K. Petroleum, Inc. v. Property Tax Number Map Number 7 Parcel 12, Knox County, Kentucky et al

Filing 97

MEMORANDUM OPINION & ORDER: Defendants' motion to dismiss for lack of subject- matter jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure [Record No. 91 is DENIED. Signed by Judge Danny C. Reeves on 3/10/16. (MRS)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
SOUTHERN DIVISION
(at London)
K. PETROLEUM, INC.,
Plaintiff,
V.
PROPERTY TAX MAP NUMBER 7
PARCEL 12, KNOX COUNTY,
KENTUCKY, et al.,
Defendants.

)
)
)
)
)
)
)
)
)
)
)

Civil Action No. 6: 14-201-DCR

MEMORANDUM OPINION
AND ORDER

*** *** *** ***
This matter is pending for consideration of the motion to dismiss filed by Defendants
Jack Elliott Jr., Holly Jean Elliott, and Marilyn Louise Elliott. [Record No. 91] The
defendants assert that the Court lacks subject-matter jurisdiction because Plaintiff K.
Petroleum, Inc. (“KPI”) allegedly lacks the power of eminent domain under the holding in
Bluegrass Pipeline Co., LLC v. Kentuckians United to Restrain Eminent Domain, Inc., No.
2014-CA-517-MR, 2015 WL 2437864 (Ky. Ct. App. May 22, 2015). In response, KPI
argues that Bluegrass Pipeline is inapposite and that KPI properly demanded temporary
rights-of-way over the defendants’ property under Kentucky law. [Record No. 92] For the
reasons outlined below, the defendants’ motion will be denied.
I.
As set forth in previous orders, KPI is a private company that constructs, maintains,
and operates natural gas pipelines. [Record No. 29, ¶ 1] In September 2014, KPI began
construction of the T-632 gas transmission pipeline on the defendants’ property located in
-1 

Knox County, Kentucky.

[Id., ¶¶ 56]

Because KPI incorrectly believed that it was

constructing the pipeline on property over which it already had obtained rights, it did not
seek condemnation of the property prior to beginning construction. [Id., ¶ 11] On or about
September 25, 2014, Defendant Jack Elliot, Jr. discovered the construction and demanded
that KPI leave the property. [Id., ¶ 15; Record No. 91-1, p. 2]
As a result, KPI filed this condemnation action against the defendants on October 6,
2014, seeking permanent and temporary rights-of-way over the subject property. [Record
No. 1] The company also arranged to construct the T-632 pipeline on other property, and
that pipeline became operational on October 17, 2014. [Record No. 36-3, p. 9] Because KPI
ended up moving the pipeline to another location, the plaintiff amended its Complaint to seek
condemnation for only temporary rights-of-way.

[Record No. 29, ¶¶ 1415]

The

defendants’ Answer to the Amended Complaint included a counterclaim for trespass and
requested an award of punitive damages. [Record No. 32]
On March 19, 2015, KPI filed a motion to dismiss the defendants’ counterclaim.
[Record No. 36] Conversely, the defendants filed a motion for partial summary judgment in
their favor with respect to all liability issues. [Record No. 46] The Court granted KPI’s
motion to dismiss, concluding that reverse condemnation was the only claim available to the
defendants under Kentucky law. [Record No. 54, p. 6] Further, the Court denied the
defendants’ motion for summary judgment, determining that KPI’s request for temporary
rights-of-way satisfied the “necessity” and “public service” requirements for the use of
eminent domain power under Ky. Rev. Stat. § 278.502. [Id., pp. 910] The defendants
moved for reconsideration, which the Court denied. [Record Nos. 58; 63]
-2 

On July 30, 2015, KPI filed a motion for summary judgment, seeking condemnation
rights and an adjudication of the compensation owed to the defendants. [Record No. 61]
The Court denied that motion because KPI failed to demonstrate that there was no genuine
issue regarding the time period for the temporary rights-of-way and, in any event, the
defendants may be entitled to the cost of removal of the pipeline. [Record No. 67, p. 10]
The parties submitted their pretrial filings, and a final pretrial conference was held on
November 20, 2015. [See Record Nos. 72; 7479; 83.] Additionally, the parties’ objections
to certain exhibits and witnesses remain pending. [Record Nos. 80; 86]
On February 25, 2016, the defendants filed the present motion to dismiss, asserting
that under the authority of Bluegrass Pipeline, KPI does not have the power of eminent
domain because it is not regulated by Kentucky’s Public Service Commission (“PSC”).
[Record No. 91-1, p. 2] The defendants argue that, as a result, the Court lacks subject-matter
jurisdiction. [Id.] In response, KPI submitted evidence that the company is regulated by the
PSC. [Record No. 92-2] In their reply brief, the defendants contend that KPI merely
“maintains a farm tap system, that is for private use, and private consumption,” meaning that
KPI cannot exercise eminent domain power for construction of the T-632 pipeline under
Kentucky law. [Record No. 95, p. 2]
II.
A.

