BILL ANALYSIS Ó SENATE JUDICIARY COMMITTEE Senator Noreen Evans, Chair 2013-2014 Regular Session AB 436 (Jones-Sawyer) As Amended June 24, 2013 Hearing Date: July 2, 2013 Fiscal: No Urgency: No TH SUBJECT Inverse Condemnation: Comparative Fault DESCRIPTION Existing case law generally provides that comparative fault does not apply in inverse condemnation actions. This bill would, instead, provide that comparative fault applies to actions in inverse condemnation and would require a court or arbiter to reduce the compensation to be paid to a plaintiff in direct proportion to his or her percentage of fault, if any, in the damaging of property that constitutes a taking for a public use. This bill would additionally apply the provisions of Section 998 of the Code of Civil Procedure to actions in inverse condemnation, thus allowing a plaintiff's compensation to be reduced if an earlier settlement offer that was more favorable than the final judgment was rejected. BACKGROUND The United States and California Constitutions require the payment of "just compensation" to property owners whose property has been taken or damaged for "public use." (Cal. Const., art. I, sec. 19; U.S. Const. Amend. V.) If that taking occurs prior to the payment of just compensation, the affected property owner must bring suit against the government in order to recover compensation owed under the Constitution in an action referred to as inverse condemnation. Regarding the payment of just compensation, the California Supreme Court has noted that: (more) AB 436 (Jones-Sawyer) PageB of? . . . with two exceptions, our state Constitution's just compensation clause requires that an owner of real property receive compensation for any actual physical injury to that property, whether foreseeable or not, that a public improvement, as deliberately designed and constructed, proximately caused. (Albers v. County of Los Angeles (1965) 62 Cal.2d 250, 263-264.) [That] strict liability test was later restated in terms of "substantial" causation, so that landowners could establish inverse condemnation liability if the public improvement substantially caused the damage, although the improvement was only one of several concurrent causes. (Bunch v. Coachella Valley Water Dist. (1997) 15 Cal.4th 432, 440.) The court has also noted that there are two exceptions to strict liability in inverse condemnation "in which the urgency or particular importance of the governmental conduct involved was so overriding that considerations of public policy [advised] against a rule rendering the acting public entity liable absent fault:" The first exception involved damages a public entity inflicted in the proper exercise of its police power. The second exception to the strict liability doctrine occurred in the 'unique' context of water law and derived from upper riparian private landowners' limited common law privilege to defend themselves against the 'common enemy' of floodwaters. Under this traditional rule, a public or private entity's liability for damage substantially caused by its flood control improvement efforts depended on whether its flood control system was intended to 'improve' or 'divert' the water's natural flow." (Id. at pp. 440-41.) Contrary to those historical limitations, this bill would provide that comparative fault applies to actions in inverse condemnation, thus, requiring a court to reduce a plaintiff's compensation in direct proportion to his or her percentage of fault, if any, in the damaging of the property. This bill would additionally apply the provisions of Section 998 of the Code of Civil Procedure to actions in inverse condemnation for the purpose of reducing compensation to be paid to a plaintiff. That section generally requires a plaintiff's award to be reduced if an offer by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment or award. AB 436 (Jones-Sawyer) PageC of? This bill is nearly identical to AB 328 (Smyth, 2011), which died in this Committee in 2011. CHANGES TO EXISTING LAW 1. Existing law prohibits the government from taking or damaging private property for a public use without the payment of just compensation and permits a person to maintain an action in inverse condemnation for the purpose of obtaining compensation for the taking or damage. (Cal. Const., art. I, sec. 19.) Existing case law states that a plaintiff may recover in an inverse condemnation action if injury to private property was proximately caused by public improvements, which requires a convincing showing of a substantial cause-and-effect relationship excluding the probability that other forces alone produced the injury. (Blau v. City of Los Angeles (1973) 32 Cal.App.3d 77, 84.) Existing law provides that for purposes of apportioning liability a plaintiff's damages may be reduced in direct proportion to his or her percentage of fault. (Li v. Yellow Cab (1975) 13 Cal.3d 804.) Existing case law exempts an inverse condemnation action from the above comparative fault rule, except in certain actions relating to damages caused by public flood control projects. (Blau v. City of Los