Coteau Properties Co. v. Department of Interior

Citations: 53 F.3d 1466; 1995 WL 261601Docket: No. 94-1093

Court: Court of Appeals for the Eighth Circuit; May 8, 1995; Federal Appellate Court

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Coteau Properties Company is appealing the district court's denial of its motion for a preliminary injunction and the dismissal of its case with prejudice concerning a final agency decision by the Office of Surface Mining, Reclamation and Enforcement (OSM). Coteau contends that OSM exceeded its jurisdiction, acted arbitrarily and capriciously, and that the district court incorrectly determined it lacked jurisdiction over Coteau’s challenge and that Coteau suffered no irreparable harm. The appellate court found that OSM did not adhere to regulatory requirements, resulting in irreparable harm to Coteau, and reversed the district court's decision.

The Surface Mining Control and Reclamation Act (SMCRA), enacted in 1977, established a regulatory framework for surface mining, dividing authority between federal and state agencies. In North Dakota, which has achieved regulatory primacy, the North Dakota Public Service Commission (PSC) is responsible for permitting surface coal mining operations. Permit applicants must disclose detailed information about any entities that "own or control" them, and the PSC cannot issue permits to applicants linked to any entity with ongoing violations of mining laws until such violations are resolved.

Coteau, a subsidiary of North American Coal Corporation, operates the Freedom Mine in North Dakota under PSC-issued permits, extracting approximately fifteen million tons of coal annually from reserves covering roughly 50,500 acres. A portion of these reserves is leased from Basin Electric Power Cooperative, and Coteau has a Lignite Sales Agreement with a Basin subsidiary, Dakota Coal Company, which requires Coteau to fulfill coal supply needs without restricting sales to other buyers.

On September 2, 1992, the United Mine Workers of America (UMWA) filed a citizen’s complaint with the Office of Surface Mining (OSM) regarding Coteau's mining permit amid a labor dispute, alleging that Basin, a union operation, owned or controlled Coteau, a nonunion operation, and that this information was omitted from Coteau's permit application as required by federal and state regulations. OSM issued a ten-day notice to the Public Service Commission (PSC), which allowed Coteau to respond to the allegations. On November 9, 1992, the PSC concluded that Coteau was not owned or controlled by Basin, issuing a detailed Report of Investigation. OSM did not respond at that time. On January 13, 1993, the chief of OSM's Applicant/Violator System (AVS) opined that Coteau was controlled by Basin, but the following day, OSM's director, Harry M. Snyder, reaffirmed the PSC's finding. This decision was reiterated on January 19, 1993, instructing the AVS system to reflect that there was no connection between Basin and Coteau. However, after a change in federal administration, acting director W. Hord Tipton withdrew Snyder's decision on August 18, 1993, and issued a Final Agency Decision (FAD) asserting that Coteau was owned or controlled by Basin, contradicting previous findings. The FAD indicated that Coteau must treat Basin as a controlling entity for permit applications and warned of potential violations that could affect permit approvals. Coteau sought a preliminary injunction against the FAD in U.S. District Court, but the court denied the motion, ruling it lacked jurisdiction over OSM regulations, found the FAD not arbitrary or capricious, and determined that Coteau would not suffer irreparable harm nor were they likely to succeed on the merits.

The Public Service Commission (PSC) required Coteau to provide detailed information about Basin and its subsidiaries to complete its permit application, which led Coteau to file an appeal. Jurisdiction is established under the Administrative Procedure Act, allowing for judicial review of agency actions. The district court determined it lacked jurisdiction over the validity of Office of Surface Mining (OSM) regulations, which is reserved for the District Court of the District of Columbia. The appellate court refrains from ruling on this jurisdictional issue. 

OSM raised two threshold issues: the requirement for Coteau to exhaust administrative remedies and Coteau's standing to contest the OSM's decision. The Supreme Court's ruling in Darby v. Cisneros clarifies that only mandatory administrative appeals must be exhausted prior to seeking judicial review, and since Coteau’s case does not involve a statute requiring such exhaustion under the Surface Mining Control and Reclamation Act (SMCRA), Coteau is not required to exhaust remedies. Furthermore, the Department of the Interior supports Coteau's standing based on precedent that allows mining operators to challenge OSM actions when state actions are taken.

For the consideration of a preliminary injunction, four factors are evaluated: likelihood of success on the merits, potential irreparable harm to the movant, the balance of harms between parties, and public interest. The appellate court reviews the denial of Coteau's injunction motion for abuse of discretion. To assess the likelihood of success, the court will examine whether OSM had the authority to review the PSC's decision, if the correct standard of review was applied, and whether OSM's reversal of the PSC’s decision was arbitrary and capricious.