Standard of Review

A party may move for dismissal based on lack of subject-matter jurisdiction under
Rule 12(b)(1) of the Federal Rules of Civil Procedure at any time. See Fed. R. Civ. P.
12(h)(3). Rule 12(b)(1) motions to dismiss may constitute facial or factual attacks. See
-3 

Gentek Bldg. Products, Inc. v. Sherwin-Williams Co., 491 F.3d 320, 330 (6th Cir. 2007). A
facial attack “questions merely the sufficiency of the pleading.” Id. On the other hand, a
factual attack requires the Court to “weigh the conflicting evidence to arrive at the factual
predicate that subject-matter does or does not exist.” Id.
The Court “engages in a factual inquiry regarding the complaint’s allegations only
when the facts necessary to sustain jurisdiction do not implicate the merits of the plaintiff’s
claim.” Id. If “the attack on subject-matter jurisdiction also implicates an element of the
cause of action,” the Court should “deal with the objection as a direct attack on the merits of
the plaintiff’s claim.” Id. (citing Williamson v. Tucker, 645 F.2d 404, 415 (5th Cir. 1981)).
In other words, the Court should treat the challenge as a motion under either Rule 12(b)(6) or
Rule 56. Id.; see also Global Technology, Inc. v. Yubei (XinXiang) Power Steering System
Co., Ltd., 807 F.3d 806, 810 (6th Cir. 2015) (“This approach is identical to the approach used
by the district court when reviewing a motion invoking Federal Rule of Civil Procedure
12(b)(6).”). But the burden remains on the party asserting federal jurisdiction, rather than the
movant. See Global Technology, 807 F.3d at 810.
Here, the defendants present a factual attack on the Court’s subject-matter jurisdiction
to entertain this case.1 [See Record No. 91-1, p. 5.] They argue that KPI lacks the power of
eminent domain because it is not regulated by the Public Service Commission and because
the T-632 pipeline does not fulfill the “public use” and “public service” requirements of Ky.

1

District courts have original jurisdiction of civil actions between citizens of different
states with an amount in controversy exceeding $75,000.00, exclusive of interest and costs. 28
U.S.C. § 1332(a)(1). The plaintiff brought the present action in federal court because the parties
are of diverse citizenship and KPI stood to lose in excess of $75,000.00 if it had been unable to
construct the T-632 pipeline. [Record No. 29, ¶¶ 1, 2, 8]
-4 

Rev. Stat. §§ 416.675(1) and 278.502. [Record No. 95, p. 2] These challenges require the
Court to consider the conflicting evidence of the parties, such as the regulatory documents
attached to the parties’ briefs. [Record Nos. 91-4; 91-5; 92-2] Further, this factual attack
implicates an element of KPI’s cause of actionwhether KPI can claim temporary rights-ofway over the defendants’ property. Consequently, the Court will address the defendants’
motion to dismiss as an attack on the merits of KPI’s assertion of temporary condemnation
rights over the subject property. See Gentek Bldg. Products, 491 F.3d at 330. In addition,
the Court will “weigh evidence to confirm the existence of the factual predicates for subjectmatter jurisdiction.” See Global Technology, 807 F.3d at 810.
B.

Kentucky’s Power of Eminent Domain

According to Ky. Rev. Stat. § 278.502:
Any corporation or partnership organized for the purpose of, and any
individual engaged in or proposing to engage in, constructing, maintaining, or
operating oil or gas wells or pipelines for transporting or delivering oil or gas,
including oil and gas products, in public service may, . . . condemn the lands . .
. .”
Ky. Rev. Stat. § 278.502. Every exercise of the power of eminent domain must be based on
“public use” of the condemned property. Ky. Rev. Stat. § 416.675(1). “Public use” includes
ownership or occupation by the Commonwealth or its entities, the acquisition and transfer of
properties for eliminating slum areas, the use of the property for the creation or operation of
public utilities or common carriers, and other uses expressly authorized by statute. Ky. Rev.
Stat. § 416.675(2). In addition, “no property may be condemned primarily for the purpose of
facilitating an incidental private use” or for merely indirectly benefiting the general public.
Ky. Rev. Stat. § 416.675(3).
-5 

