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Tuesday, April 26, 2016
Hawaii ICA Bungles Hanalei River Eminent Domain Case?
By Robert Thomas @ 4:09 AM :: 3695 Views :: Kauai County, Land Use

 

Kauaipark

Hawaii Court Of Appeals Draws A Bright Line In Eminent Domain: In Larger Parcel Analysis, Unity Of Contiguity Means Parcels Must Touch

by Robert Thomas, InverseCondemnation, April 25, 2016

A longer post to start the week because it involves an eminent domain case, a somewhat rare occurrence from the Hawaii appellate courts. The issues determined by the Hawaii Intermediate Court of Appeals are important, and because we have an old eminent domain code and don't have a whole lot of current decisional law applying it -- and we think the ICA got some critical things wrong (even though it may not matter for this case) -- we're going hit this one in some detail.   

This one involves three parcels on Kauai -- some of which were owned by a fellow who has been a thorn in the County's side -- which were condemned by the County for the expansion of a public beach park

In County of Kauai v. Hanalei River Holdings, Ltd., No. CAAP-14-0000828 (Mar. 31, 2016), the ICA addressed three issues:

  • Can a condemnor revise its initial appraisal downward and reduce the amount of the deposit used to support immediate possession? 
  • Is an owner precluded from showing that the taken property is part of a larger parcel because the parcels are not physically touching? 
  • When is a condemnor's deposit, which gives it the ability to obtain immediate possession of the property pending the determination of just compensation, "conditional," and thus not fully available to the property owner? 

Immediate Possession and the Condemnor's Withdrawal of a Portion of the Deposit

The County initially deposited $ 5.89 million to support its motion for immediate possession. Hawaii is not a "true" quick-take jurisdiction where title transfers upon the deposit, but a governmental condemnor may obtain immediate possession of property "to do such work thereon as may be required for the purpose for which the taking of the property is sought," as long as it deposits with the court a "sum of money estimated by the State or county to be just compensation or damages for the taking of the real property." Haw. Rev. Stat. § 101-29. The County didn't seek possession immediately upon the filing of the eminent domain complaint, but waited nearly a year for it.

Timeline

Here's the sequence of events relevant to this issue:

  • May 2011 - County's eminent domain complaint filed.  
  • April 2012 - County sought ex parte order of possession, deposited $5.89 million.
  • May 2012 - circuit court put County in possession.
  • August 2012 - owner asked to vacate possession due to stale appraisal. Court denied.  
  • March 2013 - owner asked to withdraw deposit.
  • April 2013 - County opposed: no way to ensure repayment by foreign corporate owner if deposit exceeds verdict.
  • Same day - County asked to withdraw $1.03 million of the deposit, based on revised appraisal.
  • 5 days later - owner and County stipulated to owner's withdrawal of $4.86 million (all but the contested $1.03 million), and owner agreed to indemnify County for any shortage.
  • 2 weeks later, owner opposed County's reduction of deposit by $1.03 million.
  • May 2013 - court allowed County to reduce deposit. 

The jury determined that just compensation was $5.8 million for the three parcels.

No Express Authority to Reduce the Deposit

The first issue the Intermediate Court of Appeals considered was whether the County properly reduced its initial deposit by $1.03 million, based on its revised appraisal. The owner correctly argued that there was no express authority in the eminent domain code for the County to do so. Thus, he asserted, the County was bound by its initial deposit. No authority means cannot do.

The ICA disagreed, concluding that by the terms of the statute the deposit is merely an "estimate" of just compensation, and the County was within its rights to revise its appraisal to conform to the date of the summons. Recall that the County's deposit was initially based on an appraisal that by the time it got around to seeking possession, was nearly a year out of date. Indeed, the owner initially objected to the "stale" appraisal when it asked the court to vacate the order of possession.

