Friday Afternoon Eminent Domain Case Review

It’s a Friday afternoon and I decided to take a quick look at the advance sheets for any newly decided appellate cases involving eminent domain. My search revealed an unpublished decision that came out yesterday (September 7, 2017) called Sacramento Area Flood Control Agency v. Souza, 2017 Cal. App. Unpub. LEXIS 6117. I’ll provide the highlights below.

Facts:

This matter involved an acquisition by the Sacramento Area Flood Control Agency (SACFA) of approximately 2.2 acres of land for the Natomas Levee Improvement Program. The acquisition was needed to widen the levee along Garden Highway, to relocate some utility facilities, and to plant grassland.  This was a partial acquisition of a larger parcel consisting of 4.68 acres.

This case proceeded to an eight-day jury trial on valuation. The property owner’s appraiser opined to a value of $465,000 and SAFCA’s appraiser opined to a value of $195,000.  The jury ultimately rendered a verdict of $455,000 for the part taken.  Both sides agreed prior to trial that there were no severance damages.

On appeal, SAFCA claimed that: (1) the trial court erred by excluding two items of evidence; (2) the property owner’s appraisal was not substantial evidence supporting the verdict; (3) the property owner’s attorney committed prejudicial misconduct; and (4) the trial court erred by awarding the property owner its litigation expenses.

Evidentiary Exclusions:

First, SAFCA claimed the trial court erred in excluding all mention of the remainder property and its certificate of compliance in the after condition. This was not a novel issue because the parties had agreed there were no severance damages.  Thus, under California law any benefit the project had on the remainder was not relevant because project benefits may only be used to offset severance damages.  While the owner’s appraiser did conclude that the part taken was the only portion of the property capable of development, the appellate court held that SAFCA was able to challenge that assumption at trial.  Thus, there was no error.

Second, SAFCA claimed the trial court erred when it prevented SAFCA from offering testimony from its appraiser to critique the property owner’s appraisal. SAFCA had not designated its appraiser to offer such testimony and the appraiser indicated during his deposition that he had not been asked by SAFCA to offer such testimony.  This is the one aspect of this decision that really caught my eye because it struck me as contrary to California law.  The appellate court agreed and concluded the trial court erred by excluding these opinions because there is no requirement to designate a rebuttal expert.  Nonetheless, the appellate court found the error to be harmless because SAFCA had an opportunity to cross examine the property owner’s appraiser and that was deemed sufficient.  This finding was surprising.  I generally don’t see how cross examination of an expert sufficiently addresses the matters that may be called out through another expert.  For example, if an attorney asks an opposing expert during cross examination if his opinion was flawed for failing to comply with pertinent appraisal standards or for relying on a flawed methodology, the opposing expert could simply disagree.  The attorney must be permitted to offer a competing expert opinion because the attorney can hardly offer his or her own opinion as evidence.  If done well, it isn’t difficult to envision a jury being moved by an expert who capably explains why a competing expert’s opinion is flawed.  To dismiss SAFCA’s inability to offer this evidence as harmless struck me as unfair.  If nothing else, a new trial should have been permitted.

Lack of Substantial Evidence:

This is a very difficult standard to overcome if you are the appellant on appeal because the appellate court presumes the record contains evidence sufficient to support the judgment and it will review the whole record in a light most favorable to the judgment, resolving all evidentiary conflicts and drawing all reasonable inferences in favor of the judgment. (City & County of San Francisco v. Golden Heights Investments (1993) 14 Cal.App.4th 1203, 1211.)  For this reason, SAFCA’s argument that the owner’s appraiser didn’t constitute sufficient evidence to support the verdict did not gain any traction.

Attorney Misconduct:

Once again, this argument achieved very little on appeal because SAFCA’s counsel either failed to object to the alleged instances of misconduct, or he did and the objections were sustained. The claimed misconduct also mostly related to the owner’s attorney suggesting that the taking was against his client’s will.  By definition, that is what eminent domain entails, so this too was a losing argument.

