State Lands Commission v. Plains Pipeline, L.P. ( 2020 )

Filed 11/19/20
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SIX
STATE LANDS COMMISSION 2d Civil No. B295632
et al., (Super. Ct. No. 18CV02504)
(Santa Barbara County)
Plaintiffs and Appellants,
v.
PLAINS PIPELINE, L.P., et al.,
Defendants and Respondents.
Because of an oil production company’s negligence, its
pipeline carrying oil burst. The company was unable to transport
oil from land it leased from the state, depriving the state of
royalty income and damaging its property.
The pipeline company has been designated a public utility.
Under the circumstances here, we conclude the pipeline company
is not exempt from liability for the interruption in service.
Appellants California State Lands Commission (the
Commission) and Aspen American Insurance Company (Aspen)
filed a lawsuit against Plains Pipeline, L.P., and its affiliates1
(collectively “Plains”), claiming that when Plains’s negligent
maintenance of a pipeline resulted in disrupting the flow of oil, it
also disrupted the payment of royalty income to the Commission,
and caused damage to improvements on the Commission’s land.
The Commission and Aspen appeal from a judgment in favor of
Plains resulting from the dismissal of their first amended
complaint after a demurrer was sustained without leave to
amend. We reverse.
FACTUAL AND PROCEDURAL HISTORY
The Commission administers public lands owned by the
state, including submerged lands. (Pub. Resources Code, § 6216.)
The Commission leased offshore lands to Venoco, Inc., to operate
Platform Holly. Oil and gas produced on the platform were
pumped to an onshore facility and pipeline operated by Venoco.
Several miles later, the oil and gas reached a pump station
where, together with oil and gas from three ExxonMobil
platforms, they were pumped into the pipeline at issue here, Line
901. Line 901 was owned and operated by Plains. It ran up the
coast where it connected to other pipelines.
Plains operated Line 901 pursuant to a Federal Energy
Regulatory Commission (FERC) tariff that applied to “[a]ny
Shipper desiring to tender crude petroleum for transportation.”
The tariff set rates and permitted Plains to refuse oil that did not
meet specified standards. If all the oil submitted for distribution
exceeded Plains’s capacity, the total capacity was required to be
prorated among the shippers.
1The affiliates are Plains All American Pipeline, L.P.,
Plains GP Holdings, L.P., Plains AAP, L.P., Plains All American
GP LLC, and PAA GP LLC.
2
Plains failed to reasonably monitor, maintain, and repair
Line 901. Pipeline walls were corroded to as little as 1/16-inch
thick. On May 19, 2015, Line 901 ruptured at Refugio State
Beach, spilling 140,000 gallons of crude oil onto the beach and
into the ocean. Line 901 was shut down and remains closed.
Because the shutdown eliminated the only feasible method
to transport oil and gas from Venoco’s onshore facility to
refineries, Venoco stopped production, thus ending its obligation
to pay royalties to the Commission. Venoco quitclaimed its lease
back to the state. The shutdown of Line 901 caused property
damage to the land and its facilities that the Commission was
obligated to remediate and repair, including capping wells to
prevent future leaks.
Plains and Venoco had a connection agreement for Line 901,
but neither the Commission nor Aspen were parties to the
agreement. Aspen paid the Commission $22 million to meet a
portion of Venoco’s bonded obligations to maintain the lands
safely and to decommission the wells and other structures. Aspen
was subrogated to the rights of the Commission against Plains.
The first amended complaint against Plains alleges
negligence causing economic and property damage, willful
misconduct, and negligent interference with prospective economic
advantage.2 The trial court took judicial notice that a jury found
Plains guilty of knowingly discharging oil, or reasonably should
have known that its actions would cause the discharge of oil, into
the waters of the state, a felony (Gov. Code, § 8670.64, subd.
(a)(3)) among other crimes.
2An additional cause of action for violation of the Lempert-
Keene-Seastrand Oil Spill Prevention and Response Act (Gov.
Code, § 8670.56.5) was dismissed on motion of appellants.
3
DISCUSSION
I
Standard of Review
We review de novo the order sustaining the demurrer.
(McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal. 4th 412, 415.)
“ ‘ “We treat the demurrer as admitting all material facts properly
pleaded, but not contentions, deductions or conclusions of fact or
law.” ’ ” (Zelig v. County of Los Angeles (2002) 27 Cal. 4th 1112,
1126.) “ ‘[W]e determine whether the complaint states facts
sufficient to constitute a cause of action.’ ” (Ibid.)
II
Public Utility Exemption
The Commission contends the trial court erred in
determining that Plains is exempt from liability as a public
utility.
In general, “[e]veryone is responsible, not only for the result
of his or her willful acts, but also for an injury occasioned to
another by his or her want of ordinary care or skill in the
management of his or her property or person.” (Civ. Code, § 1714,
subd. (a).)
