Tag: property

“Damaged Goods” Not Enough to Sway Third Circuit Court of Appeals

In early February, the Third Circuit Court of Appeals rejected the “damaged goods” approach to valuing property crossed by a pipeline. In UGI Sunbury LLC v. A Permanent Easement For 1.7575 Acres et al., the appeals court vacated the trial court’s property valuation that was based on an expert’s opinion that the stigma of a natural gas pipeline decreased the value of the property crossed by the pipeline.

The expert largely based his opinion on anecdotes from his past employment in an appliance shop where he noticed customers valued undamaged property more than damaged property. Under his “damaged goods” theory, the expert opined that property under which a pipeline crosses has a lower value because people perceive it as damaged. The panel held that the expert’s methodology was incapable of testing, had not been peer reviewed, was not generally accepted, and did not provide for a rate of error. While an expert’s opinion does not have to meet all, or even most, of those factors, the fact that this expert’s opinion met none left his opinion unreliable.

The panel noted that parts of the expert’s opinion compared the value of properties impacted by oil spills or the radiation emitted from the Three-Mile Island nuclear disaster. Those properties were figurative oranges to the apples and thus incapable of assisting the trier of fact in concluding the impact to the value of property under which a natural gas pipeline crosses.

Finally, the Third Circuit held that the district court must act as “gatekeeper” and ensure that expert opinions are based on reliable science.

© Steptoe & Johnson PLLC. All Rights Reserved.

For more on property valuation, see the National Law Review Real Estate law section.

Distressed Assets in Connecticut: What to Know Before Jumping In

There are many benefits for out of state lenders or investors looking to engage in business in Connecticut, one of the wealthiest (per capita) states in the United States of America. For example, Connecticut has relatively stable property values. However, Connecticut also has a number of legal pitfalls for lenders or investors who acquire Connecticut mortgages as part of a loan sale transaction. These pitfalls may end up causing undue delays and unnecessary expense when it comes to the legal process. A lender or entity unfamiliar with Connecticut specific laws and procedures should, prior to committing to acquire an asset secured by property in Connecticut, undertake due diligence and seek advice on what programs and statutes are or are not applicable prior to consummating the deal. Below are a few of the procedural thickets that must be navigated prior to being able to seek to foreclose a mortgage deed, the most common form of collateral for a real estate transaction, in Connecticut.

Preliminarily (and interestingly), Connecticut is unique in the United States in that it, as of January 1, 2015, recognizes three separate and distinct methods of foreclosure of a mortgage deed: Strict Foreclosure (appropriation of the mortgaged property after passage of law days set by judicial order); Foreclosure by Sale (created by statute and permits judicially ordered and overseen auction process); and Foreclosure by Market Sale (created by statute and permits agreement for marketing and private sale of property by mortgagor with consent of the mortgagee). Every foreclosure commenced in Connecticut is a judicial proceeding regardless of which of the above three forms the judgment of foreclosure will eventually take. The fact that every foreclosure is a judicial action alone can create havoc to the plans of a party who is otherwise unfamiliar with the foreclosure process in Connecticut and is best understood up front before committing any sum to a transaction where the main source of potential recovery is a parcel of property in Connecticut.

Secondly, Connecticut has many legislatively imposed requirements which must be met prior to even commencing an action for foreclosure of a mortgage deed. The vast majority of these programs were implemented either during or immediately after the nancial crisis of 2007 through (roughly) 2014 and, accordingly, revolve around 1 to 4 family owner-occupied residential property but are nonetheless worded vaguely enough so that they arguably apply to non-owner occupied or commercial properties as well. Amongst these programs are the Emergency Mortgage Assistance Program (“EMAP”), codified at Conn. Gen. Stat. 8-265dd, et seq., and the Foreclosure by Market Sale procedure, codi ed at Conn. Gen. Stat. 49-24b, et seq.

