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San Diego Gas & Electric Co. v. Schmidt

California Court of Appeals, Fourth District, First Division

July 21, 2014

SAN DIEGO GAS & ELECTRIC COMPANY, Plaintiff, and Appellant,
ARNOLD J. SCHMIDT et al., Defendants and Appellants, Valerie Schmidt, as Cotrustee, etc., Defendant and Respondent; SAN DIEGO GAS & ELECTRIC COMPANY, Plaintiff, and Appellant,
ARNOLD J. SCHMIDT et al., Defendants and Appellants,

[As modified Aug. 14, 2014.]

APPEAL and cross-appeal from a judgment and orders of the Superior Court of San Diego County, Nos. 37-2010-00094931-CU-EI-CTL, 37-2010-00094934-CU-EI-CTL Timothy B. Taylor, Judge.

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San Diego Gas & Electric Company C. Larry Davis; Horvitz & Levy, John A. Taylor, Jr., Daniel J. Gonzalez; Bartz Law Firm and Linda D. Bartz for Plaintiff, and Appellant.

Rutan & Tucker, David B. Cosgrove, Alan B. Fenstermacher; Niddrie Fish & Adams and David A. Niddrie for Defendants and Appellants and for Defendant and Respondent.

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Plaintiff San Diego Gas & Electric Company (SDG&E) initiated this eminent domain proceeding to condemn an easement for electric transmission lines across the property of defendants Arnold J. and Valerie Schmidt and Luis Naranjo after the parties could not agree on an appropriate valuation for the property. Agreeing with property owner's experts that an open-pit mining operation was the "highest and best use" for the land, the jury valued the property at about $8 million. SDG&E appeals, contending the judgment and order denying its motion for judgment notwithstanding the verdict (JNOV) must be reversed. SDG&E argues that the evidence was legally insufficient to support the jury's verdict. SDG&E also contends it is entitled to a new trial because the trial court abused its discretion in (1) limiting the cross-examination of an appraisal expert and (2) allowing the appraiser to testify in violation of Evidence Code section 819. Arnold Schmidt and Luis Naranjo (together defendants) cross-appeal, asserting the trial court erred in denying their request for litigation expenses under Code of Civil Procedure section 1250.410. (Undesignated statutory references are to the Code of Civil Procedure.) We reject SDG&E's arguments and affirm the judgment and order denying JNOV. We reverse the order denying defendants' motion for litigation expenses.


SDG&E filed two complaints for condemnation, one for each of two contiguous parcels of vacant land owned by defendants, and over which it required easements for its Sunrise Powerlink Transmission Project. Defendants' property totals 115 acres and is located near Highway 67 in the Lakeside area of San Diego County (the County). The easements included 300-foot wide corridors on which SDG&E erected transmission towers, power transmission lines and transmission supply access pads. On June 25, 2010, SDG&E deposited the probable compensation for the property, establishing this date as the "date of valuation" for a final determination of just compensation. (§ 1263.110, subd. (a).)

Because the parties could not agree on the amount of just compensation to which defendants were entitled, the case proceeded to trial on this issue. Before trial, the court denied SDG&E's in limine motions to exclude the testimony of defendants' experts. At trial, the jury heard evidence from SDG&E's real estate appraiser that residential development or habitat mitigation was the highest and best use for defendants' land. SDG&E concluded that $712, 200 constituted just compensation for the property. SDG&E's appraiser assumed it was physically possible to mine the property and that

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such use would be legally permissible upon the issuance of a major use permit (MUP), but did not assess the probability of defendants obtaining a MUP to mine the property and had no opinion on the likelihood of defendants' obtaining such a permit.

Defendants believed that the highest and best use for their land before SDG&E's taking was a granite mining operation. Briefly, defendants' mining expert, Warren Coalson, opined that a "very competitive aggregate environment" existed in San Diego and "there would be takers" if the property were offered for mining as existing sites would be depleted in the next few years. The property was zoned for mining and defendants presented evidence that it was sandwiched on both the north and south by properties owned by a mining operator, Hanson Aggregates (Hanson), that held about 950 acres in that area. Hanson had previously approached defendants about leasing the property for mining, but these discussions ended as a result of SDG&E's taking of the property. Vincent Scheidt, defendants' biological expert, performed a biological survey of defendants' property. Scheidt stated an issue existed regarding the removal of coastal sage scrub from the property for the mining operation, but this issue would arise for any type of development and could be addressed through the purchase of mitigation credits.

Defendants also presented Orell Anderson, a real estate appraiser experienced in appraising property for mining. For appraisal purposes, Anderson stated that defendants' parcels had a unity of use such that they should be viewed together in determining their highest and best use. He testified that appraisers use four tests to determine the highest and best use for a property; namely, whether a use is physically possible, legally permissible, economically feasible and maximally productive. After applying all four tests to the property in its before condition and consulting with other experts, including Coalson and Scheidt, Anderson concluded that the highest and best use of the property would be to lease it for aggregate mining.

