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July 07, 2015 Article

Texas's Yellow-Brick Road to Acquiring Common-Carrier Status

A recent case in the Lone Star State presents a more stringent barrier to oil companies seeking eminent domain powers

by Justin Hodge and Ayla Syed

The Texas Rice Land Partners case marks a significant change in a Big Oil state’s protection of landowner rights as pipeline companies in Texas must now more definitively provide proof of their “public use.” This recent Texas case involves the ability of a for-profit oil company to invoke the power of eminent domain for an alleged “public” purpose: construction of its multistate carbon dioxide pipeline. Rather than assuming that constructing a pipeline to transmit fuel constitutes a public purpose, the case of Texas Rice Land Partners Ltd. v. Denbury Green Pipeline-Texas, LLC, digs into the question of whether a private oil company serves a “public” purpose or simply transports product for private gain. 363 S.W.3d 192 (Tex. 2012); see also 381 S.W.3d 465 (Tex. 2012). With the Keystone Pipeline consistently in the headlines for the past five years, eminent domain laws have been under increasing public scrutiny in all states. Many are questioning how a private Canadian company can condemn land in the United States and what constitutes public use in the context of takings by oil companies. Other Big Oil states, such as Louisiana, take a less protective approach for landowners and assume these pipelines have an inherent public-use nature because of the economic benefits the pipeline may bring to the state regardless of how many parties or people use the line. See Collins Pipeline Co. v. New Orleans E., Inc., 250 So. 2d 29, 35 (La. Ct. App. 1971), writ refused.

Since Kelo v. City of New London, 545 U.S. 469 (2005), a case in which the U.S. Supreme Court decided property could be condemned for the sake of private economic development in “blighted” areas, several states have passed post-Kelo reforms to their eminent domain laws in an effort to better protect landowners in these cases. (Florida and New Mexico, for example, passed legislation after Kelo that banned any condemnations initiated on the premise of blight; See Act of May 11, 2006, ch. 2006–11, 2006 Fla. Laws 214; See also Act of Apr. 3, 2007, 2007 N.M. Laws 3873, ch. 330). The Castle Coalition, a group that advocates for landowner rights and stricter regulations for private use of eminent domain, graded states based on their post-Kelo reforms in its 2007 “50 State Report Card,” using criteria such as a state’s definition of public use, the state’s regulation of the condemnation of private property to private entities, and the state’s definition of blight as a determinant of condemnable property. The organization gave only five A grades to states for their post-Kelo reforms in 2007, and Texas received a C minus for not passing legislation that adequately defined public use. The organization released a similar report two years later, giving Texas a B minus for its efforts to more clearly define public use.

As evident from the legal battle in Texas Rice Land Partners v. Denbury Green Pipeline-Texas, LLC, the legal terrain in the field of eminent domain continues to change in Texas and beyond as policy makers balance the potential for economic development with individual property rights.

The Case: Texas Rice Land Partners v. Denbury Green Pipeline-Texas

“Follow the yellow brick road . . . follow, follow, follow, . . .”

The Wizard of Oz

A private entity does not have absolute authority to invoke the power of eminent domain in Texas. The extent of that authority is the focus of the Texas Supreme Court’s opinion in Texas Rice Land Partners. In that case, the court denied an oil company’s attempt to invoke the power of eminent domain to build a pipeline by wrongly claiming common-carrier status, but the pipeline had already been built. Id., 363 S.W.3d 192 (Tex. 2012).

Texas Rice Land Partners was not initially a direct challenge to the right to condemn but rather a challenge to the landowners’ refusal to allow the oil company access to survey the land in questions. As part of the eminent-domain process, an oil company often needs to access land to survey it early in the condemnation process. During this process, the company must also designate whether it claims common carrier status. To be considered a common carrier, an oil company is often required to “present reasonable proof of a future customer.” Id. at 204. A future customer “will either retain ownership of their [product] or sell it to parties other than the carrier.” Id. at 200. Texas Rice Land Partners has evolved into a landmark case in Texas eminent-domain law. Oil companies are now required to more definitively prove common carrier status.

