United States v. Johnson

• Decision Date: 08 February 1961
• Docket Number: No. 16627.,16627.
• Citation: 285 F.2d 35
• Parties: UNITED STATES of America, Appellant, v. J. Cyril JOHNSON and Ray T. Lindsay, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

285 F.2d 35 (1960)

UNITED STATES of America, Appellant, v. J. Cyril JOHNSON and Ray T. Lindsay, Appellees.

No. 16627.

United States Court of Appeals Ninth Circuit.

December 1, 1960.

Rehearing Denied February 8, 1961.

Perry W. Morton, Asst. Atty. Gen., Roger P. Marquis, Atty., Dept. of Justice, Washington, D. C., Lynn J. Gillard, U. S. Atty., San Francisco, Cal., for appellant.

Gregory A. Harrison, Atherton Phleger, Hamilton W. Budge, Brobeck, Phleger & Harrison, San Francisco, Cal., for appellees.

Before BARNES and HAMLIN, Circuit Judges, and MURRAY, District Judge.

MURRAY, District Judge.

The United States appeals from a judgment entered upon a jury's verdict fixing just compensation in a condemnation case. Taken in the condemnation action was the appellees' interest in a 505 unit housing project known as Rafael Village, constructed upon 107 acres of land adjacent to Hamilton Air Force Base in Marin County, California, together with certain personal property. Also condemned by the government were two contracts, one with North Marin County Water District under which the cost of extending water service to the project was paid by the owners of the project, and was to be recovered by the owners at the rate of 25% of the revenue collected by the Water District from water sold at the project;¹ the other was a sewage service agreement between the owners of the project and Hamilton Air Force Base for the disposal of the project's sewage through treatment facilities located on the Air Force Base.

At the time of the taking, the property was owned in fee by Rafael Village, Inc., a corporation formed by the appellees Johnson and Lindsay, subject to a note and deed of trust, which will hereafter be referred to as a mortgage. During the course of the proceedings in the court below, appellees Johnson and Lindsay were substituted as parties in place of Rafael Village, Inc., which apparently was dissolved when the project was taken over by the government. Since the distinction between the corporation on the one hand and the individuals on the other is of no significance for the purposes of this opinion, all will be referred to herein as appellees.

Rafael Village was constructed by appellees in the years 1950-1952. Cost of construction, or at least a very substantial part of it, was financed by a loan from Irving Trust Company, New York, which was secured by a mortgage on the housing project, and insured by the government under the provisions of the Wherry Military Housing Insurance amendment to the National Housing Act, 63 Stat. 570, 12 U.S.C.A. § 1748. The Wherry Act was passed in an attempt to relieve an acute housing shortage at military installations throughout the country. Among other things, the act made available FHA mortgage insurance on mortgages on housing projects in the vicinity of military establishments, which was otherwise unavailable under the National Housing Act. In order to obtain mortgage insurance under the Wherry Act, the Mortgagor was subject to certain regulations and restrictions. The mortgaged property had to be designed for rent for residential use by military personnel or civilian personnel attached to military bases, priority in the occupancy of the residences had to be granted to such personnel, and the rentals to be charged such residences were controlled by the Federal Housing Administration.

The original amount of the mortgage on Rafael Village was $4,050,000, and as of the date of taking by the government, December 31, 1957, the balance due on the mortgage was $3,695,755.65. The government condemned only the appellees' interest in the property, subject to the mortgage. The jury fixed $1,820,000 as the value of appellees' interest.

The government's position on this appeal is difficult to understand. It is clear the government feels the jury was overgenerous in awarding just compensation and that the judgment should be reversed, but its argument in support of a reversal is not so clear. A very substantial portion of its argument, both oral and in its brief, is completely immaterial and borders on the frivolous because it deals with problems which simply do not exist in this case.

In its argument the government devotes considerable effort to establishing the proposition that it was perfectly proper to condemn appellees' interest in the property subject to the mortgage, and that only the value of the limited interest of appellees could be here awarded. This is the theory upon which the entire trial of the case, from the opening statement of counsel to the court's charge to the jury, proceeded, so the significance of this part of the government's argument escapes the court.

