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Northern Natural Gas Co. v. Drilling

United States Court of Appeals, Tenth Circuit

July 11, 2017

NORTHERN NATURAL GAS COMPANY, Plaintiff Counter Defendant-Appellant/Cross-Appellee,
v.
L.D. DRILLING DEFENDANTS, VAL ENERGY DEFENDANTS, HUDSON GROUP DEFENDANTS, and HUFF LANDOWNER GROUP, Defendants Counterclaimants-Appellees/Cross-Appellants, and NASH OIL AND GAS DEFENDANTS, PRATT WELL SERVICE DEFENDANTS, and MEIRIES LANDOWNER GROUP, Defendants-Appellees/ Cross-Appellants.

         APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS (D.C. NO. 6:10-CV-01232-JTM-DWB)

          Richard A. Olmstead, Kutak Rock L.L.P., Wichita, Kansas (Mark D. Coldiron and Corey A. Neller, Ryan Whaley Coldiron Jantzen Peters & Webber, P.L.L.C.,

          Oklahoma City, Oklahoma, with him on the briefs), for Plaintiff Counter Defendant-Appellant/Cross-Appellee.

          Daniel J. Buller, Foulston Siefkin L.L.P., Wichita, Kansas, and Adam S. Davis, Wagstaff & Cartmell L.L.P., Kansas City, Kansas (Jim H. Goering, James M. Armstrong, and Timothy B. Mustaine, Foulston Siefkin L.L.P., Wichita, Kansas, for L.D. Drilling, and Brian J. Madden, Wagstaff & Cartmell L.L.P., Kansas City, Kansas, for Nash Oil and Gas, and Jeffrey L. Carmichael, Morris, Laing, Evans, Brock & Kennedy, Chartered, Wichita, Kansas, for Val Energy, and Robert R. Eisenhauer, Johnston Eisenhauer Eisenhauer and Lynch, L.L.C., Pratt, Kansas, for Pratt Well Service, with them on the briefs), for Defendants Counterclaimants-Appellees/Cross-Appellants L.D. Drilling and Val Energy, and Defendants-Appellees/Cross-Appellants Nash Oil and Gas and Pratt Well Service.

          Stephen E. Robison, Fleeson, Gooing, Coulson & Kitch, L.L.C., Wichita, Kansas (Gregory J. Stucky, David G. Seely, Daniel E. Lawrence, and Ryan K. Meyer, Fleeson, Gooing, Coulson & Kitch, L.L.C., Wichita, Kansas, and Gordon B. Stull and John D. Beverlin, Stull, Beverlin, Nicolay & Haas, L.L.C., Pratt, Kansas, for The Huff Landowner Group, and Robert R. Eisenhauer, Johnston, Eisenhauer, Eisenhauer & Lynch, L.L.C., Pratt, Kansas, for The Meireis Landowner Group, and Jack V. Black and Thomas V. Black, Black's Law Office, P.A., Pratt, Kansas, for The Hudson Landowner Group, with him on the briefs) for Defendants Counterclaimants-Appellees/Cross-Appellants The Hudson Group and The Huff Landowner Group, and Defendants-Appellees/Cross-Appellants The Meiries Landowner Group.

          Before TYMKOVICH, Chief Judge, LUCERO, and PHILLIPS, Circuit Judges.

          TYMKOVICH, Circuit Judge.

         This case arises from condemnation proceedings brought under the Natural Gas Act of 1938 (NGA), 15 U.S.C. § 717 et seq. Northern Natural Gas Company initiated proceedings against a number of parties[1] to condemn certain rights relating to the storage of natural gas in and under more than 9, 000 acres of land in southeast Kansas, known as the Cunningham Storage Field. According to Federal Rule of Civil Procedure 71.1, the district court appointed a three-person commission to determine an appropriate condemnation award. The district court adopted the commission's findings and recommendations in full, and entered final judgment requiring Northern to pay $7, 310, 427 in principal (the award recommended by the commission), plus interest, for a condemnation award totaling over $8.5 million.

         Both sides appealed, asserting various arguments in support of their positions that the award either over- or under-compensated the Landowners and Producers. We REVERSE in part and AFFIRM in part. As we explain, the condemnation award should not have included either (1) the value of storage gas in and under the Cunningham Field on the date of taking, or (2) the lost value of producing such gas after the date of certification, because certification extinguished any property interests the Landowners and Producers may have held in the gas before that date. But we agree with the award's inclusion of value for Extension Area tracts based on their potential use for gas storage and buffer rights, the commission's valuation for the eight Extension Area wells, and the district court's denial of attorneys' fees.

         I. Background

         Northern owns and operates the Cunningham Field, an underground natural gas storage facility that is part of the "Northern System."[2] Before original production depleted the field's natural resources and Northern converted it to a storage facility, the property produced approximately 80 billion cubic feet (BCF) of native natural gas from an underground dolomitic limestone formation known as the Viola Formation.

         In 1978, the Federal Energy Regulatory Commission (FERC) and Kansas Corporation Commission (KCC) first certified the Cunningham Field for gas storage.[3] At that time, the field included approximately 25, 000 acres of land. Northern's certified boundaries expanded over time with the addition of a 1, 760-acre tract north of the original boundaries on October 30, 2008 (the 2008 Extension Area) and a 12, 320-acre area located approximately five or six miles north of the original boundaries on June 2, 2010 (the 2010 Extension Area).[4] In February 2009, before it obtained certificate authority over the entire 2010 Extension Area, Northern negotiated and obtained storage leases on approximately 3, 040 acres in the southern part of the 2010 Extension Area.

