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Union Pacific Railroad Co. v. Santa Fe Pacific Pipelines, Inc.

California Court of Appeals, Second District, Eighth Division

November 5, 2014

UNION PACIFIC RAILROAD COMPANY, Plaintiff and Respondent,
v.
SANTA FE PACIFIC PIPELINES, INC., et al., Defendants and Appellants.

APPEAL from judgments of the Superior Court of Los Angeles County No. BC319170, Eli Chernow, Temporary Judge. (Pursuant to Cal. Const., art. VI, § 21.)

Mayer Brown, Donald Falk, Neil M. Soltman, Michael F. Kerr, Germain D. Labat, Matthew Marmolego; Cooley, Steven M. Strauss, M. Ray Hartman III and Summer J. Wynn for Defendants and Appellants.

McKenna Long & Aldridge, Thomas F. Winfield III and Michael H. Wallenstein for Plaintiff and Respondent.

KUSSMAN, J. [*]

INTRODUCTION

This is the latest of multiple appeals in a case in which courts have been called upon to determine the amount of rent a pipeline company must pay to a railroad for the use of land underneath its rights-of-way, most of which were initially granted to it by the federal government beginning in the mid-19th century in order to build and operate transcontinental railroads. The rent is to be determined by the terms of a settlement agreement entered into in 1994 arising out of previous litigation between the parties—former sister companies that separated, and have been involved in lawsuits ever since.

Appellants are Santa Fe Pacific Pipelines, Inc., previously known as Southern Pacific Pipelines, Inc.; SFPP, L.P., Kinder Morgan Operating L.P. “D”; and Kinder Morgan G.P., Inc. (collectively the Pipeline). Respondent is Union Pacific Railroad Company, successor to Southern Pacific Transportation Company (the Railroad). The two companies previously existed under the same corporate umbrella. In that context, they entered into master agreements in the mid-1950’s under which the Railroad granted easements to the Pipeline in the subsurface underlying the Railroad’s rights-of-way in order to convey its oil, gas and other petroleum products across the western United States. In 1983, the parties revised and revamped their master agreement, maintaining the essential element that the Pipeline continue to use the subsurface to move its commodities. But in the late 1980’s—30 years after the initial easements were granted—their parent company merged with another company. The Railroad was divested, and the companies were no longer sisters. Soon thereafter, disputes arose between the Railroad and the Pipeline companies. Litigation began in 1991 when the Railroad sued the Pipeline, complaining that the master agreement under which they were operating was not negotiated at arms-length, and that the Railroad was not receiving a fair deal. Three years later, this case resolved. In 1994, the parties executed a settlement agreement that set the parameters for how rent would be determined on the Pipeline’s easements.

Since then, there have been three court trials and five appellate decisions relating to the enforcement of this settlement agreement. The first case was brought in 1994. We are now called upon to review the most recent court trial, which generated over 42, 000 pages of testimony and concomitant volumes of exhibits and appendices and other documents. The judgment under review arose out of a declaratory relief action where the Railroad sought a determination of the rent due from the Pipeline for the continued use of its easements from 2004 to 2014.[1] The Railroad obtained a declaration that the rent due was in excess of $14 million per year. The trial court entered a judgment reflecting that the total back rent due was $81, 589, 584, plus interest in the amount of $19, 372, 195.50, up to the date of entry of the judgment. The Pipeline appealed.

On appeal, the Pipeline makes the following claims: (1) The trial court erred in finding that the prior judgment did not collaterally estop the relitigation of several issues and deciding them anew in the instant case; (2) the trial court made errors in applying the formula to calculate the rent due; (3) it was error to include rent for easements on land that had been sold by the Railroad before the 1994 settlement agreement was executed; (4) the trial court lacked authority to issue a money judgment, as opposed to a mere declaration of the amount of rent due, and therefore lacked the authority to award prejudgment interest. As to the trial court’s ruling declining to apply collateral estoppel to this action, we affirm. As to the remaining issues, we reverse and remand for the reasons discussed below.

A recurrent, yet heretofore unresolved, theme permeating this and prior cases between the parties is the nature of the Railroad’s interest in the property through which the pipelines run. This issue—whether the Railroad had sufficient interest in the land beneath its rights-of-way to grant the subsurface easements and collect rent for their use—was raised by the Pipeline in the 1994 case and raised again in the instant case. It was extensively litigated. In the 1994 case, the court assumed (but did not find) that the Railroad held the land in fee. In this case, the court concluded the Railroad had sufficient interest in the land to collect rent from the Pipeline, without determining the actual nature of that interest.

There is a large body of law—reflected by federal statutes, judicial opinions, and regulatory decisions—that bear on the nature of a railroad’s property rights, whether it can grant easements to third parties and collect rent from them, and the interests of adjacent landowners and the federal government. The trial court appears to have reached its conclusions and entered its judgment without fully analyzing this body of law, or applying it to these facts. The absence of a determination on this issue undermines the judgment.

We address the law relating to railroad rights-of-way in an effort to resolve the legal issues that apply to property interests in this land and, by extension, the Railroad’s right to grant and lease subsurface easements to the Pipeline. To this end, we begin with a brief summary of the historical context within which this dispute arises.

