N. Natural Gas Co. v. Approximately 9117 Acres in Pratt

• Decision Date: 08 July 2015
• Docket Number: Civil Action No. 10–1232–MLB–DWB.
• Citation: 114 F.Supp.3d 1144
• Parties: NORTHERN NATURAL GAS COMPANY, Plaintiff, v. APPROXIMATELY 9117 ACRES IN PRATT, KINGMAN, AND RENO COUNTIES, KANSAS, and as Further Described Herein; Tract No. 1062710 Containing 80.00 Acres More or Less, Located in Kingman County, Kansas, and as Further Described Herein; et al., Defendants.
• Court: U.S. District Court — District of Kansas

114 F.Supp.3d 1144

NORTHERN NATURAL GAS COMPANY, Plaintiff,

v.APPROXIMATELY 9117 ACRES IN PRATT, KINGMAN, AND RENO COUNTIES, KANSAS, and as Further Described Herein; Tract No. 1062710 Containing 80.00 Acres More or Less, Located in Kingman County, Kansas, and as Further Described Herein; et al., Defendants.

Civil Action No. 10–1232–MLB–DWB.

United States District Court, D. Kansas.

Signed July 8, 2015.

Richard A. Olmstead, Kutak Rock LLP, Wichita, KS, Corey A. Neller, Mark D. Coldiron, Paula M. Jantzen, Ryan Whaley Coldiron Shandy PC, Oklahoma City, OK, for Plaintiff.

Jeffery L. Carmichael, Kristen D. Wheeler, Will B. Wohlford, Morris, Laing, Evans, Brock & Kennedy, CHTD., David G. Seely, Gregory J. Stucky, Ryan K. Meyer, Stephen E. Robison, Daniel E. Lawrence, David G. Seely, Gregory J. Stucky, Fleeson, Gooing, Coulson & Kitch, LLC, Wichita, KS, John D. Beverlin, II, Stull & Beverlin, LLC, Robert R. Eisenhauer, Johnston Eisenhauer, Eisenhauer & Lynch, LLC, Pratt, KS, Adam S. Davis, Brian J. Madden, Thomas A. Rottinghaus, Wagstaff & Cartmell, LLP, Kansas City, MO, for Defendants.

MEMORANDUM AND ORDER

MONTI L. BELOT, District Judge.

Before the court are the following:

1. Northern Brief Regarding Pre–Judgment Interest (Doc. 949); Huff Group Response (Doc. 967); Meireis Group Joinder in Huff Response (Doc. 968); Producer–Defendants' Response (Doc. 969); Northern Reply (Doc. 976);

2. Summary Judgment Motions Concerning Validity of Leases

—Val Group (Docs. 950, 951), Northern Response (Doc. 970), Huff Group Response (Doc. 974), Val Reply to Northern (Doc. 989), Val Reply to Huff Group (Doc. 990);

—Pratt Well Service (PWS) Group (Doc. 952, 953), Huff Group Response (Doc. 972), PWS Reply (Doc. 987);

—Nash Oil & Gas (Docs. 954, 955), Huff Group Response (Doc. 975), Sonja Sue Staab Response (Doc. 971); Nash Reply (Doc. 988), Nash Reply to Staab (Doc. 991);

—L.D. Drilling, Inc. (Docs. 956, 957), Huff Response (Doc. 973), L.D. Drilling Reply (Doc. 992);

3. Northern's Motion to Reallocate Fees and Expenses (Doc. 959); Huff Group Response (Doc. 978); Producer–Defendants' Response (Doc. 981); Hudson Group Response (Doc. 986);

4. Huff Group's and Producer–Defendants' Motions for Attorney's Fees and Expenses (Docs. 961, 962) and Meireis Group's and Hudson Group's Joinder in the motions (Docs. 964, 966); Northern's Response (Doc. 977);

5. Northern's Motion for Sanctions (Doc. 960); Huff Group Response (Doc. 984); Meireis and Hudson Groups' Joinder in Huff Response (Docs. 983, 985);

6. Joint Report on Allocation to Interest Owners in Tracts Without Wells (Doc. 963);

7. Producer–Defendants' Report on Division Between Royalty and Working Interest Owners in Tracts with Wells (Doc. 965).

I. Introduction.

Northern brought this condemnation action under the Natural Gas Act (NGA), 15 U.S.C. § 717f(h), to expand its natural gas storage field near Cunningham, Kansas. Pursuant to authority granted by the Federal Energy Regulatory Commission (FERC), Northern sought to acquire over 9,000 subsurface acres in the Viola and Simpson formations of the designated Extension Area. The court granted a preliminary injunction allowing Northern to take possession of the property as of March 30, 2012. Doc. 464. The court subsequently held that the date of taking was March 30, 2012, the date Northern perfected a right to possession of the property. Doc. 691 at 34. A commission appointed by the court to determine just compensation for the property taken by Northern held extensive hearings and filed a report of its findings. Doc. 888. The court subsequently adopted the commission's report. Doc. 941.

The findings adopted by the court are summarized in Exhibit 3 of the commission's report, Doc. 888 at p. 84–85. The total compensation owed by Northern as of the date of taking was $7,310,427. Of that amount, about $5.9 million was attributable to Extension Area tracts that had producing gas wells in the Viola formation. A little over $1 million was attributable to the storage lease potential of the property taken. Additional compensation was determined to be owing for well salvage ($46,800), surface damages ($178,540), buildings ($278,190), and well isolation costs ($51,000).

