MERCED IRRIGATION DISTRICT v. WOOLSTENHULME (1970)

The condemnor's appeal raises the claim that the jury were improperly permitted to consider comparable sales which reflected an increase of value caused by the very project for which the property insuit was being condemned. According to the general rule, enhanced value caused by the condemnor's proposed improvement may not be considered as a factor in determining market value. (United States v. Miller (1943) 317 U.S. 369, 375, 63 S.Ct. 276, 87 L.Ed. 336; San Diego Land etc. Co. v. Neale (1888) 78 Cal. 63, 74–75, 20 P. 380; Community Redevelopment Agency of City of Los Angeles v. Henderson (1967) 251 Cal.App.2d 336, 343, 59 Cal.Rptr. 311; City of San Diego v. Boggeln (1958) 164 Cal.App.2d 1, 5, 330 P.2d 74; additional cases cited 20 Hastings L.J. 622, 625, fn. 22 (1969); 4 Nichols on Eminent Domain (3d ed. 1962) § 12.3151; 1 Orgell on Valuation Under Eminent Domain (1953) § 98 et seq.).

Defendant owns a ranch of about 13,150 acres in a remote portion of Mariposa County. One end of the ranch lies next to Lake McClure, an artificial lake created in 1927 and owned by plaintiff, the Merced Irrigation District. The district undertook construction of a new dam and the enlargement of Lake McClure for a multipurpose water project including recreational facilities in and around the lake. In the present action the district is condemning 189 acres of defendant's land for the project. The jury awarded defendant $250 per acre. The district attacks this valuation on appeal.

For many years the neighborhood had been devoted primarily to cattle-grazing. There was little domestic water and no power in the area. Lake McClure was subject to wide seasonal fluctuations, covering up to 2700 acres in the winter and dropping to 30 acres surrounded by mud flats in the summer. The district owned a buffer strip of 200 feet around the lake, presumably near the edge of the high water stage.

In 1958 the Merced Irrigation District began evolving plans for the proposed Lake McClure project. In 1962 it commenced a quest for federal funds to assist in financing. Early in 1963 newspaper accounts created public knowledge that the Lake McClure project would include recreational facilities such as camping, fishing and boating. By the beginning of 1965 the project had progressed to a point which definitely assured that a portion of defendant's ranch adjoining the lake would be needed. The trial court specifically found that about January 1, 1963, public knowledge of the project's recreational aspects and consequent enhancement of neighborhood land values had commenced; that by January 1, 1965, there was definite knowledge that a portion of defendant's land would be taken for the project. During 1965 and 1966 a flurry of land sales occurred in the neighborhood at prices ranging from $250 to $600 per acre.

The district's appraisal witnesses testified that cattle grazing was the highest and best use of the 189 acres in suit and gave it a market value of $125 per acre. The owner gave it a value of $600 an acre, but admitted that in February 1966 she had sold a 26-acre parcel for $250 per acre. Richard Leuschner, defendant's appraisal witness, gave the 189 acres a market value of $200 per acre when used for cattle grazing as part of defendant's ranch. Considering the 189 acres as a separate tract, he testified that ‘development’ was its highest and best use. Having studied sales of comparable property, he gave defendant's land a valuation of $600 per acre, after deducting $50 per acre as a product of enhancement due to the Lake McClure project.

In support of Mr. Leuschner's valuation, the defense offered evidence of some of the 1965 and 1966 sales of neighboring parcels as comparable sales under section 816 of the Evidence Code.¹ Plaintiff objected, the ground being that these sales reflected an enhancement of property values attributable to recreational benefits created by the very project for which condemnation was sought. The trial court found that these sales reflected a ‘substantial enhancement’ due to the recreational potential created by the Lake McClure project. Nevertheless, it admitted these sales in evidence, declaring that the jury would be instructed to eliminate any enhancement attributable to the project.²

Standing alone, a rule excluding changes of value attributable to the condemnor's proposed improvement is incomplete. Time and space factors are needed to fill it out. The core or standard situation involves an enhancement or depreciation of the defendant's land after it is known to be within the project. Once the land is known to be within the project, its change of value is owed to the imminence of condemnation rather than the forces of the marketplace. In that standard situation the majority of American courts, including California's, disallow the change as a factor in eminent domain valuation. (4 Nichols, op. cit., p. 206, fn. 5.) Although Code of Civil Procedure section 1249 establishes a formula for fixing the valuation date, the cutoff of market value fluctuation at the time of the land's inclusion within the project is harmonized with that formula on the theory that the latter is only procedural. (County of Los Angeles v. Hoe (1955) 138 Cal.App.2d 74, 79–80, 291 P.2d 98.)

