A137087 City of Bend v. Juniper Utility Co.
Case Date: 04/06/2011
Docket No: 02CV0202STA137087
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FILED: April 6, 2011 IN THE COURT OF APPEALS OF THE STATE OF OREGON CITY OF BEND, Plaintiff-Appellant v. JUNIPER UTILITY COMPANY, Defendants-Respondents and JUNIPER WATER COMPANY, Defendants. Deschutes County Circuit Court Stephen N. Tiktin, Judge. Argued and submitted on October 06, 2010. John W. Stephens argued the cause for appellant - cross-respondent. With him on the briefs was Esler Stephens & Buckley. Gregory R. Mowe argued the cause for respondents - cross-appellants. With him on the briefs were William F. Buchanan, Brad S. Daniels, and Stoel Rives LLP. On the reply brief was James N. Westwood. Before Schuman, Presiding Judge, and Wollheim, Judge, and Rosenblum, Judge. SCHUMAN, P. J. On appeal, reversed and remanded for reconsideration of severance damages and attorney fees; otherwise affirmed. On cross-appeal, reversed and remanded to reconsider post-judgment interest; otherwise affirmed. SCHUMAN, P. J. Nearly a decade ago, the City of Bend determined that a water and sewer utility, Juniper Utility Company, was not meeting the needs of its customers, so the city filed a condemnation action to take ownership of the utility for public use. The central question at trial was the proper method for determining the fair market value of the utility plant. The trial court applied what is known as the "cost approach" in determining that the fair market value of the plant was approximately $3.3 million. The city appeals, arguing that the court erred in applying the cost approach and that, under the proper test--the "income approach"--the fair market value was actually far less, because the plant had virtually no potential to generate income and, for that reason, no buyer would pay anything for it. Juniper Utility Company and other defendants in the case (collectively "the Utility Defendants") cross-appeal, arguing that the award of just compensation was in fact too low, and that they were entitled to additional compensation for certain easements as well as further post-judgment interest. For the reasons that follow, we affirm the judgment with respect to the trial court's valuation of the utility plant, reverse with respect to the award of certain severance damages, and remand. I. BACKGROUND We take the relevant facts from the trial court's explicit and implicit factual findings, which are supported by evidence in the record. ORCP 62 F ("In an action tried without a jury, * * * the findings of the court upon the facts shall have the same force and effect, and be equally conclusive, as the verdict of a jury.").(1) To the extent that the parties dispute the particulars or importance of various factual findings, we address those issues in greater detail in later sections of this opinion. In the 1960s, the Ward brothers began developing various properties in the Bend area. In 1972, two of the brothers, Jan and Kim, incorporated Juniper Utility Company to provide water and sewer services to support the family's development projects. Over the years, the Juniper Utility Company system(2) evolved into what is now a unique combination of water delivery facilities with a sewage disposal and treatment system. The water delivery facilities include a two-pipe system, one pipe that delivers potable water and another that provides irrigation water. The two-pipe system serves approximately 1,125 customers in southeastern Bend and supplies them with nonpotable irrigation water at an affordable price, thereby allowing them to keep their neighborhoods lush throughout the summer. The sewage collection system, meanwhile, is pressurized by pump stations at customer residences; waste is pumped to a treatment plant for processing, and effluent from the plant is then pumped through pipes and disposed of on land owned by J. L. Ward Company, the successor to the various Ward businesses. Much of the dispute in this case stems from the fact that Juniper Utility Company was never intended to be an independent profit source for its owners. Rather, from its inception, the Wards viewed it as a project that would support their other profit-making development ventures. Once the utility company was incorporated, various Ward family entities and individuals transferred ownership of an existing treatment plant, water reservoir, and certain pump and well sites to Juniper Utility Company, as well as certain "blanket easements"--i.e., easements to use their land for installation and maintenance of utilities, and to use and maintain certain "ponds." The utility company, meanwhile, agreed to provide water and sewer services to properties owned by the grantors "on a non-profit basis." In addition to those capital contributions--known in utility terminology as "contributions in aid of construction"--the Ward family and its entities also bore the initial cost of expanding the utility infrastructure. When a parcel of land was developed, J. L. Ward Company(3) would subdivide the land and then build the utility infrastructure in the common areas or, in some cases, on land dedicated to the public. Juniper Utility Company was then given an easement for its pipes and other facilities. As lots or homes were sold in the development, J. L. Ward Company recouped the cost of the infrastructure as part of the sales price. The utility entered into a series of operating agreements with homeowners associations (HOAs) and with Kim Ward (who developed mobile home and RV parks) that provided that rates would be set at a level necessary to operate and maintain the utilities but that "[n]o accumulations for profit shall be made."