HISTORICAL CONTEXT

American Railroads in the 19th Century

As America spread west in the first half of the 19th century, its frontier expanded from the Mississippi River to the coast of California and the Oregon Territory. Access to the great expanses of the prairies and mountains, as well as to the states and territories on the Pacific Coast, was necessary. The country was young and did not have a lot of money. But it had lots of land. Beginning in approximately 1850, Congress embarked upon a policy of subsidizing railroad construction by paying for it with “lavish grants from the public domain.” (Great Northern Ry. Co. v. U.S. (1942) 315 U.S. 262, 273 (Great Northern).) With the onset of the Civil War, the need for a transcontinental railroad took on particular urgency, and the ability to reach the west coast over land was considered a military necessity. President Abraham Lincoln signed the Pacific Railroad Act on July 1, 1862 (ch. 120, §§ 1-20, 12 Stat. 489), and subsequent acts were signed by him and his successors. These initial “Congressional Acts” granted vast areas of land to several transcontinental railroads, encouraging them to build tracks across the nation. Some of the land was transferred to the railroads as their own property, to sell and finance their progress in constructing and running the railroad. Other parts were granted as rights-of-way over the surface upon which to build tracks and related structures.[2]

While the early grants were “lavish”—after all, vast areas of land owned by the federal government were given to private companies—they did have strings attached. For example, if a railroad ceased to use the land for railroad purposes, it would revert to the government (or to its grantees, if any). (Northern Pacific Ry. v. Townsend (1903) 190 U.S. 267, 271 (Townsend).) The government was also concerned about losing potential wealth below the surface upon which the rails would be built. In the initial act of 1862, there was an express exception for “all mineral lands” (other than timber, which was granted to the railroad company). (Pacific Railroad Act of 1862, ch. 120, § 3, 12 Stat. 489.) In late 1862, a report from the Secretary of the Interior out of the General Land Office extolled the great potential wealth expected to be found in the western mineral lands. (U.S. Dept. of Interior, Abstract from the 1862 Annual Report of the Commissioner of the General Land Office (Nov. 29, 1862).) It is clear from this report that the Secretary considered this subsurface wealth in the public lands to be the property of the United States. In 1864, the second major railroad act was enacted. (Act of July 2, 1864, ch. 216, § 1-22, 13 Stat. 356.) It amended the Pacific Railroad Act of 1862, providing land grants to the railroads, reiterating that the government retained rights to the “mineral lands, ” with the exception of coal and iron (which obviously, along with timber, were major components of railroad construction). In 1866, Congress passed a law providing that “[i]n all cases lands valuable for minerals shall be reserved from sale, except as otherwise expressly directed by law.” (30 U.S.C. § 21.)

In the same year that he signed the Pacific Railroad Act of 1862, President Lincoln signed the Homestead Act (Ch. 75, §§ 1-8, 12 Stat. 392), which granted large swaths of land to settlers, who owned and developed the land near, and with the help of, the railroads. The laws to encourage construction of the railroads and foster the infusion of settlers brought results, and the entire project was a success. (United States v. Union Pacific R. Co. (1957) 353 U.S. 112, 126-127 (Union Pacific) (dis. opn. of Frankfurter, J.).) On May 10, 1869, the Union Pacific and Central Pacific Railroads drove the last spike at Promontory Summit, Utah Territory, completing the first Transcontinental Railroad and connecting America’s east and west coasts.

By then, the Civil War had ended. Public sentiment soon turned, and the mood of uncritical enthusiasm toward railroad enterprises began to veer. (Union Pacific, supra, 353 U.S. at pp. 126-127.) The largesse of land granted to the railroads was seen as a massive government giveaway. By the 1870’s, legislators across the political spectrum had embraced a policy of reserving public lands for settlers rather than granting them to railroads. (Brandt Revocable Trust v. United States (Mar. 10, 2014, No. 12-1173) ___ U.S. ___ [134 S.Ct. 1257] (Brandt).) However, there was still a need to provide the railroads with the ability to complete the massive project, and Congress passed the General Right-of-Way Act of 1875.[3] (18 Stat. 482, 43 U.S.C. § 934 et seq.) Like the earlier acts in the 1860’s, this legislation provided the railroads with a right-of-way through the public lands for the construction of a railroad. (Ibid.) But now Congress made it clear that it was providing the railroads with “mere easements” over the land on which they could lay their tracks and run their trains. (Brandt, supra, at p. 1264, citing Great Northern, supra, 315 U.S. at p. 271.) They were given no fee interest in the property itself (ibid.); rather, title remained in the federal government. (Great Northern, supra, at p. 275, fn. 13.)

Eventually, the need for rail service diminished with the advent of the internal combustion engine as cars and trucks appeared on the landscape. Railroads sold, abandoned, or discontinued much of their tracks as their need for the rights-of-way granted by Congress diminished. In response, Congress enacted laws governing the disposition of abandoned or forfeited railroad rights-of-way, which provided that any transfer would “be subject to and contain reservations in favor of the United States of all oil, gas, and other materials in the land.” (43 U.S.C. § 912.) Pipelines appeared on the scene, carrying oil, gas, coal slurry and other fuels. Congress passed laws governing subsurface oil and gas pipelines through federal lands, providing for annual rental payments to the government. (See, e.g., 30 U.S.C. § 185 et. seq.) Consistent with its practice of retaining the value of the subsurface to the United States, Congress passed a law providing that the government could grant leases for oil and gas deposits “in or under lands embraced in railroad or other rights of way acquired under any law of the United States, whether the same be a base fee or mere easement....” (30 U.S.C. § 301 et. seq.)

