Court Opinion

ID: 6883627
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:22:19.851267+00
Date Added: 2024-06-11T16:05:39.332933
License: Public Domain

STEPHENS, Circuit Judge
(dissenting).
I dissent.
I deem it proper to say that my conclusions on all but two of the errors claimed *295by appellants are the same as those of my associates, although I am not in full accord with the reasons given by them.
My dissent is based upon my conviction that by an instruction given the jury the appellants were erroneously deprived of the benefit of Mr. Veatch’s testimony as to the element of contractor’s profit in his “reproduction new” valuation; and that the Court erroneously struck from the record all of the severance damage testimony relating to the Bellingham office building.
These are substantial items, and if either constitutes error there is no recourse open save reversal.
Claimed Error No. 2
This concerns a part of the Court’s instruction upon the subject of “reproduction new” of the property sought to be taken by these proceedings as evidence in arriving at the fair cash market value of such property.
The relevant part of the instruction is as follows:
“I have also told you that you should take into consideration the estimated cost of reproduction new of the properties. By the cost of reproduction new of a property is meant what it would cost to reconstruct or reproduce new the presently existing units of property under present conditions and at present prices for materials and labor.
J-i ijj
“In connection with the estimated cost of construction and the estimated cost of reproduction new of the properties, and your determination of the fair cash market value thereof, you should take into consideration those items which have been described in the testimony of witnesses and the argument of counsel as ‘general overheads’ or ‘general indirect costs’ and ‘organization expense’. Among these items are engineering and supervision, law expenditures, injuries and damages, taxes during construction, interest during construction, and miscellaneous construction expenditures and expenses of organization. They are in addition to what have been referred to by witnesses and counsel as ‘direct overheads’ or ‘job overheads’ or ‘general direct costs’.
“In an estimated cost of reproduction new, allowances for general contractor’s profit and cost of his bond should be included only where the general contractor if employed would effect corresponding savings tó the owner on material ánd labor costs, and you should in giving consideration to evidence of any estimated cost of reproduction new studies containing allowances for general contractor’s profit and cost of his bond eliminate so much of such allowances, if any, as is not represented by such corresponding savings on material and labor.”
The vice of the instruction, according to appellants, is in the statement contained therein that “general contractor’s profit and cost of his bond should be included only where the general contractor if employed would effect corresponding savings to the owner on material and labor costs * *
In passing I note that appellants have designated their exceptions to this instruction under four separately stated “reasons” and appellee suggests that they are not sufficiently definite to inform the court of the claimed error.
I quote one of the “reasons” as urged by the appellants to the trial court: “It (the criticized instruction) is an incorrect statement of the law. The law is that the witness may use any method of estimating present reproduction cost of the property which in his opinion will produce the most efficient and economical result and that was Mr. Veatch’s testimony. Everyone knows that the contractor method of constructing large properties is almost-universally used today.”
I reject the suggestion that the instruction was not sufficiently excepted to.
It should be noted that the majority opinion fails to meet the question squarely, but decides the point entirely on two grounds, first that the objection was insufficient, and second, that the instruction was based on Mr. Veatch’s testimony on cross-examination. To support the second ground of decision, one sentence of Mr. Veatch’s testimony is quoted, which, taken alone, would make it appear that the witness had testified that the only excuse for employing a general contractor would be a saving in labor and material costs. I shall presently show that this assumption is improper.
In determining the reproduction new cost of a property, the appraisal may be made on three different assumptions (1) that the construction will be performed by the owner (2) that the work will be done by a general contractor; or (3) a combination of the other two.
