2/19/2007

Port condemnation case is a last act in eminent domain: Jacksonville FL Times-Union, 2/17/07

In May, a jury will decide how much the authority will have to pay for the land

By Joe Light

Tom Scholl answered the opposing attorney's questions tersely, his voice barely audible even in a silent courtroom.

"And Keystone Properties' only asset is its interest in the Smurfit property, correct?" asked Joel Settembrini, referring to 60 riverfront acres on Talleyrand Avenue by the name of its former owner, Jefferson Smurfit.

Scholl bristled.

"It's my property."

The trial in November wasn't well attended. Lawyers and witnesses easily outnumbered the public. But it was a hallmark in Florida property rights cases. It would be one of the last battles of its breed in eminent domain - a clash between a landowner defending his business and a deepwater port authority racing to acquire land before new laws would make it impossible.

It also was the climax in the decade-long story of a family business' struggle to succeed in Jacksonville, a tale punctuated by shrouded negotiations, bad blood, and a partnership between industry juggernauts to put a coal terminal in Jacksonville.

And the stakes were high. Scholl had recently bought the land, some of the last acres suitable for building a local port, for about $8 million. He planned to build his own coal terminal, before the Port Authority filed an action to take the property by eminent domain.

Scholl would lose that court battle. On Dec. 20, the judge in the case ruled in favor of the Port Authority.

In granting the order, the judge wrote that the Port Authority carried its burden in proving the necessity and public purpose of the land. She also noted that the new constitutional amendment and legislation altering eminent domain was not yet effective when the authority filed its action.

The authority opted for a "slow take." At a trial scheduled for May, a jury will decide how much the authority will have to pay for Scholl's land. At that time, port officials will decide whether to take the land.

While the condemnation was enough to leave a bitter taste, Scholl, the owner of Fort Myers-based energy company Keystone Coal, believed that the Port Authority's intention for the property was even more unsettling.

According to memorandums, e-mails, and a draft lease agreement, the authority's most likely tenant for his land was Drummond Coal, a Birmingham, Ala.-based competitor.

But port officials had their sights set on the swath of land on the St. Johns River long before Drummond entered the picture.

Obtaining the property
In 2002, the Port Authority wanted the site of the old paper mill for a completely different project - a car processing facility for Mercedes-Benz.

The authority attempted to buy the property twice, first from paper company Jefferson Smurfit, and then from Jax Maritime Partners, an investment company made up primarily of executives from Haskell, a local design-build firm. In both cases, the Port Authority lost the bidding war because the sellers wanted protection from environmental problems that the authority might discover. Attorneys said that the Port Authority couldn't legally provide that protection.

In the meantime, Mercedes-Benz executives wouldn't commit to the Jacksonville site, and Jax Maritime Partners sold about 60 acres to Keystone.

Port Authority officials, who had never used eminent domain before, moved forward with the condemnation.

Meanwhile, two industry giants saw an opening.

Acquisition troubles
Even as Port Authority officials remained confident that Mercedes-Benz would come, some executives at railroad company Norfolk Southern secretly hoped the deal would fall through.

With the land freed up, Norfolk Southern could lure a huge coal terminal to the city. The company would profit greatly from hauling the coal to power plants around the Southeast.

Before the Mercedes-Benz deal faltered, Norfolk Southern executives began discussions with Drummond Coal, a subsidiary of The Drummond Co., to build the terminal.

Compared to Keystone, The Drummond Co. was an energy juggernaut. The company had nearly $1.8 billion in sales in 2005, according to Hoover's Inc., almost 18 times what Keystone sold according to its annual report.

Norfolk Southern expected annual revenues of more than $150 million from the terminal, according to projections exchanged in e-mails between its executives.

In March 2005, Steve Evans, a Norfolk Southern assistant vice president, introduced Drummond and the coal option to the Port Authority. Although the company would eventually require cooperation with competing railroad operator CSX to make the deal work, Norfolk Southern officials insisted on secrecy at the beginning, since they didn't want CSX to interfere with the Drummond deal.

Port officials recognized the huge revenue stream a terminal could bring and entered negotiations with Drummond, first signing a non-binding memorandum of understanding and then moving on to draft a lease.

According to those documents, for the port, the deal would bring more than $11 million per year in rent and other fees, money that could be used to fund other projects. According to the Port Authority's annual report, the port generated about $33 million in operating revenue for all of 2005.

The three players also agreed to put up money to fund the construction.

Drummond's initial capital investment in the project would be about $100 million. Another $50 million would come from Norfolk Southern, and the Port Authority would contribute $25 million.