Litigation Expenses:

The body of California law governing the award of litigation expenses in eminent domain cases has evolved considerably over time. Generally speaking, a trial court evaluates the reasonableness of the property owner’s final demand and the agency’s final offer in light of the ultimate award in the case and the evidence at trial.  In particular, the trial court will look at: (1) the amount of difference between the offer and the compensation awarded; (2) the percentage difference between the offer and the award; and (3) the good faith, care and accuracy in how the amount of the offer and demand were determined.  (Los Angeles County Metropolitan Transportation Authority v. Continental Development Corp. (1997) 16 Cal.4th 694, 720.)  In this case, the property owner’s final offer was roughly an even split between SAFCA’s appraisal of $195,000 and its appraisal of $465,000.  Conversely, SAFCA only offered $55,000 more than its appraisal.  When the jury rendered a verdict of $455,000, SAFCA really had no realistic chance of avoiding litigation expenses.  Not surprisingly, SAFCA lost this issue on appeal too.

Final Thoughts:

This case didn’t break any new ground which is undoubtedly why it wasn’t published. But it still presented a good overview of many of the issues we eminent domain practitioners regularly encounter.  With the exception of finding the exclusion of rebuttal testimony to be harmless error, the appellate court’s conclusions were unsurprising given the facts stated in the decision.

New Bill Aims to Streamline LA Olympics Transit Projects & Clippers Arena

According to an article in the Los Angeles Times, California lawmakers pitch a break from a key environmental law to help L.A. Olympic Bid, Clippers Arena, California lawmakers introduced Senate Bill 789 last week in an effort to exempt from CEQA any rail, bus, or transit project connected to the 2028 Olympics, along with expediting environmental challenges to construction of the Clippers arena in Inglewood.  If passed, SB 789 would streamline such projects as the environmental review process is typically a multi-year undertaking.  The Bill was introduced by Senator Bradford (D-Gardena), who represents Inglewood in the Legislature.

Senator Bradford urged that these projects were too important to risk stalling through the regular CEQA process.  According to Bradford, “we must take action now to ensure the city’s vision comes to fruition.  It is critical that this is done immediately for the timely implementation and success of forthcoming projects.  These major projects will help boost the economy in Inglewood and the greater Los Angeles region, while improving investment, entertainment and highlighting Inglewood’s significance to California.”

Interestingly, SB 789 was not pushed by the City of Los Angeles, the Olympic Bid Committee, or LA 2028; similarly, Los Angeles’ transportation agency, which has numerous transit projects planned in advance of the Olympics, also did not play a part in its drafting.

With respect to the Clippers arena, the Bill would exempt from CEQA entirely a new transit link between a light-rail stop and the proposed arena, which would also connect to the NFL stadium under construction for the Rams and Chargers.  SB 789 would also expand the arena developers’ ability to take private property through eminent domain — except nearby residences — to ease construction.  And, it would prevent a judge from halting the project, even if the environmental review was inadequate.

We’ll see if SB 789 gains any traction despite a likely divisive issue between environmental groups and pro-development supporters.

Court Narrowly Defines “Public Improvement” for Inverse Condemnation Liability

Under inverse condemnation law in California, a public agency is generally strictly liable for physical damage to private property caused by a public improvement.  This means a public agency can be held liable even if the public improvement was properly designed, constructed and maintained.  Rarely is there a question of whether a project constitutes a “public improvement,” but in Mercury Casualty Co. v. City of Pasadena (Aug. 24, 2017), the Court of Appeal recently addressed this issue and held that a tree constitutes a work of public improvement for purposes of inverse condemnation liability only if the tree is deliberately planted by the government as part of a project serving a public purpose.  Where there is no record of installation or purpose, there can be no inverse condemnation liability.

Background

In 2011, the City of Pasadena experienced a storm that uprooted more than 2,000 City-owned trees.  During the storm, a large pine tree located on City property fell on a private residence, causing approximately $800,000 in damages.  After paying out insurance benefits, the homeowners’ insurance company sued the City for inverse condemnation on the theory that the City owned the tree and maintained and cared for it.  While the City conceded it owned the tree and maintained it, there was no evidence of who originally planted the tree over 60 years ago.  The trial court held that the tree was a public improvement and the City was strictly liable for the property damage.