*296One witness for the Company (Mr. Veatch) adopted the general contractor theory in his reproduction new testimony. In his calculations he estimated the total cost of the system and then added 10% for the compensation and expenses and expenses of the general contractor and cost of the contractor’s bond. I quote from his testimony:
“* * * I used the plan of reproduction by contract because I feel certain that it would be the plan followed by any prudent company in reproducing the property. Any of the other plans would involve what would be equivalent to the contractor taking his first job and taking the job, the first one, of some five millions dollars of property. I don’t believe that would be done by a prudent organization. * * *
“Q. Did you make any effort at all, Mr. Veatch, to ascertain that (what) the owner of this property might incur in the way of engineering expenses if he sought to set up his own organization? A. Other than the belief based on what experience I have had that the cheapest manner — I don’t necessarily mean the cheapest either —I mean the most prudent manner for the owner to handle his work would be to hire a consulting engineering firm to design it and supervise it.
“The performances used throughout the job have been based on work done by an efficient organization with efficient supervision and by an experienced contractor, and if you make your estimate without the 10% and assume that you are going to build up an organization for its first joh to build a five million dollar project, you can’t count on the same thoroughness and experience that you would get with an experienced contractor. In other words, the inclusion of 10% is to justify you in assuming performances which a reasonable experienced contractor would give.
* *
“* * * The main thing, * * * is that this 10% roughly is added to the bare cost of the work to give to the project an organized and experienced construction force and as contrasted with that if you don’t plan on a contractor with his profit you plan on setting up what is (in) a sense is a contractor for the first job taking a five million job without any experience, without any equipment and without anything else and building it and no prudent owner would do that.
“Q. * * * Now, wherein in introducing a contractor into this picture have you allowed for any saving that might be made by virtue of the fact that the contractor might bid less than your estimate? A. Well, as stated, I believe that the performances and efficiency of the whole job would justify the 10%. Furthermore, as stated a moment ago, I don’t think any prudent owner would build it on that basis.
“* * * I don’t know ever in my experience of a company reconstructing at one time five million dollars worth of property on a force account basis. It just isn’t done. H4
“Q. What allowance would you make or change would you make in these overheads, and for what reason, if you didn’t have the general contractor? A. I would certainly increase them.
“Q. Well, what ones and for what reason? What would you cover by the increase? A. Well, you would have to have —instead of the organization that is set up and the administrative offices, and so forth, you would have to include what the contractor would have over and above the field forces which have been included in the crew set up. That organization would have to be added to the organization of the owner that hasn’t been included in these overheads. >¡í % sjc
“’!' * * the plan used in making the appraisal has been one which in my opinion would give to the owner the most reasonable cost so far as the reproduction of the property at this time would be, and that is the reason. * * *
“Q. If the Puget Sound itself was the builder, would your assumption still be that a general contractor would be employed? A. That is my assumption, and it is based on the fact that the company on any of their projects of any size always do it that way. * * *
“Q. Now, further with respect to this contractor’s profit, you have been asked about it, do you know of any private corporation, and base this upon your 31 years experience, do you know of any private corporation organized for the purposes of *297operating a property that would do a several million dollar construction project, or has done — we will put it that way — by force account rather than by contract? A. I don’t know of any, no.
“Q. Do you know of any organization like private companies which, when it was first organized, launched by force account upon a construction program anywheres near this magnitude? A. I never knew of one, no. sfs :$í ;{<
“Q. * * * Now, do you know of any R. E. A. projects, rural electrical administration projects that hasn’t been or isn’t being constructed by contract rather than by force account? A. I know of none. It is my understanding they are all by contract.”
The witness testified that of the 10%, 4% would go for the contractor’s general expense, his general office expense, and all of his administrative expenses, with the exception of the definite job costs, and that the remaining 6% would be a reasonable profit.
The Court, however, in effect instructed the jury to disregard all testimony of the witness relating to the advantages of employing a general contractor for the work other than money savings, over the reproduction new cost without a general contractor and told the jury that the cost of reproduction new by contractor could include compensation to the contractor and cost of bond up to but not beyond the savings on material and labor that he was enabled to make over the reproduction new cost without a general contractor.
