California Supreme Court Provides Rare Update on Inverse Condemnation Doctrine

On August 15, 2019, the California Supreme Court issued its first inverse condemnation opinion in more than 22 years in the case City of Oroville v. Superior Court of Butte County, Case No. S243247.  The Court held that to succeed on an inverse condemnation claim, a property owner must show more than just a causal link between the existence of a public improvement and damage to private property:  it must demonstrate that “the property damage was the probable result or necessary effect of an inherent risk associated with the design, construction, or maintenance of the relevant public improvement.”
With inverse condemnation litigation on the rise in California, the Supreme Court recognizes the burden that would be placed on public agencies’ scarce resources by imposing absolute or strict liability for any damage, no matter how remote, related to public improvements.  As a result, the Opinion raises the bar on what property owners must demonstrate to prove liability by moving away from an automatic strict liability assessment and instead undertaking a more rigorous analysis focused on the reasonableness of the public agency’s actions and the potential responsibility of the private property owner as a result of its acts or omissions that may have played a role in the damages.

Summary of the Opinion

This case involved an inverse condemnation claim brought by three dentists against the City of Oroville when a sewer system back-up flooded the office owned by the dentists, where they operated their dental practice.  The dentists filed a lawsuit claiming the City was strictly liable since the damages resulted from a public improvement (the City sewer system).  The City argued it was not liable since the damages could have been prevented had the dentists installed a legally-required backwater valve, which they had failed to do.  Both the trial court and the Court of Appeal held the City liable under inverse condemnation.

The Supreme Court reversed, finding that the Court of Appeal had erred by “failing to analyze inverse condemnation with sufficient focus on substantial causation by inherent risks associated with the public improvement, and presuming that the City must disprove any causal connection to the harm.”  Instead, the Supreme Court found no inverse condemnation liability, holding that “public entities are not strictly or otherwise automatically liable for any conceivable damage bearing some kind of connection, however remote, to a public improvement.”  Rather, a plaintiff must additionally show that “the damage to private property was substantially caused by inherent risks associated with the design, construction, or maintenance of a public improvement.”

In reaching this result, the Supreme Court walked through the “inherent risks” and the “substantial causation” elements of inverse condemnation, and held that either (i) damages must be the “necessary or probable result” of the public improvement, or (ii) the immediate, direct, and necessary effect of the improvement produced the damage.  The Supreme Court explained that “This approach avoids treating inverse condemnation as a species of strict or absolute liability that would avoid the necessary analysis of inherent risks and substantial causation, frustrating the development of public improvements because of the increased costs to public entities.”

The Supreme Court explained that if it were to ignore the private owner’s failure to install a backwater value and simply impose strict liability, it would be:

airbrushing out of the picture not only the City’s considered judgment about what it would take to balance the safety and practical considerations for this public improvement, but [the owners’] noncompliance with an ordinary planning code requirement that would have eliminated or at least mitigated risks of sewer backup damage.  That is hardly different than turning inverse condemnation into a basis for automatic imposition of liability on the public entity if even a tenuous causal connection exists between the public improvement and private property damage, irrespective of whether a plaintiff’s act or omission materially contributes to the risk.  And it ignores that the City, like all public entities in an imperfect world of scarce resources, is in the business of weighing safety, the availability of resources, and possible risks that may result from its public improvements.

Significance of the Supreme Court’s Holding

The Opinion is significant not only in that it is the first time the Supreme Court has weighed in on an inverse condemnation case since Bunch v. Coachella Valley Water District, 15 Cal.4th 432 (1997), but also because it is a distinct departure from the strict liability focus featured in earlier inverse condemnation cases.  Instead, the Opinion incorporates elements of the reasonableness framework previously limited to inverse condemnation cases involving flood control improvements.
Significantly, the Supreme Court explained that for inverse condemnation claims, courts are permitted to consider a “plaintiff’s act or omission in the chain of causation, for example, a property owner’s failure to follow reasonable requirements imposed by the public entity to reduce the risk of the public improvement.”  In other words, instead of automatically imposing inverse condemnation liability if a public improvement is a cause of damages to private property, courts must undertake a liability assessment which includes analyzing whether the damages were also a result of the acts or omissions of the private property owner.

