# In th e United States Court of Federal Cl aims

No. 14-376C (Filed: Septem

b er 26, 2016)

* * * * * * * * * * * * * * * * * * *

PIONEER RESERVE, LLC, Contracts; Environm e ntal

Plaintiff
, Mitigation Banking.

v.

THE UNITED STATES,

Defendant

.

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Douglas E. Kahle , Virginia Beach, VA, f or plaintif f

. Geoffrey Martin Long, Civil Division, Departm e n t of Justice, W a shington, DC, with whom were Anthony Schiavetti and Jeff Lowry , Civil Division, Departm ent of Justice, W a s hington, DC.

OPINION AND ORDER

This case illustrates the c o n f usion and unf

a irness which can inadvertently result f

rom a n agency a cting sim

ultaneously in both a contractual and regulatory capacity

. The agency here i s the United States A rm y C orps of Engineers operating through t h e Alaska Division (“the agency ” or “the Corps”). By statute, the Corps is given responsibility to r egulate the discharge of pollutants into waters of the United S tates. See 33 U.S. C

. § 1344 (2016). In order to assist it in achieving that end, i t has erected an extensive regulatory scaf f old, including p rovisions w hich allow it to issue “credits” to landowners who agree to preserve the environm ental integrity of their lands. 33 C.F.R. § 332.8 (2016). Those c redits can then be sold to u nrelated entities that use them

as of f sets against p ollutant discha r ge i n c onnection with c onstruction or dredging projects. In ef

f ect, the Corps uses its m onopoly regulatory p owers to create a m arket of

assets which otherwise would not exist.

Plaintif f Pione e r R e s e rve, LLC (“Pioneer” or “plaintif f ”) i s a landowning entity which entered into an Um brella Mitigation Banking Instrum ent(“UMBI”) with the C o r p s by which plaintif f voluntarily im

posed perm anent environm ental protection e asem ents on two parcels of i ts land i n exchange f or the right to m arket t h e r e sulting credits. P laintif f alleges in this Tucker Act proceeding 1 that the Corps, acting in its regulatory capacity
, breached that
contract b y unilaterally reducing the total num ber o f wetland m itigation credits that plaintif

f had available to sell and by changing the of f icial classif

ication of those credits, thus lowering the desirability of those credit s to buy ers, and f rustrating plaintif

f ’s plans to sell those credits t o th e A l aska Railroad Corporation (“ARRC”).

W e previously he l d in Pioneer I 2 that the UMBI a m ounted to an enf orceable contract. In Pioneer II, 3 we d enied plaintif f ’s m otion f

or s um m ary judgm ent and g ranted-in-part and denied-in-part def e ndant’s mo t i on f

or

sum m ary judgm ent. W e f

ound that there were f

actual issues regarding whether Pioneer consen t e d t o t h e m odif ication of the U MBI and with respect to dam ages. Trial was theref ore necessary

.

Trial was held in A nchorage, Alaska f rom J une 20-25, 2016. T h e court heard live t estim ony f

rom num erous witnesses, including Pioneer owners and

m anagers Scott W alther and Calliandra Donn, various Corps e m ploy ees, the project ma n a ger f

or ARRC, and dam ages experts Charles Thom pson (f or plaintif f ), and D r. Benjam in Guillon (f or def e ndant). Af

ter p ost trial a rgum ent, the m atter is now ripe f

or disposition.

For the reaso n s s et f

o rth below, the c ourt holds that def endant

u nilaterally m odif

ied the term s of the contract, thereby c ausing a b r e a c h

. However, b ecause plaintif f was unable to prove that it w ould have sold its credits in the non-breach world, it has not dem onstrated that it i s entitled to any dam ages as a result of

the breach.

BACKGROUND

A. Factual Background

An e n v i r o n m ental m itigation b ank is c reated w hen the o wner of a parcel of land places a perm anent en c u mb rance on the land. This encum brance

1 28 U.S.C. § 1491 (2012).

2 Pioneer Reserve, LLC v. United States , 119 Fed. Cl. 201 (2014).

3 Pioneer Reserve, LLC v. United States , 125 Fed. Cl. 112 (2016).prohibits developm ent and requires the ongo i ng m aintenance and/or

restoration of the l and to keep it f unctioning biologically as it o riginally w ould without h um an i n t e r f

erence. In exchange, the owner is g ranted a c ertain

num ber of credits based upon an asses s ment of the l and. V arious credits are awarded based on the ty

pe of soil a nd vegetative characteristics of the parcel. 4 The m itigation bank can then sell these credits to entities which need to of f s et environm ental d a m age to the w aters of the United States caused by developm ent projects. The dy n am ics o f credit generation and sale has c reated

a lively m arket of buy ers and selle r s , a l t h ough this phenom enon was just getting started in southeast Alaska at the tim e this conf lict unf olded.

The Corps attem

pts to ma t ch as closely a s possible the land being af f ected by the developm ent project to the l and encum bered by the environm ental easem ents. In this r egard, it con s i d ers two f actors: the characteristics of the land and its phy sical proxim ity t o the im pacted area, ref erred to as a ba n k ’ s “service area.” Based on these f actors, the Corps identif ies a m itigation b a nk or other entity whose credits, in its d iscretionary opinion, provide the b e st m atch to of f set the expected environm ental im pact of the project. T he Corps keeps track of the ty pe and am o un t of m itigation credits that m i tigation b anks and in-lieu f e e providers have available using an online database known as RIBITS, an acrony m d e r i v e d f

rom the Regulatory In Lieu Fee and Bank I n f o rm a tion Tracking Sy stem

. The Corps then play s

m atch-m aker a nd points the applicant f o r a developm ent perm it to particular

sources f rom which the perm itee is directed to buy credits. T he C orps does not specif y a price f or the credits, leaving that to the parties to negotiate.

