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This article originally appeared in the August 2017 edition of the Oregon Real Estate and Land Use Digest, Volume 39, No. 4, a publication of the Oregon State Bar Section on Real Estate and Land Use.

water pipesThe Court of Appeals recently weighed in on the “ripeness” of claims for inverse condemnation and to interpret a judgment issued after a prior condemnation trial under the Uniform Declaratory Judgments Act. The case demonstrates the importance to both a condemner and property owner of clearly and unambiguously describing the scope of a taking in the conveying document – in this case a condemnation judgment.

The procedure for initiating and prosecuting a condemnation is set forth in Chapter 35 of the Oregon Revised Statutes. Once the condemnation lawsuit is filed, the Oregon Rules of Civil Procedure ("ORCP") typically control. However, there are potential traps lurking in the gray areas where the condemnation statute and the ORCPs converge. A condemning authority and property owner fell into such a trap in Washington County v. Querbach, 275 Or App 897 (2015).

Geese photo

In a condemnation when only a portion of the property is taken, the property owner is entitled to just compensation based on the value of the property taken plus damages to the remaining property, if any.  However, if the damage to the remaining property can be cured, the property owner is only entitled to the lesser of the damage to the remaining property or the cost to cure.

Impact on remaining property and the ability to “cure” damage is probably the most subjective area in any condemnation appraisal.  The ODOT ROW Manual instructs the appraiser to first determine if the remaining property is damaged and to quantify that damage.  Only after the appraiser has determined there has been damage and the extent or amount of the damage is the appraiser to consider if the damage can be “cured” and, if so, the “cost of the cure.”  Often, however, an appraiser will go directly to the cure and its costs, bypassing any quantification of the amount of the damages.  The “cure” and “cost of cure” are often the significant issue in partial takings with the condemner and owner positions challenging each other as to what would constitute a cure and its costs.

In two recent condemnation trials, the State of Oregon has sought to exclude evidence and testimony about potential “cures” considered by the property owner’s appraiser in concluding the just compensation for a partial taking.  In both cases, the State’s appraiser presented evidence that the damage to the property owner’s remaining property could be cured, and measured the damages to the remaining property using the “cost-to-cure” valuation methodology.  In each case, the property owner’s appraiser considered and rejected potential cures as not resulting in a cure or the cost was more than the damage.  The owner’s appraiser determined the damage to the remainder, i.e., its diminution in the value, based on a change in the highest and best use of the property, as the appropriate measurement of just compensation.

The owner did seek to present testimony and evidence as to potential cures and then costs.  The State argued to exclude this evidence based on the Oregon Evidence Code Rule 403 and the Oregon Supreme Court’s holding in Tunison v. Multnomah County, 251 Or 602 (1968). The State argued that evidence of the potential cures rejected by the property owner’s appraiser would mislead and confuse the jury, resulting in substantial prejudice to the State that would outweigh the probative value of the evidence.  The specific language in Tunison relied on by the State reads:

"[The property owner argues] that since, under the circumstances . . . restoration costs may be used as a measure of damages, it is necessary for the appraiser to make an initial estimate of such costs in order to determine whether they were less than the depreciation in the market value of the property not taken and thus binding upon the owner. We reject this argument. The appraiser may find it advisable to make such a calculation but if the owner seeks to recover the depreciation in the market value of the property remaining, he cannot testify as to restoration costs. To permit him to do so would be to inject into the case evidence which the jury is likely to improperly consider in estimating the owner’s loss.  (emphasis added.)"

Id. at 604-05

In response, the property owners made three arguments: (1) that the property owner was entitled to put on evidence of potential cures considered and rejected by the appraiser to rebut the State’s evidence that the damage to the remainder should be measured by the State’s proposed “cost-to-cure”; (2) that USPAP requires an appraiser to consider “cost-to-cure” in determining just compensation in a partial taking; and (3) that later Court of Appeals opinions favor allowing the jury to consider evidence of competing valuation methodologies in determining just compensation.  The trial court denied the motion to exclude in each case finding that the property owner was entitled to present the rejected “cures” as rebuttal evidence.  The trial courts appeared to reject (or at least did not reach a decision on) the property owners’ other two arguments.