Plains does not contest that the complaint adequately
alleges negligence. It argues, however, that as a public utility it is
exempt from liability. The Commission claims that Plains does
not qualify as a public utility under California law. We need not
decide whether Plains qualifies as a public utility. Assuming it
does, it is not exempt from liability.
The seminal case regarding public utility immunity is
Niehaus Bros. Co. v. Contra Costa Water Co. (1911) 159 Cal. 305.
In Niehaus, plaintiff’s mill was destroyed when the water utility’s
company’s service failed and plaintiff was unable to put out a fire.
4
In holding the water utility not liable, our Supreme Court pointed
out the water utility is discharging a public duty that would
otherwise devolve upon the city itself. (Id. at pp. 318-319.) The
compensation the utility receives is fixed by the city. The court
stated that given the “meager remuneration” provided by the
municipality’s rates, the water company could not be deemed to
have “undertake[n] to make good the loss which would result from
the destruction of a modern city by fire.” (Id. at p. 318; see also
Ukiah v. Ukiah Water and Imp. Co. (1904) 142 Cal. 173, 178
[water company not liable for failure to provide sufficient water to
extinguish fire].)
Cases following Neihaus have held, in the absence of a
contract between the utility and the consumer expressly providing
for the furnishing of a service for a specific purpose, a public
utility owes no duty to a person injured as a result of an
interruption of service or a failure to provide service. (White v.
Southern Cal. Edison Co. (1994) 25 Cal. App. 4th 442, 448.) In
White, plaintiff was injured in a motor vehicle accident that
occurred in an intersection near inoperative street lights owned
and maintained by an electric utility.
In Lowenschuss v. Southern Cal. Gas Co. (1992) 11
Cal. App. 4th 496, we determined that a gas utility was not liable
for its refusal to purge gas from pipes in the path of a rapidly
expanding fire.
Plains argues that the reason for the exemption from
liability for public utilities is that their rates are controlled by
governmental entities, and the rates do not take into account
liability for damages for failure of service. Plains points out that
its rates are set by FERC.
5
But the analysis is not that simple. Niehaus points out that
the water utility provides a public service that would otherwise
devolve on the municipality. In each of the cases in which the
exemption is applied, the utility directly serves members of the
general public in ways similar to the public utility in Niehaus.
The rates for utilities that provide essential services to the public,
such as water (Neihaus), electricity (White), and gas
(Lowenschuss), must be kept low to allow even the most
economically disadvantaged members of the public to obtain
essential services. One way to keep rates low is to limit liability.
In contrast, Plains does not deliver essential municipal
services to members of the general public. Its task is to transport
oil to a private entity for commercial purposes. Although it is
called a public utility, it is a private business, entitled to no more
immunity from liability than any ordinary private business. Its
rates are set by FERC and do not include compensation for
liability. That does not require an exemption. Plains may not be
compensated for damages caused by its negligence.
Plains reliance on Venoco, LLC v. Plains Pipeline, L.P. (9th
Cir. 2020) 814 Fed. Appx. 318 is misplaced. There, in a
memorandum opinion, the court concluded that under California
law all public utilities are exempt from liability. The court
reached that conclusion without analyzing the facts or reasoning
of the cases that provide for immunity. Our analysis of the facts
and reasoning of those cases lead to a different conclusion. We
decline to follow Venoco.
The dissent cites our case Unocal California Pipeline Co. v.
Conway (1994) 23 Cal. App. 4th 331, also cited by Venoco. The
dissent is puzzled by what it considers an anomaly that here we
did not reaffirm our holding in Unocal. It is self-evident that
6
Unocal is far removed from the instant case. Yes, Unocal was a
public utility that served only one customer. We agree that
serving only one or two customers does not disqualify Plains as a
public utility. But it does disqualify Plains from claiming
immunity from liability. To have immunity from liability, Plains
must provide an essential service to the general public.
Unocal involved an eminent domain action in which the
Coastal Commission ordered the movement of Unocal’s pipeline
under the ground of a private landowner. The landowner sued
for loss of goodwill. Unocal does not involve a public utility’s
claim of immunity. The dissent’s grant of blanket immunity to
all public utilities fails to take into account the policy
considerations our Supreme Court considered in granting
immunity to public utilities that provide essential services. In
the absence of such policy considerations, the grant of immunity
does not serve the public good.
No statute grants immunity to public utilities. Whether
immunity applies is a question of judicial policy.
II
Damages
Plains contends the Commission’s damages are barred by
the economic-loss rule.
Plaintiff cannot recover economic damages resulting from
negligence without a physical injury to a person or property. (City
of Santa Clara v. Atlantic Richfield Co. (2006) 137 Cal. App. 4th
292, 318.) Plains argues that at the time the pipeline failed, the
Commission owned only the land; Venoco owned the property that
was damaged. Thus, Plains claims the Commission has suffered
only economic loss.