Pioneer is a m itigation bank located in the Matanuska-Susitna Borough in Alaska. It is o w n e d a n d managed by Scott W alther and his daughter, Calliandra Donn. Pioneer consists of two parcels of l and, the Edgerton Bank Parcel (“Edgerton”) and the Seldon Bank Parcel ( “Seldon”). Mr. W a lther

4 There are various ty

pes of credits, including p alustrine, riparian, and riverine. They generally ref

er to the characteristics of the associated l and. For exam ple, palustrine c redits r ef

er to wetlands that consist o f s o ggy highly -vegetated nontidal a r e a s such as m arshes, bogs, swam ps, bottom land f

orests, and s m all ponds. R iverine credit s ref er to an actual b ody of water, s uch as a s tream or river. These c redits are f urther b r oken down based upon the exact ty pe of f oliage on the land. The Corps in Alaska classif ies wetlands according to the Cowardin classif

ication s y stem, b u t the Corps in other jurisdictions m a y u se other classif

i cation sy s tem s.

3acquired both parce l s in 1998 a nd, af ter considering several options f or developm ent, d ecided that the l and would b e m ost valuable if it were p reserved

as a m i tigation bank. I n a lengthy process detailed in P ioneer I
, p laintif f hired

an environm ental consulting f irm
, Restoration and S cien c e Engineering (“RSE”), to h elp it work with the Corps to draf t a m ap of

its land, indicating dif f erent habitats and capacity f or various ecological f

unctions.

At the end of this process, Pioneer and the Corps entered into the UMBI

on Septem

ber 9
, 2011. PX 9 (Pioneer’s UMBI). P ioneer was assigned 151.81 wetland m itigation credits f or Edgerton and 83.73 wetland m itigation credits f o r S e ldon. 5 Of the 151.81 credits generated by the Edgerton parcel, 12 4

. 7

were classif

ied as palustrine (with those credits being f ur ther assigned palustrine subty

pes) and the Seldon parcel generated 73.71 palustrine credits. The Edgerto n p arcel also contained 4.53 riverine c redits, 9.02 c redits f or wetland buf

f er, and 6.58 credits f

or outer buf

f er. A t the tim e Pi o n e e r was established, there was only one other m i tigation bank in operation in this area of Alaska, the Su-Knik Mitigat i o n B a n k (“Su-Knik”). In establishing its

m itigation bank, P ioneer worked closely with Karen Nelson, an e m ploy ee of the Corps’ Alaska Division and c hair o f the intra-agency review team (“IRT”) associated with Pioneer’s m itigation bank. Starting in 2008, M s. Nelson was Pioneer’s prim ary point of contact wit h the Corps until she was r eplaced in 2012 by Nicole Hay es.

At the t im e plaintif

f established its m itigation b ank, it was a ware that ARRC had plan s t o b uild a railroad e xtension to Port MacKenzie, called the Port MacKenzie Rail E xtension Project (“PMRE”). The project w ould require ARRC to purchase a total of 160.2 mi t i g ation credits as an of f set to the destruction of wet l a nds. P X 26 (ARRC’s Perm it). This construction w ould occur geographically

close to plaintif

f ’s land, w hich m e ant the im pact of the
pr o ject w ould be in plaintif f ’s prim ary service area, a nd plaintif f
, f rom its dealings with Karen N elson, was under the b e l i e f t hat the railroad would be obligated to buy cred i t s f r om it once the perm it was issued. Although both Pioneer and S u-Knik operate m itigation banks in the Mat n u s k a

- Susitna Borough, they do not share the sam e prim ary service area. A s p l a intif f ’s expert witness testif

ied, Pion e er was the only m itigation bank that had the im p acted area as its prim ary service area.

5 Seldon c r e d i ts are not at issue. All r ef erences to m itigation banking credits and m odif

ication of the UMBI hereaf

ter relate to the Edgerton parcel.

4As explained by witnesses at trial, both lay and expert, there are three
way s t h a t a developer can obtain m itigation credits necessary to of f set the environm ental im

pact of a proposed proj e c t: m itigation banking (buy ing credits f rom banks such as Pioneer), “in-lieu” f ee providers (explained below),

a n d mi t i g ation generated by the perm i tee on its o wn l ands. In the case o f

m itigation banking, the credit p rovider p laces a perm anent encum brance on its land in exchange f

or a certain am ount o f credits, w hich it can then sell. I n the

case of in-lieu f

ee providers, the credit provider is given provisional credits that it can m arket t o businesses. Once a transaction is com p lete, the in-lieu f

ee provider has the responsibility o f s ecuring land and pl a c i n g a conservation

easem ent o n that land. The third ty p e o f m itigation, p erm itee responsible

m itigation, involves the perm i tee itself purchasing land and devising its own conservation plan. W ithin these three alternatives, the Corps has expressed a hie r a rchical pref

erence, with m itigation banking considered the m ost pref erable, i n-lieu f

ee providers the second m ost pref e rable, and perm itee responsible m itigation the least pref erable option.

