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Calculation of Just Compensation In a Pennsylvania Federal Pipeline Condemnation Action

By Paul R. Yagelski, Esquire

How is just compensation calculated in a federal pipeline condemnation action where the pipeline is located in Pennsylvania?  Can a property be valued for a best use that is barred by current zoning designations? In Rover Pipeline LLC v. Rover Tract No. Pa WA HL-004.500T, 813 Fed. Appx. 740 (3^rd Cir. 2020), the Third Circuit Court of Appeals addressed both of these questions.

In Rover Pipeline, the Federal Energy Regulatory Commission approved Rover’s plan to build a natural gas pipeline across Ohio, Michigan, West Virginia, and Pennsylvania.  To build across private land, Rover would need a number of easements.  Most of them were bought by negotiating with landowners, but not all landowners agreed.  James and Diane Buchanan were one of those landowners.

The Buchanans own a 123.445-acre farm in Hanover Township, Pennsylvania.  Rover planned to bury its pipeline across the middle of the Buchanans’ farm.  Rover approached the Buchanans to negotiate a price for running its pipeline across their farm.  The Buchanans resisted.  Negotiations broke down, so Rover, who had eminent-domain power under the Natural Gas Act to bring condemnation actions to get easements, brought a condemnation action in the United States District Court for the Western District of Pennsylvania to secure two things:  a permanent easement for the pipeline and a temporary easement for a few construction amenities; i.e., a temporary workspace at the site, road access, and other rights of way.  The permanent easement would cut a 50-foot-wide slice right through the middle of the Buchanans’ farm, covering about two acres of their land.

Rover and the Buchanans were able to agree on a price for Rover’s initial right of entry, but there was still a bone of contention: what price was fair for the permanent and temporary easements.  To end their gridlock, Rover moved to create a court-appointed commission to decide what compensation was just.  See Fed. R.C.P. 71.1(a),(h)(2)(A). The District Court granted the motion and chose the Commission’s three members: two real-estate lawyers and a former Pennsylvania Court of Common Pleas judge.

The Commission calculated just compensation as the difference between the farm’s pre-taking and post-taking fair market values.  The Commission took the farm’s pre-taking value ($790,048), which assumed that the farm could be developed in ways barred by land zoning rules, and subtracted its post-value ($419,213), for a difference of $370,335.  After adding $4,224 for Rover’s temporary workspace easement and subtracting the $65,628 that Rover had already paid the Buchanans for its initial right of entry, the Commission set Rover’s final bill at $308,931.

The District Court reviewed the Commission’s findings de novo and adopted them in full.  Rover appealed, arguing that the Commission and the District Court overestimated the farm’s pre-taking value and underestimated its post-taking value.  In addressing Rover’s arguments, the Third Circuit first addressed how just compensation is calculated.

Private parties, like governments, must pay just compensation for takings under the Natural Gas Act.  Tenn. Gas Pipeline Co., LLC v. Permanent Easement for 7.053 Acres, 931 F.3d 237, 242-43 (3d Cir. 2019).  Accordingly, the Commission had to calculate how much Rover would have to pay the Buchanans for burdening about two acres of their roughly 123-acre farm.  State substantive law (here, Pennsylvania law) governed the calculation.  Id. at 255.

In Pennsylvania, just compensation for a partial taking equals the difference between the fair market value of the property right before and after the taking.  26 Pa. Const. Stat. § 702(a); see Stoner v. Metro. Edison Co., 439 Pa. 333, 266 A.2d 718, 720 (1970).  Fair market value is based in part on a property’s “highest and best reasonably available use.”  26 Pa. Const. Stat. § 703(2); see Stoner, 266 A.2d at 720.  So the Commission had to identify the farm’s highest and best uses both before and after the taking, assigning dollar values to each use, subtracting the post-taking value from the pre-taking value, and bill Rover for the difference.

As to the pre-taking calculation, to help identify the farm’s pre-taking value, the Commission visited the Buchanans’ farm and then held an evidentiary hearing.  The Commission found that the farm’s best pre-taking use was “rural recreational and residential uses, which includes . . . multi-family residential and recreational use.”  The Commission unanimously valued that best use at $6,400 per acre, for a total pre-taking value of $790,048.

As to the post-taking calculation, the Commission found that the farm’s best post-taking use was the farm’s “long-standing existing rural recreational and residential uses,” rather than “multi-family residential” development.  The Commission based its finding on two facts. First, Rover could block residential development.  The permanent easement would give Rover sole discretion to grant or deny construction requests, and Rover was unlikely to grant those requests.  Second, because Rover’s easements cut the farm right down the middle, they would substantially impede the Buchanans’ efforts to link utilities from the upper to the lower part of the farm.  So the Commission pegged the farm’s post-taking value at $3,400 per acre, for a total post-taking value of $419,713.

