Clyde K. EMERY and Nona Emery, Plaintiffs and Respondents, v. CITY OF PALOS VERDES ESTATES, Defendant and Appellant.
The case at bench originated in an action brought by plaintiffs Clyde K. and Nona Emery (Emery) against the City of Palos Verdes Estates (the City). The charging allegations of the complaint assert in various causes of action dangerous and negligent maintenance by the City of its storm drain system which damaged, but did not destroy, residential real property owned and occupied by Emery. The complaint also includes a cause of action in inverse condemnation based on the same conduct of the City. Emery prevailed on all claims alleged in the complaint. The damages awarded on the inverse condemnation claim being greater than those available on the other causes of action, the trial court entered judgment on the cause of action for inverse condemnation. The trial judgment on this cause of action awards Emery $800,000 for diminution in value of property, prejudgment interest of $558,143.70, and attorneys' fees and costs of $401,443.39.
This appeal by the City from the judgment involves three issues.1 First, the City contends that the trial court erred in exercising the discretion vested in it by Evidence Code section 352 to receive evidence that off-site conditions resulting from the City's conduct depressed the market for the remaining major undamaged portion of the Emery property. Second, the City contends that the trial court erred in not deducting the value of Emery's prejudgment possession and use of the property from prejudgment interest awarded pursuant to Code of Civil Procedure section 1268.311. Third, respondents Emery claim that they are entitled to attorney's fees incurred in this appeal.
We conclude that controlling California authority firmly supports the trial court's action in receiving the evidence here in dispute. We also conclude that, misled by language in a Court of Appeal opinion read out of context, the trial court erred in concluding that as a matter of law the value of prejudgment possession by an inverse condemnation plaintiff cannot be offset against prejudgment interest as it is in eminent domain. Finally we conclude that compelling Supreme Court authority requires rejection of Emery's claim for attorney's fees on appeal.
THE ISSUES AT TRIAL
Because the City's contention of trial court error in the admissibility of evidence turns primarily on evidence received at the liability phase of a bifurcated trial, and only briefly and incidentally at the damage phase, resolution of this argument requires analysis of the issues present when the liability phase was tried. Emery's complaint included causes of action for negligence, particularly in the City's design and maintenance of a storm drain system, and dangerous condition of public property, as well as for inverse condemnation. The City's answer denied Emery's claims and included the affirmative defenses of Emery's comparative fault, and that any loss suffered by Emery was due to forces beyond the control or responsibility of the City.
On the City's motion trial was bifurcated as to a liability and damage phase. As was appropriate to the issues joined by the pleading, all issues of liability, other than the question of constructive taking involved in the inverse condemnation claim, were tried to a jury. These issues were resolved by a directed verdict leaving for determination by the jury only the issue of damages. The taking issue was tried to the judge and resolved in Emery's favor as was the question of offsetting the value of Emery's prejudgment occupation of the relevant property against prejudgment interest. The City makes no argument that it requested and was refused a limiting instruction with respect to the evidence it contends was erroneously received. Hence the admissibility of this evidence, as it related to causes of action other than inverse condemnation, asserted by Emery and denied by the City and to the City's affirmative defenses, must be considered in resolving this appeal.
City, while inferentially discussing perceived weaknesses in the evidence supporting the judgment, does not challenge the directed verdict, the judicial finding of a constructive taking which supports inverse condemnation, or the sufficiency of the evidence to support the damage award. Hence, we confine our recitation of facts to those relevant to the issues raised by the City's opening brief while generally limiting our examination of a voluminous trial record to citations provided by the parties. (Fox v. Erickson (1950) 99 Cal.App.2d 740, 742, 222 P.2d 452.) We recite the facts in the light most favorable to the judgment.
The Emery property is one of eleven ocean front lots in the Bluff Cove area of the City of Palos Verdes Estates and is located near the southern end of the cove. These lots abut a high steep cliff leading to the ocean but are separated from the cliff face and seashore by a strip of land owned by the City and designated parkland. The City's design and operation of its storm drain system damaged properties in the Bluff Cove area in two ways. First, it caused erosion in high cliffs of the parkland immediately seaward of the lots. This erosion both removed lateral support from and eventually intruded physically upon some or all of the Bluff Cove lots. In 1983 this erosion intruded by a landslide on a portion of the Emery lot to a depth of about fifteen feet. Second, water from the system lubricated potential deep-seated landslide systems underlying Bluff Cove. This along with loss of lateral support caused a deep seated landslide to become active prematurely destroying homes in Bluff Cove in what was known as the Papworth slide. The Papworth slide did not affect the Emery property, but similar conditions on the Emery property and its underlying geology pose a moderate to high probability that another deep-seated landslide beneath it will occur within the next thirty years. This landslide, if it occurs, will destroy an additional sixty feet of the Emery property on the seaward side, an area which does not encompass the house and other major improvements constructed on the property.