In Septem

ber of 2012, the Corps issued A RRC a perm it to be g in

co n struction of the PMRE, c onditioned on i ts o btaining 160.2 palustrine

m itigation credits. The perm i t ranked available credits in term s of e cological and geographic pref

e rence. Credits f

r om P ioneer’s E d gerton parcel w ere the

m ost pref erred, Su-Knik’s c redits were the second m ost p ref erred, and credits f rom Pioneer’s Seldon parcel were ranked third. PX26 at 40. At the t im e, at least according to the UMBI, the Edgerton parcel had available 124.7 assigned palustrine credits and the Seldon parcel had 73.71 assigned credits available. The record is u n clear with respect t o how m any o f S u

- K n ik’s 1,891.1 originally -assigned palustrine credits it had available at this tim e

. JX 1 a t 20-21 (Su-Knik’s UMBI).

Despite the f

act that the UMBI previously had awarded Pioneer 124.7 palustrine credits with respect to the Edge r ton parcel, the perm it required ARRC to purchase only 1 6

. 9 2 p a l ustrine credits f rom that p arcel, with the

rem ainder o f the credits (approxim ately 143)to be p urchased f rom the Su-Knik bank. None were to be purchased f r om Seldon. Af

te r t r i a l
, i t i s clear that ARRC was directed to buy only 16.92 credits f rom P ioneer because, at the tim e the perm it was i ssued, and unbeknownst to Pioneer, the Alaska District had re-evaluated P ioneer’s Edgerton parcel t o c orrect what the Corps perceived to be a m apping error. This requires som e background.

In 2 0 1 2, Nicole H ay es becam e the F ield Of f ice Supervisor f

or the

5Alaska District and replaced Karen Nels o n a s I R T chair f or Pioneer’s

m it i g a t ion bank. Upon assum ing her new position, one of Ms. Hay e s’ f irst actions was to personally tour pla i n t if f ’s l and. PX 48 (Letter f rom Karen Kochenbach, C h i e f, Regulatory Divison f or the C orps, Alaska Division, to Ms. Donn). Ms. Hay es testif

ied t h a t , as she walked across Pioneer’s Edgerton parcel, she com

pared what she was seeing to the m ap of the Edgerton Parcel contained in Pioneer’s UMBI a nd im me d iately thought that the land h ad not been correctly characterized in term s of its hy dr o l ogical and biologic characteristics. Id. Bef

ore the Corps’ i ssuance of ARRC’s perm it, Ms. Hay es and Ms. Donn initiated an e xchange e-m ails regarding reclassif y ing Pioneer’s Edgerton parcel credits according to what Ms. Hay es believed to b e the correct classif i cation of the land.

On August 22, 2012, Nicole Hay es and other Corps m em be r s , a long with individuals f

r om the Environm ental P rotection Agency
, m e t with Pioneer
to discuss the best way of m oving f orward with the issue of

reclassif y ing the l a nd. N o solution was r eached at that tim e. DX 41 (Notes f r om me e t i n g between Pioneer, Corps, a nd EPA). O n Septem ber 7, 2012, Ms. Hay es sent an

e-m ail t o M s. D onn w i t h a n attached m ap, showing the p roposed changes to the Edgerton parcel. 6 DX 4 4 (Em ail conversation b etween Ms. Hay es and Ms. Donn). This r ef

lected a sm all reduction in overall credits and a reclassif i cation of a large porti o n o f available palustrine credits, resulting in a dram atic reduction to 16.92 palustrine credits. T h e f orm er p alustrine credits were den o mi n a t e d as “riparian buf f e r.” Ms. Donn replied that the m ap l ooked “better than [ she] thought” and sent Ms. Hay es a n updated t able of available credits f or the Edgerton parcel ref lecting the reclassif

ication. DX 44 at 1 At this tim e, however, no f

orm al request f

o r change was requested or m ade.

Despite no of

f icial change having b een m ade to Pioneer’s UMBI when ARRC’s perm it was i ssued by the C orps on Septem ber 1 0, 2 012, t h e p erm it directed ARRC to p u rchase only 16.92 palust r i n e c r edits f rom P ioneer and 143.28 p a lustrine credits f r om Su-Knik. PX 26 at 45. In response to o bjections Pioneer raised with the Corps, Lieutenant Colonel Mark DeRocchi, deputy

com m ander of the Arm y C orps of Engineers, Alaska District, t estif ied that when he looked into the m atter, he f ound that when the perm it w a s issued on Septem ber 10, 2 012, Pioneer’s account in RIBITS showed a balance of over

6 Table A-6 shows P ioneer as having 11.57 PFO1/SS1B c redits, 5.25 PEM1b/PEM1C credits, and 0.10 P U B3F c redits, w hich represent the totality of palustrine credits available at the Edgerton parcel.

6160 c redits available f or sale b y Pioneer. Tr. at 554-55. DeRocchi i nquired as to why the perm it required ARRC to p urchase only 16.92 credits f rom Pioneer. He was told that, although Pioneer’s credits had not been of f i cially m odif

ied by any paperwork, N icole Hay e s viewed 16.92 credits a s what w as s aleable by Pioneer. Id. Ms. Hay es testif ied that s he was concerned that Pioneer’s UMBI had m isrepresented the am ount of wetland m itigation t h e l and was actually capable of

providing. Id. At 620.

