No. 12794
I N THE SUPREME COURT O THE STATE O MONTANA
F F
1975
THE STATE O MONTANA, ACTING BY AND
F
T R U H THE DEPARTMENT O HIGHWAYS O
HOG F F
THE STATE O MONTANA,
F
Plaintiff and A p p e l l a n t ,
ARTHUR J . OLSEN and FLORENCE 0. OLSEN,
husband and w i f e , and EUGENE G. HOLMES
and EVELYN HOLMES, husband and w i f e , and
ORION HEATH and ESTHER HEATH, husband and
wife, a s Contract Purchasers,
Defendants and Respondents.
Appeal from: D i s t r i c t Court of t h e F o u r t h J u d i c i a l D i s t r i c t ,
Honorable J a c k L. Green, Judge p r e s i d i n g .
Counsel of Record:
For A p p e l l a n t :
Daniel J. S u l l i v a n argued, Helena, Montana
For ~ e s p o n d e n t s :
Koch & McKenna, Hamilton, Montana
Thomas P. Koch argued, Hamilton, Montana
Boone, Karlberg & Haddon, Missoula, Montana
William T. Boone argued, Missoula, Montana
For Amicus C u r i a e :
John C a r l argued, B u t t e , Montana
Submitted: January 10, 1975
.-
Decided : -
FED 5 1975
;*kt? - ;'
Filed: " 1975
Mr. J u s t i c e Frank I. Haswell d e l i v e r e d t h e Opinion o f t h e C o u r t .
These a p p e a l s a r i s e from a condemnation a c t i o n b r o u g h t
by t h e S t a t e Department o f Highways i n t h e d i s t r i c t c o u r t ,
R a v a l l i County. D e f e n d a n t s , Orion and E s t h e r Heath, t h e l a n d -
o w n e r s , a p p e a l from t h e d i s t r i c t c o u r t ' s r e f u s a l t o award them
t h e i r a l l e g e d " e x p e n s e s of l i t i g a t i o n " . The S t a t e c r o s s a p p e a l s
from t h e judgment a w a r d i n g $68,000 a s j u s t c o m p e n s a t i o n f o r t h e
taking.
H e a t h s owned and o p e r a t e d a "mom and pop" g r o c e r y s t o r e
i n F l o r e n c e , Montana. The s t o r e , w i t h l i v i n g q u a r t e r s a t t a c h e d ,
i s s i t u a t e d on a l o t f r o n t i n g on U . S. Highway 93. S t a t e Depart-
ment o f Highways' p l a n f o r improving t h a t highway i n v o l v e d
widening of i t s right-of-way, n e c e s s i t a t i n g a taking of p a r t of
t h e l o t owned by t h e H e a t h s . The S t a t e o f f e r e d t h e owners $3,460
f o r t h e 3 1 1 / 2 f o o t s t r i p f r o n t i n g o n t h e highway, which o f f e r
was r e f u s e d . F o l l o w i n g t h e r e f u s a l , t h e S t a t e f i l e d t h i s con-
d e m n a t i o n a c t i o n i n J u n e , 1972.
The landowners a d m i t t e d t h e n e c e s s i t y of t h e t a k i n g , b u t
d i s p u t e d t h e e x t e n t o f t h e t a k i n g and t h e amount o f j u s t compen-
s a t i o n o f f e r e d by t h e S t a t e . A j u r y t r i a l was h e l d i n J a n u a r y
1974, f o r a d e t e r m i n a t i o n of t h e s e i s s u e s . During t h e c o u r s e o f
t r i a l , t h e S t a t e a d m i t t e d t h a t i t had e r r e d i n i t s p r e v i o u s
d e t e r m i n a t i o n of t h e e x t e n t o f t h e t a k i n g . I t conceded t h e s t r i p
t o b e condemned i n c l u d e d t h e s a n i t a r y f a c i l i t i e s o f t h e l o t and
t h a t t h e t a k i n g would d e s t r o y t h e u t i l i t y o f t h e s t o r e and a t t a c h e d
residence.