Accordingly, in this case, the Supreme Court found that “the record supports that the City acted reasonably in adopting the design for the sewer system, and that the sewer was designed in accordance with the accepted practices for designing and constructing sewer systems of that time.”  The Supreme Court further relied on a “reasonableness” assessment in stating that it was reasonable for the City to expect the private property owners to comply with the law.

While the Opinion does not expressly state that the Supreme Court is abandoning the prior strict liability standard, the holding in this case suggests that the Supreme Court now contemplates a more nuanced analysis of the substantial cause element of inverse condemnation claims than before.  The Opinion amounts to a significant win for public agencies and public utilities across California.

Video: David Graeler on Preparing Experts

We are pleased to provide the next installment of our video series from Nossaman’s 2019 Eminent Domain Seminars.  In this segment, Litigation Department Chair David Graeler discusses best practices for preparing expert witnesses for trial.  Please access the video here.

Video: Artin Shaverdian on Increasing the Scope of the Taking

We are pleased to provide the next installment of our video series from Nossaman’s 2019 Eminent Domain Seminars.  In this segment, Eminent Domain Partner Artin Shaverdian discusses implications and best practices when increasing the scope of a taking.  Please access the video here.

 

Will California’s Sea-Level Rise Trigger Use of Eminent Domain?

We’ve been tracking the impacts of sea-level rise in California, and previously reported on a potential recommendation by the California Coastal Commission to utilize eminent domain for “managed retreat” — buying or condemning threatened homes and relocating them or tearing them down, which would thereafter free the coastline and preserve the beaches.  That recommendation has been met with widespread opposition.  According to an article in the San Diego Reader, “Don’t say retreat when talking about sea rise in California,” some local cities in San Diego are taking that option off the table, at least for now.  But it’s not without disagreement, as other coastal cities view the situation as a “crisis” that must be addressed immediately.

While some local officials indicate that managed retreat should not be a mandate, other officials feel there is no other choice, indicating they see managed retreat “as a measure of first resort, not last….  If we only look at hard solutions, coastal armoring, we will lose the coast we’re all trying to protect.”  Others agreed with this sentiment, indicating “we either have managed retreat or we have unmanaged retreat.  I don’t think we have any other options with respect to some areas.”

If you’re interested in this subject, and the tension between managed retreat, using eminent domain, preserving our coastal access and beaches, armoring or sea walls, please join us at Nossaman’s Coastal Law Conference on September 10 in Huntington Beach.  And if you have time for a long read, I’d highly recommend an article in the LA Times, “The California coast is disappearing under the rising sea. Our choices are grim.”  It’s probably the best article I’ve seen on the subject, covering what’s transpired in Pacifica, the impacts of managed retreat, the casualties and choices coastal cities are facing, and what options remain.  Finally, if you want to understand the potential options and costs involved, you should take a look at this Climate Costs article, which indicates the cost to address sea-level rise in California will cost over $22 billion.

Lessons in Litigating Inverse Condemnation Claims

Inverse condemnation litigation and liability has become a particularly hot topic in California over the last several years.  Not many attorneys specialize in this area, and there are a number of traps for the unwary lawyers, public agencies, and property owners involved in such litigation.  A recent Court of Appeal decision provides some important lessons for all parties involved, including the risks of settling inverse condemnation claims with insurance companies, and pitfalls in recovering attorneys’ fees and expert fees.

Background

In Herrera v. City of San Jose (June 28, 2019 – Sixth Appellate Dist.), the city’s main sewer line suffered a blockage, which resulted in flooding of a property owner’s home.  The owner submitted an insurance claim and received reimbursement for a portion of the damages.  The insurer then filed a subrogation inverse condemnation claim against the City, seeking compensation for the amounts paid to the owner as a result of the city’s failure to “inspect, maintain, and repair” the city sewer main.  The City and insurer settled the property damages claims without the owner’s involvement.