Under Ky. Rev. Stat. § 278.470, “[e]very company receiving, transporting or
delivering a supply of oil or natural gas for public consumption is declared to be a common
carrier, and the receipt, transportation and delivery of natural gas into, through and from a
pipeline operated by any such company is declared to be a public use.” However, Bluegrass
Pipeline held that only pipeline companies “regulated by the PSC” may exercise Kentucky’s
power of eminent domain. 2015 WL 2437864, at *4. That case involved a limited liability
company proposing the construction of a pipeline in Kentucky for transporting natural gas
liquids from Pennsylvania, West Virginia, and Ohio to the Gulf of Mexico. Id. at *1.
Here, the parties’ dispute involves whether KPI’s delivery of natural gas through the
T-632 pipeline constitutes both a “public use” and a “public service.” Ky. Rev. Stat. §§
416.675(1), 278.502. Because the delivery and transportation of natural gas through a
pipeline by a common carrier is considered a “public use,” the ultimate question is whether
KPI is a “common carrier” under Ky. Rev. Stat. § 278.470.
The defendants accept that KPI transports and delivers natural gas; however, they
seem to dispute whether the company does so for “public consumption.” See Ky. Rev. Stat.
§ 278.470. [Record No. 95, p. 2] Public consumption means “ultimate use by Kentucky
consumers.” In re Langford, 32 B.R. 746, 748 (W.D. Ky. 1982) (holding that small producer
was not common carrier because it sold gas only to an interstate pipeline company). The
defendants concede that KPI furnishes natural gas to at least some Kentucky consumers (i.e.,
those living within one-half mile of the producing well or gas gathering pipeline). [Record
No. 95, p. 4] Further, KPI gathers gas in Knox County to sell to Delta Natural Gas
Transmission System, which then distributes the gas to Kentucky consumers. [Id., p. 2;
-6 

Record Nos. 92-2, p. 7; 91-4] Consequently, KPI is a common carrier,2 and its transportation
of natural gas through the T-632 pipeline constitutes a public use. See In re Langford, 32
B.R. at 748. However, the defendants argue that KPI does not service the “public at-large.”
[Record No. 95, p. 2] Two cases shed light on the issues raised by the defendants.
In Milam v. Viking Energy Holdings, LLC, a limited liability company brought
condemnation proceedings against the Milams to construct a pipeline for transporting natural
gas from Richardsville to Bowling Green, Kentucky. 370 S.W.3d 530, 531 (Ky. Ct. App.
2012). The lower court determined that, despite the fact that the company conveyed natural
gas to other private companies, the company was a common carrier. Id. at 53334. Thus,
the lower court concluded that the company easily met the “public use” requirement of Ky.
Rev. Stat. § 416.675(1). See id.
The lower court also determined that the company met the “public service”
requirement of Ky. Rev. Stat. § 278.502, reasoning that: (i) the company held governmental
and regulatory licenses to transmit natural gas from Richardsville to Bowling Green; (ii) the
company was regulated by the PSC; and (iii) the company was subject to public service
company taxes. Milam, 370 S.W.3d at 53334. On appeal, the Milams argued that the
company’s particular pipeline at issue did not meet the public service requirement because it
was a “gathering line,” conveying natural gas to other private companies, rather than directly
to the public. Id. at 534. The Kentucky Court of Appeals concluded that “gathering” lines

2

In fact, the defendants have never actually challenged KPI’s status as a common carrier.
[See Record No. 54, p. 9.] 