Factual variations occur. The project may be in the discussion stage for years preceding its actual design, and its imminence may inflate or deflate neighborhood values before definite inclusion of the defendant's land. A shift in project boundaries may embrace defendant's land after a rise or fall in property values. Again, as in this case, a valuation witness may resort to sales of other properties outside the project after the defendant's land is known to be within the project.

Since our present concern is neighborhood enhancement rather than blight, we speak of the former only. (See, however, Anderson, Consequence of Anticipated Eminent Domain Proceedings—Is Loss of Value a Factor? 5 Santa Clara Lawyer 35 (1964).) A useful distinction is that drawn between direct and indirect enhancement. Such was the terminology employed in San Diego Land etc. Co. v. Neal, supra, 78 Cal. at pages 74–75: ‘The proposition is, therefore, that the defendants are entitled to the benefit arising from the improvement * * * for the purposes of which their land is sought to be taken. This seems to us inadmissible as a direct element of value. It is possible that they might get some benefit from it indirectly. That is to say, the public knowledge of a proposed improvement might cause an actual demand in the market and a subsequent advance in the current rate of price. In such case it would be impracticable for a court to analyze the price and determine the proportion in which any particular element contributed thereto. The scales of justice do not balance quite so delicately as that. But aside from this indirect benefit, and in a case where there is no actual current rate of price, and where in consequence the court must arrive at the value from a consideration of the uses to which the property may be put, it seems monstrous to say that the benefit arising from the proposed improvement is to be taken into consideration as an element of the value of the land.’

The Neale nomenclature—direct as distinguished from indirect enhancement—was picked up in a useful student note in 20 Hastings Law Journal (pp. 622–649). American decisions do not uniformly allow or disallow indirect enhancement. (See Note 147 A.L.R. 66–103; 39 So.Cal.L.Rev. 323 (1966).) Neale is the only California decision discussing it explicitly. It is not possible to generalize an indirect enhancement rule from the later California decisions. Since Neale dealt with and prohibited value testimony based upon direct enhancement, its intimation of indirect enhancement's propriety is dictum.

The Neale dictum harmonizes with the general test of market value at the time of taking. Where the general probability of the project causes an anticipatory increase in neighborhood values before the particular parcel's inclusion within the project lines, its appreciation is produced by the interplay of a free market rather than the likelihood of condemnation. To allow that value rescues the landowner from the injustice imposed when protracted pre-project discussions imprison his property in an economic no-man's-land. The federal Supreme Court allows the parcel to share in an enhancement of neighborhood values which occurs before its probable inclusion in the project. (United States v. Miller, supra, 317 U.S. at pp. 375–377, 379, 63 S.Ct. 276, 87 L.Ed. 336; Kerr v. South Park Commissioners (1886) 117 U.S. 379, 384–387, 6 S.Ct. 801, 29 L.Ed. 924.) Allowance of indirect enhancement is consistent with the California doctrine which subtracts special benefits from severance damage, but permits the landowner to retain general benefits which the project brings to the neighborhood. (Pierpont Inn, Inc. v. State of California (1969) 70 Cal.2d 282, 295–296, 74 Cal.Rptr. 521, 449 P.2d 737.) Although the decisions in other states are far from uniform, the allowance of indirect enhancement appears to be the majority view and we follow it here. (See 4 Nichols, op. cit., pp. 209–211; 147 A.L.R. 66–103.)

