REDEVELOPMENT AGENCY OF CITY OF BURBANK v. GILMORE

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Court of Appeal, Second District, Division 1, California.

REDEVELOPMENT AGENCY OF the CITY OF BURBANK etc., Plaintiff and Respondent, v. Walter L. GILMORE, Jr., et al., Defendants and Appellants.

Civ. 68906.

Decided: January 20, 1984

Irsfeld, Irsfeld & Younger, O'Neill & Huxtable, and Richard L. Huxtable, Los Angeles, for defendants and appellants. William B. Rudell, City Atty., Burbank, and Richard W. Marston, Senior Asst. City Atty., for plaintiff and respondent.

This case presents the question whether interest payable to a condemnee for delay in the payment of the value of property taken before trial should be awarded at the legal rate or at the prevailing market rate.

Defendants Walter L. Gilmore, Jr., Pamela A. Gilmore, George W. Strattan, Howard L. Hudson, and Frances P. Hudson appeal from the respective judgments entered against them in this eminent domain action.   Howard and Frances Hudson also appeal from the order denying their motion to recover litigation expenses and the order granting plaintiff's motion to tax costs.

On November 13, 1980, plaintiff filed its complaint seeking condemnation of a parcel of real property owned by George Strattan and the Gilmores (parcel 9) and a separate parcel of real property owned by the Hudsons (parcel 11).   On December 9, 1980, upon plaintiff's deposit of $200,000 with the court clerk, an order was entered authorizing plaintiff to take possession of parcel 9.   On that same date, upon plaintiff's deposit of $160,000 with the court clerk, an order was entered authorizing plaintiff to take possession of parcel 11.   An additional $126,590 was deposited on February 16, 1982, with respect to parcel 11.   Each order for possession became effective 90 days after service of the order.   The values of the respective parcels were thereafter determined at trial.

Strattan and the Gilmores introduced evidence that from March 1981 to April 1982 the “National Average Mortgage Contract Rate for Major Lenders” on the purchase of previously occupied homes varied from 13.91 percent to 15.80 percent, and that after March 1981 interest rates being paid on intermediate-term certificates of deposit by various banks and savings and loans ranged from 13.5 percent to in excess of 15 percent.   Mr. Gilmore's declaration stated that, in purchasing property comparable to parcel 9 on February 10, 1981, the Gilmores made a down payment of $200,000 and borrowed $225,000 at 14 percent interest to pay the balance of the purchase price.1

The Hudsons introduced a summary of information obtained from the Federal Reserve Bulletin concerning prevailing interest rates in 1981 and January 1982 for long-term bond rates for government and utility bonds as well as conventional mortgage rates.   The publication showed that in 1981 the average long-term government bond interest rates ranged from 9.97 to 15.13 percent and that in January 1982 the average interest rate for long-term United States government bonds was 14.48 percent and for long-term state and local government bonds was 12.97 percent.   It also indicated that in 1981 average interest rates on conventional mortgages ranged from 15.10 percent to 18.05 percent and that in January 1982 the average interest rate for a conventional mortgage was 17.20 percent.

The Hudsons also introduced the publication's summary of prime rates charged by banks on short-term business loans and interest rates on the money and capital markets on state and local notes and bonds rated Aaa by Moody's Investors Service.   The summary indicated that the average prime rate ranged from 15.75 percent to 20.50 percent in 1981, and that it was 15.75 percent in January 1982 and 16.56 percent in February 1982.   The publication also showed that the average interest rate for the money and capital markets on state and local notes and bonds rated Aaa was 10.43 percent in 1981 and ranged from 12.20 percent to 12.30 percent in January and February 1982.   The declaration of Richard Huxtable, attorney for the Hudsons, stated that Mr. Huxtable had personal knowledge that during this period of time conventional purchase money note deeds of trust required interest rates at or above 14 percent per annum.

No evidence was introduced by plaintiff concerning the prevailing interest rates.   Based on this state of the record, appellants moved that interest for the delay in payment of compensation be awarded at 16.3 percent per annum from the effective date of the orders for possession to the date of payment.