Article By Alena C. Gfeller & Andrew P. Barsom of Murtha Cullina

© Copyright 2016 Murtha Cullina

Chase Barfield v. Sho-Me Power Electric Cooperative: Major Verdict in Electric Utility Easement Case

Lewis Roca Rothgerber LLP

More than five years after starting in state court before later restarting in federal court, a federal court jury in Missouri has issued a major verdict in litigation concerning the use of electric utility easements for commercial telecommunication purposes.  On February 6, 2015, the jury in Chase Barfield, et al., v. Sho-Me Power Electric Cooperative, et al., (U.S.D.C. Western District of Missouri, 2:11-cv-4321NKL), found that the compensation owed to the plaintiff-landowners totaled $79,014,140 representing the fair market rental value of the defendants’ use of the utility easements for commercial telecommunication purposes.  While there have been other cases around the country alleging similar misuse of utility easements, those cases have all settled and the Sho-Melitigation appears to be the first to proceed through trial to a final jury verdict.

In 2010, a small group of Missouri landowners filed a state court lawsuit, which was subsequently dismissed and refiled in federal court the next year, alleging that certain electric utilities and affiliated entities in Missouri and Oklahoma installed and operated commercial fiber optic lines on the plaintiffs’ properties without the right to do so and without paying compensation to the landowners.  The lawsuit alleged that Sho-Me Power Electric Cooperative and its subsidiary Sho-Me Technologies, LLC, KAMO Electric Cooperative and its subsidiary K-PowerNet, LLC, and Cooperatives’ Broadband Network, collectively installed over 2,000 miles of fiber optic lines within easements that were limited to electric transmission and distribution line purposes.

While some of the fiber optic capabilities were utilized for the utilities’ own operations consistent with the underlying easements, the plaintiffs alleged that some of the fiber optic lines were used by the defendants or leased to third-parties for commercial telecommunication purposes in violation of the limited utility easements that had been granted.  The landowners asked the court to declare that the defendants had no legal rights to use the easements for commercial telecommunication purposes and also brought claims for trespass, disgorgement of profits, an injunction to prevent future commercial fiber optic uses of the easements, and punitive damages.  The defendant utilities and their subsidiaries admitted many of the facts related to their telecommunication activities, however, they denied that such activities were inconsistent with their easement rights.

In 2013, the federal court granted class status thereby allowing the named plaintiffs to represent the interests of more than 3,000 landowners who were crossed by the defendants’ fiber optic lines.  After many months of complex litigation addressing multiple issues, in March, 2014 the federal court issued its summary judgment decision on the primary claims.  The court adopted the plaintiffs’ categorization of the nearly 6,500 express easements and condemnation orders describing the property rights at issue; then proceeded to conduct a detailed analysis of whether the defendants’ fiber optic lines and the uses thereof were permitted under the terms of the easements and orders.  The court concluded that, under Missouri law, the defendants’ actions were inconsistent with the easements and court orders in three of the eight categories, totaling more than 3,000 individual easements and orders.

The jury’s recent decision sets the damages attributable to the defendants’ breach of the easements and court orders and resulting trespass, as found by the court.  In determining this amount, the jury considered the parties’ evidence that the value of the landowners’ claims was between $100,000, as argued by the defendants, and in excess of $100 million dollars, as argued by the landowners after considering the revenue the defendants received from the fiber optic lines and the associated expenses.  The jury’s award covered only the ten year period prior to the judgment and did not include prejudgment interest, attorney fees and costs, or future compensation.

Lessons Learned

As the national demand for improved and expanded electrical and telecommunication infrastructure continues to grow at an apparently ever-increasing pace, utilities and telecommunication service providers are faced with the challenge of where to locate such new and improved infrastructure.  Opportunities to site brand new infrastructure corridors are becoming more limited.  To the extent such opportunities exist, many landowners do not welcome such uses on their property and some complain of “easement fatigue” as a result of requests from multiple utility, telecommunication, pipeline, and other infrastructure companies.  As a result, local governments frequently require infrastructure companies to consider first the use of existing easements and corridors so as to minimize impacts on private property and to optimize the land uses within their jurisdictions.