By this time, a hodge-podge patchwork of easements and ownership interests in railroad rights-of-way had spread across the west. As one might imagine, disputes over the rights of railroads, landowners, and the government arose, resulting in numerous federal and state lawsuits and appellate decisions, as well as several landmark opinions from the United States Supreme Court. Many of the cases dealt with the rights to the subsurface beneath the railroads’ rights-of-way, and many dealt with ownership rights once the rights-of-way were no longer used for railroad purposes. Both issues arise in the instant case.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY

I. Railroad Grants Pipeline Easements Beginning in the 1950’s

The Pipeline owns approximately 1, 871 miles of pipeline running through California, Arizona, Nevada, New Mexico, Texas and Oregon within the Railroad’s right-of-way. Another 1, 400 miles or so of the pipeline veer off intermittently into public and private lands. In all, there are 1, 076 pipeline segments. Some are continuous, some are not. (Union Pacific Railroad Co. v. Santa Fe Pacific Pipelines, Inc. (Mar. 23, 2005, A103990) [nonpub. opn.] (Santa Fe II).)

In the mid-1950’s, the Railroad and the Pipeline were sister subsidiaries of Southern Pacific Corporation. The Railroad possessed a valuable transportation corridor along the rights-of-way granted to it initially by acts of Congress. The Pipeline wished to obtain a longitudinal easement through which to run its pipelines, which carried petroleum products. The two sister companies entered into master agreements in 1955 and 1956 wherein the Railroad rented portions of the subsurface under its rights-of-way to the Pipeline.

By that time, there had been considerable litigation, mostly in federal courts, regarding who owned the subsurface beneath a railroad’s right-of-way. As to the 1875 Act, it had been decided by the United States Supreme Court that railroads merely had an easement over the surface of the land, and that title to the subsurface remained in the federal government (or its grantee, if any). (Great Northern, supra, 315 U.S. at p. 275.) But as to the pre-1871 Acts, the issue was unresolved. Railroads took the position that they had been given the land itself, and therefore could do what they liked with the subsurface. The federal government disagreed. It sued the Union Pacific Railroad Company, seeking to enjoin it from extracting oil and gas from the subsurface under a pre-1871 right-of-way. In 1954, a federal district court found in favor of the Railroad, holding that it had full rights to the subsurface and refusing to enjoin its use for the Railroad’s benefit. (United States v. Union Pacific Railroad Company (D.Wyo. 1954) 126 F.Supp. 646.) In 1956, the 10th Circuit United States Court of Appeals affirmed the district court’s ruling that railroads owned the subsurface and that it could extract oil and gas from it. (United States v. Union Pacific Railroad Company (10th Cir. 1956) 230 F.2d 690.)

In that same year, an in-house attorney for the Railroad’s predecessor sent a letter to the Pipeline explaining that the Railroad appeared to have the right to grant pipeline easements in the subsurface under rights-of-way it obtained via the pre-1871 Acts. But since the 1875 Act provided only an easement, they would have to obtain consent from the adjoining landowner in order to use the subsurface for a pipeline.

However, in 1957 the United States Supreme Court issued its seminal opinion in Union Pacific, supra, 353 U.S. 112. The court held that, while under the pre-1871 Acts a railroad was entitled to full use of the surface of the land, it could only use the subsurface “‘for railroad purposes.’” (Id. at p. 114, fn. 1.) Since the extraction of minerals from the subsurface was not a railroad purpose, and was expressly reserved in the statute, the pre-1871 Acts did not provide a railroad with the right to do so. (Union Pacific, at pp. 114-115.) The lower court’s ruling was reversed, and the government’s request that the Railroad be enjoined from extracting minerals from the subsurface was granted. (Id. at p. 120.)

Despite this narrowing of a railroad’s rights to the subsurface underlying its rights-of-way, the sister companies went forward with their pipeline plan. Leases of pipeline easements proceeded in earnest in late 1957. Over the following years and decades, easements were granted and pipelines were built underneath the Railroad’s rights-of-way—those acquired under both the pre-1871 Acts and the 1875 Act—but not without concern on the Railroad’s part.

In one 1973 letter, an in-house attorney for the Railroad acknowledged that recent federal court decisions bearing on “the extent of the rights granted to Railroad under the March 3, 1871 Act now appear to be more restrictive as to use of the right-of-way for other than railroad purposes...” than previously believed. In a similar 1974 letter, the attorney wrote regarding a proposed pipeline easement in Contra Costa County, saying, “[n]o assurance can be given Railroad is entitled to grant the pipeline easement in view of the unfavorable trend of California decisions interpreting grants to railroad companies.” Another letter by the same in-house attorney written in 1976 discusses the fact that upon abandonment of rail operations the limited title properties may result in reversion of title, and that the easements are subject to loss upon abandonment for railroad purposes. It concludes that “consideration need [sic] be given as to the advisability of granting to [the Pipeline] an easement for pipelines in the property classified as limited title and easement for railroad purposes... unless it is feasible for Railroad to take steps necessary to establish that it is the fee owner of the right of way in which [the] pipeline is located.” Nevertheless, the Railroad continued to grant easements to the Pipeline.

