Opinion ID: 727217
Heading Depth: 2
Heading Rank: 1

Heading: Comparable Sales as Basis for Valuation

Text: 14 We agree with El Paso that evidence of contemporaneous sales of comparable properties is generally the preferred method of valuation. See United States v. 320.0 Acres of Land, 605 F.2d 762, 798 (5th Cir.1979) (Courts have consistently recognized that, in general, comparable sales constitute the best evidence of market value.). The validity of this method, however, depends on both the timing of the sales and the comparability of the properties involved. Where the properties are not shown to be sufficiently similar or the sales sufficiently contemporaneous, the trier of fact ... must resort to other means of determining fair market value. 103.38 Acres of Land, 660 F.2d at 211. 15 In finding that El Paso had failed to establish the comparability of the properties that provided the basis for its comparable sales valuation, the Commission stated that it was applying the standard set forth in 103.38 Acres of Land and Fairfield Gardens, Inc. v. United States, 306 F.2d 167, 172 (9th Cir.1962); namely, that although the properties need not be identical, they must be similar in many respects. See Order Denying Rehearing, 69 FERC at 61,591 & n. 10. This formulation strikes us as essentially meaningless: gold and fool's gold are similar in many respects, but the value of one hardly serves as proxy for the value of the other. The similarities, of course, must be sufficiently relevant to enable the trier of fact to determine, with reasonable confidence, the price that a buyer would be willing to pay a willing seller for the property being valued, both being informed of the relevant facts and neither being under any compulsion to buy or sell. See Reservation Eleven Assocs. v. District of Columbia, 420 F.2d 153, 155 (D.C.Cir.1969). This is the standard that FERC in fact applied when it rejected El Paso's comparable sales evidence. 16 The Commission found that El Paso's expert, Calhoun, had failed to establish that the properties were comparable because, other than pointing out that the properties were located in South Texas, were 'primarily' of gas reserves, were near in time to the La Perla transfer, and were sold in excess of the 'engineering estimate' of the properties, he [had] analyzed nothing more specific. Order Denying Rehearing, 69 FERC at 61,592. It expressed particular concern over El Paso's failure to compare significant factors, such as differences in the amount of additional drilling costs that must be incurred on each respective property, id. at 61,591, or [321 U.S.App.D.C. 17] the cost to produce and deliver reserves. Id. at 61,592. And it noted that in the case of Tana and Royal, the transactions involved the sale of the capital stock of the companies owning those properties; that the assets of those companies include[d] many different oil and gas leases having different production characteristics and operational considerations; and that their sales prices could reflect intangibles such as goodwill and other things of value apart from just proved reserves. Id. 17 El Paso dismisses the distinctions drawn by the Commission. It contends, for example, that, [i]n the absence of evidence that the purchase prices reflected values other than those of the underlying reserves, the Commission was unjustified in relying on the fact that the Tana and Royal transactions were accomplished through the sale of the corporate entities rather than of individual properties. The burden, however, was on El Paso to establish comparability; and when FERC identified factors that cast any serious question on the matter, it was incumbent on El Paso to demonstrate that the differences either were not material or that they had been accounted for. While we agree with El Paso that not every distinction identified by FERC is relevant to a determination of comparability (e.g., we are unpersuaded that the fact that Tana was bought with Texaco stock rather than cash was a material distinction), on the whole, we find that the problems identified by the Commission were both material and supported by substantial evidence in the record. 18 El Paso also argues that FERC erroneously rejected the Royal sale by arbitrarily excluding sales occurring after the La Perla transfer. See Order Denying Rehearing, 69 FERC at 61,593 (one of the properties, the Royal properties, was sold after the date of the La Perla properties and cannot, therefore, be relied on). While we agree with El Paso that there is no justification for the application of a per se rule excluding consideration of post-transaction sales, see United States v. 63.04 Acres of Land, 245 F.2d 140, 144 (2d Cir.1957) (There is no absolute rule which precludes consideration of subsequent sales.), this was merely an alternative basis for rejecting the Royal sale. The Commission had already found that the Royal sale was not comparable because the development of its reserves would involve lower drilling costs than would the development of La Perla's and because there were greater liquid petroleum reserves at Royal than at La Perla. Order Denying Rehearing, 69 FERC at 61,592. 19