Amendment of Pleadings, Processes, and Proceedings

There being no evidence that the County revised its appraisal and sought to reduce the deposit in bad faith, the ICA concluded that it could do so, unless the owner could show that it would "impair the substantial rights of any party in interest." That standard comes from a separate part of the eminent domain code that permits amendment of pleadings, "processes," and "proceedings" unless some harm would result. The court assumed that a downward revision of the deposit was a pleading, process, or proceeding (it skipped over the details), and held that the owner hadn't shown any harm, because he was eventually made whole by the jury verdict and award of what Hawaii law calls "blight of summons." This latter requirement, which we will detail more below, is a provision in the eminent domain code that requires a condemnor to pay interest of 5% on the difference between the deposit and the eventual just compensation award. Because the owner got that in the end, he couldn't show harm.

No Harm, No Foul?

While it does look like it all evened out in the end, we're not 100% on board with the ICA's analysis. We're of the belief that condemnors need to be held to extraordinarily strict standards in eminent domain proceedings where the owner is being deprived of possession or ownership of her land before the final payment of just compensation, and should not be allowed to amend willy-nilly. These proceedings are in derogation of the common law, and more importantly, someone is having their property taken without much process at all, and unlike most lawsuits, there's very little they can do to object. The owners haven't done anything wrong and have not violated any agreements, and the only reason they are getting sued is that they happen to own property someone else wants. And they are going to get harmed by under-compensation no matter what, because Hawaii law does not allow a property owner to recover attorneys fees or costs, unless the condemnation is dismissed. So even when they recover what the court views a just compensation by virtue of the verdict, plus the blight of summons damages for the delay in payment because of an insufficient deposit, they still have to carry their own fees and expenses.

Thus, the promise that one day they will be made (mostly) economically whole doesn't provide a whole lot of present solace. Especially since there's no res judicata in eminent domain, and only in rare circumstances will a condemnor who screws things up be prevented from dismissing and simply starting all over again. We think condemnors need to do that more often, rather than correcting on the fly, like here, and like innumerable other Hawaii eminent domain cases of which we are aware where condemnors approach this loosely with the belief that they can amend around all of their own shortfalls. 

Appeal Immediately, Or Risk Mootness

So we don't think that the promise of eventual compensation plus blight of summons damages means that an owner can't harmed by the County's reduction of the deposit. We can think of several scenarios where an owner could be harmed. Where possession had already been granted, for example. Or if there were multiple owners, or a lender that needed to be satisfied out of the deposit. But the owner here didn't really raise those or similar arguments, and indeed, entered into an agreement with the County allowing the owner to withdraw the undisputed portion of the deposit, $4.86 million.

Which brings us to our main disagreement with the ICA's approach. It wasn't so much that the owner wasn't harmed (he did assert in his reply brief that he could have beat the 5% statutory rate for blight of summons if he only the proper amount had remained on deposit, although the brief did not further elaborate), it's that any arguable harm caused by an insufficient deposit was mooted by taking the case to verdict. Because there no longer was a deposit. The ICA recognized this in a footnote: "[w]e note that the Sheehan Defendants do not request any form of relief from the circuit court's order permitting the County to withdraw a portion of the deposit, besides a request for us to vacate that order." Slip op. at 17, n.11. In other words, the time to effectively assert that reducing the deposit will result in harm is where the money is still on deposit and the court's order could actually have some effect. So it wasn't necessary to determine whether the owner here was or wasn't harmed, because a ruling by the appellate court would have no effect, thus reserving this issue for another case and another day. We think the ICA should have put note 11 in the text and ruled the argument was moot on appeal, which would render all the rest of this stuff dicta.

There's no absolute right to an interlocutory appeal from a trial court's order regarding a deposit (as there is in other provisions in the eminent domain code), but in situations like this, the trial court should permit them so that issues that would be mooted by a verdict are resolved by a quick appeal. And a good argument could be made for why eminent domain issues such as these should be advanced on the appellate docket.

Larger Parcel - The "Three Unities"

The next issue the ICA addressed was a consequence of the taking of multiple parcels. The County was taking Parcels 49, 33, and 34. Sheehan owned 49, and HRH, a corporation, owned 33 and 34. Sheehan asserted his use of Parcel 49 stretched across 33, 34, and Area 51 -- a portion of another Parcel but not a separate record lot. He claimed to use Area 51 pursuant to an easement.

