Eminent Domain at Issue In Shale Play Lawsuits

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A dispute over 40 acres in White County could have statewide implications.

The acreage lies between a few natural gas wells and the large interstate pipeline that transports north-central Arkansas’ new export out of state.

The question is whether the Arkansas Constitution gives the companies that install “midstream” pipelines the power of eminent domain to condemn land and so acquire the right of way necessary to install the pipelines.

The companies that build interstate pipelines have the right of eminent domain through federal law. However, it’s up in the air as to whether the state Constitution grants the same right to the midstream pipelines, which install and maintain pipelines connecting natural gas wells and the interstate pipelines.

As wells continue to pop up in the Fayetteville Shale Play’s primary region, more landowners will find themselves engaged in this argument between two tenets of society: the right to own land and manage it as wanted and the government’s responsibility to allow the condemnation of private land to better serve the public. The case, with Carroll and Lorene Smith of Searcy as defendants, will likely set a precedent that will determine how landowners and pipeline companies interact.

The Smiths own the 40 acres and are challenging Arkansas Midstream Gas Services Corp.’s claim to eminent domain, and several interested parties are waiting for the Arkansas Supreme Court to settle the issue. Arkansas Midstream is a wholly owned subsidiary of Chesapeake Energy Corp.

White County Circuit Judge Bill Mills recently ruled in favor of Arkansas Midstream, but has delayed implementation of his decision until the state Supreme Court can hear the case.

At least one other case is proceeding in White County, and several other landowners have settled suits claiming Arkansas Midstream did not have the power it claimed.

The Landowners

The argument that will be presented to the Supreme Court is academic and legal, but the story also has a personal side.

Both the Smiths and another family, the benefactors of the Ralph Loyd Martin Revocable Trust, say they fear that allowing Arkansas Midstream the power of eminent domain will destroy the value of their land. The Arkansas Constitution states that “… nor shall private property be taken for public use, without just compensation.”

The two families have nothing against placing a pipeline on their property, but, in each case, the owners object to the route chosen by Arkansas Midstream.

“My husband told them, ‘We’ll try to work with you guys and permit you on the property if you’ll move over to the west side of the property,'” Lorene Smith said. The route the Arkansas Midstream representatives presented would go through the middle of the property, Lorene Smith said, which would bisect the roughly 2-acre plot that the Smiths claim is the property’s only building site because of steep drop-offs on three sides of the site.

“That’s the reason we bought the property: It was the view. But they are taking the good building site,” Lorene Smith said. As the case has progressed, Arkansas Midstream has built a temporary line that runs along the Smiths’ property line.

Arkansas Midstream similarly chose to place a pipeline through the middle of the Martin Trust’s roughly 140-acre plot, LaDonna Kelly said. Kelly is the daughter of Ralph and Festus Martin. Festus still lives on the property, which the family hopes to develop one day, Kelly said.

“We did not oppose the gas line, but we did think we needed some conditions on it, and they weren’t willing to work with us when it’s our land,” Kelly said.

The family has had offers of up to $40,000 for a building lot, Kelly said. The land sits near the local country club where some of Searcy’s more upscale homes are, she said. The location means the family might be able to cash in on possible development, she said.

Arkansas Midstream “wanted to go through the middle,” Kelly said. “We got down to the price, and they just didn’t even want to give us even a fraction of what the land is worth.”

In both cases, Arkansas Midstream would gain a 60-foot permanent right of way through the properties, meaning neither family could build upon the easement without the pipeline company’s permission.

Arkansas Midstream’s attorney, Jerry Canfield of Daily & Woods PLLC of Fort Smith, said the company attempts to work with landowners to determine the route a pipeline will take. The location of wells, however, sometimes means that finding another route is impractical, he said.

“Sometimes you just get to the point that that is just uneconomical,” Canfield said. “The interests of directness get much more serious as you get closer to the well.”

The families’ emotional desire is that they have control over the land they have owned for decades. But both believe the argument put forth by the Smiths’ attorney, Donald P. Raney of Lightle, Raney & Bell LLP of Searcy, supports their claim that a private natural gas pipeline company does not have the power of eminent domain.