In 1983, during discussions among the related entities regarding mergers, the Railroad and the Pipeline entered into a new master agreement addressing the easements.

II. Merger of Parent Companies: The Sister Companies Part Ways and Litigation Begins

The new 1983 master agreement between the two companies revised the arrangement regarding the Pipeline’s perpetual, nonexclusive easements, and it set forth the amount of rent to be paid for existing pipeline easements through 1993. Also in 1983, the parent company of the Railroad and the Pipeline announced a merger with Santa Fe Railroad. The combination went forward but the Railroad was held in a trust and remained separate from the other newly combined entities, pending a ruling from the Interstate Commerce Commission (ICC) on the merger. Ultimately, the ICC disapproved of the consolidation of the two railroads and required the Railroad to be sold to a third party.[4] Meanwhile, the pipeline company became Santa Fe Pacific Pipelines, Inc. The Railroad and Pipeline companies were no longer sister subsidiaries.

In 1991 the Railroad sued the Pipeline and related entities, alleging that the 1983 master agreement should be rescinded because it was created while the companies were still sister entities, and, because it was “not negotiated... at arm’s length, ” it set artificially low rent for the pipeline easements. The Railroad claimed that some of the Pipeline’s facilities and tanks had been dedicated for the Railroad’s continued use, “without regard to the technical title-holder of such properties, for its fuel needs.” The Railroad also claimed that it should be permitted continued use of those pipeline facilities as if it had an “actual ownership interest.”

As the case progressed, the parties entered into a “tolling agreement” to stay the litigation in order to attempt to reach a global settlement of all issues.

III. Settlement of the 1991 Lawsuit

The parties settled the 1991 lawsuit in April 1994. Pursuant to the settlement agreement, the 1983 master agreement was rescinded; the master agreements of the 1950’s were revitalized; the Pipeline’s easement rights were confirmed and the easement locations were modified, reducing the width of the easement at many segments. The parties compromised various existing claims. The Pipeline paid over $5.5 million in return for the Railroad’s dismissal of claims and causes of action, including those related to the Pipeline facilities allegedly dedicated for the Railroad’s own use. The new settlement agreement contained no provision for the Railroad’s use of the Pipeline’s facilities for its own fuel needs.

As to future rent, the settlement agreement provided as follows: ‘Beginning January 1, 1994, and every ten (10) years thereafter, [the Railroad] may seek an increase of rent to fair market value....” If the parties could not agree, they would stipulate to an order for judicial reference pursuant to Code of Civil Procedure section 638.

In July 1994, the parties entered into an amended and restated easement agreement (AREA), which reflected that the Railroad granted easements to the Pipeline for the conveyance of petroleum or natural gas, coal slurries, etc., “in, upon, along and across the property of [the] Railroad.” The AREA reiterated the procedure and mechanism for determining rent increases set forth in the prior settlement agreement. In September 1994, the parties also entered into a side letter agreement addressing some outstanding issues. The letter agreement provided, among other things, that “all Existing Easement Agreements shall be amended and restated pursuant to the terms of the [AREA]” and that all future easements would be recorded.[5] It also provided that during the pendency of any reference proceeding or appeal regarding the rent, the Pipeline would continue to pay rent at the previous rate, subject to consumer price index adjustments, until resolution of the dispute.

IV. The 1994 Case

On August 31, 1994, the Railroad filed an action for declaratory relief when efforts to agree on a new rental amount failed. The parties proceeded by way of a temporary judge pursuant to California Constitution, article VI, section 21, rather than by way of the referee called for in the AREA. At trial, the Pipeline argued that the Railroad did not have a fee interest in its rights-of-way, since they were largely derived from the 19th century Congressional Acts. The Railroad brought a motion in limine to preclude any evidence regarding its title. The motion was granted and the Pipeline was prevented from proving that its easements did not, in fact, run through the “property of the railroad.” Although it excluded evidence of the Railroad’s property interest, the trial court nevertheless “assume[d] that the [R]ailroad own[ed] a fee interest.” At the same time, it said that “the court makes no determination as to whether in fact or in law the [R]ailroad owns a fee interest or, as [the Pipeline] contends, it owns a lesser legal, and thus lesser valued, interest.”

Judgment was entered in May 1997 in the approximate amount of $5 million base annual rent as of January 1994.[6] The Railroad appealed and the judgment was reversed two years later in Sante Fe I, supra, 74 Cal.App.4th 1232 on the grounds that the trial court refused to admit expert evidence regarding the Railroad’s valuation methods and techniques. The case was tried a second time to the same temporary judge, who then entered judgment for roughly the same amount in July 2003. The Railroad appealed again. This time the judgment was affirmed in 2005 (with one minor exception) in Santa Fe II, supra, A103990. After the Railroad sought prejudgment interest, which the temporary judge granted, another appeal followed. The Court of Appeal did not reach the merits of the prejudgment interest issue, but reversed the order on grounds that the request had been untimely. (Santa Fe Pacific Pipelines, Inc. v. Superior Court (July 26, 2006, A113858) [nonpub. opn.] (Santa Fe III).) After that, the 1994 litigation finally ended. In the meantime, however, the 2004 litigation had begun.