A s a r e s u l t o f t h i s new p o s i t i o n , t h e S t a t e ' s a p p r a i s e r
t e s t i f i e d t h e v a l u e o f t h e t a k i n g , u s i n g t h e "market d a t a " v a l u -
a t i o n method, was $39,033. The l a n d o w n e r s ' a p p r a i s e r , u s i n g a
" c a p i t a l i z a t i o n o f income" method, v a l u e d t h e t a k i n g a t $86,500.
The landowners d i d n o t t e s t i f y a s t o t h e v a l u e of t h e t a k i n g .
The jury returned a unanimous verdict of $68,000, and
judgment was entered thereon. The landowners then moved for an
award of the "necessary costs 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 Attorneys1 fees $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 "capitalization of income" valuation appropriate
on these facts?
(2) If so, was that method 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 land-
owners 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 that method is appropriate in cases in-
volving agricultural or 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 State v. Peterson, 134 Mont. 52, 328
P.2d 617, although capitalization of that income was not dis-
cussed. However, Peterson was cited in State Highway Commln v.
Heltborg, 140 Mont. 196, 369 P.2d 521, for the proposition that
income can be used in determination of market value. Heltborq
affirmed an award based on capitalization of income derived from
agricultural property.
Caveats were attached to the use of this method in State
Highway Commln v. Bare, 141 Mont. 288, 301, 377 P.2d 357, where
we said:
"While we do not reject the method in all cases,
we believe for future guidance in eminent domain
cases, the capitalization of income method should
be carefully scrutinized even where it may 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
capitalization method. 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 the method involved an unacceptable amount
of uncertainty and speculation. A similar result was reached in
State Highway Commission v. Palin, 160 Mont. 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, 162. Mont.
-
386, 513 P.2d 5 , 8, 30 St.Rep. 702, where we approved the use
of the method 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 suggest-
ed by 5 Nichols on Eminent Domain S19.3.
Income capitalization is an appropriate valuation method
in cases where it entails less conjecture and uncertainty than
alterndtive methods. 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 $86,500 by using the income capitalization method. The
State's appraiser also discussed the same three methods, reject-
ing 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 cross-
examined by opposing counsel. No suggestion was made that the
witnesses were unqualified to express an opinion. The dispute
went solely to the applicability of the methods proposed.
Under these facts we find Bennett to be controlling.
Dealing with a similar problem there, we said:
"Once proper 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 capitalization method clear-
ly was permissible under the authorities cited. The concern over
the proper application of this method goes to the weight of the
expert's testimony, not to its admissibility. Bennett, supra.
Our review of the record here finds substantial evidence support-
ing the verdict and judgment. Accordingly, the judgment of the
d i s t r i c t court i s affirmed.
The f i n a l problem p r e s e n t e d c o n c e r n s t h e d i s t r i c t c o u r t ' s
d e n i a l of t h e landowners' a l l e g e d " n e c e s s a r y c o s t s of l i t i g a t i o n " .
Tne p r i n c i p a l c h a l l e n g e c o n c e r n s t h e a p p l i c a b i l i t y of s e c t i o n
93-9921.1, R.C.M. 1947, t o a n a c t i o n pending when t h a t s t a t u t e
became e f f e c t i v e .
The S t a t e ' s c o m p l a i n t was f i l e d i n J u n e 1972. A t that
t i m e , awardable c o s t s were d e t e r m i n e d under s e c t i o n 93-9921,
R.C.M. 1947, which p r o v i d e d :
" C o s t s may be a l l o w e d o r n o t , a n d , i f a l l o w e d
may be a p p o r t i o n e d between t h e p a r t i e s on t h e
same o r a d v e r s e s i d e s , i n t h e d i s c r e t i o n of
the court."
T h e c o s t s p r o v i d e d by t h a t s t a t u t e d i d n o t i n c l u d e e x p e r t w i t n e s s
or attorney fees. S t a t e Highway Comm'n v . H e l t b o r g , 1 4 0 Mont.
136, 369 P.2d 5 2 1 ; Tomten v . Thomas, 125 Mont. 159, 232 P.2d 723,
2 6 ALR 2d 1285.