Although they could see more than a 36 percent revenue increase and believed they would benefit the public by feeding the Southeast's energy needs, port officials judged the terminal's contribution to local job growth and economic impact on the rest of the city to be less robust.

Roy Schleicher, senior director of marketing and trade development, wrote in a May 2005 memorandum to director of properties David Stubbs that the Drummond project would be a "cash cow" for the port and that "very little economic impact on the city would be realized."

Was it all a clever ruse?
When Keystone bought a hunk of the property from Jax Maritime Partners, Scholl threw a wrench in the trio's plans.

Scholl said he planned to build his own coal terminal, but Norfolk Southern executives grumbled amongst themselves in e-mails and debated whether or not Scholl was simply trying to elevate the price of the property before the port took it.

In an e-mail last year to other Norfolk Southern executives, Evans wrote that Keystone "could ruin our ability to develop the Jacksonville Coal Terminal." Jim Hamilton, another Norfolk Southern executive, wrote in an April e-mail that Scholl was "leveraging the property to get more money from Jaxport."

When Scholl seemed to start construction and erected a sign designating the land as a Keystone terminal, many Norfolk Southern officials became convinced that Scholl did intend to build a port, according to e-mails from the railroad company. Others still thought it was part of an elaborate ruse.

"It is interesting to note that, internally at NS, we are also divided as to Mr. Scholl's intentions," wrote Evans in a May 14, 2006 e-mail. "I still think that, if he is serious about proceeding to build a bulk terminal on this location, he has not addressed many key details, including rail service."

A key argument in favor of what Evans called the "Big Lie Theory" - If Scholl thought he could make money on his own terminal, where was the business plan?

Defending his plans
In the courtroom, Scholl's answers became even more succinct.

"All right. Now, your testimony is you're planning to develop the coal terminal or marine terminal of your dreams. Do you have a written business plan for this?" Settembrini asked.

"No. A total plan? I've got projections and this sort of thing, but no. I'm doing it up here."

Scholl pointed to his head.

"It's up here?"

"That's the way I work, yes, sir."

"And let the record reflect you're pointing to your temple."

Scholl didn't have a business plan written down and hadn't attempted to negotiate with Norfolk Southern, the only railroad that had tracks to transport the coal from the facility.

He also never approached port officials to let them know his plans, according to his court testimony.

Keystone attorney Andrew Brigham said that Scholl has invested more than $2 million to develop the property and even had plans to receive his first coal shipment before he lost the case. Scholl also owns coal concessions in South America and needs a port to receive the coal, he said.

But as the coal company's plans unfolded, Norfolk Southern executives held serious doubts about Keystone's financial capability to develop the port.

When Keystone tried to lease Norfolk Southern property adjacent to the former Smurfit site, Louis Cataland, a Norfolk Southern director of real estate, wrote that Norfolk Southern "does not believe Keystone will have sufficient financial ability to pay not just the rent, but also the continuing dredging costs."

According to Keystone's financial report, as of the end of 2005, Keystone Coal Company and its associated companies had about $31.6 million in liabilities and about $42.3 million in assets.

Its net income in 2005 was about $3 million, down from $4 million in 2004.

Brigham said that Scholl could get investment partners to help build his operation if he kept the land.

If Keystone did build a coal terminal, executives from Norfolk Southern, Drummond, and the Port Authority believed it would be far smaller than what they planned. Port Authority officials also believed that they were better suited to ensure the land was always used for port operations and would not be converted to another use if and when Keystone sold it off.

Moving forward
Port Authority officials now maintain that Drummond is just one of several possible tenants for the site.

E-mail exchanges between port officials and Seoul-based Hanjin Shipping indicate that the huge Asian carrier is interested in building a container terminal on the property, and port officials met with Hanjin representatives as late as December of last year.

"We're evaluating all options with them," said David Kaufman, the port's senior director of planning and property.

Both during and after the trial, Keystone attorneys suggested that the Port Authority solicited letters from other parties to help them during the trial.

Drummond director of real estate George Wilbanks didn't return more than a dozen messages left with his secretary over a month.

Steve Evans declined to comment. In a Sept. 19 deposition he testified that, last time he asked, port officials said they intended to move forward with the coal terminal. He also said Norfolk Southern had invested money to begin the preliminary engineering.

Hamilton, another Norfolk Southern executive, declined to comment, citing a confidentiality agreement, but said, "If there's a development project in play, it's always good for the communities we serve."


Jacksonville FL Times-Union: http://www.jacksonville.com/tu-online