I am of the opinion that this constitutes reversible error. It takes away from the jury all consideration of the testimony to the effect that no prudent owner would construct the properties otherwise than by general contractor, and this in the face of Mr. Veatch’s testimony that it is the universal custom to use a general contractor in all sizable projects. It takes from the jury the question of whether the general contractor method was the only practicable method of construction and would be so considered with all of its elements of cost by the hypothetical willing parties to a purchase and sale.
Claimed Errors Nos. 9 and 10
The Company owns a building in the City of Bellingham, the County Seat of Whatcom County, and a portion of this building is used by the Company in connection with the business side of its activities and a portion of it is rented. This building is not the subject of these eminent domain proceedings, and the Company claims a severance damage. Two witnesses, Mr. S. P. MacFadden, Vice President of the Company, and Mr. O. C. Scudder, a realty dealer in Bellingham, gave testimony upon this issue. After the testimony had been received it was stricken and the appellants claim error.
Both Mr. MacFadden and Mr. Scudder testified that the actual loss in value of the building by reason of the condemnation of the Company’s business was $108,000. Mr. MacFadden when questioned as to the market value of the property before the condemnation gave the figure of $231,000 as his estimate.
I quote from the testimony of Mr. Scudder :
“Q. Now, Mr. Scudder, have you been employed by the Puget Sound Power & Light Company to determine the severance damage, if any, which would be sustained by the Company to its Bellingham office building property? A. I have.
“Q. And have you made a study and inspection of the property to assist you in reaching a conclusion? A. I have. * * *
“Q. Now, have you come to a conclusion as to the severance damage in that respect? A. Yes, sir.
“Q. What in your opinion will be the depreciation or diminution in. market value of the Bellingham office building property by reason of the taking by the P. U. D. of Whatcom County system of the Company?
* * * (At this point counsel objected on the ground that it is improper to ask the witness what the severance damage-might be without giving the value of the building before and after the severance. The objection was overruled.)
“A. Not less than $108,000.00.
“Q. Now will you explain for us Mr. Scudder, the basis of your conclusion, directing your attention first to the present situation with respect to that building? A. Well, the property in its present use is earning its highest and best possible return.
“Q. First I would like to have you explain the physical situation as it now exists, what character the building is. * * * A. Well, the building was built in 1930 * * * (At this point the witness *298proceeded to describe the building in detail, stating that it was built for a district headquarters building and a sales promotion building, and for that purpose some very unusual features were built into it. He also stated that there was almost no commercial purpose that a large part of the building could be used for other than its present use.) As it sets today, it is * * * a white elephant on the owner’s hands if they don’t have the present unusual use for it. * * * You can’t make it over into an office -building very readily * * *. The rooms upstairs, * * * due to the type of construction, it would be difficult to.put into condition for office use at a cost that would allow any net return above a return on the cost of remodelling. The ground floor is worse yet. To use it for stores or, shops, which could be done, you would have to drop it to street level. Well, to take out reinforced concrete floors and supporting beams with posts every 12 or 13 feet and try to put that into storerooms, from a practical standpoint it is almost an impossibility.”
Mr. Scudder then testified: “The (maximum rental from) the portion used by the company if the present tenancy was severed from it is $350 per month. * * * We have appraised the present use in income value of the portion owned (used) by the company as not less than $950 a month * * *. Well, the difference between $350 and $950, or $600, would be $7,200 a year. We have allowed the company $60 with which to rent an office, to maintain their gas business, which reduces the annual income loss to $6,480, which brings an actual loss in value to the building of $108,000.”
On cross-examination Mr. Scudder testified that he had arrived at the $108,000 figure by capitalizing the $6,480 at 6%. On redirect examination he testified that the method followed by him in determining the severance damage and the diminution in market value was “a method generally followed by members of (his) real estate profession.”