(4) For more than two decades, Juniper Utility Company set its own rates for water and wastewater services. In 1998, however, the Oregon Public Utility Commission (PUC) asserted regulatory authority over Juniper Utility Company and held ratemaking proceedings. See ORS 757.061 (describing water utilities subject to financial regulation). In 2000, the PUC entered an order determining "fair, just, and reasonable rates" for Juniper Utility Company's services; those rates were substantially lower than the rates that Juniper Utility Company had been charging its customers. The way in which Juniper Utility Company was created and operated had a significant effect on the rates set by the PUC. As a general matter, the ratemaking process is intended to provide utilities an opportunity to earn a fair and reasonable return on their investment. Property that the utility receives as a contribution in aid of construction--"CIAC" for short--is not considered part of the utility's investment and is therefore given a value of zero for purposes of calculating the utility's rate base, which is the amount of investment on which a regulated public utility can earn a fair and reasonable return. In setting rates for Juniper Utility Company, the PUC determined that developer contributions--that is, capital contributions from J. L. Ward Company and others to create and expand the utility--were CIAC and would therefore not be considered in calculating a reasonable return on investment. As a result, the PUC determined that the total rate base for the utility was less than $100,000. The PUC authorized a 10 percent rate of return, the PUC's generic rate for water utilities, thereby allowing Juniper Utility Company to earn a return of less than $10,000 per year from its rate base. After its rates were set at that reduced level, J. L. Ward Company, which had paid for necessary maintenance of Juniper Utility Company, stopped supporting the utility. Capital improvements and maintenance were deferred; service was curtailed and became inadequate in many respects. Customers responded with complaints about the utility to the PUC and to the City of Bend. Thereafter, the PUC and the city sought and obtained injunctive relief requiring Juniper Utility Company to provide adequate service. In September 2001, the Bend City Council adopted a resolution of necessity and intent to appropriate the Juniper system property. The city initiated this condemnation action in April 2002. See ORS 225.020(1)(a) (authorizing a city to bring an action for condemnation to "[a]cquire water systems and use, sell and dispose of its water for domestic, recreational, industrial, and public use and for irrigation and other purposes within and without its boundaries"). The city's condemnation complaint sought to take various Juniper system assets for public use, including pipes, valves, pumps, wells, headgates, hydrants, a wastewater treatment facility, sewer lift stations, and other infrastructure, as well as water rights, real property, and utility easements. During the course of the litigation, the most hotly contested issue was the method of valuation to be used to determine the fair market value that the city should be required to pay for the "utility plant"--that is, "all pipes, valves, pumps, wells, treatment facilities and other infrastructure." As later discussed in greater detail, there are three commonly utilized methodologies for appraising the value of plants like the Juniper system: (1) the market approach, which looks at comparable sales data; (2) the income approach, which looks at the income-generating potential of the property; and (3) the cost approach, a valuation typically based on replacement or reproduction cost of the plant minus any depreciation. See generally Appraisal Institute, The Appraisal of Real Estate (12th ed 2001). The parties agreed that the market approach was unhelpful in this case, because there were no comparable sales of plants like the Juniper system. The city therefore urged the court to apply the income approach, which would have valued the plant based on its potential to generate income to a willing buyer. Under that approach, the city contended, the plant had a fair market value of zero; thanks to the utility's rate base, which did not account for CIAC, the regulated plant was essentially worthless because it could generate only a negligible return. The Utility Defendants, meanwhile, argued that the plant's regulated income potential--admittedly nothing--failed to capture the fair market value