The owner then filed her own lawsuit against the city for damages not covered by her insurance policy.  The owner’s lawsuit alleged negligence, dangerous condition of public property, and inverse condemnation.  At trial, the jury found for the owner, awarding hundreds of thousands of dollars.  The city filed a motion to offset the award by the prior settlement paid to the insurer, which the court granted.  The owner then filed a motion to recover attorneys’ fees and expert witness fees, along with costs and interest, which totaled over $500,000.   The court awarded the owner fees and costs, but only for the time spent on the inverse condemnation claim, and only based on a percentage of the recovery since the owner’s attorney was pursuing the claim under a contingency fee arrangement.  Both parties filed an appeal.

  • City’s Appeal

The city asserted that the owner was not entitled to any real property damages because such claims had already been resolved with the owner’s insurer.   The Court rejected this theory, concluding that the owner’s interests were not adequately represented in the negotiations between the city and the insurer, and it would not be fair to bind the owner to the settlement to which she was not a party.  The Court explained that it is unreasonable to expect a settlement to bind a party who was not involved in the settlement and who was not given an opportunity to participate.

  • Owner’s Appeal

The owner claimed it was improper to offset the jury’s award by the amount previously paid to the owner’s insurer.  The Court denied the owner’s claim, explaining that a defendant may not be subjected to double liability.

The owner also claimed it was improper to only allow 40% of the inverse condemnation award for recovery of attorneys’ fees, and instead the owner should recover attorneys’ fees based on time actually spent by the owner’s attorneys (which would have increased the attorneys’ fees award from about $20k to over $450k).  The Court rejected the owner’s claim, concluding that the attorneys’ fees recovery statute under inverse condemnation law “does not provide for fees based on the value of the effort expended by a plaintiff’s attorney, but limits the recoverable fees to the amount actually incurred by the plaintiff.”  Here, the trial court properly declined to apply the time-spent calculation method and limited the owner’s recovery to what she actually incurred under the terms of her contingency agreement with her legal counsel— i.e., 40 percent of the inverse condemnation award. 

The owner also challenged the reduced recovery of expert witness fees, but the Court concluded that the owner’s request was not supported to demonstrate that the expert fees were actually incurred and were related to the inverse condemnation cause of action.

Conclusion

The case provides some important take-aways for both property owners and public agencies when involved in inverse condemnation litigation.  For public agencies, it is important to ensure that any settlement reached with an owner’s insurer settles and releases all claims of both the insurance company and the property owner.  For property owners, if the case involves a multitude of causes of action, it is important to separate out and identify the fees and costs attributable to the inverse condemnation cause of action, under which fees and costs are recoverable as opposed to general tort causes of action.  It is also important to craft retainer agreements to ensure that any attorneys’ fee recovery is calculated based on time actually spent as opposed to a contingency percentage of the ultimate recovery.

Court Holds Agency Appraiser Not Required to Identify Specific Damages When Outweighed by Project Benefits

In an eminent domain proceeding, the property owner and the condemning agency each typically introduce evidence of just compensation through valuation experts. The jury is then required to render a verdict in between the owner’s (high) valuation and the agency’s (low) valuation. Usually the biggest delta between the sides involves severance damages — or damages to the remainder property not being acquired. But what happens when the agency’s appraiser does not render a specific valuation opinion, instead simply concluding that any damages are offset by project benefits? Is this sufficient, or is the appraiser required to identify specific dollar amounts for damages and benefits? A recent Court of Appeal decision concludes that the appraiser is not required to identify specific damages and benefits in this circumstance.

Background

In People ex rel. DOT v. Jarvis (June 28, 2019, 2019 Cal. App. Unpub. LEXIS 4403), Caltrans sought to condemn portions of two parcels for a highway improvement project to State Highway 101. The question of Continue Reading

Court Decision Serves as Important Reminder on Crafting Lease Condemnation Provisions

When entering into a lease agreement, parties rarely contemplate that the property may be subject to a future eminent domain proceeding.  As a result, many times the condemnation provision in the lease is given little thought.  But when a condemnation action does arise, that provision becomes critically important for purposes of determining how the eminent domain award is to be allocated among the property owner and business owner, and any ambiguities are likely to lead to a dispute as to apportionment of the award.  A recent California Court of Appeal decision, Thee Aguila v. Century Law Group (July 2, 2019 – B289452), highlights what can go wrong and serves as an important lesson on how to avoid such disputes.

