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Can Wetlands Go Bankrupt?

Alice Kenny

Many publications, including this one, have touted mitigation banking as a win-win solution to wetland restoration in the United States. The environment benefits from private sector investment while bankers make a buck and feel good about doing it. But what happens when things go wrong? Does win-win suddenly look more like lose-lose? The Ecosystem Marketplace asks the experts.

Many publications, including this one, have touted mitigation banking as a win-win solution to wetland restoration in the United States. The environment benefits from private sector investment while bankers make a buck and feel good about doing it. But what happens when things go wrong? Does win-win suddenly look more like lose-lose? The Ecosystem Marketplace asks the experts. Back in the pioneer days of wetland mitigation banking when businesses got their first whiff of the cash they could make and environmentalists envisioned a world of restored wetlands, a group of investors from US Wetland Services, Inc. proposed building a wetland mitigation bank on a dredge-spoil pile along New Jersey's Delaware River. In many ways, it seemed like a great idea. US Wetland Services would convert manmade-polluted hills of dredge into wetlands that filter pollution and get paid big bucks for doing so. But the venture failed miserably. While building new wetlands, the company destroyed existing ones. Then, instead of paying for the cleanup and returning to work, US Wetland Services declared bankruptcy. This was one of two mitigation bank bankruptcies declared since the field of wetland mitigation banking began in the United States during the early 1990s. In US Wetland's case, the corporation used the bankruptcy court as a shield to avoid its wetland commitments. In the other case, conversely, Ecobank, Inc. looked to the courts for help structuring its debt, then fulfilled its wetland obligations and remained in business. The banks' experiences offer a cautionary tale about the romance between business and the environment and the importance of regulation for wetland mitigation banking's continued success. Now, with the Army Corps of Engineers imminent release of its long-awaited wetland mitigation bank regulation draft revisions, many are watching to see whether they will close the bankruptcy loophole through which US Wetlands Services slipped. During the ensuing comment period, as regulators, environmentalists and bankers hash out how to advance the documented environmental benefits associated with the rise of the mitigation banking industry, many say it would be wise to consider how to curtail the environmental risks of its potential fall from grace. "Rules should be tight for mitigation," says wetland banker and scientist Richard Mogensen. "After all, part of the service we sell is assurance of mitigation over a long period of time."

The rise of mitigation banking

When mitigation banking arrived on the wetlands scene, it was heralded as a key for enabling the private sector to fix environmental problems that had long-stymied government bureaucracies. And clearly, the public sector needed help. Ever since Europeans began colonizing the New World, wetlands–which provide flood protection, shoreline-erosion control and pollution filtration–have been dried out, built over and used as virtual cesspools. "Taken individually, the wetlands losses in the past were small and disparate," comments wetlands mitigation regulator Todd Gipe, a Florida wetland regulator. "But collectively it was like a death by a thousand paper cuts." Concerned about wetlands' rapid disappearance, the federal government passed the Clean Water Act in 1972. The Act mandated that developers create, restore or enhance as many wetlands as they destroy. Yet more than a million additional acres of wetlands were destroyed without replacement during the next two decades. Crying "uncle," the government agreed in the 1990s to give the private sector, specifically mitigation banking, a shot at helping. Mitigation banks, unlike financial banks built from bricks and mortar, are actual wetlands created, restored or enhanced by private companies or government agencies. Developers, whose expertise and income lies in building on filled wetlands and not in creating new ones, can buy credits from these banks to replace the marshes or other forms of wetlands they destroy. Soon after wetland mitigation banking began, however, the private sector discovered what public environmental groups had already learned; successfully creating or enhancing a wetland can be exceedingly difficult. According to a recent study published in the National Wetlands Newsletter, only 21 percent of wetland mitigation banks function at a level ecologically equivalent to natural wetlands. Yet wetlands repaired by private developers often fare even worse and their bankruptcy numbers are far higher. So mitigation banks have continued growing despite their limitations, from 46 in 1992 to 400 today. According to Stetson University College of Law Professor Royal Gardner, this makes it even more important to ensure that mitigation bankers who promise to revive wetlands do not hide behind bankruptcy's shield should things go wrong. The professor, who served on the National Research Council's Committee on Mitigating Wetland Losses and is also the director of Stetson University Institute for Biodiversity Law and Policy, recently coauthored a study on mitigation bank bankruptcy, providing a detailed history of US Wetland Services Inc. and Ecobank.