V. The Instant 2004 Case

A. The Trial

The next stage of this litigation commenced in 2004. Efforts to agree on the amount of the annual rent increase were made in late 2003, but again failed. In July 2004, the Railroad filed a complaint for declaratory relief. The complaint sought another 10-year increase in rent to fair market value on easements “within [the Railroad’s] right-of-way property” pursuant to the AREA.

In March 2005, the parties stipulated to the appointment of the Honorable Eli Chernow, Judge (retired), to serve as a temporary judge under California Constitution, article VI, section 21. Trial commenced in February 2007. The Railroad again brought a motion in limine to exclude evidence regarding its title, on the grounds that such evidence was irrelevant to the sole issue in the case—i.e., the amount of rent due for the easements. This time, the motion was denied. Later in the trial, the Railroad brought a motion to strike evidence regarding the status of its title, which also was denied.

During trial, the Pipeline brought a cross-complaint against the Railroad regarding properties in which the Railroad had conveyed its interests to third parties but still continued to collect rent from the Pipeline. The Railroad brought its own cross-complaint regarding the Pipeline’s failure to pay rent on certain properties the Pipeline had abandoned. At the close of the Railroad’s case-in-chief, the Pipeline brought a motion for judgment pursuant to Code of Civil Procedure section 631.8 on the grounds that the Railroad had not introduced sufficient evidence of ownership of the land underlying its rights-of-way to prove its case. After hearing argument, the trial court suggested that the Railroad reopen in order to address ownership issues. A substantial amount of testimony was then heard and documentary evidence was received regarding the nature of the Railroad’s ownership interest of the land in question. Knowledgeable persons with expertise in railroad title and the Congressional Acts testified. Ultimately, the Pipeline’s motion for judgment was denied.

In April 2012, after more than 250 trial days, the trial court issued a comprehensive 105-page statement of decision. Judgment was entered on May 30, 2012. Concluding that the Railroad had sufficient property interests in all of the land beneath its rights-of-way to allow it to collect rent from the Pipeline, the court found that pursuant to the AREA the base annual rent commencing on January 1, 2004, was $14, 080, 487; “back rent” due as of the time of judgment was $81, 589, 584; and prejudgment interest payable by the Pipeline to the Railroad was $19, 372, 195.50. The court also ruled in the Railroad’s favor on both cross-complaints.

B. The Trial Court’s Rulings re “Property of the Railroad”

In various motions and pleadings, the Pipeline challenged the Railroad’s title to the land through which its easements ran—i.e., the “subject property.”[7] Witnesses testified about the pre-1871 and 1875 Congressional Acts. Title cards prepared by the Railroad were presented, delineating which acts granted each right-of-way, and also noting if the right-of-way had been acquired from different sources. The Pipeline demonstrated that in many cases the Railroad did not own the property in fee, and therefore claimed it had not met its burden to prove a key element of its case—i.e., that rent was due for easements within the property of the railroad. The Railroad did not prove otherwise; rather, the thrust of its counter-argument was that it did not have to prove title. It could collect the rent regardless of who owned the property, because the Pipeline had the easements and had agreed to pay rent to the Railroad for them. In other words, it did not have to prove the “property of the railroad” was the Railroad’s property.

After hearing evidence relating to the Congressional Acts and testimony about the title cards, the trial court noted that the records “most commonly showed that [the Railroad] originally acquired title through one or more land grants under certain Acts of Congress.” Other parcels were acquired “by grant[s] from states or other grantors.” The court also noted that “[i]t is undisputed that much of the property held by the [R]ailroad is held in less than full fee ownership” and that the Railroad “did not offer direct evidence of its title to the Subject Property.” But there is little indication that the trial court considered in detail the application of the Congressional Acts, or the case law promulgated under them, in determining the nature of the Railroad’s property interest.

Instead, the trial court believed it was “not dealing with a situation in which evidence has been presented that some third party is the owner of title.” It stated that there was “no evidence disputing the Railroad’s title to virtually all of the subject property.” And it concluded that “in the absence of any disputing evidence, the Railroad’s ownership has been adequately shown for purposes of this proceeding.” The court based its ruling in part on the fact that “no other person or entity has attempted to collect rent for the use of the property” or disturbed the Pipeline’s peaceful occupancy, although it implied the situation might be different if a valid claim was raised by a third party entitled to collect the rent.

As discussed below, there are numerous federal and state judicial opinions casting doubt on the rights of railroads to the subsurface underlying their rights-of-way based upon the Congressional Acts. Yet despite the Pipeline’s repeated challenges to the Railroad’s ownership under these acts, the trial court stated that “no challenge to [the Railroad’s] ownership [had] been made by [the Pipeline]” and that “there [was] no evidence disputing the Railroad’s title to virtually all of the subject property....” On that basis, the trial court held that “in the absence of evidence challenging the [R]ailroad’s title, ” the Railroad’s ownership of the property had been “adequately shown” and (with minor exceptions) it was entitled to rent on the easements.

