Enbridge Pipelines (East Texas) L.P. v. Avinger Timber, LLC
| Decision Date | 31 August 2012 |
| Docket Number | No. 10-0950,10-0950 |
| Parties | ENBRIDGE PIPELINES (EAST TEXAS) L.P., PETITIONER, v. AVINGER TIMBER, LLC, RESPONDENT |
| Court | Texas Supreme Court |
ON PETITION FOR REVIEW FROM THE
COURT OF APPEALS FOR THE SIXTH DISTRICT OF TEXAS
This case involves a dispute over the fair market value of acreage on which a gas processing facility is located. We must decide whether the trial court abused its discretion by admitting an expert's testimony that allegedly violated the value-to-the-taker rule, which prohibits measuring land's value by its unique value to a condemnor in determining a landowner's compensation. We hold that the expert's testimony violated the rule because it impermissibly focused on the condemnor's interest in retaining the property and was therefore inadmissible. Because the courtof appeals erred when it concluded that the trial court did not abuse its discretion, we reverse and remand to the trial court.
Almost forty years ago, the predecessors in interest of Avinger Timber, LLC leased twenty-four acres to a gas processing company so the company could build and operate a gas processing facility. The lease gave the gas processing company an endless right of renewal. The land was in one of the state's most productive counties for natural gas and already had many pipelines running underneath it. A large gas processing facility was built, and easements were freely granted by Avinger for additional pipelines, roads, and a high-voltage electric line. In 1998, the lease was renewed, but without the endless right of renewal, giving Avinger a reversionary interest in the land. Enbridge Processing, LP ("Enbridge Processing") took over as the lessee. When the expiration date for the lease was looming and the parties were unable to agree on a rental price for renewal, Enbridge Processing merged with a public utility, Enbridge Pipelines (East Texas) L.P. ("Enbridge Pipelines"), and filed a condemnation petition to condemn the land. The commissioners awarded Avinger $47,580, but Avinger objected to the commissioners' default award and went to trial on the issue of fair market value of the condemned acreage. Challenges were made to each party's expert. The trial court allowed Avinger's expert's testimony but excluded the testimony of Enbridge Pipelines's expert. The jury awarded Avinger $20,955,000 as just compensation for the tract, and the trial court rendered judgment on that verdict. The court of appeals affirmed, holding that Avinger's expert's testimony did not violate the value-to-the-taker rule, which prohibits measuring a land's unique value to a condemnor, and the project-enhancement rule, which prohibits consideration of any enhancement to the value of the property that results from the taking itself. The court of appeals held that the jurywas entitled to consider the value of improvements constructed by prior lessees and the cost savings to a potential purchaser.
We must decide whether Avinger's expert's testimony should have been excluded. Because we hold that the trial court abused its discretion by admitting testimony that violated the value-to-the-taker rule by impermissibly focusing on Enbridge Pipelines' cost savings, we reverse and remand to the trial court.
In 1973, the Simpson family, which owns Avinger, leased a 23.79-acre portion of their 418 acres to a gas processing company, Tonkawa Gas Processing Company, so that Tonkawa could build and operate gas processing facilities. Tonkawa was a private company that lacked condemnation power. At the time of the lease, the land already had several pipelines running underneath it. The 1973 lease was a ten-year lease that gave the lessee the perpetual option to renew for an additional ten years, giving the lessee an endless right of renewal. Annual rent was $500. Both parties had the right to arbitrate if no agreement was reached on new rents. The lessee was "the sole owner" of "all gas processing facilities and other improvements" on the property. If the lease expired, the lessee could remove its plant "within a reasonable time not to exceed six (6) months" or the landowner could "negotiate with [the lessee] for purchase" of the gas processing facility.
Tonkawa built a large natural gas processing facility on the land, and the Simpsons freely granted easements for roads, additional pipelines, and a high-voltage electric line. At least fifteen separate natural gas pipelines connected to the plant and the site became known as a gas processing hub in one of Texas's most productive counties. The lease was renewed in 1984 for fifteen years onthe same terms, except that the annual rent was increased to $4,000. Tonkawa then sold the plant to Koch Midstream Processing Company, which took over the lease interest, and Avinger became the successor lessor.
