### No. 12794 IN

### THE SUPREME COURT OF THE 

### STATE OF MONTANA 

### 1975

THE STATE OF MONTANA, 

### ACTING BY AND 

### THROUGH THE 

### DEPARTMENT OF HIGHWAYS OF THE 

### STATE OF MONTANA, Plaintiff and Appellant,

ARTHUR J. 

### OLSEN and FLORENCE 0. OLSEN, husband and wife, and EUGENE G. 

### HOLMES and EVELYN HOLMES, husband and wife, and ORION

### HEATH and ESTHER HEATH, husband and wife, as Contract Purchasers, Defendants and Respondents.

Appeal from: District Court of theFourth JudicialDistrict, Honorable Jack L. Green, Judge presiding. Counsel of Record: ForAppellant: 

### Daniel J. 

### Sullivan argued, Helena, Montana For ~espondents: Koch & 

### McKenna, Hamilton, Montana Thomas P. 

### Koch argued, Hamilton, Montana Boone, Karlberg & 

### Haddon, Missoula, Montana William T. Boone argued, Missoula, Montana For Amicus Curiae: John Carl argued, Butte, Montana

.- 

## ;*kt? - ;' 

### Filed: " 

## 1975 Submitted: January 10, 1975 Decided: 

## FED

# -51975Mr. JusticeFrank I. Haswell delivered the Opinion of the Court.

These appeals arise from a condemnation action brought by the StateDepartment of Highways inthe districtcourt, Ravalli County. Defendants, Orion and Esther Heath, the landowners, appeal from the districtcourt's refusal toaward them their alleged "expenses of litigation". The Statecrossappeals from thejudgment awarding $68,000 asjust compensation for the taking. Heaths owned and operated a "mom and pop" grocery store inFlorence, Montana. The store, with livingquarters attached, is situated on a lot fronting on U. S. Highway 93. StateDepartment of Highways' plan for improving that highway involved widening of itsright-of-way, necessitating a taking of part of the lotowned by the Heaths. The State offered the owners $3,460 for the 31 1/2 foot stripfronting on the highway, which offer

was refused. Following the refusal, the State filed thiscondemnation action inJune, 1972. The landowners admitted the necessity of the taking, but disputed the extent of the taking and the amount of just compensation offered by the State. A jury trialwas held inJanuary 1974, for a determination of these issues. During the course of trial, the Stateadmitted that it had erred initsprevious determination of the extent of the taking. It conceded the strip tobe condemned included the sanitary facilitiesof the lotand that the taking would destroy the utilityof the store and attached residence. As a result of thisnew position, the State's appraiser testified the value of the taking, using the "market data" valuationmethod, was $39,033. The landowners' appraiser, using a "capitalization of income" method, valued the taking at$86,500. The landowners did not testify astothe value of the taking.

### The jury returned a unanimous verdict of $68,000,and judgment was entered thereon. The landowners then moved for an award of the "necessarycosts of litigation"under the provisions of section 93-9921.1, R.C.M. 

### 1947. The amounts requested were: (a) Court fees $18.00 (b) Appraiser's fee $2,300.00 (c) Architect's fee $100.00 (d) Engineer's fee $532.50 (e) Sanitarian's fee $200.00 (£1 Attorneys1fees $16,150.00 The State moved to retax costs: the motions were jointly heard, evidence was received, and the court entered an order denying all of the costs except the $18 court fees. The landowners appeal that order and the State crossappeals from the judgment. Considered together, the issues raised are: (1) Is a "capitalizationof income"valuation appropriate

on these facts? (2) 

### If so,was thatmethod properly applied to the facts presented? (3) Are defendants entitled to recovery of "necessary costs of litigation"under the provisions of section 93-9921.1, R.C.M. 

### 1947? The first two issues are raised by the State,while the landowners present the third for consideration. Amicus curiae also briefed and argued the third issue. The State's first argument is essentially that income capitalization should not be used to value damage to business property. While admitting thatmethod is appropriate in cases involving agriculturalor rental property, it argues that business property should not be similarly valued because the income it produces depends more on the skill of the owner-operator than

on the productivity of the property. The use of income capitalization in eminent domain

### valuations is not new in Montana. The admissibility of income evidence was recognized in Statev. Peterson, 134 Mont. 52, 328 P.2d 617,although capitalization of that income was not discussed. However, Peterson was cited in State Highway Commlnv. Heltborg, 140Mont. 196, 369 P.2d 521, for the proposition that income can be used in determination of market value. Heltborq affirmed an award based on capitalizationof income derived from agricultural property. Caveats were attached to the use of this method in State Highway Commlnv. Bare, 141Mont. 288, 301, 377 P.2d 357,where

we said:"Whilewe do not reject the method in all cases, we believe for future guidance in eminent domain cases, the capitalization of incomemethod should be carefully scrutinized even where itmay be appropriate as one of the tools of the judicial workshop. We are aware that in some instances, where no comparable sales evidence is available or where it is shown to be not applicable for many reasons,the only usable method is the capitalizationmethod. However, its use must be based on a foundation which minimizes to the extent possible conjecture and uncertainty." In Bare we reversed the district court because the foun

# - dation for the use of themethod involved an unacceptable amount of uncertainty and speculation. A 

### similar result was reached in State Highway Commission v. Palin, 160Mont. 486, 503 P.2d 524, for the same reasons. Our most recent encounter with the method, apart from the instant case,was State Highway Comm'n v. Bennett, 162Mont. -. 

