Southern Star Central Gas Pipeline, Inc. v. Frederick et al

Filing 92

MEMORANDUM AND ORDER granting 45 Motion to Exclude; granting in part and denying as moot in part 47 Motion in Limine; denying 48 Motion in Limine; denying 77 Motion in Limine. See order for details. Signed by District Judge Eric F. Melgren on 3/22/2012. (cm)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

SOUTHERN STAR CENTRAL GAS
PIPELINE, INC.,
Plaintiff,

vs.

Case No. 09-2435-EFM-GLR

120 ACRES LOCATED IN RICE COUNTY,
KANSAS; LANCE D. FREDERICK;
LYNETTE K. FREDERICK, CONNIE JO
FREDERICK; LYONS FEDERAL
SAVINGS ASSOCIATION; AND
UNKNOWN OTHERS,

Defendant.

MEMORANDUM AND ORDER
Plaintiff Southern Star Central Gas Pipeline, Inc. (“Southern Star”) seeks to condemn
subsurface rights under 120 acres located in Rice County for the use of natural gas storage (“the
property”). The Fredericks (“the Landowners”) own the property in question. The ultimate issue
relates to the proper value of the subsurface and related rights. Southern Star’s proposed expert,
Bernie Shaner, values the rights at $16,500. The Landowners’ proposed expert, William Henry,
values the rights at $642,120.58. Both Southern Star and the Landowners filed motions in limine
seeking to exclude the testimony of the other’s expert. Due to the complex nature of the valuation
issues, the parties requested a Daubert hearing on the motions. The matter came before the Court

for hearing on March 20th, 2012.
Because the Court finds that Mr. Henry’s testimony is unreliable, the Court grants Southern
Star’s motion1 to exclude his testimony. The Court finds that Mr. Shaner is qualified and his
testimony is reliable, and therefore denies the Landowners’ motion to exclude his testimony.2
I.

The parties have a long history of dealing.
The property is located within the boundaries Alden Storage Field, which Southern Star

operates under Certificates of Public Convenience and Necessity issued by the Federal Energy
Regulation Commission (“FERC”). The Landowners purchased the property subject to Southern
Star’s natural gas storage rights on December 28th, 2001. The Landowners use the property for
agricultural purposes, primarily farming. By their own admission, the Landowners value the
property (in fee simple) at $3,000 per acre. Southern Star previously leased the natural gas storage
rights from the Landowners; however, the parties were unable to negotiate a continuing lease and
Southern Star has since sought to condemn an easement to the property’s natural gas storage rights.3
The case is now set for trial to determine the appropriate compensation for the taking, and each party
hired an expert to opine on the value. The bulk of this Order will address each party’s Daubert
challenge to the opposing expert.

1

Doc. 45.

2

Doc. 48.

3

Doc. 49, p. 6.

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II.

The appropriate measure of compensation is that for a partial taking under K.S.A. §
26-513(c).
Before addressing the reports and qualifications of the respective experts, the Court finds it

necessary to make a threshold determination regarding the applicable statute section for
compensation. The Landowners argue in a motion in limine that Kan. Stat. Ann. § 26-513(b) should
apply to determine compensation.4 Section 26-513(b) states: “(b) Taking entire tract. If the entire
tract of land or interest in such land is taken, the measure of compensation is the fair market value
of the property or interest at the time of the taking.” Southern Star, however, contends that K.S.A.
§ 26-513(c) should apply, which provides: “(c) Partial taking. If only a part of a tract of land or
interests is taken, the compensation and measure of damages is the difference between the fair
market value of the entire property or interest immediately before the taking, and the value of that
portion of the tract of interest remaining immediately after the taking.” “Fair market value” is
defined in section 26-513(e) as “the amount in terms of money that a well informed buyer is justified
in paying and a well informed seller is justified in accepting for property in an open and competitive
market, assuming that the parties are acting without undue compulsion. The fair market value shall
be determined by the use of the comparable sales, cost or capitalization of income appraisal methods
or any combination of such methods.”
In its amended complaint, Southern Star states that it seeks to acquire the following interests:
a.
All of the undivided mineral interests, including but not limited to, all of the
oil, gas, coal and other minerals in and under that may be produced or stored from
or in sands and formations thereunder lying approximately two hundred (200) feet
4

Docs. 48 and 77.

