Columbia Gas Transmission Corp. v. Exclusive Natural Gas Storage Easement

• Decision Date: 23 July 1992
• Docket Number: No. 91-3360,91-3360
• Citation: 962 F.2d 1192
• Parties: COLUMBIA GAS TRANSMISSION CORPORATION, Plaintiff-Appellant, v. An EXCLUSIVE NATURAL GAS STORAGE EASEMENT in the Clinton Subterranean Geological Formation Beneath a 264.12 Acre Parcel in Plain Township, Wayne County, Ohio; Matthew Kim McCullough; Luann McCullough; Federal Land Bank of Louisville; Ross McCullough, Jr.; Phyllis G. McCullough; Joanne Spiglemire, Treasurer; Unknown Interested Other Parties to Plaintiff; Universal Exploration, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1192

962 F.2d 1192

60 USLW 2692

COLUMBIA GAS TRANSMISSION CORPORATION, Plaintiff-Appellant, v. An EXCLUSIVE NATURAL GAS STORAGE EASEMENT in the Clinton Subterranean Geological Formation Beneath a 264.12 Acre Parcel in Plain Township, Wayne County, Ohio; Matthew Kim McCullough; Luann McCullough; Federal Land Bank of Louisville; Ross McCullough, Jr.; Phyllis G. McCullough Joanne Spiglemire, Treasurer; Unknown Interested Other Parties to Plaintiff; Universal Exploration, Inc. Defendants-Appellees.

No. 91-3360.

United States Court of Appeals Sixth Circuit.

Argued Nov. 21, 1991.

Decided April 30, 1992.

Rehearing En Banc Denied

July 23, 1992.

Amos Perrine, Columbia Gas Transmission Corp., Charleston, W.Va., David D. Noble (argued and briefed), John E. Sullivan, III, Noble & Sullivan, Cleveland, Ohio, for Columbia Gas Transmission Corp.

M. Howard Petricoff (argued and briefed), Vorys, Sater, Seymour & Pease, Columbus, Ohio, for Matthew Kim McCullough and Luann McCullough.

Robert J. Reynolds, Reynolds & Richard, Wooster, Ohio, for Federal Land Bank of Louisville.

Joanne Spiglemire, Wooster, Ohio, for Joanne Spiglemire.

M. Howard Petricoff, Joseph M. Brooker, Vorys, Sater, Seymour & Pease, Columbus, Ohio, for Universal Exploration, Inc.

Before: JONES and MILBURN, Circuit Judges; and ENGEL, Senior Circuit Judge.

NATHANIEL R. JONES, Circuit Judge.

On April 14, 1988, Columbia Gas Transmission Corporation filed suit in the United States District Court for the Northern District of Ohio in Akron seeking to appropriate an exclusive underground natural gas storage easement beneath 264 acres of land in Wayne County, Ohio. Columbia Gas commenced this action pursuant to its eminent domain authority conferred in § 7(h) of the Natural Gas Act. See 15 U.S.C. § 717f(h) (1988). ¹ The tract in question is part of a farm owned by defendants Matthew and Luann McCullough. ² In the present appeal, Columbia Gas challenges the judgment below directing it to pay compensation to defendants in the amount of $213,798. This appeal requires us to address whether this circuit should develop a federal common-law rule as the standard of valuation, or rather, whether the Act requires that we adopt the law of the state in which the property is situated as the appropriate federal standard. For the reasons that follow, we hold that the federal standard should incorporate the law of the state in which the condemned property is located. Because the court below did not follow Ohio law in making its determinations, we reverse and remand for further proceedings.

I

Columbia Gas is a natural gas company falling within the provisions of the Natural Gas Act, 15 U.S.C. §§ 717-717w (1988). As part of its extensive interstate natural gas distribution and transportation system, Columbia Gas maintains numerous natural gas storage fields throughout the Northeast and Midwest. These storage fields are the remnants of earlier natural gas deposits that have since been depleted. During periods of low demand, Columbia Gas injects natural gas purchased elsewhere into the storage fields for later withdrawal during periods of high demand.

The instant suit concerns the Wayne Storage Field in Wayne County, Ohio, located in a geologic stratum, or "horizon," known as the Clinton Formation. The Clinton Formation lies approximately 2800 to 3000 feet beneath the earth's surface and encompasses approximately 21,000 acres. The McCulloughs are owners in fee simple of a 399-acre farm in Wayne County on which they grow grain and raise livestock. Approximately 264 acres of the McCullough farm are located in the "buffer zone" of the Wayne Storage Field ³ and are the subject of the instant condemnation proceedings.