Court of Appeal’s Decision

On appeal, the Court held that the tree was not a public improvement and the City was therefore not liable.  The Court explained that a “public project or improvement” is a “use which concerns the whole community or promotes the general interest in its relation to any legitimate object of government.”  It went on to explain that a tree constitutes a work of public improvement for purposes of inverse condemnation liability if the tree is planted by or at the direction of the government entity as part of a planned project serving a public purpose, such as to enhance the appearance of a public road.  Despite the City’s conceding that the tree was publicly owned and maintained, the Court found that there was no evidence of who planted the tree, and therefore no evidence it was planted it as part of a project serving a public purpose.

Conclusion

Pursuant to Mercury Casualty Co., a public agency cannot be held strictly liable for inverse condemnation unless the damage was caused by a public improvement that was “deliberately designed and constructed” to benefit the public.  For older improvements or smaller ones with no record of who constructed the improvement or why, this adds an additional hurdle for plaintiffs to demonstrate liability.  This is particularly important for damage caused by trees.

While the public agency may escape strict liability under an inverse condemnation cause of action under this narrow definition (and the accompanying exposure to attorneys’ fees and costs), even where there is no evidence a tree was planted as part of a planned project or design serving a public purpose or use, an entity may still face liability for other claims, including dangerous condition of public property.

California Supreme Court Petitioned to Resolve Split in Authority Regarding Inverse Condemnation Liability in Sewage Backup Cases

The City of Oroville (“City”) has petitioned the California Supreme Court for review of an unpublished Court of Appeal decision, City of Oroville v. Superior Court (2017) 2017 WL 2554447 (Third District), finding the City liable in inverse condemnation for sewage backup into private property even though the owners failed to install and maintain backwater valves on their private property as required by state and local legal authority.  While no published decisions have been issued on this subject, four unpublished decisions in different jurisdictions throughout California over the past ten years have reached widely different decisions.  If the California Supreme Court decides to hear the case, it may resolve the split in authority regarding government liability for damages caused by sewage backup.

Factual Background

Sewage from the City’s sewer main entered a property owners’ building through a private lateral service line that did not have the legally required backwater valve in place. A root growth partially blocking flow through the sewer main was later discovered and removed by the City.  The quality of design and construction of the sewer main was not challenged or at issue.  The property owners filed suit for a determination of the City’s liability in inverse condemnation pursuant to Code of Civil Procedure section 1260.040.

Procedural Background and Court of Appeal Proceedings

The court found the City liable in inverse condemnation and trial was set on the remaining tort cause of action for nuisance and for damages in inverse condemnation. The City filed a Petition for Writ of Mandate seeking reversal of the Superior Court order.  After agreeing to hear the case, the Court of Appeal later denied the City’s petition.  The City has now petitioned the California Supreme Court to challenge the finding of liability based on inverse condemnation where the property owners failed to install and maintain a legally required backwater valve on the private sewer lateral connection to their building.

The Petition to the California Supreme Court

The City claims that the Court of Appeal did not consider the fact that the property owners failed to design, install and maintain a legally required backwater valve on their property. The Court of Appeal found the City “negligent” in failing to enforce a building code that the property owners are responsible for complying with.  While the trial court and the Court of Appeal rely heavily on California State Auto Ass’n Inter-Insurance Bureau v. City of Palo Alto (20016) 138 Cal.App.4th 474 (“CSAA”) to impose strict liability against a municipality in a sewage intrusion case, the City claims that the CSAA case did not address a missing but legally required valve situation.  Instead, the CSAA decision relied on the fact that the property owner was “faultless” and did everything to prevent a sewer backup, including installing a new private sewer lateral shortly before the backup.  The CSAA court also found that the municipality’s main line was deficient and not laid at a sufficient slope to carry sewage away from the homeowners’ building.