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below the top of the Lansing-Kansas City to the top of the Viola (approximate depth
3150' - 3390') (collectively referred to hereinafter as, “the Storage Reservoir”); and
b.
The rights of ingress and egress at all times for the purpose of mining,
drilling, exploring, operating and developing said lands for oil, gas, coal and other
minerals, and for storing, handling, transporting and marketing the same therefrom
with the right to remove from said land all of Southern Star’s property and
improvements at any time; and
c.
The ‘exclusive’ right, privilege, and easement to use the Storage Reservoir
for the introduction, injection, and storage therein of natural gas and the removal and
withdrawal of natural gas therefrom through wells now located on the Subject
Property and/or through wells to be drilled thereon and/or through wells located in
the vicinity therof, together will all rights incident to said introduction, injection,
storage, withdrawal, and removal, including without limitation, the following:
i. The right to all storage gas in the Storage Reservoir and to
retain possession, ownership, and title of natural gas so stored as
personal property.
ii. The right to conduct exploratory and testing work and to
drill, redrill, install, construct, operate, monitor, maintain, renew,
repair, replace, produce, plug, replug, abandon and remove, from
time to time, such existing wells and/or additional future storage
wells, pipelines, gas transmission pipelines, casing, drips, valves,
electric lines, telemetering or other communication lines, structures,
and other related equipment, appliances, and appurtenances as
Southern Star may deem desirable, utilizing the surface of the Subject
Property to the extent necessary to accomplish such purposes.
Southern Star’s rights shall include the right to perform downhole
work that may be required to maintain and all such wells in usable
condition and the right to flow test any and all such wells.
iii. Southern Star shall have the permanent easements and
rights of way, rights of ingress and egress, and the right to use
existing roads, at all times for the purpose of operating and
maintaining its gas storage field, including but not limited to the
surveying, drilling, monitoring, producing, operating, testing,
replacing, repairing, and plugging of existing wells, pipelines and
appurtenances on the Subject Property and additional wells, pipelines
and appurtenances that may be drilled or constructed on the Subject
Property in the future.
iv. Southern Star shall have the right to unitize the Subject
Property or any part thereof with other acreages in order to form a
gas storage unit or a unit for the recovery of oil, natural gas, gas

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liquids, gas condensate, and/or other hydrocarbons.5
Due to the seemingly exhaustive nature of this description, the Court inquired at the hearing
as to how the above description does not qualify as an “entire taking” of the subsurface rights.
Counsel for Southern Star clarified that the Landowners retained mineral interests and subsurface
rights in the areas above and below the 200-foot section described in their Amended Complaint.
Therefore, the Court finds that the taking sought by Southern Star constitutes a partial taking under
K.S.A. § 26-513(c). The Court denies the Landowners’ motions in limine requesting that the Court
find that K.S.A. § 26-513(b) is the applicable statute.6
III.

An expert must be qualified, and his testimony must be reliable in order to be
admissible.
Rule 702 of the Federal Rules of Evidence governs the admissibility of an expert opinion.7

Rule 702 states:
A witness who is qualified as an expert by knowledge, skill, experience, training, or
education may testify in the form of an opinion or otherwise if: (a) the expert's
scientific, technical, or other specialized knowledge will help the trier of fact to
understand the evidence or to determine a fact in issue; (b) the testimony is based
on sufficient facts or data; (c) the testimony is the product of reliable principles and
methods; and (d) the expert has reliably applied the principles and methods to the
facts of the case.8

5

Doc. 16, p. 4.

6

Docs. 48 and 77.

7

Daubert v. Merrel Dow Pharm., 509 U.S. 579, 579 (1993).

8

Fed. R. Evid. 702.

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This Rule is not limited to scientific testimony, but also applies to “technical” or “other specialized”
knowledge.9
Rule 702 creates a gate-keeping function that requires the trial judge to consider certain
factors in determining the admissibility of evidence.10 This analysis is a two-part inquiry, wherein
the Court should consider (1) whether the expert is qualified, and (2) whether the testimony is
reliable.11 In order to be qualified, the expert should possess the “knowledge, skill, experience,
training, or education” necessary to render an opinion on the subject.12 An expert is qualified “[a]s
long as an [he] stays ‘within the reasonable confines of his subject area.’ . . . ‘[A] lack of
specialization does not affect the admissibility of [the expert] opinion, but only its weight.’ ”13 If
the Court finds that the expert is qualified, it must then go on to find that his testimony is also
reliable.14 To do so, the Court should “assess the underlying reasoning and methodology.”15 A
misstep in the expert’s analysis renders his testimony inadmissible, whether it “completely changes
a reliable methodology or merely misapplies that methodology.”16 Further, the Court should not

9

Kumho Tire, Co. Ltd. v. Carmichael, 526 U.S. 137, 147 (1999).

10

Alice B. Lustre, Post-Daubert Standards for Admissibility of Scientific and Other Expert Evidence in State
Courts, 90 A.L.R.5th 453, 453 (2001).
11

United States v. Nacchio, 555 F.3d 1234, 1241 (10th Cir. 2009) (internal citations omitted).

12

Id.

13

Ralston v. Smith & Nephew Richards, Inc., 275 F.3d 965, 970 (10th Cir. 2001) (internal citation omitted).

