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Four Separate Parcels of Land v. City of Kodiak (2/21/97), 938 P 2d 448
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Notice: This opinion is subject to correction before publication in the Pacific
Reporter. Readers are requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone
(907) 264-0607, fax (907) 264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
FOUR SEPARATE PARCELS OF LAND, )
) Supreme Court No. S-6799
Appellant, )
) Superior Court No.
v. ) 3KO-92-232 CI
)
CITY OF KODIAK, ) O P I N I O N
)
Appellee. ) [No. 4785 - February 21, 1997]
______________________________ )
Appeal from the Superior Court of the State of Alaska, Third
Judicial District, Kodiak,
Brian C. Shortell, Judge.
Appearances: Gerald W. Markham, Kodiak, for Appellant.
Melvin M. Stephens, II, Kodiak, for Appellee.
Before: Compton, Chief Justice, Rabinowitz, Matthews,
Eastaugh, and Fabe, Justices.
MATTHEWS, Justice.
I. INTRODUCTION
Gerald Markham, owner of certain parcels of land in Kodiak,
appeals the entry of judgment by the superior court following a jury verdict
regarding the value of land taken by the City of Kodiak for a road expansion
project.
II. FACTS AND PROCEEDINGS
In 1991, the City of Kodiak (the City) made public its plans to
condemn four parcels of land to allow the widening of Mill Bay Road. Gerald
Markham owned two of the parcels to be condemned, subsequently labeled
Parcels III and IV. The other two parcels were owned by Sung Kim and Duane
and Nancy Freeman. The condemnation of Parcel III lies at the center of this
litigation.
Parcel III is a portion of three contiguous lots along Mill Bay
Road, labeled Lots 3, 4, and 5. Lot 3 was unimproved. Lot 4 contained two
houses, which gave it non-conforming use status, and Lot 5 contained one house
and a shed.
The house on Lot 5 was occupied by Andrew Lundquist under the
terms of a contract between Markham and Lundquist. Under the contract,
Markham provided Lundquist occupancy of certain office space and the house on
Lot 5 "or a comparable residence" rent-free. In exchange, Lundquist assumed
certain managerial responsibilities relating to rental properties held by Markham
in Kodiak. The contract was terminable by either party upon sixty days' notice.
The contract was intended to allow Lundquist to exclude the rental value of the
property from his taxable income under sec. 119 of the Internal Revenue Code.
(EN1)
The area taken by the City for the right of way was a strip along
the northwest edge of Lots 3, 4, and 5, parallel to Mill Bay Road, ranging
between 8.99 and 9.82 feet in width. The total area condemned was 1,124 square
feet.
According to the City's survey, one of the houses on Lot 4 already
encroached upon the existing right of way for Mill Bay Road. The remainder
rested primarily within Parcel III, the condemned area. The City's survey also
showed the house on Lot 5 as encroaching upon the existing right of way, with
the rest of the house partially on Parcel III and partially on the remainder of Lot
5. (EN2)
The City commenced negotiations to purchase either Parcel III or
the entirety of Lots 3, 4 and 5 based upon the appraisal of William Roberts, a
private real estate appraiser retained by the City. After negotiations failed, the
City, on June 5, 1992, filed a condemnation complaint and a declaration of taking
for the four parcels. The City deposited $113,000 with the court for the four
parcels, $92,000 of which was the estimated fair compensation for the strip of
land constituting Parcel III. The City later amended its declaration of taking,
correcting an error in the original declaration. The original declaration reflected
the estimated value of all of Lots 3, 4 and 5, rather than the value of only Parcel
III and the houses which sat upon that strip. The amended declaration estimated
the value of Parcel III as $24,500.
Markham filed an answer to the complaint on June 29, 1992,
challenging the City's estimate of the value and the necessity of the taking. On
July 15, the Freemans, the owners of Parcel II, filed an answer to the City's
complaint and a demand for a jury trial.