Angeles (1973) 32 Cal.App.3d 77; Locklin v. City of Lafayette (1994) 7 Cal.4th 327; Bunch v. Coachella Valley Water District (1997) 15 Cal.4th 432.) This bill would apply the doctrine of comparative fault to actions in inverse condemnation by stating that in an inverse condemnation proceeding, a court or arbitrator shall reduce compensation to be paid to a plaintiff in direct proportion to his or her percentage of fault, if any, in the damaging of property that constitutes a taking for public use. This bill would also state that the act of a plaintiff in applying for a permit or other entitlement for use or development shall not be construed as damaging or diminishing the value of the property for the purpose of calculating a plaintiff's comparative fault. AB 436 (Jones-Sawyer) PageD of? 2. Existing law provides that, in any trial or arbitration, if an offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment or award, the plaintiff shall not recover his or her post-offer costs and shall pay the defendant's costs. Existing law provides, in addition, that in any action or proceeding other than an eminent domain action, the court or arbitrator may require the plaintiff to pay reasonable costs for expert witnesses, as specified. (Code Civ. Proc. Sec. 998(c).) Existing case law holds that the Legislature perceives a difference between "eminent domain" and "inverse condemnation," and therefore the Legislature does not intend for its reference to eminent domain in Code of Civil Procedure Section 998 to encompass inverse condemnation proceedings. (Regency Outdoor Advertising, Inc. v. City of Los Angeles (2006) 39 Cal.4th 507, 530.) Existing law provides that in any inverse condemnation proceeding, the court rendering judgment for the plaintiff, or the attorney representing the public entity who effects a settlement, shall determine and award or allow to the plaintiff a sum that will reimburse the plaintiff's reasonable costs, disbursements and expenses, including reasonable attorney, appraisal and engineering fees, as specified. (Code Civ. Proc. Sec. 1036.) This bill would provide that, notwithstanding any other law, Section 998 shall apply to an action in inverse condemnation for the purpose of reducing compensation to be paid to a plaintiff regardless of whether the plaintiff is entitled to recover costs pursuant to Section 1036. COMMENT 1. Stated need for the bill According to the author: The long standing rationale behind the rule of comparative fault is to allocate responsibility and liability for damage by the actual proportion of the fault of the persons whose negligence caused the injury. To do otherwise, results in a situation that creates unjust enrichment for one side over the other. AB 436 (Jones-Sawyer) PageE of? Similarly, [Code of Civil Procedure] Section 998 is designed to encourage settlements and alleviate unnecessary burdens upon our court system. To better promote fairness and efficiency in our judicial system, both rules should be applied to inverse condemnation actions. Inverse condemnation cases are the taking of property by a government agency which so greatly damages the use of a parcel of real property that it is the equivalent of condemnation of the entire property. It is particularly important in this time of economic distress for the Legislature to clarify these two issues so that government agencies are only made responsible for their proportionate share of the costs and damages awarded in inverse condemnation cases. 2. Costs Section 998 of the Code of Civil Procedure seeks to encourage the early settlement of cases by reducing a plaintiff's recovery when a plaintiff rejects a defendant's offer and then fails to obtain a more favorable judgment or award. Generally, if a settlement offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment or award, the plaintiff cannot recover his or her post-offer litigation costs but rather must pay the defendant's costs that are incurred after the offer. In proceedings other than an eminent domain action, existing law additionally allows a court to require the plaintiff to pay a reasonable sum to cover the post-offer expert witness costs of the defendant if the plaintiff rejected an offer that was more favorable than the judgment or award ultimately received. Section 998 contains a provision explicitly stating that it "does not apply to . . . [a]n offer that is made by a plaintiff in an eminent domain action." (Code Civ. Proc. Sec. 1036(g).) Under existing law, a plaintiff awarded compensation in an inverse condemnation proceeding is also awarded a sum that will, in the opinion of the court, "reimburse the plaintiff's reasonable costs, disbursements, and expenses, including reasonable attorney, appraisal, and engineering fees, actually incurred because of that proceeding in the trial court or in any appellate proceeding in which the plaintiff prevails on any issue in that proceeding." (Code. Civ. Proc. Sec. 1036.) The AB 436 (Jones-Sawyer) PageF of? California Supreme Court articulated the reason for this cost recovery provision as follows: In cases