallels F-SMCRA, aiming to protect the environment and the rights of landowners by mitigating adverse effects from surface mining. Indiana's coal seams vary in depth and are separated by layers of sedimentary rock, with historical underground mining beginning in the early 1900s, resulting in extensive networks of abandoned mine tunnels in Sullivan County.

Abandoned mines in the area, including the Minnehaha Mine operated by AMAX, are filled with groundwater under hydrostatic pressure, causing water to flow into the Minnehaha Mine through mining-induced cracks. In Fall 1988, AMAX applied to the NRC to amend its surface coal mining permit (Cass-2) for expansion, facing opposition from adjacent property owner Jack L. Jarrett. On May 17, 1989, the NRC partially approved the permit with thirteen conditions, including Condition 12, which prohibited the activation of requested dewatering wells until further surveys were conducted to assess the impact on groundwater levels and potential subsidence on Jarrett's land.

Both AMAX and Jarrett sought administrative review of the NRC's decision. An administrative law judge (ALJ) was appointed, and on July 27, 1990, the ALJ issued a report. The NRC confirmed its authority under I-SMCRA to regulate groundwater usage by surface coal mining permittees to prevent damage to neighboring properties. The NRC's final order on October 26, 1990, upheld the imposition of Condition 12, which requires detailed assessments of the hydrological consequences before activating dewatering wells, along with the installation of a groundwater monitoring well in Coal VI. This order affirmed the DNR's regulatory authority over groundwater use associated with surface coal mining operations.

AMAX and Jarrett filed petitions for judicial review of the NRC action regarding water rights, with AMAX submitting on September 19, 1990, and Jarrett on September 25, 1990. AMAX moved for partial summary judgment on water rights on November 7, 1990, and Jarrett followed on January 29, 1991. The trial court issued its Findings of Fact, Conclusions of Law, and Judgment on June 17, 1991, granting AMAX's motion and denying Jarrett's, concluding that the imposition of Condition 12 to the Cass Permit Amendment was unlawful and beyond the NRC's authority. The issue was remanded to the NRC for further action.

B. LS was granted a permit for surface coal mining at the Hornet Mine in Indiana on July 15, 1988, despite concerns from adjacent landowners about the impact on their lakes due to water pumping. The DNR stated it had no authority to regulate groundwater use, leading the landowners to withdraw their challenge to the NRC permit. However, the NRC later determined the DNR did possess regulatory authority regarding groundwater use. On May 17, 1991, the DNR issued a Director's Order requiring B. LS to demonstrate that its operations would not harm adjacent water bodies, specifying conditions for compliance with I-SMCRA.

In response, B. LS filed multiple legal actions in June 1991, including a Verified Complaint and requests for declaratory judgment and injunctive relief in the Marion Superior Court, along with a petition for administrative review with the NRC. The NRC/DNR moved to dismiss B. LS's actions for not exhausting administrative remedies, noting that the administrative review was still ongoing.

On June 12, 1991, B. LS responded to a motion to dismiss, asserting entitlement to judicial review of a non-final agency action due to potential immediate and irreparable harm. The Marion Superior Court issued a Temporary Writ of Prohibition, Stay, and Restraining Order on June 14, 1991, prohibiting the NRC/DNR from enforcing a May 17, 1991 order. On June 21, the parties agreed on certain facts, consolidating B. LS's applications for injunctions, and the court maintained the temporary order. On August 21, 1991, the trial court issued a judgment granting B. LS's petitions and declaring that the DNR and its Director lacked authority for the May 17 order, thereby permanently prohibiting its enforcement.

Both the NRC/DNR and Jarrett appealed the trial court's decision in the AMAX case, while the NRC/DNR also appealed the outcome of the B. LS case. The trial court's review of administrative orders was guided by I.C. 4-21.5-5-1 et seq., which restricts judicial review to assessing whether agency actions are arbitrary, unconstitutional, beyond jurisdiction, procedurally flawed, or lacking substantial evidence. The burden of proof lies with the party contesting the agency action. The trial court does not conduct a de novo trial but evaluates the existing record for substantial evidence, without weighing conflicting evidence or substituting its judgment for that of the administrative body unless a legal error is present. Courts will not overturn administrative determinations unless they are contrary to law and unsupported by evidence.