Emery's valuation expert opined that the highest and best use of the Emery property was as a dwelling. In determining damage to the Emery property he concluded that after the erosion to it in 1983 a well informed buyer would be aware of the massive deep-seated landslide destruction of other homes in Bluff Cove and would know that the home next door to the Emery property had been vacated a week after the 1983 erosion which had caused much greater damage to the next door lot and house. The well informed buyer would be aware that the conditions in Bluff Cove would preclude obtaining a loan on the Emery property. Marketability of this property would be further inhibited because the seller would be required to furnish a prospective buyer with various existing geological reports showing the prospect of the deep-seated landslide on the Emery lot. Other factors depressing marketability included unavailability of insurance except under the California Fair Plan, and the unsightly view from the Emery property of adjacent lots heavily damaged in the 1983 slide. With this background Emery's valuation expert concluded that the Emery property which had been worth $1,250,000 before the 1983 slide was worth $250,000 afterward.
THE QUESTIONED EVIDENCE
Near the beginning of the liability phase of the trial the City, citing Evidence Code section 352, presented a motion in limine to exclude all evidence of the Papworth slide. The trial court denied the motion. It is this ruling and the subsequent receipt in evidence of testimony relating to the Papworth slide that is attacked by the City's first assertion of error.
Evidence Code section 352, the foundation of the City's argument, vests discretion in the trial court to exclude relevant evidence when its probative value is substantially outweighed by danger of undue prejudice, confusion of issues, tendency to mislead, or undue consumption of time. Here the record supports the trial court's exercise of this discretion so as to receive the evidence challenged by City. The probative value of the evidence was highly significant to the issues before the court and jury when the evidence was offered. With the issues then before the trier of fact the prejudice to the City flowed primarily from this probative value, and this is not the form of prejudice which justifies exclusion of evidence pursuant to section 352 of the Evidence Code.
As in the trial court, the City relies upon language in Albers v. County of Los Angeles (1965) 62 Cal.2d 250, 263–264, 42 Cal.Rptr. 89, 398 P.2d 129, and repeated in subsequent cases as late as Belair v. Riverside County Flood Control Dist. (1988) 47 Cal.3d 550, 558, 253 Cal.Rptr. 693, 764 P.2d 1070, that only “actual physical injury” to property is compensable in inverse condemnation. The City's argument is: (1) analytically wrong; and (2) contrary to doctrine clearly enunciated by our Supreme Court.
First and foremost, the evidence was primarily received when issues of negligence, causation, and comparative fault as well as inverse condemnation were being tried, and the City makes no argument that it was refused a limiting instruction. The City had chosen to deny Emery's allegations of its liability in negligence and dangerous condition of its storm drain system as well as in inverse condemnation and had asserted affirmative defenses of contributory fault and lack of causation. The evidence, the admissibility of which is now challenged by the City, was not only relevant but also necessary to meet the issues the City itself had created by its pleading. Our reading of the portions of the record cited by City, in support of its argument of undue prejudice, reveals nothing significantly inflammatory in the evidence beyond that necessary to establish liability.
Moreover, it is clear when Albers and its progeny are read in conjunction with Klopping v. City of Whittier (1972) 8 Cal.3d 39, 104 Cal.Rptr. 1, 500 P.2d 1345, that the cases upon which the City relies refer to a precondition to the liability of governmental entities for inverse condemnation and not the measure of compensation once liability is established.2 Klopping rejected as unsuited to modern conditions doctrine which had previously excluded the award of incidental severance damages in condemnation and thus had previously limited the award to the fair market value of property actually taken. Klopping holds that these damages should be measured by the reduction in fair market value of the entire property when only part is taken.
