As part of its efforts to study the eminent domain-issue, the Senate Committee on State Affairs recently heard testimony from concerned parties on the subject, with emphasis placed on the matter of fair-landowner compensation for lost property. The hearing was in response to a charge from Lt. Gov. Dan Patrick, who asked legislators to research the problem in preparation for the 2017 legislative session.

At the hearing, representatives for condemning authorities stated that Senate Bill 18, passed in 2011, offered sufficient protections for landowners. They suggested that the three-step process consisting of an initial offer, a special commissioners’ hearing, and if necessary, a jury trial, gave landowners plenty of opportunity to obtain fair compensation.

Tom Zabel, an attorney representing the Texas Pipeline Association, noted that the bulk of necessary land could be acquired through negotiations with landowners without using the power of eminent domain.

“Pipeline companies don’t have time to condemn 90 percent of the tracts on a pipeline project. No pipelines would go in the ground,” he said.

Property rights advocates voiced concerns over the ability of landowners to negotiate favorably with entities seizing their land, citing disparities between landowners and condemnors inherent in the law.

“Fair market to me is two parties getting together to work out an agreement,” said State Senator Jane Nelson who wasn’t compensated for damages a pipeline company dealt to her property. “Under eminent domain, property owners are forced to negotiate.

Kathleen Hunker, a policy analyst with the Texas Public Policy Foundation had a similar view, noting that “Property owners walk into a negotiation with a sword dangling over their head. It is an inherently unequal relationship that Texas law exacerbates.” If a landowner and eminent domain user don’t reach an agreement, then the landowners know the condemning authority will just condemn their property anyway.

Property rights advocates also raised the issue of legal fees, citing that a combination of lowball initial offers, and having to compensate an attorney to fight to protect their rights hinders landowners from obtaining fair compensation. Judon Fambrough, an expert at the Texas A&M Real Estate Center, suggested that seeking a remedy in court rarely made financial sense unless the appeal had an expected return of $500,000 or more. He suggested that one solution could be to require condemning parties who provide low-ball initial offers to pay landowners’ attorney’s fees when cases result in compensation above a certain threshold.

Hinga Mbogo is a Dallas mechanic who operates Hinga’s Automotive Company on Ross Avenue bordering the Arts District in the downtown area. In operation since 1985, Mbogo’s business has become one of the most highly rated in the city with clients including the Dallas Police Department, and even a member of the Symphony.

Recently however, the business’s very existence has come under threat. In 2005, the Dallas City Council, through a process called amortization, re-zoned the neighborhood, deeming it a “planned development district.” Properties that failed to meet the new zoning criteria were given a limited time to adjust. In April, Mr. Mbogo appealed to the Dallas City Council for a special operating permit that would allow him to remain open for an additional two years. In an 8-5 vote, the Council denied the permit.

An immigrant, Mbogo was born in Nairobi, Kenya. Raised on a farm, he soon learned how to repair tractors and other mechanical equipment. He moved to the United States with his wife in 1974, where his skills landed him a job as an aviation mechanic in South Florida. Naturally, he was thrilled to become a business owner, and devastated upon hearing he would be forced to close.

“When I opened this shop, I thought I had made it. I thought I had the American dream,” he said. “When I found out I had to lose my livelihood, I couldn’t believe that I was in America.

In property law, an exaction is a condition for land use intended to offset the perceived negative impact that a development may have. In certain cases, an exaction may also constitute a taking, triggering the Fifth Amendment of the US Constitution which requires a landowner receive just compensation for the taking of the land. It doesn’t require a great deal of imagination to see that without a clear way to distinguish between exactions and takings, many landowners could be subjected to unjust takings. So the question is, “How does the law tell the difference?”

In two separate rulings, the Supreme Court of the United States placed limits upon the conditions that may be imposed on a proposed land use. In Nollan v. California Coastal Commission, the Nollans owned a beach front bungalow they wished to demolish and replace with a larger house. The California Coastal Commission (CCC) was concerned that the larger structure would obstruct the view of the beach, which was public. They conditioned the permitting of the project upon the Nollans granting of an easement to be used for a foot path to allow public access to the beach. The Nollans believed that this exaction constituted an unconstitutional taking, and filed a writ of mandamus asking the court to nullify the condition. The U.S. Supreme Court ruled that there must be a nexus (connection) between the condition and the original purpose for requiring the land use restriction, and finding none, they ruled for the landowner.

