Opinion
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
APPEAL from an order of the Superior Court of Tulare County. Melinda M. Reed, Judge, No. VCU210016
Robert J. Ernst III for Defendants and Appellants.
Dooley, Herr, Peltzer & Richardson, Leonard C. Herr and Ron Statler for Plaintiff and Respondent.
OPINION
Levy, J.
Respondent, City of Visalia (City), brought this eminent domain proceeding to acquire a theater owned by appellants, Jerald Harrah and Lillian Martin. When this complaint was filed, a sale of the theater was pending. The Restoration Church had agreed to buy the property from appellants for $600,000, with appellants carrying back a note on the property in the amount of $450,000. A jury ultimately set the fair market value for the theater at the time of the taking at $600,000.
Appellants challenge the trial court’s denial of their posttrial request for litigation expenses, i.e., attorney fees and costs, and their request for prejudgment interest at 9 percent. According to appellants, they are entitled to their litigation expenses under Code of Civil Procedure section 1250.410 because, contrary to the trial court’s findings, the City’s final offer of compensation was unreasonable and appellants’ final demand for compensation was reasonable. Appellants further argue that the prejudgment interest rate should reflect the 9 percent called for in the sales agreement between appellants and the Restoration Church.
All further statutory references are to the Code of Civil Procedure.
As discussed below, the trial court’s findings on the reasonableness of the City’s final offer and the unreasonableness of appellants’ final demand are supported by substantial evidence. Further, the court did not abuse its discretion in setting the prejudgment interest rate at the apportionment rate earned by the State of California on its Surplus Money Investment Fund pursuant to section 1268.350. Accordingly, the order will be affirmed.
BACKGROUND
Appellants owned the Main Street Theater in Visalia. The two regular theater tenants were the Enchanted Playhouse Theater Company, which performed live stage productions, and the Restoration Church, which held services on Sundays.
In March 2004, appellants entered into an agreement to sell the theater to the Restoration Church for $600,000. The Restoration Church agreed to make a $150,000 cash down payment and appellants agreed to carry a $450,000 note on the property at 9 percent interest. However, if entirely paid before close of escrow, the purchase price would drop to $550,000.
Approximately three months later, the City filed the underlying complaint in eminent domain to acquire the theater. The City alleged that this acquisition was necessary to ensure the continuation of children’s entertainment and live theater entertainment in general in downtown Visalia. The City sought and obtained immediate possession of the theater.
In the first phase of the trial, the court upheld the taking of the property. The second phase of the trial to determine the value of the theater was to go to a jury.
Before phase two of the trial commenced, the City filed and served its final offer of compensation. The City offered to pay appellants $500,000, with the parties to bear their own attorney fees and costs.
Thereafter, appellants served and filed their final demand for compensation. Appellants demanded $868,706.15, broken down as follows: $600,000 for the value of the property; $103,706.15 in interest figured at the rate of 9.5 percent on $600,000; $160,000 in attorney fees; and $5,000 in costs.
The City’s appraiser valued the property at $380,000. He did not evaluate the property in light of the sale to the Restoration Church because he did not believe that sale was in line with the fair market value. Appellants’ appraiser valued the property at $650,000. The jury concluded the fair market value of the theater at the time of the taking was $600,000.
Following the trial, appellants moved the court for recovery of their litigation expenses in the form of attorney fees and costs. Appellants also sought prejudgment interest at the rate of 9 percent based on their sales contract with the Restoration Church.
The trial court denied appellants’ request for attorney fees on the ground that that appellants’ final demand for compensation was unreasonable. Although the court concluded that appellants’ $600,000 property valuation and request for $5,000 in costs were reasonable, the court found that the inclusion of improper attorney fees and excessive interest was not in good faith and rendered the total demand unreasonable. The court also concluded that the City’s offer was reasonable and in good faith but relied primarily on the unreasonableness of appellants’ demand in denying the motion. The court awarded appellants their reasonable and statutorily approved costs.
The court further found that appellants were entitled to prejudgment interest but that they had failed to demonstrate that the market rate was any higher than the apportionment rate as set forth in section 1268.350. Thus, the court awarded interest pursuant to that section.
DISCUSSION
1. The trial court’s denial of appellants’ request for litigation expenses is supported by the record.
In an eminent domain proceeding, the property owner’s litigation expenses are not compensable as a matter of constitutional right. (County of Los Angeles v. Kranz (1977) 65 Cal.App.3d 656, 658.) Rather, the award of these expenses as costs is governed by statute. (Ibid.)