The Texas Supreme Court’s recognition of the new Denbury challenge arguably rejects the process through which oil companies have historically attained their right of eminent domain in Texas. Previously, pipeline companies applied for a permit with the Railroad Commission of Texas (RRC), which grants operating licenses to pipeline companies who declared themselves to be common carriers by simply checking a box. When challenged to provide proof of a pipeline’s common carrier status, oil companies would often present this permit to show they could condemn property for the project in question.

In 2012, the Texas Supreme Court held that this permit alone does not grant these companies the power to condemn. Id. at 198. The RRC has maintained that it does not directly grant eminent-domain power to pipeline companies, but it recently implemented new rules effective March 2015 that require oil companies to provide up-front proof that they carry non-affiliated, third-party product in their pipelines to classify themselves as common carriers on this permit.

The Texas Supreme Court began its opinion in Texas Rice Land Partners by stating “the Texas Constitution safeguards private property by declaring that eminent domain can only be exercised for ‘public use.’” Id. at 194 (emphasis added). The court found that simply filling out and filing the permit with the applicable regulatory authority was not conclusive proof of common carrier status or of the project’s character as a “public use.” Id. Rather, for an oil company to be considered a common carrier, the pipelines’ users must be more than the corporation funding the project or its subsequent affiliates; instead, the pipeline must be open to public use. Id. at 200. Looking beyond the permit, the court explained,

Under our test, Denbury Green did not establish common-carrier status as a matter of law. A Denbury Green vice president attested that Denbury Green was negotiating with other parties to transport anthropogenic CO2 in the pipeline, and that the pipeline “can transport carbon dioxide tendered by Denbury entities as well as carbon dioxide tendered from other entities and facilities not owned by Denbury.” This affidavit does not indicate whether Denbury Green itself intended to use all of that gas for its own tertiary recovery operations. As discussed above, a carrier is not a common carrier if it transports gas only for its own consumption. The witness also stated in his deposition that the CO2 carried in the pipeline would be owned by affiliate Denbury Onshore, but that there was “the possibility we’ll be transporting other people’s CO2 in the future.” He did not identify any possible customers and was unaware of any other entity unaffiliated with Denbury Green that owned CO2 near the pipeline route in Louisiana and Mississippi. This evidence does not establish a reasonable probability that such transportation would ever occur. Further, the record includes portions of Denbury’s own website that suggest the pipeline would be exclusively for private use.

Id. 202–203.

The Texas Supreme Court reversed and remanded the case to the district court, which had initially granted Denbury common carrier status, and the case has again worked its way to the Ninth Court of Appeals of Texas. Continuing down Denbury’s “yellow-brick road” to prove its common carrier status, the Ninth Court of Appeals of Texas recently held that it could not determine as a matter of law whether a pipeline company could validly invoke the power of eminent domain, as reasonable minds could differ regarding whether the Denbury pipeline would serve a public purpose. Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas, LLC, 2015 WL 575179, at *5 (Tex. App. — Beaumont Feb. 12, 2015). The Ninth Court of Appeals found that Denbury has not yet proven it intended to allow unaffiliated third parties to use its pipeline at the time of taking. It further declared that the pipeline’s common carrier status “raises a fact issue regarding whether the taking serves a substantial pubic interest” and that “the duty of weighing this evidence belongs to the jury.” Tex. Rice Land Partners, Ltd., 2015 WL 575179, at *5. (emphasis added).

This most recent ruling comes several years after the legal battle began and after prior rulings in favor of the pipeline company. During this back-and-forth in court, Denbury built the pipeline in question. If a jury determines that the pipeline does not serve a public interest, the landowners could claim trespass damages and a possible injunction against Denbury that would temporarily halt part of Denbury’s Gulf Coast operations.