7
(a) Physical Damage
The Commission’s complaint alleges:
“Since Venoco’s second entry into Chapter 11 protection
and quitclaim of the Leased Lands, the Commission has been and
continues to pay roughly $1,000,000 per month to Venoco or the
Commission’s other contractors to remediate and repair property
damage to the oil and gas production facilities and to maintain
the facilities in a safe condition to avoid further property damage.
The Commission will be required to expend additional and
substantial sums of money to remediate and repair the above-
described property damage and maintain, decommission, and
remove said oil and gas production facilities on the Leased Lands
to avoid further property damage.”
The Commission alleges that it has succeeded to Venoco’s
property, the damage continues, and it is required to spend
substantial amounts for repairs and maintenance to keep the
facility in a safe condition. That is a sufficient allegation of
continuing damage to the property the Commission now owns.
Plains cites no authority that relieves it from liability for
continuing damage to property held by a successor in interest.
The complaint alleges property damage, not purely economic loss.
Plains’s reliance on Texas Eastern Transmission Corp. v.
McMoran Offshore Exploration Co. (5th Cir. 1989) 877 F.2d 1214
is misplaced. In Texas Eastern, an undersea pipeline ruptured
during relocation of a drilling rig platform. The court held that a
plaintiff had no cause of action for damages resulting from loss of
production absent a proprietary interest in the pipeline. (Id. at
pp. 1223-1224.)
First, unlike this case, plaintiff here did not allege physical
damage to its property. Second, Texas Eastern is not based on
8
California law. Third, to the extent Texas Eastern can be read to
conflict with this case, we decline to follow it.
(b) Special Relationship
The economic loss rule does not apply where there is a
special relationship between the parties.
In J’Aire Corp. v. Gregory (1979) 24 Cal. 3d 799, a
restaurant leased space at a county airport. The lease required
the county to provide heat and air conditioning. The county
entered into a contract with defendant to provide the heating and
air conditioning systems to the restaurant. The restaurant sued
defendant, alleging that an unreasonable delay in performing the
contract caused it to lose business. The trial court sustained the
defendant’s demurrer without leave to amend. Our Supreme
Court reversed. The court held that where a special relationship
exists between the parties, recovery for purely economic loss is not
foreclosed. (Id. at p. 804.) The court gave six factors to consider:
“(1) the extent to which the transaction was intended to affect the
plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the
degree of certainty that the plaintiff suffered injury, (4) the
closeness of the connection between the defendant's conduct and
the injury suffered, (5) the moral blame attached to the
defendant's conduct and (6) the policy of preventing future harm.”
(Ibid.)
(1) Intended to Affect Plaintiff
Plains relies on Southern California Gas Leak Cases (2019)
7 Cal. 5th 391, 400, where our Supreme Court cited J’Aire with
approval and stated, “What we mean by special relationship is
that the plaintiff was an intended beneficiary of a particular
transaction but was harmed by the defendant's negligence in
carrying it out.” There the defendant owned a gas storage facility
9
that suffered a massive leak causing an evacuation of residents
who lived within a five-mile radius. Businesses within the
evacuation area brought a class action alleging purely economic
losses. The businesses conceded the only relevant ties to the
defendant were having the misfortune of operating near the
defendant’s gas storage facility. (Id. at p. 408.) Our Supreme
Court determined that there was no special relationship between
the businesses and the defendant.
Here the relevant tie between the Commission and Plains
is more than that the Commission happened to own a business in
the vicinity of an oil spill. The purpose of Plains’s pipeline was to
transport oil taken from the Commission’s land so that the
Commission, among others, could make a profit. The
Commission is intended to be a direct beneficiary of the pipeline
transaction.
(2) Foreseeability of Harm
It was entirely foreseeable that if the pipeline failed, the
Commission would lose royalties from its land and would be
required to take over and maintain Venoco’s facilities in order to
prevent further harm.
(3) Degree of Certainty Plaintiff Suffered Injury
The Commission alleged that it lost royalty payments and
was required to spend money to repair and maintain Venoco’s
facilities. There is a high degree of certainty that the
Commission suffered injury.
(4) Closeness of Connection Defendant’s Conduct and Injury
There is an immediate and direct connection between
Plains’s conduct and the Commission’s injury.
10
(5) Moral Blame
Plains’s conduct was not only grossly negligent, it was
criminal.
(6) Policy of Preventing Future Harm
The immense environmental damage caused by an oil spill
of the quantity involved here is well known. The damage could
have easily been avoided if Plains had bothered to conduct an
adequate inspection of its pipeline. Damages awarded to the
Commission will encourage Plains and other pipeline operators to
avoid such future harm.
