Published: January 17, 2012
Author: Mitchell Olson

Condemnation of private property by the State for public purposes, such as for highway right-of-way, is a common practice generally subject to well-established rules. Parties often litigate the fair market value which the State must pay to the landowner. A developing issue across the United States is how to determine the fair market value of environmentally contaminated property. The Wisconsin Supreme Court, in 260 North 120th Street, LLC v, State Dep’t of Transportation (DOT), recently endorsed a simple and straight forward approach to such valuation allowing for reduction of fair market value based on evidence of contamination and/or cost to remediate the contamination.

In 260 North 120th Street, the DOT condemned an entire parcel as part of its Marquette interchange project in Milwaukee. DOT made a jurisdictional offer of $1,348,000, which accounted for a reduction due to environmental contamination and the estimated cost of remediation. The landowner obtained an appraisal for $3,497,00 which did not account for the contamination. The landowner filed suit appealing the DOT’s award of damages.

The primary issue on appeal was whether evidence of environmental contamination and of remediation costs is admissible in condemnation proceedings. Wis. Stats. sec. 32.09(5)(a) provides that “the condemnor shall pay the fair market value of the property taken….” Fair market value is defined as the amount a parcel could be sold for on the open market between a willing buyer and willing seller. In measuring fair market value, “every element which affects value and which would influence a prudent purchaser should be considered.” Accordingly, the Supreme Court easily reached the conclusion that, subject to the trial court’s discretion, evidence of contamination and cost of remediation is admissible as long as relevant to the value of the property.

The Court rejected the position of the Minnesota Supreme Court which generally excludes such evidence as a matter of law. The Minnesota Court contends that admitting such evidence unfairly subjects the property owner to double liability or a double take, in which the owner first receives a reduced condemnation award due to the contamination, and then still is potentially liable for the contamination under environmental laws. The Minnesota Court contended it should be “fluid” in its standard as to just compensation as “fairness so requires.”

The Wisconsin Court summarized its position: “to deny the condemnor the right to put on evidence as to one of the significant determinants of that condition – and hence value – because it may not reflect the owner’s degree of responsibility for the condition misses the point of an eminent domain valuation process.” Given that in the subject case, and in many cases, the landowner was not actually subject to remediation costs, the Court will not exclude evidence based on a mere possibility of a double take. Ultimately, compensation must be just both to the landowner and the public which pays the bill.

In a concurring opinion, Justice Abrahamson noted only 12 states have addressed this issue and only a slim majority follow the rule of admissibility. Some states exclude evidence of contamination and remediation costs, while others only the latter. Two states have a process whereby the evidence is excluded but the award is held in escrow allowing the condemnor to later pursue actual costs of remediation from the account. Noting the complex issues underlying this determination, the concurring opinion concluded by stating: “the majority opinion unfortunately makes the answer to the complex question of valuing contaminated property deceptively simpler than it is, and therefore may lull litigants and courts into overlooking the complexities and possible injustices presented when valuing contaminated property in condemnation proceedings.”

Thus, while Wisconsin had adopted a fairly clear rule, there appears to be room for an argument to exclude these costs at the discretion of the trial court judge. For example, what happens where the condemnation occurs at a time when an environmental suit is pending against the landowner? What if the parcel is worth $4 million clean, but an assessment of $2 million for remediation costs against the landowner has been made or is a foregone conclusion? If the condemnor is allowed to take for $2 million (accounting for the contaminated status), and then the landowner is forced to pay $2 million for clean up, the condemnor obtains a windfall of $2 million once the property is cleaned up. This fact pattern suggests the need for a different result. Thus, the unique facts of each case should be carefully considered.

For more information on environmentally contaminated property in Wisconsin, contact Mitchell Olson at 608.283.6724 or molson@axley.com.