While t h i s a c t i o n was pending, s e c t i o n 93-9921 was re-
p e a l e d and s e c t i o n 93-9921.1, R.C.M. 1947, was s u b s t i t u t e d . It
provides, i n p e r t i n e n t p a r t :
" * * * I n t h e e v e n t o f l i t i g a t i o n , and when t h e
p r i v a t e p r o p e r t y owner p r e v a i l s , by r e c e i v i n g
a n award i n e x c e s s of t h e f i n a l o f f e r of t h e
condemnor, t h e c o u r t s h a l l award n e c e s s a r y ex-
p e n s e s of l i t i g a t i o n t o t h e condemnee."
The t i t l e of t h e 1973 l e g i s l a t i v e a c t i n d i c a t e s s e c t i o n 93-9921.1
was d e s i g n e d t o implement A r t i c l e 11, S e c t i o n 29, of t h e 1972
Montana C o n s t i t u t i o n . C h a p t e r 453, Laws of 1973.
The new s t a t u t e and t h e new c o n s t i t u t i o n went i n t o e f f e c t
d u r i n g t h e t i m e t h i s s u i t was pending. The language of t h e new
p r o v i s i o n i s c l e a r l y b r o a d e r t h a n t h e former law, and " n e c e s s a r y
c o s t s of l i t i g a t i o n " i n c l u d e s e x p e r t w i t n e s s and a t t o r n e y f e e s .
T n e C o n s t i t u t i o n a l Convention n o t e s appended t o A r t . 11, Sec. 2 9 ,
of t h e 1 9 7 2 Montana C o n s t i t u t i o n , r e c i t e :
" R e t a i n s p r o v i s i o n s i n 1889 c o n s t i t u t i o n
[ A r t . 111, s e c . 1 4 1 on eminent domain and expands
i t s p r o t e c t i o n by g u a r a n t e e i n g t h a t a p r o p e r t y
owner who g o e s t o c o u r t and i s awarded more money
t h a n o f f e r e d f o r h i s p r o p e r t y b e i n g condemned
w i l l be r e i m b u r s e d f o r t h e n e c e s s a r y e x p e n s e s of
t h e l a w s u i t (such a s a p p r a i s e r and a t t o r n e y s f e e s ) . "
I t t h u s becomes n e c e s s a r y t o d e t e r m i n e whether o r n o t
t h e new law a p p l i e s t o a n a c t i o n p e n d i n g , when t h e r i g h t t o
expanded c o s t s became o p e r a t i v e . The S t a t e a r g u e s t h e q u e s t i o n
o f a p p l i c a b i l i t y i s c o n t r o l l e d by t h e t r a n s i t i o n s c h e d u l e which
g o v e r n s t h e change from t h e 1889 t o t h e 1972 C o n s t i t u t i o n . Sec-
t i o n 3 of t h a t s c h e d u l e p r o v i d e s :
"Any r i g h t s , p r o c e d u r a l o r s u b s t a n t i v e , c r e a t e d
f o r t h e f i r s t t i m e by A r t i c l e I1 s h a l l be p r o s -
p e c t i v e and n o t r e t r o a c t i v e . "
S i n c e p r i o r t o t h e a d o p t i o n of t h e 1972 C o n s t i t u t i o n and i t s
implementing l e g i s l a t i o n t h e r e was no r i g h t t o a t t o r n e y and
a p p r a i s e r ' f e e s a s a n element of c o s t s , t h e S t a t e a r g u e s t h a t
t h e new p r o v i s i o n s a r e p r o s p e c t i v e o n l y and c a n n o t be a p p l i e d
t o s u i t s commenced under t h e o l d law.
W e disagree. While t h e new s t a t u t o r y and c o n s t i t u t i o n a l
provisions a r e c l e a r l y prospective i n a p p l i c a t i o n , t h a t does not
prevent t h e i r application here. The r i g h t t o n e c e s s a r y c o s t s of
l i t i g a t i o n p r o v i d e d by s e c t i o n 93-9921.1, R.C.M. 1947, d o e s n o t
a r i s e when t h e s u i t i s f i l e d , b u t v e s t s o n l y when t h e p r i v a t e
p r o p e r t y owner p r e v a i l s , s e c u r i n g a v e r d i c t h i g h e r t h a n t h e S t a t e ' s
final offer. The r i g h t h e r e v e s t e d a f t e r t h e s t a t u t o r y and con-
s t i t u t i o n a l p r o v i s i o n s were o p e r a t i v e . Their prospective appli-
c a t i o n t h u s encompasses t h e p r e s e n t c a s e .