In oral argument the contention was vigorously advanced by the government that not only must the legal possibility of removing restrictions placed on the property by the mortgage be shown, but that the economic feasibility of removing such restrictions by paying off the mortgage must also be shown before evidence of the value of the property without restrictions would be admissible. Whatever the merit of this contention may be, it is of no concern here because as hereinafter shown appellees' experts appraised the property in the light of all of the restrictions which existed as of the date of taking.

The government places much emphasis upon the proposition that in a condemnation case the property taken must be valued with regard to all restrictions as to use and so forth that exist at the date of taking, and that in this case appellees' interest in the property should be valued in the light of the rent controls and other restrictions that existed by virtue of the Wherry Act mortgage and mortgage insurance, which had the effect of denying to appellees as owners of the project the benefits of any inflationary influences which may have been at work. Again the government's argument may be absolutely correct, but it has no application to this appeal because appellees' experts appraised the land in exactly the manner that the government urges it should have been appraised. Mr. Smitten, the first of appellees' experts on valuation testified:

"Q. Now, in any of your approaches or in your summation value, did you give any effect to any anticipated future increases in land value in the project? A. No.

"Q. Or any increased future rental values in the project? A. We made a rental survey of the district to discover what economic rents would be, as though this was a freehold estate.

"Q. When you say a `freehold estate\', you are referring to it being not subject to a mortgage, is that it? A. Yes, free and clear of all encumbrances.

"Q. And what did you find with respect to the economic rental levels as compared to the rental levels which you used in your income approach? A. We found that the economic rentals in the area would average, applied to this project, approximately 15% higher than the rents charged.

"Q. But you made no allowance for that in your income approach? A. No, sir."

Government counsel was aware that Mr. Smitten valued the property in the light of the restrictions as is apparent from the following statement of counsel to the Court in the course of a discussion:

"Mr. Cavalier: Well, of course, Mr. Smitten, your Honor, has testified that he has valued that value of $1,850,000, that value is based on the status quo, so to speak, as of December 31, 1957."

Appellees' only other expert appraiser testified as follows:

"Q. Now, in either your summation approach, or in your financial approach to this property, have you given any weight to any future appreciation in the land on which the project is located? A. No, sir, I have not, and I would like to explain it for just a moment, if I may. That is one of the so-called weaknesses that unfortunately occur in our income approach. We do not have a hard, fast rule to value these, so that all we can do is to assume present-day factors. Consequently, the value that has been placed on the land in the income approach and the valuation on the summation are only the values that exist, in my opinion, as of 1957.

"Q. And without any allowance for any speculative future increases? A. No, none whatsoever, which is certainly a very realistic possibility.

"Q. And what about any possible increase in rents? A. The same thing is true there. It does not take into account any rental increases.

"Q. Does it take into consideration any predicted condition of inflation? A. None whatsoever; no, it does not."

Smitten and Clark were the only witnesses for appellees as to market value of the property on the date of taking. Neither expressed an opinion as to the market value of the property with the restrictions removed.

The government complains that it was unduly restricted in cross-examination of the appellees' expert, Mr. Smitten, as to the effect the restrictions contained in the mortgage would have on the value of the property. An examination of the record in this connection shows that when government counsel started to ask Mr. Smitten on cross-examination concerning rental restrictions on the property contained in the mortgage, objection was made and after some colloquy between the Court and counsel, the Court ruled "Oh, well, that hasn't anything to do with the fair market value of the property, but go ahead and ask your questions." At the time government counsel declined to proceed with the examination, but requested the Court to hear argument, which the Court did in the absence of the jury. After completion of that argument, court adjourned for the day and the following morning counsel for appellees made the following statement:

"Now, whatever the law may be and whether admissible or not admissible, and whether or not it is proper cross-examination we will not object to government counsel asking our valuation witness what, if any weight or value he gave, or whether it would affect his opinion or the opinion of a buyer, when his attention is called to the mortgage or any provision of

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