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general / Real Estate

Eminent Domain Under Review

The generally stable area of eminent domain law, which permits the government to acquire private property as a means to achieve certain public purposes, got a jolt recently when an intermediate appellate court declared that part of the statutory scheme was unconstitutional.

The case, Property Reserve, Inc. v. Superior Court (224 Cal. App. 4th 828 (2014)), involved the so-called entry statutes. (See Cal. Code Civ. Proc. §§ 1245.010-1245.060.) These sections come into play frequently, as state agencies often must inspect or analyze a particular property before making the ultimate decision to acquire it by condemnation for public use. The entry statutes permit state entry to and activity on a property without having to actually initiate a condemnation proceeding. (In this context, the word condemnation does not mean the property is unfit for occupancy; it refers to the process by which government acquires private property for public use.)

In Property Reserve, the court held that when government representatives enter private property to inspect it for possible acquisition, a "taking" may occur and the state must pay just compensation for that taking. (See Property Reserve, 224 Cal. App. 4th at 836.)

The case is a significant win for individual landowners, but it creates an imposing obstacle sure to interfere with the state's ambitious public works goals, including water and high-speed rail projects. Indeed, with the Property Reserve ruling now under review by the California Supreme Court (see 173 Cal. Rptr. 3d 45 (2014) (order granting review; case pending as No. S217738)), the state's eminent domain law is truly in flux. Dozens of public works projects and countless property owners are in legal limbo. Depending on how the state Supreme Court resolves the issue, a litany of California public works projects could be derailed - or at least made significantly more expensive.

Background
Eminent domain is the right of the government to take private property for public use. (See Cal. Code Civ. Proc. § 1240.010.) Because this right is a sovereign power, the federal and state constitutions describe it indirectly. Under the Fifth Amendment, no private property shall "be taken for public use, without just compensation." Under the California Constitution, "[p]rivate property may be taken or damaged for public use only when just compensation ... has first been paid to, or into court for, the owner." (Cal. Const., Art. 1, § 19.)

In 1975 California enacted a statutory Eminent Domain Law (Cal. Code Civ. Proc. §§ 1230.010-1273.050) modeled after the Model Eminent Domain Code and the Uniform Eminent Domain Code. (See 12 Cal. Law Rev. Comm. Reports, at p. 1627.) According to the code, "[t]he power of eminent domain may be exercised to acquire property only for a public use." (§ 1240.010.) A government entity must satisfy three requirements before such power is actually implemented: (1) "The public interest and necessity require the project;" (2) the project must be "planned or located in the manner that will be most compatible with the greatest public good and the least private injury;" and (3) the property sought for acquisition must be necessary for the project. (See § 1240.030(a)-(c).)

Before Acquisition
Prior to launching a formal eminent domain proceeding, a public agency may well wish to inspect and perform tests on the subject property to determine its suitability for a given project. To do that work, government representatives typically invoke the precondemnation entry statutes, which authorize a person to enter upon property "to make photographs, studies, surveys, examinations, tests, soundings, borings, samplings, or appraisals or to engage in similar activities" reasonably related to its potential acquisition for public use. (§ 1245.010.)

In exercising these precondemnation rights, a governmental entity or agency may petition the court for an order permitting entry onto the property. The court then determines the purpose for the entry, the nature and scope of the contemplated precondemnation activities, and "the probable amount of compensation to be paid to the owner for the actual damage to the property and interference with its possession and use." (§ 1245.030(b).)

After making that determination, the court will issue an order describing both the purpose for the entry and the nature and scope of the activities to be undertaken. The order will also require the person seeking entry "to deposit with the court the probable amount of compensation." (§ 1245.030(c).) If the precondemnation activities "cause actual damage to or substantial interference with the possession or use of the property," the property owner may recover such damages in a civil action. (§ 1245.060(a).)

In the event that the government decides to acquire the property, the agency involved must then bring a condemnation proceeding in court to obtain title and determine the amount of compensation to be paid to the owner. (§§ 1250.010-1268.720.) (The code also provides that the parties may agree to resolve the controversy via arbitration; see §§ 1273.010-1273.050.)