C. The Appeal

The Pipeline timely appealed from the judgment and “all orders and rulings subsumed therein” as well as various postjudgment orders. At oral argument, we asked whether the Railroad had the right to grant the Pipeline’s easements in the first instance, given the terms of the Congressional Acts and the extensive relevant case law. When counsel for each side did not appear fully prepared to respond to this inquiry, the court requested supplemental briefing on the subject of the Railroad’s property interests.

In its supplemental briefs, the Pipeline claims the Railroad did not have sufficient title to the property to grant the subsurface easements in the first instance.[8] The Railroad claims it did have sufficient title to do so. Both sides discuss the nature of the conveyances provided by the Congressional Acts. Much of the result turns on the question of what is meant by a “railroad purpose.” In reviewing the judgment below, we address and resolve the question of how the Congressional Acts apply to the Pipeline’s subsurface easements beneath the Railroad’s rights-of-way.

As to the other issues raised on appeal, we affirm the trial court’s ruling that the judgment in the 1994 case did not collaterally estop the relitigation of issues raised in that case. However, for the reasons discussed below regarding the outstanding question of the Railroad’s property rights, the trial court’s rulings as to the calculation of the rent owed, the Railroad’s right to collect rent for easements in land that had been sold prior to 1994, and the right of the Railroad to collect prejudgment interest, are reversed and remanded.

STANDARD OF REVIEW

The multiple issues raised in this appeal call for various standards of review. As to questions of law, such as the construction of the Congressional Acts granting rights-of-way to the railroads, we employ a de novo standard. (People ex rel. Lockyer v. Shamrock Foods Co. (2000) 24 Cal.4th 415, 432; Topanga and Victory Partners v. Toghia (2002) 103 Cal.App.4th 775, 780-781.) We also employ a de novo standard of review regarding the interpretation of contracts and stipulations between the parties where there was no conflicting extrinsic evidence presented at trial. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865-866.) And we apply the same standard when determining if res judicata and/or collateral estoppel principles apply, in light of the previous trial and judgment in the 1994 case. (Estate of Kampen (2011) 201 Cal.App.4th 971, 985.)

As to rulings on the admissibility of evidence, we utilize an abuse of discretion standard. (Gordon v. Nissan Motor Co., Ltd. (2009) 170 Cal.App.4th 1103, 1111.) And in assessing the trial court’s findings of fact, we employ a substantial evidence standard. (Wilson v. County of Orange (2009) 169 Cal.App.4th 1185, 1188.)

DISCUSSION

I. The Amount of Rent Due to the Railroad for the Pipeline Easements Requires a Determination of the “Property of the Railroad”

The AREA requires the Pipeline to pay rent to the Railroad on easements running through the property of the Railroad. Since the trial court did not make a factual determination of what the property of the railroad is, we remand the case for the court to make that determination.

A. What Is the “Property of the Railroad”?

This action is based on the AREA, which addresses the easements granted to the Pipeline in, upon, along and across the “property of [the] Railroad.” (See, e.g., AREA, para. 1. (a.), p. 2.) The Railroad’s complaint alleges that the Pipeline owes rent on its easements within the “[R]ailroad’s right-of-way property.” It has long been recognized that the word “property” is a term with multiple meanings. (Hohfeld, Some Fundamental Legal Conceptions as Applied in Judicial Reasoning (1913) 23 Yale L.J. 16, 21.) “Sometimes [the word] is employed to indicate the physical object to which various legal rights, privileges, etc., relate; then again—with far greater discrimination and accuracy—the word is used to denote the legal interest (or aggregate of legal relations) appertaining to such physical object.” (Ibid.) In other words, the word “property” is sometimes used to refer to the physical parcel of land in question. Other times it refers to the “complex aggregate of rights (or claims), privileges, powers, and immunities” that one has in that parcel of land. (Hohfeld, Some Fundamental Legal Conceptions as Applied in Judicial Reasoning (1917) 26 Yale L.J. 710, 746.)

“In a strict legal sense, land is not ‘property, ’ but the subject of property. The term ‘property, ’ although in common parlance frequently applied to a tract of land or a chattel, in its legal signification ‘means only the rights of the owner in relation to it.’... ‘Property is the right of any person to possess, use, enjoy, and dispose of a thing.’” (Eaton v. B. C. & M. R.R. (1872) 51 N.H. 504, 511; see also Wynehamer v. People (1856) 13 N.Y. 378, 433.)

Thus, “‘“[p]roperty” is more than just the physical thing—the land, the bricks, the mortar—it is also the sum of all the rights and powers incident to ownership of the physical thing. It is the tangible and the intangible. Property is composed of constituent elements and of these elements the right to use the physical thing to the exclusion of others is the most essential and beneficial. Without this right all other elements would be of little value....’” (Dickman v. Commissioner (1984) 465 U.S. 330, 336.) “A common idiom describes property as a ‘bundle of sticks’—a collection of individual rights which, in certain combinations, constitute property.” (United States v. Craft (2002) 535 U.S. 274, 278.)