Background

In Thee Aguila v. Century Law Group, the Los Angeles Unified School District (LAUSD) condemned a commercial property for a new school site.  The eminent domain action named both the property owner and the business, El Parral Restaurant.  The matter was eventually resolved, and the trial court entered a judgment awarding (i) $6.2 million to the property owner for its interest in the property, and (ii) $6.1 million to the business for its interest in the property, including “any claims for leasehold value, goodwill, fixtures and equipment, relocation benefits, litigation expenses, interest and costs . . . .”

After the entry of judgment, the property owner filed a complaint against the business.  The owner claimed that the business had agreed in its lease that any award received as a result of condemnation was to be assigned to the owner, and therefore the $6.1 million award to the business actually belonged to the owner.   Specifically, the parties’ lease provided that if the property was taken by eminent domain:

All awards for the taking of any part of the Premises or any payment made under the threat of the exercise of the power of eminent domain shall be the property of the Landlord, whether made as compensation for the diminution of the value of the leasehold or for the taking of the fee or as severance damages; provided, however, that Tenant shall be entitled to any award for loss or damage to Tenant’s trade fixtures and removable personal property.

The trial court concluded that the lease’s condemnation clause did not give the owner an interest in the business or entitlement to monies awarded to the business in the eminent domain judgment.  The trial court also concluded that the eminent domain judgment collaterally estopped the owner from any of its various claims to the money awarded to the business in the eminent domain judgment.  The property owner appealed.

Court of Appeal Decision

On appeal, the Court held that the property owner was not entitled to compensation for the business’ goodwill.  While parties are free to contract between themselves to allocate eminent domain awards, the lease provision here did not specifically allocate the goodwill of the business to the owner.  While the lease language stated that “any payment” made under eminent domain belonged to the landlord, it went on to state that this applied regardless of whether the compensation was for “diminution of the value of the leasehold or for taking of the fee or as severance damages . . . .”   In other words, the assignment to the landlord was for all real estate claims, which are separate and apart from the lessee’s goodwill as an owner of a business.  The Court explained that goodwill exists separate and apart from the parties’ interests in the property taken, and the owner’s attempt to broadly interpret the lease’s condemnation provision was inappropriate.  The goodwill award continued to belong to the business.

The Court further explained that the property owner was precluded from bringing such a separate lawsuit against the tenant with respect to the allocation of the eminent domain proceeds.  If the owner sought to claim the funds awarded to the business, the appropriate time to do so was in the eminent domain action — not after in a separate action.   Pursuant to Code of Civil Procedure section 1260.220, where there are divided interests in property acquired by eminent domain:

the value of each interest and the injury, if any, to the remainder of such interest shall be separately assessed and compensation awarded therefor. . . .   The plaintiff may require that the amount of compensation be first determined as between plaintiff and all defendants claiming an interest in the property. Thereafter, in the same proceeding, the trier of fact shall determine the respective rights of the defendants in and to the amount of compensation awarded and shall apportion the award accordingly.

Therefore, the owner’s only opportunity to contest the apportionment of the award was in the actual eminent domain action.

Conclusion

The case serves as an important reminder for property owners and businesses to carefully draft and review the condemnation provision in their lease agreements.  While a condemnation action is never anticipated at the time the lease is entered into and will rarely occur, when it does happen, the parties need to be prepared and have a good understanding of who is entitled to what.  The allocation of the eminent domain award may have huge consequences, particularly if the property involves a long-term lease, there are substantial improvements made to the site, or there is a wide discrepancy in market and contract rent.

The case also highlights the importance of resolving any apportionment disputes within the actual eminent domain action — not later in a separate action.  For all parties — including public agencies — if there is a dispute regarding allocation of the proceeds, the best approach is to obtain a determination as to the overall award, and then allow the defendants to sort out apportionment.

