I Lost My House, I Won My Court Case, Now What Do I Get?
Our home in Glen Oaks wasn’t destroyed in the January Montecito mudslides, but others within a cat’s prowl lost theirs. This article about measuring “just compensation” in an inverse condemnation case is for my less lucky neighbors and friends. This involves real estate appraisal, which, like poker, is not very interesting unless played for money.
Readers of this column will recall from the first article in this series (Volume 24, Issue 4, page 22) that the California Constitution and the U.S. Constitution guarantee that private property shall not be taken for a public use unless “just compensation” has first been paid to the owner. And when a government – or a utility company – takes or damages private property without paying, then the private property owner can sue under a theory called inverse condemnation to recover “just compensation,” as long as the property owner demonstrates a cause-and-effect relationship between the public works (e.g., roads, creeks, sewers, water mains, power lines) and the incident giving rise to the property damage.
So, let’s say we sue and after years of effort in court with our geologists, hydrologists, structural engineers, architects, and appraisers, we are able to show that the public work was a cause of damage to your property – and we win. What do we get for our efforts?
Damages fall into two categories. First, under a constitutional theory you get the Fair Market Value of your property as if it had been undamaged. Second, under a tort theory you also get money for the “annoyance and discomfort” resulting from a trespass or nuisance – that is, compensation for all the emotional havoc and disruption to your life. In addition to damages, you can also get your attorneys’ fees and experts’ fees paid, and pre-judgment interest.
Let’s look a little deeper into the idea of “Fair Market Value” (or FMV for short) in a constitutional case – a measure of compensation that has been defined in a series of judicial decisions extending back in time more than a century.
When appraising a property for “just compensation,” the government agency or utility is required to pay FMV, an appraisal measure that is different than mere “Market Value.” FMV requires the appraiser to pick the highest comparable sales to arrive at the highest price that a willing buyer would pay a willing seller on the date of value (which would usually be the date of trial, but could be the date of damage in a declining real estate market.)
The purpose of property valuation in constitutional cases is to make the property owner whole. The fundamental maxim of eminent domain is that, when the government compels the owner of private property to sell property to the government (either through outright purchase or through destruction), the property owner is to be put “in as good a position pecuniarily as if the property had not been taken.”
This is a mandate of simple fairness: because the property owner is being compelled to sell — regardless of current use, future plans, or sentimental attachment — the government’s obligation is to fill the void with compensation. Cash may not heal all wounds, but it is a constitutionally acceptable substitute.
That’s why the California Supreme Court has held that the property owner is entitled to “the ‘full and perfect’ monetary equivalent of the fair market value of the land paid at the time the taking occurred.” This sum must be adjusted to the date of the award so the property owner can afford a new home.
In 1960, the California Law Revision Commission worked to codify a body of law that had, in some aspects, been considered too harsh to homeowners. The commission stated: “Market value, strictly interpreted as meaning probable sale price [as opposed to the highest price], cannot be defended as even an approximate measure of value to the owner in most of those cases which actually arise under the law of eminent domain.”
Why? As the commission put it, “Courts have readily admitted that regardless of the equities on the [property owner’s] side, the law is often against him.”
Our Supreme Court has repeatedly stated that the underlying purpose of requiring payment of the “highest price” is “to ensure that the owner of damaged property is not forced to contribute more than his proper share to the public undertaking; in other words, the [Just Compensation] clause aims to distribute throughout the community the loss inflicted upon the individual by the making of the public improvements.”
Don’t count on the government agency or the utility company to reach the FMV. I recently had a case in which the utility’s appraiser relied on the ordinary “market value” standard, typically used by lending banks, in order to select low-priced comparable sales to arrive at the “most probable price,” meaning an average price at best.
When we caught the appraiser having used the wrong appraisal standard, he got red-faced and quickly tried to cover up his fatally flawed report by preparing and back-dating a new appraisal report that gave lip service to the definition of Fair Market Value. But his new account kept the same low-ball valuation that was in his original appraisal one.
That’s how he got in trouble with the jury.
And it didn’t help him that he had a phony Ph.D. from a correspondence school and wasn’t a member of the Appraisal Institute (or MAI), which is the authoritative organization for appraisers, similar to the AICPA for the accounting profession.
Courts have called the exercise of eminent domain “a sovereign’s most awesome grant of power.” Our Supreme Court has cautioned government and utility attorneys to exercise great care in respecting the constitutional rights of property owners, stating that they have the responsibility to seek justice and to develop a full and fair record, and must not use their position or the economic power of the government to harass parties or to bring about unjust settlements or results.
Will the government or utility lawyer follow this high-minded ideal? Don’t count on it. Sometimes they ignore the constitutional standard of “just compensation” and simply abuse their power by seeking to make an example of anyone who challenges their authority. It is no joke that a senior official at a utility recently quoted the famous closing line from the movie Chinatown, which is about the Los Angeles Department of Water & Power in the 1930s: “Forget it, Jake. It’s Chinatown.”
Sometimes, you need a good movie detective like Jack Nicholson to get the job done, but other times you merely need a good lawyer. There are many technical rules about how to determine the Fair Market Value and the compensation for “annoyance and discomfort.” It is important that your lawyer has substantial experience in preparing the property owner’s experts and in cross-examining the government’s experts. It can make a big difference to whether you recover enough money to keep on living the Montecito dream.
This is the ninth in a series of articles about the law and the Montecito mudslides. You can read the first eight articles on montecitojournal.net and cal-landslidelaw.com, or email me: email@example.com.