Texas Rice Land Partners Revisited: Texas Supreme Court Sets Low Bar for Pipeline Common Carriers

© 2017 The Texas Lawbook.

By Michael E. Schonberg, Richard B. Hemingway Jr., Richard B. Phillips Jr. and John Atkins of Thompson & Knight

In Denbury Green Pipeline–Texas, LLC v. Texas Rice Land Partners, Ltd. (“Texas Rice Land Partners II”), the Texas Supreme Court held that Denbury, a pipeline company, met its burden to demonstrate “common carrier” status for the purpose of establishing eminent domain authority because it had shown that, at the time of condemnation, there was a “reasonable probability that, at some point after construction, the [pipeline for which the land was condemned] would serve the public by transporting CO₂ for one or more customers who will either retain ownership of their gas or sell it to parties other than the carrier.”

In so doing, the court demonstrated that its 2012 holding in a related case – Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas, LLC  (“Texas Rice Land Partners I”) – should not be taken as a stringent restriction on Texas pipeline companies’ rights to use eminent domain. Indeed, the newly stated “reasonable probability” test appears to set a low bar for establishing the right to use eminent domain to acquire easements for constructing pipelines.

The original dispute arose when the landowner, Texas Rice Land Partners, Ltd., denied Denbury access to its land for the purpose of surveying a proposed pipeline route. Denbury sued, claiming that it qualified as a common carrier by virtue of a permit granted by the Railroad Commission. Denbury alleged it had the right to use eminent domain to take private property for a public-use CO₂ pipeline, asserting that Texas Rice Land could not challenge the taking in court.

After significant litigation, that dispute rose to the Texas Supreme Court in Texas Rice Land Partners I, which held that the Railroad Commission’s permit was issued without any evidence of whose CO₂ would be transported in the pipeline. Therefore, the permit alone did not establish Denbury’s status as a common carrier because there was no evidence as to whether the pipeline to be constructed would ever be used to transport CO₂ not owned by Denbury.

After the case was sent back to the trial court, Denbury set about providing the court with additional evidence of its status as a common carrier, including several post-construction contracts with different businesses showing that third parties intended to use Denbury’s pipeline to transport their CO₂. Denbury moved for summary judgment based on this evidence.

The trial court granted the motion, finding that Denbury’s evidence was sufficient to establish its common carrier status. The court of appeals reversed, however, finding this evidence too meager, and holding that Denbury’s intent in building the pipeline was relevant to whether it could be considered a common carrier.

In Texas Rice Land Partners II, the Texas Supreme Court first corrected the appellate court’s misunderstanding of Texas Rice Land Partners I, noting that the intent of the pipeline company seeking common carrier status was not the crucial inquiry.

What matters, according to the Texas Supreme Court, is whether the pipeline will, with reasonable probability, serve a public purpose at some point after its construction. The court held that the evidence Denbury provided – particularly the evidence of contracts with unaffiliated entities – more than met Denbury’s burden.

The court cautioned that one of the contracts Denbury put forward – a contract whereby one company used the pipeline to transport its CO₂ to Denbury, which Denbury would then own – was not sufficient on its own to show a reasonable probability of public use after construction. But that contract, together with evidence of another contract to transport CO₂ that Denbury would not then own, plus evidence of various nearby potential customers for the pipeline, was more than sufficient to support the district court’s summary judgment determination.

Interestingly, the court left for a later time the question of whether one or more contracts between a pipeline company claiming common carrier status and entities affiliated with it to transport gas owned by those entities would be sufficient to show the requisite probability of public purpose. The facts of this case did not require the court to tackle that much thornier question.

The takeaway is that while establishing status as a “common carrier” by a pipeline builder does require some evidence that businesses other than the builder will use it to transport gas they own, this threshold is not high. Minimal contracts with unrelated entities for future transport and lists of potential nearby customers for the pipeline will likely be sufficient to establish “reasonable probability” that a pipeline will serve a public purpose and, therefore, empower the builder to use eminent domain to acquire easements for the pipeline.

Clients with property in areas subject to future pipeline activity should consider structuring their projects in a manner that will minimize the impact of future pipeline development. Most importantly, developers should be particularly mindful of the condemnation provisions in their leasing and financing documents.

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