California Eminent Domain Report

One of the peculiarities with California's eminent domain law lies with the way it addresses situations in which an agency makes a deposit of probable compensation in a case in which one or more of the defendants raise a right-to-take challenge. 

The issue came to a head yet again, with the California Supreme Court holding that a lender's withdrawal of a condemnation deposit does not result in a waiver of the property owner's right to take challenge.  The decision, Los Angeles County Metropolitan Transpiration Authority v. Alameda Produce Market (November 14, 2011), chronicles the long and twisted history of this area of the law, but in the end, the Court struggles with the real problem:  the law, as written, fails to address properly the two key policy concerns at play. 

The deposit of probable compensation plays a key role in eminent domain cases.  It establishes the date of value in most cases, but we sometime forget why the deposit is used to set the date of value.  The deposit represents an approximation of the property's value.  By the agency's making a deposit which quickly becomes available to the property owner, the owner gains the chance to keep those funds in the real estate market. 

This is crucial, because it allows - at least theoretically - the owner to maintain its position in the real estate market.  The idea is simple:  the owner can withdraw the deposit of probable compensation, invest that money in another property, and still enjoy the benefits of market appreciation.  Thus, by providing the owner with the capital to reinvest as of the deposit date, it is "fair" to use that date as the date of value. 

Of course, it doesn't always work this way, and agency's are often accused of making woefully inadequate deposits that prevent the owner from investing in comparable property.  And, of course, there is always a delay between the date of deposit and the date on which the owner has the funds available and can secure replacement property.  But conceptually at least, the idea makes sense. 

Where a right-to-take challenge combines with a deposit, however, another key policy concern comes into play.  Condemning agencies have a legitimate interest in not having deposits withdrawn only to later lose a right-to-take challenge, leaving them trying to pursue the party that withdrew the deposit.   This risk is unfair to the agency.

Thus, the basic rule:  for a party to withdraw a condemnation deposit, they must waive their right-to-take challenge.  (See Code of Civil Procedure section 1255.260.)   But this rule misses both key policies.  On the one hand, it prevents someone with a legitimate right-to-take challenge from withdrawing the deposit and using that money to invest in replacement property.  Yet this does not prevent the deposit from establishing the date of value, meaning the owner can "miss" a rising market.

On the other hand, as the Court held in the Alameda Produce case, where the party withdrawing the deposit is not the same as the party making the right-to-take challenge, no waiver occurs.  Thus, the agency faces the real risk that Party A will walk away with the money, never to be seen again, while Party B pursues its right-to-take challenge which, if successful, places the agency at huge financial risk. 

There's a very simple solution to all of this, and the Supreme Court mentioned it.  Instead of speaking in terms of waiver, all the law needs to do is ensure that if a condemnation deposit is withdrawn while a right-to-take challenge is pending, the withdrawal must be bonded.  This

1. Secures the agency's money,
2. Allows the withdrawing party to utilize the funds to reinvest, and
3. Allows legitimate right to take challenges to proceed, all while 
4. Allowing us to preserve the idea that the deposit date is properly used as the date of value. 

Current law creates no such mandatory bonding, leaving both key policy interests unprotected.  In the end, I think the Legislature should step up and modify these rules so that they in fact protect the two key policy interests in play.  Alternatively, our trial courts should be prepared to deny all requests for withdrawals of condemnation deposits until (1) all right to take challenges are resolved or (2) the money withdrawn is properly bonded.  

Absent that, we are in for yet more cases where either the owner is put to the unfair choice of missing the opportunity to use the condemnation deposit or abandoning a right to take challenge, or the agency is placed at risk of losing its condemnation deposit where one party withdraws the money as another challenges right to take.