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County of Kaua'i v. Hanalei River Holdings Ltd.

Supreme Court of Hawaii

May 16, 2017

COUNTY OF KAUA'I, Respondent/Plaintiff-Appellee,
v.
HANALEI RIVER HOLDINGS LIMITED, a Cook Islands corporation; MICHAEL GUARD SHEEHAN; Petitioners/Defendants-Appellants, and PATRICIA WILCOX SHEEHAN, as Trustee of that certain unrecorded Revocable Trust Agreement of Patricia Wilcox Sheehan, dated December 21, 1994; PATRICIA WILCOX SHEEHAN; GAYLORD H. WILCOX; DANIEL H. CASE; GROVE FARM COMPANY, INC., a Hawai'i corporation; HUGH W. KLEBAHN; DONN A. CARSWELL; PAMELA W. DOHRMAN; ROBERT D. MULLINS; WILLIAM D. PRATT; RANDOLPH G. MOORE; and the Heirs and/or Assigns of JOHN B. BROSSEAU, also known as JOHN BROSSEAU, JOHN B. BRASSEAU and J.B. BRASSEAU; Respondents/Defendants-Appellants.

         CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS (CAAP-14-0000828; CIV. NO. 11-1-0098)

          Richard E. Wilson for petitioners

          Mauna Kea Trask, Rosemary T. Fazio, and James K. Mee for respondent County of Kaua'i

          RECKTENWALD, C.J., NAKAYAMA, McKENNA, POLLACK, AND WILSON, JJ.

          OPINION

          NAKAYAMA, J.

         I. INTRODUCTION

         This case concerns the condemnation of three parcels of privately-owned property and presents the following three issues: (1) whether two parcels of land must physically abut in order for a condemnee to be entitled to severance damages when one of the parcels is condemned; (2) whether blight of summons damages only begin to accrue after each condemnee has established its entitlement thereto and; (3) whether a condemnor may withdraw a portion of its estimate of just compensation based on an updated estimate of the property's value, after the deposit has been made and the condemnor has taken possession of the property.

         For the reasons stated below, we hold that: (1) the presence or lack of physical unity is not dispositive of whether a condemnee is entitled to severance damages; (2) a deposit of estimated just compensation does not become conditional, and blight of summons damages do not begin to accrue, when a condemning authority objects to a condemnee's motion to withdraw funds based on the fact that the condemnee's entitlement to such funds is unclear and; (3) the court in an eminent domain proceeding has the discretion to permit a governmental entity to withdraw a portion of a deposit of estimated just compensation when the deposit has not been disbursed to the landowner, the government acted in good faith in seeking to adjust the estimate to accurately reflect the value of the property on the date of the summons, and the adjustment will not impair the substantial rights of any party in interest.

         Therefore, we affirm the Intermediate Court of Appeals's May 11, 2016 judgment on appeal entered pursuant to its March 31, 2016 published opinion, which affirmed the Circuit Court of the Fifth Circuit's (circuit court) final judgment except with regard to the award of blight of summons damages, but on different grounds with regard to the defendants' entitlement to severance damages.

         II. BACKGROUND

         This case concerns the condemnation of three parcels of privately-owned land (Parcels 33, 34, and 49). In October 2004, Michael G. Sheehan (Sheehan) acquired his ownership interests in Parcels 33 and 34 from the Patricia Wilcox Sheehan Trust. At that time, a portion of Parcel 49 was also a part of Parcel 33. Parcel 49 was later created through consolidation and re-subdivision of neighboring lands. On October 19, 2011, Sheehan transferred ownership of Parcels 33 and 34 to Hanalei River Holdings, Ltd. (HRH), but retained his fee simple title to Parcel 49. Geographically, the subject area consists of "three adjoining irregular shaped parcels[, ]" Parcels 49, 33 and 34 respectively, "located along the east side and toward the end" of a road in Hanalei, Kaua'i. "Parcels 33 and 34 [are both adjacent to each other, and] front along the Hanalei River along their northern boundaries while Parcel 49 is one lot removed from the river."

