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Calculation of Damages in a Federal Pipeline Condemnation Action

Third Circuit Sets Standard for Calculation of Damages in a Federal Pipeline Condemnation Action in Pennsylvania

By Paul R. Yagelski, Esquire

In Tennessee Gas Pipeline Co., LLC v. Permanent Easement For 7.053 Acres, 931 F.3d 237 (3rd Cir. 2019), the Third Circuit Court of Appeals set the standard for the calculation of damages in a federal pipeline condemnation action in Pennsylvania under the Natural Gas Act.

In Tennessee Gas Pipeline Company, Tennessee Gas Pipeline, LLC (“Tennessee Gas”) commenced a condemnation act under the Natural Gas Act of 1938 (“NGA”), 15 U.S.C. §§ 717-717z, to acquire easements to construct natural gas pipelines over a 975 acre tract owned by King Arthur Estates, LP (“King Arthur”) and located in Pike County, Pennsylvania.  As required by the NGA, Tennessee Gas obtained a Certificate of Public Convenience and Necessity from the Federal Energy Regulatory Commission authorizing it, inter alia, to construct natural gas pipelines in New Jersey and Pennsylvania to augment its natural gas delivery capacity to the region.  As part of this project, Tennessee Gas sought to obtain easements.  Upon unsuccessfully attempting to purchase the requisite easements from King Arthur, Tennessee Gas filed a condemnation action under Federal Rule of Civil Procedure 71.1 in the United States District Court for the Middle District of Pennsylvania.

In the District Court, after the parties stipulated that Tennessee Gas could access and possess the easements, they engaged in discovery pertinent to determining the appropriate compensation for the condemnation.  Following the close of discovery, Tennessee Gas moved for summary judgment on various issues including that of compensation.  The District Court ruled that federal law governed the substantive determination of just compensation in the dispute.  The District Court then determined that, although King Arthur could recover consequential damages for professional fees and development costs under Pennsylvania law, it could not do so under federal law.  Together, the consequential damages at issue totaled under $1 million.

King Arthur filed a motion to certify the District Court’s Order for interlocutory appeal, which the District Court granted.  The petition was granted by the Third Circuit, which was then faced with the purely legal question of whether state law or federal law governed the substantive determination of just compensation in condemnation actions brought by private entities under the NGA.

In addressing this question, the Third Circuit noted that the concept of just compensation originates from the Fifth Amendment: although the federal government has “the authority to take private property for public use by eminent domain . . . [it] is obliged by the Fifth Amendment to provide ‘just compensation’ to the owner” of the property.  Kirby Forest Indus., Inc. v. United States, 467 U.S. 1, 9 (1984).

Under the Fifth Amendment, just compensation generally means “the fair market value of the property on the date it is appropriated” and nothing more.  Id. at 10.  In other words, in such contexts, “the Constitution has never been construed as requiring payment of consequential damages” like lost profits or development costs.  United States v. Miller, 317 U.S. 369, 376 (1943).  This is because “the sovereign need only pay for what it actually takes rather than for all that the owner has lost.” Air Pegasus of D.C. Inc. v. United States, 424 F.3d 1206, 1215 (Fed. Cir. 2005)).

Thus, in cases involving partial takings, here, the standard is “the difference between the market value of the entire holding immediately before the taking and the remaining market value immediately thereafter of the portion of property rights not taken.”  United States v. 68.94 Acres of Land, 918 F.2d 389, 393 n.3 (3rd Cir. 1990).  “If the value of the remaining land, on a unit basis, diminishes when the condemned parcel is removed from the larger whole, the landowner is entitled to compensation ‘both for that which is physically appropriated and for the diminution in value to the non-condemned property.’”  United States v. 4.0 Acres of Land, 175 F.3d 1133, 1139 (9th Cir. 1999).  See also Miller, 317 U.S. at 376 (“If only a portion of a single tract is taken[,] the owner’s compensation for that taking includes any element of value arising out of the relation of the part taken to the entire tract.”).  But, if the taking somehow benefits the value of the remaining land, “the benefit may be set off against the value of the land taken.”  Id.

By contrast, Pennsylvania has an enacted its own remedial scheme that is applicable to condemnation proceedings that take place within the state.  Similar to federal law, Pennsylvania defines just compensation as consisting of “the difference between the fair market value of the condemnee’s entire property interest immediately before the condemnation as unaffected by the condemnation and the fair market value of the property interest remaining immediately after the condemnation and as affected by the condemnation.”  26 Pa. Cons. Stat. § 702(a).  Fair market value, however, is a more inclusive concept under Pennsylvania law.  In contrast to the federal rule regarding partial takings, the recoverable market value under Pennsylvania law appears to include any benefits to the value of the remaining property as a result of the taking.  See Id. § 706(a).

Further, although Pennsylvania law generally defines fair market value as “the price which would be agreed to by a willing and informed seller and buyer,” it allows consideration of certain consequential damages within the concept.  Id. § 703.  For example, the relevant law provides that one of the factors for determining fair market value is the “cost of adjustments and alterations to any remaining property made necessary or reasonably required by the condemnation.”  Id. 1105(2)(v) see also Id. § 703(4) (stating that considerations for market value include factors as regarding what evidence may be proffered pursuant to §§ 1101-06).

Pennsylvania law also permits recovery of professional fees, such as appraisal, attorney and engineering fees.  Id. § 710.  The default rule limits such recovery to $4,000.  Id. § 710(a); however, a property owner is entitled to complete reimbursement for those professional fees when the “condemnor attempts to avoid the payment of monetary just compensation to which the [owner] otherwise would be entitled by use of a substitute for monetary compensation and the [owner] incurs expenses” as a result.  Id. § 716.  On the whole, then, Pennsylvania law allows private property owners within the state to obtain more money from condemnors than they could under federal law.

In determining whether state law or federal law governs the measure of just compensation in condemnation proceedings brought by a private entity under the NGA, the Third Circuit concluded that fashioning a uniform federal common law to determine just compensation in condemnation actions by private entities under the NGA would risk “upsetting the parties’ commercial expectations” based upon “the already well-developed state property regime.”  Columbia Gas Transmission Corporation v. Exclusive Natural Gas Storage Easement, 962 F.2d 1192, 1198 (6th Cir. 1992).  The Third Circuit decided to incorporate state substantive law as the federal standard of measuring just compensation in condemnation proceedings by private entities acting under the authority of the NGA.  Accordingly, as Tennessee Gas’ action was brought in Pennsylvania, Pennsylvania substantive law governed the determination, the measure, of just compensation in condemnation actions brought by private parties acting under the authority of the NGA.

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