The City claims that by discussing and applying flood control cases to the sewer backup cases in the CSAA case, the court has created confusion in the law between two very different types of potential harm caused by public projects. The general rule of inverse condemnation law imposes liability only when a public project that is “functioning as intended” causes damage.  (Albers v. County of Los Angeles (1965) 62 Cal.2d 250, 261-262.)  Flood control cases are an exception to this rule.  The City claims that flood control cases should have no application to sewer cases and the “failed to function as intended test” should not apply where legally required backwater valves are not installed and maintained.  As a result, a taking should not occur if the overflow on the owners’ property occurs because the system fails to function as intended as a result of the owners’ failure to comply with established state and local building codes.

We will keep an eye on whether the California Supreme Court decides to resolve the issues presented by the City of Oroville’s petition. Regardless of whether the Court affirms or reverses the lower court’s decision, the confusion presented by the current split in authority should be resolved so that municipalities will know what to do to avoid liability and private owners can know what to do to protect their private property.

Court Holds Temporary Injunction on Martins Beach Access Dispute Does Not Constitute a Taking

The Martins Beach access dispute in San Mateo County continues to make headlines.  As a quick refresher, billionaire venture capitalist Vinod Khosla purchased 90 acres of beachfront property south of Half Moon Bay, and subsequently proceeded to lock the gated entry to Martins Beach, effectively preventing public access to the popular beach.  We’ve been covering the dispute for quite some time, including the recent introduction of legislation to potentially fund the State Lands Commission’s use of eminent domain to acquire an easement for access to the popular beach.

While the potential eminent domain process continues to play out, and a lawsuit makes its way through court on whether the public has an easement by dedication to access Martins Beach, a separate lawsuit filed by the Surfrider Foundation was recently heard by the California Court of Appeal.  In Surfrider Foundation v. Martins Beach 1, LLC (A144268, Aug. 9, 2017), the Court recently held that the owner’s blocking access to Martins Beach was a “development” activity within the meaning of the California Coastal Act, which triggered the need for a Coastal Development Permit (CDP).  Because the owner had failed to secure a CDP, an injunction was issued requiring the owner to restore public access to the beach.

  • Requiring a Coastal Development Permit Does Not Constitute an Unlawful Taking of Property

On appeal, the property owner countered that requiring the owner to obtain a CDP would constitute an unlawful taking.  The Court of Appeal held that such a claim was not ripe, as the owner had not yet sought a CDP.  Because the owner had not yet applied for a CDP, the Court had no information on whether the Coastal Commission would issue such a permit, or what restrictions or impacts its decision may have on the property’s use.  Simply requiring a person to obtain a permit before engaging in a certain use does not result in the taking of property.

  • The Court’s Temporary Injunction Does Not Result in a “Per Se” Taking of Property

The property owner also claimed that the trial court’s issuance of an injunction preventing the owner from blocking public access to Martins Beach constituted a “per se” physical taking of its property.  The Court explained that the United States Supreme Court is divided on whether a judicial action may constitute a taking.  In this particular case, the Court explained that “the trial court’s injunction intrudes on [the owner’s] established property right to exclude others by allowing the public to access Martins Beach pending a determination on [the owner’s] application for a CDP.”  However, the Court went on to hold that the temporary right of beach access does not constitute a “per se” taking, and because the owner did not allege a taking under the Penn Central multi-factor test, the Court did not engage in such an analysis.

Specifically, the Court explained that while a permanent physical invasion — and the loss of the ability to exclude others — constitutes a “per se” physical taking, here the injunction is temporary in nature and only lasts until there is a decision on the CDP.  Because the injunction is only temporary, it does not constitute a “per se” taking.  The Court relied on prior case law establishing that temporary limitations are subject to a more complex balancing process to determine whether they are a taking since they do not absolutely dispossess the owner of the right to use, and exclude others, from the property.

