Last week, the Texas Supreme Court issued its opinion in Hlavinka v. HSC Pipeline.  [Read opinion here.]

Photo by Built Robotics on Unsplash

Background

Plaintiffs (“Hlavinka”) own four tracts of land totaling 13,000 acres in Brazoria County, Texas.  Although the family uses the land for agriculture, Mr. Hlavinka testified his primary purpose for purchasing the property was to sell pipeline easements.

The land has 25 pipeline easements on it. Mr. Hlavinka recently negotiated two such easements in arms’ length, private sales transactions, receiving $3.45 million and $2 million, respectively.

HSC installed the pipeline at issue in this case, a polymer-grade propylene pipeline, across Hlavinka’s property. HSC owns the pipeline. HSC has affiliations with several Enterprise entities, including Enterprise Products OLPGP, which serves as HSC’s sole managing member and Enterprise Products Operating LLC which serves as both the pipeline’s operator and manufactures and sells polymer-grade propylene, which the HSC pipeline transports. Braskem, which is not an Enterprise affiliate, purchases the propylene from Enterprise Products prior to it entering HSC’s pipeline.  HSC published a tariff indicating that the pipeline is open to all who desire to ship in the line and meet the terms of the tariff.

After negotiations, Hlavinka rejected HSC’s offer to purchase a 30′ pipeline easement.

Litigation

When the parties were unable to reach an agreement on the easement, HSC filed a condemnation suit.  Hlavinka sought dismissal arguing that HSC did not have the power to exercise eminent domain authority.  HSC filed for partial summary judgment seeking a ruling that it did have common-carrier eminent domain authority.

The trial court granted HSC’s motion, finding that it did meet the requirements to exercise eminent domain.  The case proceeded to a bench trial.  Mr. Hlavinka sought to testify about the private sales values mentioned above and, based on those sales, he would have testified as to a $3.3 million/rod fair market value. HSC moved to exclude his testimony related to the other pipeline sales.  The trial court excluded the testimony, leaving the agricultural value as the only remaining testimony.  The trial court awarded Hlavinka $132,293.36 compensation.  Hlavinka appealed.

The Court of Appeals affirmed the holding that HSC was entitled to eminent domain authority under Business Organizations Code Section 2.105 because polymer-grade propylene constitutes an “oil product” under that statute. The Court of Appeals, however, reversed on two other issues, finding that the contract between HSC and Braskem did not conclusively demonstrate public use and that the court improperly excluded Mr. Hlavinka’s valuation testimony. [Read blog post on opinion here.]

Both parties sought review before the Texas Supreme Court.

Texas Supreme Court Opinion

The Texas Supreme Court essentially addressed two questions: (1) Does HSC have condemnation authority?; and (2) Should Mr. Hlavinka’s valuation testimony have been allowed?  [Read Opinion here.]

Does HSC Have condemnation authority?

The Court first addressed whether HSC has eminent domain authority.

Statutory Eminent Domain Authority

The Texas legislature created two sources of condemnation power for pipelines: Business Organizations Code Section 2.105 & Natural Resources Code Chapter 111.

Business Organizations Code Section 2.105 provides: In addition to the powers provided by the other sections of this subchapter, a corporation, general partnership, limited partnership, limited liability company, or other combination of those entities engaged as a common carrier in the pipeline business for the purpose of transporting oil, oil products, gas, carbon dioxide, salt brine, fuller’s earth, sand, clay, liquefied minerals, or other mineral solutions has all the rights and powers conferred on a common carrier by Sections 111.019-111.022, Natural Resources Code.

Hlavinka argued that to qualify for the power, HSC must first qualify as a common carrier under Natural Resources Code Section 111.002 in order to qualify under the Business Organizations Code Section 2.105.  In other words, Hlavinka argued these two statutes were not independent grants of authority, but instead that Section 2.105 was subordinate to the Section 111.002.

The Supreme Court disagreed with this argument.  Instead, it held Section 2.105 explicitly expands condemnation authority to pipeline entities engaged as common carriers for the transport of products beyond those included in the Natural Resources Code.  The Court noted that Section 2.105 did not refer to Section 111.002 at all. Instead, it “explicitly expands condemnation authority to pipeline entities engaged as common carriers for the transport of products beyond those included in Section 111.002.”  Although both the Section 2.105 provision and the Section 111.002 provisions refer to Section 111.019, the Court found that both “provide alternative paths to obtaining that power.”

Is polymer-grade propylene an “oil product?”

Once the Court determined Section 2.105 conferred eminent domain authority, the question was whether polymer-grade propylene is an “oil product” under Section 2.105.

Section 2.105 does not define the meaning of “oil product.”  The Natural Resources Code defines “oil” as “crude petroleum oil” and “petroleum product” to include “any other liquid petroleum product or byproduct derived from crude petroleum oil.”  The Railroad Commission defines “product” to include “refined crude oil, . . . processed crude petroleum, residue from crude petroleum, . . . blends or mixtures of petroleum, and/or any and all liquid products or by-products derived from crude petroleum oil or gas, whether hereinabove enumerated or not.”

HSC claimed that polymer-grade propylene is an “oil product” since it can be derived as a byproduct of crude oil. Conversely, Hlavinka claimed it is not an “oil product” because it is not a naturally occurring byproduct of refined petroleum.

The Supreme Court found polymer-grade propylene is an “oil product.”  It is a derivative of crude petroleum made by further distilling and deriving product from propane and natural gas, both of which are components of crude petroleum. Enterprise collects the refinery-grade propylene from more than 40 area crude oil refineries before Enterprise further refines it into polymer-grade propylene.