On August 28, the City and Markham entered into a stipulation
before the court. Under the stipulation, Markham withdrew his objections to the
declaration of taking for Parcels III and IV and acknowledged that he did not seek
and was not entitled to just compensation for the taking of property other than
Parcels III and IV. He reserved the right to contest the compensation due for
Parcels III and IV. As to the issue of the houses and the alleged encroachment,
the parties stipulated:
For all the purposes in the future of these
proceedings Plaintiff and Mr. Markham stipulate
and agree that the just compensation to be awarded
Defendant Markham for Parcel III shall be
determined without regard to any alleged
encroachment of these two houses into the right of
way of Mill Bay Road. In other words, for
purposes of establishing the compensation due to
Mr. Markham as a result of the condemnation of
Parcel III, there shall be no deduction or argument
that there should be a deduction for any actual or
apparent encroachment of either of the houses on
that parcel into the existing Mill Bay Road right of
way.
Notwithstanding the above, and without
otherwise affecting the amount of compensation to
which he is entitled, the parties agree that Mr.
Markham shall have the right, at his sole expense,
to remove either or both houses which presently sit
partially on Parcel III from that parcel . . . .
The stipulation also provided that, since the City's estimated value
in the declaration of taking was based upon a valuation assuming an encroachment
into the existing right of way, the City would have the right to amend its
estimation of fair market value and to adjust its deposit of funds with the court
accordingly. The City did so by filing a second amended declaration of taking
which estimated the value of Parcel III at $43,605. The estimated combined
value of Parcels III and IV was consequently $46,205. The City adjusted the
funds on deposit with the court accordingly.
Markham subsequently moved the houses under the terms of the
stipulation. He moved the house on Lot 5 back from the condemned strip and
moved the house on Lot 4 to a subdivided portion of Lot 3, which Markham calls
Lot 3-B. (EN3)
Shortly before the trial began, Duane and Nancy Freeman settled
with the City and were dismissed as parties under a stipulation to the court.
Three appraisers testified at the jury trial. William Roberts first
testified for the City. He testified that there are three accepted methods for
appraising property: the direct sales comparison approach, in which the appraiser
examines recent sales of similar property; the replacement cost approach, in
which the cost of building a replacement structure is estimated, less deductions
for depreciation; and the income approach, which estimates the value of the rental
income to the owner. Roberts testified that the combined value of Parcels III and
IV was $44,500. (EN4) He used the direct sales comparison method to value the
land on Parcel IV, the land on Parcel III, (EN5) and the house on Lot 5.
He used the replacement method as a backup to check his figures for the
house on Lot 5; the result was slightly lower so he adopted the higher market
sales number as his estimate. He noted that the income approach is generally not
used for single family homes such as the house on Lot 5.
Roberts testified that the house taken from Lot 4 was in "fairly sad
condition"and "fairly well depreciated,"so that he could not find any sales of
homes in similar condition with such a short economic life. He also testified that
there was little probability that anyone in the Kodiak market would pay to replace
a similar structure on the lot. Thus, he used an "interim use"valuation approach
for the house, which is a type of income analysis focusing upon the income the
structure could produce before it would be removed to make way for a higher use
for the property. (EN6) He determined that the value of the net income stream
Markham could receive for the property over its useful life was $1,900.
In sum, then, Roberts testified to the following values:
Land on Parcel III: $ 6,500
House on Lot 5: 33,500
House on Lot 4: 1,900
Land on Parcel IV: 2,600
Total: $44,500
Thomas Dunagan then testified for the City as an expert appraiser
who had reviewed Roberts's report and inspected each of the parcels involved.
He testified that Roberts had correctly valued the properties.
Michael Renfro then testified for Markham. Renfro valued the
total take at $57,170. He compared his appraisals to those which Roberts
conducted for the City, and testified that "the approaches to value are similar in
both cases. . . . The process that we went through is the same process." He
testified that his estimates of value were generally somewhat higher than
Roberts's, but repeatedly mentioned that any difference was "a difference of
opinion." For example, to value the house on Lot 4, Renfro used a longer useful
economic life, a higher monthly rent, and a lower capitalization rate, but he
testified that the process was the same. To value the house on Lot 5, Renfro
testified that he used both a market approach and a replacement cost approach and
"came out with pretty much the same numbers"as Roberts. He testified that he
also calculated the value of that house using an income approach, but did not
include it in his report because he "didn't think it pertained to the property." He
testified that, generally speaking, "in residential properties you don't use the
income approach. Traditionally, you don't use it."
