Hermosa Beach has agreed to pay $1.5 million to E&B Natural Resources in exchange for the energy company abandoning all claims against the city, bringing to a close decades of disagreement that climaxed in the 2015 defeat of Measure O.
Under the terms of the settlement, E&B agreed to terminate a 1992 lease on the City Yard where it planned to extract oil. E&B also abandoned its claim for additional interest from the city stemming from a 2012 contract, and surrendered its rights to mineral resources in the city limits.
Although voters rejected Measure O, which would have revoked the city’s existing ban on oil drilling, in March 2015 by margin of more than 3 to 1, the dispute over interest and other ongoing claims prevented the city from escaping from the shadow of oil drilling. Tuesday’s settlement, city officials said, finally accomplished that.
“With this settlement, Hermosa Beach has conclusively eliminated E&B’s potential for oil drilling in the City of Hermosa Beach, achieving what the community expected when it voted against Measure O,” Mayor Hany Fangary said in a statement. [Story continues following photos]
[ngg_images source=”galleries” container_ids=”1753″ display_type=”photocrati-nextgen_pro_masonry” size=”300″ padding=”15″ ngg_triggers_display=”exclude_mobile” captions_enabled=”1″ captions_display_sharing=”1″ captions_display_title=”1″ captions_display_description=”1″ captions_animation=”plain” is_ecommerce_enabled=”1″ order_by=”sortorder” order_direction=”ASC” returns=”included” maximum_entity_count=”500″]The agreement, negotiated by City Attorney Michael Jenkins and a team of outside attorneys, earned the unanimous approval of the City Council. In an interview Tuesday, Fangary said that although the city does not take the $1.5 million payment lightly, the costs and uncertainties associated with protracted litigation, as well as the comprehensive resolution of claims in the settlement, convinced council members to support it. E&B was asking for at least $3.5 million in interest.The settlement allows the city to achieve more than it would have had it gone to trial on the interest claim and prevailed, said Marc Rohatiner, a real estate attorney with Wolf, Rifkin, Shapiro, Schulman & Rabkin, who assisted the city during the settlement process. In addition to the city yard, where the proposed drilling would have been staged, E&B held mineral rights associated with some two dozen residential and school district parcels throughout the city, including the ground under South Park.
“We realized that they were willing to give up way more than we could have obtained in court,” said Councilmember Stacey Armato, who helped organize the No on O campaign before being elected to council. “Not just the lease in the city yard, but the mineral rights in all the other properties. That was certainly a victory for us because it was a true walkaway.”
Oil in Hermosa has a long history. Residents defeated extraction attempts by Shell in the late ‘50s, instituting a ban on oil drilling in the city. That ban was revoked by voters in 1984, when the city was desperate for cash. In 1992 Hermosa granted a 35-year lease to Macpherson Oil to “slant drill” into offshore oil deposits from the City Yard at 6th Street and Valley Drive. But in 1995, voters approved Proposition E, which reinstated the oil drilling ban. In 1998, the City Council rejected the project after a report from Aspen Environmental Group and Bercha International identified previously unrecognized environmental risks.
Macpherson sued, seeking the potential value of oil they estimated they would have extracted had the project gone forward. The number fluctuated with the price of oil, but by 2012 reached into the hundreds of millions of dollars, enough to bankrupt the city.
In March 2012, shortly before trial was set to begin on how much the city owed Mcpherson, Hermosa reached an agreement with Macpherson and E&B Natural Resources. Macpherson would receive $30 million in exchange for abandoning its claims in Hermosa. E&B paid McPherson $12.5 million to assume the lease, leaving Hermosa responsible for the remaining $17.5 million. Hermosa did not have the money at the time, so E&B paid the whole $30 million, with the understanding that Hermosa would put a measure to the voters, asking them to rescind the city’s ban on drilling in the tidelands. Additionally, Hermosa agreed to pay back the $17.5 million if the measure failed.
After the defeat of Measure O, Hermosa floated a bond to pay the money back. Hermosa paid $247,151.25 in interest, which constituted a five percent rate on the money owed, accruing over the period stretching from March 24, 2015 — the date Los Angeles County certified the election results for Measure O — until the principal was paid in August.
But attorneys for E&B contended that that interest began accruing on the signing of the March 2012 agreement. At five percent, this totalled nearly $3.5 million. In October 2015, E&B attorneys sent a letter to Jenkins, demanding that the city enter mediation on the dispute. In addition to the interest dispute, E&B alleged that the City Council had engaged in “bad faith” by not remaining neutral during the election, which could have provided for additional damages. A subsequent letter, from February 2016, said that Measure O had suspended the term of the lease of the City Yard, meaning the lease could extend beyond its original 2027 end date.
The city began mediation with E&B in spring 2016. Marc Benezra, an attorney with Baker Hostetler who worked with the city during the settlement process, said that the interest dispute came down to whether the upfront payment by E&B constituted an “advance” or a “loan.” Rohatiner, the real estate attorney, examined several possible arguments, including one that the lease on the city yard that E&B acquired from Macpherson had lapsed just before litigation got under way in 1998.
The decision to settle, despite what lawyers described as several strong arguments, came not just because of the strategic advantages it provided, but because negotiations constituted “a huge distraction” from other council business.
“This was consuming a lot of our time. We talked about it at almost every single closed-session meeting. It was taking away focus from a lot of other issues in town that we really need to be spending our time on,” Armato said.
E&B President Steve Layton, a Hermosa resident, said in a statement that the company was pleased with the settlement. It is unclear what will become of E&B’s office building at the corner of 6th and Cypress Avenue, just west of the City Yard.
“E&B is a California based company with operations in Southern California. We maintain offices throughout the area including a small office with professional employees in Hermosa Beach,” said Amy Roth, public and government affairs director for E&B, in an email.
Anti-oil activists cheered news of the settlement. George Schmeltzer, who was part of the campaign behind No on O as well as 1995’s Proposition E, said that he was “as proud of our city’s leaders and voters as I could possibly be.”
“It’s a cliche I know, but this is actually a win/win. The system worked. Bumpy, loud and contentious, but it worked,” Schmeltzer said in an email.