In Dolan v. City of Tigard, Dolan, an Oregon business owner, wished to expand her plumbing and electrical supply store. The City of Tigard decided to allow the permit on the condition that Dolan allocate a portion of her property for use as a pedestrian and bicycle pathway. The City believed the allocation was necessary to accommodate increased traffic as a result of the expansion. Dolan interpreted this condition as an unconstitutional taking and contested it in court. The Supreme Court held that the exaction met the nexus test established in Nollan v. California Coastal Commission, but that the City did not show how it was “roughly proportional” to the negative effects; that the exaction was sufficiently related in both nature and extent to the speculated impact.

These two cases, when taken together, establish the modern standard for determining the validity of an exaction, which is as follows, that government “may not condition the approval of a land-use permit on the owner’s relinquishment of a portion of his property unless there is a ‘nexus and ‘rough proportionality’ between the government’s demand and the effects of the proposed land use.” Koontz v. St. Johns River Water Management Dist. (describing Nollan/Dolan test). It is essential to note that this test deals specifically with administrative exactions, or in other words, exactions that result from the orders of government. It is unclear whether this test applies to exactions resulting from legislative actions.

So, thinking locally, what happens when a municipality imposes an exaction on a Texas landowner? What happens if you live in Houston, Dallas, Austin, or any other place in Texas? The Nollan/Dolan test has been successfully applied in Texas. In Town of Flower Mound, Texas v. Stafford Estates Limited Partnership, Stafford sought to develop its land into a residential subdivision. As a condition to approving the plat, the Town required Stafford to demolish the road abutting the land and replace it with a two-lane concrete road. Stafford fulfilled the exaction, but sued the Town, arguing that the plat approval condition was an unjust taking. The case found its way to the Texas Supreme Court, which, upon applying the Nollan/Dolan test, held that the exaction failed the test’s “nexus” requirement as the State did not sufficiently argue the exaction’s ability to advance a legitimate government interest. The exaction also failed the “rough proportionality” standard due to the road building stipulation’s inadequate relation to the construction’s proposed impact. The exaction, therefore, constituted an unjust taking, and the Texas Supreme Court affirmed the lower Court’s award of $425,426.00 for Stafford.

The issue of legislative exactions was raised most recently on February 29, 2016 when the Supreme Court of the United States denied certiorari in California Building Industry Association v. City of San Jose, California et al. The case involved California legislation and City ordinances that conditioned permits for residential developments upon the constructor’s reserving at least 15% of for-sale units for low-income individuals. Justice Thomas who concurred, noted that the case was unlikely to reach the exactions issue, but continued to express his concern over whether a legislatively imposed exaction is any more constitutional than an administrative one.

 “What’s in the Pipeline,” an article in Vol. 79 of the Texas Bar Journal, raises concerns about speculative and allegedly inaccurate land valuation in condemnation cases involving pipelines.  Although the authors correctly point out that City of Harlingen v. Estate of Sharboneau prohibits fact-finders from considering speculative future uses and developments when valuing a property for damages, they fail to mention that “the objective of the judicial process in the condemnation context is to make the landowner whole.”   Exxon Pipeline Co. v. Zwahr, 88 S.W.3d 623, 625 (Tex. 2002) (citing Tex. Const. Article I) (emphasis added).  In order to ensure that this occurs, the law requires every factor that may influence a willing buyer and willing seller in a market transaction be considered, including the highest and most profitable use of the property.   See State v. Windham, 837 S.W.2d 73, 77 (Tex. 1992) (“In deciding the market value, the jury is permitted to consider all of the uses to which the property is reasonably adaptable and for which it is, or in all reasonable probability will become, available within the foreseeable future.”) (emphasis added).

The authors’ suggestion that the admission of all the uses to which a property is reasonably adaptable “creates more uncertainty for the oil and gas industry” is misplaced.  As part of a highest and best use analysis, expert appraisers are required to conduct a careful investigation of all available uses to which a property may be put.  The Appraisal Institute’s definition of highest and best use is “the reasonably probable use of property that results in the highest value.”  The Appraisal of Real Estate 332 (14^th ed., Chicago: Appraisal Institute 2013) (emphasis added).   Under this definition, a property may have several available uses and purposes, but only one use that results in the highest value.