The railroad succeeded in buy ing 143 palustrine c redits f rom Su-Knik f or $10,000 per credit. As to the 16.92 credits ARRC was d irected to buy f rom the Edgerton p arcel, Pioneer m ade a n initial of f er to A RRC to sell the credits f or $2.496 m illion. This was based on its pre-existing pricing schedule. Pioneer of

f ered a volum e discount, ref lected in the f

o llowing table:

Tiered Pricing Schedule

Total Credits Purchased D iscount

Tier 1 0 - 5 $160,000.00 (base price, no discount)

Tier 2 6 - 15 10%

Tier 3 16 - 25 20%

Tier 4 26 - 45 30%

Tier 5 46 - 70 40%

Tier 6 71 - 100 50%

Tier 7 > 100 60%

DX 3 6 at 1 (Pioneer’s pricing schedule). The percentages i ndicated in Tiers 2 through 6 r ef

lect an increasing d iscount to the T ier 1 p rice based on volum e. Id. 7

7 For exam

ple, if an entity was to purchase 2 5 credits f rom Pioneer, they w ould
pay $160,000 per credit f

or the f irst 5, $144,000 per credit f or the n ext 1 0, and $128,000 f

or the f inal ten.

7ARRC responded with a n o f f e r t o purchase the credits f or $346,000, approxim ately $20,000 per credit, twice w hat i t paid Su-Knik. Eventually
, u n a b l e to reach an agreed price with Pioneer, ARRC asked the Corp s t o

m odif y its perm it. ARRC argued that Pioneer’s price was p r o h i bitively expensive. It proposed in the alternative that it be allowed e i t h e r t o : (1) purchase all of the credits f rom plaintif

f o r f r om S u-Knik Mitigation bank; (2) purchase its m itigation credits f rom an in-lieu f

ee provider a s an a lternative to

a m itigation bank; o r (3) purchase the balance of credits f rom S u-Knik while opening the sale of the 16.92 rem ai n i n g credits to a com petitive bidding
process between Pioneer and Su-Knik. DX 55. T he Corps denied ARRC’s request o n Decem

ber 21, 2012, noting that, “[ a ] t t h i s tim e, ARRC’s

m odif ication request does not provide the Corps suf f icient evid e nce dem onstrating com

pensatory m itigation costs a r e so prohibitive that it w ould make the work authorized under the D A p erm it no l onger practicable.” DX 58.3.

On January 2 5
, 2 0 1 3
, ARRC again p etitioned the Corps f or a perm it

m odif ication. The r equest noted that “[ d]espite protrac t e d n e gotiations with Pioneer Reserve, ARRC has been u nable to execute a m utual agreem ent f

or the purchase of 16.92 m itigation credits.” DX 80 at 2 (Em ail f ro m Jef f Schivley of ARRC to Ms. H ay es). ARRC proposed m odif y ing the perm it to a llow it to purchase the rem aining 16.92 credits f rom Great L and T r

ust (“GLT”), an inlieu f ee pr o vider. ARRC f

u rther noted that it “ cannot purchase these credits dir ectly f rom Pioneer Reserve as s pecif ied by the Corps a nd com ply with Procurem ent Rules” because ARRC “is owned by the State of Alaska and as such, it i s r equired to com ply with Procurem ent Rules that are based upon

com petitive principles consistent with [ Alaska S t a t u te] 36.30 and industry standards.” D X 69 at 1 (Letter f rom ARRC t o Ms. Hay es). S ubsequently
, in a

m em o r a n dum d raf ted by Nicole Hay es, the Corps g ranted ARRC’s request and allowed it to purchase 16.92 credits f rom GLT. DX 85.

On January 28, 2013, ARRC and GLT com pleted a sale f

or the

rem aining 1 6 .92 m itigation credits. JX 11 (Letter f rom GLT to ARRC). A RRC paid $492,101.28, or $29,084 per credit. Id. In the en d
, P i o n e e r did not sell
any of its available m itigation cre d i t s to ARRC. At the t im e it f iled its

com plaint, Pioneer h a d com

pleted only two sales of m itigation c r edits, both to the Alaska Departm ent of Transportation. The f irst s ale, on J uly 25, 2013, was f or 4.4 credits f

or a total of $347,600 ($79,000 per credit). PX 52 (First Pioneer bill of sale to Alaska DOT). The second sale, on January 21, 2014, was f or 0.28 credits f

or a total of

$22,120.00 (also $79,000 per credit).

8Des pite the earlier disagreem ents that P ioneer and the Corps had

concerning credits, on Septem ber 4, 2013, Ms. Donn e-m ailed M s. H ay es, say ing “ we need to f

orm ally request that the clock starts on com m ents on o ur draf t so I would like to do that.” D X 9 9 at 2 (Em a il e xchange b etween Ms. H a y e s a n d Ms. D onn). This was in ref e rence to a revised m ap and table o f credits f or Pioneer’s Edgerton parcel. W e can only assum e that Ms. Donn did
not appreciate that the r e classif ication underc u

t t h e m a r k e tability o f the credits. The draf t m entioned in the e-m ail ref e rs to the pre v i o u s l y re-m apped and revised ledger of Pioneer’s available credits. On the s am e day
, Ms. Hay es em ailed back say ing that “we [ the Corps] d o not n eed any thing else” and asked Pioneer “[ w ]ill y ou be providing a signed request or is the e m ail below serving

as the request [ f

or m odif ication]? ” D X 9 9 at 1

. M s. Donn replied “[ i ]f the

em ail below is suf

f i cient to serve as the request that would be great.” Id.

