Case Background
The county initially deposited $5.89 million to support its motion for immediate possession of three parcels of land. Hawaii is not a “true” quick-take jurisdiction where title transfers upon the deposit. Robert H. Thomas, “New SCOTUS Amicus Brief: There’s No IOU’s in Eminent Domain—Quick-Take Deposit Belongs to the Property Owner,” inversecondemnation.com, Nov. 13, 2015. However, 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; see also Robert H. Thomas, “Hawaii Federal Court: “‘Quick-Take’ in Eminent Domain May Not Give Condemnor Exclusive Possession,” inversecondemnation.com, Aug. 27, 2014.
The county filed its eminent domain complaint in May 2011 and sought an ex parte order of possession in April 2012, depositing $5.89 million with the circuit court. One month later, the circuit court put the county in possession.
Here, the county did not seek possession immediately upon the filing of the eminent domain complaint, waiting nearly a year to do so.
The following is the sequence of events relevant to the case:
- May 2011: County’s eminent domain complaint filed.
- April 2012: County sought ex parte order of possession and deposited $5.89 million.
- May 2012: Circuit court put county in possession.
- August 2012: Sheehan, the domestic owner, asked to vacate possession due to stale appraisal. Court denied the request.
- March 2013: Sheehan asked to withdraw deposit.
- April 2013: County opposed because there was no way to ensure repayment by foreign corporate owner, HRH, if deposit were to exceed verdict. On the same day, county asked to withdraw $1.03 million of the deposit, based on revised appraisal. Five days later, Sheehan and county stipulated to Sheehan’s withdrawal of $4.86 million (i.e., all but the contested $1.03 million), and owner agreed to indemnify county for any shortage attributable to HRH’s taken property. Two weeks later, Sheehan opposed county’s reduction of deposit by $1.03 million.
- May 2013: Court allowed county to reduce deposit.
Ultimately, the jury determined that just compensation was $5.8 million for the three parcels, only $90,000 less than the amount of funds originally deposited by the county.
Reduction of the Deposit
The first issue before the ICA was whether the circuit court had the authority to permit the county to reduce 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. On that basis, he asserted that the county was bound by its initial deposit and had no right, after the fact, to seek its reduction.
The circuit court disagreed, concluding that by the terms of the statute, the deposit is merely an “estimate” of just compensation and that 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. Affirming on a different basis than relied on by the circuit court, the ICA applied a standard from a separate section of the eminent domain code that permits amendment of “pleadings,” “processes,” and “proceedings” unless some harm would result, Haw. Rev. Stat. § 101-19, and held that a downward revision of a condemnation deposit constitutes such an amendment. Thus, based on this separate statute, a portion of an initial deposit could be withdrawn, as long as the withdrawal request is made in good faith and unless the owner could show that it would “impair the substantial rights of any party in interest.” The ICA held that the owner had not shown any harm because he was eventually made whole by the jury verdict and award of what Hawaii law calls “blight of summons.” “Blight of summons” is the term of art for a provision in the eminent domain code that requires a condemnor to pay interest of 5 percent on the difference between the deposit and the eventual just compensation award. Haw. Rev. Stat. § 101-33. The ICA reasoned that, because the owner got these interest payments in the end, the owner could not demonstrate any impairment of his “substantial rights.” While this reasoning may appear sound, on its face, there is a flaw in the court’s analysis.
No harm, no foul? Condemnors should be held to extraordinarily strict standards in eminent domain proceedings, where the owner is being deprived of possession or ownership of land before the final payment of just compensation, and condemnors should not be allowed to amend willy-nilly. More importantly, in an eminent domain case, someone is having property taken without much process at all. And in contrast to most lawsuits, there is very little the owner can do to object.
In these cases, owners have not done anything wrong and have not violated any agreements. The only reason they are being sued is that they happen to own properties that public authorities want. And these owners are going to be harmed by under-compensation, regardless of the outcome at trial, because Hawaii law does not allow a property owner to recover attorney fees or costs, unless the condemnation is dismissed(see State v. Davis, 53 Haw. 582, 499 P.2d 663 (1972) (attorney fees and costs of litigation are not generally recoverable in condemnation as part of just compensation or damage)) or unless a condemnor acts in “bad faith” (see State v. Pioneer Mill Co., 64 Haw. 168, 637 P.2d 1131 (1981)). So even if an owner recovers what the court views as just compensation by virtue of a verdict, together with the blight of summons damages for the delay in payment because of an insufficient deposit, the owner still has to absorb his or her own fees and expenses in procuring such a verdict and damages.
