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By Megan R. Knell     

Landowners achieved another victory in the recent case of Hlavinka v. HSC Pipeline Partnership, LLC, in which the court revisited the pipeline company’s “common carrier” status based on the reasonable probability test established in Texas Rice and also the valuation of the land taken for the easement.  2020 WL 3393540 (Tex. App. – Houston [1st Dist.] 2020).  Most importantly, the court held that the property owner’s own testimony regarding prior pipeline easements and a “per rod” valuation in connection therewith was proper evidence to be submitted for consideration in establishing the valuation of the condemned property.

The Hlavinkas owned approximately 16,000 acres in Brazoria County, Texas (the “Property”).  At the time the Hlavinkas purchased the land, there were already as many as twenty-five pipelines situated on and across the 16,000-acre tract.  According to testimony of Terrence “Terry” Hlavinka, the family originally purchased the property for purposes of granting additional pipeline easements in order to generate income.

In 2016, HSC Pipeline Partnership, LLC (“HSC”) contacted the Hlavinkas for purposes of acquiring a pipeline easement across four tracts of land situated within the Property.  The Hlavinkas and HSC were unable to reach an agreement for the pipeline easement, and HSC subsequently filed condemnation proceedings seeking to condemn the pipeline easement across the Property.

In the condemnation proceedings, the court ultimately found that HSC qualified as a common carrier, and it ordered the testimony of Terry Hlavinka regarding amounts paid for prior easements across the Property excluded as evidence.  As such, the trial court entered a final judgment awarding HSC the pipeline easements it sought across the Property and valuing the land taken for such easements at $132,293.36.  The Hlavinkas subsequently appealed the trial court’s denial of a motion for new trial, and they challenged (i) the trial court’s finding that HSC qualified as a common carrier with power of eminent domain, and (ii) the exclusion of the testimony of Terry Hlavinka in connection with the valuation of the land sought to be taken. 

Common Carrier

Texas Natural Resources Code § 111.019(a) provides that “[c]ommon carriers have the right and power of eminent domain.”  Article I, Section 17 of the Texas Constitution allows for the taking of private property by eminent domain when such taking is for a “public use.” In evaluating whether the taking by HSC would be for a “public use,” the court revisited the two pivotal opinions issued in Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas, LLC, 363 S.W.3d 192 (Tex. 2012) (“Texas Rice I”) and Denbury Green Pipeline-Texas, LLC v. Texas Rice Land Partners, Ltd., 510 S.W.3d 909 (Tex. 2016) (“Texas Rice II”).  In Texas Rice I, the court the court held that a pipeline company qualified as a common carrier pursuant to Texas Natural Resources Code § 111.002(6) if it met the “reasonably probability test.”  The reasonable probability test is met when there is a reasonable probability “that the pipeline will at some point after construction serve the public by transporting gas for one or more customers who will either retain ownership of their gas or sell it to parties other than the carrier.”  In Texas Rice II, Denbury (the pipeline company) presented evidence that it had entered into two transportation contracts.  One of such contracts was for transportation of a product that Denbury would not sell or buy at any point.  As such, the Texas Rice II court ultimately held that it was “more likely than not” that the pipeline would serve the public “at some point after construction.”

Unlike the evidence presented in Texas Rice II, the evidence presented in Hlavinka was not sufficient to meet the reasonable probability test.  HSC presented evidence that its pipeline would be used to transport production to a plant owned by Braskem and that the production was owned by Braskem at all times while being transported in the pipeline.  However, the evidence also indicated that the production was owned by HSC or one of its affiliates immediately prior to entering the pipeline, and HSC or its affiliate was selling the production to Braskem.  As such, the pipeline was being used to ship product owned by HSC (or its affiliate) to its customer, who would be the sole and end user of the product.  Additionally, no evidence was presented that the pipeline was offered to additional parties for transport.  Based on this evidence, the court held that HSC had not conclusively established as a matter of law that it was a common carrier with power of eminent domain. 

Valuation of Easement Property

For landowners, the more important issue in Hlavinka was the court’s willingness to consider the landowner’s own testimony regarding consideration paid in connection with prior pipeline easements in connection with the valuation of the easement.  Compensation paid for land taken by eminent domain must be based on the fair market value of the land at the time of the condemnation.  See Exxon Pipeline Co. v. Zwahr, 88 S.W.3d 623, 627 (Tex. 2002).  Fair market value is defined as what a willing buyer would pay a willing seller, not a seller who is obligated to sell under threat of condemnation or otherwise. 