The Court even attempted to harmonize its ruling with the California Supreme Court’s recent decision in Property Reserve, where the right of entry statutes to conduct environmental studies were analyzed from a takings context, and in which the Court held that not all temporary physical invasions are takings that require prior compensation under the California Constitution.  While the Court expressly recognized that temporary physical invasions may constitute a compensable taking, they are not automatically “per se” takings.  In other words, in drawing a very fine line, the Court explained that while temporary physical intrusions can be compensable takings, not all temporary physical invasions are “per se” takings.  Because the owner did not allege a taking under the Penn Central multi-factor test, and because the temporary injunction did not constitute a “per se” physical taking, it could not be reversed by the Court of Appeal.

  • Conclusion

Where does the Surfrider decision leave things?  Public access to Martins Beach will be temporarily restored pursuant to the Court’s injunction, at least until the owner pursues a CDP to prevent or alter public access.  In the meantime, the other pending litigation will continue through the court system for a determination on whether the public has an easement by dedication to access Martins Beach over Khosla’s property.  And, the government always wields the power to condemn the public access easement, if necessary.  The temporary win goes to the public, and we’ll continue to see how things shake out.

Caltrans Seeks Input on SB1 Planning Grants Guides

We’ve previously reported on the recent passage of Senate Bill 1 (SB 1), The Road Repair and Accountability Act of 2017, which will raise approximately $52 billion in funding over the next 10 years specifically for transportation.  SB1 is now in full swing, and Caltrans is on a fast track to release new grant funding provided under the legislation.

On August 3, Caltrans released for public review and comment the final drafts of the SB 1 Sustainable Communities and Adaptation Planning Grant guides, which will provide more than $270 million in planning grants for local communities over the next decade.  These Grant Application Guides for the new SB 1 planning grant funds encompass the following:

  • Transportation Planning: Caltrans will provide $25 million in annual grants for planning to support the goals and best practices cited by the California Transportation Commission in its regional transportation plan guidelines.
  • Climate Change Adaptation Planning: Caltrans will provide $20 million over three years to agencies to support transportation infrastructure planning for areas that are potentially vulnerable to climate change.

The formal 30-day comment period for the final draft guides will be open through August 31.  The draft guidelines and comment forms can be found at http://www.dot.ca.gov/hq/tpp/grants.html.  Additionally, two workshops will be held to discuss the Grant Application Guides.  The Sacramento workshop will be webcast live and viewable at http://ctmedia.dot.ca.gov/webcast/live/live_event.asp.

Grant applicants are encouraged to begin considering possible applications based on these drafts.  More details about the workshops, the grants and applications can be found at: http://www.dot.ca.gov/hq/tpp/grants.html.

Supreme Court Develops New Multifactor Balancing Test to Determine What Constitutes a “Larger Parcel” in Regulatory Takings Cases

Last week, the United States Supreme Court in Murr v. Wisconsin issued a key regulatory takings decision which creates a new multifactor balancing test to determine whether two adjacent properties with single ownership could be considered a larger parcel.  In a 5-3 decision, the Court found that the properties were a single parcel and because the owners were not deprived of all economically viable uses of their property they could not establish a compensable regulatory taking.

The Murr Family owned two lots adjacent to a river.  A cabin was built on one of the lots, while the other lot remained unimproved.  The Murr Family attempted to sell one of two lots.  Although each lot was over an acre, due to their topography, each lot had less than one acre suitable for development.  State and local regulations prevented the use or sale of adjacent lots under common ownership as separate building sites unless they have at least one acre of land suitable for development.  The Murr Family applied with the St. Croix County Board of Adjustment (“Board”) for approval of a variance, which the Board denied.  The state court affirmed, finding that the local ordinance effectively merged the lots.  The unimproved lot, therefore, could not be sold or developed separately, though the property could continue as a residential use with a single improvement to extend over both lots.

In finding that the property was a single parcel, the Supreme Court laid out the following factors:

  1. the treatment of the property, in particular how it is bounded or divided, under state and local law;
  2. the property’s physical characteristics, including the physical relationship of any distinguishable tracts, topography, and the surrounding human and ecological environment; and
  3. the property’s value under the challenged regulation.