Because January 1, 1965, was established as the date when defendant's property was definitely included in the Lake McClure project, it was entitled to share in the rise of neighborhood values preceding that date but not that following it. The admissibility of nearby sales depended upon their comparability. (Evid. Code, § 816, fn. 1, supra.) “‘The sales of the other tracts must have been * * * sufficiently alike in respect to character, situation, usability, and improvements, to make it clear that the two tracts are comparable in value and that the price realized for the other land may fairly be considered as shedding light on the value of the land in question. Manifestly, the trial judge in applying so vague a standard must be granted a wide discretion.”’ (County of Los Angeles v. Faus (1957) 48 Cal.2d 672, 678, 312 P.2d 680, 684; Los Angeles etc., School Dist. of Los Angeles County v. Swensen (1964) 226 Cal.App.2d 574, 583, 38 Cal.Rptr. 214.)

In one respect the nearby sales utilized by Mr. Leuschner and admitted in evidence were not comparable, because they took place in 1965 and 1966, thus reflecting to some extent the recreational increment occurring after January 1, 1965. To consider that increment in valuing defendant's 189 acres would violate the rule against direct enhancement. The trial judge had discretion to decide which sales were comparable but no discretion to allow jury consideration of project-related recreational values accruing after the cutoff date. He might have excluded them as lacking comparability. (See, e. g., International Paper Co. v. United States (9th Cir. 1955) 227 F.2d 201, 209; Williams v. City and County of Denver (1961) 147 Colo. 195, 363 P.2d 171, 173–174; Cole v. Boston Edison Co. (1959) 338 Mass. 661, 157 N.E.2d 209, 214.) To exclude them would deprive the landowner of legitimate support from meaningful real estate activity in the area. Faced with this dilemma, the trial judge improvised a procedure, admitting the sales as comparable, but instructing the jury, as fact finder, to subtract whatever it found to be the direct enhancement.

The procedure had been argued to some extent by City of San Diego v. Boggeln, supra, 164 Cal.App.2d 1, 330 P.2d 74. There the court allowed the valuation opinion of an expert who had admittedly considered sales benefiting from proximity to the condemnor's project but who had excluded this enhancement in valuing the property in suit. In view of the appraiser's testimony and a jury instruction directing disallowance of the enhancement, the reviewing court found no error.

Several factors support the trial judge's present ruling. First, according to the evidence, enhanced land values in the neighborhood were due to a mixture of elements, of which the recreation potential was only one. Among such elements were an annual increase of seven per cent in the price of California grazing land; the state's increase in population; a heavy demand for mountain and foothill land for vacations and retirements; newly built highways which provided better access; proximity to Lake McClure in its pre-project condition. The landowner was entitled to the support of these permissible valuation elements.

Second, the recreational potential revealed by the Lake McClure project in 1963 and 1964 had exerted an influence on the 1965–1966 sales. These sales reflected an inseparable mixture of recreational enhancement occurring before and after the January 1, 1965, cutoff date. While an appraiser would find much difficulty in ascribing a dollar value to the pre-1965 increment, the landowner was entitled to have it considered.

Third, the procedure was well adapted to achieve practical consummation of the rule against direct enhancement. That the rule can be maintained only by excluding evidence is only an assumption. True, the segregation of permissible and impermissible evidentiary factors often strains jury capabilities. Where, as here, the segregation can be achieved by establishing two monetary figures, then subtracting one from the other, the process is well within the range of jury capability. All the appraisal witnesses had testified to the virtual impossibility of ascribing a dollar amount to the recreational enhancement. Mr. Leuschner had essayed an opinion (really a calculated guess) that project-related enhancement was $50 an acre. The district's appraisers had fixed it at everything over $125 an acre. Appropriately instructed, the 12 jurors could consider these divergent views in the light of comparable sales produced by both parties, arrive at their own appraisal of recreational enhancement—with as much efficiency as in any other valuation decision—and then perform the simple mathematical act of subtracting it from the market value as of the valuation date. There is no claim that the instructions did not adequately convey this direction to the jury. We conclude that the trial court's action was appropriate and did not invite substantive error.

