Opinion ID: 2592992
Heading Depth: 1
Heading Rank: 2

Heading: Going Concern Value

Text: The question of whether the appraisers and the district judge were required as a matter of law to consider or award going concern value in arriving at an award requires analysis of K.S.A. 12-527. Our court's review of questions of statutory interpretation or construction is de novo. Higgins v. Abilene Machine, Inc., 288 Kan. 359, 204 P.3d 1156, 1158 (2009). The most fundamental rule of statutory interpretation and construction is that the intent of the legislature governs if that intent can be ascertained. Winnebago Tribe of Nebraska v. Kline, 283 Kan. 64, 77, 150 P.3d 892 (2007). The court's first task is to determine the legislature's intent through the statutory language it employs, giving ordinary words their ordinary meaning. State v. Stallings, 284 Kan. 741, 742, 163 P.3d 1232 (2007). When a statute is plain and unambiguous, we must give effect to its express language, rather than determine what the law should or should not be. We will not speculate on the legislative intent and will not read the statute to add something not readily found in it. If the statute's language is clear, there is no need to resort to statutory construction. Graham v. Dokter Trucking Group, 284 Kan. 547, 554, 161 P.3d 695 (2007). If, on the other hand, a plain reading of the text of a statute yields an ambiguity or a lack of clarity, statutory construction becomes appropriate. In such circumstances, a court must move outside the text of the provision at issue and examine other evidence of legislative intent, such as legislative history, or employ additional canons of statutory construction to [determine] the legislature's meaning. Board of Leavenworth County Comm'rs v. Whitson, 281 Kan. 678, 685, 132 P.3d 920 (2006). Moreover, if constitutional interpretation of a statute is required, our court has held: A statute is presumed constitutional and all doubts must be resolved in favor of its validity. If there is any reasonable way to construe a statute as constitutionally valid, the court must do so. This court not only has the authority, but also the duty, to construe a statute in a manner that it is constitutional, if the same can be done within the apparent intent of the legislature in passing the statute. [Citation omitted.] However, we may not rewrite a clear and unambiguous statute to make it pass constitutional muster. [Citation omitted.] Martin v. Kansas Dept. of Revenue, 285 Kan. 625, 629-30, 176 P.3d 938 (2008). The plain language of K.S.A. 12-527 is nonspecific and internally variable. A city acquires title to all facilities owned by the water district and used for the transportation or utilization of water distribution to the water district benefit units within the area annexed by the city, and it is required to pay a water district the reasonable value of such property. If no agreement is reached on the reasonable value for such facilities, then the reasonable value will be determined by the procedures set forth: (1) Three appraisers will conduct appraisals to determine the reasonable value of the property, facilities and improvements of the district annexed by the city; (2) the decision of at least two of the three appraisers shall be the fair market value to be paid; and, (3) if the parties disagree with the appraisers' award, the reasonableness of the value can be challenged in district court. We conclude from these assorted formulations that K.S.A. 12-527 contemplates that the appraisers' and, possibly later, the district court's calculation of the reasonable value covers at least the value of facilities, property, and improvements. The statute makes no mention of going concern value. Given the statute's silence on this precise point, we must look beyond its plain language to determine whether the concept was meant to have a role in the calculation as a component of the reasonable value of facilities, property, and improvements or as necessary additions to it. Examining the legislative history of K.S.A. 12-527, we learn that the statute was originally enacted in 1968. At that time, the statute required an annexing city to pay the value of: [F]acilities used for the transportation or utilization of water belonging to the water district.... In addition to compensation for such physical facilities the city may pay to the water district an amount equal to that portion of outstanding indebtedness of the district which is properly attributable to the portion of the water district annexed by the city. L. 1968, ch. 80, sec. 1. The 1968 statute provided that the value of such property would be determined as agreed by the governing body of the city and the board of directors of the district, or if such agreement is not made, then as determined by the city. If a city's unilaterally set value was disputed, the statute permitted a district to bring an action in the district court to determine the reasonableness of the amount of compensation fixed and determined by any such city. K.S.A. 1968 Supp. 12-527(a). The legislature amended K.S.A. 12-527 in 1986. While the initial description of the value to be paid remained the same, the legislature then described reasonable value and required consideration of certain bonded indebtedness: (b) Such compensation shall include an amount to reimburse the district for any bonded indebtedness of the district existing at the time the annexation ordinance took effect and attributable to the annexed area based on the following factors: (1) The cost of the construction of the facilities within the annexed area in proportion to the construction costs for the entire district at the time of annexation; (2) the number of benefit units connected to and served within the annexed area in proportion to the number of benefit units connected to and served by the entire district at the time of annexation; and (3) the current revenue received from benefit units within the annexed area in proportion to the current revenue received from all benefit units of the entire district at the time of annexation. K.S.A. 1986 Supp. 12-527(b). The 1986 version of the statute still provided in the first instance for an agreement between a city and a water district on value; failing that, for the city to set the value; and, in the event of a disagreement, for the water district to bring an action in district court to determine the reasonableness of the value set by the city. K.S.A. 1986 Supp. 12-527(a). The next year, 1987, the legislature passed another amendment to K.S.A. 12-527. The governor, however, vetoed this amendment. The language the governor rejected shifted the power to set a value unilaterally from cities to water districts. It also listed specific factors to be among those included in reasonable value: (1) An amount to reimburse the district for any bonded indebtedness of the district existing at the time of payment by the city and attributable to the annexed area based upon the ratio of the benefit units in the annexed area compared