-7 

could satisfy the public service requirement, affirming the lower court’s reasoning. Id. at
535. 
Similar to the company in Milam, KPI has authorization for “exploring, producing
and gathering” natural gas in Whitley, Knox, and Clay Counties “for sale to various users via
the Delta Natural Gas Transmission System.” See id. at 533. [Record No. 92-2, p. 7]
Further, the PSC establishes the rates KPI may charge to the Kentucky customers for it
services. See id. [Id., p. 4] Additionally, KPI’s farm tap system is “constructed according to
all applicable rules and regulations of the Public Service Commission.” [Id., p. 8] Although
the parties have not presented any evidence regarding whether KPI pays public service taxes,
the services provided by KPI closely resemble the services provided by the company in
Milam, indicating that KPI meets both the “public use” and “public service” requirements of
Ky. Rev. Stat. §§ 416.675(1) and 278.502, respectively. See Milam, 370 S.W.3d at 533, 535.
Here, the defendants seem to assert the same argument presented in Milamthat
gathering lines cannot satisfy the public service requirement because they primarily convey
natural gas to private organizations. See In the Matter of K-Petroleum, Inc., Case No. 200200302, *12 (PSC Oct. 29, 2002) (describing KPI as a “gathering facility and transmission
facility” that is “subject to Public Service Commission (Commission) jurisdiction and
regulation”). [Record No. 95, p. 2] That argument is foreclosed. See Milam, 370 S.W.3d at
535.
Likewise, in EQT Gathering, LLC v. A Tract of Property Situated in Knott County,
Kentucky, this Court stated that regulated pipelines “need not be fully open to the public to
be a public use.” 970 F. Supp. 2d 655, 663 (E.D. Ky. 2013). The case involved a company
-8 

that constructed, maintained, and operated natural gas pipelines, permitting other natural gas
companies to use the pipeline at issue. Id. The Court determined that the company’s
pipeline was “available for public use by the portion of the public relevant herenatural gas
transportation companies.” Id. Moreover, the Court determined that the public use and
public service requirements were one and the same, at least with respect to common carriers.
See id. at 662 (citing Milam, 370 S.W.3d at 53335).
KPI resembles the company in EQT Gathering in that it conveys natural gas to Delta
Natural Gas Company, Inc., which is listed on the PSC’s “Natural Gas Distribution Service
Areas” map, attached to the defendants’ motion to dismiss. See EQT Gathering, 970 F.
Supp. 2d at 663. [Record Nos. 92-2, p. 7; 91-4] Thus, KPI serves the relevant portion of the
Kentucky publica natural gas transportation company.

See id. at 663.

Further, the

defendants’ contention that KPI’s pipeline does not meet the public service requirement of
Ky. Rev. Stat. § 278.502 because it is “NOT a transmission line” is unavailing. See id. at
662. [Record No. 95, p. 2]
The defendants’ arguments regarding Bluegrass Pipeline are also unpersuasive.
[Record No. 95, p. 2] Again, KPI has demonstrated that it is regulated by the PSC, as
required by Bluegrass Pipeline. 2015 WL 2437864, at *4. [Record No. 92-2] In addition,
KPI’s T-632 pipeline actually serves Kentucky customers, so it is distinguishable from the
pipeline in Bluegrass Pipeline, which transported natural gas to the Gulf of Mexico. Id. at
*1. [Record No. 92-1, p. 24]
The defendants present two other documents to challenge KPI’s assertion of eminent
domain authority. They contend that, because the PSC’s “Annual Report Statistics” for 2013
-9 

and 2014 do not identify KPI, then KPI “does not provide natural gas to Kentucky
Consumers.” [Record No. 95, p. 3] However, the Annual Report Statistics only list “Gas
Distribution Companies” [see Record No. 91-5], and KPI is a “gathering facility.”  See In the
Matter of K-Petroleum, Inc., Case No. 2002-00302, *1 (PSC Oct. 29, 2002). Milam held that
a gathering line can satisfy the public service requirement in Ky. Rev. Stat. § 278.502, so
KPI need not be a “gas distribution company” for its pipeline to meet the public service
requirement.3  370 S.W.3d at 535.
III.
KPI has demonstrated its ability to exercise eminent domain authority under
Kentucky law because it is regulated by the Public Service Commission and conveys natural
gas to Kentucky consumers. As a result, the defendants’ motion to dismiss fails under Rules
12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. Accordingly, it is hereby
ORDERED that the defendants’ motion to dismiss for lack of subject-matter
jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure [Record No. 91] is
DENIED.
This 10th day of March, 2016.

3

The fact that KPI does not report the production of natural gas to the PSC, as required by
805 Ky. Admin. Regs. 1:180 (2007), merely indicates that KPI is not an “oil or gas operator”
under that regulation. The defendants do not explain how that regulation relates to whether KPI
is a common carrier under Ky. Rev. Stat. § 278.470 or whether KPI otherwise meets the
requirements of Ky. Rev. Stat. §§ 416.675(1) and 278.502. [Record No. 95, p. 3]
- 10 -