On N o v em

ber 4, 2 013, Pioneer’s UMBI w as of f icially m odif

ied b y a letter to Pioneer sent by Colonel Christopher Lestochi of the Corps. The letter noted th at the changes o ccurred “[ b]ased on y our re q u e s t of Septem b er 4, 2013. ” JX 12 (Letter f

rom Col. Lestochi to Pioneer). The letter included a revised table showing P ioneer’s credits generated by the Edgerton parcel. In addition to an overall reduction of credits, f rom 151.80 to 151.60, Pioneer was given a total of 36.36 palustrine-ty pe c redits. Id. The m ajority (92.62) of P ioneer’s credits were newly classif ied as “Riparian.” Id. 8 The court wa s of f ered no explanation by e ither party f o r why the previously revised num ber of palustrine credits (16.92) becam e 36.36 credits. By the tim e of the N o vem ber 2 013 m odif

ication, which plaintif

f seem s to have r equested
, t h e ARRC credit purchase f

rom Su-Knik and GLT was com plete.

On May 5
, 2014, plaintif

f f iled the instant case, alleging that the Corps

8 The of f icial am endm ent to Pioneer’s U MBI called these credits “ Riparian.” Previous draf

t versions of the A-6 credit table, such a s the one draf t ed by Ms. Donn and s en t to Ms. Hay es in S eptem ber of 2012, called these credits “Riparian Buf

f er.” The s e t e r

m s a r e a p p a r e n t l y s y n o ny m ous. M s. Donn testif

ied
t h a t s h e had never previously heard of riparian buf f e r c redits, and did not believe there was any m arket f or them

. Ms. Hay es testif

ied that the C orps did not have jurisdiction over the upland-ty pe lands that m ake up riparian buf f er

or riparian c redits. Tr. 733. As n oted by M s. Hay e s, the Corps cannot m andate

m itigation f

or upland areas because those lands a re not within its j urisdiction. There is, then, essentially no m arket f or riparian credits because the Corps h as no authority

to com pel m itigation f

or their destruction.

9breached the UMBI in Septem ber 2012 when it unilaterally acted to reduce Pioneer’s E dgerton palustrine credits f rom 124.7 to 16.92. P laintif f f urther alleges that, had that breach not o c c u r r e d
, the Corps would have directed AARC to purchase a ll of Pioneer’s Edgerton parcel palustrine credits. Plaintif f f urther argues that it would have be e n a b l e t o sell those credits f o r $89,000 each, and asks f

or a total of

$12.6 m i llion in dam ages.

DISCUSSION

Two issues rem ain. First, i t mu s t be determ ined whether the Corps breached the U MBI i n Septem ber 2012 when it directed A R R C t o buy only 16.92 palustrine credits f

r om the Edgerton parcel. A related inquiry is whether the Corps unilaterally reduced the num ber o f credits without the written
consent of Pioneer. If it is the case that the C o rps un i l a terally reduced Pioneer’s m a rketable credits, such action w ould necessarily result in a breach of contract. Second, if a b reach is f ound, the court m

ust determ ine the proper

am ount of

dam ages to be awarded to Pioneer.

A. The Corps u nilaterally reduced t he number o

f palustrine credits available to Pioneer, thereby breaching the UMBI

The o riginal U M B I provided P ioneer with 1 51.81 credits f or the Edgerton p a r c e l
, o f w hich 124.7 credits were classif ied a s palustrine. It is und i sputed that the UMBI was in f act m odif

ied on N ovem

ber, 2013, apparently by t h e C o r

ps and with Pioneer’s consent. U pon m odif ication, the total num ber of c redits f

or Edgerton was reduced to 151.6, while the num ber of palustrine c redits was reduced to 36.36. That m odif ication, however, took place one y ear af

ter the Corps directed A RRC to buy only 16.92 credits f rom Pioneer’s Edgerton parcel. It is the events in Septem b er 2012, which Pioneer relies on f

or its breach claim

.

Section VII G of the UMBI i s entitled “ Modif ications” and r eads in f ull:

This UMBI m ay o nly be am ended or m odif i ed with the written approval of the Sponsor and the Corps. In the e vent the Sponsor determ ines that m odif

ications mu s t b e m ade i n the Mitigation Plan to ensure successf

ul establishm ent a n d operation of the Bank, the Sponsor shall subm it a written r e quest f or such

m o dif ication to the Corps, f or a pproval. The Corps will

10distribute this request to the IRT to seek their recom m endations.

PX 9 at 15. Thus, i t is clear that in order to m odif y the U MBI, both parties had
to a gree i n writing. Unilateral m odif i cation of the UMBI would constitute a breach of this section and the contract as a whole.

