ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION EMINENT DOMAIN

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION EMINENT DOMAIN UPDATE 2009

Valuing and Acquiring Environmentally Contaminated Properties Lenny D. Asaro, Esq. Rebekah Czerwionka, Law Clerk and J. D. Candidate 2010, Chicago-Kent College of Law

United States Constitution Fifth Amendment “…nor shall private property be taken for public use, without just compensation. ”

State of Illinois Constitution Article I, Section 15 “Private property shall not be taken or damaged for public use without just compensation as provided by law. Such compensation shall be determined by a jury as provided by law. ”

735 ILCS 30/10 -5 -60 “Except as to property designated as possessing a special use, the fair cash market value of property in a proceeding in eminent domain shall be the amount of money that a purchaser, willing, but not obligated, to buy the property, would pay to an owner willing, but not obliged, to sell in a voluntary sale. ”

Illinois Pattern Jury Instruction (Civil) (IPI) – 300. 80 Just Compensation “When I use the words ‘Just Compensation’ for the defendant’s property which [will be] [has been] taken, I mean the fair cash market value of the property at its highest and best use on [INSERT FILING DATE OF COMPLAINT]. ”

Illinois Pattern Jury Instruction (Civil) (IPI) – 300. 81 Fair Cash Market Value “When I use the words ‘fair cash market value’ I mean that price which a willing buyer would pay in cash and a willing seller would accept, when the buyer is not compelled to buy and the seller is not compelled to sell. ”

Illinois Pattern Jury Instruction (Civil) (IPI) – 300. 84 Highest and Best Use “When I use the expression ‘highest and best use’ of property I mean that use which would give the property its highest cash market value on [INSERT FILING DATE OF COMPLAINT]. [This may be the actual use of the property on that date or a use to which it was then adaptable and which would be anticipated with such reasonable certainty that it would enhance the market value on that date. ]”

735 ILCS 30/10 -5 -50, formerly known as 735 ILCS 5/7 -119, effective January 1, 1998 “Evidence is admissible as to… (2) any unsafe, unsanitary, substandard, or other illegal condition, use, or occupancy of the property, including any violation of any environmental law or regulation; … and (4) the reasonable cost of causing the property to be placed in a legal condition, use, or occupancy, including compliance with environmental laws and regulations. Such evidence is admissible notwithstanding the absence of any official action taken to require the correction of abatement of the illegal condition, use, or occupancy. ” (Emphasis added)

Illinois Dept. of Transp. v. Parr, 259 Ill. App. 3 d 602 (3 rd Dist. 1994) • Question: Whether IDOT may introduce alleged environmental remediation costs at eminent domain proceedings in determining the fair market value of the subject property? • Answer: No. • Reasons: – Remediation costs, standing alone, have no direct bearing on the valuation of condemned property; and – Admission of remediation costs would violate due process rights of property owners under the Illinois Environmental Protection Act.

Parr • Facts: – – – – Dennis & Betty Parr Subject Property abutted the Illinois River at 412 Southwest Washington Street, Peoria, IL Robert H. Michel bridge $100, 000 in environmental remediation costs Complaint Motion to dismiss – failure to make good faith offer of just compensation Quick-take motion Quick-take hearing IDOT valued the subject property at $0 due to remediation costs Trial court rejected IDOT’s allegation of environmental hazards and remediation costs – awarded $40, 700 to the Parrs IDOT took possession of the subject property Illinois Environmental Protection Agency investigated and took corrective action IDOT and the Agency reached agreement on remediation to alleviate contamination Parr’s motion in limine Motion granted Certified question for appeal

735 ILCS 5/7 -119, effective July 1, 1982 “Evidence is admissible as to… (2) any unsafe, unsanitary, substandard or illegal condition, use or occupancy or the property; …and (4) the reasonable cost of causing the property to be placed in a legal condition, use or occupancy. Such evidence is admissible notwithstanding the absence of any official action taken to require the correction or abatement of such illegal condition, use or occupancy. ”

Parr • Legal Analysis – 735 ILCS 5/7 -119, effective July 1, 1982 – Existence of conditions on the property v. the costs to provide a remedy for such alleged conditions on the property – Section 7 -119 does permit the admission of remediation costs where: (a) there is proof of an underlying illegal condition to justify the costs and (b) the property owner’s procedural due process rights pursuant to the IEPA are not violated.

1994 - 1997 Crickets: Chirp, chirp…

735 ILCS 30/10 -5 -50, formerly known as 735 ILCS 5/7 -119, effective January 1, 1998 “Evidence is admissible as to… (2) any unsafe, unsanitary, substandard, or other illegal condition, use, or occupancy of the property, including any violation of any environmental law or regulation; … and (4) the reasonable cost of causing the property to be placed in a legal condition, use, or occupancy, including compliance with environmental laws and regulations. Such evidence is admissible notwithstanding the absence of any official action taken to require the correction of abatement of the illegal condition, use, or occupancy. ” (Emphasis added)

What about procedural due process rights under the IEPA?

