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December 21, 2012

Natural Gas Company Seeks $50 Million in Damages in Hydrofracking Lawsuit Filed Against Town and NYS Department of Environmental Conservation

A small natural gas production company in western New York has sued the Town of Avon ("Town") over the enactment of a one-year moratorium on the development of natural gas facilities. In an apparent first in New York State, the lawsuit filed last month by Lenape Resources Inc. ("Lenape") also names the New York State Department of Environmental Conservation ("Department") as a party to the litigation. Lenape alleges that the Town's moratorium illegally encroaches on the preemptive authority of New York State to regulate natural gas wells under Article 23 of the Environmental Conservation Law ("ECL"), and therefore, the company is entitled to an injunction against the moratorium pursuant to the Department's Article 23 enforcement authority.

If the court will not enjoin enforcement of the moratorium, Lenape requests in the alternative damages of at least $50 million based on the moratorium being an unconstitutional regulatory taking of the present market value of its mineral leases, wells, and supporting facilities in the Town and adjoining towns. Our colleague Yvonne Hennessey, who represents companies and groups in the natural gas industry, advises us that Lenape is the first operator in New York to assert in court a takings claim of this sort. Lenape claims that the moratorium prohibits it from installing new wells on its existing leaseholds and from using up-to-date methods to enhance and extend natural gas production at its older existing wells. Lenape currently has approximately 15 natural gas wells installed and gas leases covering approximately 5,050 acres in the Town, as well as approximately 97 wells installed and tens of thousands of acres under lease in the adjoining towns of York and Caledonia. Lenape alleges that it has made capital investments of more than $25 million for its land leases, exploration activities, wells, and supporting infrastructure in those three communities.

The purpose of the Town's moratorium is to give the Town Board time to study the purported potential adverse environmental and health effects of natural gas production using high volume hydraulic fracturing and to develop, if appropriate, local laws to avoid or mitigate such effects. The Department itself has imposed a moratorium on the permitting of hydraulic fracturing since it began an environmental impact review in 2008. After numerous delays, that review and the accompanying development of new regulations are expected to be completed in the Spring of 2013. See our Legal Alert, New York's Regulatory Review of Shale Development - Is the End in Sight?

Lenape's existing wells have been permitted by the Department and installed over the course of the last 30 years. Their continuing operation is not subject to either the Town's or the Department's moratorium because they are traditional vertical wells that were drilled using conventional non-hydraulic fracturing methods. Further, the Town's moratorium law expressly exempts the continued operation of existing wells. However, the Town's moratorium law prohibits the drilling of additional wells, even the traditional, non-hydraulic fracturing wells, and prohibits "reworking" existing wells by the use of hydraulic fracturing or horizontal drilling.

Lenape initially discontinued operation of its existing production wells in the Town after the imposition of the moratorium to evaluate its potential affect on Lenape's existing operations. See our Legal Alert, Moratorium Sparks Shut OFf of Existing Gas Wells. According to local media reports, Lenape has subsequently reactivated the wells.

In a July letter to the Department, Lenape requested that the agency advise the Towns of Avon and Caledonia (which has enacted a similar moratorium) that their moratoriums violate the State's Article 23 natural gas drilling regulatory scheme and, if necessary, exercise the agency's Article 23 enforcement authority to seek nullification of the two local laws. In the letter, Lenape cited the statute which provides that the Department's Article 23 authority shall "supersede all local laws or ordinances relating to the regulation of the"¦ gas"¦ mining industr[y]" with the exception of local jurisdiction over local roads and real property taxes. ECL §23-0303(2). Lenape's point is that the Town's moratorium law is a local law or ordinance relating to the regulation of the gas mining industry, and ECL §23-0303(2) expressly supersedes and preempts it.

Nevertheless, earlier this year, two trial level courts in Central New York ruled that town-wide bans on natural gas drilling and related activities are not preempted by this law. See our Legal Alert, Did the Dryden and Middlefield Courts Get it Wrong? Both decisions are under appeal.

Perhaps with those cases in mind, the Department did not act on Lenape's request for enforcement, and an agency spokeswoman instead has publicly stated that the "scope of the preemption must be left to the courts." As a consequence of the Department's inaction, Lenape's lawsuit seeks to invoke on Lenape's behalf the Department's authority to enforce Article 23's State preemption rule. It does so by using a State statute that authorizes private plaintiffs to seek an injunction against another party's violation of Article 23 if Department fails to act on the plaintiff's request that the agency take its own enforcement action. ECL §71-1311. This alternative enforcement mechanism exempts the plaintiff from the usual requirement to post a bond or undertaking prior to the issuance of a preliminary injunction.

It will be interesting to see how the Department answers the lawsuit. It will be more difficult for it to take the neutral stance of "leaving to the courts" the preemption issue now that the agency is a litigant in a case that is focused on the issue. It will also be interesting to see how another court tackles the preemption question, especially given the case's catch-22 approach – the local law is either preempted or it is a multi-million dollar regulatory taking. The case is scheduled for oral argument before the State Supreme Court, Livingston County on February 4, 2013.

Hiscock & Barclay LLP has extensive experience in successfully challenging regulatory over reach if there is a particular state regulation or local zoning ordinance about which you have a question. If you require further information regarding the issues presented in this article, feel free to contact the chair of our municipal and zoning practice area, Tom Walsh, at; or either of the article's authors: Matt Kerwin, at, and Tom Warth at


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