The court now has before it motions addressing most of the remaining issues in the case, including: whether prejudgment interest should be awarded as part of just compensation; whether oil and gas leases on a number of well tracts terminated prior to the date of taking; whether some of the commission costs paid by Northern should be reallocated to other parties; whether defendants are entitled to attorney's fees; whether Northern is entitled to sanctions against landowners' counsel; how the award on non-well tracts should be allocated; and how the award on tracts with wells should be allocated among the various interest owners.

II. Prejudgment interest.

Northern took possession of the defendant property on March 30, 2012, but has yet to pay the owners just compensation. As the court has previously noted, when property is taken by a condemnor prior to payment of just compensation, the condemnor has an obligation to pay interest on the value of the property until just compensation is ultimately paid to the owner. Doc. 691 at 9 (citing United States v. Dow, 357 U.S. 17, 22, 78 S.Ct. 1039, 2 L.Ed.2d 1109 (1958) ). "[I]f disbursement of the award is delayed, the owner is entitled to interest thereon sufficient to ensure that he is placed in as good a position pecuniarily as he would have occupied if the payment had coincided with the appropriation." Kirby Forest Indus., Inc. v. United States, 467 U.S. 1, 10, 104 S.Ct. 2187, 81 L.Ed.2d 1 (1984).

Interest is thus an element of just compensation owed for the taking of the property. See Seaboard Air Line Ry. Co. v. United States, 261 U.S. 299, 306, 43 S.Ct. 354, 67 L.Ed. 664 (1923) ("The addition of interest allowed by the District Court is necessary that the owner shall not suffer loss and have 'just compensation' to which he is entitled."). The Supreme Court has said that a "reasonable rate" of interest is appropriate in such circumstances. See United States v. Creek Nation, 295 U.S. 103, 111, 55 S.Ct. 681, 79 L.Ed. 1331 (1935). In Seaboard Air Line, the court found that awarding interest at a rate established by state law was a "palpably fair and reasonable method" of awarding just compensation. 261 U.S. at 306, 43 S.Ct. 354. See also United States v. Rogers, 255 U.S. 163, 170, 41 S.Ct. 281, 65 L.Ed. 566 (1921) (the fact that the interest rate applied by the court "is in harmony with the policy of the state where the lands are situated does not militate against, but makes for, the justice and propriety of its adoption.").

After examining the various alternatives, the court concludes that the Kansas post-judgment interest rate provided for in K.S.A. § 16–204(e)(1) provides the appropriate measure of compensation. Kansas law applies this rate when an appeal from an initial condemnation award results in a greater award. K.S.A. § 26–511. Although the condemnation procedures used in this federal proceeding differ from the Kansas procedures, the Kansas judgment rate nevertheless provides a fair assessment of the compensation owed for the period from the taking of the property until ultimate payment of the condemnation award. Cf. Spears v. Williams Nat. Gas Co., 932 F.Supp. 259 (D.Kan.1996) (in condemnation proceeding under the Natural Gas Act, court applied the judgment rate of K.S.A. § 16–204 ). Under the formula in K.S.A. § 16–204(e)(1), the applicable rate in this case is 4.75%, which is four percentage points above the federal reserve discount rate for the prior year.¹

The court has considered but rejected the alternatives suggested by the parties. Northern, for example, argues that prevailing money market rates (0.70% for a 36–month CD) "would place the condemnees, as ordinary investors, in as good a pecuniary position as had there been no delay" in payment. Doc. 949 at 10. But as Northern itself recognizes, this has been a period of historically low interest rates during which cash equivalents like CDs have earned little or no return. During the same period, there were reasonably safe alternatives from which ordinary investors could generate more substantial returns. For example, other courts have awarded interest based upon long-term corporate bond yields. See e.g., Textainer Equipment Management Limited v. United States, 115 Fed.Cl. 708, 719 (Fed.Cl.2014) ("the court is persuaded that in this instance an objective 'reasonably prudent investor' would have sought yields consistent with the Moody's Rate."). See also Pitcairn v. United States, 212 Ct.Cl. 168, 547 F.2d 1106, 1124 (1976) ("[L]ong-term corporate bond yields are an indicator of broad trends and relative levels of investment yields or interest rates. They cover the broadest segment of the interest rate spectrum."). The court notes that in the period from April 2012 to present, long-term corporate bond yields have generally been between 3.5% and 4.5%.² Under the circumstances, current CD yields and similar measures are not sufficient to ensure that property interest owners suffer no economic loss from the delay in payment over the past three years.

The Huff group and the producer-defendants, by contrast, urge the court to apply the 10% annual rate in K.S.A. § 16–201. Huff points out that the Kansas Supreme Court previously applied that statute to damages awarded in an inverse condemnation case. Herman v. City of Wichita, 228 Kan. 63, 612 P.2d 588 (1980). (At the time Herman was decided, it should be noted, the statute provided for 6% annual interest.). Aside from the fact that Herman was expressly limited to inverse condemnation claims, however, the 10% flat rate in K.S.A. § 16–201 takes no account of actual market conditions. It embodies an arguably punitive element that has no place in just compensation. And a 10% annual return is well above what a relatively safe investment would have earned over the...