Pipeline Construction Allegedly Causes Land Contamination And Lost Agricultural Profits


Business Valuation Expert

Court: United States District Court for the Northern District of Ohio
Jurisdiction: Northern District of Ohio, Eastern District
Case Name: Pipeline v. 10.55 Acres
Citation: 2018 U.S. Dist. LEXIS 157188

Facts

The plaintiff, Rover Pipeline, LLC, brought this action in accordance with the Natural Gas Act (NGA) and under the procedural framework of Federal Rule of Civil Procedure 71.1. Rover claimed censure of approximately 700 tracts of land located within this judicial district through which it intended to construct a pipeline. These tracts of land had received a certificate from the Federal Energy Regulatory Commission (FERC), and settlement with the majority of property owners along the route of the proposed pipeline had already been reached.

After various hearings and mediation sessions, the plaintiff arrived at an agreement with all defendants on the issue of immediate possession and entered into an agreement with a few property owners, including the landowners, on the issue of compensation.

The condemned parcel consisted of approximately 7.528 acres of land in Wayne County, Ohio, which included a temporary construction easement and a smaller permanent easement. The property was part of a larger tract of land that totals more than 100 acres and was owned by the landowners. During construction, Rover utilized a 150-foot wide easement of the property to construct and install the pipeline. This initial easement occupied a total of 3.4199 acres. Within the initial easement was a smaller 60-foot wide permanent easement that was being used by Rover to operate and maintain its pipeline. The permanent easement, which was the only easement currently in place on the property, occupied approximately 1.3719 of the 7.528 acre tract. Because the pipeline was buried a minimum of 4-feet underground, the landowners were permitted to continue to utilize the 60-foot permanent easement area for certain limited purposes including farming, utility construction, driveway cross, and other uses consistent with Rover’s operation and maintenance of the pipeline.

The parties agreed that the property and the adjoining farm acreage that made up the 100 acres were utilized as a collective unit to grow Christmas trees. The stock of the business, The Farms at Pine Tree Barn, was owned entirely by the landowners. The Farms at Pine Tree Barn grew Fraser fir trees, which are not indigenous to Ohio. According to the landowners, this species of evergreen tree requires a specific combination of soil composition and growing conditions that were present on the property prior to the installation of the pipeline. It was the landowners’ position that after the installation of the pipeline and Rover’s allegedly inadequate remediation efforts, commercially marketable Fraser fir trees would no longer grow on the property.

In anticipation of the trial on compensation, the parties had identified approximately 10 expert witnesses to provide opinions on topics ranging from soil and horticulture to real estate and economics. This motion in limine addressed the admissibility of the opinions of several of these witnesses.

The Experts

The landowners retained a business valuation expert to discuss lost profits. The landowners insisted that lost profits were available under federal and Ohio law. Rather than applying Ohio law to determine the before-and-after values of the fee and factoring in any incidental damages however, the landowners chose to separate the property from the business and value each individually — something that even the business valuation expert testified could not be done, given the business’ dependence on the land.

Then the landowners asked the business valuation expert to provide an analysis of the Christmas tree business. Assuming that no trees (including Fraser firs) would ever be grown on the property again, the business valuation expert valued the business under three different approaches—the asset approach, the market approach, and the income approach. According to the expert, the first two approaches resulted in a loss to the landowners of $167,000 and $157,000 respectively. Finding that the income approach best captured the loss from the easement, however, the expert determined that the loss to the landowners was actually $888,000.

Rover sought to exclude all testimony of lost profits proffered by the landowners, including any and all testimony of the landowner’s business valuation expert.

Discussion

It was Rover’s position that consideration of lost profits was not permitted when calculating fair market value in condemnation actions under the Fifth Amendment and well-established case law from the Supreme Court of the United States.

As a general rule, the federal courts have refused to consider income generated by businesses that are condemned. But the Supreme Court had steadfastly refused to declare any hard and fast rules in eminent domain cases. Additionally, even where the Supreme Court found that lost profits and other going concern damages were not available in condemnation proceedings, it recognized that a loss in the income-generating-power of the property would be relevant to a potential buyer and, therefore, should inform the fair market analysis.

Ohio follows the general rule that lost profits are usually not available in condemnation. “The business-losses rule was a judicial construct that holds that the power of appropriated property may not be compensated for the loss of future profits from any commercial enterprise on the property.” Like its federal counterpart, the Ohio rule against awarding lost profits was not absolute and required the trial court to examine the evidence to determine whether it was sufficient to determine lost future profits out of the field of speculation.

Given that federal and state law permit the award of lost profits in limited circumstances, and further recognizing that the overall goal of the just compensation guaranteed by the Fifth Amendment was equitable in nature and designed to make the landowner whole, the court refused to exclude, as a matter of law, all evidence of lost profits.

Without even getting into the factual basis and the methodology supporting expert’s opinion, the court found that this piecemeal approach does not meet the Rule 702 standard for admission of expert evidence. First, because the approach does not value the actual property, before and after the taking, it will not assist the jury in their assigned task. Separate analyses of a vacant lot, and an unattached business will not inform the jury on the decrease in the value of the property, as improved by the business, before and after the condemnation.

Held

The business valuation expert’s opinions were ultimately excluded.

It was found that lost profits were relevant where the business’ profitability was “attributable to the property’s unique location, rather than the business acumen of its owners.” Thus, compensation for lost future profits may be permitted if such profits can be proven with reasonable exactitude.

However, the court found the expert’s opinion regarding the income approach as the best estimation for the value of the Christmas tree business to be contradictory.

A real estate appraisal expert witness in the case noted that the income approach was an inappropriate method for valuing the landowners’ type of business. In both instances, the jury was left with the task of reconciling seemingly irreconcilable opinions of the landowners’ own experts in order to accept any part of the landowners’ valuation expert evidence.

In combination, the court found that these reasons illustrated the fatal flaws in the landowners’ approach and demonstrated that the business valuation expert would not help the trier of fact to understand the evidence or to determine a fact or data necessary to award just compensation in this case.

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