On June 30, 1982, an interlocutory judgment was entered as to parcel 11, fixing the value of the property at $284,000.   Because of the deposit of $160,000, $124,000 was awarded to the Hudsons with “interest at the legal rate” from March 18, 1981, to the date of payment.

On July 21, 1982, an interlocutory judgment was entered as to parcel 9, reciting that the value of the property was $500,000 and that $326,590 had already been paid to Strattan and the Gilmores.   The judgment awarded Strattan and the Gilmores $173,257 and awarded the County of Los Angeles $153 for real property taxes.   Strattan and the Gilmores were awarded interest on the sum of $300,000 at the rate of 7 percent per annum from March 16, 1981, to February 16, 1982, and interest on the sum of $173,410 at 7 percent per annum from February 16, 1982, to the date of payment.

I

 We hold that, where there has been a pretrial taking of private property, interest on the unpaid value of the property must be paid at the prevailing market rate in order to provide just compensation in accordance with the Fifth Amendment of the United States Constitution.

In Seaboard Air Line Ry. v. U.S. (1923) 261 U.S. 299, 43 S.Ct. 354, 67 L.Ed. 664, the United States Supreme Court explained the Fifth Amendment prohibition against taking private property for public use without just compensation, stating:  “The compensation to which the owner is entitled is the full and perfect equivalent of the property taken.  [Citation.]  It rests on equitable principles and it means substantially that the owner shall be put in as good position pecuniarily as he would have been if his property had not been taken.  [Citation.]”  (Id., at p. 304, 43 S.Ct. at p. 355.) 2  It therefore follows that, where the fair market value of the property has not been paid contemporaneously with the taking, the owner is entitled to interest for delay in payment from the date of the taking until the date of payment.  (Miller v. United States (1980) 620 F.2d 812, 837, 223 Ct.Cl. 352;  see Albrecht v. United States (1947) 329 U.S. 599, 602, 67 S.Ct. 606, 608, 91 L.Ed. 532;  Seaboard Air Line Ry. v. U.S., supra, 261 U.S. 299, 306, 43 S.Ct. 354, 356, 67 L.Ed. 664.)   Payment of such interest at the prevailing rate is necessary to achieve the federal constitutional mandate that the property owner be provided just compensation.  (Miller v. United States, supra, 620 F.2d 812, 837–839.)

Our Legislature has provided for interest on condemnation awards by Code of Civil Procedure sections 1268.310 and 1268.320.3  Section 1268.310 provides, “The compensation awarded in the proceeding shall draw legal interest from the earliest of the following dates:  [¶]  (a) The date of entry of judgment.  [¶]  (b) The date the plaintiff takes possession of the property.  [¶]  (c) The date after which the plaintiff is authorized to take possession of the property as stated in an order for possession.”  Section 1268.320 provides, “The compensation awarded in the proceeding shall cease to draw interest at the earliest of the following dates:  [¶]  (a) As to any amount deposited pursuant to Article 1 (commencing with Section 1255.010) of Chapter 6 (deposit of probable compensation prior to judgment), the date such amount is withdrawn by the person entitled thereto.  [¶]  (b) As to the amount deposited in accordance with Article 2 (commencing with Section 1268.110) (deposit of amount of award), the date of such deposit.  [¶]  (c) As to any amount paid to the person entitled thereto, the date of such payment.”

The legal rate of postjudgment interest was 7 percent until July 1, 1983 (Cal. Const., art. XV, § 1), and thereafter was set by section 685.010 at 10 percent.  Article XV, section 1, of the California Constitution provides in pertinent part, “The rate of interest upon a judgment rendered in any court of this state shall be set by the Legislature at not more than 10 percent per annum.   Such rate may be variable and based upon interest rates charged by federal agencies or economic indicators, or both.  [¶]  In the absence of the setting of such rate by the Legislature, the rate of interest on any judgment rendered in any court of the state shall be 7 percent per annum.  [¶]  The provisions of this section shall supersede all provisions of this Constitution and laws enacted thereunder in conflict therewith.” 4  Section 685.010, which became operative July 1, 1983, provides in pertinent part as follows:  “Interest accrues at the rate of 10 percent per annum on the principal amount of a money judgment remaining unsatisfied.”   Section 685.110 provides, “Nothing in this chapter affects the law relating to prejudgment interest.”

