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Rover Pipeline LLC v. 1.23 Acres of Land

United States District Court, E.D. Michigan, Southern Division

December 4, 2019

ROVER PIPELINE LLC, Plaintiff,
v.
1.23 ACRES OF LAND, et al., Defendants.

          OPINION & ORDER OVERRULING ROVER'S OBJECTIONS (Dkt. 958), OVERRULING THE IRS'S OBJECTIONS (Dkt. 960), AND ADOPTING THE COMMISSION'S IRS R&R (Dkt. 956)

          MARK A. GOLDSMITH UNITED STATES DISTRICT JUDGE

         Plaintiff Rover Pipeline, LLC has installed a 42-inch interstate natural gas pipeline through Michigan and other states, including through property owned by non-party John D. Engelbert. Under the Natural Gas Act (“NGA”), 15 U.S.C. § 717 et seq., Rover has a right to exercise the power of eminent domain to secure the easements necessary to construct its pipeline. However, before it can exercise the power of eminent domain, it must attempt to reach a settlement with the impacted property owners to compensate them for Rover's partial taking of their property. For property owners with whom Rover could not reach a settlement, Rover condemned their property in this action and must pay them just compensation. Rover reached such a settlement with Engelbert, but it failed to notify or negotiate with another holder of an interest in Engelbert's property, Defendant the Internal Revenue Service. The IRS has a federal tax lien on the property for an outstanding tax debt owed by Engelbert, which lien Rover now seeks to condemn.

         The Court appointed a Commission to determine the amount of just compensation owed to the IRS and others. The Commission held hearings and submitted a Report and Recommendation (“R&R”) (Dkt. 956) to the Court recommending that $27, 400 would be just compensation for Rover's easement through Engelbert's property. Both Rover and the IRS have filed objections to the Commission's report (Dkts. 958, 960). Rover's position is that the IRS lien has not been impacted by Rover's taking in 2017, because Rover had already settled with Engelbert in 2015. However, Rover cannot evade the just compensation owed to the IRS so easily. Its other objections to the IRS award are similarly without merit. The same is true of the IRS objections.

         For the reasons discussed below, Rover's objections are overruled, the IRS's objections are overruled, and the Commission's R&R is adopted.[1]

         I. BACKGROUND

         Rover has acquired non-exclusive 50-foot easements, as well as temporary easements, across several properties in Michigan and other states to install a 42-inch high-pressure interstate natural gas transmission pipeline. For the property owners from whom Rover could not obtain the necessary easements through private transactions, Rover obtained a Certificate of Public Convenience and Necessity under the NGA, which allows for condemnation of property necessary to build permanent natural gas pipelines. Rover brought this action seeking to condemn any Michigan property interests it was unable to obtain through private transactions.

         The R&R addressed in this Opinion involves two parcels of land: MI-WA-59.500 (“the 59.50 Property”) and MI-WA-060.000 (“the 60 Property”). The 60 Property is a thirty-five-acre parcel of land owned by Engelbert. The 59.50 Property is an eight-acre strip of land that was once part of the 60 Property but was later sold to the Schaible family, who joined it to their property as a single contiguous parcel of land. The IRS, Rover, and Schaible were all allowed to present argument and evidence to the Commission regarding just compensation attributable to the 59.50 Property and the 60 Property (Dkt. 951). However, the parties resolved the outstanding issues related to the 59.50 Property, which left only the 60 Property's just compensation to be determined. Both Rover and the IRS presented evidence at the Commission hearing. R&R at 1-2.

         At the Commission hearing, the IRS offered Engelbert's testimony and five contested exhibits related to Rover's discussions with Engelbert as to the fair market value of the 60 Property and other nearby properties. R&R at 2. The contested exhibits are “Right of Way Cost Estimates, ” which reflect the easement agreements between Engelbert and Rover and the itemized values for the permanent easements, temporary workspace, crop damages, administration fees, and signing bonuses (Dkts. 972-7 to 972-11). The Commission ruled that the testimony and the contested exhibits were not admissible as evidence of fair market value, because they did not reflect good-faith offers. Id. at 3-9 (citing Dep't. of Transp. v. Frankenlust Lutheran Congregation, 711 N.W.2d 453 (Mich. Ct. App. 2006)).

         Rover called general real estate appraiser Anthony Sanna to testify. Sanna submitted a report and testified that the pre-taking value of the land was $245, 000, Sanna Report, Tab 6 to J.A., at 23 (Dkt. 972-6), and that the post-taking value of the land on the day of the taking, using rounded numbers, was $218, 000, id. at 32. Sanna's valuation was based on valuing the land taken by the permanent easement (the 50-foot easement) at $15, 400, and adding the value of the land taken by the temporary easement (temporary workspace to install the pipeline) at $12, 000. Id. at 12. The Commission found Sanna's testimony credible and determined that $27, 400 was an appropriate just compensation award for the taking. Id.

         II. APPLICABLE LAW

         Under the NGA, Rover can bring an action to condemn property when it cannot agree with the property owner on the compensation to be paid for the necessary right-of-way to construct its pipeline. 15 U.S.C. § 717f(h). Although the action is brought in federal court, the practice and procedure must “conform as nearly as may be with the practice and procedure in similar action or proceeding in the courts of the State where the property is situated.” Id.; see also Columbia Gas Transmission Corp. v. Exclusive Natural Gas Storage Easement, 962 F.2d 1192, 1199 (6th Cir. 1992) (explaining that “although condemnation under the Natural Gas Act is a matter of federal law, § 717f(h) incorporates the law of the state in which the condemned property is located in determining the amount of compensation due”).