Markham also sought to introduce the expert testimony of Ronald
Greisen, a CPA, for the purpose of establishing certain losses from the taking.
Judge Shortell heard Greisen's testimony outside the presence of the jury to
determine the allowable scope of the testimony.
Greisen's proposed testimony was offered to establish three things:
(1) that the loss of the non-conforming use status on Lot 4 was valued at $24,700;
(2) that the income approach to valuation established the value of the house on
Lot 5 at $60,700; and (3) that the taking resulted in a loss of a benefit from the
management contract with Lundquist valued at $35,000. Judge Shortell allowed
the testimony concerning the loss of the non-conforming use status. He
disallowed the testimony regarding the income approach valuation of the house
on Lot 5 and the loss relating to the Lundquist contract.
The jury returned a verdict of $46,400, representing a fair market
value of property taken in the amount of $44,500, and other losses over and
above the fair market value of the property in the amount of $1,900. The
superior court entered a judgment in favor of Markham for $195, the difference
between the jury award and the amount deposited with the court by the City under
its declaration of taking. Markham moved for an award of $145,870 in attorney's
fees; the superior court denied Markham any fees. Markham appeals.
III. DISCUSSION
A. Greisen Testimony
Markham appeals the superior court's ruling on the admissibility
of testimony relating to the "lost profits"from the management contract. (EN7)
The trial court ruled that the testimony was inadmissible because it rested upon
false factual foundations.
In the establishment of just compensation, neither party generally
bears the burden of proof. State v. 45,621 Square Feet of Land, 475 P.2d 553,
554-56 (Alaska 1970). But the condemnee bears the burden of proving both lost
profits and incidental damages with reasonable certainty by a preponderance of
the evidence. City of Kenai v. Burnett, 860 P.2d 1233, 1244-45 (Alaska 1993);
State v. Hammer, 550 P.2d 820, 827 (Alaska 1976).
Greisen's analysis asked what Markham would have to pay
Lundquist so that Lundquist would be able to live in a house that rented for $900
a month, the assumed rental value of the house on Lot 5. Given a tax bracket of
28%, Lundquist would have to earn $1,250 to be left with $900 after taxes.
Markham claimed that the $350 per month difference, which he did not have to
pay Lundquist, was an advantage under the contract which was lost by the take.
He translated that to $4,200 per year, and capitalized it at 12% to reach $35,000.
(EN8)
This analysis rests upon at least two questionable assumptions:
first, that the contract would have continued indefinitely if not for the taking; and
second, that the benefit of the contract was extinguished by the taking. Although
he was given the opportunity to make an offer of proof, Markham demonstrated
neither.
The management contract was terminable at will by either party
upon sixty days' notice. Markham testified that he saw "no problem"with the
contract extending into the future, but this court has indicated that such
expectations may be insufficient as proof of incidental damages. See Stroh v.
Alaska State Housing Auth., 459 P.2d 480, 482 (Alaska 1969) (expectation or
probability of lease renewal does not give tenant right to compensation in
condemnation action).
More importantly, Markham was not able to demonstrate a factual
foundation for the testimony because the benefit of the contract was not
extinguished by the taking. Markham moved the house on Lot 5 back from the
parcel taken by the City. After the house was moved, Lundquist continued to
occupy the house rent-free and continued to manage Markham's other property,
so that the relationship continued as before. Judge Shortell acknowledged that
Markham may have had a viable claim for a four-month period in which
Lundquist had to vacate the house so that it could be moved, but ruled that
Markham could not receive compensation for loss of a contractual benefit
indefinitely into the future when the loss had not in fact been incurred and the
contract was still in existence.
We affirm the superior court's ruling since Markham did not
demonstrate that Markham's benefit from the contract was terminated by the
taking. Greisen's testimony as to the value of that benefit was therefore
irrelevant. (EN9)
B. Cost of Cure Recovery
Markham next argues that if he is not allowed compensation for the
loss of the benefits (or "lost profits") of the management contract with Lundquist,
he should be granted compensation for the "cost of cure,"or the cost to him of
moving the house on Lot 5 back so that Lundquist could resume occupancy under
their management agreement. (EN10)
The superior court did not allow testimony related to Markham's
costs in moving the houses because the stipulation signed by Markham provided
that he would have the right to remove either or both houses affected by the
taking "at his sole expense." Markham's response is that the language of the
stipulation required him to bear the expenses of the move as they are incurred,
but that the City was still obligated to reimburse him for those expenses as part
of his just compensation.