 Defendants' evidence shows, and indeed judicial notice reveals, that in recent years market rates of interest have greatly exceeded 7 percent and have also exceeded the new statutory rate of 10 percent.   Thus, we are confronted with the issue whether the California Constitution's limitation of interest conflicts with the federal constitutional requirement of payment of just compensation for the taking of private property for a public purpose.   As the just compensation right has its source in the federal constitution, that right supersedes state constitutional and statutory limitations of interest in the context of eminent domain.   We hold that the determination of the rate of prejudgment and postjudgment interest necessary to provide just compensation is a question for the trial court.  (See § 1268.340.)   It is a matter not subject to preordination by legislative fiat.   A governmental entity desiring to avail itself of the sovereign right to pretrial possession should not be permitted also to make use of the property owner's just monetary award at bargain interest rates.

We do not here tread on virgin judicial soil.   Numerous courts have recognized that the determination whether a particular rate of interest is sufficient to provide just compensation is a judicial function and that the rate of interest provided by statute may apply only if it is adequate under federal constitutional requirements.  (See Seaboard Air Line Ry. v. U.S., supra, 261 U.S. 299, 306, 43 S.Ct. 354, 356, 67 L.Ed. 664;  Miller v. United States, supra, 620 F.2d 812, 837–838;  United States v. 429.59 Acres of Land (9th Cir.1980) 612 F.2d 459, 464–465;  United States v. Blankinship (9th Cir.1976) 543 F.2d 1272, 1275–1276;  Textron, Inc. v. Commissioner of Transp. (1978) 176 Conn. 264, 407 A.2d 946;  Department of Transp., etc. v. Rasmussen (1982) 108 Ill.App.3d 615, 64 Ill.Dec. 119, 439 N.E.2d 48;  Marine Midland Bank, N.A. v. State (Ct.Cl.1983) 118 Misc.2d 472, 460 N.Y.S.2d 902;  Township of Wayne in County of Passaic v. Cassatly (1975) 137 N.J.Super. 464, 349 A.2d 545;  State by Spannaus v. Carney (Minn.1981) 309 N.W.2d 775.)

Payment of prejudgment or postjudgment interest at a rate far below what the condemnee could reasonably have expected to earn had the award been contemporaneous with the taking simply does not accord with the federal constitutional requirement of just compensation.   In 1940, the California Supreme Court stated that legal interest was “frequently accepted as the basis for fixing the measure of damages” caused by delay in compensating the owner for a taking.  (Metropolitan Water Dist. v. Adams (1940) 16 Cal.2d 676, 681, 107 P.2d 618.)   We infer from the court's statement that the legal rate of interest was “frequently accepted” for such purpose that such rate of interest might not always be sufficient to provide just compensation.   Recently, in United States v. Blankinship, supra, 543 F.2d 1272, the Ninth Circuit Court of Appeals construed the 6 percent interest rate (40 U.S.C. § 258a) specified by the Declaration of Taking Act (40 U.S.C. § 258a et seq.) as the minimum rather than the maximum rate of interest applicable to delay damages, noting that “a rate no greater than 6 percent in some instances will contravene the Fifth Amendment.”  (United States v. Blankinship, supra, 543 F.2d 1272, 1276.)   The court held that the market rate of interest for the period of delay should be used, and it provided guidelines for determination of that rate.  (Id., at pp. 1276–1277.)   In Matter of City of New York (1983) 58 N.Y.2d 532, 462 N.Y.S.2d 619, 449 N.E.2d 399, the New York Court of Appeals held that the 6 percent statutory rate of interest was inadequate to provide just compensation for the years 1978–1981 because the average interest rates on stable investments during that period ranged from 8.3 percent in 1978 to 12.5 percent in 1981.  (Also see Department of Transp., etc. v. Rasmussen, supra, 108 Ill.App.3d 615, 64 Ill.Dec. 119, 439 N.E.2d 48 [6 percent rate of interest “ ‘grossly inadequate’ ”];  Miller v. United States, supra, 620 F.2d 812, 838 [6 percent rate of interest “neither reasonable nor judicially acceptable”].)

