What is an Exaction?


Construction of the 485-mile-long southern portion of the TransCanada Keystone Pipeline system (known as the Gulf Coast Project) is scheduled to be completed and operational by the end of 2013, but it leaves a legacy of contentious NIMBY (Not in My Back Yard) disputes between landowners and pipeline companies. Environmental and land use controversies surrounding the Keystone Pipeline, coupled with public sentiment favoring private land ownership rights, have led to widely publicized battles between pipeline companies and landowners. Recent court decisions favoring landowners in condemnation cases have raised great concerns not only for pipeline companies, but other condemning authorities as well, and likely foreshadow years of uncertainty as litigation continues.


Like most other states, Texas gives the power of eminent domain to oil and gas pipeline companies when they act as common carriers (a power often derisively labeled "private condemnation"). In order to obtain a common carrier pipeline permit, a pipeline company need do little more than check a few boxes on a form filed with the appropriate state regulatory agency. Texas landowners have decried this practice and achieved their greatest success by challenging pipeline companies’ status as common carriers. In 2011, the Texas Supreme Court sent shock waves through the industry by ruling that the administrative issuance of a common carrier permit was not conclusive when challenged by a landowner in a condemnation proceeding. Instead, the pipeline company had to prove it qualified as a common carrier. Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas, LLC, 363 S.W.3d 192 (Tex. 2011).


While the Denbury case involved a CO2 pipeline, landowners argued it should extend to other types of pipelines, and specifically the Keystone crude oil pipeline. By 2013, two Texas appellate courts had agreed, holding that Denbury required crude oil pipeline companies to prove their common carrier status if challenged by the landowner. The Crawford Family Farm Partnership v. TransCanada Keystone Pipeline, L.P., 2013 Tex. App. LEXIS 11723 (Tex. App. – Texarkana, Aug. 27, 2013, pet. filed); Crosstex NGL Pipeline, L.P. v. Reins Road Farms-1, Ltd., 404 S.W.3d 754 (Tex. App. – Beaumont 2013, no pet.).


Recently, a Texas appeals court in another Keystone Pipeline case added a new wrinkle to the "common carrier challenge" by saying the trial court should have made a "preliminary finding" of TransCanada’s status as "an entity with ‘eminent domain authority’" (i.e., common carrier status) before it allowed the company to begin any construction activities on the landowner’s property. In re Texas Rice Land Partners, Ltd., 402 S.W.3d 334 (Tex. App. – Beaumont 2013, pet. denied). That ruling caused an uproar in the industry, because neither statute nor court rule even mentions, much less requires, such a preliminary finding. Rather, the Texas statutes allow a condemning authority to enter upon the landowner’s property and begin construction by posting the necessary financial security, even before a judgment is entered in the case. This new requirement of a "preliminary finding" threatens that procedure.


TransCanada appealed to the Texas Supreme Court, supported by briefs submitted by a number of industry trade groups. They argued the appellate court’s ruling portended disaster for the energy industry, the judicial system, and the economy at large. Noting the unique nature of pipeline construction projects, which can span hundreds of miles and require an equal number of right-of-way acquisitions, the trade groups described how a single landowner could delay or completely halt huge construction projects for months or years with nothing more than a bare allegation questioning the pipeline company’s common carrier status. They raised the prospect of inconsistent rulings by trial courts located in different counties up and down a pipeline route. They pointed out the ruling’s implications for stalling other necessary public work projects such as water pipelines and electricity transmission systems.


One pipeline operator made a not-so-subtle threat to relocate a planned 200-mile pipeline from Texas to Louisiana if the Supreme Court did not act. Others warned that disruptions within the pipeline industry would have a ripple effect "damaging state and local economies and shifting capital investment and job creation elsewhere." Some groups warned of a new wave of "mass litigation" and "the birth of a new and economically destructive lawsuit industry," where the mere prospect of delay would exert an "exquisite squeeze" on pipeline companies and force "duress-driven" settlements as the price for obtaining access to the land.


Despite these dire predictions, the Texas Supreme Court declined to hear TransCanada’s appeal without comment in September 2013. The reasoning behind the court’s decision is unknown. Equally unknown is whether and how any other Texas appellate or trial courts will follow the lead of the Texas Rice Land Partners case. Fueled by emotions ranging from antipathy to outright hostility, however, landowners undoubtedly will use the case’s "preliminary finding" language to carry their fight to a new level as they seek to stop pipeline companies from taking their land. It is probably fair to say that uncertainties created by the court opinion will adversely affect pipeline development and construction for some time. In ways unforeseen, that may be the Keystone Pipeline’s greatest long-term legacy in Texas condemnation law.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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