Coteau contends that the Office of Surface Mining (OSM) exceeded its authority by reversing the state’s determination that Coteau was not owned or controlled by Basin. The district court dismissed Coteau's objections as insignificant and asserted that OSM's review of PSC decisions was valid if they concerned compliance with national regulations, concluding that OSM's actions were neither arbitrary nor capricious. However, the appeal emphasizes the importance of the regulatory power allocation between federal and state agencies under the Surface Mining Control and Reclamation Act (SMCRA). Coteau argues that, as a primacy state, North Dakota holds exclusive jurisdiction over the permitting process, meaning Coteau should only adhere to state, not federal, regulations. The text clarifies that North Dakota's primacy status, achieved by a state regulatory program's approval by the Secretary of the Interior, grants the state exclusive regulatory authority over surface mining. Once a state program is approved, federal oversight becomes primarily one of monitoring, with limited exceptions outlined in SMCRA. Specifically, Section 1271(a) provides procedures for the Secretary to enforce regulations in primacy states, including notifying the state of potential violations and requiring state action. If the state does not respond appropriately, the Secretary can order federal inspections and, if necessary, issue cessation orders for imminent dangers.

Section 1271(a)(1) of the SMCRA is referenced by the OSM for issuing a ten-day notice, which applies to violations identified through information received by the Secretary, not from federal inspections. Coteau’s alleged breach of ownership and control regulations did not pose an imminent threat to health, safety, or the environment, which is necessary for federal intervention under sections 1271(a)(1) and (2). Coteau contends that the enforcement authority does not apply to the permitting process, as permits are exclusively issued by the state, and individual state decisions are not subject to Secretary review. The permitting requirements concerning ownership and control are unlikely to be verified through federal inspections, and the case record indicates no federal inspection occurred. Consequently, sections 1271(a)(1) and (2) do not grant OSM the authority to intervene in the PSC’s permitting decisions regarding Coteau, which has no physical violations of surface mining regulations. The authority for OSM’s ten-day notice and subsequent review of PSC’s ownership and control determination must be sought in SMCRA regulations. Specifically, 30 C.F.R. 842.11(b)(1) mandates a federal inspection when there is reason to believe a violation exists that could cause imminent danger or significant environmental harm, alongside a notification requirement to the state regulatory authority. If the state fails to act within ten days, the authorized representative may issue a notice of violation without further notification to the state, as outlined in 30 C.F.R. 843.12(a)(2).

The regulations specified in 30 C.F.R. 843.12(a)(2) closely align with SMCRA 1271(a)(1) and (2), requiring intervention for any conditions violating state or federal regulations or presenting imminent danger. Federal inspection, which may include financial investigations of mining operations, grants the OSM authority to review PSC permitting decisions regardless of the nature of the regulations or danger involved. 30 C.F.R. 778.13 mandates that surface mining permit applicants disclose ownership and control information to regulatory authorities. Sections 842.11 and 843.12 empower federal intervention, including inspections and notices of violation, for violations of these requirements. OSM is authorized to issue a ten-day notice to the PSC concerning alleged ownership and control links between Coteau and Basin. Should the PSC not respond appropriately, OSM can initiate an inspection and issue a notice of violation. 

The review of PSC’s determination regarding Coteau's ownership by Basin is conducted under the premise that the enforcement regulations are valid. As established in legal precedent, agencies must adhere to their own regulations. The agency's findings and decisions are subject to being set aside if deemed arbitrary, capricious, abusive of discretion, or not in accordance with the law.

Applying a de novo standard of review, it was determined that the Office of Surface Mining (OSM) did not comply with legal standards, and its reversal of the PSC’s determination was arbitrary. OSM's argument to only assess for a "patent violation" based on Leedom v. Kyne is invalid, as the PSC order is not a final order eligible for judicial review. OSM designated its ownership and control decision as a “final agency decision,” making Leedom inapplicable. The review follows general standards applicable when no specific Congressional limitation is indicated, referencing Citizens to Preserve Overton Park v. Volpe.

Under 30 C.F.R. 842.11, OSM can mandate federal inspections only if the state fails to appropriately address reported violations. If the state shows appropriate action or good cause within ten days of a notice, federal actions become unauthorized. Appropriate action is defined as a response that is not arbitrary, capricious, or an abuse of discretion. The PSC determination that Basin does not own or control Coteau was supported by thorough investigation and factual evidence, qualifying as appropriate action that should conclude proceedings.

The PSC's findings are underpinned by federal and state regulations presuming certain relationships as ownership or control unless proven otherwise. Basin owned coal leased to Coteau, with a subsidiary, DCC, contracted for all coal supplies from Coteau, which reinforces the PSC's conclusion regarding the lack of control.

