Court Opinion

ID: 8878183
Source: CourtListenerOpinion
Date Created: 2022-11-26 19:45:27.573704+00
Date Added: 2024-06-11T17:06:29.239545
License: Public Domain

On Rehearing in banc
Before LUMBARD, Chief Judge, and WATERMAN, MOORE, FRIENDLY, SMITH, KAUFMAN, HAYS, ANDERSON and FEINBERG, Circuit Judges.
FRIENDLY, Circuit Judge.
Appellees seasonably submitted a petition for rehearing and a suggestion that this be in banc. They contend that the severe limitation imposed by the majority of the panel on the award of compensation- for “middle category” trade fixtures of tenants under short-term leases ran counter to relevant portions of recent decisions of two other panels in the Foley Square condemnation cases, United States v. Certain Property Located in the Borough of Manhattan, etc., 306 F.2d 439 (2 Cir. 1962), and 344 F.2d 142 (2 Cir. 1965), and would have a sérious ef-feet on similar fixture claims of tenants in other condemnations pending in the circuit. After giving the Government opportunity to respond and reviewing its answer, the court ordered reconsideration in banc on the papers already submitted. We disagree with the conclusion of the panel majority that just compensation for trade fixtures of a tenant under a short-term lease can never exceed reproduction cost less depreciation to the date of taking calculated at a rate that would amortize the fixtures “completely over the term of the lease regardless of their normal period of usefulness.” On the other hand we do not accept appel-lees’ view that a near certainty of the tenant’s being forced to move at the end of his lease because of the landlord’s having other plans for the building independent of the condemnation must be disregarded.
Resort to depreciated cost in the evaluation of tenants’ fixture claims is simply a means to an end. The end, more readily stated than attained, is that the claimant shall receive “the full and perfect equivalent in money of' the property taken” and thereby “be put in as good position pecuniarily as he would have occupied if his property had not been taken.” United States v. Miller, 317 U.S. 369, 373, 63 S.Ct. 276, 279, 87 L.Ed. 336 (1943). Normally this objective will be realized by awarding what “it fairly may be believed that a purchaser in fair market conditions would have given,” City of New York v. Sage, 239 U.S. 57, 61, 36 S.Ct. 25, 26, 60 L.Ed. 143 (1915) and that sum can be determined with a reasonable approach to accuracy by evidence of fairly contemporaneous sales of comparable property not under condemnation. But since such evidence is unprocurable in the case of trade fixtures of the “middle category,” see 306 F.2d at 453, which are being evaluated separately for purposes of fixing just compensation, see Marraro v. State, 12 N.Y.2d 285, 293-296, 239 N.Y.S.2d 105, 110-113, 189 N.E.2d 606 (1963), and United States v. Certain Property, supra, 344 F.2d at 147, the. trier of the facts must endeavor to reconstruct as best he can “what a purchaser would pay for them for use in the premises being condemned.” United States v. Certain Property, supra, 306 F.2d at 448.
The hypothetical purchaser would not pay more than the current cost of comparable new fixtures less an appropriate allowance for deterioration from use and obsolescence. Evidence of that amount thus is competent, indeed, in *601most cases, sufficient.1 Marraro v. State, supra, 12 N.Y.2d at 296, 239 N.Y.S.2d at 113, 189 N.E.2d 606. Since the purpose of the deduction is to take account of the discount for deterioration and obsolescence on which the putative purchaser would insist, the allowance should be computed in the first instance on the basis of useful life and without regard to the term of the particular lease. While expiration of the lease before the end of the useful life might in the unusual circumstances hereafter indicated require depreciation on a more_ rapid basis, ordinarily it will not, since, as said by Judge Lehman in a well-known decision of the New York Court of Appeals, “perhaps the parties might havre chosen to preserve that value [of the fixtures] either by renewal of the lease or by transfer of title to the fixtures from the tenant to the owner of the fee.” Matter of City of New York (Allen St.), 256 N.Y. 236, 249, 176 N.E. 377, 381 (1931). Cf. United States v. Seagren, 60 App.D.C. 183, 50 F.2d 333, 335 (1931).2
We are unable to follow the panel majority in assuming that -tenants under short-term leases will generally not be able to derive any value from their fixtures beyond the expiration of their leases. The contrary is proved not only by common experience but by the record of frequent lease renewals in this very ease. Lessors do desire, after all, to keep their properties leased, and an existing tenant usually has the inside track to a renewal for all kinds of reasons— avoidance of costly alterations, saving of brokerage commissions, perhaps even ordinary decency on the part of landlords. Thus, even when the lease has expired, the condemnation will often force the tenant to remove or abandon the fixtures long before he would otherwise have had to, as well as deprive him of the opportunity to deal with the landlord or a new tenant — the only two people for whom the fixtures would have a value unaffected by the heavy costs of disassembly and reassembly.3 The condemnor is not entitled to the benefit of assumptions, contrary to common experience, *602that the fixtures would be removed at the expiration of the stated term. As Judge Lehman also wrote in Allen Street, supra, 256 N.Y. at 249, 176 N.E. at 381:
“Choice lay with the tenant and landlord, and how that choice would have been exercised rests in speculation which does not concern the courts in this jurisdiction.”
However, an accelerated depreciation schedule would be proper in the rare case when the condemnor sustains the heavy burden of demonstrating that, because of a factor altogether independent of the condemnation, the tenant could not reasonably expect either to continue in possession throughout the useful life of the fixtures or to sell them at an earlier date to the landlord or a successor for use in situ. The putative purchaser would surely take such a factor into account, and we see no reason why a tenant seeking compensation for fixtures on a separate evaluation theory should receive more from the condemnor and thereby in effect realize a windfall from the condemnation. Although the point had not been urged in the Government’s brief, the panel opinion suggests that this may be such a case, citing United States v. Certain Property, 374 F.2d 138 (2 Cir. 1967), and we assume the Government’s broader contention enables it to take advantage of the narrower. However, several of the appellees tell us that the landlords’ plans for demolition and improvement did not include the building in which they had leases. All this may be explored upon remand.
We therefore vacate the judgment of the District Court with directions to allow the Government to present proof that would bring the case within the exception stated in the preceding paragraph. If it can do so, the district court shall make whatever additional deduction from the award of the Commissioners is appropriate under the principles herein stated; if it cannot, the confirmation of the award of the Commissioners shall stand. No costs on appeal.