From buoyant to bankrupt

Before the lawsuits, bickering and bitterness, US Wetland Service, Inc.'s plans to enhance wetlands in Gloucester County New Jersey began with optimism and accolades. The company promised to create Woodbury Creek Wetland Mitigation Bank in 1995. It would enhance nearly 129 acres of degraded wetlands, create 39 new acres of wetlands and add nearly 19 acres of upland buffers for wetland protection. In return for this environmental bonanza, the corporation would be lucratively rewarded, selling credits in its newly created wetlands to developers legally responsible for building or repairing wetlands to replace ones they had damaged. After receiving government approvals, the corporation began to carry out its plans, selling nearly a third of its credits. But things went wrong almost from the sketch board, recalls wetland scientist Mogensen who worked on a nearby bank. "The bank should never have been built," says Mogensen. "It should never have gotten approvals in the first place." The basic design was critically flawed, he explains. First of all, Woodbury Creek' bank was designed to be built atop a spoil pile dredged from the Delaware River. But building on a dredged pile meant building a wetland on a hill. Since water runs down hill, this would be nearly impossible to maintain. Further, since a wetlands' function is to filter pollutants, building a wetland on contaminated dredge seemed inherently contradictory. And, finally, LandBank, the owner of US Wetland Services, made financial assurances that it would complete the work without ensuring that it had the long-term financial wherewithal to stand behind those promises. The bank's plans unraveled quickly after LandBank, while creating a new wetland, inadvertently drained almost 19 acres of an existing one. The New Jersey Department of Environmental Protection expected the corporation had funding to remediate the problem since LandBank had put up a performance bond. But the corporation, it turned out, had failed to pay the premiums on the bond, rendering it worthless. Then LandBank's controlling corporation, IT Group, Inc., filed for Chapter 11-bankruptcy protection. Meanwhile, IT Group moved its assets, turning LandBank into a shell corporation. The New Jersey Department of Environmental Protection refused to accept the legal maneuverings, insisting that LandBank pay for the wetlands it destroyed. To penalize the corporation, the agency demanded LandBank restore the destroyed 19 acres of wetlands at a three-to-one ratio, creating 57 new acres of wetlands. The department also levied a $9,000 fine against the bank. Aware of LandBank's bankruptcy application, the department added that the order be binding on bankruptcy trustees. But the judgements and penalties turned out to be meaningless; New Jersey learned that federal bankruptcy court trumps a state administrative order. The court directed New Jersey to dismiss its claim on December 6, 2004, ruling that the state, similar to other creditors, had only a financial claim against LandBank. So instead of creating new wetlands, the mitigation bank left New Jersey with more damaged ones.