The PSC determined that a presumption of control by Basin over Coteau arose under regulation 773.5(b)(6), but Coteau successfully rebutted this presumption. The PSC identified that their contractual agreements were typical "arm’s length" business contracts, with provisions aimed at risk allocation, including default remedies for Basin, which would be unnecessary if Basin controlled Coteau. Key aspects of the Agreement included arbitration for disputes with DCC, a "cost plus" arrangement that transfers increased production costs to DCC, compliance requirements with surface mining regulations, and a structure for financial arrangements concerning coal deliveries. The Agreement also permitted Coteau to sell coal to other customers, with certain conditions, such as fulfilling obligations to DCC before additional sales and requiring Basin's approval for sales exceeding two million tons annually during the first ten years.

The PSC highlighted that Coteau's mining plan must be approved by DCC only upon request, indicating a lack of control rather than oversight, as approval is deemed granted unless DCC objects within seventy-five days. The Agreement's only significant restriction was ensuring Coteau adheres to sound engineering practices and legal regulations, reflecting standard expectations in a business context. Additionally, the PSC noted that the coal leased from Basin represented about 5.8% of Coteau's total coal reserves, with the lease allowing Coteau discretion over its operations. The PSC concluded that the comparison of leased coal to total reserves, rather than just the specific permit's reserves, was appropriate, as Coteau provides coal from any of its tracts under the Agreement.

Coteau holds permits for tracts where none of the coal is leased from Basin, resulting in varying connections between the two companies depending on the specific permit analysis. The primary question is Basin's overall control of Coteau’s mining operations rather than control under specific contracts. The AVS links entities on an overall basis rather than permit-by-permit. The PSC identified several indicators of Coteau's independent operations at the Freedom Mine, including: 

1. Coteau conducts all premining engineering and obtains necessary permits.
2. Coteau is solely responsible for reclamation and compliance with environmental regulations.
3. Employees at the Freedom Mine are Coteau's, and it manages all hiring and firing.
4. Coteau employs its own professional staff, including engineers and environmental specialists.
5. Coteau or its contractors establish all permanent facilities and equipment on-site.
6. All operational permits are in Coteau's name.
7. Coteau develops and implements all policies and procedures related to personnel, environment, and safety.
8. Coteau negotiates and maintains all necessary surface lands, easements, leases, and mining rights.

The PSC concluded that Coteau rebutted the presumption of ownership and control under regulatory guidelines, establishing that Basin did not dictate Coteau's operational methods. Although there are contractual agreements between Basin and Coteau, these are structured to protect individual interests rather than indicate control. The PSC emphasized that if Basin had control over Coteau, protective provisions in agreements would be unnecessary. OSM's initial response supported the PSC's findings, affirming that both parties are bound only by the terms of their agreements, and dismissing implications of Basin's control over Coteau's operations as misunderstandings of standard business contracts.

The AVS Memo disregards the PSC’s interpretation of relevant provisions, asserting that such provisions should be evaluated individually rather than collectively, despite their commonality in large-scale utilities contracts. Following a change in federal leadership, the acting director of the OSM retracted the previous decision, issuing a Final Agency Decision (FAD) that concluded Basin controls Coteau. This FAD failed to apply the deferential review standard required by OSM regulations and instead performed a de novo review, which is not permitted. The FAD claims to have considered all relevant documents but does not adhere to the legal standards regarding the PSC's determination. It incorrectly cites 30 C.F.R. 842.11(b)(1)(ii)(B) for authority while neglecting to acknowledge that actions deemed appropriate must not be arbitrary, capricious, or an abuse of discretion.

The withdrawal of the previous director’s decision supporting the PSC is deemed arbitrary, with the FAD offering three insufficient reasons for this retraction: 1) the previous director allegedly did not review the entire record, 2) a preliminary analysis suggested his decision lacked evidentiary support, and 3) he recused himself shortly after agreeing with the PSC. None of these reasons convincingly justify the withdrawal. The previous director had indeed considered the complaint and PSC’s report, which covered the relevant connections between Coteau and Basin. The FAD's assertion that the former director's failure to cite the entire record undermines his decision is undermined by the lack of new evidence in the FAD's discussion. Additionally, the appropriate standard for evaluating the PSC's decision is whether it was arbitrary or capricious, not based on the weight of the evidence. Finally, the FAD's reference to the director's later recusal does not substantiate claims of impropriety affecting the earlier determination.

OSM utilizes Belville Mining Co. v. United States to argue that its withdrawal of prior decisions was justified due to inadequacies in those decisions. In Belville, the court ruled that a withdrawal following an administrative change was not arbitrary, emphasizing that the previous decisions lacked legal and factual analysis. However, the current case is distinguished from Belville as OSM withdrew its decision based on doubts arising from changing policies rather than merely correcting minor errors. The analysis reveals that while OSM claims similarity to Belville due to Snyder’s brief letter, Snyder's reliance on the PSC report provided proper legal and factual reasoning for his determination. 