. The appraisers here made further deductions, usually of trifling amounts, which the commissioners adopted, for “what a willing buyer would pay a willing seller.” Apparently this figure, representing the value of the fixtures after costs of disassembly and reassembly, was deducted on the theory that, because of the limitation in the declaration of taking, the tenants would retain the fixtures after disassembling and removing them. See Judge Dimock’s opinion, 225 F.Supp. 498, 502-503 (S.D.N.Y.1963). In some instances the figure was zero.

. It is immaterial that the tenant may or must depreciate the fixtures more rapidly for income tax purposes. Section 178 (c), which was added to the Internal Revenue Code in 1958 and codified the case law permitting a lessee to amortize improvements over the term of his lease, gives the typical tenant the benefit of the doubt to the extent that his occupancy is indeterminate. In the case of a condemnation, however, similar considerations of fairness point to giving the tenant the benefit of any reasonable doubt that he will be able to realize the life expectancy of the fixtures through either use or sale. Furthermore, even if the tenant in a particular case has already amortized the full cost of the fixtures for tax purposes under § 178(c), this should not prevent him from claiming the sound value of the fixtures in a condemnation 'proceeding, since as long as marginal tax rates do not reach 100% the amount of the tax deduction which proves to be “unearned” as a result of the fixtures retaining value after the amortization period will never equal the amount of the value retained. Finally, as we have said, “the-rate at which an owner endeavors to recover the cost of his capital as a tax deduction does not determine the value of the property at any given date.” 344 F.2d at 152.

. While these possible purchasers might seek to take advantage of the tenant’s need 'to sell, this may be counterbalanced by the tendency of depreciation formulas to overstate loss of value 'except when functional obsolescence has occurred. In any • event an attempt to forecast the terms of a bargain that might never have had to be made is altogether too speculative, as Judge Lehman indicated in the passage quoted below, and it is fairer that the cost of any error in approximation should fall on the person who brought the problem about.