Daubert Motions and natural gas storage under Oklahoma eminent domain law

Daubert Motions and natural gas storage under Oklahoma eminent domain law

We’ve discussed the valuation of surface and subsurface easement rights for underground natural gas storage facilities in eminent domain cases before, and we’ve also mentioned several cases we’re handling in Alaska and Oklahoma that pertain to this issue.  One of our on-going cases in Oklahoma involves Stephens’ Production Company, which seeks to condemn two easements over the 80 acre parcel owned by our client, the property owner.  The one easement will allow Stephens to store gas in the underground reservoir on our client’s property (Reservoir Easement), while the other easement allows access to the surface to conduct various maintenance activities related to underground gas storage.  The Reservoir Easement will permanently prevent the property owner from using or selling property rights associated with the reservoir.  The Surface Easement permanently interferes with the property owner’s surface rights.  The condemnor has paid the property owner $0 and we’ve assessed damages amounting to $419,000.

One of the more interesting elements of this case was the Daubert Motion filed by the condemnor to request that our appraiser’s report and testimony (appraisal for the property owner) be excluded from evidence.  Among other claims addressed in the Motion, the condemnor argued that 1) our use of the ‘before and after’ method was specifically prohibited from use in Oklahoma eminent domain cases and, 2) our highest and best use assessment was contrary to established appraisal methodology.

The court denied their Motion.  Following is a closer look at several of the arguments presented.

Condemnor’s claim: The Before and After Method is prohibited from use in Oklahoma eminent domain cases.  

The condemnor claimed that our appraiser used the traditional “Before and After” method when calculating damages in this case, and this valuation method is prohibited from use in Oklahoma eminent domain cases.  Consequently, they argued that our appraiser did not determine “just compensation” in accordance with the requirements outlined in the Oklahoma Constitution.  The Oklahoma Constitution was amended to adopt the definition of just compensation in partial taking eminent domain cases “as the value of the property taken, and in addition, any injury to any part of the property not taken.”

In their Daubert Motion, the condemnor quoted the Oklahoma Supreme Court in Williams Natural Gas Co vs Perkins, 1997 OK 72, 952 P.2d 483, 486:

Williams posits that the before and after method stated in 53(D) is just one method of determining the value of the land taken.  We cannot agree….if the intent was to retain the before-and-after method, there would have been no need for the constitutional provision to define just compensation as the ‘value of the land taken, and in addition, any injury to the land not taken’.  The adoption of this language evidences an intent to change the method of determining just compensation”.

Consequently, the plaintiff postulated that our appraiser valued the subject property using an unconstitutional method of valuation.

We argue that Williams did not hold that the ‘before and after’ valuation method is never relevant in a takings case.  In Williams, the Court addressed the amendment of Section 24, article 2 of the Oklahoma Constitution.  Section 24 was amended to recognize severance damages.  In response to the Constitutional Amendment to Section 24, the Oklahoma Legislature passed an amendment that attempted to override the mandate of the people of Oklahoma in amending the Constitution.  The Legislature in effect, sought to “reinstate the before-and-after method for partial takings.” Id. at 487.  The issue presented to the court in Williams, then, was whether the Legislature could statutorily impose the before-and-after method of valuation as the sole method for determining just compensation after Section 24 had been added to the constitution.

The Oklahoma Supreme Court held that, after the adoption of Section 24, the before and after methodology could not be established by the legislature as the exclusive method of determining condemnation damages.  Williams however, “did not hold that the ‘before and after’ valuation diminution of value method is never relevant in a takings case; rather, it held that the legislature could not sidestep the constitutional directive of Art.2 stat. 24, by imposing a different valuation method in partial takings cases.” Chesapeake  Operating, Inc. v. Loomis, 164 P.3d 254, 285 (Okla.2007).  Thus Williams does not bar the before-and-after method.  Rather, where a before and after valuation does not recognize the full extent of damages, the Legislature could not prohibit the use of the part-taken/damages-to-the-remainder method instead.

Holding true to Oklahoma’s definition of just compensation, our appraisal concludes that the fair value for just the Easement Reservoir is $385,000 which results from a calculated apportionment of the entire Reservoir’s value of $3,364,179.  The before and after method is not used to determine this value.  Thus, our appraisal values the property taken without using the before and after method.

The appraisal also includes an independent, separate calculation of “the severance damage to the fee simple surface area yet retained by [our client]”.   This separate valuation of the severance damages does use the before and after method.  Our appraisal thus conforms in every sense to Oklahoma’s definition of “just compensation” in partial takings cases.  Because the reservoir (the part taken) has been totally excluded from the before-and-after method calculation of the severance damages, the appraisal, by definition, is not a before and after appraisal of the entire property.

Condemnor’s claim: Our highest and best use assessment was contrary to established appraisal methodology.

The condemnor also claimed that our highest and best use assessment of natural gas storage was contrary to established appraisal methodology because the determination was based upon a use that did not exist for the property owner at the time of acquisition.  The condemnor argued that because the property owner could not establish a natural gas storage facility on his own, the highest and best use could not be based upon that use.  Additionally, they claimed that our pre-taking highest and best use was flawed because it assumed the existence of the project.

We argued that our appraisal was performed in accordance with established appraisal practice and law.  Our appraisal does not rely on the project in its determination of highest and best use.  It does not assume the use of the condemnor, but rather, the highest and best use was determined after examining the market and physical properties of our client’s parcel.  One parcel may serve many functions.  Agriculture land may also be used for mineral exploration, and if the highest and best use of property is for more than one use, than the appraiser must consider the value of each use (as long as there is no duplication in value).

If a property contains oil, an appraiser will be asked to value the property-including the oil-considering the market and physical characteristics of the property.  Mineral exploration is a use separate from that of the surface e.g. hunting, ranching recreation, etc.  If the appraiser, after examining the market, concludes that the highest and best use includes oil production, the property will have multiple highest and best uses: one for surface uses, one for minerals (subsurface).  The situation in this case is no different. The highest and best use of our client’s property is formed by the market, not by the project.

As stated previously, the court denied their Daubert Motion and our client’s appraiser was allowed to testify at trial.   Contact Us and read more about Oklahoma eminent domain law.

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