W hen Nicole Hay es replaced Kare n Nelson as the m ain point of contact, one of her p riorities was to p ersonally tour a ll of the m itigation bank properties f

or which she was responsible. Af ter visiting Pioneer’s m itigation bank on May 29, 2012, Nicole Hay es a nd her team reviewed the wetland delineation in the adm inistrative r ecord and conf irm ed that, i n their view, large portions of the Edgerton parcel that w ere c l ass i f i e d a s w etlands s hould have been instead classif

ied as uplands. Upland areas cannot generate palustrine credits. Thus, the ef

f ect of reclassif

y ing som e o f Pioneer’s l and f rom wetlands
to uplands reduces the n um ber of palu s t r i n e c r e dits a vailable f or sale by Pioneer.

The evide n ce shows that the Corps believed P ioneer’s UMBI to have be e n incorrectly m apped. Although the Corps engaged in d iscussions with Pioneer f o r over a y ear, it unilaterally
, and without Pioneer’s approval, reduced the am ount of palustrine credits available f o r Pioneer to sell. It was not until Septem ber 2013 that Pioneer consented to the m odif ication of the UMBI. Prior
to then, any talk of m odif ication had been purely in the n ature of negotiation. Although both s ides exchanged revised f igures and tables, nothing prior to the Septem ber 2013 e-m ail exchange between Ms. Donn and M s

. Hay es can be f airly construed a s Pioneer approving the m o dif ication o f its credits. W hen the

m odif ication f inally took place, it was a y ear af ter the breach. 9

Even though the Corps’ of f icial d atabase as of Septem b er 2012 showed that Pioneer had its original, f ull am ount of p alustrine credits, t h e C o rps nevertheless unilaterally reduced Pioneer’s credits when it directed ARRC to purchase only 16.92 o f those credits f r om plaintif

f

. ARRC’s perm it indicated that it needed a to t a l o f 160.2 credits f or the PMRE and that Pioneer’s Edgerton palustrine credits were the m ost pref e rred and ecologically appropriate ty

pe of credit f

or of f set. T here i s no question that, if the Corps viewed Pioneer as having m ore than 1 6

. 9 2 of these credits, it would have ordered ARRC t o purchase all of them bef ore purchasing a ny credits f rom Su9 The governm ent has not argued that m odif ication of the UMBI in Novem ber 2013 constituted a waiver by Plaintif f o f the prior breach.

11Knik. Accordingly
, the court f inds that the Corps breached the U MBI when it directed ARRC to p u rchase only 16.92 palustrine cred i t s f rom Pioneer at a point when no m odif

i cation to the contract had y et been m ade.

B. Plaintiff Cannot Prove That It W ould Have Sold All Its Mitigation Credits In The Non-Breach W

orld

Having determ i ned that the actions of the Corps lead to a b reach of the UMBI, the court now turns to the issue of d am ages. Plaintif f contends that, had the Corps not unilaterally acted to reduce the overall n u mb e r o f palustrine credits it had available, the perm it issued to ARRC would have ordered A RRC
to purchase a ll of Pioneer’s palustrine c redits, and that it would, in f act, have sold all of those credits t o ARRC. Plaintif f asks f or $89,000 pe r c r edit in d a ma g e s f

o r a total of $12,655,800, based upon a presum ed sale of 160.2 credits, the num

ber of credits the railroad needed. 10

It is notable that p laintif

f of f ered no alternative s cenario f o r dam ages other than the s ale to the railroad and no a lternative valuation m ethod than the

use of its advertised pricing schedule. This is perhaps understandable b ecause, although the m itigation credits have real value, the owner’s ability to exercise those credits is c ontrolled by the Corps. In t his instance, during the approxim ately one y ear period between breac h a n d m odif ication, plaintif

f of f ers evidence of only one project f or which the Edgerton credits w ould have had any utility –the PMRE.

To support its credit pricing, plaintif f of f e r e d the e xpert report and testim ony o f Charles Thom pson, the c o -owner and principal of Eco-Capital Advisors, LLC, a f

i nancial advisory and private equity f irm based in A tlanta, Georgia. In h i s c areer, Mr. Thom p son h as been involved in hundreds of individual transactions involving the sale of m i tigation credits. D e f endant prof f ered Dr. B enjam in Guillon as its e x pert witness. Dr. G uillon is c urrently the m anaging director of the conservation f inance departm ent at W R A, Inc.,

a c o nsulting group f

or developing and m anaging m itigation and conservation banks, a nd spent three y ears as the h ead of the com pany ’s m itigation banking departm ent. Dr. Guillon testif ied that he has pers o n a l l y s upervised the developm ent a nd m anagem ent of over 10 m i tigation banks a n d conducted due

10 It is n ot clear why plaintif f would u se the total num

ber of c r edits the r ailroad needed, when the m axim um num ber of palustrine credits available f rom the Edgerton parcel was 124.7.

12diligence on over 100 dif f erent m itigation b anks. The c ourt f ound b oth Mr. Thom pson and Dr. Guillon to be credible expert witnesses.