Here, the pipelines run through the physical land below the Railroad’s rights-of-way. But the “property of the railroad” refers to the rights, privileges, powers and immunities that the Railroad has in the land through which its rights-of-way run. The question here is whether, as of 2004, the Railroad had enough “sticks” to allow it to collect rent on the easements running under its rights-of-way.

The trial court concluded that the Railroad had sufficient property interests to have granted the Pipeline easements and to collect rent on them (even those that the Railroad had sold prior to 1994, when the AREA was executed). On appeal, the Railroad argues that the trial court’s ruling should stand, and that this court should not even address the nature of the grants made to it by the federal government. According to the Railroad, this court, like the trial court, should either assume that the Railroad had title to virtually all of the subject property or, alternatively, did not need to prove it in any event.

The Railroad fashions this case as a “private-rights property dispute” and contends it is a based upon a “private rental agreement [that does not] involve any matter of public interest or administration of justice.” We reject that characterization. This case is not simply a private matter between two corporations that disagree about the amount of money one owes another in a dispute over private property. Nor is it a lawsuit involving the right of a landowner who purchased real property in the marketplace and seeks to use it as he or she sees fit. Public land was allocated to the railroads by the federal government for a specific purpose—to construct and operate a transcontinental railroad, in order to help protect the nation during civil strife, to expand its frontier, grow its economy, and develop its future. The land provided by Congress was neither purchased by the railroads nor was it given to them with no strings attached. Strings were attached.[9] We must determine whether those strings limit the ability of the Railroad to use the land as a private revenue source.

A concept all too often overlooked in railroad litigation and its judicial opinions is that the grants of rights-of-way to the railroads by Congress were not merely conveyances of land from the government to the railroads so they could build and operate railroads across the continent. Certainly, they were that. But they were more. They were laws. It has long been recognized that “[a] legislative grant operates as a law as well as a transfer of the property, and has such force as the intent of the legislature requires.” (Schulenberg v. Harriman (1874) 88 U.S. (21 Wall.) 44, 62.) After all, “[w]hen Congress grants a property interest, the grant is both a grant of property and a law and Congress is free to specify terms or elements different from those that otherwise would apply either by virtue of the common law or in other statutes. This fact seems to have been lost in some of the discussions of congressional railroad grants.” (Baldwin & Flynn, Federal Railroad Rights of Way, Congressional Research Service (May 3, 2006) p. 4, italics added.) “‘[W]hile the vocabulary of the common law of real property is often imported into the discussion of railroad rights-of-way, where those rights-of-way have been created by federal law, they are entirely creatures of federal statute, and their scope and duration are determined, not by common law principles, but by the relevant statutory provisions.’” (Beres v. United States (Fed.Cl. 2005) 64 Fed.Cl. 403, 411.)

This is not to say, of course, that common law principles have no role to play. Indeed, in the end they may ultimately be determinative. (See, e.g., Brandt, supra, 134 S.Ct. at p. 1266.) But it does mean that traditional common law principles must be applied, and sometimes modified, in the context of congressional enactments bearing on the property in question. We are required to take judicial notice of the statutory and decisional law of California and of the United States. (Evid. Code, §§ 451, 459.) Numerous statutes and abundant case law address the question of who owns the land underlying railroads’ rights-of-way. Notwithstanding the Railroad’s argument that we should avoid the issue, this body of law must be considered and applied here in order to determine what the “property of the railroad” is.[10]

The initial enabling statutes passed by Congress have given rise to numerous ownership questions over the years. As stated by the United States Supreme Court in Leo Sheep Co. v. United States (1979) 440 U.S. 668, quoting a much earlier case, “‘The solution of [ownership] questions [involving the railroad grants] depends, of course, upon the construction given to the acts making the grants; and they are to receive such construction as will carry out the intent of Congress, however difficult it might be to give full effect to the language used if the grants were by instruments of private conveyance.’” (Id. at p. 682, quoting Winona & St. Peter RR. Co. v. Barney (1885) 113 U.S. 618, 625 (Winona).)

In the instant case, the trial court does not explain its analysis of the Congressional Acts, nor how that analysis led to its conclusion that the Railroad had adequate ownership interests to charge rent for the Pipeline’s easements. As the trial court did in the 1994 case, the trial court here essentially decided not to decide what the “property of the railroad” was. Instead, it appears to have taken a tack similar to that employed by expert witnesses at trial, who expressed their opinions based upon the assumption that the Railroad had a fee interest in the land, and thus sufficient ownership to grant and collect rent on the subsurface easements. But in the face of 150 years of federal and state jurisprudence that define and delineate the nature of railroad rights-of-way vis-à-vis the rights of the federal government and adjacent landowners, that is insufficient. Without an analysis of the Congressional Acts and their application to the facts presented, one cannot resolve the ownership questions at the heart of this case.[11]

B. Did the Congressional Acts Granting Rights-of-Way to the Transcontinental Railroads Give Them the Right to Rent the Subsurface to Private Third Parties for Use as a Pipeline?

The Congressional Acts were passed in order to effectuate construction of a transcontinental railroad (Beres v. United States, supra, 64 Fed.Cl. at p. 410), but they used two different mechanisms to accomplish their goal: The initial “land grant” statutes before 1871, and the subsequent “easement” statutes from 1875 and beyond. Since the nature, scope, and extent of these enactments differ significantly, we address them separately.