instituted by the property owner the reason for allowing him costs in case of recovery is even stronger than in condemnation cases, for in the former, instead of an offer of compensation or suit to condemn, there has been a wrongful taking and damaging of private property without permission of the owner or effort to first compensate him, in consequence of which the owner has been forced to initiate the litigation. If costs should be assessed against him, his recovery would be diminished by that amount and he would be to that extent deprived of the full measure of compensation to which he is justly entitled. (Heimann v. Los Angeles (1947) 30 Cal.2d 746, 753.) This bill would create new cost-shifting provisions for inverse condemnation actions in Section 998 by providing that if an offer made by a defendant (public agency) is not accepted and the plaintiff (landowner) fails to obtain a judgment or award, the plaintiff shall not recover his or her post-offer costs but shall instead pay the defendant's costs from the time of the offer, including, at the court's discretion, a reasonable sum to cover the plaintiff's expert witness costs. In cases where an offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment or award, this bill would prevent the plaintiff from recovering his or her post-offer costs, but would also provide that the plaintiff shall not be ordered to pay the defendant's costs from the time of the offer. a. Promoting settlement The Los Angeles City Attorney, sponsor, asserts that the proposed amendments to Section 998 extending its principles to inverse condemnation actions "is good public policy that will encourage settlements and alleviate unnecessary burdens upon our court system." From a practical standpoint, the application of Section 998 principles to inverse condemnation cases would provide plaintiffs (damaged property owners) with a strong incentive to accept offers to compromise due to the risk of their compensation being even further reduced as a result of a lower verdict. Those offers to compromise may also be used strategically to force a settlement due to the risks to the plaintiff if a potentially reasonable settlement offer is AB 436 (Jones-Sawyer) PageG of? rejected. While Section 998 acts to promote settlement in actions between private parties, the policy question raised by this bill is whether to specifically apply that statutory incentive to settle to inverse condemnations actions. Courts differ regarding application of Section 998 to inverse condemnation actions given the constitutional requirements underlying those actions. For example, in Goebel v. City of Santa Barbara (2001) 92 Cal.App.4th 549, the court held that "[t]here [was] no constitutional bar to assessing costs against an unsuccessful inverse condemnation plaintiff, and no policy reason to excuse such a plaintiff from paying expert fees under [S]ection 998." (Id. at p. 560.) The court also asserted that "[i]f the Legislature had intended to restrict the use of [S]ection 998 offers in all inverse condemnation actions, we believe it would have done so explicitly." (Id. at p. 559.) Alternatively, in Orpheum Bldg. Co. v. San Francisco Bay Area Rapid Transit District (1978) 80 Cal.App.3d 863, a court of appeal applied the current exclusion for eminent domain settlement offers to those made in inverse condemnation actions. That court held: The question here is whether subdivision (f) [now codified as subdivision (g)] of [S]ection 998 is applicable in an inverse condemnation situation. Subdivision (f) voids the provisions of [S]ection 998 where the plaintiff in an eminent domain proceeding makes the offer. The plaintiff in the normal eminent domain proceeding is the government entity. [Defendant] relies on cases and code provisions that distinguish between eminent domain and inverse condemnation, none of which are apposite here. We can see no legitimate reason why subdivision (f) should not apply to the action herein. We cannot believe that the Legislature sought to distinguish between government entities when they are called plaintiffs or when they are called defendants in actions that are substantially identical. Therefore, we hold that subdivision (f) applies. Therefore, the award of costs to [Plaintiffs] was not barred by its refusal of the compromise settlement offer. (Orpheum Bldg. Co. v. San Francisco Bay Area Rapid Transit Dist. (1978) 80 Cal.App.3d 863, 878.) In each of these cases, both courts looked at the Legislature's intent (as well as the Constitution), and reached different results. The issue raised by this bill is AB 436 (Jones-Sawyer) PageH of? whether to codify, contrary to Orpheum, that Section 998 does apply to inverse condemnation actions. The resulting policy question is whether the Legislature should encourage settlement in these cases where an individual's property has arguably been "taken" (damaged or destroyed) for public use. For example, victims of the 2011 San Bruno gas pipeline explosion have brought inverse condemnation actions against PG&E,<1> and, if those victims reject settlement offers