Dedeaux Utility Co. v. City of Gulfport
| Docket Number: | 2010-CA-00290-SCT Linked Case(s): 2010-CA-00290-SCT |
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| Supreme Court: | Opinion Link Opinion Date: 04-07-2011 Opinion Author: Randolph, J. Holding: DA-Affirmed in part, reversed in part and remanded; CA-Affirmed in part, reversed in part and remanded. |
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| Additional Case Information: |
Topic: Eminent domain - Contested expert testimony - M.R.E. 702 - Inverse-condemnation claim - Section 77-3-21 - Section 11-27-19 - Constitutionality of application of statute - M.R.C.P. 24(d)(2) - M.R.A.P. 44(a) - M.R.E. 103 - Plain error doctrine - Depreciated cost methodology - Cross-examination - M.R.E. 403 - Law of the case doctrine - Admission of testimony - Fair market value - Damages jury instructions - Closing argument - Equal protection claim - Motion to Recover Excess Interest - Section 75-17-7 - Section 11-27-19 - Change of venue - M.R.C.P. 60(c) Judge(s) Concurring: Waller, C.J., Carlson and Dickinson, P.JJ., Lamar, Kitchens, Chandler, Pierce and King, JJ. Procedural History: Jury Trial Nature of the Case: CIVIL - EMINENT DOMAIN |
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| Trial Court: |
Date of Trial Judgment: 01-21-2010 Appealed from: Harrison County Chancery Court Judge: James H.C. Thomas, Jr. Disposition: The jury awarded the Appellant for $5,131,676 for a taking. Case Number: 09-00264-4 |
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| Consolidated: 2008-CA-02105-SCT Dedeaux Utility Company, Inc. and any and all Parties having or Claiming any Legal or Equitable Interest in the Property Described Therein v. The City of Gulfport Mississippi, A Municipal Corporation; Harrison Special Court of Eminent Domain 1st District; LC Case #: 96-01102; Ruling Date: 09/25/2008; Ruling Judge: T. Larry Wilson | ||
| Party Name: | Attorney Name: | Brief(s) Available: | ||
| Appellant: | Dedeaux Utility Company, Inc. |
PETER C. ABIDE
HARRY R. ALLEN
MICHAEL CLARK MCCABE, JR.
JAMES H. HERRING |
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| Appellee: | The City of Gulfport Mississippi, A Municipal Corporation | GARY WHITE |
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| Topic: | Eminent domain - Contested expert testimony - M.R.E. 702 - Inverse-condemnation claim - Section 77-3-21 - Section 11-27-19 - Constitutionality of application of statute - M.R.C.P. 24(d)(2) - M.R.A.P. 44(a) - M.R.E. 103 - Plain error doctrine - Depreciated cost methodology - Cross-examination - M.R.E. 403 - Law of the case doctrine - Admission of testimony - Fair market value - Damages jury instructions - Closing argument - Equal protection claim - Motion to Recover Excess Interest - Section 75-17-7 - Section 11-27-19 - Change of venue - M.R.C.P. 60(c) |
| Summary of the Facts: | In 1996, the City of Gulfport filed a complaint of eminent domain against Dedeaux Utility Company, a privately-owned, public utility company. For the following eight years, Dedeaux continued to operate the utility. A physical taking did not occur until 2004, after a jury in the Special Court of Eminent Domain awarded Dedeaux $3,634,757 for the taking. Dedeaux appealed and Gulfport cross-appealed. The Supreme Court reversed and remanded for a new trial. On retrial, the jury awarded Dedeaux $5,131,676 for the taking. Following the trial court’s denial of post-trial motions by both parties, Dedeaux filed notice of appeal and Gulfport filed notice of cross-appeal. |
| Summary of Opinion Analysis: | Issue 1: Contested expert testimony M.R.E. 702 makes it necessary for a trial court to apply a two-pronged inquiry when evaluating the admissibility of expert testimony: is the witness qualified, and is the testimony relevant and reliable. Dedeaux challenges whether Gulfport’s experts, Dax Alexander and James Stokes, were qualified by knowledge, skill, experience, training, or education. The testimony of Alexander and Stokes was interrelated because Alexander provided per-unit replacement-cost estimates and useful-life estimates for the components of the Dedeaux utility system as of December 3, 1996, which were then used by Stokes in his comprehensive valuation. Alexander is a Mississippi-licensed engineer and the president of an engineering firm. According to Alexander, his experience included involvement in approximately twenty major sewer projects in south Mississippi. Given Alexander’s engineering background and his experience in the construction of water and sewer systems, the trial court did not act in an arbitrary or clearly erroneous manner (i.e., abused its discretion) in deeming Alexander qualified to testify as an expert in the field of water and sewer system design and construction. Stokes is a certified public accountant, certified valuation analyst, and the managing partner of an accounting and business consulting firm. According to Stokes, he had conducted approximately forty business valuations by the time of trial and previously had been qualified as an expert in the general field of business valuation. Thus, the trial court did not abuse its discretion in deeming Stokes, a certified valuation analyst with extensive valuation experience, qualified to testify as an expert in business valuation. An expert’s testimony must be based upon sufficient facts or data, the product of reliable principles and methods, and the principles and methods must be applied by the witness reliably to the facts of the case. Such foundational facts must afford a reasonably accurate basis for the expert’s conclusions. An eminent domain suit is a peculiar type of action where the condemnor is under a heavy and non-delegable duty and responsibility