At the conclusion of Mr. Scudder’s testimony on this subject the appellee moved to strike his testimony, whereupon the Court ruled that the witness “after apparently qualifying himself as an expert witness on real estate values in this City, in my opinion disqualified himself disestablished his qualification with respect to the depreciation in the market value of this one building, this office building”. The entire testimony of Mr. Scudder on the question of severance damages to the office building was stricken from the record.
It should be noted at this point that Mr. Scudder had testified that he had been in the real estate business in Bellingham for more than 20 years and was generally familiar with the market value of real estate in Wha'tcom County. No 'question was made as to his general qualification as an expert, the Court apparently basing its conclusion as to his disqualification to testify in regard to this one building on the method used in arriving at his estimate of diminution in value. The qualifications of the witness are beyond attack. It is plain to be seen that the Court thought evidence of the method used in regard to the severance damage as to the building was inadmissible. . Entertaining this view it was of course the Court’s duty to rid the record of it. This the Court did and it is our function here to determine the right or wrong of this action uncomplicated with the course the Court took as to disqualification of the witness.
It is argued before the Trial Court that it was improper in the first instance to allow the witness to state how much, in his opinion, the land would be depreciated in value on account of the condemnation of the Company’s properties, the contention being that the amount of damages was for the jury to determine — that the sole function of the witness was to state the market value of the property before and after the condemnation, and allow the jury to make the mathematical computation. The Court overruled the objection, and properly so, in view of the Washington law on the subject. See Seattle & M. Ry. Co. v. Gilchrist, 4 Wash. 509, 30 P. 738, 739; Ingram v. Wishkah Boom Co., 35 Wash. 191, 77 P. 34; and King County v. Joyce, 96 Wash. 520, 165 P. 399.
I quote from the Gilchrist case, supra [4 Wash. 509, 30 P. 739] : “It is also objected that one of the respondents was permitted to state how much, in his opinion, the land would be depreciated in value on account of the appropriation of the right of way and the construction of the railroad. It is conceded by appellant that it is competent for a witness, if properly qualified, to state his opinion as to the value of the land before and after the appropriation; but it is contended that it is for the jury to say what the damages are, and *299not the witness. While there is undoubtedly a conflict of authority upon this question, it seems difficult to perceive any substantial reason for rejecting such testimony. To- admit evidence of the value of the land before and after the taking is to admit, in effect, the same thing to be done which appellant complains of, since the amount of the damages is then ascertained by the jury by the mere process of subtraction. And, this being so, we are unable to understand, why the witness should not be permitted to state the result, as well as the facts from which such result is reached. In either case, the amount of the damages is ultimately based on the opinion of the witness. The distinction here insisted on between the two methods is based on mere form, rather than substance. The facts upon which the witness bases his opinion may be shown on cross-examination, and when this is done the jury have all the means which can be afforded for forming an independent judgment as to the damages.”
It therefore seems clear that the witness’s testimony as to his estimate of diminution in value was admissible. The question then arises, was the Court justified in striking the testimony in view of the method used in determining the figure given by the witness ?
In my opinion the Court committed error in so doing. The witness laid the foundation that it was the custom of realtors in the Bellingham district to use this method in checking for market value. It is too restricted a view of Mr. Scudder’s testimony to hold that the capitalization of rental losses was taken by him without regard to other elements that might reasonably be taken into consideration as affecting market value before and after the severance. His testimony very definitely points to the unusual features of the building and to the fact that they adversely affect its use and its marketability. In fact he went so far as to say that it was unsalable and that the actual severance damage was far in excess of the figure resulting from the capitalization method that resulted in the figure $108,000.
To hold that the expected income from a property cannot be figured in terms of interest return on the investment as an element in the ascertainment of the property’s normal market value is to exclude a basic element of the capitalistic theory of valuation.