In L & M Professional Consultants, Inc. v. Ferreira (1983) 146 Cal.App.3d 1038, 194 Cal.Rptr. 695, the court noted but found it unnecessary to reach the question whether application of the legal rather than market rate of interest may violate the Fifth Amendment right to just compensation.  (Id., at p. 1057, 194 Cal.Rptr. 695.)   The court stated that Brown v. United States (1923) 263 U.S. 78, 86–87, 44 S.Ct. 92, 95, 68 L.Ed. 171, is authority for awarding interest at the legal rate.  (L & M Professional Consultants, supra, 146 Cal.App.3d at p. 1057, 194 Cal.Rptr. 695.)   We do not so read the Brown case.   Rather, we read Brown as holding that, to comply with the conformity provision of the federal Act of August 1, 1888 (Act of Aug. 1, 1888, ch. 728, § 2, 25 Stat. 357),5 a federal court should follow such a state provision “if it is a fair one.”  (Brown, supra, 263 U.S. at p. 87, 44 S.Ct. at p. 95.)   A corollary is implied that, if it is not fair, such a state provision should not apply.

Because the Fifth Amendment right to just compensation is a federal constitutional right, the trial court had a duty to determine from the evidence that the legal rate of interest in California established by the California Constitution and by Code of Civil Procedure section 1268.320 would not place the owners in “as good [a] position pecuniarily as [they] would have been [in] if [their] property had not been taken.”  (Seaboard Air Line Ry. v. U.S., supra, 261 U.S. 299, 304, 43 S.Ct. 354, 355, 67 L.Ed. 664.)

Unrebutted evidence indicated that neither the 7 percent rate of interest provided by California Constitution, article XV, section 1, nor the 10 percent statutory rate of interest effective July 1, 1983, was sufficient to provide just compensation to defendants.

 The Gilmores' contention that they should be awarded interest at the same rate at which they were required to borrow money cannot be sustained.   Although the rate at which the Gilmores borrowed is relevant, that rate alone is not determinative.  (Georgia-Pacific Corp. v. United States (1980) 640 F.2d 328, 366, 226 Ct.Cl. 95.)   Evidence of interest rates in general during the pertinent period has more bearing on the issue of the proper rate than does the Gilmores' isolated transaction.   Prevailing interest rates charged for the financing of real property during the period in question are particularly relevant to determination of the rate of interest needed to provide just compensation.   Also relevant to such determination are loan origination fees that would be required to obtain interim financing because of the discrepancy between the amount of the deposited funds and the ultimate award.

II

Howard and Frances Hudson filed a memorandum of costs and disbursements listing attorney's fees and appraisal fees as recoverable items.   They also moved for recovery of those items as litigation expenses pursuant to section 1250.410, subdivision (b).   Their motion was opposed by plaintiff, and plaintiff also moved for an order striking those items from the Hudsons' memorandum of costs and disbursements.   The trial court denied the motion for litigation expenses and granted the motion to tax costs.

The Hudsons contend that those rulings were erroneous because the award was significantly higher than the highest offer made by plaintiff.   The Hudsons rely on County of Los Angeles v. Kranz (1977) 65 Cal.App.3d 656, 135 Cal.Rptr. 473 and Community Redevelopment Agency of Hawthorne v. Friedman (1977) 76 Cal.App.3d 188, 143 Cal.Rptr. 160 in support of this contention.   When the motions under review in Kranz and Friedman were ruled upon, recovery of a condemnee's litigation expenses was governed by former section 1249.3, which provided in pertinent part, “If the court, on motion of the defendant made within 30 days after entry of judgment, finds that the offer of the condemnor was unreasonable and that the demand of the condemnee was reasonable, all viewed in the light of the determination as to the value of the subject property, the costs allowed pursuant to Section 1255 shall include all expenses reasonably and necessarily incurred in preparing for and in conducting the condemnation trial including, and not limited to, reasonable attorney's fees [and] appraisal fees ․”  (Stats.1974, ch. 1469, § 1, p. 3208, italics added.)   Former section 1249.3 has been replaced by section 1250.410.   When the motions to tax costs and to recover litigation expenses were made in the instant case, subdivision (b) of section 1250.410 provided as follows:  “If the court, on motion of the defendant made within 30 days after entry of judgment, finds that the offer of the plaintiff was unreasonable and that the demand of the defendant was reasonable viewed in the light of the evidence admitted and the compensation awarded in the proceeding, the costs allowed pursuant to Section 1268.710 shall include the defendant's litigation expenses.   In determining the amount of such litigation expenses, the court shall consider any written revised or superseded offers and demands filed and served prior to or during trial.”  (Italics added.) 6  (Section 1235.140 defines “litigation expenses” as including attorney's fees and appraisal fees reasonably and necessarily incurred by the defendants.)