In 1998, Avinger renewed the lease with Koch, but on different terms. The lease term was reduced to three years with a three-year option. Annual rent was increased to over $21,000. Importantly, the language giving the gas processing company a right of never-ending lease renewals was removed, giving Avinger a reversionary interest in the land. Koch renewed the lease at the end of the three-year term, and Enbridge Processing became the gas plant operator and successor lessee after purchasing the lease and the plant from Koch. Like Tonkawa and Koch, Enbridge Processing was a private company that lacked the power of eminent domain.
With the lease expiration date nearing and the parties unable to agree on a rental price for a lease renewal, Enbridge Pipelines,1 a public utility company, sent an offer to Avinger to purchase the land for $35,685. At the time Enbridge Pipelines sent the offer, it was not the owner of the gas processing facility or the lessee of the property. Avinger refused the offer. Enbridge Processing then merged with Enbridge Pipelines and secured the right to acquire the property through eminent domain. A petition for condemnation was filed, and the commissioners awarded Avinger $47,580 as compensation after it failed to appear at the valuation hearing. Avinger objected to the commissioners' default award and went to trial on the issue of fair market value.
At trial, Enbridge Pipelines's expert, Albert Allen, valued the property at $47,940, with the land's highest and best use as vacant rural residential property using sales comparison analyses. Avinger's expert, David Bolton, valued the property at $20,955,000, with its highest and best use as industrial property to house a gas processing plant. Bolton used a comparable sales methodology, two income approaches, and additional intrinsic value analyses in reaching his conclusion. In reaching the value of the property, Bolton relied on the provision in the lease which required the lessee to remove all improvements on the land within six months of the lease's termination. He testified that the value of the property to Enbridge would have been much greater than the $20,955,000 amount he concluded was its market value because the terms of the lease required Enbridge to remove its plant within six months, an obligation that Enbridge avoided by condemning the property. To determine the value added to Avinger's interest by Enbridge Pipelines's obligation to remove the gas plant, Bolton consulted with Donald Niemac, a gas-industry expert. Bolton's report stated that (1) the lease agreement was in effect at the time of the condemnation; (2) the lease agreement forms part of the fair market value of the land burdened by the lease; (3) the lease required the lessee to remove its improvements, including the gas processing facility; (4) Enbridge Pipelines, the condemnor, would not be removing the facility under the terms of the lease; and (5) Enbridge Pipelines's cost savings is incorporated into the value of the land.2 Based on Niemac's testimony about practices in the gas processing industry, Bolton's expert report concluded that a prudent and knowledgeable investor,considering Enbridge Pipelines's cost savings, would pay between $21,750,000 and $28,500,000 for Avinger's interest.
In calculating the comparable sales analyses, Bolton started with six similar industrial property sales with an average value of $13,480 an acre. Bolton then added value for the pipeline infrastructure and the lessee's cost of complying with the lease by removing the improvements on the land, reaching a value of $22,000,000, or $924,758 per acre. Bolton also valued the land using the discounted cash flow method and the direct capitalization method. Under the discounted cash flow method, Bolton reached a value of $18,904,350. To reach this amount, Bolton speculated that Avinger and Enbridge Pipelines would renew the lease for three additional years and that Enbridge Pipelines would pay $63,158 in rent over the three year term. Bolton calculated Avinger's reversionary interest in the fourth year as being worth $22,000,000, the value reached for his comparable sales analyses. Under the direct capitalization method, Bolton relied on the cost savings to Enbridge Pipelines in avoiding business disruption and reached a value of $22,275,000. Although Bolton's expert report concluded that a prudent and knowledgeable investor, considering Enbridge Pipelines's cost savings, would pay between $21,750,000 and $28,500,000 for Avinger's interest, at trial, he testified that the land was still worth $20,955,000 even if Enbridge Pipelines did not exist and the plant was "swept away by a tornado."
Both Avinger and Enbridge Pipelines moved to exclude the other party's expert's testimony. Enbridge Pipelines argued that Bolton's testimony impermissibly relied on project-enhancement by...
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