Barclay Damon
Barclay Damon

Legal Alert

New York Appellate Court Upholds Drilling Bans

On May 2, 2013, a New York appellate court upheld lower court decisions in Norse Energy Corp. USA v. Town of Dryden and Cooperstown Holstein Corp. v. Town of Middlefield, which found municipal bans on natural gas development to be a valid exercise of home rule. More specifically, the Third Department, Appellate Division, unanimously held that a New York State law that expressly preempts local laws regulating how natural gas is developed neither expressly nor impliedly preempts a local zoning ordinance banning natural gas development.

There are a number of reasons, however, that the Court should have instead overturned the lower court decisions. The plaintiffs/appellants will shortly be petitioning the State’s highest court, the Court of Appeals, for leave to appeal so that these arguments may be heard.

First and foremost, the Court ignored the long-standing principle of statutory construction, which states that a statute must be read as a whole in order to decipher its meaning and the legislative intent. In analyzing the preemption issue, the Third Department failed to read the applicable statute, the Oil, Gas and Solution Mining Law (“OGSML”), as a whole. Rather, the Court focused only on the phrase “relating to the regulation” when analyzing the OGSML’s preemption clause in section 23-0303(2) of the Environmental Conservation Law (“ECL”). The Court ignored the statute as a whole, which clearly states that “all local laws and ordinances” are preempted. The disputed zoning ordinances are necessarily either a local law or ordinance.

The Court also ignored another long-standing principle of statutory construction when it disregarded the implication of statute’s provision of only two specific exceptions to the preemption of “all local laws and ordinances,” namely “local government jurisdiction over local roads or the rights of local governments under the real property tax law.” Under the statutory construction tenet expressio unius est exclusio alterius, the Legislature’s decision to exclude from preemption only the municipality’s jurisdiction over local roads and rights under the real property tax law evidences its intent to preempt zoning.

By focusing on the phrase “relating to the regulation” to the exclusion of the language preempting “all local laws and ordinances,” the Court perplexingly ignored the actual OGSML regulations and elected to look to an online dictionary to define the term “regulation” in order to narrowly construe it as only concerning the “details or procedure” of drilling. If, however, the Legislature intended to define “regulation” as narrowly as the Court did, then there would have been no need to exclude local roads and real property taxes since neither concerns the “details or procedure” of drilling, i.e., neither concerns the “how” of natural gas development.

The Court should have, instead, looked to the OGSML, its related regulations, the 1992 Generic Environmental Impact Statement and the proposed Supplemental Generic Environmental Impact Statement, to define the scope of how the oil, gas and solution mining industry is “regulated.” Had the Court defined “regulation” in this manner, it would have properly concluded that the OGSML’s regulation of the oil, gas and solution mining industry is not limited to just the “details or procedure” of drilling but also to the location of drilling. Moreover the OGSML’s actual regulation of the location of drilling is entirely consistent with OGSML’s mandate to promote “a greater ultimate recovery of oil and gas” and to protect the “correlative rights of all owners” of mineral rights. Further, the OGSML’s regulations regulate setbacks from private dwellings, places of assembly, schools, and other areas (6 NYCRR §553.2) and address other land use issues pursuant to the law’s mandate that resources are to be developed in a manner in which “the general public is fully protected” (ECL §23-0301).

The Third Department’s failure to read the OGSML as a whole continued through its analysis of implied preemption. There the Court focused its conflict preemption discussion on the OGSML’s well spacing provisions to the exclusion of the setback provisions in OGSML’s implementing regulations that relate to the protection of public health, safety and welfare on the land that is above the underground resource. Local zoning ordinances that dictate if and where drilling can occur are patently in conflict with these OGSML provisions.

In an analogous situation, another State appellate court reached an opposite conclusion by looking at the statute as a whole. That court invalidated a local zoning ordinance designed to limit check cashing establishments to certain zoning districts, because it found that the comprehensive regulation of such businesses under the State Banking Law impliedly preempted local ordinances impinging on the same area of regulation. Even in the absence of a provision expressly preempting local zoning, the court held that the State Banking Law occupied the field because of its provisions regulating the placement of such establishments for the “convenience and benefit” of the community, including the establishment of a buffer distance from other cash checking establishments. Sunrise Check Cashing and Payroll Services, Inc. v. Town of Hempstead, 91 A.D.3d 126 (2d Dept. 2011), aff’d on other grounds, 2013 N.Y. LEXIS 125 (2013). The OGSML’s mandate to promote “a greater ultimate recovery of oil and gas” and protect the “correlative rights of all owners” of mineral rights is substantially similar to the State Banking Law’s provisions regulating the placement of check cashing establishments for the “benefit” of the community. Therefore, it would seem that the local bans on natural gas development similarly encroach on the field of regulation occupied by the OGSML.

The Court also seemed to omit from its review pertinent legislative history. Of particular significance is its failure to consider the implications of the documented trade-offs made in 1981 when the Legislature enacted the preemption provision at issue. In exchange for removing natural gas development from the reach of all but two specific kinds of local laws and ordinances, local municipalities were given a huge monetary windfall – the ad valorem tax, which allows each municipality to collect taxes on the value and production of wells located in its jurisdiction. Also of note is the legislative history concerning the avoidance of “waste,” the legislative intent not to leave gas “wasted” in the ground and the State’s consistent policy objective to promote the recovery of natural gas.