Anderson testified that a MUP was required to mine the property and that the property did not have such a permit, but it was legally permissible to obtain such a permit. Using a discounted cash flow method, Anderson determined the value of the property based on the present value of the property's projected rental income stream from mineral royalties. Using this method, Anderson opined the "before condition" value of the subject property was $10, 359, 000, the value of the "part taken" was $1, 877, 000, and the severance damages were $6, 622, 000. The total just compensation was $8, 499, 000.

The jury returned a verdict close to Anderson's figures. The jury agreed with Anderson regarding the value of the land in the before condition and the value of the part taken, but lowered the severance damages to $6, 157, 000, resulting in total compensation to defendants of $8, 034, 000.

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SDG&E moved for new trial and JNOV, arguing that substantial evidence did not support the verdict. It also argued that the trial court improperly limited the testimony of its appraiser and cross-examination of defendants' appraiser. In a lengthy ruling, the trial court denied both motions. The trial court found Coalson credibly testified that the County was running out of aggregate mines, the location minimized likely opposition and permit processing time on other mines has been shorter than what SDG&E predicted for this theoretical mine. The court concluded that the evidence supported the verdict, specifically noting that Coalson's opinions "were unchallenged by SDG&E due to its fatal strategic error in not naming a mining expert of its own."

SDG&E timely appealed from the judgment and the denial of JNOV. Defendants timely appealed from the order denying their motion for litigation expenses.


I. SDG&E's Appeal

A. Legally Sufficient Evidence Supported the Jury's Verdict

1. General Legal Principles

Owners of private property taken for public use are entitled to just compensation for the full monetary equivalent of the property as of the date of the taking. (Almota Farmers Elevator & Warehouse Co. v. United States (1973) 409 U.S. 470, 473 [35 L.Ed.2d 1, 93 S.Ct. 791].) If possible, owners should be placed in the same monetary position they would have been without the taking. (United States v. Reynolds (1970) 397 U.S. 14, 16 [25 L.Ed.2d 12, 90 S.Ct. 803].) The measure of just compensation to be awarded for the property taken is the fair market value of that property (§ 1263.310), meaning "the highest price on the date of valuation that would be agreed to by a seller, being willing to sell but under no particular or urgent necessity for so doing, nor obliged to sell, and a buyer, being ready, willing, and able to buy but under no particular necessity for so doing, each dealing with the other with full knowledge of all the uses and purposes for which the property is reasonably adaptable and available." (§ 1263.320, subd. (a).)

The jury determines the fair market value of the property based on the highest and best use for which the property is geographically and economically adaptable. (San Diego Metropolitan Transit Development Bd. v. Cushman (1997) 53 Cal.App.4th 918, 925 [62 Cal.Rptr.2d 121] (Cushman); CACI No. 3502.) Section 501 of the State Board of Equalization Assessors'

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Handbook (Handbook) states that "[h]ighest and best use is perhaps the most fundamental concept in real estate appraisal." (Handbook, § 501 at p. 48.) The highest and best use is defined as "that use, among the possible alternative uses, that is physically practical, legally permissible, market supportable, and most economically feasible.... The appraiser must make a determination of highest and best use as part of the appraisal process." (Ibid.; see 11 Miller & Starr, Cal. Real Estate (3d ed. 2011) § 30A:25, pp. 30A-55 to 30A-56 (rel. 9/2011) (Miller & Stan).) Courts may rely upon assessor handbooks in the interpretation of valuation questions. (Prudential Ins. Co. v. City and County of San Francisco (1987) 191 Cal.App.3d 1142, 1155 [236 Cal.Rptr. 869].)

The highest and best use for which the property is adaptable may not be its current use. (See City of Los Angeles v. Decker (1977) 18 Cal.3d 860, 863, 869 [135 Cal.Rptr. 647, 558 P.2d 545] [evidence that residential property could be used in the future as airport parking properly admitted]; People ex rel. Dept. of Water Resources v. Andresen (1987) 193 Cal.App.3d 1144, 1159-1160 [238 Cal.Rptr. 826] (Andresen) [condemnee properly tendered evidence that property was suitable as a proposed rock quarry].) "The highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future is to be considered, not necessarily as the measure of value, but to the full extent that the prospect of demand for such use affects the market value while the property is privately held." (Olson v. United States (1934) 292 U.S. 246, 255 [78 L.Ed. 1236, 54 S.Ct. 704].) After the highest and best use of the property has been determined, the Evidence Code sets forth various methodologies sanctioned for use by valuation experts for determining the market value of property. (Cushman, supra, 53 Cal.App.4th at p. 926.) The Evidence Code codifies three basic methods of appraising real property, including income capitalization (Evid. Code, § 819), reproduction costs (Evid. Code, § 820) and comparative sale data (Evid. Code, §§ 816, 818).