Deference is not accorded to an agency's legal conclusions, as both the agency and judiciary hold the authority to interpret the law. Courts can set aside agency actions that are not in accordance with the law, per Miller, 519 N.E.2d at 733. Judicial review of agency actions allows for trial court decisions to be appealed, governed by civil appeal rules. The current case involves the DNR's authority under I-SMCRA to impose restrictions on mining companies regarding groundwater extraction. In the AMAX case, the trial court ruled that the NRC lacked the authority to impose a condition on AMAX concerning the dewatering of strip mines, necessitating corrective action. Similarly, in the B. LS case, the court enjoined the DNR from limiting B. LS's water pumping, citing a lack of statutory authority and the potential for unconstitutional taking of water rights. While a state may impose land use restrictions for public welfare under its police powers, the primary issue is whether I-SMCRA grants the DNR regulatory authority over groundwater use. The statute provides express provisions for the DNR's implementation, mandating assessments of hydrologic consequences related to mining and reclamation activities, including the protection of surface and groundwater quality. Permit applications must detail probable hydrologic impacts and include reclamation plans that ensure water quality protection during mining operations.

The rights of current water users must be considered in relation to the quantity of surface and groundwater systems affected by mining and reclamation processes, including the provision of alternative water sources when necessary. The permit application for surface coal mining must include a plan to protect groundwater systems, with the burden on the applicant to demonstrate compliance with all statutory requirements. The Department of Natural Resources (DNR) reviews the potential cumulative impacts of mining on the hydrologic balance and will only approve permits if the applicant can affirmatively show that their operations will not materially damage the hydrologic balance outside the permit area. 

Reclamation plans are mandated to minimize environmental damage and assess mining impacts on hydrologic balance both inside and outside the permit area. Performance standards require permit holders to limit disturbances to the hydrologic balance and restore the recharge capacity of mined areas. Additionally, operators must replace water supplies for affected users and comply with conditions set by the DNR. Regulations specify minimum standards for hydrologic protection, and violations of these standards constitute a breach of the Indiana Surface Mining Control and Reclamation Act (I-SMCRA). Close monitoring and reporting of mining operations affecting aquifers and hydrologic balance are also required.

The DNR has specific regulations for monitoring ground water in relation to surface coal mining operations, particularly under 310 IAC 12-5-27. When a coal mining operation threatens the ground water system or poses risks to the environment, property owners, or public interest, the DNR can halt operations. The law mandates that if any condition presents an imminent danger to public health or significant environmental harm, the director must order cessation of the relevant mining activities and take necessary steps to resolve the issue. If cessation does not fully mitigate the danger, the director can impose additional requirements on the operator.

Furthermore, under 310 IAC 12-5-29, operators are required to restore water supplies for affected property owners. These regulations reflect legislative intent for the DNR to oversee surface coal mining impacts on ground water. The DNR has established regulations to enforce these statutes, reserving powers for itself to regulate coal mining and ground water usage. 

In the AMAX case, the coal company submitted a plan to maintain hydrologic balance, but the NRC deemed it inadequate, conditioning permit approval on further studies. The DNR is authorized to deny permits if the applicant fails to demonstrate that operations will not materially damage the hydrologic balance outside the permit area. This authority was upheld when the NRC required additional studies for the AMAX permit. In the B. LS case, although the DNR initially approved a permit for dewatering, it later recognized its statutory authority to regulate the use of ground water, affirming its role in overseeing such activities.

The DNR retroactively determined that B. LS's application was non-compliant with I-SMCRA, requiring B. LS to demonstrate either that its operations would not harm off-site water bodies or that it had acquired rights to lower those lakes. The DNR can mandate permit revisions based on written findings, adhering to notice and hearing requirements as outlined in I.C. 13-4.1-5-6. The Director's May 17, 1991, order directed B. LS to seek permit revision approval contingent upon meeting specified conditions. Failure to comply may result in permit suspension or revocation under I.C. 13-4.1-5-8.

In relation to common law water rights, the trial court upheld that I-SMCRA maintains the common law water rights established prior to its enactment, as illustrated in Wiggins v. Brazil Coal and Clay Corp., where a coal mining company’s water pumping activities led to a lowered lake level, resulting in litigation from adjacent landowners. The court affirmed the coal company's right to pump water, stating that percolating groundwater is part of the land and can be utilized, provided it does not harm neighboring properties. Appellees argue that Wiggins is relevant to their case, citing an I-SMCRA provision that preserves individuals' rights to protect their water interests affected by mining operations (I.C. 13-4.1-8-1(25)). The trial court interpreted this provision as prohibiting the DNR from enacting regulations that conflict with common law water rights. The trial court referenced federal cases that supported preserving common law water rights, noting that the Secretary of the Interior had interpreted relevant federal regulations as deferring to state law.

The Secretary interprets 30 U.S.C. 1307(a) to require deference to state water law concerning water use, indicating that 30 U.S.C. 1307(b) and the relevant regulations do not mandate the replacement of water supplies consumed or used by coal mine operators under senior water rights defined by state law. This interpretation was upheld by a federal district court. In National Wildlife Federation v. Hodel, the Federation argued that the Secretary's reinterpretation was contrary to federal intent, claiming Congress wanted to eliminate property rights to groundwater for coal operators and to provide additional remedies for those adversely affected by mining operations. However, the D.C. Circuit Court rejected this argument, affirming that the federal statute does not strip operators of their existing water rights and that Congress aimed to preserve property rights and respect state determinations.