### 386, 513 P.2d 5, 8, 

### 30 St.Rep. 702,where we approved the use of themethod in a condemnation involving rental cabins and a 

### service station. Bennett, and others heretofore cited, gives Montana a different rule from that urged by the State and suggested by 5 Nichols on Eminent Domain S19.3. Income capitalization is an appropriatevaluation method in cases where it entails less conjectureand uncertainty than

### alterndtivemethods. Its applicability is determined less by the 

### type of property taken than by a comparison of the relative certainty resulting from the use of the various methods. While

some types of property may lend themselves to a particular method, the appropriateness of any given method must necessarily hinge on the facts of the case being tried. The alternative methods of valuation were presented to the jury in the instant case. The landowners' appraiser discussed three: market data, reproduction cost, and income capitalization. He rejected the first two as inapplicable here, and valued the taking at $86,500by using the income capitalization method. The State's appraiser also discussed the same threemethods, rejecting the last two, and valuing the taking at $39,033 by applying the market data method. Each of the experts pointed out the flaws he felt to be inherent in the other's approach. Each was rigorously crossexamined by opposing counsel. No suggestionwas made that the witnesses were unqualified to express an opinion. The dispute went solely to the applicability of themethods proposed. Under these factswe find Bennett to be controlling. Dealing with a similar problem there,we said: "Onceproper foundation has been laid as to the witness' expertise he should be permitted to give his opinion using any of the accepted means of calculating value. It is thus incumbent upon the State to bring out any weaknesses of his valuation upon cross-examination." The foregoing discussion responds to both issues raised by 

### the State. The use of 

### the income capitalizationmethod clearly 

### was permissible under the authorities cited. The concern over the proper application of thismethod goes to the weight of the expert's testimony, not to its admissibility. Bennett, supra. Our review of the record here finds substantial evidence supporting the verdict and judgment. Accordingly, the judgment of thedistrict court is affirmed. The finalproblem presented concerns the district court's denial of the landowners' alleged "necessary costsof litigation". Tne principal challenge concerns the applicabilityof section 93-9921.1, R.C.M. 1947, to an action pending when that statute became effective. The State's complaint was filed inJune 1972. Atthat time, awardable costs were determined under section 93-9921, R.C.M. 1947, which provided: "Costsmay be allowed or not, and, if allowed may be apportioned between the parties on the same or adverse sides, in the discretion of the court." The costs provided by that statute did not include expert witness

or attorney fees. State Highway Comm'n v. Heltborg, 140Mont. 136, 369 P.2d 521; Tomten v. Thomas, 125Mont. 159, 232 P.2d 723, 26 ALR 2d 1285. While this action was pending, section 93-9921 was 

### repealed and section 93-9921.1, 

### R.C.M. 1947, was substituted. It provides, inpertinent part: 

### " 

## * * 

## * In the event of litigation, and when the private property owner prevails, by receiving an award in excess of the final offer of the condemnor, the court shall award necessary expenses of litigation tothe condemnee." The titleof the 1973 legislativeact indicates section 93-9921.1

was designed to implement Article 11, Section 29, of the 1972 Montana Constitution. Chapter 453, Laws of 1973. The new statute and the new constitution went into effect during the time this suitwas pending. The language of the new provision is clearly broader than the former law, and "necessary costs of litigation" includes expert witness and attorney fees. Tne Constitutional Convention notes appended toArt. 11, Sec. 29, of the 1972Montana Constitution, 

### recite:"Retains provisions in 1889 constitution [Art. 111, sec. 141 on eminent domain and expands 

### itsprotection by guaranteeingthat a property owner who goes tocourt and 

### is awarded more money than offered for his property being condemned willbe reimbursed for the necessary expenses of the lawsuit (such asappraiser and attorneys fees)." It thus becomes necessary todetermine whether or not the new law applies toan actionpending, when theright to expanded costsbecame operative. The State argues the question of applicabilityiscontrolled by the transition schedule which governs the change from the 1889 tothe 1972 Constitution. Section 3of that schedule provides: "Any rights, procedural or substantive, created for the firsttime by Article I1 shallbe prospective and not retroactive." Since prior to the adoption of the 1972 Constitution and its implementing legislation there was no right toattorney and appraiser' fees asan element of costs, the State argues that the new provisions areprospective only and cannot be applied tosuitscommenced under the old law. Wedisagree. While the new statutory and constitutional provisions areclearlyprospective inapplication, that does not prevent their applicationhere. The right tonecessary costsof litigationprovided by section 93-9921.1, R.C.M. 1947, does not arisewhen the suit is filed, but vests only when the private property owner prevails, securing a verdict higher than the State's final offer. The right here vested after the statutory and constitutionalprovisions were operative. Their prospective applicationthus encompasses the present case. Our holding here is inaccord with the general rule, recognized by case law and the authorities. See, e.g. Fellers