of the utility. The better approach, in their view, was the cost approach. That approach, according to the Utility Defendants, would account for the fact that CIAC, though not counted for purposes of ratemaking, nevertheless is valuable property that cannot be taken without just compensation. The trial court, in an extensive written opinion, agreed with the Utility Defendants that the cost approach provided the best indicator of the plant's fair market value. The court explained that it is "not a novel concept in eminent domain law * * * that the condemning authority must pay fair market value, regardless of how the condemnee came to own the taken property." Accordingly, the "intrinsic value" of the plant "does not disappear because of the decision by J. L. Ward Company to contribute the assets, rather than loan Juniper Utility Company the money to buy the assets. A taking of the Juniper Utility Company assets for no compensation [as the city proposed] would be little more than a confiscation." The court continued, "Nor does the difficulty in valuing a special use asset work to deprive it of value. Certainly, Juniper Utility Company is a unique, special purpose property. As a result, there is no ability to value it using the market approach as there are no comparable sales. The income approach fails to value the taken property at all. In this situation, it is black letter law that the cost approach may be considered." Although the court concluded that "[t]he cost approach is the only method of valuation appropriate in this case," it nevertheless declined to accept the Utility Defendants' appraisal "lock, stock and barrel." Rather, the court concluded that the starting point for determining fair market value of the plant was "original cost new less depreciation," which, according to the court, would take into account the age and condition of the plant and the regulatory environment (including the fact that even an unregulated buyer would not pay more for the plant than the original cost of the plant less depreciation). In the end, the court found "the fair market value of the Juniper Utility Co. plant to be $3,297,859." The court separately valued water rights ($347,590), easements ($1,515,883), and real property taken in fee ($326,400). As relevant here, in valuing the easements, the court concluded that certain "blanket easements"--those easements that had been granted to Juniper Utility Company to facilitate access to the utility infrastructure--were typically granted to utility providers at no cost and should therefore not increase the compensation award.(5) The court also awarded the Utility Defendants damages for impairment to their remaining property that was caused by the condemnation of the utility. The court then entered a judgment of condemnation that included prejudgment but not post-judgment interest as part of the calculation of just compensation. The city appeals, and the Utility Defendants cross-appeal.(6) II. ANALYSIS A. The Law of Eminent Domain A quick primer on the law of eminent domain is helpful to set the stage for the parties' various assignments of error. Under Article I, section 18, of the Oregon Constitution, "Private property shall not be taken for public use * * * without just compensation[.]" Private property is "taken" for public use through the exercise of the power of eminent domain--that is, "'the power inherent in a sovereign state of taking or of authorizing the taking of any property within its jurisdiction for a public use or benefit.'" Dept. of Trans. v. Lundberg, 312 Or 568, 571 n 1, 825 P2d 641, cert den, 506 US 975 (1992) (quoting MacVeagh v. Multnomah County, 126 Or 417, 431-32, 270 P 502 (1928)). Governmental units with eminent domain authority, such as the City of Bend, can exercise that authority by instituting condemnation proceedings. See ORS chapter 35 (governing condemnation proceedings). If the condemner and the property owner cannot agree on "just compensation," the issue is tried to the jury or a court. See ORS 35.305(2) ("Condemner and defendant may offer evidence of just compensation, but neither party shall have the burden of proof of just compensation."). Under Oregon law, "just compensation" is determined based on the fair market value of the property that is being taken. Fair market value, in turn, is "defined as the amount of money the property would bring if it were offered for sale by one who desired, but was not obliged, to sell and was purchased by one who was willing, but not obliged, to buy." Lundberg, 312 Or at 574. In other words, "just compensation" is the amount that a willing buyer would pay a willing seller for the condemned property. B. The Appeal The difficulty, of course, is how to figure out what a willing buyer would pay a willing seller for a public utility like the Juniper plant--a water and sewage system for which there is no established market.