We affirm the superior court's ruling on the grounds that Markham
assumed the cost of removal under the stipulation. Markham fails to persuade us
that the stipulation language providing that he would bear the expense of moving
the houses implied that the City would ultimately pay for the move as part of its
just compensation payment.
C. Evidence of "Admissions"
Markham further argues that the superior court erred in refusing
to allow the introduction of two documents which he purports to be admissions
of inaccurate appraisals or biased appraisers. We disagree.
The first document at issue is a letter from the City's attorney,
Melvin Stephens, to the City Manager, Gary Bloomquist, written before the
encroachment issue was stipulated out of the trial. Taken as a whole, the letter
discusses the rules relating to attorney's fees in condemnation actions, in which
the condemning authority can never recover costs and attorney's fees, but the
condemnee can recover full fees if the jury is convinced that the property is worth
more than 10% over the amount deposited with the court. See Civil Rule 72(k).
The letter reads in pertinent part:
While I see little hope of negotiating a
settlement with Mr. Markham . . . let me
emphasize that, when it comes to determining the
value of the property being condemned, the City's
case is only as strong as its appraisal evidence. . .
.
With someone like Jerry Markham, this rule
[on attorney's fees] can turn condemnation litigation
into something akin to a poker game in which the
other side keeps raising and you can never win the
pot. I mention this because it would be foolish to
regard our appraisals in the present instance as
unassailable. Even the most straightforward
appraisals are subject to legitimate differences of
opinion and, in the present instance, the appraisal
issues are by no means straightforward. One of
Jerry's properties contains a dwelling which
encroaches into both the strip of property the City
needs to condemn and the existing right-of-way of
Mill Bay Road so there can be several different
views as to how one goes about determining the fair
market value of that property.
Viewed in context, the letter was evaluating the risk that the City
could be held responsible for Markham's attorney's fees and costs in light of the
uncertainties surrounding valuation of property whose possible encroachment onto
an existing right of way was disputed. Markham did not demonstrate before the
trial court and does not demonstrate here why this amounts to either an admission
that the final appraisal was flawed or a demonstration of some sort of bias by the
appraiser. Judge Shortell correctly excluded the letter because it was irrelevant
and it threatened to expand the scope of the trial by introducing to the jury issues
relating to the ten-percent rule regarding attorney's fees under Civil Rule 72(k).
(EN11)
The second letter Markham sought to introduce was a handwritten
note from Wayne Coleman, the project engineer for the Mill Bay Road project,
to the city attorney. In it, Coleman discussed negotiations with Duane and Nancy
Freeman concerning the purchase of all or parts of property adjacent to
Markham's. The last paragraph stated, "Not gaining these properties in total
detracts a bit from potential bargaining leverage w/ Markham but that should not
be a significant factor." Judge Shortell decided not to admit the letter for the
purpose of showing bias by the appraiser.
We also affirm this ruling. The handwritten letter was from the
project engineer to the city attorney. The appraiser, Roberts, was neither the
author nor the recipient of the letter and no connection was made between
Roberts and this letter or any other reference to "bargaining leverage." The letter
was irrelevant to the purpose for which Markham sought to introduce it.
D. Evidence of Tax Appraisal
Markham further argues that the trial court erred in refusing to
allow evidence of the Kodiak Island Borough's assessment of the property for tax
purposes. In cross-examining Roberts, Markham's counsel sought to have him
read a portion of his appraisal describing taxes and assessments by the Borough.
After an objection by the City's counsel, the superior court dismissed the jury and
heard the testimony at issue. Roberts explained that the tax assessments were
included in his report because if he were to perform an income approach
valuation of the property he would need to know the taxes assessed. But he
testified that the figures "had no bearing whatsoever"on his value determination,
after noting that assessments are often considerably higher or lower than true
market value.
Markham's counsel argued that the data should come in under
Alaska Rule of Evidence 705 as a disclosure of facts or data underlying an expert
opinion. Even if the assessment were a basis for Roberts's opinion, Evidence
Rule 705(c) allows a court to exclude underlying facts or data "if the danger that
they will be used for an improper purpose outweighs their value as support for
the expert's opinion." Here, the court acted well within its discretion to exclude
the evidence.