         Although it is not being condemned by the County of Kaua'i (the County), a piece of property referred to by the parties as Area 51 is also relevant to this case. Area 51 includes land immediately to the east of Parcel 34. Area 51 is also a part of Lot 127, owned by Patricia Wilcox Sheehan.[1] In 2004, Patricia Wilcox Sheehan granted Sheehan an easement over Area 51 to operate a boatyard. This easement provided in pertinent part:

AND THE GRANTEE does hereby covenant and agree:
(1) That Grantee his successors and assign's easement to use the premises shall be limited solely for a boat baseyard as that use is permitted by the 'Decision and Order' of the Planning Commission of the County of Kauai, under its Special Management Area Use Permit, SMA(U)-87-8; Special Permit SP-87-9; Use Permit U-87-32, and Class IV Zoning Permit Z-IV-87-40, dated June 24, 1987.
(3) That in the event the Special Management Area Use Permit, SMA(U)-87-8; Special Permit SP-87-9; Use Permit U-87-32, and Class IV Zoning Permit Z-IV-87-40, and the authority to use the easement premises as a boat baseyard is withdrawn, cancelled or revoked by the Planning Commission of the County of Kauai, State of Hawai'i, this 'Grant of Easement' shall expire and be null and void upon the recordation at the Bureau of Conveyances of the State of Hawai'i, of a certified copy of said action of the Kauai County Planning Commission disallowing any further use of the premises for a boat baseyard.

         Sheehan's permits to operate a boatyard were revoked in 2010. Sheehan v. Cty. of Kaua'i, 134 Hawai'i 132, 337 P.3d 53 (App. 2014); Sheehan v. Cty. of Kaua'i, No. SCWC-11-601 (Haw. Jan. 16, 2015) (order rejecting application for writ of certiorari); Although Area 51 has not been designated by the County as a separate lot of record, it has been considered a separate lot of record for tax purposes as TMK No. (4) 5-5-01:51.

         A. Circuit Court Proceedings

         On May 31, 2011, the County filed a complaint and summons in the circuit court to condemn Parcels 33, 34, and 49 for use as a public park. In the County's subsequently filed first amended complaint, HRH, Sheehan, and Patricia Wilcox Sheehan were listed among others as those who might have or claim some right, title, or interest in the Parcels.

         On April 30, 2012, the County filed an ex parte motion for an order putting plaintiff in possession pursuant to Hawai'i Revised Statutes (HRS) § 101-29. After the circuit court[2] granted the County's motion in an order filed on May 4, 2012, the County deposited estimated just compensation of $5, 890, 000 with the clerk of the court.

         On July 3, 2012, Patricia Wilcox Sheehan filed an answer to the County's first amended complaint, which asserted that she is the "owner of the fee simple interests, easements, rights of way or the express contingent remainder man [sic], to all or portions of the real property" identified as Parcels 33, 34, and 49. Patricia Wilcox Sheehan requested that the circuit court dismiss the complaint, and if it did not, that

the respective interests of all Defendants in the property be determined and that appropriate orders be entered thereon, and that the Court determine and award the just compensation, including but not limited to blight of summons, to which Patricia W. Sheehan is entitled by virtue of the taking, and severance damages to the remaining property.

         On August 16, 2012, HRH moved the circuit court to vacate the aforementioned order of possession because the initial appraisal of the subject property was seven months old on the date of summons, and consequently, HRH alleged it was "stale as a matter of law and did not in good faith represent the reasonable fair market value of the property." The circuit court denied HRH's motion on September 13, 2012.

         On March 11, 2013, the defendants filed an application for payment of estimated compensation pursuant to HRS §§ 101-31 and -37. The memorandum in support of the motion asserted that Sheehan was the legal owner of Parcel 4 9 and that HRH was the legal owner of Parcels 33 and 34. Patricia Wilcox Sheehan filed a statement of no position regarding HRH and Sheehan's application.

