California Appellate Decision Could Impact Railroad–Underground Pipeline Relationships Nationwide

Posted on March 3, 2015 by Tom Sansonetti

On January 21, 2015 the California Supreme Court declined to hear an appeal from a lower appellate court, thus leaving in place a decision with the potential to impact the longstanding relationship between the nation’s railroads and pipeline companies concerning payment for use of congressionally granted right-of-ways that date from the 19th Century.

The momentous decision in Union Pacific Railroad vs. Santa Fe Pacific Pipeline, Inc. was announced by a unanimous three judge panel from the Court of Appeal of the State of California’s Second Appellate District on November 5, 2014.  The ruling overturned a Los Angeles County trial court judge’s award of $10 million for back rent, plus interest due to the Union Pacific Railroad from the Santa Fe Pacific Pipeline Company.

The pipeline company’s successful appeal centered on narrowing the scope of what pre-1871 grants from Congress to railroad companies included.  The appellate court agreed with the pipeline company that the proverbial “bundle of sticks” of property rights granted by Congress only included uses related to “railroad purposes.”  Oil and gas pipelines buried alongside the tracks were deemed not to be a railroad purpose, as petroleum pipelines were not even conceived of at the time the grants were issued, and had no link or relationship with the daily running of a railroad.

As a result of the appellate court’s holding, the true recipient of the pipeline rental payments was declared to be the United States government as represented by the Department of the Interior’s Bureau of Land Management.  The right-of-way at issue was 2014 miles in length, touched five states and was being renewed for a period of ten years.  Since the pipeline company had been making its rental payments to the railroad for several decades, the possibility looms of the United States, who was not a party to the lawsuit, seeking retroactive application of the ruling to the millions of dollars previously paid to the United Pacific Railroad.

It is anticipated that the railroad will file a petition to grant certiorari with the United States Supreme Court by its April 21, 2015 deadline.  If the Union Pacific Railroad is unsuccessful in either getting certiorari granted or in the subsequent appeal itself, then one could envision other pipeline companies, fiber optic companies and other non-railroad oriented users of the many railroad right-of-ways across the entire country seeking to suspend and not renew rent payments to railroads with pre-1871 grants.  Consequently, the United States government could end up with an unanticipated sizeable new income stream to help fill the nation’s coffers.



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