HOUSTON, September 4, 2012 -- On August 31, 2012, the Texas Supreme Court reversed a $20,955,000 condemnation judgment against Baker Botts client Enbridge Pipelines (East Texas) L.P. and remanded the case for a new trial. In an opinion authored by Justice Debra Lehrmann and joined by five other justices, the court held that the expert opinion offered by landowner Avinger Timber, LLC, violated the value-to-the-taker rule, which prohibits basing an award on a tract’s unique value to the condemnor, by impermissibly focusing on the costs that Enbridge would have incurred had it been required to remove a gas processing plant previously constructed on the condemned tract. The decision represents the first time that the court has explicitly considered the applicability of the value-to-the-taker rule to a project constructed on land long before the land was condemned. Justice Phil Johnson issued a dissenting opinion that two other justices joined. Copies of both the majority opinion and dissenting opinion are available by clicking on the appropriate links. The case attracted considerable attention from a variety of interested parties; twelve amicus briefs were filed, nine supporting Enbridge and three supporting Avinger.

Factual and Procedural History

Avinger’s predecessor initially leased the 23.79-acre tract in question in 1973 to Tonkawa Gas Processing Company for the purpose of building and operating gas processing facilities. The initial lease was for ten years with a perpetual renewal option. Tonkawa built a large natural gas processing plant on the land, and, over time, 15 or 16 separate natural gas pipelines owned by various companies were connected to the plant, turning the site into a gas processing hub.

In 1998, Tonkawa’s successor and Avinger renewed the lease but eliminated the perpetual renewal feature of the original lease, which meant that Avinger, at the end of the renewal term, had a reversionary interest in the land. Under the terms of the original lease, which were extended to the new lease, the lessee retained ownership of its improvements, which it was obligated to remove within six months of the expiration of the lease.

In 2004, Enbridge, which had become the lessee and plant owner, was unable to agree with Avinger on a lease extension and proceeded to condemn the land on which the plant was located. Commissioners awarded Avinger $47,580 for the land, and Avinger exercised its right to a jury trial.

Enbridge challenged the reliability of the testimony of Avinger’s expert witness David Bolton. The main question was whether Bolton was entitled to consider the gas processing plant and Enbridge’s removal obligation in valuing the land underneath it. The trial court found that the plant and lease could be considered and allowed Bolton to testify concerning all existing factors in determining the land’s fair market value, including the fact that Enbridge’s lease obligation to remove the plant at the end of the lease term left it exposed to moving costs of between $29 million and $38 million. The jury accepted his opinion testimony and awarded Avinger $20,955,000.

Court of Appeals Opinion

The Texarkana Court of Appeals affirmed the trial court judgment in a unanimous opinion. Enbridge Pipeline (East Texas) L.P. v. Avinger Timber, L.L.C., 326 S.W.3d 390 (Tex. App.—Texarkana 2010, pet. granted). The court rejected all of Enbridge’s complaints regarding the judgment. Among other things, it held that even though Bolton considered the effect that the plant and the expiring lease had on the value of the land condemned, he did not violate the value-to-the-taker rule because he testified that he did not assess the value of the land to Enbridge. Following the issuance of the court of appeals’ opinion, Enbridge retained Baker Botts to petition the supreme court for review.

The Supreme Court’s Opinion

The supreme court found it highly significant that Bolton relied explicitly on the provision in the lease that required Enbridge to remove all improvements on the land within six months of the lease’s termination and on the savings that Enbridge would receive if it were able to avoid incurring those costs. Specifically, the court agreed with Enbridge “that Bolton’s testimony violated the value-to-the-taker rule by improperly focusing on the costs Enbridge Pipelines saved by avoiding its obligation to remove the plant under the lease agreement” and condemning the land instead. Citing a landmark United States Supreme Court opinion by Justice Oliver Wendell Holmes for the proposition that “the question is, what has the owner lost, not what has the taker gained,” the court reasoned that the moving costs that Enbridge avoided by condemning the land were a unique benefit to the taker and did not enhance the value of the land that Avinger lost. The court recognized that Avinger was entitled to have the land valued as a site for a gas processing plant but found no evidence in the record of what that value would be if the existing plant and Enbridge’s moving-cost obligations under the lease were ignored. It specifically rejected Bolton’s claim that the land would have the same value with or without the plant as “flatly contradict[ory].”