CHAPTER 11 UNDERSTANDING THE RECLAMATION SURETY RELATIONSHIP BEFORE AND AFTER OPERATOR DEFAULT

• Jurisdiction: United States

Mine Closure, Financial Assurance, and Final Reclamation
(Nov 2009)
CHAPTER 11
UNDERSTANDING THE RECLAMATION SURETY RELATIONSHIP BEFORE AND AFTER OPERATOR DEFAULT
William T. Gorton III
Stites & Harbison PLLC
250 West Main Street, Suite 2300
Lexington, Kentucky 40507

William T. Gorton III is national counsel to numerous clients on natural resource, environmental regulatory and land and water resources matters. He has been counsel in the development of over 10 power plants. He has been lead counsel to numerous surety companies regarding close to $2 billion in financial guarantees on mining operations, hazardous waste facilities and solid waste disposal facilities throughout the United States. He also counsels on natural resource sales and acquisitions. Before embarking on a law career, Mr. Gorton managed The Kentucky office of Skelly and Loy Engineers Consultants and managed many mining and related environmental projects throughout the U.S. for both private and governmental clients. He wrote the SMCRA Title IV reclamation programs for Virginia and Alaska. Bill has a B.S. from Penn State University and a J. D. with distinction from The University of Kentucky College of Law. He is an Associate Professor at the University of Kentucky teaching Environmental Law and Regulation in the National Resources Conservation and Management program. He is listed in Best Lawyers in America and Chambers USA in the field of environmental and natural resources law. He is a Trustee for the Energy and Mineral Law Foundation.

i. Preface

The extractive industries are highly regulated by state and federal natural resource and environmental management agencies. Along with requiring detailed environmental performance and reclamation standards, the laws relating to mine reclamation require operators to provide financial guarantees (a/k/a "reclamation bonds") to assure that environmental and reclamation performance standards are met. Although the regulations requiring financial guarantees appear straight forward, when an operator fails to reclaim the mines many other aspects of business and law come to life in what is often a very chaotic legal experience for all parties involved. This article discusses the relationships, practice and trends seen throughout the United States when the mine operator ceases to perform, ultimately defaults on its reclamation obligations and the bonds are called into play.

I. INTRODUCTION

All mining operations throughout the United States whether energy related, metals or nonmetals are subject to significant state and federal law governing environmental performance, land reclamation and water quality. The coal industry is regulated by the federal Surface Mine Control and Reclamation Act ("SMCRA")¹ under the auspices of the U. S. Department of Interior, Office of Surface Mining, and its state analogs. Among its purposes, SMCRA is to . . . "protect society and the environment from the adverse effects of surface coal mining operations"² and to "assure that adequate procedures are undertaken as to protect the environment."³ Under federal SMCRA each State may assume primary enforcement responsibility under the concept of "primacy".⁴ With the exception of Tennessee,⁵ Washington⁶ and Georgia⁷ which have federal programs⁸ all other coal producing states have primacy to

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enforce SMCRA⁹ and have enacted their own state statutes, which must meet and may exceed the federal regulatory requirements to control environmental impacts of coal mining activities.¹⁰

Unlike their coal mine counterparts, non-coal mines on private property are not regulated by federal reclamation laws.¹¹ While coal mines on federal land are regulated under SMCRA, non-coal mines on federal land however, are subject to extensive regulation by both state and federal agencies under various laws. If the mine is on federal land the U.S. Department of Interior, Bureau of Land Management¹² has extensive performance and reclamation requirements under the Federal Land Policy and Management Act. ("FLPMA").¹³ Under FLPMA the Secretary of Interior is required to take any action required to prevent the "undue degradation of public land and its resources." BLM issued regulations effective in 1981 that require all operators to reclaim BLM land disturbed by their hardrock operations.¹⁴ However it wasn't until 2001 that BLM established rules requiring operators to include reclamation plans and cost estimates in their notices and plans of operations to BLM for approval. The new regulations require that financial assurances be provided to cover those estimated reclamation costs for notice and plan-level hardrock operations.¹⁵ By comparing the history of the regulatory programs in the coal and non-coal industries it is easily determined that regulation of the coal industry regarding reclamation and financial guarantees is significantly more mature than that found in the non-coal arena. For the purposes of this paper the references to reclamation and financial assurance requirements will address federal law, however there is significant parallel state law regarding the topics.