1998 – June 12, 2009 Crickets: Chirp, Chirp…

Northeast Ct. Economic Alliance, Inc. v. ATC Partnership, 776 A. 2 d 1068 (2001) • Holding: Evidence of environmental contamination and remediation costs is relevant to the valuation of the real property taken by eminent domain.

ATC Partnership, Inc. • Facts: – – – Windham, CT 40 acres Previously used as a textile mill Release of hazardous waste Prior owner agreed to remediate hazardous waste discharge No manufacturing activity occurred while the condemnee owned the property – Environement Site Assessments: • presence of asbestos containing materials and the conditions of these materials; • presence of lead-containing materials, like lead paint and conditions of those materials; and • soil contamination by PCBs and petroleum substances – Condemnor offered $1 – Filing of complaint/statement of compensation – Review of complaint

ATC Partnership, Inc. • § 8 -132: required the report of the referee in the condemnation proceeding to “take into account any evidence relevant to the fair market value of the property, including evidence of environmental condition and required environmental remediation” • 735 ILCS 5/7 -119

What elements of value affecting price would an owner or prospective purchaser reasonably consider? • Environmental contamination • Remediation costs

Split of Authority • Majority of jurisdictions have concluded that such evidence is admissible • Two approaches that favor inclusion of evidence of environmental contamination and remediation costs: – 1 st Approach: As a factor affecting the fair market value of the property, evidence of environmental contamination and remediation costs is admissible. – 2 nd Approach: If there is a sufficient factual predicate upon which to conclude that the contamination affected market value. • Supreme Court of Connecticut adopts the 1 st Approach • Refusing to follow either approach is likely to result in a fictional property value, which is inconsistent with the principles by which just compensation is calculated.

Factors Making Property Less Attractive to Prospective Buyers • Remediation costs • Potential liability under various environmental statutory schemes • Potential litigation brought by members of the public for damages • Stigma even after full remediation • Higher financing costs • Increased regulation

Fact or Fiction? • Parcel A – No environmental contamination – Market value of $5 M • Parcel B – Environmental contamination – Remediation cost of $2 M – Market value as clean of $5 M

ATC Partnership, Inc. • The Court rejected the notion that the issue of fault overcomes the issue of the condition of the property and the value of the property based on that condition. • The Court was not persuaded by Parr. • The issue of fault is not an issue in a condemnation proceeding.

Housing Authority of the City of New Brunswick v. Suydam Investors, LLC, 177 N. J. 2 (2003) • Holding: – Contaminated property is to be valued as if it has been remediated; and – Condemnor may then seek an order requiring a portion of the award to be set aside to satisfy the condemnee’s clean-up and transfer obligations

Suydam Investors, LLC • Facts: – Three parcels of land in downtown New Brunswick – Residential and commercial – Phase I Report: • • USTs Automobile body repair and service business Spill of hazardous substances on adjoining property Asbestos and lead-based paint – Condemnor’s appraisal in support of the offer – no consideration of potentially hazardous material – Filing of condemnation action – Phase II Report

Suydam Investors, LLC • Law: – Where property to be condemned is or may be environmentally unsound, other laws come into play. • Federal and State Statutes impose liability on present and past owners for discharge of hazardous substances. See Comprehensive Environmental Response, Compensation, and Liability Act, 42 U. S. C. A. §§ 9601 to 9675 (CERCLA); New Jersey Spill Compensation and Control Act (Spill Act); Industrial Recovery Act.

Interplay • Eminent Domain Act • Federal and State Statutes that impose liability on present and past owners for discharge of hazardous substances.

Split of Authority • At the heart of the decisions that admit such evidence is the notion that environmental contamination is a property characteristic that necessarily affects value. • The cases that exclude the evidence view the issue as the problem of potential double liability, the involuntary nature of condemnation and due process concerns.

The Major Issue – Fundamental Fairness • The reality of condemnee’s liability under the Spill Act and like statutory initiatives • Double-take: discounted just compensation + full cleanup costs = windfall for condemnor

The Solution • Eminent Domain Proceeding • Cost-recovery Proceeding • Withhold portion of just compensation until final determination of cost-recovery proceeding

Condemnee’s Theory of Valuation Highest and Best Use different from current use

Highest and Best Use Analysis • • Physically possible Legally permissible Financially feasible Maximally productive

Comparable Sales Analysis • • • Real property rights conveyed Financing terms Conditions of sale Expenditures made immediately after purchase Market conditions (time) Location Physical characteristics Economic characteristics Use (zoning) Non-realty components of value

• • Environmental law or regulation Environmental Site Assessment shows violation Cost to remediate

Challenges Environmental Site Assessment • Pre-filing • Post-filing

Challenges Cost of remediation • Pre-filing • Post-filing

Parr v. Section 10 -5 -50, effective January 1, 1998 • Score: – Owners: 1 – Condemnors: 1 • Springfield Odds: – The smart money is on Parr and Suydam