         This appeal concerns property rights related to the storage of natural gas in and under approximately 9, 200 acres of land in the vicinity of the Cunningham Field, including some of the Extension Area. Valuation is determined from the "date of taking" for purposes of valuing the relevant property rights. United States v. Miller, 317 U.S. 369, 374 (1943) ("[V]alue is to be ascertained as of the date of taking."). For our purposes the parties agree the date of taking is March 30, 2012, which is when Northern perfected its right to take physical possession of the property by posting security and providing notice to relevant landowners. See App. 1638-72.

         Over the course of its operations, Northern discovered that volumes of storage gas injected into the Cunningham Field did not always match volumes withdrawn from the field. This mismatch indicated that at least some amount of gas was migrating outside of the field's primary storage area boundaries. For example, in the early 1990s Northern discovered that approximately 10 BCF of storage gas had migrated to a sandstone layer directly beneath the Viola Formation, known as the Simpson Formation. In 1996, Northern obtained FERC and KCC approval to include the Simpson Formation within the Cunningham Field's certified boundaries. Later, when Northern began producing gas from the 2010 Extension Area, it noticed that injected volumes were exceeding withdrawn volumes, again indicating gas migration.

         Northern subsequently discovered that gas was leaking out of the Cunningham Field across a lengthy fault originally thought to form a physical barrier to gas migration across the field's northern boundaries. In an effort to curb this migration, Northern engaged in an array of legal and administrative efforts against companies that were allegedly producing gas from areas north of the field's boundaries, which tended to draw the storage gas away. After it obtained FERC certification for (and the associated power of eminent domain over) the 2010 Extension Area, Northern initiated proceedings to condemn the land under the NGA.[5]

         As part of its initial complaint, Northern sought "[a]n immediate injunction against further exploration, production, and operation . . . to protect and preserve the [Cunningham Field] from irreparable harm done by further production of Northern's storage gas and to comply with the 2010 Certificate Order." See App. 273. Northern therefore filed a motion asking the district court to order that the Producers' wells be "shut in" (i.e., closed) pending resolution of its claims. It obtained a preliminary injunction to this effect on December 22, 2010. See N. Nat. Gas. Co. v. L.D. Drilling, Inc., 759 F.Supp.2d 1282 (D. Kan. 2010); App. 695-96.

         Meanwhile, the district court exercised its authority under Federal Rule of Civil Procedure 71.1[6] and appointed a three-person commission with the powers of a Rule 53 "master"[7] to determine an appropriate condemnation award. The commission conducted a trial and recommended an award totaling $7, 310, 427, including: (1) $5, 950, 740 for oil and gas in place on the date of taking; (2) $1, 086, 347 for gas storage and buffer value of the Extension Area tracts; (3) $226, 540 for surface takings and damages; and (4) $46, 800 for eight Extension Area wells.

         The district court adopted the commission's findings and recommendations as its own, and entered final judgment requiring Northern to pay the Landowners and Producers the award recommended by the commission, plus interest. Both sides appealed, challenging various aspects of the condemnation award.

         II. Analysis

         The parties raise a number of issues relating to the valuation of the storage gas and the proceedings below.

         First, Northern argues that the value of storage gas in and under the Extension Area on the date of taking should not have been included in the condemnation award. This contention also implicates challenges to the commission's valuation of future production and the district court's instruction that, when calculating the value of lost future production, the commission should ignore the inhibition on production triggered by the preliminary injunction that shut in the producing wells.

         Second, Northern and the Landowners dispute the valuation of gas storage and buffer rights for Extension Area tracts, as well as the inclusion of that value in the condemnation award.

         Third, the Producers reject the valuation of the eight Extension Area wells, which included only a "salvage" value for casing materials remaining in each wellbore.

         Fourth, the Landowners and Producers argue they are entitled to additional compensation to cover their attorneys' fees.

         We address each of these issues in turn, reviewing the district court's determinations in these condemnation proceedings to determine "whether proper legal standards were applied in resolving the issue of just compensation and whether any supplemental findings of the district court were clearly erroneous." United States v. 179.26 Acres of Land, 644 F.2d 367, 368 (10th Cir. 1981) (citations omitted). We consider a commission's findings "only to see whether the district court properly accepted and approved them as not being clearly erroneous." Id. at 368-69 (citations omitted). A district court commits reversible error in adopting the commission's conclusions "only if the commission misapplied the law or made findings contrary to the clear weight of the evidence, " and we "will not retry the facts." United States v. 2, 560.00 Acres of Land, 836 F.2d 498, 501 (10th Cir. 1988) (citations omitted). "[A] determination by the commission based on sharply conflicting evidence should be viewed as conclusively binding." Id. (citations omitted).

         For the following reasons, we reverse in part and affirm in part. We disagree with the inclusion of the value of storage gas in and under the Extension Area on the date of taking because we find that the Landowners and Producers had no right to produce such gas after the date of certification. We affirm the remaining ...


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