The Arguments

At issue is which private companies can claim the power of eminent domain in Arkansas. Select private companies, known as “common carriers,” have the privilege. These companies, such as utilities and railroads, may use eminent domain to condemn land required to lay the infrastructure that will allow them to transport goods for the benefit of the public.

In addition, the public must have access to the infrastructure, as is the case with power lines and railroads. By benefiting the public, the common carrier meets the Arkansas Constitution’s definition of “public use” required to gain eminent domain.

“Our client contends that there is a strong public use to get natural gas out of these areas that are developing,” said Canfield, Arkansas Midstream’s attorney.

Arkansas has what is known as a “narrow” definition of eminent domain, meaning the state strictly restricts the instances under which the power can be used. In fact, a 2005 opinion issued by then-Attorney General Mike Beebe states that Arkansas has one of the narrowest definitions of public use in the country.

Arkansas Midstream contends that, although it is sole owner of the pipelines, the public has an interest in transporting the natural gas found in the Fayetteville Shale Play out of the area.

The pipelines owned by Arkansas Midstream are no less important than the larger interstate pipelines to which the company’s pipelines transport gas, Canfield said. The importance of gathering lines is similar to the importance of state highways to the interstate system.

“You can’t build an interstate through every town. You have the interstate highways and then the smaller highways that get you to the big highways,” Canfield said.

Raney takes issue with Arkansas Midstream’s contention that its pipelines are open to the public.

To qualify for Arkansas’ definition of “public use,” and therefore gain the right of eminent domain, the use must allow any member of the public to use the entity for which the land was condemned. The Smiths’ suit claims that since only those involved in gas exploration may use gas pipelines, the pipelines do not serve a public use.

A Common Carrier?

Arkansas law does not give the power of eminent domain to gathering pipeline companies, according to the argument laid forth by Raney, whose firm formerly counted Gov. Mike Beebe as a partner.

The Smiths “contend that a specific grant of authority should be required from the General Assembly for a pipeline company to use the most powerful authority of eminent domain and that such intended use be for a public use,” the brief states.

The Arkansas Public Service Commission – which regulates common carriers and pipelines, among other entities – first heard of the case in February, when Arkansas Midstream filed for an application to determine whether it required a certificate of convenience and necessity. The certificate would recognize the pipeline company as a common carrier able to condemn property in order to build pipelines.

Ultimately, the commission decided it did not have “regulatory authority over Arkansas Midstream insofar as any necessity or requirement of it having to obtain” a certificate for installing gathering pipelines, according to the commission’s order. The commission punted the case back to White County Circuit Court.

Raney took the commission’s order to mean that it does not have regulatory authority over gathering pipelines.

“If the [commission] does not consider the Plaintiff’s gathering lines a pipeline of a public utility and for delivery of gas for the public for compensation and thereby under the ambit of the [commission] how can the Plaintiff claim it is a common carrier and thereby have the power and right of condemnation under the aforesaid code section,” according to Raney’s arguments in circuit court documents.

The commission’s order does not determine that it does not have regulatory authority over the pipeline companies, however, Canfield argues.

“They have the authority and if they tried to exercise it, they could exercise it. But they have not required it,” Canfield said.

The commission still has power over the Arkansas Natural Gas Pipeline Safety Act, he said. The issue the commission ruled on was not whether the commission has jurisdiction over pipeline companies; it was whether pipeline companies must receive a certificate of convenience and necessity as common carriers do, Canfield contends.

The Precedent

Since Judge Mills ruled in favor of Arkansas Midstream, all sides have been waiting for him to issue a finding of fact, which outlines the facts the judge used in making his decision. At that point, the case will likely move on to the Arkansas Supreme Court.

The parties involved all want a decision that will settle the question of eminent domain for gathering pipelines.

“Stressful – it has been a very stressful experience,” Lorene Smith said.

The representatives of the Martin Trust also hope for a speedy resolution so they can determine what will become of their land.

“We wanted to resolve this a long time ago,” LaDonna Kelly said.

And because many other landowners will likely find themselves in the way of the Fayetteville Shale’s development, a ruling in this case will provide guidance to the companies building the infrastructure needed to take the natural gas from the well to market.

“Once the precedent is set, then the courts will get through this more quickly. And the company can more efficiently determine” its course of action, Canfield said.