Lotmap

Parcel 49 (green) -- Parcel 33 (pink)  -- Parcel 34 (yellow) -- Area 51 (blue)

Unity of Use, Title, and Contiguity

Because he claimed to use Area 51 in conjunction with Parcels 49, 33, and 34, the owner asserted that he was entitled to prove that his use of Area 51 was damaged by the County's condemnation. Eminent domain lawyers know this as the "larger parcel" or "parent tract" question. Generally, if the taken parcel is used together with other land that is not being condemned, the owner is entitled to put on evidence that the taking resulted in damage to her use of that other land. Before the case went to trial, however, the circuit court granted summary judgment to the County and prohibited the owner from introducing evidence that his (alleged) use of Area 51 was impacted by the condemnation of the other parcel.

The ICA agreed, correctly recognizing the "three unities" test for determining when a parcel which has not been condemned may be considered part of the larger parcel that was damaged by the taking. Courts and appraisers look at unity of use, title, and contiguity. In other words, are the two properties used by the owner as an integrated whole, and are they owned by the same owner, and how close they are to each other. The modern trend is for the three unities test to be applied holistically -- the bottom line question, after all, is whether the parcels can be considered part of a unified whole -- with no one of the three elements being dispositive.

A Bright-Line Test?

But the ICA held otherwise, concluding that Sheehan only owned Parcel 49, and since that was not adjacent to Area 51, he could not show that Area 51 was part of the larger parcel:

Thus, the only condemned parcel owned by Sheehan, Parcel 49, is not adjacent to "Area 51," because Parcels 33 and 34, both owned by HRH, lie in between. Sheehan therefore cannot satisfy the physical unity requirement.

Slip op. at 19 (footnote omitted). The ICA asserted this rigid test was established by the Hawaii Supreme Court in City and County of Honolulu v. Bonded Investment Co., Ltd., 54 Haw. 523, 511 P.2d 163 (1973), which required "that all of the pertinent lots abut one another." Slip op. at 20. The court rejected Sheehan's argument that Bonded Investment required no such thing, concluding that "[t]his is a clear misreading" of the decision:

[T]he Hawaii Supreme Court expressly noted that of the three parcels at issue in that case (all of which satisfied the unity of title requirement), two were contiguous, and one of the two contiguous parcels adjoined the third, thus all three could comprise one tract of land.

Slip op. at 20 ("Finally, we reject Sheehan's argument that under Bonded Inv. II there is no requirement that all of the pertinent lots abut one another.") (citing Bonded Investment, 54 Haw. at 524, 527, 511 P.2d at 164, 166).

Yes, in Bonded Investment, the parcels touched. But that fact does not lead to the rule the ICA set out.

Bonded Investment: Unified Use, Not Rigid Rules

In that case, Bonded owned three lots: Lot 59, as well as the lots on either side of that parcel, Lots 65 and 60. The City condemned all three. Thus, there was "no question" the taken tract adjoined the other two taken tracts, and that Bonded owned them all. Thus, "the three lots could comprise one tract of land." Id. at 524, 511 P.2d at 164.

But simply because there the parcels were adjacent and the court concluded they could be a single tract, does not lead to a requirement that the parcels touch. Of course, when parcels touch they will more likely be treated as a single tract. But the converse is not also true, and the mere lack of contiguity isn't, by itself, fatal to a larger parcel argument as the ICA held.

One of the classic examples of the larger parcel issue is a building on one side of the street, and a parking lot on the other. If the parking lot is condemned, the owner of the building should be entitled to present to the jury the impact of the loss of his parking lot on his use of the building. It shouldn't matter in that case that the parcels didn't touch. Indeed, there's nothing to prevent an owner from claiming a very distant parcel is part of the larger parcel, provided it can show how the two are used as an integrated whole.