to pay the defendant landowner the full fair market value of her property. The primary inquiry is what is the worth of that being taken to the person having to sell his property. The value of the utility as a going concern is obtained by taking a comprehensive view of each and all of the elements of property, tangible and intangible, and considering them as inseparable parts of the business entity. The valuation process is to be guided by the three, interrelated approaches to value: the cost approach, the income capitalization approach, and the market-data or comparative sales approach. Dedeaux argues that the methodology used by Alexander and Stokes for determining the depreciated replacement cost of Dedeaux’s tangible assets was “unreliable,” as it was based upon the “raw land assumption.” The cost approach is a method by which the value of the property is derived by estimating the replacement cost of the improvements and deducting from that figure the estimated physical depreciation and any form of obsolescence, if appropriate. This figure is then added to the market value of the land to yield an overall valuation of the realty. There is no dispute that the cost approach was utilized by both Stokes and Elliott. The debate pertains to the “foundational facts” applied by those experts (i.e., the assumption of raw land or existing constraints) in their cost approach calculations. The trial court did not abuse its discretion in admitting all such expert testimony and leaving resolution of the evidence presented to the jury. Stokes valued Dedeaux’s intangible assets at $255,202, while Elliott’s valuation was $2,320,088. The parties do not dispute that the present value of future cash flow is a requisite intangible-asset consideration. But the parties do dispute the proper methodology to be used in determining the present value of future cash flow. The parties also disagree as to whether the present value of future CIAC is a proper intangible-asset consideration. Neither party has provided an authoritative statement on the time period to be used in estimating the present value of future income. In light of the liberal thrust of the rules of evidence and Elliott’s qualifications, the trial judge did not abuse his gatekeeping discretion by allowing Elliott to testify using fifteen-year estimates. Dedeaux argues that Stokes’s intangible-asset valuation methodology was unreliable, “ipse dixit speculation” which suggested that “the value of the Certificate is simply the difference between the revenue derived from the higher rates it is permitted to charge as a monopoly and the lower rates of other unregulated public utilities.” As the Certificate is required by statute in order to provide water and sewer services, it is undoubtedly an element of value. Under the income-capitalization approach, the anticipated net income which the property is expected to generate over its usable life is capitalized and processed to indicate the capital investment which produces the net income. Without question, Stokes failed to implement the aforementioned income-capitalization approach and instead focused only on the rate differential between Dedeaux and Gulfport at the date of taking. But applying Gulfport’s rates is error. The only rate to be considered is that which a hypothetical buyer would be able to charge as a regulated utility. Moreover, Stokes’s valuation was merely his “opinion,” with no supporting recognized methodology. Ipse dixit opinions are inadmissible. Thus, the trial court abused its discretion in admitting Stokes’s testimony on the present value of future cash flow. Gulfport argues that Elliott’s calculation of the present value of future cash flow was not the product of reliable principles and methods. There is no fault with the income-capitalization method used by Elliott in determining the present value of future cash flow. While Elliott admitted that the physical facilities and Certificate collectively produce future income, he chose to attribute the entire present value of future cash flow to the Certificate. The ability to produce income is interdependent upon both, for under the circumstances presented, neither can produce income without the other being in place. Whether the cash flow was attributed by Elliott to one, the other, or collectively both, is of no consequence as long as they are not cumulative. Gulfport argues that Dedeaux has failed to produce any authoritative source in support of the use of the present value of future CIAC in valuing the Certificate. Since Elliott’s testimony on future CIAC was based only upon his professional judgment, without reference to recognized authority, it is too speculative to constitute a valid consideration in intangible-asset valuation. Issue 2: Inverse-condemnation claim Dedeaux argues that section 77-3-21 imposed the responsibility to accept and maintain improvements to its water and sewer system when such work was necessary to maintain reasonably adequate service to the citizenry within Dedeaux’s certificated area. As such, Dedeaux argues that section 11-27-19, which provides that fair-market value is “established as of the date of the filing of the complaint[,]” is unconstitutional when applied to the condemnation of assets of a privately owned public utility because it does not afford just compensation for CIAC that it must receive and maintain as a matter of state law during the pendency of the eminent domain proceeding until the final judgment. According to Dedeaux, settled law must yield to Dedeaux’s unassailable and fundamental constitutional right to reimbursement for assets that it must receive and maintain as a matter of state law during the pendency of the eminent domain proceeding until final