Thus, the Supreme Court affirmed the trial court and court of appeals holding that HSC has the authority to condemn property to build its pipeline.

Does the pipeline serve a public use?

Lastly, the Court determined that the pipeline serves a public use.  Both the US and Texas Constitution requires that a pipeline be for a public use in order to exercise eminent domain authority. Section 2.105 incorporates this by requiring a pipeline transporter must be engaged as a common carrier to qualify to exercise eminent domain authority.

The test to determine common carrier status was set forth by the Texas Supreme Court as follows: “A pipeline serves a public use as a matter of law if it is reasonably probable that, in the future, the pipeline will ‘serve even one customer unaffiliated with the pipeline owner.'”  It cannot be built solely for the builder’s exclusive use.

The Court found the contract with Braskem to be sufficient proof of common carrier status because “it is an existing transportation contract with an unaffiliated customer, and the pipeline connects to existing pipeline networks, making the transportation network feasible.”  Further, the Court stated, “the pipeline has additional capacity and terminates near other potential customers” and “HSC has publicly filed a tariff with the Railroad Commission demonstrating that it offers and markets the pipeline for public hire.”

Hlavinka further argued there should be an additional requirement that the manufacturer of the transported product must have no affiliation with the pipeline owner. Hlavinka argued  although Braskem takes title to the product before it enters HSC’s pipeline, they could have just as easily taken title at the other end of the line.  The Supreme Court disagreed, refusing to add this additional requirement to the test for common carrier status.

Lastly, the Court re-affirmed its prior ruling that the question of whether a project is for a public use is a question of law for a court to decide, rather than a question of fact for the jury.

Should Mr. Hlavinka’s testimony have been admitted?

Having determined that HSC did have eminent domain authority, the question then became whether Mr. Hlavinka should have been permitted to offer the testimony about other arms’ length sales for pipeline easements across the property.

The Court laid out the general rules related to the admissibility of this testimony.  Generally speaking, a property owner may testify about the market value of the property taken so long as their testimony is based on facts that demonstrate the market value, rather than on speculative or intrinsic facts.  Arms’ length transactions are appropriate evidence of market value, “provided the sales are voluntary, contemporary, local, and “involve land with similar characteristics.”

Highest and best use

HSC argued that the Hlavinka’s current use of the property–agriculture–should be considered the land’s highest and best use.  The Hlavinkas argued that given the location of the land, their intent in purchasing, and the number of pipelines already in place, the highest and best use was for pipeline easements and the land should be valued as such.  The Court noted that although there was a presumption that the existing use is a property’s highest and best use, that may be rebutted by a landowner.  The Court held that the testimony from Mr. Hlavinka about the prior arms’ length pipeline sales offered at least some evidence that the condemned land could have been sold to another pipeline at a significantly higher price than its agricultural value.

Project Enhancement Rule

Next, HSC argued that Mr. Hlavinka’s testimony violated the project-enhancement rule by considering enhancement to the land from the pipeline itself, which is not proper.  The Court, however, noted that it was not that the HSC pipeline that would make the easement valuable; it is valuable because of purchasers other than HSC who value its geographic qualities.  This was not created by HSC’s interest or pipeline, but is based on the value of the easement itself the landowners could sell to another party. The number of pipelines on the property and prices paid to secure those easements is evidence of the value of the land, regardless of HSC’s condemnation.

Prior Pipeline Sales

Finally, the Court noted that due to the prior private pipeline sales on the property, this case was unique.  This makes it distinguishable from other cases where landowners sought to testify about the “going rate” for pipeline easements in the area, but where there was no indication that such sales had occurred.  Ordinarily, there is no credible evidence that the land could be sold as a pipeline easement to another were it not condemned for the same purpose. Again, the prior sales to other pipeline companies and the number of lines on the property provide some evidence that the Hlavinkas could have sold to another company but were instead forced to sell toHSC.

Critically, the Court noted that this case does not stand for the proposition that “any land a pipeline traverses instantly or always becomes a pipeline corridor with a corresponding rise in market value.”  Instead, “a landowner must show a ‘reasonable probability’ that the land would ‘likely be needed in the near future for another use by another interested market participant.'”  A single pipeline or an ancient pipeline may not be sufficient to show an increase in market value as they may not indicate a current market absent the taking exists.  However, in a case like this with “frequent, recent, comparable sales” such evidence should be admitted to show a reasonable probability that the easement condemned by HSC would likely have been sold to another pipeline in the near future.  Of course, a jury is free to believe or not believe any evidence in a case.

Finally, the Court summarized as follows:  “A condemnation should not be a windfall for a landowner.  Nor should it be a windfall for a private condemnor.  A condmenor must pay fair price for the value of the land taken.  Evidence of fair market sales  to secure easements running across the property that precede the taking are admissible to establish the property’s highest and
best use, and its market value, at the time of the taking.”

Based on this, the Court held that the trial court committed a harmful error when it excluded Mr. Hlavinka’s testimony.  Thus, a new trial as to market value was ordered. The Court noted that HSC is free to challenge any assumption made by Mr. Hlavinka, and the jury is free to adjust the market valuation of the property based on all admissible evidence.

Key Takeaways

For landowners, it is likely the Court’s third decision–that Mr. Hlavinka may testify as to other recent, arms’ length, easement sales–that is the most important.  For landowners who may have this type of evidence of other private pipeline sales on their property, this ruling is important and will allow this type of evidence (assuming it meets the requirements set forth by the Court) in future trials.

Additionally, the Court’s reaffirmation of the way to analyze whether a company qualifies as a common carrier is useful as well.  Even where there may be just one unaffiliated contract such as the one with Braskem, that appears sufficient for the Texas Supreme Court.