California Eminent Domain Report : a blog following condemnation, inverse condemnation, and regulatory takings written by attorneys with Nossaman LLP.

According to an article by Ken Carlson in the Modesto Bee, "Modesto will try eminent domain," the Modesto City Council this week voted 6-0 in favor of utilizing eminent domain to acquire easements necessary for the widening of Roselle Avenue.  The remaining hold-out properties include part-takes from a seven-acre ranchette and a two-and-a-half acre vacant lot.  The owner of the ranchette, Daniel Nickles, claims the City's survey is flawed, and its $15,000 offer is less than a tenth of fair market value.

The acquisition if Nickles' property includes a 5-foot by 304-foot-long strip of property.  Nickles is quoted as being "so irritated" with the City because apparently no one will listen to him.  Whether this is true or not in this case, a government agency never wants to be painted as not listening to a property owner impacted by eminent domain.  The agency should -- and is required to -- make good faith and reasonable efforts to negotiate before turning to the power of condemnation as a last resort. 

The City's mayor has apparently stated the City is only permitted to pay the appraised value for Nickles' property, as anything more would constitute a "gift of public funds."  We've heard this argument many times, and as we've reported in the past, this is not necessarily the case.  There are many factors that would allow a government agency to pay more than its own appraiser's value.  A few factors an agency could consider in justifying a higher payment include the costs of litigation, the potential to exposure of a much larger award, or the risk of a fight on possession or right to take which could delay or prevent a much needed project.  Many of these potential costs far outweigh what the agency could pay to resolve a matter, and sometimes they should be taken into consideration in deciding whether to settle an eminent domain case at a number above the agency's appraiser's opinion of value.

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In response to my earlier post on the Pombo decision, I was asked whether complying with the decision to avoid an award of litigation expenses would expose the agency to an illegal gift of public funds claim. 

This is an issue that arises with some frequency with public agencies, where people are understandably -- and appropriately -- sensitive to claims that they have misused taxpayer money.  In particular, people worry about making an "illegal gift of public funds."  This principle arises from the idea that taxpayer money must be used for public purposes; the government cannot simply give that money to a private individual. 

In the context of eminent domain, the concern is that agreeing to pay a huge premium over the agency's appraised value exposes the agency to an "illegal gift" claim.  Rest assured, this is only a remote possibility, if that.   Indeed, I am not aware of any California court ever concluding that an eminent domain settlement constitutes an illegal gift. 

As we discuss in more detail in When (if Ever) Does a Payment Become an Illegal Gift of Public Funds? , the government is free to take into account both defense costs and litigation risk in evaluating a possible settlement.  As long as the agency can document a legitimate public purpose behind paying more than its appraised value, no illegal gift occurs. 

Agencies have enough things to worry about in evaluating whether a particular settlement makes sense, especially in cases where a large gap exists between the parties appraisals -- but a "gift of public funds" is not one of them. 

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There was an interesting discussion at the IRWA Chapter 57 seminar last Friday, and it’s one that I have seen play out many times in many contexts, so I thought it was worth a short discussion here. The issue was when the illegal “gift of public funds” doctrine comes into play in the context of an eminent domain case (the text appears in Article XVI, section 6 of the California Constitution). The concept is simple: The government cannot give away public funds to a private person or company. The eminent domain scenario is all too frequent: A proposed settlement is for more than the property’s appraised value, rendering the “excess” payment a potential illegal gift.

Such payments do not violate the rule. Based on well-established interpretations of the "no gifts" clause, a payment does not qualify as an illegal gift if the expenditure is for a "public purpose."  Thus, for example, where the property owner claims a massive amount of compensation, either in terms of fair market value, damages, or both, and the agency negotiates a settlement that is higher than its appraised value, but lower than the agency’s possible exposure, the “public purpose” is the settlement of a larger claim, creating an easily identifiable benefit.

Even in a case where the maximum realistic exposure might not account for the entire payment, it is unlikely the payment would qualify as an illegal gift. The settlement may avoid:

1. A fight over possession, which could put the construction schedule at risk; or
2. A nasty public relations battle that could jeopardize another badly needed project (as just two examples).

In the end, as long as the agency documents what it is doing and why, it is unlikely any “gift of public funds” argument would ever succeed in an eminent domain case (and I’m certainly not aware of any court decision striking down an eminent domain payment as an illegal gift).

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