judgment. To comply with M.R.C.P. 24(d)(2) and M.R.A.P. 44(a), a party challenging the constitutionality of a legislative enactment must serve a copy of his or her brief on the Attorney General. However, a claim which does not seek to invalidate a statute, but only challenges the constitutionality of its application, does not require Rule 24(d)(2) notification. Dedeaux does not assert that section 11-27-19 is per se unconstitutional, but only unconstitutional as applied to privately owned, public-utility companies like itself. As such, no Rule 24(d)(2) notification was required. Moreover, there is no dispute that Dedeaux provided Rule 44(a) notice to the Attorney General in its Appellant’s Brief. Based on the plain error rule of M.R.E. 103, even in the absence of a proffer of post eminent-domain-complaint CIAC, etc., by Dedeaux, its constitutional right to “just” or “due” compensation mandates the Court’s consideration of the substantive merits of this claim. Section 11-27-19 clearly fixes fair-market value as of the date of the filing of the complaint. Moreover, in inverse-condemnation proceedings, the amount of the compensation should be determined as of the date of taking. Here, it is undisputed that between December 3, 1996, when Gulfport filed its complaint of eminent domain, and December 20, 2004, when Gulfport physically took over the assets and assumed operation of the utility system, Dedeaux continued to operate the utility. Under section 77-3-21, Dedeaux had a duty to render reasonably adequate service during this period. As such, in the interest of doing substantial justice in the eminent-domain proceeding so as to provide Dedeaux with its constitutional right to just compensation, the ordinary rules of valuation must change. In short, regarding privately owned, public-utility companies, fair-market value shall not be limited to the date of taking. Rather, in these specific cases, the applicable date for purposes of determining due compensation is the actual date the property is transferred (here, December 20, 2004). Therefore, section 11-27-19 is unconstitutional as applied to privately owned, public-utility companies. On remand, the jury may consider not only the value of the property at the time the petition was filed but also the worth of all extensions, additions, and improvements of the property which were necessarily and in good faith subsequently made or commenced by Dedeaux in accordance with its operating authority. These figures should be subject to setoffs arising out of Dedeaux’s continued use of the property during that time, including revenues earned. Issue 3: Depreciated cost methodology At trial, Dedeaux sought to introduce an October 1999 “Updated Evaluation of Orange Grove Utilities” by CH2MHill, an independent appraiser agreed upon by Gulfport and Orange Grove Utilities, and Gulfport’s March 2000 “Comprehensive Master Plan -- Water Utilities System.” The trial court excluded the “Updated Evaluation” because it “was another eminent domain case pending at approximately the same time . . . that settled and . . . any testimony from that is not admissible . . . .” The trial court excluded the “Comprehensive Master Plan” because it was created after the date of taking. Dedeaux argues that the “Updated Evaluation” and “Comprehensive Master Plan” should have been admitted for purposes of impeaching Gulfport’s affirmation of the value of the Dedeaux system. Amounts paid in settlement of eminent domain claims are not admissible to prove just compensation. But the considerations involved in a presettlement appraisal (e.g., assumption of raw land or existing constraints) could be contemplated without admitting the amounts paid in settlement. In this case, however, both the “Updated Evaluation” and the “Comprehensive Master Plan” were created after the date that Gulfport filed its complaint of eminent domain. As such, the trial court did not err in excluding these documents. Issue 4: Cross-examination At trial, the trial court prohibited Dedeaux from cross-examining Stokes on his testimony from the first trial or his opinions that the court struck in the motion in limine hearing or the Daubert hearing. Dedeaux argues that under the “law of the case” doctrine, Stokes should not have been permitted to testify at retrial or alternatively, that it should have been permitted to impeach Stokes and attack his qualifications. Under M.R.E. 403, even relevant evidence may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury. The “law of the case” doctrine is inapplicable to the issue of whether Stokes should have been permitted to testify. A new trial provides a clean slate. The issues must be retried, and the parties may thus present evidence differently. As Stokes’s testimony on retrial included the use of the depreciated replacement-cost methodology, the “law of the case” doctrine has no application. As to the trial court’s decision to prohibit cross-examination specifically referencing Stokes’s testimony from the first trial or those opinions which were stricken pretrial, there was no abuse of discretion. Undoubtedly, the jury could have been prejudiced, confused, or misled by impeachment evidence which implicated otherwise-excluded subject matter. Issue 5: Admission of testimony At trial, Elliott testified, without objection, that his valuation required an assumption that there was a willing buyer and a willing seller as, in eminent-domain proceedings, Gulfport is “a more than willing buyer[,]” while Dedeaux is “a less than willing seller . . . .” Thereafter, in explaining his valuation, Elliott discussed “the principle of alternatives and substitutes. In other words, does a willing buyer have an alternative or a substitute to pay this