 Thus, the mathematical relation between the plaintiff's highest offer and the award is but one factor to be considered by the trial court.   Section 1250.410 requires the court to evaluate the reasonableness of the plaintiff's offer in light of the award and the evidence adduced at trial.   The trial court's determination of that issue is a resolution of a question of fact and will not be disturbed on appeal if supported by substantial evidence.  (City of El Monte v. Ramirez (1982) 128 Cal.App.3d 1005, 1009–1014, 180 Cal.Rptr. 690.)

 Although appellants have supplied us with a reporter's transcript of the hearing on the motions for recovery of litigation expenses and to tax costs, the Hudsons have neglected to supply this court with a reporter's transcript of the trial.   Since the reporter's transcript of the trial has not been provided, we must presume that the evidence adduced at trial supports the determination that plaintiff's offer was reasonable.  (Ibid.)

That portion of the judgment involving parcel 11 that awards the Hudsons interest at the legal rate is reversed and remanded for a determination of the weighted average market rate of interest during the time period mentioned in that judgment.   The judgment involving parcel 11 is otherwise affirmed.   That portion of the judgment involving parcel 9 that awards the Gilmores and Strattan interest at 7 percent is reversed and remanded for a determination of the weighted average market rate of interest during the period of time mentioned in that judgment.   The judgment involving parcel 9 is otherwise affirmed.   The order granting the motion to tax costs is affirmed.   The order denying the Hudsons' motion to recover litigation expenses is affirmed.

FOOTNOTES

1.   The declaration incorporated by reference facts set forth in the “Notice of Intention to Call Defendant, Walter L. Gilmore, Jr., as a Valuation Witness,” which was filed July 29, 1981.   Because the latter document was listed in appellants' designation of clerk's transcript but is not part of the clerk's transcript, we have reviewed that document upon obtaining the superior court file.  (Cal.Rules of Court, rule 12(a).)

2.   The Fifth Amendment just compensation clause was held applicable to the states through the due process clause of the Fourteenth Amendment in Chicago, Burlington & C. R'D v. Chicago (1897) 166 U.S. 226, 241, 17 S.Ct. 581, 586, 41 L.Ed. 979.

3.   All California statutory references hereinafter are to the Code of Civil Procedure.

4.   Because of this final sentence in article XV, section 1, of the California Constitution, our discussion of the right of just compensation is based on the federal constitutional right and not on California Constitution, article I, section 19.

5.   The conformity provision read, “The practice, pleadings, forms and modes of proceeding in causes arising under the provisions of this act shall conform, as near as may be, to the practice, pleadings, forms and proceedings existing at the time in like causes in the courts of record of the State within which such circuit or district courts are held, any rule of the court to the contrary notwithstanding.”  (Act of Aug. 1, 1888, ch. 728, § 2, 25 Stat. 357.)

6.   Section 1250.410, subdivision (b), now provides:  “If the court, on motion of the defendant made within 30 days after entry of judgment, finds that the offer of the plaintiff was unreasonable and that the demand of the defendant was reasonable viewed in the light of the evidence admitted and the compensation awarded in the proceeding, the costs allowed pursuant to Section 1268.710 shall include the defendant's litigation expenses.  [¶]  In determining the amount of such litigation expenses, the court shall consider the offer required to be made by the plaintiff pursuant to Section 7267.2 of the Government Code and any other written offers and demands filed and served prior to or during the trial.”

DALSIMER, Associate Justice.

LILLIE, Acting P.J., and L. THAXTON HANSON, J., concur.