The Tunison case is most often cited in support of using a “cost-to-cure” methodology in valuing damages to the remainder in condemnation cases.  As a result, the State’s use of this case in an attempt to exclude competing “cost-to-cure” evidence is clever, but also disconcerting. First, USPAP (and the ODOT Right of Way Manual) requires an appraiser to consider potential cures in determining damages to the remainder in a partial taking case.  To exclude evidence of rejected potential cures would prevent an appraiser from testifying to a key underpinning of his or her opinion on value. Second, the argument runs counter to Oregon Court of Appeals cases issued after Tunison that set a liberal standard for presenting expert testimony on valuation methodology to juries.  See Tri-Met v. Posh Ventures, LLC, 24- Or App 425, at 437-438 (2011) (finding that jury is entitled to “hear expert testimony regarding the appropriateness of a particular valuation methodology”) and City of Bend v. Juniper Utility Co. 242 Or App 9, 20 (2011) (it is left to the trier of fact to assess the evidence, including expert testimony regarding the appropriateness of a particular valuation methodology, and to then make a factual call as to the fair market value of the property in question).  Third, any danger that a jury will be misled or confused by evidence of rejected “cures” is mitigated by the uniform jury instructions used in most condemnation cases.  For these reasons, it is the authors’ opinion that a property owner should be entitled to present evidence of competing potential cures in it case in chief, and not just as rebuttal evidence.

Effectively, the State asserted that only it could present evidence and testimony of a potential cure and its costs, but the owner, if relying on just compensation using diminution in value to the remainder, could not present testimony or evidence as to a cure or its costs, i.e., what is good for the goose is only for the goose.   Fortunately, in both cases, the court allowed the owner to put in evidence and testimony regarding potential cure and their costs as rebuttal to the State’s assertion of a specific cure and its costs.  Overall, a practitioner should carefully consider this aspect of the Tunison case in preparing for any trial that involves a partial taking in which either party intends to present “cost-to-cure” evidence.

Eminent DomainState v. Alderwoods (Oregon), Inc., 2014 WL 4823607 (Or. App. Sept. 17, 2014)

The issue of whether a property owner is entitled to compensation for the taking of abutter’s rights of access to a public highway was again taken up by the Court of Appeals in State v. Alderwoods (Oregon), Inc.  The case involved an eminent domain action relating to the recent improvements to Highway 99W near its intersection with Highway 217.  The State filed an eminent domain action seeking to take a temporary construction easement in order to improve the sidewalk and to remove the curb cuts and driveways that allowed access to the Alderwoods (Oregon), Inc.’s property from Highway 99W.  The property retained indirect access to Highway 99W from Warner Road. In its Complaint, the State alleged that, in addition to the temporary construction easement, it was seeking to acquire “[a]ll abutter’s rights of access, if any” to Highway 99W.  After the Complaint was filed but before trial, ODOT exercised its regulatory authority to remove the property’s access to Highway 99W through a separate administrative action.  Prior to trial, the trial court granted the State’s motion in limine to exclude all evidence of diminution in the value of Alderwoods’s land resulting from the loss of direct access to Highway 99W.  The parties stipulated to a general judgment awarding just compensation for the temporary construction easement and Alderwoods appealed the trial court’s ruling on the motion in limine.

The Court of Appeals heard the appeal en banc and an equally divided Court issued a per curiam decision affirming the trial court’s ruling. Judge Armstrong wrote the concurring opinion in favor of affirming the trial court’s decision.  Judge Sercombe wrote a separate concurring opinion.  Judge Wollheim wrote the dissent. All three opinions agree that, generally, “there is no right to compensation for a loss or restriction of access to an abutting street if access to the property is not completely eliminated by the project for which the other property is being condemned.” Id. at *8. Although a property owner has a common law right of access to an abutting public right of way, that access right is subservient to the public’s right of free use of the streets.  The state may protect that right through the exercise of its police powers.  Thus, if the state exercises its police power to eliminate or restrict property’s access to an abutting public right of way (so long as all access is not eliminated), the property owner is not entitled to compensation regardless of the diminution of value caused by the loss or restriction of access.