"The right to future exploitation of undeveloped natural resources has a present and ascertainable value for purposes of eminent domain." (City of Stockton v. Albert Brocchini Farms, Inc. (2001) 92 Cal.App.4th 193, 199 [111 Cal.Rptr.2d 662] (Brocchini Farms).) Accordingly, " '[i]n determining just compensation in eminent domain proceedings, the existence of valuable mineral deposits in the land taken constitutes an element which may be considered insofar as it influences the market value of the land.' [Citations.]" (Ventura County Flood Control Dist. v. Campbell (1999) 71 Cal.App.4th 211, 219 [83 Cal.Rptr.2d 725] (Ventura); see 4 Nichols on Eminent Domain (3d ed. 1997) § 13.14 p. 12-123 (rel. 72-12/02) [existence of mineral deposits are an element in valuing land]; 1 Matteoni & Veit, Condemnation Practice in Cal. (Cont.Ed.Bar 3d ed. 2013) § 4.87, p. 4-141 (rev. 10/13) ["A right to future exploitation of undeveloped natural resources has a present and

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ascertainable value."]; 29A C.J.S. (2007) Eminent Domain § 179, p. 341 ["Mineral rights in lands have ascertainable market value, to be considered in fixing the compensation for the taking of lands in condemnation proceedings, even though there is an element of speculation in such rights."]; 27 Am. Jur. 2d (2d ed. 2014) Eminent Domain §528, p. 193 ["[E]vidence of the value of mineral deposits on a condemned property is admissible, not to establish the separate value of the deposits, but to establish the value of the overall property as enhanced by the deposits."].) "Although it is generally not proper to reach an award by separately evaluating the land and the deposits, 'it is possible to capitalize potential royalties, by multiplying the reasonably probable royalty rate by the estimated tonnage of mineral in place and reducing the result to present value.' " (Ventura, supra, at pp. 219-220.) "Such evidence is proper where there is proof of an active market for the minerals in question, that such transactions commonly take the form of royalty payments and that the estimate for recoverable deposits is not too speculative. [Citation.] 'This method results in an accurate assessment of the capitalized net profit which the condemnee could expect to realize, if the condemnee remained in possession and performed the work, and it is that interest which the condemnee would be able to market to a willing buyer desiring to perform the extraction and realize those profits for itself.' " (Id. at p. 220.)

It is important to note that while lost business profits are not compensable as an element of damage in an eminent domain proceeding, "evidence of economic feasibility of a claimed highest and best use of the property bears upon market value and is, therefore, admissible." (Orange County Flood Control Dist. v. Sunny Crest Dairy, Inc. (1978) 77 Cal.App.3d 742, 759 [143 Cal.Rptr. 803].) Stated differently, "a defendant may not present evidence of income from a business that is conducted on the condemned property, but may offer proof of rental income from the property itself and any improvements presently in existence." (Brocchini Farms, supra, 92 Cal.App.4th at pp. 198-199.)

As one commentator explained, the "[v]aluation of mineral properties is difficult and to a degree speculative, but this does not preclude their having ascertainable market value." (Montano, Valuation of Lands with Mineral Deposits (Jan. 7, 1993) C791 ALI-ABA 269, 272 (Montano).) First, evidence must be presented showing that development of minerals is compatible with the highest and best use of the property. (Ibid.) After it is established that development of minerals is a proper use, the next step in the process is to determine the proper approach to value the property. (Id. at pp. 272-273.) While the comparable sales approach is the most reliable and easiest, other approaches may be used if it is established there is a lack of comparable sales. (Id. at p. 273.) In this situation, "use of income generated from the land, as opposed to income generated from a business conducted on the land, may be used to determine the value of mineral bearing lands." (Id. at p. 274.)

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The income approach to value requires expert testimony regarding (1) the existence of the deposit, (2) the quantity and quality of the deposit, (3) whether a market exists for the deposit, and (4) the net income projected over the life of the deposit. (Montano, supra, at pp. 276-277.) "The net income is then capitalized using appropriate capitalization rate and in the process discounted to determine the present worth of the projected future income." (Id. at p. 277.) The "present value for minerals may be determined by estimating future income over a period of time, and capitalizing that income to determine its present value." (Ibid.) Finally, a real estate appraiser testifies as to the overall market value of the land, including the overall influence of the mineral deposits. (Id. at p. 278.)

Real estate developers have also created their own internal method of valuing land, called the "developer's approach" or "residual land value" approach. (Miller & Starr, supra, § 30A:26, p. 30A-66 (rel. 9/2011).) This valuation method "starts with the presumed value of the finished product, such as a housing tract, apartment complex or commercial building. The developer then subtracts costs of marketing the product, building the improvements and obtaining development entitlements to end with the portion of the finished product value attributable to the land. This residual land value guides the amount a real estate developer will offer to purchase land. [Fn. omitted.] The courts have rejected the use of this residual land value or 'developer's approach' in eminent domain cases. [Fn. omitted.] Such an approach is speculative and subject to vagaries and contingencies of the market and the costs of development in the future. [Fn. omitted.]" (Id. at pp. 30A-66 to 30A-67.)

Where, as here, property acquired by eminent domain is part of a larger parcel, compensation must be awarded not only for the part taken, but also for the injury, if any, to the remainder. (§ 1263.410, subd. (a).) This compensation, called severance damages, is computed by subtracting the fair market value of the remainder after the ...

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