Kurth v. Iowa Dept. of Transp., No. 99-0666.

CourtUnited States State Supreme Court of Iowa
Writing for the CourtSNELL, Justice.
Citation628 N.W.2d 1
PartiesJerry KURTH, Individually and d/b/a Fisherman's Wharf Restaurant, Appellee, v. IOWA DEPARTMENT OF TRANSPORTATION, Appellant.
Docket NumberNo. 99-0666.
Decision Date31 May 2001

628 N.W.2d 1

Jerry KURTH, Individually and d/b/a Fisherman's Wharf Restaurant, Appellee,

No. 99-0666.

Supreme Court of Iowa.

May 31, 2001.

628 N.W.2d 3
Thomas J. Miller, Attorney General, David A. Ferree, Special Assistant Attorney General, and Mark Hunacek, Assistant Attorney General, for appellant

Richard J. Barry of Montgomery, Barry & Bovee, Spencer, for appellee.

Considered en banc.

SNELL, Justice.

This fee condemnation case asks us to determine what type of evidence can be presented to the jury and what is proper

628 N.W.2d 4
language to instruct the jury. The Iowa Department of Transportation (DOT) maintains that the jury was impermissibly allowed to hear testimony of the value of the business on the land being condemned. We agree. The jury's verdict is reversed and the case remanded for a new trial

I. Factual Background and Procedure

Jerry Kurth owned and operated the Fisherman's Wharf Restaurant (Wharf) on West Lake Okoboji. Kurth purchased this property in 1994 for approximately $85,000. Kurth made several improvements to the restaurant. On August 5, 1997, Kurth received a condemnation notice for this property from the DOT to accommodate nearby bridge expansion. He was awarded $180,000 by the Dickinson County Compensation Commission.

The restaurant was in a prime location to receive business from highway and boat traffic. The restaurant property was zoned commercial and provided dock access and outside eating to accommodate its patrons. Kurth characterized this location as the busiest spot on West Lake Okoboji and the best location for a restaurant. According to trial testimony, there is no other commercially zoned property on West Lake Okoboji that could be used for a restaurant that fronts on the lake similar to the Wharf.

With the proceeds from the condemnation, Kurth bought nearby property on which had once been located a Kentucky Fried Chicken restaurant, no longer in business. Kurth's new property sits on East Lake Okoboji directly on the other side of the bridge from the Wharf. The restaurant is also on the lakefront with a dock and includes several amenities the Wharf did not, such as on-site parking, a newer building, and twice as much land. Kurth testified that he planned to someday open a restaurant on this location.

Kurth was unsatisfied with his condemnation award because he felt it did not take into account the Wharf's business value and location. Accordingly, Kurth sought judicial review of his award from the district court. Prior to trial, the DOT made a motion in limine to exclude evidence describing the business value of the Wharf or providing its past and future profits. The DOT wanted a determination based solely on the value of the land and the structure on it. This was denied, and the case went to jury trial.

Kurth presented the testimony of local real estate experts. Greg Winkel, a certified general real estate appraiser, testified to the worth of the land and the building. This figure was presented as $285,000. Larry Harden, a certified valuation analyst, utilized the "capitalization of earnings method" to place a fair market value on the business and the business property. To produce this number, the expert looked at past earnings to determine what the likely normalized future income would have been given this type of business and its history, location, risk, fixtures, etc. Harden arrived at the amount of $239,952, which he added to the $285,000 valuation for the land and building provided by the earlier expert. He then placed the total value of the Wharf property at $524,952.

Conversely, the DOT's expert real estate appraiser, James Hayes, concluded that the fee was worth only $182,500 by looking at comparable sales. At the conclusion of testimony, over the objection of the DOT, the judge instructed the jury to consider the value of the Wharf property using all competent facts the buyer would factor into his price, including, if relevant, the net income of the business on the property.

The jury returned a verdict for Kurth in the sum of $375,000. The DOT appeals this decision for three reasons: (1) The

628 N.W.2d 5
court impermissibly allowed the jury to hear evidence of the value of the business; (2) The court erroneously instructed the jury as to what it may consider when valuing the condemned land; and (3) The court improperly overruled the DOT's objection to a letter containing hearsay statements

II. Scope and Standard of Review

The standard of review is in dispute. Ordinarily, the district court's evidentiary and trial objection rulings are reviewed for an abuse of discretion. State v. Tracy, 482 N.W.2d 675, 680-81 (Iowa 1992). The DOT argues that when those decisions are based upon an erroneous interpretation of law, our review should be on legal error. See State v. Kjos, 524 N.W.2d 195, 196 (Iowa 1994). This is an accurate statement, however, the district court's ruling to allow testimony of the value of the business is not based on any statute or codified rule. Accordingly, we review this determination for an abuse of discretion.