The insight of Klopping has subsequently been applied by our high court to inverse condemnation. When liability in inverse condemnation is established, and the governmental action has not destroyed all value in the affected property, the measure of damage is the difference between the value of the property before the constructive taking which results from the damage and the value of the undamaged property afterward. (Pierpont Inn, Inc. v. State of California (1969) 70 Cal.2d 282, 294–295, 74 Cal.Rptr. 521, 449 P.2d 737.) As Pierpont Inn makes clear this measure is not limited because intangibles beyond the actual physical harm influence the after taking value.
“․ Items such as view, access to the beach property, freedom from noise, etc. are unquestionably matters which a willing buyer in the market would consider in determining the price he would pay for any given piece of real property․
“These elements of damages ․ are not claimed by respondents as special damages, but are merely the reasons given by the experts for their opinions that the market value of the portion of the tract not taken would be diminished by reason of the taking․” (Ibid., at p. 286, 74 Cal.Rptr. 521, 449 P.2d 737)
The Pierpont Inn principle was recently repeated in San Diego Gas & Electric Co. v. Daley (1988) 205 Cal.App.3d 1334, 1345, 253 Cal.Rptr. 144:
“[S]everance damages are not limited to specific direct damages but can be based on any indirect factors that cause a decline in market value of the property․ Logic and fairness, however, dictate that any loss of market value proven with a reasonable degree of probability should be compensable․” (Ibid., at p. 1347, 253 Cal.Rptr. 144, emphasis in original. See also City of Salinas v. Homer (1980) 106 Cal.App.3d 307, 165 Cal.Rptr. 65.)
Riverside County Flood Control etc. Dist. v. Halman (1968) 262 Cal.App.2d 510, 69 Cal.Rptr. 1, repeatedly cited by the City in support of its argument to the contrary is inapposite because it deals with the issue of the time when property is taken. (Ibid., at p. 515, 69 Cal.Rptr. 1.) The bankruptcy of the City's reliance on Riverside County Flood Control is established by our Supreme Court's decision in Holtz v. San Francisco Bay Area Rapid Transit Dist. (1976) 17 Cal.3d 648, 131 Cal.Rptr. 646, 552 P.2d 430, which expressly holds that Riverside is inapplicable to inverse condemnation claims. (Ibid., at p. 658, 131 Cal.Rptr. 646, 552 P.2d 430.)
The City argues that “market blight” cannot be considered in determining severance damages. Assuming this to be sometimes true in the abstract it is irrelevant to the case at bench. Here the market blight was due to the very course of conduct of the City which resulted in its liability to Emery. It was this course of conduct which contributed to the critical landslides which damaged Emery's property, which threaten to damage it further and which depressed the value of the as yet undamaged remainder.
OFFSET OF POSSESSION VALUE AGAINST PREJUDGMENT INTEREST
In paragraph 2 of its judgment the trial court incorporated a finding that the date of constructive taking was April 3, 1983 and awarded prejudgment interest computed at the market rate as provided in Code of Civil Procedure section 685.010 from that date to the date of judgment. The trial court found further that:
“Plaintiffs have been at all times since April 3, 1983, and presently are, in actual and continuous possession and physical occupancy of the subject property. During all such times, such possession and occupancy has been and presently is full, free, unimpaired and untrammeled, and the effect upon plaintiffs' possession and occupancy of the physical damage to the subject property has been and is de minimus. The court would allow full offset against the interest allowed under paragraph 2 hereof for the value of such possession but for the fact that, in the opinion of this Court, the appellate decisions preclude the allowance of such offset which, in reason and in equity, should otherwise be allowed herein. Offset is therefore denied solely for the foregoing reason.”
The appellate decisions to which the trial court referred in reaching a conclusion contrary to its intuition are Parker v. City of Los Angeles (1974) 44 Cal.App.3d 556, 118 Cal.Rptr. 687 and Placer County Water Agency v. Hofman (1985) 165 Cal.App.3d 890, 211 Cal.Rptr. 894. Analysis of these cases in light of the purpose of the award of damages and prejudgment interest in inverse condemnation reveals that the trial court's intuition was correct and that its conclusion to deny the offset of possession value was misled by language in Parker presented out of context.