Under section 1250.410, subdivision (a), the parties to an eminent domain action are required to file a final offer of, or demand for, compensation at least 20 days before trial. Section 1250.410, subdivision (b), permits the court to award the property owner litigation expenses if it finds the public agency’s offer was unreasonable and the property owner’s demand was reasonable. Thus, all litigation expenses, including attorney fees and expert witness fees, are awarded to a property owner who is unnecessarily compelled to litigate due to the public agency’s intransigence. (Inglewood Redevelopment Agency v. Aklilu (2007) 153 Cal.App.4th 1095, 1117.)
The purpose of this section is to encourage settlement of condemnation actions by providing incentives for both parties to be reasonable. (People ex rel. Dept. of Transportation v. Yuki (1995) 31 Cal.App.4th 1754, 1763.) Accordingly, before the trial court can award litigation expenses to the property owner, it must find both that the property owner’s demand was reasonable and that the agency’s offer was unreasonable. (Inglewood Redevelopment Agency v. Aklilu, supra, 153 Cal.App.4th at p. 1117.)
In ruling on a section 1250.410 motion, the court must determine the reasonableness of the offer and demand “in the light of the evidence admitted and the compensation awarded in the proceeding .…” (§ 1250.410, subd. (b).) The determination of reasonableness or unreasonableness is addressed to the trial court’s discretion to be exercised after weighing all the evidence and independently assessing witness credibility. (People ex rel. Dept. of Transportation v. Yuki, supra, 31 Cal.App.4th at p. 1763.) This ruling resolves a question of fact and therefore will not be disturbed on appeal if supported by substantial evidence. (Inglewood Redevelopment Agency v. Aklilu, supra, 153 Cal.App.4th at p. 1117.)
The courts have developed guidelines to help determine whether an offer or demand is reasonable. (County of Contra Costa v. Pinole Point Properties, Inc. (1994) 27 Cal.App.4th 1105, 1115.) These are: (1) the amount of the difference between the demand or offer and the compensation awarded; (2) the percentage of difference between the demand or offer and the award; and (3) the good faith, care and accuracy with which the demand or offer was calculated. (City of Long Beach Redevelopment Agency v. Morales (2007) 157 Cal.App.4th 287, 291.)
In People ex rel. Dept. of Transportation v. Yuki, supra, 31 Cal.App.4th 1754, the court conducted a survey of cases with respect to the mathematical relation between the highest offer and the award. This survey revealed that final offers that are 60 percent or less of the jury’s verdict have been found to be unreasonable. In contrast, offers that are above 85 percent of the verdict have been considered reasonable per se. (Id. at p. 1764.) Despite these precedents, this mathematical relation is still only one factor that should enter into the trial court’s determination. (City of Long Beach Redevelopment Agency v. Morales, supra, 157 Cal.App.4th at p. 291.) Those offers in the middle range, i.e., between 60 and 85 percent, have fallen in both groups, depending on the other factors, particularly the extent of the good faith, care and accuracy in the method of determination of the offer or demand. (People ex rel. Dept. of Transportation v. Yuki, supra, 31 Cal.App.4th at p. 1764.)
As outlined above, the trial court determined that appellants’ demand was unreasonable and denied the motion primarily on that ground. The trial court noted that the demand requested the amount of the award, i.e., $600,000, as the value of the property. However, by also including $5,000 in costs, $103,706 in interest, and $160,000 in attorney fees, appellants demanded $868,706 in total compensation, an amount that exceeded the award by $268,706. The court acknowledged that appellants would be entitled to a reasonable amount for costs but concluded that, even deducting the $5,000 claimed as costs, an $863,706 demand was still unreasonable. The court also found that the inclusion of attorney fees was improper and that the excessive and inaccurate interest demand indicated an absence of good faith.
Appellants contend that, in evaluating the reasonableness of their demand, the trial court should have considered only the $600,000 attributed to the value of the property. According to appellants, the compensation requested in the demand, i.e., the value of the property taken plus any consequential damage, is what must be compared to the jury’s award. In other words, their final demand should be construed as requesting $600,000, not $868,706.
Contrary to appellants’ position, the trial court properly considered the entirety of appellants’ demand. This was the bargaining posture appellants assumed before trial. (Inglewood Redevelopment Agency v. Aklilu, supra, 153 Cal.App.4th at p. 1118.) Appellants demanded $868,706 to settle, not $600,000. The purpose of filing a final demand under section 1250.410 is to foster settlement of the action. This purpose is not served if a multifaceted demand can be found to have been reasonable based on an analysis of the compensation element alone.