Despite the authors’ criticism of the Fort Worth and San Antonio Courts of Appeals’ pipeline opinions in Crosstex DC Gathering Co., J.V. v. Button and LaSalle Pipeline, LP v. Donnell Lands, L.P., the United States Supreme Court has made clear that an “owner must be compensated for what is taken” which includes the “fair market value for all available uses and purposes.” United States v. Chandler-Dunbar Water Power Co., 229 U.S. 53, 81 (1912) (emphasis added).  Following this same basic principal, the Texas Supreme Court made clear that “our Constitution and law enshrine landownership as a keystone right, rather than one ‘relegated to the status of a poor relation.’”  Tex. Rice Land Partners v. Denbury Green Pipeline-Tex., LLC, 363 S.W.3d 192, 204 (Tex. 2012) (citing John Locke, Second Treatise of Government Ch. IX, §124 (C.B. McPherson ed., Hackett Publishing Co. 1980) (1690).  Simply put, when delegated the power of eminent domain, pipeline companies must compensate landowners for the highest value for what is taken — not the value that satisfies a “budget[] for future infrastructure projects.”

The Trans-Pecos Pipeline, a subsidiary of Energy Transfer Partners, has leveled lawsuits against 13 landowners with whom they have failed to reach easement agreements. The lawsuits, which were filed in Brewster and Presidio Counties, are a final attempt to secure the land use agreements necessary to construct and operate the pipeline. In total, the lawsuits, if successful, will allow the company to secure 17.5 miles of land, 14.13 miles in Presidio County, and 3.37 miles in Brewster County.

The landowner response so far has been quiet acceptance. Those who offered comments seemed to view the lawsuits as inevitable.

“It’s my opinion that it was their intention all along. I have never entertained the idea that we could stop the pipeline, but there were discrepancies between the polished statements and their actions,” said Jeanne Simpson, owner of Barreno Ranch. “We tried to negotiate in good faith. This is a disappointment.”

“You can be mad or be glad about it, said Ike Livingston, who has been sued but has yet to receive formal service. “There’s not much we can do to stop it.”

“Our first priority, is to cultivate a relationship with each landowner in order to negotiate a voluntary easement agreement. Historically we have successfully reached voluntary easement agreements with more than 90% of landowners throughout the country,” said pipeline spokesperson Lisa Dillinger. “That percentage is even higher on the pipeline projects we have done in Texas.”

However, there have been concerns that negotiations have been less benevolent than pipeline spokespersons have made them out to be.

“There are some small parcel landowners that are absentee, so you could expect some suits with no malfeasance. But I know a number of the landowners that tried negotiation. Two of those believed they had reached a settlement only to receive a suit within a couple of days. It’s definitely a concern with the landowners who tried to negotiate,” said Coyne Gibson a member of the Big Bend Conservation Alliance environmental advocacy group.

“It’s good for the company, but not the landowners,” Coyne continued. “The pipeline claimed going for condemnation was the last resort, but it sure isn’t what’s happened.”

Questions have been raised regarding the appropriateness of Energy Transfer Partner’s use of condemnation. Though the project will undoubtedly create short term employment gains in the construction sector, the pipeline’s ultimate destination is Mexico. Indeed, the entire project was conceived and executed on the premise that a Mexican market exists for American natural gas. Critics have argued that the company is taking American land to benefit a foreign economy.

Pipeline companies, particularly smaller ones, are beginning to feel the effects of depressed oil prices. As prices continue to decline, and hope for a short term turnaround diminishes, pipeline companies have begun to exhaust their options for maintaining a black balance sheet.

As midstream companies (companies which engage in the transportation of oil and natural gas products), pipeline firms are dependent on oil producers and oil sellers for profit. As a result, they are vulnerable to losses if there is a drop in price or production.

Particularly at risk are companies who have staked a large proportion of their profits on one or two contracts. Such exposure tends to be consistent with companies of smaller size which lack the diversified revenue stream to comfortably float a few bad contracts.

One example of such a firm would be Crestwood Midstream, a Houston based operator of various Midwestern pipeline assets. During the period between 2008 and 2010, they signed multiple contracts with drilling firm Quicksilver Resources to gather Barnett Shale oil. Three years later, income from the contracts made up over 10% of Crestwood’s revenue. In 2015, Quicksilver filed for bankruptcy, and was unable to meet its obligations to Crestwood.

Not all of the companies at risk are small however. Williams Midstream, a Tulsa based company with a presence in Houston has estimated that nearly a quarter of its revenues comes through a contract with Chesapeake Energy, an upstream company focused on shale. If Chesapeake were unable to fulfill its obligations, Williams could find itself in a tight spot. As it stands, the establishment consensus is that Chesapeake is in serious, but not irrecoverable trouble. Its valuation has fallen to nearly a 20^th of what it was a year ago. Most financial institutions have issued “hold” ratings on Chesapeake stock and have lowered their target prices.

Sixty oil companies have already filed for bankruptcy worldwide. Research firm HIS Inc. estimates that this number could rise to over two-hundred by mid-2016 if oil prices continue on their current trajectory.