The FAD's withdrawal of Snyder’s decision is deemed arbitrary because it fails to show the PSC's determination was arbitrary or capricious. The ownership and control determination primarily depended on the mining plan approval and cost-plus provisions, which the PSC analyzed reasonably. In contrast, the FAD presents unsubstantiated assertions that these provisions indicate control, lacking the nuanced analysis found in the PSC report. Additionally, the AVS Memo, which OSM cites, conducted a de novo review without deference to the PSC. It also contained mostly conclusory statements regarding control, ignoring the balanced perspective of the cost-plus arrangement as a normal business practice rather than a control indicator.

Ultimately, the reversal of the PSC’s determination is found to be arbitrary, and Coteau demonstrates a strong likelihood of success on the merits in its challenge against OSM's Final Agency Decision. However, the district court concluded without elaboration that Coteau would not suffer irreparable injury from OSM’s findings regarding control by Basin.

The court's finding regarding irreparable injury is based on OSM's representations, particularly from a letter dated September 9, 1993, which indicated that while Coteau is not currently associated with any violating parties, it must comply with specific regulatory information requirements. The letter revealed potential outstanding violations on sites linked to Coteau or Basin, with Coteau required to provide current violation information in its permit applications, despite Basin's exit from the mining business. This situation complicates Coteau's obligation to investigate ownership and control links, posing a risk of incomplete applications and potential permit suspensions if any violations are discovered. Coteau has five pending permit revision applications and could face severe difficulties fulfilling contractual obligations if delays or denials occur. Moreover, Coteau lacks the authority to compel Basin or its affiliates to address any violations, which could jeopardize its permits and lead to irreparable harm. The district court erred by concluding that Coteau would not suffer irreparable injury if its preliminary injunction was denied. Additionally, the court did not address the potential injuries to other parties and the public interest, indicating that granting the injunction would impose minimal harm on others.

OSM will not incur harm by allowing the case to proceed to a merits adjudication, as it is aware of the connection between Coteau and Basin, with Basin’s ownership information available through its permit applications. The public interest does not oppose granting a preliminary injunction to Coteau, as the SMCRA's goals of environmental protection and public health are upheld; Coteau maintains a strong compliance record, and Basin has no outstanding violations. If Basin or its affiliates violate regulations, they will be responsible for remediation, and Coteau has no authority to enforce compliance. The AVS system aims to identify potential violators attempting to evade accountability, but there is no evidence that either Basin or Coteau are attempting to evade violations. The Dataphase factors favor granting Coteau's preliminary injunction, indicating the district court abused its discretion by denying the motion.

The district court's dismissal of the case on the merits was premature, as Coteau demonstrated a strong likelihood of success and was not notified of the intention to consolidate the preliminary injunction hearing with a merits trial, limiting its ability to present a full case. OSM filed its answer shortly before the court’s order, and the complete administrative record was not available for review. Parties must receive clear notice of such consolidations to avoid unfair treatment. The court's dismissal on the merits is reversed, and Coteau's motion for a preliminary injunction is instructed to be granted. The case is remanded for reinstatement and trial. Additionally, a requirement contract specifies that the seller must provide the quantity of commodity needed by the buyer, with Basin characterized as an electric utility utilizing lignite mines for electricity generation rather than a coal mining operation.

The union filed a lawsuit against Basin, DCC, Coteau, and North American under the Labor Management Relations Act, claiming violations of a collective bargaining agreement, tortious interference with contract, and equitable servitude. The court dismissed the claims against Coteau and North American. Under 30 U.S.C. § 1271(a)(1), if the Secretary of the Interior suspects a violation of mining regulations, they must notify the state regulatory authority, which has ten days to act. If no action is taken, the Secretary can order a federal inspection. The district court referenced 30 U.S.C. § 1276(a)(1) regarding the judicial review of the Secretary's regulatory actions, indicating that actions related to national rules are reviewed by the District of Columbia Circuit, while others are reviewed by the district court where the mining operation is located. A legal challenge regarding the constitutional validity of the Office of Surface Mining (OSM) regulations has been ongoing since 1988. OSM contended that the court should have dismissed the action for lack of jurisdiction; however, the court asserted it had jurisdiction to review OSM’s application of regulations to Coteau. The definitions of ownership and control in North Dakota’s regulatory program align with federal definitions, eliminating the need to resolve conflicts between state and federal regulations. Cost-plus contract provisions are common and not unique to evade regulations, as evidenced by their use in federal contracts. Additionally, the approval rights over mining plans are similar to federal provisions governing coal mining plans on leased properties.