Prior to 1987, Columbia Gas held a series of limited-duration underground gas storage leases with the McCulloughs. These leases granted Columbia Gas the exclusive right to use the Clinton Formation beneath the property as a barrier to prevent the escape of gas in the reservoir of the storage field. The final lease expired in 1987, and Columbia Gas and the McCulloughs were thereafter unable to settle on a new lease term. Instead, on March 1, 1988, the McCulloughs entered into a six-month term production lease with Branney Operating Company, which in turn formed a joint venture with Universal Exploration and Petro Evaluation Services. The lease gave Branney Operating the exclusive right to drill, produce, and market all recoverable oil and natural gas from under the McCulloughs' property in exchange for a one-eighth royalty of the proceeds from the sale of all oil and gas recovered, free of the costs of production.

On March 28, 1988, Branney Operating assigned all of its rights under the lease to Universal Exploration. After arrangements were well under way to secure the necessary capital and drilling permits, Columbia Gas filed the instant suit condemning the underground storage easement. Columbia Gas feared that defendants' drilling might destroy the permeability barrier containing the stored gas within the field. The effect of the condemnation was to deprive defendants of their right to prospect for oil and gas within and below the Clinton Formation.

The district court proposed the empanelling of a commission pursuant to Federal Rule of Civil Procedure 71A(h) to determine the amount of compensation owed defendants. Following a comment period during which both parties proposed instructions, the court appointed a three-person Rule 71A(h) Commission. On May 4, 1990, the court issued an order finalizing the instructions and granting leave to both parties to file objections.

At hearings before the Commission, defendants presented expert testimony suggesting that the wells slated for drilling might well prove productive. An expert also predicted that the present interest value of the expected future net income from the proposed wells might reach as high as $873,802. Columbia Gas responded with expert testimony and evidence indicating that the marketplace value of the right to prospect for oil and gas in land comparable to that belonging to defendants was approximately $50 per acre, bringing the total value of the easement to $13,200. Columbia Gas also offered evidence that a fee simple interest in the subject tract, unencumbered by any easements, was worth no more than $154,200.

After two days of hearings, the Commission issued its report. The Commission found that "[i]t is more likely than not that commercially recoverable oil and gas reserves exist within the property sought to be appropriated." J.A. at 195. The Commission further found that "the present value, on the date of taking, of the net cash flow from the natural gas reserves from the property sought to be appropriated, discounted at twelve percent (12%), is ... $305,426." Id. at 196. After discounting this amount by 30% due to its determination that the property would more likely than not be classified as "proved undeveloped" reserves, the Commission concluded that just compensation for the condemned property was $213,798. Id.

On January 22, 1991, after various post-report motions by both parties, the court ordered the Commission to supplement its report stating the evidentiary basis for its findings. On March 21, 1991, after receiving the Commission's supplemental report, the court upheld the Commission's findings of fact and conclusions of law. Columbia Gas subsequently filed this timely appeal.

II

Columbia Gas's primary contention on appeal is that the Commission applied the improper legal standard in determining the amount of compensation due the defendants. Specifically, Columbia Gas argues that the Commission erred in relying upon the present value of the expected future net income of the planned wells, rather than upon the difference in value of the subject property before and after the condemnation. Before addressing the merits of this claim, however, we must first determine whether this issue should be resolved in accordance with state law, in this case the law of Ohio, or under federal common law. ⁴

Resolution of this issue follows the analysis set forth in United States v. Kimbell Foods, 440 U.S. 715, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979), and its progeny. Kimbell involved the priority of competing private and federal liens, some of which arose under federal loan programs, in the absence of a federal statutory scheme setting priorities. Id. at 718, 99 S.Ct. at 1453. The Supreme Court first addressed whether the federal program required that federal law should govern and unequivocally held that it should:

Since the agencies [that held the United States' liens] derive their authority to effectuate loan transactions from specific Acts of Congress passed in the exercise of a "constitutional function or power," their rights, as well, should derive from a federal source.... In such contexts, federal interests are sufficiently implicated to warrant the protection of federal law.

Id. at 726-27, 99 S.Ct. at 1457-58 (citation omitted) (quoting Clearfield Trust Co. v. United States, 318 U.S. 363, 366, 63 S.Ct. 573, 574, 87 L.Ed. 838 (1943)).

Given that federal law provided the source of power, the Court next addressed whether the federal courts should fashion a uniform federal common-law rule or adopt state law as the federal standard. Id. at 728, 99 S.Ct. at 1458. The Court enunciated three considerations guiding its analysis: (1) the need for a nationally uniform body of law, (2) whether the application of state law would frustrate specific objectives of the federal program at issue, and (3) the extent to which application of a federal rule would upset commercial relationships predicated on state law. Id. at 728-29, 99 S.Ct. at 1458-59; accord Gaff v. Federal Deposit Ins. Corp., 919 F.2d 384, 387 (6th Cir.1990), modified, 933 F.2d 400 (6th Cir.1991). Reviewing each factor in turn, the Court concluded that state law should be adopted as the appropriate federal rule.

Since its decision...