Under both SMCRA and FLPMA mining companies must apply for surface and underground mining permits or approvals which include detailed background and baseline environmental information, operations plans, environmental performance and reclamation plans. Prior to receiving its permit, the operator must post adequate financial guarantees to assure final reclamation in compliance with the law and as detailed in the approved permit. Both federal statutes define the types of financial assurance mechanisms that are acceptable.¹⁶

SMCRA allows financial guarantees to be in the form of a corporate surety bond, cash collateral or securities.¹⁷ In 2001 the BLM revised its bonding requirements for hardrock

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operations on federal lands to include corporate surety bonds, cash, irrevocable letters of credit, cd's, government securities or bonds, investment grade rated securities or insurance.¹⁸ The majority of mining operators throughout the United States choose to post corporate surety bonds as the preferred form of reclamation financial guarantee. The term "reclamation bond" is generally used throughout the industry to cover all forms of reclamation financial guarantees.

The obligations under the bonds assure that the reclamation plan contained in the mine permit application is completed to regulatory standards. The reclamation obligations include, but are not limited to, the backfilling of open pits, grading, topsoil replacement, revegation, reclaiming the surface effects of underground mining, underground mine sealing, demolition of mineral preparation and processing plants and related surface structures, reclamation of refuse and waste rock disposal/storage areas, and long term water treatment.¹⁹ One aspect of the mining operation that often eludes critical review by bonding company underwriters is the prospect of unanticipated adverse surface or ground water pollution problems, including acid mine drainage or other forms of leachate seeps which were not predicted during the pre-mine planning and permitting process. Nevertheless, hydrologic quality concerns and in particular, long term treatment obligations often arise in the context of defaulted or bankrupt operators and are expressly considered as bonded obligations.²⁰ Every component of the mine footprint must be addressed in order to mitigate the environmental, health and safety concerns inherent to a newly abandoned mine. It is usually when the mining company defaults that the remaining parties look at the substantive nature of reclamation bonds and the relationship of the parties for the first time.

Members of the regulated community and the regulatory agency often do not appreciate or have little experience with the legal and practical framework of suretyship in the event of the default and/or bankruptcy of the mining company. Although the regulations provide a bare bones framework for "bond forfeiture" there is much more to the equation when balancing the needs and obligations of getting a mine (or very often a family of mines) reclaimed, creditors paid and land owners satisfied. The failure of a mining company leads to absolute legal and regulatory chaos and impacts many parties including vendors, landowners, mineral owners, financial institutions, the community and the environment by proxy through the regulatory agencies. The bonding company or "Surety" plays a unique and very important role in how the regulatory requirements are or can be met under many circumstances which are discussed below. It is important to understand how the Surety fits into the reclamation program structure.

II. THE NATURE OF THE SURETY RELATIONSHIP

"Suretyship" is an ancient principal²¹ and is a subject of its own unique area of law.²² Principles of "Surety Law," which is contractual in nature, including the specifics regarding

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"statutory bonds," apply in these cases; however, many of the parties involved in a reclamation bond forfeiture matter are unaware of even the most basic principles of suretyship.

A. Suretyship Is a Three Party Relationship

The surety relationship involves three distinct parties, including the Principal who is the primary obligor, the Obligee is the party to whom the principal and surety owe a duty and the Surety is the secondary obligor.²³

Each party in the three part surety relationship has distinct obligations, responsibilities and rights. Surprisingly to many who encounter the topic after there has been a default, a surety bond is not an insurance policy. It is blackletter law that suretyship is not insurance.²⁴The surety relationship is a three-party relationship wherein the surety can seek reimbursement from the principal once it has paid due to the principal's default. Insurance is a two-party relationship where an insurer makes an independent agreement (an insurance...