type price.” At this point, counsel for Gulfport objected, contending that “[h]e’s talking about a buyer under compulsion.” The trial judge overruled the objection. Gulfport argues that Elliott’s testimony was contrary to the rule that neither the buyer nor seller should be considered under a compulsion. According to Gulfport, this testimony denied it a fair trial on the issue of just compensation. Fair-market value involves the sales price that would be negotiated between knowledgeable and self-interested persons, the seller being under no obligation or compulsion to sell, and the buyer being under no necessity of having the property. But public-utility properties are unique because they are so rarely bought and sold on the open market. While Elliott’s “to pay this type price” language is suspect, the trial court did not abuse its discretion in admitting such testimony. Moreover, even if the admission of this testimony was error, such error was cured by the jury instructions. Issue 6: Fair market value Gulfport argues that, because Elliott acknowledged that “as long as [Dedeaux] owned the system it was not reasonably probable that the system would be incorporated into a much larger, unregulated publicly owned utility[,]” the trial court erred in permitting Elliott to testify that such would be the “highest and best use,” since Dedeaux “is not entitled to be paid . . . For any value attributable [to] the benefit [gained by Gulfport] by acquiring the utility system.” In determining fair-market value, Dedeaux is not entitled to any gain which may accrue to Gulfport. However, there was no dispute that the “highest and best use” is as a utility system, and the expert valuations would remain the same regardless of whether the Dedeaux utility system was regulated or unregulated. On remand, the trial court should avoid instructions on the “highest and best use” of the Dedeaux utility system as an unregulated utility. Issue 7: Damages jury instructions Gulfport argues that it was not proper for the court to instruct the jury regarding separate elements of damages. If the jury instructions, read as a whole, fairly announce the law of the case and create no injustice, no reversible error will be found. These instructions are neither cumulative nor repetitive, for they do not seek to amass or multiply the damages sought. Issue 8: Closing argument Dedeaux argues that the trial court’s decision to overrule the closing argument objection was erroneous, as it was contrary to the court’s earlier ruling that the investment value of cash paid for the assets was irrelevant; effectively authorized a methodology for determining value contrary to jury instructions; and the argument itself invoked the regulated income approach which was the primary basis for reversal in the earlier case. Based upon the trial court’s ruling that Stokes’s testimony on investment return was irrelevant and to be disregarded by the jury, the closing argument of counsel for Gulfport was not based upon admissible evidence. Issue 9: Equal protection claim While the difference in proposed payment-per-customer by Gulfport to Dedeaux and Orange Grove Utilities might seem significant, in light of the differences between those utilities, the trial court did not err in denying Dedeaux’s equal-protection claim. Issue 10: Motion to Recover Excess Interest The trial court granted Gulfport recovery of the $698,604.86 in compounded interest, but denied Gulfport’s request for interest on the overpayment to Dedeaux. Gulfport argues that fairness dictates that the return of $698,604.86 in compounded interest is a judgment to which section 75-17-7 is applicable. Section 75-17-7 does not apply to eminent-domain judgments because the eminent domain statutory scheme has a specific provision for interest on eminent domain judgments in section 11-27-19. Section 11-27-19 provides only that “[a]ny judgment finally entered in payment for property to be taken shall provide legal interest on the award of the jury from the date of the filing of the complaint until payment is actually made . . . .” This provision is clearly inapplicable to Gulfport’s request for interest on the overpayment. Therefore, the trial court did not abuse its discretion in denying Gulfport’s “Motion to Recover Excess Interest,” insofar as Gulfport sought interest on the overpayment. Issue 11: Change of venue Gulfport argues that when a statute provides for only one county of venue, venue then is jurisdictional. Gulfport argues that, under section 11-27-5, the only court with jurisdiction over eminent domain proceedings is the Special Court of Eminent Domain of the county in which the land is situated. Since Harrison County has two judicial districts which are treated by statute as two separate counties, Gulfport argues that the trial court’s order transferring the venue of this case from the First Judicial District to the Second Judicial District equated to transferring the case to another county. M.R.C.P. 60(c) provides that an order transferring a case to another court will become effective ten days following the date of entry of the order. Any motion for reconsideration of the transfer order must be filed prior to the expiration of the 10-day period, for which no extensions may be granted. Gulfport clearly failed to comply with this rule. For purposes of section 11-27-5, either the First Judicial District or the Second Judicial District could have had jurisdiction of this case. Moreover, section 11-27-5 does not prohibit change of venue. Under these circumstances, i.e., remaining in Harrison County and the trial court’s sound rationale for granting change of venue, the trial court did not err. |
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