(CN) — The Ninth Circuit refused Tuesday to let the city of Oakland ban coal shipments from a new terminal being built from an old army base at the foot of the San Francisco Bay Bridge.

Slated to be built on the site of the former Oakland Army Base near the Port of Oakland, the Oakland Bulk & Oversized Terminal would be capable of exporting up to 10 million tons of coal annually — making it the largest coal export terminal on the West Coast.

California Capital and Investment Group, a firm led by former Governor Jerry Brown’s friend Phil Tagami, was selected to develop the base.

But in June 2016, the Oakland City Council prohibited the storage and handling of coal and petroleum coke at any bulk-materials facility in the city after multiple studies found that coal dust blowing off trains can cause asthma or cancer, and that emissions from the terminal would worsen West Oakland’s already poor air quality.

The new regulations brought the project to a halt. The developers sued to reverse the ban, claiming it breaches a 2013 development agreement between OBOT and the city.

In 2018, U.S. District Judge Vincent Chhabria found the city breached the agreement with the terminal’s developers by adopting the ban without “substantial evidence” that transporting coal through the terminal would present a “substantial danger” to people in Oakland.

The appellate panel affirmed Chhabria’s decision 2-1 on Tuesday, finding the judge’s ruling was not legally unsound or “clearly erroneous.”

“In affirming, we do not opine on the ultimate issue of any alleged health or safety impact of OBOT’s proposed plan. Nor do we judge the economic or environmental merits of the agreement to develop a commercial terminal that may house and transport coal,” U.S. Circuit Judge Kenneth Lee, a Trump appointee, wrote for the majority. “Rather, we affirm, under a clearly erroneous standard of review, the district court’s bench trial ruling that Oakland breached the agreement.”

At a three-day bench trial in 2018, Chhabria allowed evidence beyond what the Oakland City Council heard in public meetings on the issue, after which he found consulting firm Environmental Science Associates made flawed calculations when estimating the amount of particulate matter the terminal would produce.

“In fact, the record is riddled with inaccuracies, major evidentiary gaps, erroneous assumptions, and faulty analyses, to the point that no reliable conclusion about health or safety dangers could be drawn from it,” Chhabria wrote.

He also found the consultant ESA made a “big mistake” in failing to consider OBOT’s proposed pollution mitigation measures, such as placing covers on rail cars carrying coal or spraying the coal with a chemical surfactant to keep coal dust from blowing off uncovered cars.

The city, which appealed Chhabria’s ruling along with the Sierra Club and San Francisco Baykeeper, argued that the judge should have deferred to their experts’ assessments about pollution and mitigation measures at the time the council made its decision, instead of relying on OBOT’s extra-record evidence and his own judgment.

But Lee — joined by U.S. Circuit Judge Carlos Bea, a George W. Bush appointee — disagreed, finding that doing so would have unfairly tipped the scales in the city’s favor.

“Indeed, deferring to a government agency’s findings would effectively create an escape hatch for the government to walk away from contractual obligations if political winds shift or if it faces an unexpected public backlash against a deal negotiated with a private party. Through self-serving regulatory findings insulated by judicial deference, the government would stack the odds in its favor in any ensuing litigation. The house (of government) would always win, and private parties would be left to the whims of a regulatory roulette,” Lee wrote.

In an email, Oakland Deputy City Attorney Erin Bernstein said the city attorney’s office is still reviewing the opinion, adding, “We have no comment at this time.”

U.S. District Judge Lawrence Piersol, a Bill Clinton appointee who sat on the panel by designation from the District of South Dakota, said in his dissent that the evidence Chhabria admitted at trial went beyond what he was allowed to consider under the development agreement.

“Instead of the trial court’s review of the city’s determination being based on the evidence before the City in its public proceedings, the trial court allowed OBOT to present a variety of experts to contradict and otherwise point out flaws in the evidence that was put before the city,” Piersol wrote.

“In the present case, it was error for the trial court to admit and consider evidence pertaining to the health and safety effects of coal handling and storage upon nearby residents that was not submitted to the city. To allow otherwise subverts the public proceedings of governmental entities and makes their hearings a mere warmup for when the heavy artillery is brought out in a trial.”

Bob Feldman, a partner at Quinn Emanuel Urquhart & Sullivan LLP, represented the OBOT. He praised the ruling.

“Judge Chhabria correctly exercised his discretion in admitting and excluding evidence in this bench trial. At some point- hopefully now — the city should recognize reality and work something out with OBOT.”

Ted Franklin, a retired attorney and member of the grassroots group No Coal in Oakland, said he wasn’t surprised by the majority’s emphasis on contract rights given that Bea and Lee are Republican appointees. “It’s infuriating but no surprise,” Franklin said by phone Tuesday.

Franklin said Chhabria’s ruling rewarded the developer’s legal strategy by allowing them to present contradictory evidence at trial rather than to the City Council, which he said spent a great of time and money exploring the health and safety issues raised by the terminal.

“The city was ambushed here. It was held to what was in front of it during its proceedings. He allowed the proponents of the project to present an entire battery of expert testimony that was never before the city,” Franklin said.

Tuesday’s ruling does not portend an easy road ahead for the OBOT. The city can still petition for the Ninth Circuit to rehear the case before an en banc panel of 11 judges.

There are other signs that point to the project’s unraveling. The city could still use the California Environmental Quality Act to force the project to comply with stricter environmental review.

But the key to its undoing may be financial.

“The entity that is supposed to run this operation, Insight Terminal Solutions, is in bankruptcy and has been in bankruptcy since August of last year,” he said, adding that the Bank of Montreal, the terminal’s financier, recently pulled its funding. OBOT is seeking new investment from commercial banks in Japan, but they have been under pressure not to fund new coal power projects.

“The idea that anyone will ever make money off of a coal terminal in Oakland is an absurdity,” Franklin said.

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