The City of Hermosa Beach's "no-oil" initiative overrides the city's pre-existing contract with an oil company to permit oil drilling on a city-owned parcel of land, the Second District Court of Appeal has ruled. The initiative is not trumped by the contracts clause of the U.S. Constitution, and the oil company in question did not have a right to proceed in the face of the initiative, the court decided. Hermosa Beach voters originally banned all oil drilling in the city in 1932. However, in 1984, to generate funds needed to acquire parks and open space, the voters approved two propositions to create exemptions from the ban for two publicly owned sites, including one owned by the city known as the City Yard Site. In 1995, voters approved Proposition E, an initiative that repealed the two exemptions. In the meantime, however, the city had moved forward to contract with the Macpherson Oil Company, which had been a leading force in placing the 1984 ballot measures before the voters. In ruling for a coalition of environmental groups, the Second District, Division Two 2, concluded that Proposition E's ban on oil drilling in order to protect public safety — and, subsequently, the city's decision to terminate the contract based on the same grounds — was a proper exercise of the city's police powers and overrode Macpherson's argument that the initiative violated the company's constitutional right to carry out a contract executed with the city. The court also ruled that because Macpherson had borne only "soft" costs and not "hard" costs — and because the company had not acquired all of the necessary permits to begin drilling —- it had not obtained a vested right to move forward with the oil-drilling project. Between the passage of the ballot measures in 1984 and the initiative in 1995, the city entered into two contracts with Macpherson, one in 1986 and one in 1992. Under the terms of the lease, the city was required to give Macpherson the City Yard Site and obtain State Lands Commission approval for drilling in the tidelands. Macpherson was required to obtain all necessary permits, including a conditional use permit from the city and a coastal development permit from the Coastal Commission. After certifying an environmental impact report, the city approved a general plan amendment and zone change in 1990. Three years later, the city certified an addendum to the EIR and approved the conditional use permit. Environmental groups sued to challenge the EIR's adequacy and the CUP approval but eventually abandoned an appeal after losing in the trial court. The State Lands Commission originally approved the project in 1993. But, after environmentalists filed a lawsuit, the project returned to the commission, which approved it again in 1994. The Coastal Development Permit was approved in 1998, after being submitted two times and withdrawn once. In the meantime, the Hermosa Beach Stop Oil Coalition qualified an initiative to ban all oil drilling in the city. The initiative was approved by 56% of the voters in the November 1995 election. The initiative specifically repealed the 1984 exemptions to the city's oil-drilling ban, including the exemption regarding the City Yard Site. The ballot arguments focused mostly on the Macpherson proposal and the City Yard Site. Fearful of being sued for a contracts violation, the city continued to honor its lease with Macpherson after the passage of Proposition E. However, in 1997 the Stop Oil Coalition sued the city, seeking declaratory and injunctive relief to require the city to apply Proposition E to the Macpherson project. In 1998, Los Angeles County Superior Court Judge Kurt J. Lewin ruled in favor of the city and Macpherson, stating that while there was no question that Proposition E was intended to apply to the project, implementing it would be an unconstitutional impairment of the contract between the two parties. "The voters by initiative may repeal any law including the limited exceptions to the oil ban," Judge Lewis wrote. "They may not by legislative fiat extinguish a valid subsisting contract … without a demonstration that such total impairment of the contract is reasonable and justified because it is compelled by real threats to the health, safety, and welfare of the community." Prior to the trial judge's ruling, the city stopped performing under the terms of the contract based on a consultant's analysis that public safety could be endangered by the risk of an escaping methane gas cloud. Macpherson subsequently filed a cross-complaint against the city alleging that the methane gas risk had previously been assessed and accusing the city of breach of contract. On appeal, Stop Oil contended that Proposition E was intended to apply to the Macpherson project; that the initiative was a valid exercise of the police power that did not violate the contracts clause of the constitution; and that the contract between Macpherson and the city was authorized by the lease agreement itself. Macpherson contended that it had a vested right to move forward with the project. The three-judge appellate panel ruled in favor of Stop Oil on all counts. The court decided that Proposition E was clearly aimed at the Macpherson project, and concluded that the measure does not constitute a retroactive application of a law to a situation but, rather, applies only to future permits which Macpherson was required to obtain to move forward. As for vested rights, the court noted that Macpherson had not obtained all required governmental approvals, including the coastal development permit, at the time Proposition E passed. Also, because it had invested only in "soft" costs, the company had not made a "substantial investment," as required under the leading vested rights case, Avco Community Developers Inc v. South Coast Regional Commission (1976) 17 Cal.3d 785. "With only a conditional use permit (as to which many conditions remained unfulfilled), no building permit and no substantial work done to construct the project, Macpherson can claim no vested right to preclude application of Proposition E to the oil drilling project at the City Yard Site," wrote Los Angeles County Superior Court Judge Dennis Perluss, sitting by assignment to the appellate court. Most significantly, the court ruled that Proposition E does not violate the contracts clause of the U.S. Constitution. First, the court said, the initiative was a proper exercise of police power because it raised a legitimate question of public safety. The appellate court disagreed with the trial court and concluded that substantial evidence of the public safety threat had been presented during the trial. Furthermore, the court concluded, the 1992 lease actually anticipates regulatory changes such as Proposition E. "By its express mandate that Macpherson obtain a drilling permit, the lease thus incorporates this further command that the Macpherson project operate in compliance with then-existing law," wrote Judge Perluss. Furthermore, he wrote, "one of the conditions of the CUP issued in 1993, to which Macpherson agreed, was that [t]he subject property shall be developed, maintained, and operated in full compliance with the conditions of this grant and any law, statute, ordinances, or other regulation applicable to any development or activity on the subject property." Perluss also pointed out that Macpherson could have negotiated for protection from future regulatory changes but did not. The Case: Hermosa Beach Stop Oil Coalition v. City of Hermosa Beach, No. B138557, 01 CDOS 722, 2001 Daily Journal D.A.R. 913, issued January 24, 2001. The Lawyers: For Stop Oil: Jan Chatten-Brown, Chatten-Brown & Associates, (310) 474-7793. For City of Hermosa Beach: Michael Jenkins, Richards, Watson, & Gershon, (213) 626-8484. For Windward Associates (Macpherson): James Bright, Bright & Brown, (818) 243-2121.