The Bonded Investment court's analysis confirms this. The court focused on unity of use, noting that the owners incurred expenses for the use of lot 65 as a location for a proposed condo, and did the same for another condo that would be on both lots 59, and 60. But these were to be separate buildings. Thus, the court held that "[i]t is clear to us that the owners not only by choice and design had separated the use of Lot 65 from Lots 59 and 60[.]" Id. at 527, 511 P.2d at 166. Thus, the court concluded that Lot 65 was a single parcel, and that Lots 59 and 60 were a single parcel. But the three could not be combined:

The owners having thus separated the use of Lot 65 from other lots, it could no longer be said that there was such "connection, or relation of adaptation, convenience, and actual and permanent use between them, as to make the enjoyment of the parcel taken, reasonably and substantially necessary to the enjoyment of the parcel left, in the most advantageous and profitable manner in the business for which it is used."

Id. at 527, 511 P.2d at 166 (citations omitted). Thus, that test, and not bright-line rules about title and adjacency as applied by the ICA to the Sheehan properties, is the essential question in larger parcel analysis. So we think the ICA got it wrong on this issue, and the lack of physical contiguity between Parcel 49 and Area 51 should not have been automatically fatal to Sheehan's claim.

But what about title and unified use? HRH, not Sheehan, owned the two lots in between, and a third person owns Area 51. This argument was problematic for Sheehan, because at the time it entered summary judgment for the County, Sheehan had only submitted his unexecuted declaration that he used all of the parcels and Area 51 for his business, and he didn't file a signed declaration until five months after the court ruled against him. Whether an appellate court reviewing the record de novo can consider a later-filed declaration we leave to wiser minds. In any event, the ICA skipped over that, and instead (incorrectly, in our view) affirmed summary judgment solely because the parcels didn't abut.

"Conditional" Deposit and Blight of Summons

The final issue the ICA addressed was the fallout from the County's withdrawing a portion of the deposit. The jury awarded $5.8 million and the deposit was only $4.86, a difference of $940,000. As we noted earlier, when the just compensation and damage verdict exceeds the deposit, the property owner is entitled to the time value of the difference. The statute provides for 5%, although this is the starting point, not a high limit if the owner can show that the market would return more.

The County was okay with paying 5% on the $940,000 difference between its deposit and the jury verdict. But the owner wanted 5% on the entire jury verdict, because the County's deposit was not unconditional. Recall that a deposit is used to allow a governmental condemnor to obtain immediate access to property. In order for the immediate possession process to be constitutional, the deposit must be fully available to the property owner.

But in this case, two of the parcels were owned by HRH, a Cook Island entity, and the County was concerned that should the deposit exceed the verdict, the County would have no way of getting the excess deposit back from HRH. Thus, the County objected when the owners asked the court to withdraw the deposit. The County also objected to disbursement because the title to Parcels 33 and 34 was not clear. Eventually, the parties agreed that Sheehan would indemnify the County for any amounts paid to HRH that exceeded the jury verdict, and a subsequent pleading clarified who owned what. 

The ICA correctly concluded that the County's objection to the disbursement showed the deposit was conditional, which meant that the property owners did not have free access to the funds. The ICA held that the owner was entitled to blight of summons damages on the entire just compensation award, from the date of the summons (with one small exception, when title was truly in question). 

The County's position would, in effect, allow it to circumvent HRS §§ 101-29, 101-30, 101-31 and 101-33, by first depositing estimated just compensation to stop the running of interest on that amount, but then also conditioning access to that money by the "persons entitled thereto" on the acceptance of "protective measures." In addressing persons or parties entitled to just compensation, HRS §§ 101-29 through 101-31 do not distinguish between local and foreign owners, or owners whose financial situation may be conducive to difficult recovery of overpayment. The County chose to pursue immediate possession, and such action requires the deposit of estimated just compensation that the "person entitled thereto" has the right to withdraw and use at once, if title is clear.

Slip op. at 27 (citations omitted). The ICA sent that part of the case back to the circuit court for a recalculation of interest.

Here are the briefs filed in the court of appeals:

Stay tuned, folks.

---30---

PDF: County of Kauai v. Hanalei River Holdings, Ltd., No. CAAP-14-0000828 (Haw. App. Mar. 31, 2016)

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