The purpose of the award of prejudgment interest in inverse condemnation is to provide “constitutionally mandated just compensation.” (Marshall v. Department of Water & Power (1990) 219 Cal.App.3d 1124, 1147, 268 Cal.Rptr. 559.) The monetary compensation paid to the one whose property is taken or damaged substitutes for the property or damage to the property, and prejudgment interest compensates for denial of the use of the monetary substitute until compensation is paid. In economic terms interest is rent for the use of money. (S. Call & W. Holahan, Micro Economics 2d ed. 370.) To the extent that the action which constitutes a taking in eminent domain or inverse condemnation does not deprive the party entitled to compensation of the use of the relevant property until compensation is paid, rent for the use of money will duplicate in whole or in part the possession, i.e. rental, value of the property.
The Eminent Domain Law recognizes this economic fact in Code of Civil Procedure section 1268.330(a). This statute provides that if the property owner remains in possession after interest in eminent domain begins to accrue, “the value of that possession shall be offset against the interest.” The parties argue extensively whether section 1268.330(a) is applicable to inverse condemnation as well as to actions in eminent domain. We need not resolve this argument in this case. Assuming for the purposes of argument that section 1268.330(a) is not applicable to inverse condemnation, the legislative enactment is nevertheless significant.
Liability in eminent domain and inverse condemnation stem from the same constitutional root requiring compensation for governmental taking of property. “[C]ondemnation and inverse condemnation are merely manifestations of the same governmental power ․ with correlative duties imposed upon public entities by the same constitutional provisions.” (City of Oakland v. Oakland Raiders (1982) 32 Cal.3d 60, 67, 183 Cal.Rptr. 673, 646 P.2d 835.) Thus to the extent that inverse condemnation doctrine is judicially developed as opposed to statutory (Leaf v. City of San Mateo (1984) 150 Cal.App.3d 1184, 1190, 198 Cal.Rptr. 447), substantive legislative policy embodied in the Eminent Domain Law consistent with the constitutional mandate is significant to judicial determination of inverse condemnation doctrine.
Respect for the legislative policy here involved requires that we apply the spirit of Code of Civil Procedure section 1268.330(a) to inverse condemnation allowing however for the varied forms that inverse condemnation may take rather than adopting the code section mechanically. Sometimes as in Parker and Placer County, supra, the cases relied upon by the trial court, the diminution in fair market value which is compensated in inverse condemnation is attributable virtually entirely to interference with the inverse condemnee's continuing possession and enjoyment of the relevant property. In Parker, the interference was in the form of low overflight by commercial jet aircraft. In Placer County the interference was in the form of an easement. The same seems true where inverse condemnation compensation is awarded where unreasonable delay in proceeding with formal action after notice of intention to condemn interferes only with the use of property. (See Tilem v. City of Los Angeles (1983) 142 Cal.App.3d 694, 703, 191 Cal.Rptr. 229.)
In these situations the value of possession after constructive taking is accounted for in the award itself so that a second offset of possession value against prejudgment interest will undercompensate. In these cases the measure of damages is not diminution in property value but rather diminution in the value of possession, and hence the award itself takes into account post “taking” possession value. It is in this context that the Parker court employed its language that possession value should not be offset against prejudgment interest in “nondispossession cases.” (44 Cal.App.3d at p. 565, 118 Cal.Rptr. 687.)
In other inverse condemnation cases, however, diminution in market value is attributable to factors other than interference with possession and enjoyment. The case at bench is one of them. The trial court implicitly found that the factors depressing the after taking value of the Emery property did not significantly affect the value of prejudgment possession. The record discloses that value of the Emery property after it was damaged was depressed primarily by the prospect of a future major deep seated landslide and market forces in the form of unavailability of loans, the reputation of Bluff Cove, and restricted availability of insurance, all of which were operative primarily to sale to an informed buyer. In these circumstances the award of prejudgment interest at market rates without offset for possession value overcompensates Emery who would then receive rent for money substituting for property while still having the benefit of the rental value of the property itself.
Emery argues that possession value should not be offset because: (1) inverse condemnation actions present no opportunity for deposit in court of anticipated compensation which may be drawn by the condemnee pursuant to Code of Civil Procedure section 1255.010; (2) Code of Civil Procedure section 1255.040(c) precludes the offset; and (3) the decision of our Supreme Court in Holtz v. San Francisco Bay Area Rapid Transit Dist. (1976) 17 Cal.3d 648, 131 Cal.Rptr. 646, 552 P.2d 430 precludes the offset.