The three opinions differ on whether the State is required to pay just compensation where it seeks to take or restrict a property owner’s right of access through an eminent domain action as opposed to an administrative action exercising its police powers.  Judge Armstrong in his concurring opinion reasoned that Alderwoods had a common law right of access to Highway 99W.  However, because that right of access was lost by administrative action “the property has no lawful access to Highway 99W irrespective of the condemnation of the access to the highway.” Id. at *7 (emphasis in original).  Therefore, Judge Armstrong concluded that the evidence of diminution of value was irrelevant and properly excluded by the trial court.

Judge Sercombe in his separate concurring opinion finds that an abutter’s common law right of access is general and unfixed.  Judge Sercombe reasons that compensation is only required if the state takes both the direct and indirect access to the public right of way. Id. at *9.  Judge Sercombe concludes that Alderwoods was not entitled to compensation for the loss of direct access to Highway 99W in the eminent domain action because the State did not also seek to take Alderwoods’s indirect access.  The fact that the State also took Alderwoods’s right of access through an administrative action did not factor into Judge Sercombe’s opinion.

Judge Wollheim’s dissent concludes that Alderwoods should have been allowed to present evidence of damages resulting from the State’s taking of its abutter’s right of access to Highway 99W in the eminent domain proceeding. Judge Wollheim does not dispute that the State has the right to take or restrict access through its regulatory authority without compensation (so long as all access is not eliminated).  However, because the State chose to take the access through its eminent domain under the authority granted by ORS 374.035, the State was statutorily required to pay just compensation in the eminent domain proceeding.  Judge Wollheim did not consider the administrative action eliminating access, in part, because the State did not argue that the regulatory action eliminated Alderwoods’s right to compensation.

It is anticipated that Alderwoods will file a petition of review with the Oregon Supreme Court.  Until the Supreme Court weighs in on the issue, the primary take away from the Court of Appeals per curiam decision is that the condemner should exercise its regulatory authority to eliminate or restrict a property’s abutter’s rights of access before it files an eminent domain action.  It is clear under all three opinions that a property owner is not entitled to just compensation for a restriction or elimination of abutter’s right of access through the state’s regulatory authority (so long as all access is not eliminated).

Several of the blogs we have posted have addressed different aspects of the law of condemnation (read here, here, and here).  This law addresses the power of eminent domain – the ability of the government to take private property.  Although the government has this right, it is qualified by, among other things, both the Oregon Constitution Article I, Section 18 and the U.S. Constitution’s Fifth Amendment, which provide that the government may exercise this right only upon paying “just compensation” for the property being taken.

Typically the traditional purpose of condemnation is to acquire property for public projects like roads and sewers.  However, it has also been used in a not so traditional way to acquire property that the condemning government may convey – i.e. “flip” – to private developers for purposes of redeveloping property.  Many of the urban renewal efforts have used the power of eminent domain to acquire “blighted” properties in order to include them in economic redevelopment projects.  This approach to economic development has been used for generations, but for many it was under the radar until it was addressed in the U.S. Supreme Court case of Kelo v. City of New London.  In Kelo, the facts aligned where the taking was of property owned by an elderly lady who had no interest in selling her property and wished to live out her days in her home.  However, the City of New London, Connecticut had a different plan for her property – it should be redeveloped along with other properties in order to boost the economic development of that area of the city.  Since the owner was unwilling to sell to the developer, the city would use its eminent domain powers to acquire her property and then convey it to the developer to be included in the larger redevelopment project.  Although this was nothing new, when the U.S. Supreme Court ruled the city was well within its authority to use its powers in this fashion there was public outrage across the country and many states passed legislation under public pressure that would not allow a government to use condemnation to acquire property that would then be conveyed to a private developer.  In Oregon the issue was placed on the ballot by an initiative which passed by a large margin, resulting in the ORS 35.015 prohibition that a public body may not use its power of eminent domain to acquire private property which it intends to convey to another private party.