The appeal presents one other problem, a charge that the trial court erred in awarding the landowner, Mrs. Woolstenhulme, a $3500 attorney fee premised upon a partial abandonment by the condemnor. Code of Civil Procedure section 1255a provides that a condemnee shall be compensated for ‘recoverable costs and disbursements,’ including reasonable attorney fees, in preparing to defend a condemnation action which is later abandoned by the condemnor.

The irrigation district had sought to condemn the fee of two areas designated as parcels 1 and 2; the cattle-grazing and watering rights to 199.9 acres designated as parcel 3; the fee of parcels 4 and 5, a longitudinal strip aggregating 13.56 acres. Defendant and a predecessor had originally sold parcel 3 to the district, but had reserved the grazing and watering rights. After this condemnation action was filed, Mrs. Woolstenhulme instituted a separate lawsuit to rescind the sales of parcel 3. She was successful in accomplishing rescission. The district then, on August 7, 1967, filed an amended complaint in this action, seeking condemnation of the fee of parcels 1 and 2 and the fee of 117 acres of parcel 3. (These three parcels, as described in the amended complaint, fixed the ‘take’ at the 189 acres upon which the parties went to trial.) The amended complaint dropped the demand for grazing and watering rights and excluded parcels 4 and 5 from the ‘take.’ The trial court held that the amendment of the complaint amounted to a partial abandonment and awarded the landowner an attorney fee of $3,500.

At the time of the proceedings in the trial court, Code of Civil Procedure section 1255a did not expressly cover cases of partial abandonment. Case law, however, had established the landowner's right to an attorney fee when the condemnor filed an amended complaint abandoning a part of the original objectives. (County of Kern v. Galatas (1962) 200 Cal.App.2d 353, 356–357, 19 Cal.Rptr. 348.) In 1968 the statute was amended to recognize partial abandonments.

When the court made its order awarding abandonment costs on April 4, 1968, the irrigation district did not appeal. Rather, it objects to the award in the course of its appeal from the condemnation judgment entered April 19, 1968. The landowner seeks to preclude review of the award, relying on the rule that an appealable order from which no appeal was taken cannot be reviewed on appeal from the final judgment. (Code Civ.Proc., § 906.) The contention begs the question of the cost award's appealability. Where there is a complete abandonment of the condemnation, the order awarding costs is sought and made after the abandonment has been manifested by dismissal of the action. In such a case, an order taxing costs is regarded as a special order made after judgment, from which appeal will lie. (Oak Grove Sch. Dist. of Santa Clara County v. City Title Ins. Co. (1963) 217 Cal.App.2d 678, 711, 32 Cal.Rptr. 288.) The present case involves a partial abandonment manifested by amendment of the complaint rather than by dismissal of the action. The order assessing costs was entered prior to the judgment and was reviewable only on an appeal from the judgment. (Distefano v. Hall (1963) 218 Cal.App.2d 657, 681, 32 Cal.Rptr. 770.)

The district contends that Mrs. Woolstenhulme, the landowner, was not entitled to a fee award, having only a contingent fee contract with her attorney. Were the question still open, one might suggest a statutory purpose to compensate both the client and the attorney for the economic loss caused by abandoned condemnation, even when the fee contract is entirely contingent. (See generally, La Mesa-Spring Valley Sch. Dist. of San Diego County v. Nobuo Otsuka (1962) 57 Cal.2d 309, 317, 19 Cal.Rptr. 479, 369 P.2d 7.) Three decisions, however, hold that no fee may be awarded where the landowner's contract with his attorney is wholly contingent upon recovery. (Franklin-McKinley Sch. Dist., etc. v. Lester (1963) 223 Cal.App.2d 347, 35 Cal.Rptr. 727; City of Los Angeles v. Welsh (1935) 10 Cal.App.2d 441, 443, 52 P.2d 296; City of Long Beach v. O'Donnell (1928) 91 Cal.App. 760, 761, 267 P. 585.) Because the statute has been amended in various respects since these decisions but without abrogating them, they must be followed as settled law.

