Chump Change or Steep Road to Coal: Court Narrows Tagami’s Options

  • Group photo (partial), West Oakland Community Rally, 2023-07-22

In a proposed statement of decision issued Monday, Judge Noël Wise slashed OBOT’s $159.6 million damages claim, leaving developers with a choice between walking away from the project with a paltry $317,683 or resuming efforts to build the terminal with an extension of their initial construction deadline to June 2026. Phil Tagami’s team has until January 5 to pick between these two remedies.

This is a big loss for OBOT. In their final pitch, the developers sought an opportunity to choose between $159.6 million to walk away or $24.6 million if they want to go ahead with the project. Instead, the court offered a choice between a much smaller monetary award or an opportunity to move ahead with the project – no way to mix and match.

Recent history shows the wiser course might be to take the money and run.

The late John Siegel, the coal executive who collaborated with Phil Tagami in efforts to bring a coal terminal to Oakland, reportedly threw $27 million at the West Oakland bulk terminal project before his Insight Terminal Solutions (ITS) collapsed into bankruptcy. Picked up out of bankruptcy by hedge fund Autumn Wind Lending, ITS now holds a 66-year sublease with exclusive rights to build and operate the terminal.

Walking away might not be too painful for Tagami. He has already made $19.5 million by selling Siegel ten options and a sublease to develop the property. But for Vikas Tandon, CEO of Autumn Wind and frontman for wealthy hedge fund operator Jonathan Brooks, it might be a painful loss. Court records show Autumn Wind invested an estimated $17 million of its own to bail out and later acquire ITS as Segal’s grip on the Oakland project faltered.

As hard as it may be to write off the loss, Tandon’s effort to build a terminal faces major hurdles.

First, ITS is just a shell corporation without any experience constructing or operating a terminal. ITS would have to find a buyer willing to gamble on the terminal’s future prospects. A 2012 draft report commissioned by the City of Oakland stated, “The economic prospects for the business that might be conducted using the OBOT and OGRE facilities are limited and fragile.”

Second, it will take an estimated $250-300 million or more to build the terminal. Even the cornerstone $50 million of funding from the State of Utah is not, and never has been, legally committed to this specific project. Prospective investors have no assurance that the money from Utah will materialize. The money is in a suspense fund that could be awarded to other projects, including construction of a potential coal export facility in Ensenada, Mexico. Environmental groups based in Utah are prepared to bring credible legal challenges to the fund’s use on any out-of-state infrastructure project.

Third, although the City of Oakland is bound to honor the terms of the ground lease executed with OBOT in 2016, the community is not. The first thing a prospective investor will come across in a simple online search is the fierce resistance to coal that derailed OBOT in 2016 and threatens to disrupt any attempt to revive plans for a coal terminal. Years ago, a robust and broad-based coalition drove the Bank of Montreal to abandon its plan to sucker pension funds into making unsecured loans to the developers.

Fourth, the City has not exhausted its options to keep coal out of Oakland. The federal court decided in 2018 that the City’s ban on coal at the West Gateway site violated the developers’ rights because the City had not yet gathered sufficient evidence of dangers to the health and safety of workers and nearby residents. The decision left the door to a “re-do” wide open, so long as a new vote to prohibit storage and handling of coal at the West Gateway is based on more compelling evidence. A recent study has filled a crucial gap in the earlier case by quantifying the amount of coal dust that blows off of passing coal trains with the same grade of Utah coal.

Meanwhile, a 2023 decision by the California Court of Appeal (Discovery Builders v. City of Oakland) has called into question the rationale of the federal court’s ruling in 2018 which assumed that the development agreement could restrict the City’s police power to regulate health and safety. Judge Chhabria applied a stricter standard derived from contract interpretation, but the recent Court of Appeal decision holds that a City cannot narrow its police power by contract.

Finally, the City may be required to conduct further review of the terminal project under the California Environmental Quality Act. Tagami has repeatedly insisted since the 2015 revelation of his dalliance with the coal industry that the perfunctory Initial Study/EIR Addendum prepared in 2012 was the City’s last chance at CEQA review. But this may not prove to be the case. The 2012 study described a project that would reuse an existing terminal that could not handle coal.

CEQA review could consider many factors – including greenhouse gas impacts, pollution of Bay waters, noise, and blockage of key intersections by increased train traffic – that the City Council could not consider when it was considering whether to ban coal under the narrow criteria set forth in the development agreement. Environmental lawyers say that a coal terminal could easily be blocked under full CEQA review and, if there is a proper trigger for new CEQA review, the challenge could be undertaken by a non-governmental organization.