"An abuse of discretion occurs when the trial court `exercises its discretion on grounds clearly untenable or to an extent clearly unreasonable.'" State v. Greene, 592 N.W.2d 24, 27 (Iowa 1999) (quoting State v. Smith, 522 N.W.2d 591, 593 (Iowa 1994)). "[W]e grant the district court wide latitude regarding admissibility" and will reverse only where the losing party was prejudiced by an unreasonable decision. State v. Sallis, 574 N.W.2d 15, 16 (Iowa 1998); accord State v. Caldwell, 529 N.W.2d 282, 285 (Iowa 1995).

When review of the district court's instruction to the jury is involved, our review is for correction of errors at law. City of Dubuque v. Fancher, 590 N.W.2d 493, 495 (Iowa 1999). "Error in giving ... a particular instruction does not warrant reversal unless the error is prejudicial to the party." Herbst v. State, 616 N.W.2d 582, 585 (Iowa 2000). Prejudice is presumed when the jury has been misled by a material misstatement of the law. Graber v. City of Ankeny, 616 N.W.2d 633, 642 (Iowa 2000); Iowa Comprehensive Petroleum Underground Storage Tank Fund Bd. v. Shell Oil Co., 606 N.W.2d 376, 379 (Iowa 2000).

Generally, hearsay rulings are also reviewed for errors at law. State v. Ross, 573 N.W.2d 906, 910 (Iowa 1998) ("In the case of hearsay rulings, our review is for correction of errors at law because admission of hearsay evidence is prejudicial to the nonoffering party unless the contrary is shown."). However, when the basis for admission of hearsay evidence is the expert opinion rule, which provides no hard and fast rule regarding admissibility, we will employ an abuse of discretion standard. Hutchison v. Am. Family Mut. Ins. Co., 514 N.W.2d 882, 889 (Iowa 1994); Brunner v. Brown, 480 N.W.2d 33, 37 (Iowa 1992); see also In re Estate of Kelly, 558 N.W.2d 719, 722 (Iowa Ct.App.1996) (reviewing trial court's decision to admit hearsay evidence pursuant to expert opinion rule for an abuse of discretion).

III. Issues on Appeal

The admissibility of testimony and the jury instructions given both stem from the same issue—whether profits can be considered in determining the fair value of land in an eminent domain proceeding. The remaining issue will have us pass judgment on the admissibility of out-of-court statements in support of an expert's testimony.

A. Business Value Testimony in Eminent Domain Proceedings

What this issue involves is "just compensation." The Iowa Constitution requires

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the state to provide just compensation to the owner of land affected by a taking. "Private property shall not be taken for public use without just compensation first being made, or secured to be made to the owner thereof, as soon as the damages shall be assessed by a jury...." Iowa Const. art. I, § 18. However, what constitutes just compensation has historically been an elusive question. 26 Am.Jur.2d Eminent Domain § 294, at 705 (1996).

The general rule states:

A court may consider all factors indicative of the value of the property, and which would have been present in the minds of a willing buyer and a willing seller, unless the considerations advanced are too speculative or remote, and thus not a necessary, natural, or proximate result of the taking.

Id. § 297, at 707-08 (footnotes omitted). This rule has been restated in our cases. "A jury may, of course, consider ... the advantages the land possesses which a seller would press to the attention of a buyer." Heins v. Iowa State Highway Comm'n, 185 N.W.2d 804, 807 (Iowa 1971). "When the entire property is taken, our general rule is that the measure of damage is the reasonable market value at the time of condemnation[,] ... [or] what a willing buyer would pay in cash to a willing seller...." Aladdin, Inc. v. Black Hawk County, 562 N.W.2d 608, 611-12 (Iowa 1997) (citation omitted).

However, our cases also place a limitation on what type of evidence a jury may hear when making its just compensation determination.

Where condemnation of a fee interest is sought, generally evidence of business profits is inadmissible as an [independent] element of damage or as relevant in determining the value of the land because it is too uncertain and depends upon too many contingencies.
... The fundamental reason for the exclusion of evidence of profits lies in the rule of substantive law that the condemnor takes only the real property, not the business located thereon.
The courts have generally stated that business profits are the result of so many factors and that their repercussion on the market is so remote, that the evidence is more likely to mislead than to aid in the determination of market value.

Twin-State Eng'g & Chem. Co. v. Iowa State Highway Comm'n, 197 N.W.2d 575, 578 (Iowa 1972) (citations omitted). "The profits of a business are too uncertain, and depend upon too many contingencies to safely be accepted...

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