Mr. Thom

pson looked to several f

actors i n reaching his conclusion that $89,000 r epresented a f

air m arket value f

or one of Pioneer’s palustrine credits, and that th e r a n g e o f values f or one of P ioneer’s c redits was $79,000 to $167,000. PX 64 at 11 (Plaintif f ’s Expert Report). First, Mr. T hom pson l ooked
at historical credit sales in the region, including the Anchorage b owl area. W h ile noting that land in the Anchorage area generally represented higher value property than land in the Matanuska-Susitna Borough where Pioneer’s la n d is located, Mr. Thom p son believed that Pioneer’s land was m ore

com parable to land in the Anchorage bowl area due to the f act it was f

ully developable f

or r esidential and / o r com m e rcial use. Id. Because in-lieu f ee generated credits h ad been sold by GLT f or Anchorage bowl projects f or $167,000 per c redit, Mr. Thom pson b elieved that value to be the high end of the range f

or Pioneer’s credits. Mr. Thom p son next l ooked at the underly ing tax-assessed land value. Based on the knowledge tha t A R R C thought i t was reasonable to p ay Su-Knik $10,000 p e r credit, Mr. Thom pson looked t o the
average per acre tax assessed value f or S u-Knik’s land, which he determ i ned
to be $426. He then divided $10,000 by $ 426 and f ound that the credits were priced at a m

ultipl e o f approxim ately 23 tim es the underly ing land’s taxed assessed v a lue. Apply ing this sam e m ultiplier to Pioneer’s t ax assessed value
per acre of $ 4,969, this w ould place a value of appro x i ma tely $114,000 per credit on Pioneer’s palustrine credits. PX 64 at 12.

Mr. Thom

pson f inally looked at credit sales com pleted by P ioneer (two sales of palustrine credits to the Alaska DOT f o r $ 7 9
, 0 0 0 per credit), and Pioneer’s p ricing schedule, which would have y ielded a value of $89,000 per cred i t b a s e d u p o n a sale of 160.2 credits. PX 64 at 12. Mr. Thom p son also opined that he did not think the pricing of f ered by G reat L and Trust ( $29,000
per in-lieu f

ee advance c redit) was a proper com parison to Pioneer’s credits because Pioneer of

f e red m itigation credits w hile GLT of f ered credits as an i nlieu f ee provider. He also opined that, when looking at m itigation costs as an overall percentage of the budget of a project, a cos t o f $ 89,000 per credit would have been within the industry standard. PX 64

. Dr. Guillon, on the other hand, opined that, as of Septem ber 10, 2012 (the d ate the p e rm it w a s i s s u ed), Pioneer’s credits were worth between $12,217 and $29,084 per credit. DX 125 at 4 (Def e ndant’s Expert Report). I n reaching this conclusion, Dr. Guillon looked a t the p rice points of potential c om petitors

13(in this case, GLT’s sale of in-lieu f e e credits t o ARRC at $29,084 per credit and Su-Knik’s pricing of $10,000 per credit), as w e l l as a d iscounted cash f l ow valuation, w hich l ooked to Pioneer’s price structure and re a s o n a ble revenue expectations. Id. at 18. Dr. Guillon looked t o a l l of Pioneer’s expenses associate d w i t h starting the m itigation bank such as consulting f ees, the loss of value in the land as a result of restricting it with an easem ent, and the cost of ongoing m aintenance and taxes. He also considered the discount rate, which is the target nom i nal i nternal rate of return a m itigation bank would expect to get on its investm ent. Id. at 25. A f t e r l o o k ing a t a variety of risk f actors, Dr. Guillon c oncluded that 25% would be a n appropriate nomi n al d iscount rate. Id. at 26. Based on this, Dr. Gui l l o n concluded that an investor seeking to generate an annual r eturn o f 25% on his investm e nt i n P i oneer’s land w ould have priced each credit at $12,217. Id.

It i s unnecessary f

or us to resolve the disagreem ent between Mr. Thom pson and Dr. Guillon. Even if Mr. Thom pson’s f igures can be justif

ied, the f act is that plaintif

f had com petition in Septem

ber 2012 f

rom at least two other sources willing to undercut i ts prices. The railroad w as n ot o bligated to pay m o re than it had to, and indeed, it t ook the position that d oing so w ould

run af o u l o f s t ate procurem ent regulations. The critical f law in plaintif

f ’s
attem pt to prove dam ages is that i t ha s not m a d e a showing that, absent the breach of contract, it would have been a b le to sell any , m

uch less a ll of its Edgerton parcel palustrine credits to ARRC for $89,000 per credit. In a nonbreach world, Pioneer would have h ad 124.7 palu s t r i n e c redits available f or sale f rom its Edgerton parcel. Yet, de s p i t e over f ive m onths of n egotiation regarding the price of

credits, Pioneer and ARRC could not consum m ate the sale o f e ven 16.92 credits. On Septem ber 17, 2012, Pioneer’s initial of f er was sent to ARRC, and the of f er proposed the sale of

16.92 palustrine credits f or

a t otal of $ 2
, 4 9 6
, 000.00, or an average p rice of $146,823.53 per credit. DX 50.13. This of

f er was rejected by ARRC because ARRC believed the price was too high. On January 22, 2013, ARRC sent out its f inal quotation request t o,

am ong others, Pioneer. D X

. 78.1 O n January 2 5, 2013, Pioneer e -m ailed its f i n al of f er to ARRC, in which it proposed to s ell the credits f or a price o f $122,576.83 per c redit, a total of $2,074,000.00. J X 1 0

. T h i s p rice was over f our tim es as expensive as the next highest of f er, $492,101.28 (an average of $29,084 per credit) f

r om GLT. JX 9.