Down but not out

Fortunately, from a wetlands-preservation perspective, the other wetland-bank that filed for Chapter 11 bankruptcy, Ecobank, is working out a far different resolution. In this case, the Florida wetland mitigation corporation entered into a joint venture with Da Capo al Fine, Ltd. Together they developed three mitigation banks, Lake Louisa/Green Swamp Regional and Hunter Mitigation bank in Florida and Barra Farms Cape Fear Regional Mitigation Bank in North Carolina. Ecobank provided the know-how and Da Capo provided the cash. Speaking from his air-conditioned Florida office as temperatures outdoors soared to a humid 100 degrees Fahrenheit, Ecobank Vice President, Alan Fickett describes his company's mitigation banks, the difficulties they encountered and the resolutions they are stitching together. Unlike Woodbury Creek, Ecobank has almost completed restoring and enhancing 2700 acres of once-damaged wetlands at three sites. And, based on credit releases permitted by its regulators, its reclamation work has been largely successful. At Lake Louisa in Clermont, Florida, the corporation turned over a thousand of acres of once-converted citrus groves back into wetlands and hills that protect wetlands called uplands. Here, Ecobank turned off pumps in manmade wells, removed the citrus trees and completely replanted historic oak, pines and herbaceous wire grass. It removed pesticide and fertilizer runoff, stocked the lakes with fish and allowed the aquifer to recharge. At East Central Florida Regional Mitigation Bank in Orange County, Ecobank created nearly 1000 acres of wildlife conservation corridor between the Econolockhatchee River Basin and St. Johns River. To restore wetlands, the company filled 2.5 miles of canals that had drained them, reestablished Christmas Creek's flow into St. Johns River and fenced the restored land to protect it from nearby grazing. And in the Carolina Bays, the corporation restored historic streams within a 632-acre site that had been ditched and drained to support agricultural activities. But despite its success restoring these wetlands, the corporation hit an impasse. Over the years, Fickett says, Da Capo "became inpatient" about collecting a profit, causing the joint venture to break up. Since De Capo was the venture's financial backer, providing the bank's financial assurances for long-term maintenance, this unleashed a financial crunch. But, in contrast to LandBank in New Jersey, Florida had required as a preliminary condition of approval that the joint venture supply foolproof letters of credit. So when the corporation filed for Chapter 11 bankruptcy, funding for the wetland banks' long-term maintenance remained in place. Moreover, Fickett says, Ecobank would "pay within the next 14-15 months 100 percent of its creditors 100 cents on the dollar…because that's good business."

Here comes the Army

Ecobank and LandBank's bankruptcies spotlight loopholes that mitigation-bank watchdogs like Gardner, the law professor, say they hope will be closed by the Army Corps of Engineers' upcoming regulations. Pushed by environmentalists and mitigation bankers dissatisfied by what they characterize as the Corps' lax and inconsistent oversight, the agency has worked on rewriting its mitigation bank regulations for the past two years. The draft rules are expected to be published in the federal register within the next month. After that, the Army Corps, wetland bankers and environmentalists will sit down to refine the new regulations before they are published in final form this December. US Army Corps of Engineers Regulatory Branch Chief Mark Sudol declined to discuss specifics about the proposed regulations, waving off questions regarding bankruptcy regulations until the draft is published. He says, however, that the draft regulations require increased mitigation standards that will lead towards improved success. In contrast to the Corps' chief, Gardner offers detailed suggestions. First, he says, financial assurances must be available to be drawn on at every stage of a mitigation site's life. During the construction/restoration phase of a mitigation bank, bankers should be required to provide adequate notice before they are allowed to cancel performance bonds or other financial guarantees, he says. When credits are sold, money to fund long-term stewardship should be put aside. And, finally, once all the banks' credits are sold, funds must be guaranteed to cover the site's long-term care.

Banking on benefits

With over two decades in the business, Mr. Gardner adds, wetland mitigation banking has played a significant role reversing the decline of this nation's valuable wetlands. And banking has often been more tightly regulated and more successful at preserving wetlands than private developers and environmental organizations. It is important to note, however, the synergistic relationship wetland banking has with long-term wetland restoration. Wetland restoration can only be deemed a success if the wetland flourishes over time. So for this new industry to last, it must demonstrate that the wetlands it enhances can be sustained. Otherwise, the industry could experience another LandBank, with wetlands lost and the tax-paying public picking up the tab. Entrepreneurship in any field is a high risk, high return proposition. But for the public to support mitigation banking, the risk must remain on the banker's side. The public's return must be a near-guarantee. With appropriate regulations, Mr. Gardner concludes, "bankruptcy doesn't necessarily mean disaster." Alice Kenny is a prize winning science writer and a regular contributor to the Ecosystem Marketplace. She may be reached at alkenny@aol.com. First Published: September 8, 2005

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