14

Nacchio, 555 F.3d 1234 at 1241.

15

Id.

16

Mitchell v. Gencorp Inc., 165 F.3d 778, 782 (10th Cir. 1999) (internal quotation omitted).

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accept guesses or speculation of an expert as reliable.17
IV.

Although Mr. Henry is qualified to testify as an expert, the Court finds that his
testimony is unreliable.

a.

Mr. Henry is a qualified expert.
Mr. Henry is an engineer and energy consultant on matters of natural gas storage. His

current job description states that he “provides energy consulting services for midstream operations,
management, storage, regululatory, and permit services.”18 Southern Star argues that he is not
qualified to offer valuation testimony; however, the Court finds that his background in the energy
industry provides sufficient qualifications. Although the Court finds that he is qualified to testify
as an expert in such matters, the second inquiry regarding reliability precludes his proposed
testimony here.
b.

Mr. Henry’s testimony is unreliable.
In his report,19 Mr. Henry claims that he employed an income-based approach to valuing the

subsurface rights because of the lack of comparable data for determining fair market value. He used
information such as existing gas storage leases, information gathered from conversations with
personnel and companies involved in the operation of gas storage fields and new storage projects,
and his experience in the development and operation of reservoir gas storage field. Based on his
17

Mooring Capital Fund, LLC v. Knight, 388 Fed.Appx. 814, 820 (10th Cir. 2010) (quoting General Elec. Co.
v. Joiner, 522 U.S. 136, 146 (1997) (“[N]othing in either Daubert or the Federal Rules of Evidence requires a district
court to admit opinion evidence that is connected to existing data only by the ipse dixit of the expert. A court may
conclude that there is simply too great an analytical gap between the data and the opinion proffered.”).
18

Doc. 46-6, p. 14.

19

Doc. 46-6.

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experience and review of storage leases, Mr. Henry stated that he believed the following standards
were appropriate:
1. An up front [sic] bonus of two to three times the per acre rate; 2. Annual lease
payments negotiated at the time the lease is signed with an annual escalation based
on a Cost of Living Index or a specified percent of 4 – 10%; 3. Royalty payments on
any original gas or liquids recovered during the operation of the storage field; 4. One
time payments for pipeline ROW which vary according to pipeline size and location;
5. One time payments for temporary and permanent well sites; and 6. Payments for
crop and land use during construction of facilities.20
He claims that he considered these, as well as the “value of the service provided by the storage
field,” which includes “the revenues generated for the Pipeline from the storage field”; “the capital
invested in the storage field”; “the development cost of new storage fields of a similar nature”; and
“the risk factors of leases in the development of new storage fields as compared to the renewal of
leases in existing storage fields.”21
Using the above information and three different methods,22 Mr. Henry calculated a fair
market value for the taking of $642,120.58. He calculated the value based on “the payment of an
up front bonus in the first year and rental income of $150 per acre for 120 acres” for 50 years, with
a 5% annual escalation every five years.23 He then calculated the net present value by employing
a 7% discount factor.

20

Id. at p. 3.

21

Id. at p. 5.

22

Mr. Henry’s self-described “method Number 2" employed a $0.05 per Mcf per acre amount. Id. at 4.

23

Id. at p. 6.

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The Court must exercise its gate-keeping function under Daubert and Rule 70224 to exclude
Mr. Henry’s testimony based on its reliability.25 Henry’s testimony is not based on sufficient facts
or data. For example, the Court finds no basis for Mr. Henry’s $150 per acre lease estimate. The
only basis for this figure appears to be taken from an Alaska lease, which is too remote to be
relevant. The Court has similar concerns regarding the data (or lack thereof) employed to arrive at
the $0.05 per Mcf factor, as well as the four or five percent income factor.
The Court also finds that Mr. Henry’s testimony is not the product of reliable principles and
methods. Mr. Henry’s methods have not been tried or consistently applied in the community.
Indeed, Mr. Henry admits that he has never before utilized his “methods Number 2 and 3,” and is
unable to offer any support for such valuation methods.26
Therefore, Mr. Henry’s report will be excluded. Southern Star’s motion in limine is
granted.27 Mr. Henry may still testify as to the foundation of leases and offers for leases previously
made by Southern Star, which the Court considers appropriate evidence in this case. He may not,
however, opine as to the value of the taking.

24

Rule 702 of the Federal Rules of Evidence requires that the testimony is “based on sufficient facts or data”
and is the “product of reliable principles and methods,” and that the expert reliably apply the “principles and methods
to the facts of the case.”
25
These concerns were addressed in detail at the March 20th, 2012 hearing. Therefore, they are only briefly
discussed here.
26

Doc. 46-4, p. 107-108.

27

Doc. 45.

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V.