Of final note is the Court’s improper reliance on precedent under the Mined Land Reclamation Law (“MLRL”). The MLRL’s preemption provision analyzed in Frew Run is different in many important respects from the OGSML provision. (See our March 2012 Alert http://www.hblaw.com/alerts/Did-the-Dryden-and-Middlefield-Courts-Get-It-Wrong-03-01-2012) These differences, however, were not discussed by the Court which merely stated without analysis that the two provisions were “similar.” Likewise, the Court did not discuss the apparent dissimilarities between surface mining and natural gas drilling or the divergent legislative histories.

In short, the Third Department seems to have misapprehended the fundamental purpose of the OGSML, the implications of which can be easily derived from the State’s long-standing regulation of the oil and gas industry under the OGSML and the distinct differences between surface mining and natural gas drilling. The Court’s conclusions that the local zoning bans have only an “incidental” effect on regulation of the industry, and that the OGSML and the State’s long-standing policy to promote the development of natural gas can “harmoniously coexist” with municipal-wide drilling bans, also signals some fundamental misunderstandings about oil and gas exploration and development.

Turning to the Court’s analysis, it began, as it should, with the express language of the statutory provision at issue – ECL section 23-0303(2):

“[t]he provisions of [ECL article 23] shall supersede all local laws or ordinances relating to the regulation of the oil, gas and solution mining industries; but shall not supersede local government jurisdiction over local roads or the rights of local governments under the real property tax law[.]”

Focusing on the phrase “relating to the regulation,” the Court defined the term “regulation” by looking to the definition found in the Merriam-Webster On-Line dictionary which defines regulation as “an authoritative rule dealing with details or procedure[.]” Using this definition, the Court found that the towns’ zoning ordinances, which outright banned all natural gas development within the towns, “do[ ] not seek to regulate the details or procedure of the oil, gas and solution mining industries.” Instead, they “simply establish[ ] permissible and prohibited uses of land … for the purpose of regulating land generally[.]”

The Court then went on to find that the legislative history of ECL 23-0303(2) supported its holding. The Court found that “it is evident that the Legislature's intention was to insure uniform statewide standards and procedures with respect to the technical operational activities of the oil, gas and mining industries[.]” Conversely, the Court found nothing in the language of ECL §23-0303(2), the ECL generally, or the pertinent legislative history indicating that the Legislature intended to usurp municipalities’ land use authority. Absent such express legislative intent, the Court declined to read the statute as preempting local zoning ordinances.

Finally, as to express preemption, the Court found further support for its holding based on the Court of Appeals’ decision in Frew Run, which evaluated an express preemption provision in the MLRL and ultimately found no preemption over local zoning ordinances. Significantly and similar to the findings of the courts below, the Third Department determined that the language in the MLRL was “similar” to the OGSML’s preemption language. As such, the Court relied on Frew Run for further confirmation that the Legislature did not intend for a local municipality’s zoning authority to be preempted by the OGSML.

The Court did, however, reject one premise of the lower courts’ decisions which held that the existence of an express preemption provision forecloses the possibility of implied preemption. The Court, therefore, did not end its inquiry with its rejection of express preemption. Rather, the Court evaluated whether zoning ordinances banning natural gas development were impliedly preempted because they conflict with the OGSML’s language or policy objectives. The Court ultimately found that they did not.

In doing so, the Court rejected the petitioners’ argument that the OGSML, particularly its provisions regarding well spacing, direct “where” a well is drilled in order to maximize resource recovery and minimize waste, and that zoning ordinances banning drilling directly conflict with this directive. The Court instead determined that the OGSML provisions concerning well spacing “do not address traditional land use considerations, such as proximity to nonindustrial districts, compatibility with neighboring land uses, and noise and air pollution.” And, therefore, the OGSML and municipal zoning “may harmoniously coexist; the zoning law will dictate in which, if any, districts drilling may occur, while the OGSML instructs operators as to the proper spacing of the units within those districts in order to prevent waste.” Finally, the Court found nothing in the OGSML or its legislative history supporting a state policy to maximize the recovery of oil and gas everywhere it is present at the expense of local law use determinations.

Nevertheless, the Third Department’s decision to reject part of the lower courts’ decision, which held that the existence of an express preemption provision forecloses the possibility of implied preemption, will allow the plaintiffs/appellants to raise implied preemption with the Court of Appeals if they are given leave to appeal. We understand that the plaintiffs/appellants intend to petition for leave to appeal from the Court of Appeals as soon as practicable. Leave to appeal, however, is not routinely granted and the standard is quite high in cases like Dryden and Middlefield where the Appellate Division affirms without dissent unless there is a split in authority among departments of the appellate division.

In the meantime, local bans on natural gas development may be challenged on grounds other than State law preemption, such as effecting an unconstitutional regulatory taking and/or inconsistency with a municipality’s comprehensive plan for development. The prospects for both types of challenges is enhanced in municipalities where natural gas wells have been developed or mineral rights have been leased in reliance on zoning laws that previously allowed natural gas development.

If you require further information regarding the issues presented in this alert, feel free to contact the Chair of our Oil & Gas team, Yvonne Hennessey, at yhennessey@hblaw.com, or the Chair of our Land Use practice area, Thomas Walsh, at twalsh@hblaw.com.