Whether motivated by landowner concerns, local government requirements, or other project considerations, utilities and other infrastructure companies are trying to squeeze every permissible use out of their existing land rights.  For example, use of technologies such as fiber optic ground wires that combine an electrical ground wire with bundled fiber optic lines allow electric utilities to maximize the use of their existing easements with little or no physical intrusion on the property on which the infrastructure is located.  This technology was at issue in theSho-Me litigation.  However, the analysis is not limited to the extent of the physical intrusion on the underlying property.  At the heart of such disputes is the landowner’s right to control and be compensated for the beneficial use of his or her property.

The Sho-Me court explained that resolution of such issues requires consideration of “how changing technologies should be harmonized with historic real property principles.”  Furthermore, “[w]hether an additional use is reasonable and necessary depends on whether the additional use represents only a change in the degree of use, of whether it represents a change in the quality of the use.  If the change is in the quality of the use, it is not permissible, because it would create a substantial new burden on the servient estate.”  As the court concluded, where the additional use exceeds that which is authorized by the easement, a trespass occurs and a landowner may be entitled to compensation.

As demonstrated by the recent decision in the Sho-Me litigation, such compensation can be substantial.  Given that most instances of this type of dispute involve lengthy linear infrastructure projects – electric transmission or distribution lines, pipelines, railroads, etc. – crossing many landowners’ properties, the risk associated with large awards for trespass or unjust enrichment cannot be ignored.

It is important to note that real property law is, for the most part, a matter of state law.  While the basic principles of real property law are generally similar among most jurisdictions, the specific law and the analysis of the facts under that law will vary from state to state.  Therefore, before proceeding with a new or additional use on an existing easement, utilities and other infrastructure companies must conduct a careful analysis of the land rights supporting a particular project  considering the laws of the specific states involved.  The decisions and jury verdict in the Sho-Me litigation should provide an instructive, cautionary tale.

ARTICLE BY

Thomas J. Dougherty
OF
Lewis Roca Rothgerber LLP

It’s That Time of the Year Again Re: Wisconsin Property Taxes

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It’s time to open up the unwelcome envelope with your property tax bill inside. Property taxes are necessary, of course, for roads and schools and all of the other services your property receives, but you should take some time to make sure that you are not paying more than your fair share of these taxes.

Wisconsin’s State Constitution has a provision requiring that all real estate be taxed “uniformly.” Regular real estate and personal property is taxed by the local municipality. Property which is used for manufacturing purposes, is taxed by the State of Wisconsin, in an effort to make sure that manufacturing property throughout the State is taxed in the same manner. Land which is in agricultural use enjoys a separate “use value assessment” system, which not only allows a lower assessment for land in that use, but also requires a per-acre penalty if that land is removed from the ag use, as defined by those statutes.

Of course, each of those taxing categories is controlled by pages of regulations containing definitions and limitations which are too complicated to insert into this article. Be aware that if you bought a parcel during calendar year 2013, your tax assessment may rise next year to the sale price named on the Transfer Tax Return filed with that deed, and you will receive a notice next spring of that increased assessment. The notice will tell you the procedure for contesting that new higher assessment and the time period, usually very short, during which you must file an appeal or lose the opportunity for another year. However, if your tax assessment should have been reduced and was not, you might not receive a notice at all, which means you must affirmatively seek out the date for filing the tax challenge and the forms needed to preserve the right to challenge. You must affirmatively notify the assessor if you demolished a building, lost a tenant, suffered a casualty loss, signed new leases for lower rents or had to offer rent concessions to renew a lease, or moved a parcel of land into or out of ag use, if you want to be sure the tax assessment is properly calculated for the actual use of the land and actual income from it. We can help you evaluate behind the scenes if the property is accurately assessed, and if it is not, file and defend a claim for you. We often charge a nominal amount for the investigation and then take the tax challenge on a contingency basis so you are only billed if we secure a tax savings for you.