Appellees assert that the Department of Natural Resources (DNR) cannot interfere with groundwater usage rights as defined by state common law, aligning with federal court interpretations that require deference to state law. The trial court supported this view, stating that I-SMCRA does not affect water rights. Appellees mistakenly believe that a specific I-SMCRA provision dictates applicable law in water rights cases; however, this provision merely preserves individuals' rights to enforce interests in water without defining those limits. Federal cases indicate that state law determines applicable rights. The conclusion that both I-SMCRA and F-SMCRA preserve all water rights under state common law is incorrect; the provisions protect the right to enforce existing interests in water resources. The court's analysis will focus on identifying the applicable law, noting that when Wiggins was decided, I-SMCRA regulations did not apply, as Indiana gained regulatory control over strip coal mining only in 1982. Wiggins acknowledged that state policy was evolving towards limiting absolute property rights in water for landowners.

The Wiggins decision is based on Indiana's traditional ground water law and does not negate the authority of the Department of Natural Resources (DNR) to regulate ground water use, as asserted by appellees AMAX and B. LS. The court rejects the argument that a 1986 amendment to I.C. 13-4.1-8-1(25) nullifies the DNR's regulatory power, emphasizing that legislative intent should prevail over literal interpretations of statutory language. The decision acknowledges that while property rights to ground water remain intact, the state can impose regulations on their use. This aligns with the Supreme Court's ruling in Village of Euclid, which articulates that regulations must adapt to changing conditions while remaining within constitutional bounds. The court also addresses B. LS's claim of an unconstitutional taking of property rights due to DNR regulations. It cites the Fifth Amendment's Public Use Clause, interpreted to prevent one citizen's property from being taken for another's benefit unless justified by a public purpose, as established in Hawaii Housing Authority v. Midkiff. The court asserts that the state's regulatory efforts fall within its police powers, thereby maintaining the legitimacy of such regulations.

The U.S. Supreme Court will not override legislative determinations regarding public use unless such determinations lack a reasonable foundation. If the legislature's reasons for property taking are deemed reasonable, courts will normally defer to that judgment. Groundwater, which is highly mobile and susceptible to pollution, poses significant risks to private property, communities, and the environment. In response, the legislature enacted I-SMCRA to regulate potentially harmful activities. The Department of Natural Resources (DNR) acted within its authority under this Act to enforce regulations aimed at protecting public health, safety, and welfare, thereby constituting a public use under the Fifth Amendment's Takings Clause.

Additionally, regulatory takings occur not only through physical property seizures but also through regulations that infringe upon vested property rights. The criteria for determining if a regulation constitutes a taking include whether it substantially advances a legitimate state interest and does not deprive the property owner of economically viable use. The DNR's actions, which included a change in regulatory interpretation, did not deny economically viable use, although the property owner argued that it retroactively undermined their investment-backed expectations.

The legitimate interest of the state is assessed based on whether the government had the right to exercise its police power in the manner it did, regardless of the burden placed on the property. If a regulation fails to substantially relate to its intended goals, it may be deemed unreasonable. In this case, the DNR's actions aligned with the objectives of I-SMCRA, specifically aimed at preventing offsite damage from dewatering activities, thereby fulfilling its regulatory purpose.

The actions taken by the Department of Natural Resources (DNR) under the Indiana Surface Mining Control and Reclamation Act (I-SMCRA) were deemed legitimate in protecting adjacent landowners from the adverse impacts of surface coal mining, specifically concerning hydrologic balance changes. In the B. LS case, the DNR presented two options to B. LS: either demonstrate that dewatering would not cause damage or pay for a right of entry. The court acknowledged the first option as justifiable, similar to conditions in the AMAX case, but noted that the second option raised concerns regarding potential environmental harm, as it could permit coal companies to cause damage unchecked. Nonetheless, the court concluded that voluntary compliance with the second option would still serve state interests by safeguarding adjacent landowners' water rights. The ruling asserted that there was no unlawful regulatory taking and upheld the DNR's authority to regulate groundwater withdrawal. The judgments in both the AMAX and B. LS cases were reversed in favor of the DNR and other defendants. Concurrences were noted from Justices SHEPARD and SULLIVAN, while Justices GIVAN and DICKSON dissented. The DNR argued that legislative amendments indicated a deferral of water rights decisions to pre-I-SMCRA law, specifically referencing the case of Wiggins v. Brazil Coal and Clay, which limits the DNR's authority to mandate operational plans to prevent dewatering. B. LS claimed it had exhausted administrative remedies and would face irreparable harm without relief. The DNR's position and subsequent interpretations were also examined in context with federal statutes.