The court decides the value based on a weighing of evidence provided by both sides. "The trier of fact generally is presented with conflicting opinions of value and supporting data and is required to fix value based on the weight it gives to the opinions and supporting data." (People ex. rel. Dept. of Transp. v. Salami, 2 Cal. App. 4th 37, 42 (1991).)

After the plaintiff pays the full judgment amount, the court issues its final order of condemnation, which may be recorded in the county where the property is located. (See Civ. Proc. Code §§ 1268.030(a), (c).)

Constitutional Issue
In the Property Reserve case, the state of California proposed to construct a tunnel to transport water from the northern part of the state to the south. However, before condemning the land needed for the project, the state sought to study the environmental and geological suitability of potential properties on which the tunnel might be constructed.

The state brought a petition pursuant to the precondemnation entry statutes and sought permission to conduct various tests on those properties, implicating more than 150 owners of more than 240 parcels and spanning tens of thousands of acres. Pursuant to the petition, the state sought authority to conduct both environmental and geologic investigations. The environmental work consisted of surveys to determine and document the botany and hydrology of each parcel, the existence of plant and animal species, animal habitats, and potential recreational uses. The geological activities involved soil testing and boring, which would ultimately create holes in the ground to be filled with a permanent cement and bentonite grout. (Property Reserve, 224 Cal. App. 4th at 838-39.)The trial court granted the state's petition to conduct environmental activities, but it denied the petition to conduct the geological activities on any of the properties, ruling that the activities constituted a taking or damaging action, and that the entry statutes were therefore unconstitutional. (224 Cal. App. 4th at 836.) Both sides appealed.

The court of appeal first found that the geological activities constituted a taking per se, as the state's activities - drilling and placing cement and grout into the ground - would result in a permanent occupancy of private property. (See 224 Cal. App. 4th at 840.) Specifically, the permanence of filling holes with cement is the type of physical invasion that standing case law mandates must be acquired by eminent domain and compensated. It was immaterial to the court that such an invasion would be covered by two feet of soil, would affect a small portion of property, might serve a beneficial purpose, or would impose arguably minimal economic impact on the landowner. (See 224 Cal. App. 4th at 843-44.)

Having concluded that the geological activities would constitute a taking, the court then examined whether the state could acquire interests in the property directly by means of the entry statutes. To be constitutionally valid, the court reasoned, the statutes must at least provide the eminent domain rights granted under Article I, section 19(a), of the state Constitution. That is, if the entry statutes authorize the state to conduct takings, those statutes must also provide corresponding constitutional protections to landowners, including the right to be paid just compensation. (See 224 Cal. App. 4th at 844.)

Ultimately, the court found that the statutes do not provide the required constitutional protection. To begin with, they do not provide for the acquisition and transfer of a property interest even though the entry constitutes a taking. Instead, the statutes only allow a court to determine the probable amount of just compensation owed a landowner if the entry will inflict actual damage or substantially interfere with the use or possession of the property. Moreover, the statutes shift the burden of proof to the landowner to show damage or interference. By contrast, in a direct condemnation action, a determination of the fair market value of the property interest is required, irrespective of damage or interference.

Also, in direct condemnation actions just compensation is a factual issue of valuation for which neither the condemnor nor the landowner bears the burden of proof. In this situation, the landowner bears only a burden of "going forward." (See 224 Cal. App. 4th at 852-53.)

An additional flaw in the procedure is that the entry statutes do not provide for a condemnation suit initiated by the condemnor in which just compensation is determined by a jury. (224 Cal. App. 4th at 853.) Under the entry statutes, the landowner is not entitled to a jury determination of just compensation unless he or she files a new civil action. The landowner is not even entitled to a hearing on either the entry petition or on the determination of the probable amount of just compensation. (See 224 Cal. App. 4th at 853-54.)