Article by:

Nancy Leary Haggerty

Of:

Michael Best & Friedrich LLP

Prospective Waivers of the Fair Market Value Defense Held Invalid in Arizona Court

Lewis Roca Rothgerber

In an opinion issued last week, the Arizona Court of Appeals held that commercial borrowers and guarantors ‎cannot prospectively waive their right to limit their damages in a deficiency action on the basis of the fair market value of property ‎sold through a trustee’s sale, potentially impacting any loan agreements that provide for such ‎waivers.‎ The holding does not affect most residential loans, for which lenders are generally precluded from recovering deficiencies.

Background

A.R.S. § 33-814(A) provides that borrowers, and by extension guarantors, are entitled to a credit ‎on the underlying debt for the greater of the trustee’s sale price or the fair market value of the ‎trust property at the time of the sale, as determined by the court at a priority hearing. The ‎purpose of these provisions is to protect borrowers from inequities that may result if the property ‎is sold below market value. In an effort to avoid litigation, lenders sometimes include language ‎in loan documents stating that borrowers and guarantors waive the ability to seek a determination ‎of market value.‎

The Arizona Court of Appeals Abolishes Prospective Waivers of the Fair Market Value Defense

A prospective waiver of a fair market defense hearing was at issue in CSA 13-101 Loop, LLC v. ‎Loop 101, LLC., No. 1 CA-CV 12-0167, 2013 WL 4824461 (Ariz. App. Sept. 10, 2013). In that ‎case, a lender made a $15.6 million loan, which was secured by a deed of trust. In the note and ‎guaranty, the borrower and guarantors waived “the benefits of any statutory provision limiting ‎the right of [lender] to recover a deficiency,” including the benefits of A.R.S. § 33-814. Even ‎more specific, the deed of trust stated that the sales price at the trustee’s sale would conclusively ‎establish the fair market value of the property and that the borrower and guarantors waived their ‎ability to seek a fair market value determination.‎

Following a default, the lender initiated a trustee’s sale, at which the lender’s assignee purchased ‎the property with a credit bid of $6.15 million. At the time, about $11.2 million remained due on ‎the note. The lender’s assignee then brought a deficiency action against the borrower and ‎guarantors for the difference. The borrower and guarantors counterclaimed, asserting that the ‎credit bid was unreasonably low. The court denied a motion to dismiss the counterclaims, ‎holding the borrower and guarantors were entitled to a fair market value hearing ‎notwithstanding the written agreements to the contrary. ‎

The Court of Appeals affirmed, holding that the deed of trust statutes impliedly prohibit ‎prospective waivers of fair market value hearings. The court relied on the purpose of the deed of ‎trust statutes, the comprehensiveness of the protections, and the legislative history, which the ‎court stated was to protect borrowers from the unfairness that results if a property is sold at a ‎trustee’s sale below its market value. According to the court, allowing parties to prospectively ‎waive the protection of a fair market value hearing would effectively undo the statutory scheme ‎and undermine an important purpose of the deed of trust statutes.‎

Conclusion

Arizona’s appellate courts have shown increased interest of late in foreclosure-related cases. ‎Earlier this summer, Division One of the Arizona Court of Appeals abolished prospective ‎waivers by borrowers of the residential anti-deficiency protections under A.R.S. § 33-814(G) based on public ‎policy grounds. Parkway Bank & Trust Co. v. Zivkovic, 232 Ariz. 286, 304 P.3d 1109 (App. ‎‎2013). In another decision out last week, Division Two of the Arizona Court of Appeals, citing ‎Parkway Bank, declined to consider whether a guarantor can waive same the protections of A.R.S. § ‎‎33-814. First Credit Union v. Courtney, No. 2 CA-CV 2013-0005, slip op. (Ariz. App. Sept. 12, ‎‎2013). Lewis Roca Rothgerber continues to monitor the developments in this evolving area.‎

Lenders, borrowers, and guarantors should consider how these recent decisions affect their ‎existing and prospective lending relationships.

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