Miller Bros. v. Department of Natural Resources, Docket Nos. 145198

CourtCourt of Appeal of Michigan (US)
Citation513 N.W.2d 217,203 Mich.App. 674
Docket Number150573 and 150574,145199,Docket Nos. 145198
PartiesMILLER BROTHERS, a Michigan co-partnership; Miller Brothers Oil Corporation, a Michigan Corporation; Peter C. Cook; D.A. Lubricant Company, Inc.; Muskegon Development Company; Alpar Resources, Inc.; Miller Energy; C.E. Jacobs; Marilyn H. Jacobs; Victory Inc. of Michigan; Miller Oil Corporation; and Wolverine Gas and Oil Company, Inc., Plaintiffs-Appellees/Cross-Appellants, v. The DEPARTMENT OF NATURAL RESOURCES, and The Supervisor of Wells, Defendants-Appellants/Cross-Appellees. CARNAGEL OIL ASSOCIATES, Pinnacle Resources Company, Gerald A. Derks, Jacklyn J. Derks, William J. Staley, and Agnes K. Staley, Plaintiffs-Appellees/Cross-Appellants, v. The DEPARTMENT OF NATURAL RESOURCES, and The Supervisor of Wells, Defendants-Appellants/Cross-Appellees.
Decision Date22 February 1994

Roberts, Betz & Bloss by David J. Bloss, Grand Rapids, Steven J. Lechner and William Perry Pendley, Denver, CO, for Mountain States Legal Foundation and the Independent Petroleum Ass'n of America.

McNeil & Associates, P.C. by John P. Forester, Grand Haven, Olson & Noonan, P.C. by James M. Olson and John D. Noonan, Traverse City, for Hamlin Lake Ass'n, West Mich. Environmental Action Council, Mich. Environmental Protection Foundation, Northern Mich. Environmental Action Council, and Tip of the Mitt Watershed Council.

Mika, Meyers, Beckett & Jones by John C. Jones, Fredric N. Goldberg, John M. DeVries, and Neil P. Jansen, Grand Rapids, for Miller Bros., Miller Bros. Oil Corp., Peter C. Cook, D.A. Lubricant Co., Inc., Muskegon Development Co., Alpar Resources, Inc., Miller Energy, C.E. and Marilyn H. Jacobs, Victory Inc. of Michigan, Miller Oil Corp., and Wolverine Gas & Oil Co., Inc.

Warner, Norcross & Judd by Douglas A. Dozeman, Harold S. Sawyer, and John H. Logie, Grand Rapids, for Carnagel Oil Associates, Pinnacle Resources Co., Gerald A. and Jacklyn J. Derks, and William L. and Agnes K. Staley.

Frank J. Kelley, Atty. Gen., Thomas L. Casey, Sol. Gen., Thomas J. Emery, Asst. in Charge, and Gary L. Hicks, Asst. Atty. Gen., for defendants.

Smith, Haughey, Rice & Roegge by Jon Vander Ploeg, Grand Rapids, Ronald A. Zumbrun, Edward J. Connor, Jr., and James S. Burling, Sacramento, CA, for amicus curiae, Pacific Legal Foundation.

Before FITZGERALD, P.J., and NEFF and CONNOR, JJ.

CONNOR, Judge.

In these inverse condemnation actions, we are asked to determine whether an administrative decision made by the director of the Department of Natural Resources effectively took plaintiffs' property, and, if so, whether the trial court correctly determined the amount the state must pay as just compensation. We conclude that plaintiffs' property was taken, but that the trial court did not correctly determine the amount of compensation owed. We affirm the summary disposition, vacate the compensation judgment, and remand for further proceedings consistent with this opinion.

I

On April 23, 1987, the director of the Department of Natural Resources, acting in his capacity as Supervisor of Wells, see M.C.L. § 319.3(1); M.S.A. § 13.139(3)(1), designated a 4,500-acre area in Mason County as the Nordhouse Dunes Area. He found that any oil or gas development in the area would constitute waste prohibited by law. M.C.L. § 319.4; M.S.A. § 13.139(4). He determined that no oil or gas exploration or development would be permitted in the area.

Plaintiffs fall into two categories. Some are owners of oil and gas rights in the "protected" area. Others are developers who had leased oil and gas rights from the owners, and who had been preparing to develop the area's oil and gas potential. Plaintiffs filed inverse condemnation actions against the state, claiming that the director's decision effectively took their property from them. The trial court granted plaintiffs' motion for summary disposition, finding that the director's decision amounted to a taking. After a trial to resolve the issue of damages, the court awarded plaintiffs $71,479,000 as just compensation for the property taken, plus interest, costs, and attorney fees.