(7) That is the primary issue on appeal, as it has been throughout this litigation: In the absence of comparable sales, what is the proper methodology for determining the fair market value of the Juniper system? The city argues that the method utilized by the trial court, the cost approach, was erroneous as a matter of law: "The trial court erred as a matter of law when it used the cost method to determine the fair market value (just compensation) of property that its owner(s) devoted to a public purpose and that was necessary or useful to provide water and wastewater utility service--particularly where the market value of that property was capable of being established by the income method." The parties, as an initial matter, disagree about the proper standard of review with respect to the trial court's use of the cost approach. The city argues that "[w]hat approach, method, or theory a court should properly use to determine the fair market value of property is a matter of law for the court, and the Court of Appeals reviews the trial court's decision for errors of law." The Utility Defendants, meanwhile, submit that the "trial court's choice of valuation methodology and most of the other decisions that the City challenges are questions of fact reviewed under the any evidence standard of review." Fair market value in condemnation cases is ultimately a question of fact. See Lundberg, 312 Or at 574-75 ("The question of the highest and best use of particular property is not a question of constitutional magnitude or of law, but is a question of fact that relates to the question of value and is to be decided by a jury."); Selbee v. Multnomah County, 247 Or 390, 394, 430 P2d 561 (1967) ("In order to enable the jury to pass intelligently upon the question of whether the market value of the remaining land has been increased as a result of the improvement, we think that, at least in the generality of cases, there must be some evidence of that fact other than the improvement itself." (Emphasis added.)).(8) At the same time, courts have always served an important role in cabining the "just compensation" inquiry--i.e., in applying limits on what a trier of fact can consider when determining fair market value. See, e.g., Santiam Lumber Company v. Conhaim, 218 Or 220, 224, 344 P2d 247 (1959) ("We think that in a condemnation proceeding to acquire an easement for a logging road right of way, evidence of the quantity of timber that might be transported over the right of way is not a proper factor to be considered by the jury in determining the fair market value of the land being condemned."). Neither the Supreme Court nor this court has ever addressed exactly where valuation methodology falls on the continuum between questions of fact and questions of law in eminent domain cases. However, in tax cases--cases involving public utilities, no less--the Supreme Court has repeatedly observed that, when determining fair market value, the choice among particular valuation methods is generally a fact-based inquiry rather than a question of law. See, e.g., United Telephone Company v. Dept. of Rev., 307 Or 428, 431, 770 P2d 43 (1989) ("[W]hen this court evaluates and then either accepts or rejects various theories of valuation offered by the parties, it almost always does so as a finder of fact on de novo review of the record made in the Tax Court."); Pacific Power & Light Company v. Dept. of Rev., 286 Or 529, 533, 596 P2d 912 (1979) ("[W]hether in any given assessment one [valuation] approach should be used exclusive of the others or is preferable to another or to a combination of approaches is a question of fact to be determined by the court upon the record."); Brooks Resources Corp. v. Dept. of Revenue, 286 Or 499, 503, 595 P2d 1358 (1979) (reviewing as a fact question the choice among "three standard approaches to valuation: the market data approach, the income approach, and the cost approach"). The court's discussion of valuation methodologies in Brooks Resources Corp. is particularly illuminating: "We have observed in previous cases of this kind that there are three standard approaches to valuation: the market data approach, the income approach, and the cost approach. Bend Millwork v. Dept. of Revenue, 285 Or 577, 592 P2d 986 (1979); Medical Building Land Company v. Dept. of Rev., 283 Or 69, 582 P2d 416 (1978); Swenson v. Dept. of Revenue, 276 Or 1, 553 P2d 351 (1976). The appropriateness of a particular valuation method or combination of methods is not determined by fixed principles of law, but is a factual determination that depends on the record developed in each case. See Medical Building Land Company v. Dept. of Rev., supra at 78-79. Because we try this case 'anew upon the record,' we must determine which of the above approaches to valuation, under the facts of this case, best reflects the 'true cash value' of the property. In making this determination, we emphasize that we are performing our function as fact-finder, not our function as a corrector of legal errors." 