Further, the trial court correctly determined that appellants improperly included attorney fees in their demand. Attorney fees are not to be considered when calculating a demand or offer. (County of Contra Costa v. Pinole Point Properties, Inc., supra, 27 Cal.App.4th at p. 1114.) While a property owner is entitled to both costs incurred (§ 1268.710) and interest on the compensation (§ 1268.310), that property owner is not entitled to attorney fees. (County of Los Angeles v. Kranz, supra, 65 Cal.App.3d at p. 658.)
Moreover, while interest may be included in a demand if so stated (§ 1250.410, subd. (a)), here the interest was excessive. As noted above, the sales agreement between appellants and the Restoration Church included a $450,000 note bearing interest at 9 percent as part of the purchase price. Even assuming that just compensation required that this 9 percent rate be applied, appellants’ interest demand was calculated at 9.5 percent. This lack of care and accuracy in determining the amount of the demand further indicates that this demand was unreasonable.
In sum, the trial court’s determination that appellants’ demand was unreasonable is supported by substantial evidence. Excluding costs, the demand was $263,706 higher than the jury award, an increase of approximately 44 percent. Moreover, the demand was calculated without care or accuracy. Based on this finding alone, the court correctly denied appellants’ motion for litigation expenses.
The trial court also found that the City’s offer was reasonable. Again, this determination is supported by substantial evidence.
The City’s $500,000 offer was approximately 83 percent of the jury’s award. Being below 85 percent, this offer does not fall under the category of reasonable per se. Nevertheless, the City offered substantially more than the $380,000 value placed on the property by the City’s appraiser. Thus, the City did not simply rely on its own expert but, rather, also considered appellants’ evidence. This indicates the City’s offer was calculated in good faith.
Taking all the relevant factors into consideration, the trial court’s denial of appellants’ motion for litigation expenses will be affirmed.
2. The trial court did not abuse its discretion in awarding interest at the apportionment rate.
Where, as here, the condemned property is taken before payment, the property owner is entitled to interest on the balance due computed with reference to the prevailing market rate in order to provide constitutional “‘just compensation.’” (Redevelopment Agency v. Gilmore (1985) 38 Cal.3d 790, 796.) This payment of interest is reimbursement for lost use of money due as compensation for the property, but not paid contemporaneously with the taking. (Id. at p. 799.)
The setting of the interest rate to be applied in a condemnation case is a judicial function. (Redevelopment Agency v. Gilmore, supra, 38 Cal.3d at p. 797.) “In general, the trial court should examine, at the condemnee’s behest, the rates prevailing during the period a condemnation payment was delayed for all forms of money-market obligations, governmental and private, which prudent depositors and investors normally purchase for income purposes, and whose terms or maturities fall within the period of delay.” (Id. at p. 806.)
Following Redevelopment Agency v. Gilmore, supra, the Legislature enacted a statutory scheme for calculating the interest rate to be paid in a condemnation case. (§ 1268.310 et seq.) Under section 1268.350, the rate of interest payable is the apportionment rate. This apportionment rate is “the rate of earnings by the Surplus Money Investment Fund.” (§ 1268.350, subd. (a).) This rate of return continually “‘floats,’” so as to reflect a relatively current matrix of market rates of interest. (People ex rel. Dept. of Transportation v. Diversified Properties Co. III (1993) 14 Cal.App.4th 429, 451.) Nevertheless, this “floating rate” merely provides a “floor” for interest rates in condemnation cases. The trial court determines what rate should be applied in a particular case. (Id. at p. 450.)
Here, the trial court relied on the apportionment rate. Appellants contend the trial court erred in not applying a 9 percent interest rate based on the contract they negotiated with the Restoration Church. However, that one contract does not in itself establish the prevailing market interest rate and appellants presented no other relevant evidence, i.e., the prevailing rates for money-market obligations, governmental and private, that are normally purchased for income purposes by prudent investors. In contrast, the City submitted data on the various interest-bearing obligations for the relevant time period released by the Federal Reserve. Not one approached a 9 percent rate of return.
Since appellants presented no relevant evidence on prevailing market rates, it was appropriate for the trial court to rely on the apportionment rate of return in setting the interest rate to be applied here. This rate is itself evidence of market rates of interest upon which the trial court can rely in independently determining extant market rates of interest. (People ex rel. Dept. of Transportation v. Diversified Properties Co. III, supra, 14 Cal.App.4th at p. 451.) Indeed, absent a compelling showing by a party that other market rates of interest are more appropriate under the particular facts of the case, it is hard to imagine that a trial court could be found to have abused its discretion in simply relying on the apportionment rate of return in setting the rate of interest to be applied in a condemnation case. (Ibid.)
DISPOSITION
The order is affirmed. Pursuant to this court’s discretion under section 1268.720, each party shall bear their own costs on appeal.
WE CONCUR: Wiseman, Acting P.J., Hill, J.