This court has held that evidence of a tax assessment to establish
fair market value is inadmissible, since such an assessment is "notoriously
unreliable as a criterion of true value." State v. 45,621 Square Feet of Land, 475
P.2d 553, 557 (Alaska 1970). That case recognized, without deciding, that there
might be an exception "where a taxing entity assesses at one level of value but
later the same entity condemns at a lower value." Id. at 558 n.12. That possible
exception does not apply here because the assessment was conducted by the
Borough and the condemnation was executed by the City.
E. Appointment of a Master
Markham objects in his opening brief to the failure of the superior
court to appoint a master. Civil Rule 72(h)(3) provides that a master will be
appointed to determine the amount to be paid to each condemnee ufor trial.
Here, co-defendants Duane and Nancy Freeman filed a request for a jury trial on
July 15, 1992. On August 28, 1992, at a status hearing regarding the parties'
stipulation on the encroachment issue, Markham asked the court to appoint a
master. Judge Shortell then invited the parties to submit names of any people
they would find acceptable to serve as masters.
Markham apparently never again raised the matter before the court.
He filed a Memorandum to Set Civil Case for Trial on December 15, 1993, in
which he noted that a jury trial had been demanded and estimated a trial time of
five days. The Freemans were dismissed as parties on October 26, 1994, under
the provisions of a stipulation. Following a telephonic hearing in which counsel
for Markham repeatedly asserted that he was prepared to go ahead with the trial
and that he "want[ed] to go ahead with the trial,"the jury trial began on
November 1, 1994.
Markham's reply brief indicates that his position is only that, if the
case is remanded for a new trial, he be allowed to present his case to a master.
He writes:
The issue here is not whether Condemnee
would not be bound by the verdict when on the eve
of a long overdue trial, the Condemnor settled with
a co-defendant demanding jury, and the Condemnee
seeking a master nevertheless acquiesces in the jury
trial then set. The question is whether following a
reversal on appeal on other grounds . . .
Condemnee here can be said to have forever waived
his right to a master on remand?
(Footnote omitted.)
Thus, given our affirmance of the judgment, this issue has been
mooted.
F. Costs and Attorney's Fees
The City deposited $46,205 with the court under its declaration of
taking for Markham's property. This amount was distributed to Markham by
court order in September 1992. The total jury award to Markham was $46,400.
The court entered judgment in favor of Markham for the $195 difference, plus
interest. The jury award was thus slightly over 0.42% greater than the amount
deposited originally.
Civil Rule 72(k) governs costs and attorney's fees in eminent
domain actions. That rule provides in part:
Costs and attorney's fees incurred by a defendant
must be assessed against the plaintiff if:
. . .
(3) the award of the court was at least ten
(10) percent larger than the amount deposited by the
condemning authority or the allowance of the
master from which an appeal was taken by the
defendant; [or]
. . .
(5) allowance of costs and attorney's fees
appears necessary to achieve a just and adequate
compensation of the defendant.
Markham filed a motion seeking $146,870 in attorney's fees and
$10,342 in costs. After considering the motion, Judge Shortell issued a
preliminary order denying costs and fees to Markham on February 9, 1995. His
order included findings that: Markham was not entitled to fees and costs under
Rule 72(k)(3) since the award was only slightly higher than the amount deposited;
that the manner in which Markham litigated the case substantially and
unreasonably increased the costs and fees incurred; that his cost and fee request
appeared unreasonable; that he had produced no evidence that he incurred any
out-of-pocket attorney's fees because throughout he either represented himself or
had an associate represent him; and that he had failed to explain why the
attorney's fees were necessary and reasonable, or why a fee award of $146,870
was necessary to achieve just and adequate compensation in a case where the
property was valued at approximately $46,000.
Judge Shortell offered Markham the opportunity to file
supplemental evidence to show that the fees and costs he claimed were reasonable
and necessarily incurred. On July 11, 1995, Judge Shortell issued a final order
denying fees and costs to Markham, noting that Markham had "made an
insufficient factual showing to entitle him to an award of costs and fees, in any
amount, under Civil Rule 72(k)(5)."