In Niagara, Lockport & Ontario Power Co. v. Horton, 231 App.Div. 402, 247 N.Y.S. 761, 764, the Court was concerned with eminent domain proceedings in the State of New York. One witness qualified as an expert on land values and gave as his opinion that the land had a market value of $269,000. On cross-examination the witness told how he arrived at his valuation, which was by determining the net income to be derived from such a plant and capitalizing this amount and then awarding to the defendants a proportionate share. I quote from the opinion of the Court:
“The commissioners concluded that the witness had adopted an erroneous theory of damages and struck out, not only his answers that the land in question had a market value of $269,000, but all of his testimony. This was error. * * *
“Defendants are not entitled to a valuation mathematically fixed and determined by the proportionate contribution of their land to a completed plant * * *.
“But defendants are entitled to the fair market value of their land for its highest and best available use. * * *
“And when a witness, duly qualified as an expert, to give evidence on the question of value, gave his opinion as to value, his evidence should not have been stricken out, but should have been considered for what it was worth, in view of all that he said in regard to the method by which he arrived at his conclusion, and keeping in mind the true measure of damages. * * jjc ))
Mr. Scudder’s testimony should not have been stricken.
Mr. MacFadden did not qualify as a realty expert, but was offered as a witness on the theory that as Vice President in general charge of all operations of the Company he occupied the position of owner and therefore need not otherwise qualify in order to give testimony with respect to the severance damages.
There is no doubt that under the Washington law Mr. MacFadden was in the position of an owner by virtue of his position in the Company. See Weber v. West Seattle Land & Improvement Co., 188 Wash. 512, 63 P.2d 418.
Mr. MacFadden admitted on the witness stand that he had been assisted in making his determination of value by the computations of Mr. Scudder and Mr. *300Wright, another realty expert. I quote from the testimony of Mr. MacFadden:
“Q. Mr. MacFadden, what information did you have to assist you in arriving at this one hundred and eight some odd thousand dollar figure? A. I had two competent Bellingham real estate men determine the figure of $108,000 for me, and after going over it, I agreed that it was the proper figure.
“Q. Who were these men? A. Mr. Scudder and Mr. Wright.
(The record does not reveal that Mr. Wright testified as to his method of arriving at severance damages.) * * *
“Q. And is the figure that you used the figure that they gave you? A. Yes, sir, $108,000.
“Q. You have adopted it wholly? A. Yes, sir.
“Q. Does that serve as the basis of your opinion? A. Yes, sir, tliat and my knowledge of the situation.” (Emphasis supplied.)
In sustaining a motion to strike Mr. MacFadden’s testimony on the subject, the Court ■ ruled that the witness had not testified as an owner, but “is stating that because somebody, some expert witnesses, told him that”.
By this ruling the Court fell into error. The witness testified that he based his estimate on his own knowledge of the situation, as well as the advice of the experts. And what I have said about the testimony of Scudder applies as well to that of MacFadden. The stricken testimony should have gone to the jury for what it was worth.
The majority in affirming the action of the trial court in striking MacFadden’s testimony, take only a part of his testimony and give it a meaning that it cannot ¡have in its real context.
After the justification of the striking of ¡MacFadden’s severance damage testimony dn this erroneous manner, the majority proceed to justify the striking of Scudder’s iseverance damage testimony, but not upon rthe ground that severance is improper mor upon the ground that the witness was .in any way disqualified. The majority •opinion takes the view that “while Scudder ^testified as to the fair market value of ■the building before the taking, he did not rtestify as to the fair market value of the ¡building after the taking. He did testify as to the loss of rental value but such loss is not the fair ‘market’ value. Whether the rental value ‘loss’ could be used in computing the fair ‘market’ value is a matter requiring the speculation and conjecture of the jury, because it does not directly prove or tend to prove the value required”.
But this theory overlooks the testimony of Scudder which I have quoted above to the effect that in his opinion the property would be damaged in the sum of $108,000 by the severance. The testimony as to rental value loss was merely explanatory of the witness’s method of arriving at that1 $108,000 figure. I can see nothing in the record to justify an assumption that the Washington measure of damages as quoted in the majority opinion, “the fair market value of the property taken together with the amount of depreciation, if any, in the value of the property not taken” was not fully followed.