In reviewing whether the Commission overestimated the farm’s pre-taking value and underestimated its post-taking value, the Third Circuit noted that as this was a federal action in a federal court, federal procedural law dictated whether the Commission’s assessment of the farm’s best use was a question of law or fact, see Cooper Labs, Inc. v. Int’l Surplus Lines, Ins. Co., 802 F.2d 667, 671 (3d Cir. 1986); see also Coplay Cement Co., Inc. v. Willis & Paul, Grp., 983 F.2d 1435, 1438 (7^th Cir. 1993).   Under federal law, the assessments a Commission makes in its valuation report are “findings of fact” subject to review for clear error.  United States v. Mertz, 376 U.S. 192, 198 (1964).

Rover argued that as to the pre-taking valuation, the Commission ( and thus the District Court) erred by identifying the wrong best use, and thus overestimating the farm’s pre-taking value. The Third Circuit agreed.

The Commission found that the farm’s best pre-taking use was “rural recreational and residential uses, which includes a less dense multi-family residential and recreational use.”  The Third Circuit could not find any evidence in the record to support a “multi-family residential” use.  By choosing a use that “bears no rational relationship to the supportive evidentiary data,” the Commission clearly erred.  VICI Racing, LLC v. T-Mobile USA, Inc., 763 F.3d 273, 283 (3d Cir. 2014) (quoting Berg Chilling Sys., Inc. v. Hull Corp., 369 F.3d 745, 754 (3d Cir. 2004)).

The Buchanans’ farm was not zoned for multi-family-residential use.  The Buchanans’ farm was zoned for rural residential use and was (at the time of taking) zoned for rural preservation use, both of which allow only a single-family dwelling.

The Third Circuit noted that although in Pennsylvania finders of fact may value a property for a best use that is barred by current zoning designations, Redevelopment Auth.v. Lieberman, 461 Pa. 208, 336 A.2d 249, 255 (1975); see also 26 Pa. Const. Stat. § 703 (providing “[f]air market value” includes “[t]he highest and best reasonably available use of the property” (emphasis added)), in order to do so, they must identify evidence that those designations are reasonably likely to change.  See Redevelopment Auth., 326 F.2d at 255.  Here, the Buchanans offered no evidence that Hanover Township would change course.  On the contrary, the Township had previously rejected the Buchanans’ requests for a zoning variance.  Neither the Commission nor the District Court considered this problem in valuing the pre-taking best use.

As to the post-taking valuation, Rover objected to the Commission’s post-taking valuation on two grounds.  First, it rejected the notion that its easements actually burdened the Buchanans’ development prospects.  Second, it argued that the Commission let anti-pipeline rhetoric infect its analysis.  The Third Circuit found that both objections failed.

The Commission found that Rover’s easements burdened future development because Rover could veto future construction requests.  That veto, it reasoned, would impair the property’s value.  The Third Circuit found that the Commissions’ finding was not clearly erroneous.  The Commission’s post-taking valuation rested not on speculation but on objective evidence:  the terms of Rover’s easements and its past conduct.  Plus, the Commission acknowledged that while the pipeline did not foreclose all future development, it at least made development less certain.  Because there was evidentiary support for the post-taking valuation, the Third Circuit affirmed the District Court’s adoption of the post-taking valuation.

As to the anti-pipeline stigma, Rover argued that the testimony of the Buchanans’ expert that the presence of a pipeline would guarantee that no developer would invest in the property reflected a general, irrational fear of pipelines, as it is speculative.  The Third Circuit held, however, that although that may be so, this evidence made no difference.   Rover did not show that the testimony of the Buchanans’ expert affected either the Commission’s post-taking valuation or the District Court’s reasoning.

The Third Circuit held that the court-appointed Commission based its pre-taking valuation of the Buchanans’ farm on a use that was barred by local zoning rules and did not explain why those rules would change.  Accordingly, the Third Circuit reversed the District Court in part and remanded for a new pre-taking valuation. As to the post-taking valuation, however, the Third Circuit held that both the Commission and the District Court reasonably found that the pipeline would reduce the farm’s value, and neither rested on a fear of pipelines.  As such, the Third Circuit affirmed the Commission’s post-taking valuation.

In answer then to the first question, in a federal pipeline condemnation action where the pipeline is located in Pennsylvania, just compensation for a partial taking equals the difference between the fair market of the property right before and after the taking.  In answer to the second question, in Pennsylvania finders of fact may value a property for a best use that is barred by current zoning designations; however, evidence must be identified that those designations are reasonably likely to change.

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