Our h o l d i n g h e r e i s i n a c c o r d w i t h t h e g e n e r a l r u l e ,
r e c o g n i z e d by c a s e law and t h e a u t h o r i t i e s . See, e.g. F e l l e r s
v . S t a t e Highway Commission, 214 Kan. 630, 5 2 2 P.2d 341; S t a t e ,
Department o f Mental H e a l t h v . Cholewinsk, 27 Conn. Sup. 286, 236
A.2d 339; 20 C.J.S. C o s t s § 3 ( b ) ; Annotation, 9 6 A.L.R. 1428. We
do n o t f i n d t h a t r u l e v a r i e d by t h e c o n s t i t u t i o n a l t r a n s i t i o n
schedule here. T h a t s c h e d u l e merely makes t h e a p p l i c a b i l i t y of
these c o s t s prospective. A s t h e landowners' r i g h t t o t h e s e c o s t s
d i d n o t a r i s e u n t i l t h e y p r e v a i l e d a t t r i a l , t h e d a t e of judgment
is controlling. The s t a t u t e and c o n s t i t u t i o n a l p r o v i s i o n s a u t h o r -
i z i n g i n c r e a s e d c o s t s were b o t h i n e f f e c t a t t h a t t i m e .
The S t a t e f u r t h e r c o n t e n d s t h a t , even i f s e c t i o n 93-9921.1
i s a p p l i c a b l e t o t h i s c a s e , c o s t s c a n n o t be a l l o w e d t h e r e u n d e r be-
c a u s e t h e r e was no " f i n a l o f f e r " by t h e S t a t e - - a condition prece-
d e n t t o a n award o f c o s t s .
S e c t i o n 93-9912, R.C.M. 1947, r e q u i r e s t h e d i s t r i c t c o u r t
judge t o a p p o i n t "condemnation commissioners" who a r e t o assess
t h e v a l u e of t h e t a k i n g . That a s s e s s m e n t c a n be a p p e a l e d under
t h e p r o v i s i o n s o f s e c t i o n 93-9915, R.C.M. 1947. These p r o c e d u r e s
were n o t f o l l o w e d . h e r e , and t h e S t a t e a r g u e s s e c t i o n 93-9921.1,
R.C.M. 1947, s p e a k s o f a f i n a l o f f e r o n l y i n t e r m s o f t h e o f f e r
it r e q u i r e s t o be made w i t h i n t h i r t y d a y s of t h e p e r f e c t i n g of
t h e a p p e a l from t h e commissioners' a s s e s s m e n t .
The r e c o r d c e r t i f i e d from t h e d i s t r i c t c o u r t d i s c l o s e s
n o t h i n g c o n c e r n i n g why t h e s e p r o c e d u r e s i n v o l v i n g a c o m m i s s i o n e r s '
a s s e s s m e n t were n o t f o l l o w e d . The S t a t e ' s a p p e l l a t e b r i e f a l l u d e s
t o a w a i v e r o f t h i s p r o c e d u r e , which we assume t o be t h e c a s e .
The q u e s t i o n t h u s p r e s e n t e d i s n o v e l . The d i s t r i c t c o u r t ,
a p p a r e n t l y w i t h t h e c o n s e n t of t h e p a r t i e s , f a i l e d t o f o l l o w a
mandatory s t a t u t o r y procedure--namely a p p o i n t i n g comrnissioners
and s u p e r v i s i n g t h e i r a s s k s s m e n t . Arguably, t h i s d e f e c t was c u r e d
by t h e s u b s e q u e n t d i s t r i c t c o u r t t r i a l a t which t h e i s s u e s which
s h o u l d have been p r e s e n t e d t o t h e commissioners w e r e d e t e r m i n e d .
Now t h e S t a t e s e e k s t o a v o i d i t s s t a t u t o r y l i a b i l i t y f o r n e c e s s a r y
c o s t s o f l i t i g a t i o n by a s s e r t i n g t h a t i t n e v e r made a f i n a l o f f e r
w i t h i n t h e meaning of s e c t i o n 93-9921.1, R.C.M. 1947, and t h a t i t
was n o t r e q u i r e d t o submit a f i n a l o f f e r b e c a u s e no c o m m i s s i o n e r ' s
h e a r i n g was h e l d .