Emery's first argument is irrelevant. No prejudgment interest runs on the amount that the condemnee draws from the deposit. (Code Civ.Proc., § 1268.320.) Emery's second argument misconstrues Code of Civil Procedure section 1255.040(c). This section imposes a sanction in the form of denial of the offset of possession value where after a notice of intended condemnation the prospective condemnee moves to require a deposit by the condemnor, the court grants the motion, and the condemnor fails to honor the court's order.
As we read Holtz it does not stand for the proposition for which it is cited by Emery. The quotations from Holtz in the City's brief refer to the date on which prejudgment interest accrues and not to offset of possession value against the interest. In contrast the Holtz court said in denying offset of possession value:
“In an order made after judgment the [trial] court refused to deduct from the amount awarded as interest the sums received by the plaintiff as rent and income during the period before repairs to the building were made. The court properly held it had no jurisdiction to adjust the award because BART's motion to offset was made after it filed its notice of appeal from the judgment.” (17 Cal.3d at p. 651, 131 Cal.Rptr. 646, 552 P.2d 430.)
Later language in Holtz stating, “Because we agree that former section 1255(b) [of the Code of Civil Procedure] is not applicable we need not consider BART's argument that it was entitled to a setoff of plaintiff's rents and profits from the date interest accrued ․” (17 Cal.3d at p. 658, fn. 11, 131 Cal.Rptr. 646, 552 P.2d 430) must be read in light of the Court's previous statement of why section 1225(b) was inapplicable. Indeed, important commentary on California law of eminent domain and inverse condemnation cites Holtz is support of its statement that, “This rule [of offset of possession value against prejudgment interest] also applies in inverse condemnation.” (Matteoni & Veit, Condemnation Practice in California, 1992 Supp., § 1.9, p. 3.)
THE AMOUNT OF THE OFFSET
The trial court found that but for its interpretation of Parker and Placer County it would have allowed total offset of prejudgment interest by possession value. This conclusion seems based upon a presumption affecting the burden of proof contained in Code of Civil Procedure section 1268.330, a presumption consistent with an inference flowing from treatment of interest as rent for the use of money. However, the parties in the trial court joined issue only on the question of the availability of any offset and not on its amount. Fairness now dictates that Emery be entitled to produce evidence to establish that possession value was less than prejudgment interest if such evidence there is. We hence remand the matter to the trial court for a hearing on this issue.
ATTORNEYS' FEES ON APPEAL
Emery recognizes that Holtz v. San Francisco Bay Area Rapid Transit Dist., supra, 17 Cal.3d 648, 658, 131 Cal.Rptr. 646, 552 P.2d 430 holds that attorneys' fees are not allowable for appeal of an inverse condemnation judgment. Emery asks us to create an exception to this proposition where the governmental agency knows of its liability before the inverse condemnation action is filed and nevertheless fails to institute eminent domain proceedings. The holding of Holtz is based upon its strict construction of then Code of Civil Procedure section 1246.3, the predecessor to current section 1036 allowing attorneys' fees at trial to a prevailing plaintiff in an inverse condemnation case. Creation of an exception to the rule of Holtz is a matter for our Supreme Court, not this court.
The portion of the judgment awarding damages and attorney's fees to appellant plaintiff is affirmed. That portion of the judgment awarding plaintiff prejudgment interest is reversed and remanded to the Superior Court for further proceedings consistent with section V of this opinion. Respondent Emery is entitled to costs (City of Los Angeles v. Ricards (1973) 10 Cal.3d 385, 110 Cal.Rptr. 489, 515 P.2d 585) but not attorneys' fees on this appeal.
1. An appeal by Emery was dismissed on Emery's motion.
2. The actual physical damage to the Emery property necessary to establish the City's liability in inverse condemnation is admitted by the City's concession of liability in its opening brief. It is also established by the record. The 1983 landslide physically destroyed part of the property and there was further physical damage in the removal of lateral support to the Emery lot. (Holtz v. Superior Court (1970) 3 Cal.3d 296, 304, 90 Cal.Rptr. 345, 475 P.2d 441.)
THOMPSON, Associate Justice.** FN** Retired Justice of the Court of Appeal assigned by the Chairperson of the Judicial Council.
JOHNSON, Acting P.J., and FRED WOODS, J., concur.