By contrast, the state Constitution requires the condemner (the public agency seeking to acquire the property) to file a condemnation suit, as well as just compensation to be determined by the fact finder at a hearing. That provision also provides a mechanism for the condemner to deposit the probable amount of compensation on a noticed motion to take early possession of the property. (224 Cal. App. 4th at 854; see also Cal. Const., Art. I, §19(a).) Finding that the entry statutes fell short of the protections offered by the constitution, the court of appeal thus ruled that the entry statutes could not be used to accomplish the invasive physical tests proposed by the state. (224 Cal. App. 4th at 836.)

The court of appeal also found - albeit on different legal grounds - that the proposed environmental activities constitute a taking, thus requiring the full eminent domain protections afforded by Article I, section 19(a). Once again, the court concluded that the entry statutes fell short of providing the necessary protection of the landowner's rights. (See 224 Cal. App. 4th at 865.)

The Property Reserve decision exposes the fatal flaw of the entry statutes: They permit the state, under the guise of preliminary investigative activity, to "take" property and thereby sidestep the fundamental eminent domain protections embedded in the state Constitution. As noted in a lengthy dissent by Presiding Justice Coleman A. Blease, the ruling represents the first time a portion of the entry statutes has been declared unconstitutional since their enactment 38 years ago. (See 224 Cal. App. 4th at 867.)

The Future
Property Reserve was officially depublished on June 25, 2014, when the California Supreme Court granted review. As a result, the future of public works projects in California is woefully unclear.

On the one hand, the state Supreme Court may overturn Property Reserve and rule that California's entry statutes do, in fact, provide an adequate mechanism to compensate property owners for precondemnation activities that amount to a taking. That scenario would represent an obvious win for the government, as it would once again enable the state to undertake extensive investigative activities without having to bear the full expense of a condemnation action. Such a decision would leave unchanged the state's budgetary planning for pending precondemnation activities; state and local condemnors would not have to incur the unforeseen extra cost of an eminent domain action in the event they seek simply to test or inspect plots of private property to determine if they are fit for public use. The state would thus be free to continue pursuing planned projects and acquiring necessary personal property in the way. A decision along that line from the high court might actually escalate the state's plans to take property via eminent domain proceedings: Absent legislative intervention, it would lock in the cheaper precondemnation procedure.

On the other hand, a state Supreme Court ruling that upholds Property Reserve could have staggering consequences for California's pending and future public works plans. Virtually any public works plan that entails acquiring real property would potentially be saddled with the burdensome expense of formal condemnation proceedings during (and in reality, prior to) the state's test-and-examination phase. Prior to Property Reserve, the state could project costs for initiating expensive condemnation actions if its tests and examinations revealed that the property was both viable and useful for the planned project. If the court of appeal's conclusions are affirmed by the state Supreme Court, the heightened expense must then be figured into every potential plot of land - before the state even decides whether it needs to acquire the property.

As a result, public works projects such as municipal buildings, schools, hospitals, transportation infrastructure, parks, and water supply lines all may become much more expensive. For instance, hopes run high that by 2029 the first high-speed rail system in the nation will run from San Francisco to the Los Angeles basin. To implement this project, the state is relying heavily on the eminent domain power, and counting on the lower costs of that power permitted by existing entry statutes. The project has already been met with repeated challenges regarding its budget and funding, so the added costs associated with condemnation proceedings could stall the project, or throw it off the rails entirely.

Although eminent domain has traditionally been met with fiery opposition by private landowners and reinvigorated debates over basic property rights, it has generally been a stable area of law, subject to firmly established California statutes and judicial rulings. But the Property Reserve decision is an earthquake of sorts. Depending on how the state's high court resolves the issue, eminent domain in California may either continue as before, or impose a new and substantial financial burden on the state to the point where public works projects stall or fail completely. If upheld, Property Reserve will be a big win for landowners but a substantial blow to the public good - the very push and pull at the heart of the eminent domain debate since its inception.

Richard H. Lee is a founding partner and Jay M. Lichter an associate at Salisian Lee in Los Angeles, where their practice includes real estate and development matters and other complex business litigation.

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