Markham appeals this decision. He asserts that full attorney's fees
and costs are "the norm"under Rule 72(k). An examination of the rule shows
that this is not the case. Full fees are awarded if the final award is more than ten
percent greater than the amount deposited by the condemning authority. Rule
72(k)(3). They may also be awarded if they appear "necessary to achieve a just
and adequate compensation." Rule 72(k)(5). Nothing suggests that full fees are
the "norm"where the amount awarded is substantially the same as the amount
deposited.
Markham implies that he should receive attorney's fees under Rule
72(k) because, "[a]fter over two years of litigation, and a five day trial, [he]
received an award of [only] $195 due to jury error in understanding the City's
appraisal evidence." This argument goes to the merits of the jury's decision,
which has been addressed above.
Judge Shortell's discussion of the necessity of an award of costs
and fees to achieve adequate compensation was thorough and fair. He gave
Markham more than one opportunity to show that an award of attorney's fees was
necessary. Markham failed to do so. We affirm the superior court's denial of
fees and costs.
IV. CONCLUSION
The judgment of the superior court is AFFIRMED.
ENDNOTES:
1. 26 U.S.C. sec. 119(a) provides an exclusion from gross income for the
value of lodging furnished to an employee by an employer for the convenience
of the employer "if . . . the employee is required to accept such lodging on the
business premises of his employer as a condition of his employment."
2. Markham denied that any of the houses encroached upon the existing right
of way. Though he recognizes that he has little documentation to support it, he
maintains that the State reached a settlement in the mid-1970's with his mother,
then the owner of the property, ensuring that the houses did not encroach.
3. Markham could not move the house on Lot 4 back on the same lot because
the second house on that lot remained, and the lot's non-conforming use status
would be lost by the move. He moved the house to Lot 3-B and moved another
recently acquired house to Lot 3-A.
4. Roberts's initial appraisal estimated a total value of $46,100, including
$3,500 for the house on Lot 4. He testified at trial that he had mistakenly
underestimated the expenses associated with ownership of the property, and that
the actual value at the time of the taking was $1,900. The mistake of $1,600
would lower the total value to $44,500.
5. In valuing the land on Parcel III, he determined that the highest and best
use of the land on Lot 5 was to leave it as a single family residence, since the
house on that land still had considerable value. Because the existing structures
on Lot 4 were "small, very old, very dilapidated buildings,"he determined that
the highest and best use of Lots 3 and 4 was to combine the two into a multi-
family lot and develop it with either a four-plex or a professional office.
6. See supra note 5. He estimated the useful rental life of the house at five
years.
7. Markham does not appear specifically to argue in his opening brief that
the house on Lot 5 should have been valued using the income approach. If he
did, the argument would be meritless since his own expert acknowledged that the
income approach was an improper method of valuation for that house.
8. That is, he divided $4,200 by .12. He explained that 12% was the rate
of return that a real estate investor would want on his or her property. He
admitted that if Lundquist moved out after 60 days, as he was entitled to do under
the contract, the contract would be valued at $350 for two months, or $700.
9. Substantial portions of Markham's brief make reference to State v.
Hammer, 550 P.2d 820 (Alaska 1976). In that case, this court decided that a bar
owner could recover lost profits due to business interruption when the State took
the bar owner's property, forcing the bar owner to relocate. Id. at 827. The
case provides little support for Markham's position; indeed, Judge Shortell did
allow Markham to try to prove damages during the four-month period in which
the houses were being relocated on the properties.
10. The use of the term "cost of cure"is somewhat misleading. This court
has held that the "cost of cure"may sometimes be an appropriate measure of
damages when the property owner can show that a fair market valuation would
not give adequate compensation. City of Kenai v. Burnett, 860 P.2d 1233, 1242
(Alaska 1993). Here, however, Markham litigated and was paid fair market
value for the land and houses. He does not argue that he should be paid the cost
of moving the houses instead of the fair market value of the houses. He wants
the "cost of cure"on top of the fair market value as incidental damages relating
to the reestablishment of his relationship with Lundquist.
11. Judge Shortell also indicated that the communication was protected by the
attorney-client privilege. That issue need not be addressed given the letter's
irrelevance.
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