         The County filed a memorandum in opposition to HRH and Sheehan's application on April 2, 2013. The County argued that HRH and Sheehan should not be allowed to withdraw the deposit until the respective interests of all the defendants was judicially determined. The County noted that Patricia Wilcox Sheehan, HRH, and Sheehan all had asserted an interest in the deposited money.

         Additionally, in the same memorandum, the County noted that it was filing a separate motion to withdraw a portion of the deposit, based on an updated appraisal that reflected a lower estimate of compensation at $4, 860, 000. The County asserted that it "should not be jeopardized by having Movants withdraw more than the actual estimated value of the condemned property" because "[o]nce Movants withdraw [all] the money, the County would have no reliable means of recouping any excess payment."

         On the same date that the County's opposition to HRH and Sheehan's application was filed, the County also filed a motion to withdraw $1, 030, 000 from the amount it had deposited with the clerk of the court in light of the second appraisal. Citing University of Hawaii Professional Assembly v. University of Hawaii, 66 Haw. 214, 221, 659 P.2d 720, 725 (1983), the County contended that "[p]ursuant to the doctrine of quasi estoppel, [the defendants] cannot now object to the County's obtaining an updated appraisal as of the date of summons[, ]" because they had objected to the County's reliance upon the previous appraisal.[3]

         On April 5, 2013, Patricia Wilcox Sheehan filed a waiver and release of any claims or interest in the proceeds payable by the County and consented to the disbursement of the proceeds to HRH and Sheehan. And on April 10, 2013, the County, HRH, and Sheehan entered into an agreement regarding the withdrawal of the deposit. In addition to an agreement that the County would stipulate that Sheehan and HRH could withdraw $4, 860, 000, Sheehan agreed to indemnify the County if HRH failed to repay any money that exceeded the jury verdict on Parcels 33 and 34. That same day, the parties filed a stipulation agreeing that Sheehan and HRH could withdraw $4, 860, 000 (the amount of the second appraisal) minus taxes, to be apportioned among the three parcels as stated in the stipulation.

         On April 22, 2013, the defendants filed a motion in opposition to the County's motion to withdraw a portion of the deposit, alleging that there is no provision in HRS Chapter 101 permitting the County to offer a new estimate as a basis for withdrawing funds after it had already seized the subject property and the condemnees have applied for release of the funds, that the defendants consequently waived all defenses to the condemnation action besides an assertion of greater compensation or damages, and that the funds deposited constituted an estimate of the subject property's value at the time the County seized the property. Following a hearing, the County's motion to withdraw $1, 030, 000 was granted on May 13, 2013.

         The circuit court's scheduling order for trial required Sheehan and HRH to produce their appraisal reports of the properties. In the defendants' expert report, Sheehan and HRH's valuation expert, Paul Cool (Cool), provided valuation estimates for Parcels 33, 34, and 49. Additionally, Cool also included a valuation of damages to Area 51 in his report. Specifically, Cool's report stated,

Area 51 consists of the lands immediately east of Parcel 33. [4] In the past, Michael G. Sheehan has used this area, together with Parcels 33 and 34 as a boatyard and in conjunction with boat and ocean activity operators from the property since the late 1980s. Improvements include:
-Canoe pavilion with kitchen
-Restroom facility
-Outdoor shower
-Boat wash down facility.
Over the years, the relationship between Mr. Sheehan and the County with regards to these operations have been contentious. The County has challenged and continues to challenge the legality of operations. Matters are pending before the State of Hawai'i Intermediate Court of Appeals.
The taking of the three Hanalei River parcels will require operations to be consolidated onto Area 51. While having no contributory value to the highest and best use of the three Hanalei River parcels, the improvements on Parcels 33 and 34 are integral to continued activities that remain on Area 51.