CondemnationYou might think the backlash to Kelo would cause public agencies to be more discrete and conservative in utilizing condemnation for non-traditional purposes.  But that isn’t the case, at least in a couple of California jurisdictions, where they have considered using condemnation to acquire not real property itself, but interests in real property in the form of “underwater mortgages.”  This concept was apparently first floated in a Cornell Law School Legal Studies Research Paper authored by Professor Robert C. Hockett.  The idea of these “Mortgage Condemnations” is to condemn underwater mortgages secured by private deeds of trusts.  Only that interest in the property, i.e., the financial instrument, would be condemned, not the property itself.  The beneficiary of the deed of trust, generally a bank, would be paid less than the face value of the performing loan, reflecting the possibility that the property owner would eventually stop paying if the property value remains less than what is owed.  Once the deed of trust was acquired, the condemner would convey this interest in the property to a private entity that would offer the property owners an opportunity to refinance their mortgage for a lower principal amount and more favorable terms, increasing the chance they will stay in their home. 

This proposed approach may have a populist appeal in that it addresses the impact on homeowners of the declining value of residential property.  The concept is that, once the underwater mortgage was acquired, the owner’s loan could then be restructured in a way to allow the owner to stay in their home.  However, it is not necessarily entirely altruistic.  A primary advocate for mortgage condemnations is a private group of investors located in San Francisco, Mortgage Resolution Partners (MRP).  Purportedly MRP would provide to the condemning authority the funds necessary to acquire the underwater mortgage.  The acquired underwater mortgages would be transferred to MRP (or a similar private party), which would then renegotiate terms more favorable to the owner and manage the account.  As with any investor, it is assumed that MRP will get a return on its investment and efforts.

The use of condemnation to acquire underwater mortgages is fraught with issues, primarily the issue of whether it is constitutional.  To see the Points – Counterpoints view of this use of eminent domain, you can visit the web pages of Mortgage Resolution Partners (pro) and the Securities Industry and Financial Market Association (con).  There are also interesting issues concerning how the just compensation would be determined – i.e., what is the fair market value of an underwater mortgage?  However, the constitutional and other legal issues aside, at least in Oregon, given the ORS 35.015 prohibition on the use of eminent domain to acquire private property which is intended to be conveyed to another private party, it is unlikely this use of eminent domain is going to happen.

There is a certain irony that a populist response to the use of eminent domain in Kelo resulted in many cases of restrictions being legislatively imposed on condemnation, while a populist response to the housing crisis is the basis for likely the most “creative” expansion of the use of eminent domain authority since...well...since it was first used to acquire property to be turned over to private parties for redevelopment.

In State ex rel Dept. of Transp. v. Singh, No. 110469, A1495660, 2013 WL 3215699 (Or. Ct.. App. June 26, 2013) , the State sought to close two reservations of access by eminent domain on Highway 34 to a property that was improved with a convenience market and also to close access to the County Road using its police powers.  The property owner, Mr. Singh, moved to dismiss the condemnation case for the State’s failure to comply with the Condemnation Procedures Act because its statutory offer of just compensation (1) did not include a specific description of the location and extent of the rights of post-taking access to Mr. Singh’s property, and (2) did not address all compensable damages to the property as a result of the elimination of access to the property. The trial court granted Mr. Singh’s motion for summary judgment and dismissed the State’s complaint. The State appealed.