Despite the numerous potential obstacles to success, Tagami and Tandon may elect to proceed with a good plan, a bad plan, or no plan at all. The easiest way to clear away some obstacles would be to enter into an ironclad agreement not to bring coal to Oakland, but the developers’ refusal to rule out coal apparently killed the settlement framework negotiated in 2022

OBOT’s Evaporating Damage Claims

The largest part of OBOT’s $159.6 million damages claim consisted of “lost profits.”  Most of the four-day trial on damages revolved around the OBOT’s assertion that “but for” the City’s unlawful termination of its lease in November 2018, OBOT would have earned vast sums of money over the 66-year life of the lease.

Judge Wise rejected the lost profits claim on numerous independent grounds, making a successful appeal of her decision very unlikely.

She noted that the development agreement and ground lease contain provisions that do not allow OBOT to receive incidental or consequential damages, including those for “lost profits, loss of opportunity, lost revenues, or similar consequential damage[s].”  Under the terms of the lease, if the City breached the agreement, OBOT’s “exclusive” remedy was “actual damages incurred by [OBOT] as a direct result of [the City’s] default.” Judge Wise rejected OBOT’s effort to characterize “lost profits” as “actual damages,” finding that they did not flow directly from the City’s default but were “uniquely tied to the detailed financial obligations … set forth in subleases that OBOT entered into with third parties.”

Even if the explicit exclusions of “lost profit” and “consequential” damages did not apply, the Court held, OBOT “failed to demonstrate with any reasonable probability that it would have received those amounts; instead, the evidence demonstrated those projections were uncertain, moving targets.” Under California law, “lost profits” damages are “recoverable [only] where the evidence makes reasonably certain their occurrence and extent.”

To prove its monetary losses, OBOT relied almost exclusively on the testimony of Tagami and Peter Brown, a CPA who was called to testify as an expert in “quantifying economic damages in commercial disputes.”

Brown tried to hit a home run, and wound up striking out.

“Brown has no experience or expertise in the development of bulk commodities terminals, the rail industry, or the commodities markets for coal and soda ash,” wrote Judge Wise, “and OBOT did not call any other experts to provide foundational testimony as to those topics.”  Further, while Brown conceded that experts should not rely excessively on client-provided data with no independent analysis, the judge identified as one of the flaws of Brown’s opinion that he “uncritically relied” upon a preliminary design document and two subleases provided by his client to calculate the terminal’s projected revenues.

Judge Wise also questioned the reliability of many assumptions underlying his “lost profits” estimates: “These include but are not limited to his assumptions that: the terminal will be commissioned on February 2025; the demand for coal will not decrease between now and 2082; no future federal, state or local regulations regarding fossil fuels will have any negative impact on the Project for 66 years; the project will never handle any commodities other than coal or soda ash; transports by ship or rail will never be disrupted (meaning no acts of war, earthquakes, storms, labor disputes, pandemics, or political controversies will ever impact the constant flow of coal or soda ash); etc.”

Judge Wise concluded that Brown’s calculations of “lost profits” were “speculative and unreliable,” nowhere close to meeting the required legal standard, “reasonably certain.”

Although the court’s rejection of “lost profits” wiped out the lion’s share of OBOT’s damage claims, Judge Wise didn’t stop there. On multiple grounds, she disallowed recovery of $4.6 million for attorneys’ fees and costs allegedly racked up in the earlier trial in federal court and another $331,740 claimed for the federal appeal.

Judge Wise allowed claims for $317,683 to cover project-related staff costs and costs related to illegal dumping between June 2018 and December 2023, but denied OBOT’s claim it should recover the damages even if it elects to move forward with the project, the option referred to as the “equitable remedy.” She pointed out that the parties waived “incidental damages” in the lease. Also, OBOT did not present the court with evidence that these expenses were lost because of the City’s termination of the lease, that they would have been unnecessary if OBOT had been able to proceed with the project in 2018, or that OBOT will need to “replace” them once the project resumes, assuming OBOT elects the “equitable remedy.”

The “equitable remedy,” stripped of claims for “lost profits,” “out-of-pocket costs,” and legal fees incurred in federal courts, amounts to a simple opportunity to restart the project with two years and five months to get the initial construction underway.

More Big News Coming Soon

Oakland officials and the public will soon know which option Tagami and his hedge fund collaborators will choose. The parties have until December 18 to register any objections and propose corrections to the court’s proposed statement of decision. Shortly thereafter, Judge Wise will issue her final decision on damages which is not expected to differ substantially from her proposed decision. OBOT will have seven calendar days or until January 5, 2024 to file a draft judgment revealing OBOT’s election between monetary damages or restarting the project.

After judgment is entered, OBOT will file a motion for millions of dollars in attorneys’ fees and costs spent in achieving its victory at the liability stage and its partial victory at the damages stage. Either side may appeal any part of the judgment. For example, the City may appeal the court’s earlier decision that it breached the lease when it failed to provide OBOT with an extension of construction deadlines in 2018. Likewise, OBOT could seek an appellate ruling that its blooper on damages was actually a home run.

Expect big news in the weeks ahead.