         Cool opined that Area 51 suffered severance damages in an amount of $250, 000 to $300, 000 caused by the taking of Parcels 33, 34 and 49. Prior to Cool's report, neither HRH nor Sheehan asserted a claim for severance damages in their answers, their pretrial statement, or elsewhere in the record. Sheehan claims an interest in Area 51 due to the boatyard easement that was granted to him by Patricia Wilcox Sheehan in 2004.

         On August 13, 2013, the County moved for partial summary judgment against HRH and Sheehan on the issue of severance damages. On September 3, 2013, HRH and Sheehan opposed the motion, and supported the opposition with a declaration from counsel, an unsigned declaration from Sheehan, [5] and a Parcel history report for Area 51.[6] The circuit court granted the County's motion based on its finding, inter alia, that Area 51 and Parcel 49 did not meet the three unities test as set forth in City and County of Honolulu v. Bonded Investment Co., 54 Haw. 523, 525, 511 P.2d 163, 165 (1973) [hereinafter "Bonded Inv. II"], as there was neither unity of title, physical unity, nor unity of use between Parcel 49, the condemned parcel, and Area 51, the area in which Sheehan had asserted a right to severance damages.

         Jury trial began on November 4, 2013, and the jury reached a decision on the condemnation action on November 8, 2013. The jury awarded compensation for each of the three Parcels, valuing Parcel 33 at $2, 030, 000, Parcel 34 at $3, 016, 000, and Parcel 49 at $754, 000. The verdict thus totaled $5.8 million.

         On November 18, 2013, the County filed its motion for blight of summons damages. The County asserted that damages should be measured for two time periods:

(1) from May 31, 2011 (the date of summons) until May 4, 2012 (the date the County deposited estimated just compensation of $5.89 million pursuant to the Order putting the County into possession) measured at 5% simple interest/year on the jury verdict of $5.8 million, and (2) from April 29, 2013 (the date of entry of the Order Granting the County's Motion to Withdraw Portion of Deposit) until the date the County pays Defendants $940, 000, which is the difference between $4.86 million and the jury verdict.

         In their response, Sheehan and HRH agreed that the first time period on the $5.8 million jury verdict should be calculated from May 31, 2011 through May 4, 2012. However, the defendants contended that because the County moved to reduce the initial estimate deposited with the court, the deposit was not an unconditional deposit that was exempt from interest, and that therefore, the proper calculation for the interest on the $940, 000 difference is from May 4, 2012 through the date that the County paid the defendants in full.

         At a hearing on the State's motion held on January 8, 2014, the circuit court found that the County's deposit was unconditional and that the blight of summons damages stopped accruing on May 4, 2012. The circuit court granted the County's motion for blight of summons damages on January 16, 2014, and on April 25, 2014, the circuit court issued its final judgment. The circuit court concluded that total just compensation for the condemned property was $5.8 million, and "[a]s additional just compensation, blight of summons damages at the rate of five percent (5%) per annum (without compounding) accrued" from "May 31, 2011 until County deposited $5, 890, 000 with the Clerk of Court, " and from April 29, 2013 until the County paid the defendants in full.

         B. Intermediate Court of Appeals Proceedings

         The defendants appealed to the Intermediate Court of Appeals (ICA) and asserted three points of error: (1) "The trial court erred when it permitted the County to withdraw a portion of the estimate of just compensation after Defendants-Appellants applied for its release"; (2) "The trial court erred when it granted summary judgment in favor of the County on the issue of severance damages"; and (3) "The trial court erred in its calculation of blight of summons damages."

         The ICA vacated the circuit court's award for blight of summons damages and affirmed the circuit court in all other respects. Cty. of Kaua'i v. Hanalei River Holdings, Ltd., 137 Hawai'i 471, 474, 375 P.3d 250, 253 (App. 2016). Addressing the circuit court's order allowing the County to withdraw a portion of its estimated just compensation, the ICA reviewed HRS §§ 101-29, -30, and -31 and noted that the statutes do not expressly authorize the withdrawal of a portion of the deposit. Id. at 479-80, 375 P.3d at 258-59. However, the ICA held that HRS § 101-19 "provides the court in an eminent domain action with broad authority to permit amendments to the proceeding . . . [and] authorized the circuit court to allow amendments , in form or substance' of processes, motions, or other proceedings, as long as the ''amendment will not impair the substantial rights of any party in interest.'" Id. at 480, 375 P.3d at 259 (footnote omitted).