286 Or at 503-04 (footnote omitted). The tax context differs, of course, from condemnation in many ways, but the basic premise of Brooks Resources Corp. carries over to any context in which a factfinder is charged with determining fair market value, be it a conversion case, a tax case, or a condemnation case. That is, unless some fixed principle of the law demands otherwise, 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. Viewed through that prism, we understand the city's first assignment of error to present a rather narrow legal question: whether some fixed principle of eminent domain law prohibited the trial court from considering the cost approach as part of its factual determination of fair market value. If so, the trial court committed reversible error in relying on that evidence as it did; in the absence of such a fixed principle, however, we will not second-guess the trial court's decision to give weight to a particular valuation approach in finding a fair market value for the Juniper system.(9) The city offers several interrelated reasons as to why the cost approach was, as a matter of law, an impermissible valuation methodology in this case. The contentions, as we understand them, boil down to the following: (1) The cost approach is evidence of the maximum amount that a willing buyer might pay, not a measure of fair market value in itself; for that reason, Oregon courts have approved the use of the cost approach only as a ceiling when other valuation methods yield a higher fair market value. (2) The appropriate measure of fair market value for a public utility like the Juniper system is, as a matter of law, the income approach, not the cost approach. We are not persuaded by those contentions. The city's primary argument is that the cost approach, standing alone, never yields a fair market value for purposes of eminent domain. That is so, the city argues, because "[t]he cost approach, unlike the market approach and the income approach, has no external reference to the market." According to the city, "[t]he cost approach is based on the principle of 'substitution,' that a willing buyer would not pay more for a property than the cost of constructing a comparable facility." For that reason, the argument goes, "Oregon courts have consistently held that the cost approach is not an appropriate way to value property in an eminent domain action."(10) After canvassing the authority cited by the city, we are not persuaded that the cost approach serves such a limited role in assessing fair market value, particularly in a condemnation case like this. The underpinnings and application of the cost approach have long been the subject of scholarly debate. In his treatise on the appraisal of property, Professor Bonbright explains that the principle of substitution "merely justifies the inference that * * * property cannot be worth more than its replacement cost," but that "[i]t by no means warrants the further inference that the value is as high as this, or even that the value is nearer to replacement cost than it is to zero"--a point that "the American courts have often failed to recognize[.]" James C. Bonbright, I Valuation of Property 159 (1st ed 1937). "Nevertheless," Bonbright continues, "under certain circumstances an appraiser is warranted in accepting an estimate that the replacement cost of property, with proper allowance for incidental loss and for depreciation, as the best available measure of its value." Id. (emphasis added). One of those circumstances, he later explains, is in eminent domain cases: "Estimates of current replacement cost minus arbitrary deductions for depreciation must often be accepted in default of a better measure." Id. at 420-21. Modern authorities likewise have taken the view that the cost approach, in addition to establishing an upper limit to fair market value, can itself be an acceptable indicator of fair market value in some cases: "Buyers of these [special-purpose or specialty properties not frequently exchanged in the market] often measure the price they will pay for an existing building against the cost to build minus depreciation or the cost to purchase an existing structure and make any necessary modifications. If comparable sales are not available, they cannot be analyzed to develop an opinion of the market value of such properties. Therefore, current market indications of depreciated cost or the costs to acquire and refurbish an existing building are the best reflections of market thinking and, thus, of market value * * *." The Appraisal of Real Estate at 354; accord Delta Air Lines, Inc. v. Dept. of Rev., 328 Or 596, 605, 984 P2d 836 (1999) ("The cost approach to value is based upon the principle of substitution, that is, it assumes that property is worth its cost or the cost of a satisfactory substitute with equal utility." (Emphasis added.)).(11) Indeed, Oregon courts have specifically recognized--if not endorsed--the cost approach as an appropriate valuation methodology in condemnation cases involving special use property for which comparable sales data is unavailable. In Highway Comm. v. Superbilt Mfg. Company, 204 Or 393, 419-20, 281 P2d 707 (1955), the court, quoting a leading treatise on the subject of eminent domain, stated: "Peculiar circumstances warranting a resort to other considerations than the usual tests for determining market value are set forth in 4 Nichols, Eminent Domain 133, |