The Court found that all three factors pointed to the lots being evaluated as a single parcel.  Specifically, the merger of the lots under state law “informs the reasonable expectation that the lots will be treated as a single property.”  Second, the terrain and shape make it reasonable to expect their range of potential uses may be limited.  The property’s location adjacent to a river would also put the owners on notice of potential state, federal and local law regulations.  Third, the restriction on using the individual lots provides a benefit of increasing privacy and recreational space that can benefit the other property.  The Court also concluded that because the property could still be used as a residential property, the owners have neither been deprived of all economically beneficial use of their property under Lucas v. South Carolina Coastal Council (1992) 505 U.S. 1003, nor have they suffered a taking under Penn Central Transp. Co. v. New York City (1978) 438 U.S. 104, 115-116.

The dissent argues that the State law should define the boundaries of distinct parcels of land, and those boundaries should determine the “private property” at issue in regulatory takings cases.  States may define those plots differently, whether using metes and bounds, government surveys, recorded plats or subdivision maps.

The Supreme Court’s undertaking may have implications across the Country as the Court’s fluid multifactor test appears to give courts more discretion in determining what constitutes the “larger parcel.”  And by looking at the government’s interest, as the dissent explained, the new test may result in less favorable outcomes for property owners.  The “larger parcel” inquiry is only the first step in determining whether a taking has occurred.  The court must also analyze the regulation under Lucas or Penn Central, which provide two other seemingly fluid and discretionary tests that also look at the government’s interest when determining whether a regulatory taking occurred.

 

Public Comment Requested on Revisions to Precondemnation Right of Entry Statutes

When public agencies analyze a potential public project, they often need to gain access to private property for surveys, testing, and to otherwise investigate whether a particular property is suitable for a planned project.  Often, agencies gain access by talking with the property’s owner and reaching agreement on a right of entry.  But where the owner refuses to allow access, the agency must resort to the courts.  For decades, agencies have followed a set of rules that allow them to obtain a court-ordered right of entry with minimal notice and without most of the formality of a full-blown eminent domain action.  When that process was challenged in Property Reserve v. Superior Court, last year the California Supreme Court held that the right of entry statute was constitutional, with the exception of needing to include a right to a jury trial on compensation (which the Court “reformed” on its own initiative to require such a trial).

The Court’s holding created an inconsistency between what the statute says on its face and what the Court reformed it to mean.  As a result of this situation, and to avoid confusion and error, the California Law Revision Commission tentatively recommends that the precondemnation activities / right of entry statute be revised to conform to the reformed meaning established by the Court, and is seeking public comment accordingly.  The tentative recommendation is available on the California Law Revision Commission’s website.  Other than minor tweaks, the Commission’s proposed revision includes adding a sentence to Code of Civil Procedure section 1245.060, subdivision (c), stating that

In a proceeding under this subdivision, the owner has the option of obtaining a jury trial on damages.

The Commission often substantially revises its recommendations as a result of public comment.  If anyone is interested in commenting on the Commission’s recommendation, to receive timely consideration, comments should be submitted by August 8, 2017.

Government’s Termination of Lease Pursuant to its Terms is Not a “Taking”

Public agencies own significant amounts of property throughout California and the United States.  Sometimes, those properties are not being put to a public use, and the government acts as a landlord, leasing out property to private entities.  But when the government is ready to put the property to a public use, and it terminates the lease, is there a “taking” of private property triggering the need to pay just compensation?  A recent unpublished Court of Appeal decision, California Cartage Company v. City of Los Angeles, addressed this issue and held that the government’s termination of a lease in accordance with its terms does not trigger inverse condemnation liability.

In California Cartage, the public agency leased property to a private entity since the 1950’s pursuant to a series of fixed-term leases, but then, more recently, as a month-to-month tenancy.  Over the course of 60 years, the tenant constructed extensive physical improvements; its was operating a large business that generated over $65 million in annual revenues and employed hundreds of workers.  In order to make way for a public project, the agency sent the lessee — in accordance with the lease — a 30-day notice to terminate.  The lessee filed an inverse condemnation action, claiming that the termination of its lease was the “substantial equivalent” of a taking.

Both the trial court and Court of Appeal found no liability:

[T]he termination of Plaintiff’s short-term contractual right to occupy the land already owned by the City . . . does not constitute a taking for purposes of eminent domain law.