         The ICA also held that under federal case law, which was cited favorably by this court in City and County of Honolulu v. Bonded Investment Co., 54 Haw. 385, 507 P.2d 1084 (1973) [hereinafter "Bonded Inv. I"], the government is allowed to withdraw the excess of the cash deposited following a revised estimate of just compensation. Id. at 481, 375 P.3d at 260 (citing United States v. 1, 997.66 Acres of Land, More or Less, in Polk Cty., Iowa, 137 F.2d 8, 13 (8th Cir. 1943)). The ICA concluded:

Based on HRS § 101-19 and persuasive federal case law, we hold that the court in an eminent domain proceeding may permit a governmental entity to withdraw a portion of the estimated just compensation deposit that has not been dispersed to the landowner when the governmental entity, acting in good faith, seeks to adjust the estimate to accurately reflect the value of the property on the date of summons and the adjustment will not impair the substantial rights of any party in interest.

Id.

         Applying the new standard to this case, the ICA concluded that the circuit court did not abuse its discretion in allowing the County to withdraw part of its deposit because (1) the deposit had not been disbursed yet; (2) the County appeared to have acted in good faith because the withdrawal was based on an updated appraisal, which the defendants had previously requested; and (3) the withdrawal of a portion of the estimated just compensation did not impair the defendants' substantial rights. Id. at 481-82, 375 P.3d at 260-61.

         Regarding severance damages, the ICA first held that Sheehan's unsigned declaration, the sole paper upon which the defendants relied to raise a genuine issue of material fact, did not constitute admissible evidence under Rule 56(e) of the Hawai'i Rules of Civil Procedure (HRCP) because it violated Rule 7(g) of the Rules of the Circuit Courts of the State of Hawai'i, which sets forth the requirements for when a declaration may be submitted in lieu of an affidavit. Id. at 483, 375 P.3d at 262. The ICA also rejected Sheehan's contention that, under Bonded Inv. II, there is no requirement that all of the pertinent lots physically abut one another in order to meet the three unities test. Id. The ICA concluded that no genuine issue of material fact existed as to Sheehan's inability to satisfy the three unities test, and that therefore, Sheehan was not entitled to severance damages for Area 51 as a matter of law. Id. at 483-84, 375 P.3d at 262-63.

         As for blight of summons damages, the ICA noted that the only issue raised on appeal was whether the County's deposit of estimated just compensation was conditional, such that the deposit did not stop accruing interest. Id. at 485, 375 P.3d at 264. The ICA determined that at the time the deposit was made, there were no express conditions placed on the deposit. Id. The ICA also held that the County's opposition to the defendants' withdrawal of the deposit based on lack of clear title was not a condition because, pursuant to HRS § 101-31, "a party must be entitled to the just compensation in order to receive payment of the estimated amount deposited with the court. Requiring a party to demonstrate entitlement to the money does not constitute placing a condition upon the deposit." Id. at 486, 375 P.3d at 265.

         Following this reasoning, the ICA concluded that it was not until April 5, 2013 when Patricia Wilcox Sheehan waived any interest in the just compensation that "it became clear that the Sheehan Defendants were the parties entitled to just compensation." Id. at 487, 375 P.3d at 266. However, the ICA held that the deposit became conditional because the County did not agree to release the deposit until April 10, 2013, which is when Sheehan agreed to indemnify the County. Id. Therefore, the ICA concluded that blight of summons damages were as follows: (1) from May 31, 2011 to May 4, 2012, 5% interest per annum on the $5.8 million jury verdict; (2) from April 5, 2013 to April 10, 2013, 5% ...


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