Thus, the promise that one day an owner will be made (mostly) economically whole does not provide a whole lot of present solace. This is especially so because there is no res judicata in seriatim eminent domain cases. Only in rare circumstances will a condemnor that has failed to follow the prescribed procedures be prevented from dismissing and simply starting all over again.
Though it rarely happens, we believe that condemnors need to dismiss and start over more often, rather than seek to correct their mistakes on the fly, as the county did here and as was done in innumerable other Hawaii eminent domain cases of which we are aware, in which condemnors approach the process loosely with the belief that they can amend around all of their own mistakes. This looseness leads to bad law and bad results.
Unfortunately, taking authorities have not been compelled to dismiss and start over when they make procedural mistakes by the Hawaii courts, which remain—with few exceptions—generally property owner unfriendly (or, perhaps to put it more accurately, very deferential to the exercise of governmental power in the taking and regulation of real property). But, at the same time, neither has this approach been expressly rejected, and once courts are made aware of the dynamics of eminent domain, and its inherent unfairness and unequal bargaining power between owners and taking authorities, it is to be hoped they will come around.
Appeal immediately, or risk mootness. Accordingly, we do not believe that the promise of eventual compensation, plus blight of summons damages, meant that the owner in Hanalei River Holdings was not harmed by the county’s reduction of the deposit. We can imagine several scenarios through which an owner would be harmed by the withdrawal of a portion of the deposit. For example, certainly harm would befall an owner where possession has already been granted; or where there were multiple owners or a lender that needed to be satisfied out of the deposit; or where an owner withdrew the deposit, thus waiving all defenses except the amount of compensation. But, in Hanalei River Holdings,the owner did not really raise these issues; indeed, they were not strictly applicable because the owner entered into an agreement with the county, allowing the owner to withdraw the undisputed portion of the deposit, $4.86 million.
These facts from Hanalei River Holdings bring us to our main disagreement with the ICA’s approach and analysis. The flaw in the court’s reasoning is not that the owner demonstrated harm (though he did assert in his reply brief that he could have bested the 5 percent statutory rate for blight of summons if only the proper amount had remained on deposit, although the brief did not further elaborate). The error in the court’s decision is that any arguable harm caused by an insufficient deposit was practically mooted by advancing the case to verdict, because, by that point, there was no longer a deposit. The court recognized this fact in a footnote: “We 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.” Hanalei River Holdings, slip op. at 17 n.11. In other words, the time to effectively assert that reducing the deposit will result in harm is when the money is still deposited with the clerk of the circuit court and the ICA’s order could actually have some effect.
Thus, it was not necessary for the ICA to determine whether the owner in Hanalei River Holdings was or was not harmed, given that a ruling by the appellate court would have no effect. If the ICA had dismissed this portion of the owner’s appeal on mootness grounds, it would have reserved this issue for another case and another day, when there was more practically at stake than in this case. We think the ICA should have put note 11 in the text and ruled that the argument was moot on appeal, which would render the rest of its analysis dicta, not essential to the judgment and therefore not precedential.
There is 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). However, in situations like the one presented in Hanalei River Holdings, the trial court should permit them so that issues that would be mooted by a verdict are instead 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, before they otherwise become practically moot: Cases are better decided when there is something, in fact, at stake.
A 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 owned 33 and 34. Sheehan asserted that 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. On a map, the parcels were oriented left to right as follows: 49, 33, 34, and area 51. Thus, parcel 49 and area 51 were separated by parcels 33 and 34.
Unity of use, title, and contiguity. Because Sheehan claimed to use area 51 in conjunction with parcels 49, 33, and 34, Sheehan asserted that he was entitled to prove that his use of area 51 was damaged by the county’s condemnation. Eminent domain lawyers throughout the country know this as the “larger parcel” or “parent tract” question. See, e.g., Dade County v. Midic Realty, Inc., 551 So. 2d 499, 500 (Dist. Ct. Fla. 3d Dist. 1989) (“[w]here only a portion of a larger tract of land is condemned, severance damages may be awarded as to the remainder portion, if both the remainder portion and the condemned portion are part of a ‘single tract’ or, in other words, the ‘parent tract’”). 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 net damage to his or 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 affected by the condemnation of the other parcel.
The ICA agreed, correctly recognizing the “three unities” test for determining when a parcel that has not been condemned may be considered part of a larger parcel that was damaged by the taking. In this type of analysis, 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, are they owned by the same owner, and how close are they 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 single element being dispositive.