Oil Interests in Other States

States vary in how they reach the issue of establishing common carrier status and the element of public use to justify condemnation. The matters in question in this Texas case do not differ greatly from those in other state condemnation cases, as many states authorize condemnations before landowners can challenge these takings.

Some states require oil companies to file for a certificate of public convenience and necessity within the state before beginning construction of a pipeline. This certificate helps show that the proposed land condemnations are reasonably necessary for the construction of the pipeline. See Public Service Company of Oklahoma v. B. Willis, C.P.A., Inc., 941 P.2d 995, 1000 (Okla. 1997). See also Eckre v. Public Service Commission, 247 N.W.2d 656, 663 (N.D. 1976). In North Dakota, a panel of three elected public commissioners approves pipeline routes and determines if the pipeline serves a public interest. Oil companies must also register pipelines with the state’s public service commission in Wyoming and Louisiana and file for a certificate of public convenience and necessity. In Oklahoma, an oil company has to fill out a similar certificate. The certificate simply establishes a prima facie case for condemnation that shifts the burden of disproving a pipeline’s public-use nature to the landowner. See Oklahoma Gas & Elec. Co. v. Beecher, 256 P.3d 1008, 1011 (Okla. 2010). A landowner who wishes to challenge an oil company’s authority to condemn after the company has completed the required paperwork may be doing so after the pipeline has been built, as is the case in Texas Rice Land Partners.

Remedies for Affected Land Owners

The Texas Rice Land Partners case suggests that it is up to a jury whether any particular pipeline serves the public interest, thereby justifying the use of eminent domain powers. Often, the land intrusion has already occurred. In such cases, if a jury determines that a pipeline does not serve a public interest, then the landowner could claim trespass damages and a possible injunction against an oil company that would halt a significant portion of its operations. Trespass generally occurs when a person enters another’s land without consent, and a plaintiff typically must prove that “(1) the plaintiff owns or has a lawful right to possess real property; (2) the defendant entered the plaintiff’s land and the entry was physical, intentional, and voluntary, and (3) the defendant’s trespass caused injury to the plaintiff. …Trespass requires only proof of interference with the right of possession of real property; the only relevant intent is that of the actor to enter the property.” Wilen v. Falkenstein, 191 S.W.3d 791, 797–98 (Tex. App.—Fort Worth 2006). Intent, therefore, does not determine whether a party trespasses. Even if the oil company argues it acted in good faith, a jury could still hold the company liable for any trespass resulting from the taking.

A jury may even hold the oil company accountable for exemplary damages—damages in addition to those caused by the taking—if it finds it acted with “recklessness, malice or deceit.” Black’s Law Dictionary 448 (9th ed. 2009). In Matador Pipelines, Inc. v. Watson, the Tenth Court of Appeals of Texas found that the pipeline company circumvented proper condemnation proceedings by arranging three special commissioners (other than those appointed by the court) to determine the fair-market price of the land in question. 626 S.W.2d 139, 141 (Tex. App.—Waco 1981). The court granted the landowner exemplary damages because the oil company built its pipeline without due process. Matador Pipelines, Inc., 626 S.W.2d at 141. An oil company may also be liable for the time between its original taking without common carrier status and the time of any future claims for condemnation. See Gully v. Southwestern Bell Telephone Co. 774 F.2d 1287, 1290 (5th Cir. 1985). In Gully, the Fifth Circuit stated “when a pre-condemnation trespass diminishes the value of the land subsequently taken, the landowner is entitled to recoup the fair market value of the land as it stood prior to the trespass.” Gully, 774 F.2d at 1293.

Oil companies will continue to follow the “yellow-brick road” to prove their common carrier status in order to get these pipelines built, but it raises a question: Is “an after-the-fact award of just compensation . . . an adequate remedy”? U.S. v. Clarke, 445 U.S. 253, 261 (1980), (Blackmun, J., dissenting).

Keywords: real estate litigation, pipeline, condemnation, eminent domain, oil

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