Mr. Shaner is qualified to testify as an expert in this case, and his testimony is reliable.

a.

Mr. Shaner is a qualified expert.
Mr. Shaner is a real estate appraiser with nearly forty years of experience in the appraisal

industry. He holds both SRA and MAI designations. The SRA designation is issued to those “who
are experienced in the analysis and valuation of residential real property.”28 The MAI membership
designation is issued to appraisers “who are experienced in the valuation and evaluation of
commercial, industrial, residential and other types of properties.”29 Both designations are issued by
the Appraisal Institute, which requires candidates for both designations to “[c]omplete rigorous
education requirements, submit extensive specialized appraisal experience, demonstrate appraisal
report writing abilities and potentially pass a comprehensive examination.”30 In addition to the
education and experience required to attain these designations, Mr. Shaner also has experience that
is directly relevant to his opinion here–he has performed valuation reports for numerous
condemnations, some of which included the taking of subsurface rights for natural gas storage.
The Landowners argue that Mr. Shaner is not qualified to testify as an expert in this case.
They argue that he does not have any experience, education, background, or training in valuing
mineral interests. The Court finds that although he may not be a mineral interest expert, his training
and education as a real estate appraiser, combined with his vast experience applying traditional
28

SRA, Appraisal Institute, http://www.appraisalinstitute.org/designations/SRA_designations.aspx (last visited
Mar. 20, 2012).
29
MAI, Appraisal Institute, http://www.appraisalinstitute.org/designations/MAI_Designations.aspx (last visited
Mar. 20, 2012).
30

Professional Designations, Appraisal Institute, http://www.appraisalinstitute.org/designations/Default.aspx
(last visited Mar. 20, 2012).

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appraisal methods, make him qualified to opine as to the value of the taking here.
b.

Mr. Shaner’s testimony is reliable.
In creating his expert report,31 Mr. Shaner employed a comparable sales approach to

determine the value of the taking. He found that the highest and best use of the property to the
Landowners was agricultural use. He analyzed data of nearby and relatively recent sales of similar
agricultural land, both with and without subsurface rights. He then used this data to estimate the
value of the land, in fee simple absolute, at $165,000 before the taking. He found that the value of
the land after the taking was $148,500. Therefore, his report indicates that the value of the taking
is the difference between these two values – $16,500.
The Court finds that Mr. Shaner’s report is reliable. The data and statistics that he employed
have a proper foundation and relationship to the property in question. The method that he employed
is an accepted methodology in the appraisal business, and he reliably applied that method to the facts
and data in this case.
What shortcomings might exist with regard to Mr. Shaner’s testimony go to the weight that
the jury should give his testimony, not to its admissibility under Rule 702.32 Therefore, the Court
denies the Landowners’ motions to exclude the testimony of Mr. Shaner.33
VI.

Other Non-Daubert Rulings
31

Doc. 50-8.

32

See Daubert, 509 U.S. at 596 (“Vigorous cross-examination, presentation of contrary evidence, and careful
instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.);
see also Newman v. State Farm Fire & Cas. Co., 290 Fed.App’x 106, 114 (10th Cir. 2008) (noting that issues concerning
an expert’s opinion went to weight rather than admissibility).
33

Docs. 48 and 77.

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a.

The “date of taking” will be the date of judgment in this case.
Southern Star raised the of what constitutes the “date of taking.”34 The Court finds that the

“date of taking” will be the date of judgment in this case.
b.

The “date of valuation” will be the first day of trial.
Southern Star also raised the issue of what constitutes the “date of valuation.”35 The Court

finds that the “date of valuation” will be the first day of trial in this case.
c.

The surface rights issues raised in Doc. 47 are moot.
The parties agreed at the Daubert hearing on March 20th, 2012, that the definition of the

taking was not at issue, and includes the surface rights incident to the use of the subsurface rights
being taken. Therefore, this portion of Southern Star’s motion is denied as moot.36
IT IS ACCORDINGLY ORDERED that Souther Star’s Motion to Exclude Testimony of
William A. Henry (Doc. 45) is GRANTED.
IT IS FURTHER ORDERED that the Landowners’ Motions to Exclude Testimony of
Bernie Shaner and Motions for a Ruling that K.S.A. § 26-513(b) Applies (Docs. 48 and 77) are
DENIED.
IT IS FURTHER ORDERED that the Landowners’ Motion to Determine Date of Taking,
Date of Valuation, and to Determine the Surface Rights Taken (Doc. 47) is GRANTED in part and
DENIED AS MOOT in part.

34

Doc. 47.

35

Id.

36

Doc. 47.

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IT IS SO ORDERED.
Dated this 22nd day of March, 2012, in Wichita, Kansas.

ERIC F. MELGREN
UNITED STATES DISTRICT JUDGE

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