A bright-line test? The ICA did not apply the three unities holistically following the modern trend. The court held that Sheehan owned only parcel 49 and that because that property is 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.
Hanalei River Holdings, slip op. at 19 (footnote omitted).
The court asserted that 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 the court viewed as requiring “that all of the pertinent lots abut one another.” Hanalei River Holdings, slip op. at 20. The court rejected Sheehan’s argument that Bonded Investment required no such thing, concluding instead 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.
Hanalei River Holdings, slip op. at 20 (citing Bonded Investment, 54 Haw. at 524, 527, 511 P.2d at 164, 166 (“[f]inally, we reject Sheehan’s argument that under Bonded Inv. II there is no requirement that all of the pertinent lots abut one another”).
It is true that, in Bonded Investment, the parcels touched. But that fact does not inescapably lead to the rule the ICA set out.
Bonded Investment: unified use, not rigid rules. In Bonded Investment, the owner, Bonded, owned three lots: lot 59, as well as 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.
However, simply because in that case the parcels were adjacent and the court concluded they should be considered a single tract, it should not be concluded that the court set a bright-line requirement that parcels must touch in all cases in order for severance damages to be applicable. 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 is not, 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 the parking lot on the value of the building. It should not matter in that case that the parcels do not touch. Indeed, there is nothing to prevent an owner from claiming a very distant parcel as part of the larger parcel, provided he or she can show how the two are used as an integrated whole.
The Bonded Investment court’s analysis confirms this analytical framework. The court focused predominantly 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 two condos 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. Accordingly, the court concluded that lot 65 was a single parcel and that lots 59 and 60 comprised a single parcel, but that the three parcels 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).
For that reason, the test articulated by the court in Bonded Investment does not consist of bright-line rules about title and adjacency, unlike those the ICA applied to the properties in Hanalei River Holdings. Thus, we believe that the ICA simply 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 owned area 51. This argument was problematic for Sheehan because at the time the court entered summary judgment for the county, Sheehan had submitted only his unexecuted declaration that he used all of the parcels and area 51 for his business. He did not 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 this fact and instead (incorrectly, in our view) affirmed summary judgment solely because the parcels did not abut each other.
“Conditional” Deposit and Blight of Summons
The last issue the court decided in Hanalei River Holdings concerned the result of the county’s withdrawal of a portion of the deposit. The jury awarded $5.8 million and the deposit was only $4.86 million, 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 blight of summons damages, the time value of the difference between the deposit and fair market value on the date of the taking. The statute provides for 5 percent, although this benchmark is the starting point, not a high limit if the owner can show that the market would return more.
The county found it acceptable to pay 5 percent on the $940,000 difference between its deposit and the jury verdict. But the owner wanted 5 percent 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.
However, 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 circuit court to withdraw the deposit. The county also objected to disbursement because the title to parcels 33 and 34 was not, at that time, 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 established that the deposit was conditional, which meant that the property owners did not have free access to the funds. The court 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 [Hawaii Revised Statutes] §§ 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, [Hawaii Revised Statutes] §§ 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.
Hanalei River Holdings, slip op. at 27 (citations omitted).
The court sent that part of the case back to the circuit court for a recalculation of interest.
Conclusion: Now What?
The ICA published the opinion, which means that unless and until the Hawaii Supreme Court says otherwise, unfortunately it is precedent in Hawaii courts. We are especially concerned with the larger parcel analysis, because the court wrongly adopted a bright-line rule that parcels must abut and, absent such contiguity, a property owner is not entitled to present its case to the jury about how a taking of one parcel affects his or her use of another.
Given this erroneous outcome, what is the best way for condemnation lawyers to plan to deal with this decision?
- Thoroughly document the joint use of the parcels. The more integrated the uses, the more likely the courts will view the properties together. Examples include the building and parking lot example described earlier.
- Consolidate ownership and title under a single—or at least related—owner, where possible.
- Work with an appraiser to document similar highest and best uses of the two parcels. The more they are legally similar, and the more that the market would treat them similarly, the more likely it will be that a court will agree.
- Be prepared to distinguish the ICA ruling to other courts. Until overruled by the Hawaii Supreme Court, lower courts will likely consider themselves bound by the ruling.
A final note: In August 2016, the Hawaii Supreme Court granted discretionary review and heard oral arguments in October. As of the publication of this article, the court has not rendered a decision. So, for now, we must wait.
Keywords: real estate litigation, eminent domain, takings, blight, contiguity, three unities test