         In Michigan, such actions are governed by the Uniform Condemnation Procedures Act (“UCPA”). Mich. Comp. Laws. § 213.51 et seq. Under the UCPA, an “owner” includes a governmental agency having an interest, including a security interest, in a property being condemned. Id. at § 213.51(f). “Property” under the UCPA includes “property rights.” Id. at § 213.51(h). A lien upon land qualifies as a property right subject to just compensation in a condemnation proceeding. See City of Pontiac v. Ottawa Tower II, L.L.C., No. 324548, 2016 WL 1038135, at *6 (Mich. Ct. App. Mar. 15, 2016).

         III. PARTIES' OBJECTIONS

         A. Rover's Objections (Dkt. 958)

         Although Rover makes four objections, they embody essentially two arguments in support of its positions: (i) the IRS is not entitled to just compensation because Rover has already settled with Engelbert for its right-of-way easement through the 60 Property; and (ii) if just compensation is to be awarded, the IRS is not entitled to the entirety of the award, because other entities with property interests in the 60 Property might be entitled to a portion of the award or because the IRS has other collateral through which its lien is secured.

         1. Objections One and Two

         Rover argues that the Commission erred in its just compensation award by failing to take into account that Rover possessed an easement on the 60 Property prior to the taking in 2017. Obj. at 3-4. It reasons that because it settled with Engelbert in 2015, any diminution to the value of the property resulting from Rover's easement had already occurred prior to the date of the taking, March 10, 2017. See id. Therefore, Rover argues, the value of the 60 Property before and after the taking was the same, and the IRS is entitled to no compensation. Id. at 6.

         This argument is flawed and, if adopted, would create a gaping loophole in the UCPA. Under Rover's theory, it could avoid any lien-whether created by a mortgage, tax liability, or judgment-by first settling with the land owner, recalculating the value of the land, and then arguing that the lienor's interest before and after the taking is the same. The result of such action would be that the lienor would be entitled to no compensation, even though its security interest in the land had been diminished.

         A condemnor cannot diminish a lien's value by negotiating a separate peace with the property owner and then point to the depressed value of the property at the time of taking as an appropriate basis for establishing compensation. This reverse alchemy-turning valuable liens into less valuable, possibly worthless ones-would be patently unfair. And it would also lead to great mischief by incentivizing condemnors not to engage in pre-taking negotiations with lienors, despite a statutory requirement that they do so, see 15 U.S.C. § 717f(h) (“When any holder of a certificate of public convenience and necessity cannot acquire by contract, or is unable to agree with the owner of property to the compensation to be paid for, the necessary right-of-way to construct, . . . it may acquire the same by the exercise of the right of eminent domain . . . .”); see also Mich. Comp. Laws § 213.55 (“If an agency is unable to agree with the owner for the purchase of the property, after making a good faith written offer to purchase the property, the agency may file a complaint for the acquisition of the property in the circuit court in the county in which the property is located.”). Indeed, in our case, Rover did not negotiate at all with the IRS before the taking, even though the IRS held a significant interest in the 60 Property.

         To adopt Rover's approach would ignore the fundamental principle that a lienor has a property interest that is distinct from the landowner's property interest. It is for this reason that a lienor is made a party to condemnation proceedings. See, e.g., City of Pontiac, 2016 WL 1038135, at *6. And it is for this reason that the separate property interest must be valued as part of the proceeding. See Mich. Comp. Laws § 213.63 (providing for the court to “divide the award among the respective parties in interest, whether the interest is that of mortgagee, lessee, lienor, or otherwise . . . .” (emphasis added)).

         The Commission's approach was sound. It valued the property before the taking of the IRS lien without regard to any diminution in value attributable to the easement negotiated with Engelbert. In that fashion, the award properly recognized the impact of the taking on the IRS lien and was in accord with fundamental principles of Michigan condemnation law. “A guiding principle when awarding just compensation in a condemnation suit is to neither enrich the individual at the expense of the public nor the public at the expense of the individual but to leave him in as good a position as if his lands had not been taken.” Michigan Dep't of Transp. v. Tomkins, 749 N.W.2d 716, 725 (Mich. 2008) (internal marks omitted). The Commission's award is consistent with that “guiding principle.”

         Rover's first two objections are overruled.

         2. Objection Three

         In its third objection, Rover argues that if there is a just compensation award, it must be apportioned to other entities possessing interests in the 60 Property, including the Washtenaw County Water Resources Commissioner, Enbridge Pipelines (Toledo), and Wolverine Pipe Line Company. Obj. at 6. However, the other property interest holders have apparently resolved whatever impact the taking might have on their interests. See Stipulated Orders of Dismissal of Enbridge Pipelines (Toledo) (Dkt. 399), Wolverine Pipeline Company (Dkt. 655), and Washtenaw County Water Resources Commissioner (Dkt. 803).

         Additionally, the entities Rover argues should share in the just compensation proceeds are not in the same position as Engelbert or the IRS. The entities appear to have easements on the 60 Property, entitling them to a limited possessory interest. Because they are not interested in the value of the property-rather, only undisturbed access-they are not in the same position as a title holder, such as Engelbert, or a lienor, such as the IRS. There has been no suggestion or theory advanced that Rover's pipeline has somehow interfered with any other entities' easement on the 60 ...


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