Saturday, December 16, 2006, 11:09 AM

Lost Profits Inadmissible In Eminent Domain Arena

On Friday, the NC SC, in Department of Transportation v. M.M. Fowler, Inc., established a bright-line rule that evidence of lost profits is inadmissible in condemnation cases for purposes of determining fair market value of the land remaining after a partial taking.


In M.M. Fowler, the DOT took property from a Durham gas station in order to make improvements to an intersection. The DOT's taking resulted in a decrease in the gas station's number of driveways from 3 to 2, and 1of the 2 remaining post-taking driveways was steeper, shorter, and "not as well-positioned" as before the taking. Evidence was presented that convenience is one of the most important factors in determining the value of land used for a gas station and that, as a result of the taking, it was less convenient for customers to access the gas station. M.M. Fowler also presented evidence that the profit margin on each gallon of gas sold dropped 4 cents in the 5 months after the taking, and, based on that data, presented evidence that the fair market value of the property dropped by $500 K after the taking.

At trial, the judge allowed the lost profits evidence in but instructed the jury that it was not to award damages for any loss in business income but only for diminished value of the property. The Court of Appeals unanimously upheld the trial court's decision. On Friday, the Supreme Court reversed.

The Majority

At issue was whether evidence of the gas station's lost profits was allowed to be considered in determining the fair market value of the land remaining after the taking. The majority answered no, that "evidence of lost business profits is inadmissible in condemnation actions."

It was not disputed that where a party's land is the subject of a DOT taking, that party is entitled to just compensation consisting of the difference between the fair market value of the entire tract immediately before the taking and the fair market value of the land remaining immediately after the taking. N.C. Gen. Stat. § 136-112. It was also not disputed that the party is not entitled to compensation for lost business profits.

At issue in M.M. Fowler was whether lost profits evidence could come in for the purpose of informing fair market value. To reach its answer, the majority looked to Pemberton v. City of Greensboro, 208 N.C. 466, 181 S.E. 258 (1935), in which the plaintiffs sought compensation for their sheep farm. The Pemberton plaintiffs proffered evidence of the farm's monthly earnings before the taking. The trial court let the evidence in, with limiting instructions, but the Supreme Court held it was "manifest from the court's rulings and the jury's verdict that plaintiffs [were] awarded compensation for the loss of their dairy business." (The dissent, discussed more below, pointed out that Pemberton did not address whether evidence of such lost earnings was admissible for determining fair market value of post-taking property.)

The M.M. Fowler majority also indicated that under Kirkman v. State Highway Commission, 257 N.C. 428, 126 S.E.2d 107 (1962), the non-quantitative evidence of lost profits may be generally considered in determining whether there has been a diminution in value in the land remaining after a partial taking-- even though quantified evidence of lost business profits is not admissible.

The majority then held that because here, evidence, and quantified evidence, of lost profits was allowed in, a new trial was warranted.

The majority seems to conflate (i) allowing evidence of lost profits in for the purpose awarding damages on lost profits and (ii) allowing evidence of lost profits in for purposes of determining the fair market value of the post-taking property. Indeed, the majority stated "There is no difference between using lost profits to determine the fair market value of the land and awarding them as a separate item of damages."

The majority also seems to have taken particular issue with the "quantified" nature of the admitted lost profits evidence in this case, indicating that evidence of unquantified lost business profits may be generally considered in determining a decrease in the value of the land remaining after a partial taking. It will be interesting to see what the courts deem to be permissible non-quantified data in the context of profits and property values, which would seem to be inherently quantitative.

The majority indicated that evidence of lost profits is inadmissible not just, e.g., because they are irrelevant as a matter of law, but also because of their speculative nature. The opinion included language such as "the speculative nature of profits makes them improper bases for condemnation awards[,]" and "the uncertain character of lost business profits evidence could burden taxpayers with inflated jury awards bearing little relationship to the condemned land's fair market value." Do such statements spell trouble for the admissibility of lost profits in other contexts, too, since speculative damages evidence is generally not admissible?

The Dissent

Justices Martin, Wainwright, and Timmons-Goodson dissented. The dissent's leitmotiv: Evidence of lost profits is relevant to determining fair market value where the property at issue directly contributes to the revenue derived from that property.

The dissent stated, e.g., that "the majority's result is fundamentally at odds with the statutory objective of N.C.G.S. § 136-112: To compensate the 'unwilling' seller with fair market value. That is, since the income potential of revenue-producing property is the most important characteristic in establishing the value for a voluntary exchange, the majority opinion excludes, as a matter of law, the very information that a willing buyer would want to know about this property."

The dissent indicated that the majority, rather than explaining or reconciling Kirkman, overruled it. According to the dissent, Kirkman distinguished between using lost profits to inform market value and recovering lost profits themselves as damages. The dissent noted, inter alia, Kirkman's language that "when the taking renders the remaining land unfit or less valuable for any use to which it is adapted, that fact is a proper item to be considered in determining whether the taking has diminished the value of the land itself."

The dissent also noted that a number of prior (albeit perhaps rental income focused) NC cases have held evidence of lost revenues or profits admissible for informing market value. The dissent argued that the General Assembly didn't change the eminent domain law after those cases and therefore approved of the prior interpretation allowing such revenue evidence in. According to the dissent, this case therefore not only overruled Kirkman but subverted legislative intent.

Legislative Action?

Does the dissent's legislative intent argument foreshadow potential legislative change specifying how fair market value may be calculated? Particularly in this post-Kelo v. City of New London (for more, click here) period of sensitivity about the fact that the "public" purpose underpinning a government taking can include high-end condos and a hotel, eminent domain issues may have legislative legs.


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