In support of $89,000 as a plausible price, plaintif f points t o the f

act that, in 2013, i t sold approx i ma t e l y f i ve palustrine c redits to the Alaska Departm ent o f Transportation f or a price of $79,000 per credit. W e d isagree.

14Assum ing that the C orp w ould order ARRC to f irst purchase a ll of Pioneer’s Edgerton palust r i n e c r edits, that is only 124.7 credits and still short of the 160.2 credits ARRC was r e q u i r ed to p urchase. ARRC would then have to purchase the remaining b alance of credits f r om Su-Knik as the second m ost pref erable option. Using Pioneer’s t iered pricing schedule, the price f or 124.7 credits would b e $12,140,800 total, or $97,360.06 per credit. It is unlikely that ARRC would have agreed to p urchase credits f or $ 89,000, or even $79
, 0 00,

m uch less $97,360.06, given its kno w l e d g e t h a t S u

- K n i k was selling m itigation credits f o r $ 10,000, not to m ention i t s r e q uirem ent t o com ply with state procurem ent r

u les. DX 69.1. 11 Dr. Guillon reached this s am e conclusion in his expert report, noting that “if ARRC had bee n d i r ected to p urchase 160.2 credits f rom Pioneer r eserve at $90,287.14 per credit, which is alm ost 1 0 t im es

as m any as ARRC ref

u s ed to purchase a t $88,094.12 per c redit, there is s trong

reason to think that ARRC would have sought a m odif i cation and initiated a bidding process, sim ilar to the process that was later initiated by ARRC f or the 16.92 credits.” DX 125.16.

In the breach world, af

ter m onths of negotiations with ARRC, Pioneer f aced m a k i n g a do-or-die of f er f or the sale of 16.92 credits. It of f e red those credits f o r $ 1 2 2
, 5 76.83 p e r credit, and did so knowing that, if an agreem ent

was not reached, it would lose out on the opportunity to sell these credits to ARRC. The sim

ple f act i s that Pioneer w as unwilling to lower its p rice into a range that ARRC w o u ld have f ound acceptable. Accordingly
, plaintif f h as f ai l e d to adequately prove a non-breach world in w hich Pioneer and A RRC would have reached a deal f or the s ale o f 124.7 credits a t $ 8 9 ,000 per credit when, in the breach world, they could not even consum m ate a deal f or 16.92 credits. The breach did not cause that loss. Plaintif f chose to build its dam ages

m odel around i ts own pricing schedule without t aking into account the f act that it was responsible f

or electing not to consum m ate a deal at a price ARRC was willing to pay

. Having been presented no alternative m eans of m easuring the dam age caused by the breach, w e m ust conclude that p laintif

f h as not proven that it suf f e red any dam age.

W e s y m p a t h i z e w i t h p laintif f ’s dif f iculty in proving dam ages f or breach of contract with respect to a property interest as unique as m itigation credits. In som e respects what the agency di d here sounds m ore in the nature of a taking o f property , or interf erence with a business r e lationship, or im proper

11 A RRC specif

ically m entioned AS 3 6.30. Title 3 6 is entitled “Public Contracts” while Chapter 30 is entitled “State Procurem ent Code.”

15adm inistrative a ction. But the underly ing relationship here is, indeed,

generated b y a contract, m aking a constitutional taking approach problem atic (and, in a ny e vent, unasserted); i nterf e rence with a business relationship i s a tort over which this court would not have jurisdiction a nd which in all likelihood would run af

oul o f g overnm ent def

e nses in a Tort Claim s Act 12 proceeding; and we previously held that the plaintif f could not proceed in this
court with a challenge to the agency ’ s actions in reexam ining the c l assif i cation of the land included i n the m itigat i o n b a nk. 13 W e note as w ell, that it w ould have been im

possible to assert a br e a c h o f contract c laim af ter Novem

ber 2013, when Pioneer c onsented t o a m o dif ication to the U M B I

. P l aintif f was thus boxed into a contract proceedin g f o r events p rior to the agreed-upon

m odif ication, but it then elected to f ram e its dam a ges claim entirely a round a lost sale opportunity with the railroad. T he f a ct that both e xperts thus attribute

some value t o the extinguished credits does not advance p laintif f ’s claim
, which was an all-or-nothing approach built on an unproved assum ption–that the sale to the railroad would have been consum m ated, but f or the breach.

CONCLUSION

For the reasons set f

orth above, the court f

inds that, although def

endant breached the UMBI when it acted u n i l a t e r a lly in reducing the n um b er of available credits that plaintif f had available f

or sale, Pioneer has not proved tha t, in the non-breach w orld, Pioneer and ARRC w ould have c om e to an agreem ent f

or the sale o f c r e d i t s

. Accordingly
, p laintif f has f ailed to prove dam ages and we m

u st award judgm e nt f

or the def endant. The clerk of court is directed to enter judgm ent accordingly . No costs.

s/Eric G. Bruggink ERIC G. BRUGGINK Senior Judge

12 2 8 U.S.C. § 1346(b) (2013).

13 I n Pioneer II

, the court r e

j e c t e d the plaintif

f ’s attem pt to challenge the actions of the Corps, holding that “we agree with def endant’s a rgum ent that the regulations af

f ord the C orps som e level of discretion, which insulates its PMRE perm it decision f

rom collateral scrutiny in an action here f or dam ages.” Pioneer II

, 125 Fed. Cl. at 118.

16