The Court distinguished situations in which an agency provides a notice of intent to condemn, but then purchases private property under threat of eminent domain and terminates the lease.  In such cases, there is a substantial equivalent of condemnation because the agency acquires the property “not as a result of bargaining in the open market, but rather in the broad exercise of its power to condemn private property for public use.”  In other words, simply having the power to condemn is not sufficient; there must be some actual exercise of that power either by condemnation or the threat of condemnation.

In conclusion, for purposes of takings-liability, public agencies operating in the open market without exercising (or suggesting the potential use of) eminent domain should be treated similarly to other private market participants.  The fact that a public agency’s lease termination was for a public use is irrelevant if there was no taking.  But keep in mind that the agency does not need to condemn to trigger liability; in California Cartage Companythe court concluded that the agency had never even threatened to use its power of eminent domain — a key factor in the court’s finding of no taking.

Note also that this analysis may be different in the context of a claim for relocation reimbursement if a person or business is displaced by a public project, which has a different set of regulations that do not necessarily require a taking of private property.  While the case law is only partially developed, there is a reasonable argument that the standard for qualifying for relocation benefits as a displacee is lower than the standard for proving a taking for inverse condemnation liability.

Valuing Underground Natural Gas Storage in Eminent Domain Proceedings

In California eminent domain proceedings, a property owner is entitled to the “fair market value” of the property being acquired.  Typically, fair market value is determined by analyzing comparable sales or by utilizing an income capitalization approach.  But every once in a while, there is no relevant market data, in which case the law permits determining compensation “by any method of valuation that is just and equitable.”  (Code Civ. Proc., sec. 1263.320.)  A recent court of appeal decision, Central Valley Gas Storage v. Southam, explains when this “just and equitable” valuation approach may be used, and what limits an expert appraiser may face when using such a methodology.

In Southam, Central Valley operated a reservoir for storage and subsequent withdrawal of natural gas.  After obtaining approval from the California Public Utilities Commission, Central Valley commenced an eminent domain action to acquire Southam’s underground gas storage rights in 80 acres of land.  Central Valley’s expert sought to value the storage rights using market data of similar transactions, which he claimed were based on the number of surface acres the landowners hold within the storage boundaries.  Southam, on the other hand, sought to value the storage rights based on the volume of gas in the storage reservoir.

Central Valley filed a motion to exclude any valuation testimony based on the volume of gas in the storage reservoir, claiming that such an approach was improper given the uncertainty and speculative nature of what is lying underneath the ground.  The trial court agreed, and excluded any such valuation testimony.

On appeal, Southam claimed that its approach was proper and Central Valley’s approach was inappropriate.  Southam pointed out that thirty years ago, in Pacific Gas & Electric Co. v. Zuckerman (1987) 189 Cal.App.3d 1113, the court excluded the exact surface-acre approach Central Valley now used, concluding there were no true “comparables” in dealing with underground storage reservoirs because there were relatively few such properties in the state, and they were substantially different in geographical locations, temporal transactions, and physical characteristics.  As a result, in Zuckerman, the court stated that “latitude must be accorded an expert in valuing such properties, and any approach that is ‘just and equitable’ may be considered.”

Here, however, the circumstances had changed:  a market for natural gas storage leases had developed in California since the decision in Zuckerman was issued, and all of these leases were based on the number of surface acres the landowners hold.  Given the existence of the new market for comparable data, the court found Zuckerman inapplicable.  The court further held that it is inappropriate to admit evidence of a valuation methodology that ignores the developed market for a particular type of property, and an expert’s opinion must take into account only reasonable and credible factors.  Because Southam could not produce a single instance of a natural gas storage lease that based its value on underground volume, it was appropriate to exclude such an approach.

The Southam case serves as a good reminder:  the “just and equitable” valuation methodology cannot ignore evidence of how particular properties are bought and sold, and it likewise must be reasonable, credible, and non-speculative.  It also allows for the valuation of underground rights based on surface-acres given the existence of market data supporting such an approach.

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