A factfinder may consider the “highest and best use” of the property to be taken in determining fair market value.  The existing use of the land is presumed to be the “highest and best use” of such property, but this is a rebuttable presumption that may be overcome by evidence that the property is adaptable and “would likely be needed in the near future for another use.”  Exxon Pipeline Co. v. Zwahr, 88 S.W.3d 623, 628.  Further, a single tract of property may be evaluated as a separate economic unit instead of as one large tract.  Exxon Pipeline Co. v. Zwahr indicated that a tract may qualify as a single economic unit when a property owner “actually uses parts of what would otherwise constitute a unified tract for different or separate purposes” and the smaller tract has a different value from the remaining land. When a tract qualifies as a separate economic unit, the market value of the severed land can be determined without considering its value in relation to the remaining land. 

In Hlavinka, Terry Hlavinka intended to testify that the 10-foot wide tracts within the Property used for pipeline easements were “functionally separate” from the Property, and the highest and best use of such separate tracts was for pipeline development.  The Hlavinkas could sell pipeline easements over these smaller tracts, and they could not sell the Property as a whole for the same amount of money because it did not have the same use as the smaller 10-foot wide strips.  Alternatively, HSC argued that the land to be taken had to be considered as part of the Property, and the highest and best use of the Property was for agricultural, recreational, and/or rural residential use. 

HSC further challenged the treatment of the 10-foot wide strips as separate economic units by asserting that Terry Hlavinka’s methodology violated the “project-enhancement rule.”  The project-enhancement rule requires that one cannot rely on the condemnation itself to establish land as a separate economic unit.  For example, in Exxon Pipeline Co. v. Zwahr, the landowner used the pipeline easement at issue to establish that the highest and best use of the land to be taken was as a pipeline easement.  Prior to the condemnation, the condemned property was used solely for agricultural purposes, and the landowner did not present evidence that any of the land was used for pipeline easements prior to the taking.  Further, there was no evidence that future pipeline development was contemplated for such land.  Unlike Zwahr, the Hlavinkas would present evidence that (i) the separate economic units were the ten-foot wide strips adjacent and parallel to existing pipelines on the Property, and (ii) that the landowner sold such ten-foot wide strips in order to ensure pipelines on the Property were spaced five feet apart.  Such evidence would indicate that the ten-foot strips were separate economic units prior to the condemnation by HSC. 

Because the highest and best use of the separate 10-foot wide strips was for pipeline development, and the Hlavinkas would no longer be able to sell pipeline easements across such strips (as separate economic units) after the taking, Mr. Hlavinka opined that the property to be taken would have no value after the condemnation.  As such, Mr. Hlavinka valued the three 10-foot wide strips sought to be condemned by HSC at $3,383,160.  Mr. Hlavinka explained that he arrived at his valuation by considering the “per rod” compensation paid by other pipeline companies for prior easements in 2014 and 2015 as his basis, and he adjusted such figure based on other factors including, but not limited to, the size and location of the easement sought. In evaluating whether to allow such testimony, the court provided that a “per rod” valuation is only improper when it is used to the exclusion of other “relevant factors and does not translate into information that a factfinder can use.”  Mr. Hlavinka’s valuation was not based solely on a “per rod” valuation but instead incorporated comparable sales of prior easements on similarly situated property located nearby that occurred only one to two years prior to the date HSC approached the Hlavinkas.  For these reasons, the court held that Mr. Hlavinka’s testimony was proper evidence regarding the valuation of the pipeline easement, and it should not have been excluded by the trial court.

Conclusion

While pipeline easement negotiations may begin with a “per rod” valuation, landowners are typically concerned about the unwillingness of courts to use such a valuation in determining the fair market value of the easement property in a condemnation proceeding.  This uncertainty has deterred landowners from the condemnation process, and pipeline companies have used it as leverage when negotiations with a landowner seem to have stalled.  However, Hlavinka appears to provide landowners with some certainty that courts may be willing to consider a “per rod” valuation when used in conjunction with other factors.  As a result, pipeline companies should be prepared for the successful use of a “per rod” valuation in future condemnation proceedings.