v. StateHighway Commission, 214 Kan. 630, 522 

### P.2d 341; State, Department of Mental Health 

### v. Cholewinsk, 27 Conn. Sup. 286, 236 A.2d 339; 20 C.J.S. Costs §3(b);Annotation, 96 A.L.R. 1428. Wedo not find that rulevaried by the constitutional transition schedule here. That schedule merely makes the applicabilityof these costsprospective. As the landowners' right tothese costs did not arise until they prevailed attrial, the dateof judgment iscontrolling. The statuteand constitutional provisions authorizing increased costswere both ineffect atthat 

### time. The State further contends that, even if section 93-9921.1 is applicable to thiscase, costs cannot be allowed thereunder because therewas no "final offer" by the State--a condition precedent toan award of costs. Section 93-9912, R.C.M. 1947, requires the district court judge toappoint "condemnation commissioners" who aretoassess the value of the taking. That assessment can be appealed under theprovisions of section 93-9915, R.C.M. 1947. These procedures

were not followed .here, and the Stateargues section 93-9921.1, R.C.M. 1947, speaks of a finaloffer only in

### termsof the offer it requires tobe made within thirty days of theperfecting of the appeal from the commissioners' assessment. The record certified from thedistrict court discloses nothing concerning why these procedures involving a commissioners' assessment were not followed. The State's appellatebrief alludes toa waiver of thisprocedure, which we assume tobe the case. The question thus presented isnovel. The district court, apparentlywith the consent of the parties, failed tofollow a mandatory statutoryprocedure--namely appointing comrnissioners and supervising their asskssment. Arguably, thisdefectwas cured by the subsequent districtcourt trialatwhich the issues which should have been presented tothe commissioners weredetermined. Now the State seeks toavoid its statutory liability for necessary costs of litigationby asserting that it never made a finaloffer within themeaning of section 93-9921.1, R.C.M. 1947, and that itwas not required to submit a final offer because no commissioner's hearing was held. To adopt such a theory here would contravene the intent of the statuteand would violate the constitutionalmandate. Article 11, Section 29, 1972 Montana Constitutionrequires that

a Landowner be compensated for necessary expenses of litigation ifhe prevails. This constitutional directive cannot be frustrated by inadvertent or intentional violations of statutoryprocedure. There is no statutoryprohibition against the State's making an offer atany time prior totrial. Section 93-9921.1, R.C.M. 1947, provides, inpertinent part: "The fact that an offer ismade but not accepted does not preclude a subsequent offer." 'Yhus, the Statecould nave made an offer atany 

### timeprior to trial, whether or not a commission hearing was held. Accordingly,

we find the $3,460 offer made prior tothe filing of thisaction

was the State's finaloffer under the factshere. Since the ultimate award was far inexcess of that offer, the landowners

are entitled to an award of their necessary expenses of litigation. The State alsochallenges the necessity of some of the items of expense submitted inthe landowners' motion forcosts. Without detailing the specific claims alleged by the State, we note that they center around the charge that fees resulting from exhibits and witnesses n~t produced attrial should not be allowed. We have reviewed the entirerecord, including the hearing

on themotion for costs, and find that the items claimed as necessary weremade unnecessary only by the State's admission attrialthat the taking included the sanitary facilities. The challenged expenses were incurred when the landowners prepared to prove that very fact. Although the State's admission relieved the landowners of the necessityof proof, 

### it came too latetoavoid liability for expense incurred inpreparing thatproof.

### The proceedings at the ConstitutionalConvention make it abundantly clear that it intended by Article 11, Section 29 to make the landowner whole in eminent domain proceedings to the extent that the amount of the judgment for the taking of his land and improvements would be a "net recovery"with expenses of litigation assessed against the State,where the landowner prevailed. The large award of attorney fees as a necessary expense of litigation is the result of the peculiar facts of this case. Because of an error, the State originally did not include the sanitary facilities in the taking which resulted in an extremely low offer of only $3,460 to the landowners. At trial the State admitted its error and appraised the "take"at $39,033. However, the only offer made to the landownerswas the original amount offered, $3,460. The jury fixed the award to the landownersat $68,000, a difference of $64,540. The contract between the landowners and their attorneys provided for an attorneys' fee of 25% of the increased value secured by the attorneys and proof of the reasonablenessof this percentage was made at the hearing. The award of attorneys' fees was reasonable under these factsand necessary to make the landowners whole. Accordingly, the $68,000 judgment in favor of the landowners is affirmed. The denial of necessary expenses of litigation pursuant to section 93-9921.1, R.C.M. 1947, is vacated and necessary expenses of litigation are fixed and allowed in the total sum of $19,300.50 as requested by the landowners.

Justice1:. *. i ---------------a--,-------------- Chief Justice