There was no dispute that the taking eliminated all rights of access to Mr. Singh’s property, and that absent reasonable alternative post-taking access, Mr. Singh’s remaining property would be land locked. In order to mitigate the damage to the remaining property, the State attempted to grant Mr. Singh rights to access and use a new road to be constructed across the neighbors’ private properties for access to his remaining property. As the trial court correctly ruled, however, there was nothing in the State’s offer (or the Complaint) describing with any definiteness or certainty the location or right to use a proposed new access road to Mr. Singh’s property. The State merely “offered” to build a road, at some generally-described location, and at some undefined point in time, all to be determined at the State’s sole discretion. The Court of Appeals agreed with the trial court’s dismissal of the condemnation action for failure to comply with the Condemnation Procedures Act. ORS 35.346(1) required the State to “make a written offer” to the property owner (a) “to purchase the property or interest,” (b) “to pay just compensation therefore,” and (c) to “pay just compensation for any compensable damages to the remaining property.” Implicit in the concept of an offer under the statute is that the amount offered is specifically tied to the terms of the offer. Thus, the amount of damages that a condemner offers must be based on an evaluation of the compensable damages that the remaining property will suffer if the property owner accepts the terms of the proffered agreement.

Because the appraiser for the State made the assumption in its appraisal that there would be access different than what was “offered,” the dismissal was appropriate.  The Court of Appeals held there is no requirement that the complaint include a metes and bounds description of the future access that the condemnor will provide. However, when the State chooses to make an offer of compensation before the specifics of a future access are certain, the statute requires that the compensation offer include compensation for that uncertainty. The trial court correctly dismissed the condemnation complaint.

The City of Harrisburg placed a municipal water well on undeveloped property owned by the Defendant property owner, Ms. Leigh. Shortly thereafter, the City discovered that they placed the well on her property but they did nothing. Several years later Ms. Leigh decided to sell the property and her broker discovered the well and approached the City with the situation. The City responded to her discovery of the well by suing her for adverse possession of her property, instead of offering to pay her fair market value of her property. The City lost and she won an ejectment action – which resulted in the trial Court opinion that the City was not entitled to legal possession or any interest in the property and ordering the City to vacate the property and decommission the well by September 1.

Months later, on a Friday, August 28, the City offered to purchase her property for $7,425. When she rejected their offer, they filed an emergency condemnation proceeding the following Tuesday, September 2. The dates here are important.

Ms. Leigh’s position at trial was that, as a matter of law, as of September 2, (one day after the well was to have been decommissioned) Ms. Leigh owned the well because the trial court’s judgment specifically held that the City had no legal right to Ms. Leigh’s property and were required to decommission the well by September 1st , which had not occurred. The trial court rejected Ms. Leigh’s legal argument and Ms. Leigh received only compensation for the land and not for the well.

Ms. Leigh appealed to the Oregon Court of Appeals, which agreed that the ejectment judgment conclusively established that Ms. Leigh was the owner of the property, including its improvements. Accordingly, she was entitled to compensation for the value of the property, as improved. A public body that takes private property for public use must pay the property owner “just compensation”. OR Const, Art I § 18. The Court of Appeals held that the prior judgment conclusively held that the City was “wrongfully withholding possession of the Property”, and therefore, the value of the property was measured as of September 2, 2008 – the date the condemnation action was commenced and the property included compensation for the well because the well had not been decommissioned by September 1. The case was remanded back to the trial court for entry of judgment for Ms. Leigh.

(Property owner was represented by Garvey Schubert Barer.)

City of Harrisburg v Ellen Leigh

From time to time governments need to take property for a public purpose. Both the federal and state constitutions allow this, provided the government pays “just compensation.” If the government can’t reach an agreement with the property owner, it can take the property under its eminent domain authority – condemnation – by filing a lawsuit naming the property owner (and any other party having an interest in the property to be taken). The issue in a condemnation lawsuit is: what is the amount of just compensation owed?

In a case of first impression in Washington State, Division I of the Washington Court of Appeals ruled on January 31, 2011 in Ruvalcaba v. Kwang Ho Baek, Division One, No. 63572-2-1, that landowners may condemn a private way of necessity under RCW 8.24.010 after voluntarily landlocking their property.  In that case, the Ruvalcabas had divided their land in 1971 and sold the eastern parcel which bordered a public street 42nd Avenue NE, thus landlocking the remaining parcel.  The Ruvalcabas then brought an action to condemn a private way of necessity against other neighbors to the north to gain access to NE 135th Street.

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