The original contract between Mrs. Woolstenhulme and her attorney took the form of a letter from the attorney to his client, setting out a purely contingent fee arrangement. Months later, envisioning a possible partial abandonment, the attorney wrote his client another letter, stating that in the event of abandonment, his charge would be based upon ‘reasonable charges.’ (See, California Condemnation Practice (Cont.Ed.Bar) p. 18.) In making the award, the trial court viewed the second letter as an amendment of the attorney fee contract. That conclusion rested upon an implied finding that Mrs. Woolstenhulme had consented to the amendment.

The court received evidence, including Mrs. Woolstenhulme's deposition, in support of her motion for costs. When the district filed its amended complaint, Mrs. Woolstenhulme's attorney sent her a bill for services he had performed in connection with the properties and rights dropped from the lawsuit. Mrs. Woolstenhulme testified that she understood this billing to cover a fee over and above the contingency fee; that she offered to pay the billing but was told by her attorney to wait until the court determined whether the amount was proper. This testimony forms substantial evidence that she consented to the amendment of the fee contract, which was no longer a purely contingent one. Consequently, the court had power to make an award.

Section 1255a is designed to compensate the defendant for expenses incurred when the condemnor fails to carry the proceeding through to conclusion. (Oak Grove Sch. Dist., etc. v. City Title Ins. Co., supra, 217 Cal.App.2d at p. 698, 32 Cal.Rptr. 288.) The trial court correctly concluded that when the district dropped its effort to condemn the fee of parcels 4 and 5 and the grazing and watering rights on that portion (82.9 acres) of parcel 3 omitted from the amended complaint, a partial abandonment occurred. As to the remainder of parcel 3 (117 acres in extent), the district simply shifted from its prayer for grazing and watering rights to the condemnation of a fee simple estate. The grazing and watering rights were severable portions of the collection of rights making up the fee simple estate. (County of Kern v. Galatas, supra, 200 Cal.App.2d at p. 356, 19 Cal.Rptr. 348.) The shift to a fee simple taking was not a relinquishment of the grazing and watering rights; rather, it was an enlargement of the lawsuit to take up the entire collection of rights forming the fee simple estate in the 117 acres. The landowner's action in rescinding the original sale forced that enlargement upon the district. The district did not voluntarily relinquish any rights in the 117 acres, did not fail to carry the proceeding through to conclusion. (County of Kern v. Galatas, supra, 200 Cal.App.2d at pp. 356–359, 19 Cal.Rptr. 348.) As regards the 117 acres, the trial court erred in viewing the shift as an abandonment.

Thus the abandonment was less extensive than that contemplated by the trial court when it made its cost order. Just how the reduced compass of the abandonment will affect the amount of the fee award can best be determined by the trial court.

The cost order is set aside to the extent that it was premised upon plaintiff's abandonment of grazing and watering rights in 117 acres of parcel 3. Defendant's motion for costs and disbursements is remanded to the trial court for recomputation of the attorney fee. The judgment is otherwise affirmed. Appellant shall bear the costs of appeal.

FOOTNOTES

1.  Evidence Code, section 816: ‘When relevant to the determination of the value of property, a witness may take into account as a basis for his opinion the price and other terms and circumstances of any sale or contract to sell and purchase comparable property if the sale or contract was freely made in good faith within a reasonable time before or after the date of valuation. In order to be considered comparable, the sale or contract must have been made sufficiently near in time to the date of valuation, and the property sold must be located sufficiently near the property being valued, and must be sufficiently alike in respect to character, size, situation, usability, and improvements, to make it clear that the property sold and the property being valued are comparable in value and that the price realized for the property sold may fairly be considered as shedding light on the value of the property being valued.’

2.  In the course of its jury instructions, the trial court declared that evidence of sales of comparable properties should be considered only for the limited purpose of understanding and weighing the opinion testimony of the valuation witnesses; that by January 1, 1965, it became reasonably probable that defendant's property would be taken for the project; that the jurors were not to consider any enhancement of value that came about by virtue of public knowledge of the recreational aspects of the project after January 1, 1965. The court informed the jurors that it was their function to determine what the enhancement factor was; that Mr. Leuschner had placed it at $50 per acre, while the plaintiff's witness had declared anything over $125 per acre to be an enhancement.

FRIEDMAN, Acting Presiding Justice.

REGAN and JANES, JJ., concur.