with the total benefit units served by the district; and (2) an amount to reimburse the district for all the facilities to be transferred to the city based upon the ratio of the benefit units in the annexed area compared with the total benefit units served by the district, applied to the original construction cost adjusted to the current construction value and depreciated at a straight line rate over a forty-year period. The depreciated reduction of value shall be applied for the actual number of years the system has been in service or 30 years whichever is the lesser of the time expended; and (3) an amount equal to the gross revenue loss for the immediate past one business year from those benefit units in the annexed area or the actual current benefit unit costs for those benefit units in the annexed area whichever is the greater. H.B. 2480 Ultimately in that session, the legislature passed and the governor signed a later bill amending K.S.A. 12-527 to its current format. This version omitted the language vetoed by the governor earlier that year and that portion of the language added in 1986 that had required consideration of certain bonded indebtedness and set forth the factors used to determine it. In support of this second effort at a 1987 amendment, Representative Vancrum wrote a letter to the House Energy Committee explaining the new language. Vancrum said that the amendment would force cities to pay for a water district's assets and customer base; would permit appraisers to consider any element of value; and would make the statute's language comparable to that used in K.S.A. 66-1,176, which requires fair and reasonable compensation when annexation affects retail electric suppliers. In addition to the legislative history described above, case law may guide us to a decision in this case. Although K.S.A. 12-527 has rarely been the subject of litigation, the Court of Appeals addressed the meaning of its current language in City of DeSoto. In that case, De Soto annexed land belonging to the largest existing customer of Consolidated Water District No. 6, arguing it should pay only for the value of the water district's physical facilities located on the land. The water district sought compensation for the going concern value of the land taken. Although both parties, following K.S.A. 12-527, had selected appraisers, De Soto brought a declaratory judgment action in district court to determine the correct method for arriving at a reasonable value under the statute. This action was brought before the appraisers had settled on an amount. City of DeSoto, 23 Kan.App.2d at 408-09, 930 P.2d 624. The district court initially declined to determine the correct statutory method, ordering the appraisers to determine the value under each of the parties' suggested methods. The appraisers valued the physical assets at $19,300 and the going concern value at $41,000. City of DeSoto, 23 Kan.App.2d at 409, 930 P.2d 624. Without further hearing, the district court granted summary judgment to the water district in the amount of $41,000, holding: `[T]he term reasonable value used in K.S.A. 12-527 is an open ended term granting to the appraisers ... the discretion to consider whatever evidence they deem to be relevant in determining the reasonable value of the property taken.... K.S.A. 12-527 does not limit the value of the property taken to the value of the physical property taken.' City of DeSoto, 23 Kan.App.2d at 409, 930 P.2d 624. De Soto appealed. Reviewing K.S.A. 12-527's language and legislative history, the Court of Appeals endorsed the district court's decision that going concern value should be considered in the setting of an award under the statute. [A]ppraisers should be instructed to take into consideration the going concern value of the facilities within an annexed area in determining fair market value. Such an approach recognizes and properly considers not only the physical assets taken by a city but also the going concern value, which a city receives and a water district loses. To interpret the statute as only providing for the physical value of the assets would financially damage a water district to the advantage of a city. We do not believe that the legislature intended such an unfair outcome. City of DeSoto, 23 Kan.App.2d at 411, 930 P.2d 624. Nevertheless, the Court of Appeals reversed and remanded the case for a district court evidentiary hearing, because the parties were never given an opportunity ... to challenge the reasonableness of the appraisal before the entry of summary judgment. City of DeSoto, 23 Kan.App.2d at 411, 930 P.2d 624. Based on the legislative choice evident in the current general wording of K.S.A. 12-527, as opposed to the specificity of its earlier iterations, and on the content of the Vancrum letter and on the common sense of the Court of Appeals' decision in City of DeSoto, we hold that going concern value is a potential component of reasonable value, as that term is used in K.S.A. 12-527. As a matter of law, under the open-ended statute, going concern value should be considered for inclusion in any appraisers' award and any district court's reconsideration of the same in district court. In this case, however, this holding does not necessarily take the Water District where it wants to go. The record shows that the appraisers were instructed explicitly by the district judge to include going concern value in their calculus. It is obvious that the appraisers and the district court understood the possible importance of this element. Consistent with K.S.A. 12-527, the appraisers were free to decide whether going concern value was pertinent and, if so, the amount the evidence demanded be attributed to it as part of the reasonable value of the annexed territory. Any re-examination of the award in the district court was governed by the same legal standard. Thus the Water District's complaint actually is not that the appraisers were prevented from considering or failed to consider going concern value, but, as the dissenting appraisers' comments made clear, that they did not place a high enough number next to that potential component of reasonable value. The trouble with this is the statute's undifferentiated, or, perhaps, egalitarian approach. No city and no water district is irrevocably bound to any particular component or any specific formula in the presentation of evidence or argument about reasonable value under K.S.A. 12-527. The appraisers in this case and in any similar water district annexation case may evaluate any and all factors bearing on reasonable value. They may assign those factors any or no weight and any or no dollar amount, as compelled by the evidence and its persuasive force. There will be times when going concern value is enormously influential and a high-dollar component of reasonable value. At other times, going concern value will have little impact and may reasonably be set at zero. The statute allows for the entire continuum of outcomes; any point on that continuum may be selected.