To a d o p t such a t h e o r y h e r e would c o n t r a v e n e t h e i n t e n t
of t h e s t a t u t e and would v i o l a t e t h e c o n s t i t u t i o n a l mandate.
A r t i c l e 11, S e c t i o n 2 9 , 1972 Montana C o n s t i t u t i o n r e q u i r e s t h a t
a Landowner be compensated f o r n e c e s s a r y e x p e n s e s of l i t i g a t i o n
i f he p r e v a i l s . T h i s c o n s t i t u t i o n a l d i r e c t i v e c a n n o t be f r u s t r a t e d
by i n a d v e r t e n t o r i n t e n t i o n a l v i o l a t i o n s of s t a t u t o r y p r o c e d u r e .
There i s no s t a t u t o r y p r o h i b i t i o n a g a i n s t t h e S t a t e ' s
making a n o f f e r a t any t i m e p r i o r t o t r i a l . S e c t i o n 93-9921.1,
R.C.M. 1 9 4 7 , provides, i n p e r t i n e n t p a r t :
"The f a c t t h a t a n o f f e r i s made b u t n o t a c c e p t e d
does n o t preclude a subsequent o f f e r . "
'Yhus, t h e S t a t e c o u l d nave made a n o f f e r a t any t i m e p r i o r t o
t r i a l , whether o r n o t a commission h e a r i n g was h e l d . Accordingly,
w e f i n d t h e $3,460 o f f e r made p r i o r t o t h e f i l i n g of t h i s a c t i o n
w a s t h e S t a t e ' s f i n a l o f f e r under t h e f a c t s h e r e . Since t h e
u l t i m a t e award was f a r i n e x c e s s of t h a t o f f e r , t h e landowners
a r e e n t i t l e d t o an award of t h e i r n e c e s s a r y e x p e n s e s of l i t i g a t i o n .
The S t a t e a l s o c h a l l e n g e s t h e n e c e s s i t y of some of t h e
i t e m s of expense s u b m i t t e d i n t h e l a n d o w n e r s ' motion f o r c o s t s .
Without d e t a i l i n g t h e s p e c i f i c c l a i m s a l l e g e d by t h e S t a t e , w e
n o t e t h a t t h e y c e n t e r around t h e c h a r g e t h a t f e e s r e s u l t i n g from
e x h i b i t s and w i t n e s s e s n ~ produced a t t r i a l s h o u l d n o t be a l l o w e d .
t
W have reviewed t h e e n t i r e r e c o r d , i n c l u d i n g t h e h e a r i n g
e
on t h e motion f o r c o s t s , and f i n d t h a t t h e i t e m s c l a i m e d a s
n e c e s s a r y w e r e made u n n e c e s s a r y o n l y by t h e S t a t e ' s a d m i s s i o n
a t t r i a l t h a t t h e taking included t h e s a n i t a r y f a c i l i t i e s . The
c h a l l e n g e d expenses were i n c u r r e d when t h e landowners p r e p a r e d t o
prove t h a t very f a c t . Although t h e S t a t e ' s a d m i s s i o n r e l i e v e d
t h e landowners of t h e n e c e s s i t y of p r o o f , i t came t o o l a t e t o a v o i d
l i a b i l i t y f o r expense i n c u r r e d i n p r e p a r i n g t h a t p r o o f .
The proceedings at the Constitutional Convention 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 landowners was the original amount
offered, $3,460. The jury fixed the award to the landowners at
$68,000, a difference of $64,540. The contract between the land-
owners and their attorneys provided for an attorneys' fee of 25%
of the increased value secured by the attorneys and proof of the
reasonableness of this percentage was made at the hearing. The
award of attorneys' fees was reasonable under these facts and
necessary to make the landowners whole.
Accordingly, the $68,000 judgment in favor of the land-
owners is affirmed. The denial of necessary expenses of liti-
gation 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.
Justice
1 : . *. i
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Chief Justice