United States v. CHESAPEAKE GARDENS, INC.,

• Decision Date: 22 November 1968
• Docket Number: No. 12504.,12504.
• Citation: 404 F.2d 178
• Parties: UNITED STATES of America, Appellee, v. CHESAPEAKE GARDENS, INC., and Chesapeake Gardens, Inc., No. 2, Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

404 F.2d 178 (1968)

UNITED STATES of America, Appellee, v. CHESAPEAKE GARDENS, INC., and Chesapeake Gardens, Inc., No. 2, Appellants.

No. 12504.

United States Court of Appeals Fourth Circuit.

Argued October 7, 1968.

Decided November 22, 1968.

John J. Geraghty, Raleigh, N. C. (Poyner, Geraghty, Hartsfield & Townsend, Raleigh, N. C., John A. Pryor, Joseph M. Wyatt, and Wyatt & Jones, Baltimore, Md., on brief), for appellants.

S. Billingsley Hill, Atty., Dept. of Justice (Clyde O. Martz, Asst. Atty. Gen., Roger P. Marquis, Anne S. Bell, Attys., Dept. of Justice, Stephen H. Sachs, U. S. Atty. and Ralph J. Luttrell, Sp. Asst. U. S. Atty., on brief), for appellee.

Before SOBELOFF, BOREMAN and BUTZNER, Circuit Judges.

SOBELOFF, Circuit Judge:

This appeal concerns the proper measure of compensation in a condemnation case instituted by the Government.

The Capehart Act, 42 U.S.C. § 1594 (a), provides that Wherry Act (12 U.S.C. § 1748 et seq.) housing may be acquired by the Government in the discretion of the Secretary of Defense.¹ Pursuant to this authorization, condemnation proceedings were instituted against Chesapeake Gardens, Inc., and Chesapeake Gardens, Inc., No. 2, owner-mortgagors of a Wherry leasehold interest, and they now appeal from a judgment rendered in their favor by the District Court on a jury verdict of $184,000.

The Wherry Act was passed in response to the acute housing shortage existing in the area of most military installations. It provided for leasing of Government-owned land at nominal rentals under long-term leases to "Owner" corporations which would construct and operate the needed housing. Owner corporations are subject to Federal Housing Administration regulations on such matters as rents, rate of return, and certain aspects of operation, and mortgages made to financing institutions by the Owners are insured by the FHA up to 90% of the estimated cost of construction.

The Owners assign error to the reception of testimony that they had realized the sum of $569,000 by reason of the fact that the mortgage loan exceeded the actual cost of construction by that amount. The Owners do not dispute the fact that there were excess mortgage proceeds and that the excess has been retained by them, but they contend that this evidence was irrelevant and prejudicial and did not enter into the estimates of value made by any of the expert witnesses who testified at trial. The Government counters that the evidence is indeed relevant on the issue of what a "willing, prudent buyer and seller could contemplate or expect in the way of income and rental ceilings in the future."²

The Government reasons that the fact that there were excess mortgage proceeds might be considered by the FHA as justification for reducing rentals presently being charged by the Owners or as ground for refusing increases if applied for in the future.³ The Owners rejoin that no statute, rule, or regulation having the force of law has conferred upon the FHA the power unilaterally to reduce rents.

We deem it unnecessary, in determining that the proffered evidence was admissible, to decide whether the FHA could upon its own initiative reduce rents. We adhere to the rule announced by Judge Boreman in another Wherry Act condemnation case. United States v. Certain Interests in Property in Cumberland County, 296 F.2d 264 (4 Cir. 1961). There he stated that "this court has in the past favored a broad rule of admissibility and consideration of evidence in condemnation cases; the only condition has been that there be a showing that willing vendees and vendors would deem such evidence or information relevant in their negotiations."

It seems patent to us that in his negotiations a prospective buyer would find the fact of excess mortgage proceeds highly relevant because the FHA might well be influenced adversely thereby in the event of a future request for a rental increase. The Ninth Circuit in Winston v. United States, 342 F.2d 715 (1965), upheld the admission of evidence of excess mortgage proceeds and rejected the argument now urged by the Owners that this fact could not possibly affect future rental charges. The conclusion of the Tenth Circuit in Sill Corporation v. United States, 343 F.2d 411, cert. denied, 382 U.S. 840, 86 S.Ct. 88, (1965),⁴ is in accord with that reached by the Ninth.

The other major contention of the Owners is that the Government's witnesses, in computing "just compensation," improperly deducted from capitalized value the amount of a certain reserve fund. The Owners were required by their charters to deposit $39,750 annually into a fund which was designed to assure the mortgagee that funds would be available to replace certain assets at the end of their respective useful lives. On the date of the taking, the accumulated reserve had a balance of $296,337 on deposit with the mortgagee. Subsequently, the Government and the mortgagee executed an agreement for the payment of the full amount of the accumulated fund to the Owners, and this was done.

The Owners insist that the fund was their asset and that the Government is therefore not entitled to a deduction by virtue of the release of the fund to them. The Government asserts, and we agree, that the deduction of this amount by the Government's witnesses in computing the value of the Owners' interest was correct because a prospective buyer would be required upon acquisition of the Owners' interest to deposit $296,337 of his own funds with the mortgagee or be held in default on the mortgage. The Owners acknowledge that the fund depleted by the payment made to them would have to be replenished and maintained by a prospective purchaser. They argue however that to permit a deduction of the amount...