1. The 1875 Act Did Not Provide the Railroad with Sufficient Property Interests to Justify Its Collecting Rent on the Pipeline’s Subsurface Easements

With the 1875 Act, the railroads obtained a “mere easement[]” over the land, which otherwise remained the property of the owner of the servient estate. This issue was addressed and confirmed in the recent case of Brandt, supra, 134 S.Ct. 1257. There, the United States Supreme Court pointed out that the act itself used language that was “‘wholly inconsistent with the grant of a fee interest.’” (Id. at p. 1264.) Congress provided that “all such lands over which such right of way shall pass shall be disposed of subject to such right of way.” (43 U.S.C. § 937.) As the United States Supreme Court stated, “‘[a]pter words to indicate the intent to convey an easement would be difficult to find.’” (Great Northern, supra, 315 U.S. at p. 271.) In light of the conclusion that the railroad had a mere easement, the court then applied traditional common law principles to find that, when the beneficiary of an easement ceases to use it for its intended purpose, it disappears and the owner of the servient estate (i.e., the federal government or its grantee) resumes full and unencumbered interest in the land. (Brandt, supra, at p. 1265.)

Much of the analysis in Brandt was based upon an earlier case, which dealt directly with the use of the subsurface underlying a railroad right of way. In Great Northern, a railroad sought to drill for and remove gas, oil and other minerals from beneath its right-of-way, which it had obtained through the 1875 Act. The United States Supreme Court pointed out that Congress had merely granted an encumbrance upon the land, but no actual land to the railroad company.[12] (Great Northern, supra, 315 U.S. at p. 272.) The court made it clear that with the 1875 Acts title to the land remained in the federal government. (Id. at p. 275.) Since the act granted only an easement, but no title to the subsurface lying in the servient estate, the railroad “had no right to the underlying oil and minerals.” (Id. at p. 279.) Put another way, the federal government gave the railroad the right to use the surface of the land to construct and operate its railroad, but it did not give it the right to extract value from the subsurface, which was still owned by the federal government (or, later, its grantees).

The Railroad here argues to the contrary, claiming that the 1875 Act granted it far more than a simple easement. It argues in its supplemental briefs that the 1875 Acts authorized the Railroad “to conduct... all activities on the surface or subsurface of the property” that derive from or further a railroad purpose. However, the Railroad has cited no case holding that the 1875 Act allowed “all activities [in the] subsurface, ” whether derived from or furthering a railroad purpose or not.

On the other hand, to consider the right-of-way provided by the 1875 Act as an old-fashioned common law easement is not accurate. While Brandt made clear that the right-of-way is a mere easement for purposes of what happens when it is no longer used by the railroad, and that it is a surface easement passing over the land of another (Brandt, supra, 134 S.Ct. at p. 1262), cases have recognized that even under the 1875 Act railroads obtained more than a traditional easement at common law.[13] From the beginning, courts have recognized the unique aspect of a railroad right-of-way. As noted early on by the United States Supreme Court (when discussing a right-of-way under an 1866 land grant), “[a] railroad right of way is a very substantial thing. It is more than a mere right of passage. It is more than an easement.” (Western Union Tel. Co. v. Penn. R. R. (1904) 195 U.S. 540, 570 (Western Union).) It is an “interest in the land, special and exclusive in its nature.” (Ibid.) In distinguishing a railroad right-of-way from an easement at common law—which was considered a nonpossessory and incorporeal interest in property—the court referred to New Mexico v. United States Trust Co. (1898) 172 U.S. 171, which stated that if a railroad right-of-way was an easement it was “one having the attributes of the fee, perpetuity and exclusive use and possession; also the remedies of the fee, and, like it, corporeal, not incorporeal, property.” (Id. at p. 183.)

State courts also contributed to the lexicon of railroad rights-of-way. The Iowa Supreme Court opined that “[t]he easement is not that spoken of in the old law books, but is peculiar to the use of a railroad, which is usually a permanent improvement, a perpetual highway of travel and commerce....” (Smith v. Hall (1897) 72 N.W. 427, 428.) Thus, a railroad right-of-way, whether called an easement or not, is different than “a medieval right of way that authorized merely taking horses or wagons across a field” owned by someone else. (Home on the Range v. AT&T Corp. (2005) 386 F.Supp.2d 999, 1014 (Home on the Range).)

Early on—before the days when subsurface pipelines were even feasible—courts also recognized there was a difference between the surface and subsurface. In Western Union, the United States Supreme Court extolled the substantiality of the railroad rights-of-way, but nevertheless opined that they were simply a “‘fee in the surface and so much beneath as may be necessary for support.’” (Western Union, supra, 195 U.S. at p. 570, citing Pennsylvania Schuylkill Valley R.R. Co. v. Reading Paper Mills (Pa. 1892) 24 A. 205.) Thus, the land underneath the surface is not necessary for the railroad, except as a physical foundation. “‘“[O]rdinarily the fee is of little or no value unless the land is underlaid by a quarry or mine.”’” (San Gabriel v. Pacific Elec. Ry. Co. (1933) ...


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