II

The state takes issue with the trial court's summary disposition ruling that the director's administrative action constituted a compensable taking. We affirm the trial court's grant of summary disposition.

Both our federal and state constitutions mandate that when private property is taken for public use, its owner must receive just compensation. U.S. Const., Am. V; Const. 1963, art. 10, § 2. In the regulatory context, a compensable taking occurs when the government uses its power to so restrict the use of property that its owner has been deprived of all economically viable use. See Electro-Tech, Inc. v. H.F. Campbell Co., 433 Mich. 57, 68-69, 445 N.W.2d 61 (1989).

Plaintiffs' mineral interests in the Nordhouse Dunes Area had one, and only one, economically viable use: the extraction of any oil or gas that might be found under the land. To extract oil and gas from the land, a well is needed. To be able to drill a well, a permit issued by the Supervisor of Wells is required. M.C.L. § 319.23; M.S.A. § 13.139(23). The director of the DNR is the Supervisor of Wells. M.C.L. § 319.3(1); M.S.A. § 13.139(3)(1). The director's administrative action made it clear that no permits would be issued for drilling in the protected area. 1 The director's action prevents plaintiffs from extracting any oil or gas from the land. Consequently, by the exercise of its regulatory power, the government had so restricted the use of plaintiffs' property rights that plaintiffs had been deprived of all economically viable use. Cf. Silva v. Ada Twp., 416 Mich. 153, 159-160, 330 N.W.2d 663 (1982).

The parties dispute whether the order prohibited directional drilling to get at oil and gas in the protected area from drilling sites located outside the protected area. Because the director's action was not unequivocal on this point, the trial court did not decide the issue on summary disposition. 2 Nevertheless, we find that summary disposition of the issue of whether a taking occurred was still proper. If allowed, directional drilling could not be used to extract all the oil and gas there may be under the protected area. Consequently, the director's action completely deprived plaintiffs of all use of at least some portion of their property holdings in the protected area. While there remained questions of fact about both the extent and the value of the property taken, the trial court decided neither issue on summary disposition.

It is also immaterial that all but one plaintiff have extensive property holdings outside the protected area. This case is not similar to the cases defendants cite wherein development of a portion of a parcel of land was limited or restricted. Cf. Bevan v. Brandon Twp., 438 Mich. 385, 475 N.W.2d 37 (1991). In this case, development of thousands of acres of property was totally prohibited.

The state contends that plaintiffs' lawsuits were premature, that they should have been required to apply for drilling permits or appeal the director's decision before claiming that their property had been taken. Again, we disagree. Applying for individual drilling permits would have been a futile gesture. Plaintiffs are not required to pursue futile remedies. Cf. Michigan Waste Systems, Inc. v. Dep't. of Natural Resources, 157 Mich.App. 746, 758-759, 403 N.W.2d 608 (1987). The director's decision was final and absolute. As Supervisor of Wells, the director is the person empowered to decide whether to issue drilling permits; his decisions are final. They are not rendered less final because they are appealable. Moreover, plaintiffs do not have to exhaust administrative remedies that may have been available to challenge the decision. Their lawsuits are not a collateral attack on the director's decision, and do not seek to invalidate it. Regardless, the Natural Resources Commission (NRC) explicitly approved the findings and determination of the director two weeks after the decision at a commission hearing. Clearly, any appeal to the NRC seeking to invalidate the decision would also be an exercise in futility. Id.

III

The state contends that, even if a taking did occur, it need not pay compensation because development within the protected area could have been enjoined under nuisance law. We disagree. Under nuisance law, plaintiffs could have been ordered to keep their activities from having a detrimental effect on adjoining property. However, the director expressly stated that his action was necessary in order to protect the surface owner's property. 3 Plaintiffs could not have been ordered to refrain from exercising their rights to extract oil and gas merely because it might have had some detrimental effect on the surface property: the surface owner had a contractual duty to allow plaintiffs to exercise their rights to extract oil and gas, even if it caused some harm to the surface property. 4

IV

The central issue on appeal is the trial court's just compensation award. Generally, just compensation is determined by referring to the fair market value of the property taken. We find that the trial court did not clearly err in determining what the fair market value of the property was at the time of the taking. However, because the trial court erroneously equated market value with just compensation, we vacate the compensation award and remand for further proceedings consistent with this opinion.

A

Determining market value in this case is particularly difficult, because the market for the property taken does not involve cash transactions.

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