The complaint alleges sufficient facts to show a special
relationship between the parties that allows the Commission to
recover purely economic damages.
IV
Inverse Condemnation
For the first time on appeal, the Commission contends it
should be allowed to amend its complaint to allege that if Plains
is a public utility, it is liable for property damage in inverse
condemnation.
We need not decide the matter. The allegations of the
Commission’s complaint without amendment are sufficient to
require an unqualified reversal. The effect of an unqualified
reversal is to leave the case “at large” as if no judgment had ever
been rendered. (9 Witkin, Cal. Procedure (5th ed. 2008) Appeal,
§ 869, p. 928.) Thus, the proper procedure is to make any motion
to amend in the trial court in the first instance. We express no
opinion on how the trial court should rule.
11
The judgment is reversed. Costs are awarded to
appellants.
CERTIFIED FOR PUBLICATION.
GILBERT, P. J.
I concur: YEGAN, J.
12
TANGEMAN, J., Dissenting:
I respectfully dissent. The majority couches its
holding that Plains Pipeline, L.P. (“Plains”) is not entitled to
immunity from liability for an interruption in service because
“[a]lthough it is called a public utility, it is a private business,
entitled to no more immunity from liability than any ordinary
private business.” (Maj. opn., ante, p. 6.)
This holding is inconsistent with both statutory and
case authorities in existence for more than a century. (Niehaus
Bros. Co. v. Contra Costa Water Co. (1911) 159 Cal. 305; Ukiah v.
Ukiah Water & Imp. Co. (1904) 142 Cal. 173.) In reaching this
result, the majority grafts onto existing law the additional
requirements that in order to benefit from the exemption from
liability, the public utility must do more than “qualify as a public
utility” (maj. opn. ante, at p. 4). These additional requirements
lack any grounding in existing law and will give rise to
uncertainty in the law and increased litigation.
The majority decline to decide whether a pipeline
company that serves only a few commercial users is a public
utility. Venoco, LLC v. Plains Pipeline, L.P. (9th Cir. 2020) 814
Fed. Appx. 318 (Venoco), which the majority “decline[s] to follow”
(maj. opn. ante, at p. 6), answered that question in the
affirmative. In support of that answer, Venoco cited Unocal
California Pipeline Co. v. Conway (1994) 23 Cal. App. 4th 331
(Unocal), for the proposition that a public utility “‘may serve only
one or a few customers.’” Unocal was decided by a panel of this
same court, including both members of the majority here. We
held in Unocal that a pipeline whose only customer was its own
parent corporation was a public utility. The same result should
follow here. Nor does the majority distinguish Public Utilities
Code section 216, subdivision (a)(1), which states that a “‘public
utility’” includes every common carrier [and] pipeline corporation
. . . where the service is performed for, or the commodity is
delivered to, the public or any portion thereof.”
This opinion gives rise to more questions than it
answers. The majority’s new requirement that the public utility
must “deliver essential municipal services to members of the
general public” (maj. opn. ante, p. 6) has never existed before
today. Which services are “essential” and which are merely
convenient? Which services come within the umbrella of
“municipal” services? And what segment of the population
constitutes the “general public”? Does this opinion purport to
strike the words “or any portion thereof” from Public Utilities
Code section 216, subdivision (a)(1)?
With this decision, the majority casts doubt on more
than a century of cases holding public utilities exempt from
liability for interruptions in service. Moreover, this opinion
creates the anomalous result that the state and its insurer can
sue Plains for indirect damages here, even though their losses are
derivative of the direct loss to Venoco. Meanwhile, the direct
victim, Venoco, is barred from recovery. (Venoco, supra, 814
Fed. Appx. 318.)
Because I discern no legal basis for the anomalous
results reached here, I dissent. I would affirm the trial court’s
thoughtful and reasoned decision.
CERTIFIED FOR PUBLICATION.
TANGEMAN, J.
2
Colleen K. Sterne, Judge
Superior Court County of Santa Barbara
______________________________
Xavier Becerra, Attorney General, Diane S. Shaw,
Assistant Attorney General, Brian D. Wesley and Matthew C.
Heyn, Deputy Attorneys General, for Plaintiff and Appellant
California State Lands Commission.
Robins Kaplan, David C. Veis, Jason R. Fair and Glenn A.
Danas for Plaintiff and Appellant Aspen American Insurance
Company.
Baker Marquart, Jaime W. Marquart, Brian E. Klein and
Shane Pennington for Venoco as Amici Curiae on behalf of
Plaintiffs and Appellants.
Fell, Marking, Abkin, Montgomery, Granet & Raney, Craig
S. Granet; Munger, Tolles & Olson, Henry Weissmann, Fred A.
Rowley, Jr., Daniel B. Levin and Aaron D. Pennekamp for
Defendants and Respondents.