Video: David Graeler on Temporary Construction Easements

We are pleased to provide the next installment of our video series from Nossaman’s 2019 Eminent Domain Seminars.  In this segment, Eminent Domain Partner and Litigation Department Chair David Graeler discusses managing Temporary Construction Easements when there is a project delay.                  Please access the video here.

U.S. Supreme Court Reverses Itself – Property Owners Can Have their Day in Federal Court

For more than three decades, most property owners have been relegated to state courts when pursuing a takings claim against a state or local agency.  In a 5-4 decision issued this week, the U.S. Supreme Court reversed itself and opened the door to the federal courthouse, allowing property owners to bypass the state courts and file a Fifth Amendment takings claim in federal court in the first instance.  Knick v. Township of Scott, 588 U.S. __ (June 21, 2019).  What this eventually means for property owners, and the federal courts, only time will tell.  However, one can reasonably assume that forum shopping, once an unheard of practice in the world of takings claims, will now be commonplace, as property owners will evaluate state and federal judges, and their related bodies of law, and file lawsuits in what they believe to be the more favorable forum.

A detailed summary of the facts in Knick v. Township of Scott is available here.  In summary, Ms. Knick filed a state court challenge to a local ordinance requiring her to keep her property open to the general public during daylight hours.  After the Township agreed to stay enforcement of the ordinance while the state court action was pending, the state court dismissed the action finding that since enforcement was stayed Ms. Knicks could not demonstrate the irreparable harm necessary for equitable relief.  Ms. Knick then filed a Fifth Amendment takings claim under 42 U.S.C. § 1983 in federal court.  But the federal district court dismissed the lawsuit, and U.S. Court of Appeals for the Third Circuit affirmed, relying on Williamson County Regional Planning Commission v. Hamilton Bank of Johnson City, 473 U.S. 172 (1985).

In 1985, the Supreme Court issued its decision in Williamson County, holding that a property owner cannot pursue a takings claim in federal court unless (1) the state or local agency’s decision was final, and (2) the property owner has pursued compensation through any applicable state procedures.  Twenty years later, in San Remo Hotel, L.P. v. City and County of San Francisco, 545 U.S. 323 (2005), the Supreme Court held that a state court’s resolution of a takings claim would essentially govern in any subsequent federal lawsuit.  Thus, as pointed out by the majority in its recent decision, “the guarantee of a federal forum rings hollow for takings plaintiffs, who are forced to litigate their claims in state court.”

While leaving the finality requirement from Williamson County in place, the Supreme Court, in a decision penned by Chief Justice Roberts, held that “the state-litigation requirement imposes an unjustifiable burden on takings plaintiffs, conflicts with the rest of our takings jurisprudence, and must be overruled.”

One of the key legal issues debated by the majority and the strongly worded dissent authored by Justice Kagan, was the issue of when a Fifth Amendment violation is deemed to have taken place.  According to the majority, the violation takes place when property is taken without compensation, not after the exhaustion of state court remedies.  The majority analogized the situation as follows:

“A bank robber might give the loot back, but he still robbed the bank.  The availability of a subsequent compensation remedy for a taking without compensation no more means there never was a constitutional violation in the first place than the availability of a damages action renders negligent conduct compliant with the duty of care.”

Not surprisingly, the majority then concluded that “because a taking without compensation violates the self-executing Fifth Amendment at the time of the taking, the property owner can bring a federal suit at that time.”

Notably, the majority did caution that its decision should not be interpreted as opening the door to injunctive relief for regulatory actions that are found to result in a taking, because “[a]s long as just compensation remedies are available—as they have been for nearly 150 years—injunctive relief will be foreclosed.”

Video: Artin Shaverdian on Abandonments and Narrowing the Scope of the Taking

We are pleased to provide the next installment of our video series from Nossaman’s 2019 Eminent Domain Seminars.  In this segment, Eminent Domain Partner Artin Shaverdian discusses best practices when abandoning take areas and narrowing project scope.

Please access the video here.

 

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