Judge GARRECHT in his concurring opinion further justifies the striking of Scudder’s entire severance damage testimony upon the ground that an omission occurred in MacFadden’s testimony as to the Company’s income. The equation is this: The Company housed its offices in the building but did not charge itself rental. That this would require that the net income should be decreased in an amount equal to such rental value. Therefore it follows' the severance damage would be “double rental value”. Here is as plain a non sequitur as one could ever find and can only be accounted for by arriving at the conclusion that my associate was in some manner misled as to^ the use the income testimony could be and was put to in the case. Assuming the correctness of the premise that the omission of a rental charge was left without proper explanation in MacFadden’s testimony, a premise which I shall presently show does not exist, it could not be an offset to severance damage any more than three apples could be taken from five pears.
Judge Wilbur in Puget Sound Power & Light Co. v. City of Puyallup, 9 Cir., 51 F.2d 688, 695, in defining “the fundamental questions involved” in this kind of an eminent domain case, said they were “the ascertainment of the market value of the property taken plus the depreciation of the market value of the property retained”. In the Puyallup case it was sought by the Company to get the full *301market value of the property taken and to top this with a sum which capitalized would produce the profit to the company about the same as though it had never sold the property taken by condemnation — a classic example of trying to eat the cake and have it too. This claim was incorrectly called severance damage to the whole system. Judge Wilbur very properly held that this profit which was sought to be awarded under the term of severance damage was an item already taken into consideration in the fair market value of the property taken. No such situation appears in the instant case. No general severance damage to the Company system is sought. The severance damage to the building alone is sought more on the idle plant theory which was mentioned but not claimed in the Puyallup case.
Now, let us return to the claim that the failure to charge itself rental was an exact offset to the building severance damage (which of course it was not and could not have been). The whole matter was called to the attention of the jury and the jury will be presumed to have considered and justly to have adjusted the income figure accordingly. Then when the severance damage evidence came in the jury should have been allowed to consider it the same as any other proper evidence. How could it be clearer that this puts the doubling as against the Company rather than as against the District.
It would seem that this might be enough but there is much more.
My associate has erroneously assumed that the figure of net income is a definite item in the judgment amount and that if this figure is overstated the judgment award should be deducted by such overcharge and that the court may look for any item in the testimony and strike it out as a correction.
The net income is not such a definite item, it is but one important item among many others going to make up the estimation of the going concern value attributable to the property taken.
Mr. MacFadden, in being cross examined upon his testimony as to fair market value, was asked the following question, “This element of going concern value as you have appraised it or estimated it takes into consideration the earning ability of the company?”, to which the witness answered, “That is one element, yes, sir.”. Question, “Well, it takes into consideration that element?”. Answer, “That is one of the things considered.” Question, “I appreciate that there may be other things, but that thing itself is considered?” Answer, “Yes, sir.”
I quote from the cross-examination of another Company witness, W. C. Gil-man : “In arriving at market value, in my opinion it is not possible to put a price tag on each particular factor. I have given consideration to the earnings of the enterprise in Whatcom County, testimony as to reproduction new and depreciation' — - those might be called facts. There are other intangible factors such as my opinion as to the possibilities of this territory, the present earning power and the reason of the prospective earning powers. Those are intangible. Those are all elements, however, which go to make up value. It is impossible to weigh them in terms of percentages. Market values and prices are not arrived at that way.”
But the factual premise of my associate on this point is palpably erroneous. There was no omission of rental charge that was not thoroughly given the jury for its adjustment as heretofore mentioned.
My associate states: “The jury, if the evidence had been admitted, would have considered double rental value — once in the capitalization of earnings, and once in the capitalization of loss”. There is nothing in the record to substantiate the assumption that valuation would be arrived at by capitalization of earnings.
In my opinion the judgment should be reversed.