that end up being greater than a final condemnation award, their recovery could theoretically be reduced pursuant to the proposed changes to Section 998 (if this bill were enacted at that time). Considering that the entire purpose of Section 998 is to encourage settlement by reducing recovery when a plaintiff rejects an offer that is greater than a final award, the Committee should consider whether it is, in fact, appropriate to reduce recovery in cases of inverse condemnation when offers are rejected. The Committee should also consider whether this provision would create undue pressure for potential plaintiffs to settle their inverse condemnation actions due to fear of a lower condemnation award. WOULD THIS CREATE UNDUE PRESSURE FOR INJURED LANDOWNERS TO SETTLE INVERSE CONDEMNATION CLAIMS, INCLUDING THOSE WHO LOST THEIR HOMES IN THE 2011 SAN BRUNO GAS PIPELINE EXPLOSION? b. Just compensation As noted above, the United States and California Constitutions require the payment of "just compensation" to property owners whose property has been taken or damaged for "public use." That constitutional requirement to pay compensation applies to inverse condemnation actions, thus, raising the question whether the application of Section 998 to reduce the "just compensation" paid to successful plaintiffs would be constitutional. That concern arises because those plaintiffs are constitutionally entitled to receive "just compensation," and, if the amount paid for just compensation is reduced, it is unclear whether the Constitutional requirement to pay that compensation has been met. Regarding the ability to assess costs against a plaintiff (landowner) in an inverse condemnation action, the California Supreme Court in Locklin v. City of Lafayette (1994) 7 Cal.4th --------------------------- <1> Private utilities may be held liable in inverse condemnation actions as public entities. (See Barham v. Southern Cal. Edison Co. (1999) 74 Cal.App.4th 744, 753.) AB 436 (Jones-Sawyer) PageI of? 327 held: An inverse condemnation plaintiff must establish a compensable taking or damage before article I, section 19 of the California Constitution, may be invoked to shield the unsuccessful plaintiff from assessment of costs . . . The statutory power of a court to impose costs of litigation on an unsuccessful party in a civil action is limited by article I, section 19 [citation omitted], but that provision comes into play only when property is taken for public use or damaged by a public entity . . . Neither sound public policy nor protection of property owner's rights under article I, section 19 of the California Constitution, suggests that public funding of inverse condemnation actions is necessary if the plaintiff fails to establish a compensable taking or damage. (Id. at p. 377.) Given that holding, it is unclear how the proposed application of Section 998 to reduce recovery in successful inverse condemnation actions would not be precluded (or shielded) by the "just compensation" requirement of the California Constitution. The law firms in opposition argue that cost shifting of the type envisioned by this bill would violate the California Constitution. DOES THE APPLICATION OF SECTION 998 TO SUCCESSFUL INVERSE CONDEMNATION ACTIONS VIOLATE CALIFORNIA'S CONSTITUTIONAL REQUIREMENT TO PAY JUST COMPENSATION? c. Attorney's fees The general rule governing the allocation of attorney's fees in the United States is that each party must bear the costs of his or her own attorney's fees, regardless of who prevails in litigation. Fee shifting statutes are enacted only when society considers a statutory or constitutional right important enough to justify fee shifting. (See Choate v. County of Orange (2000) 86 Cal.App.4th 312, 322-23; Code Civ. Proc. § 1021.) In inverse condemnation actions -- which are fundamentally actions that allow plaintiffs to protect a constitutional property right -- the Legislature has previously acted to shift payment of attorney's fees and other litigation costs away from a prevailing property owner and to the condemning public entity. (See Code Civ. Proc. Sec. 1036.) By applying Section 998 to AB 436 (Jones-Sawyer) PageJ of? inverse condemnation actions for the unmistakable purpose of reducing compensation to be paid to plaintiffs, it is unclear whether an award so reduced would satisfy the Constitution's "just compensation" requirement, as noted. However, it may also provide a disincentive for property owners to continue to pursue vindication of their property rights through litigation. Although undefined in the bill, restricting the ability of a plaintiff to recover his or her post-offer "costs" could be interpreted as including attorney's fees, which, if so understood, could potentially reduce access to the courts as a result of attorneys being unwilling to take cases where payment for their services is less certain. COULD THE BILL POTENTIALLY REDUCE ATTORNEY FEE AWARDS AND LIMIT ACCESS TO THE COURTS? 3. Comparative fault Under the tort doctrine of comparative fault, a plaintiff's damages may be reduced in direct proportion to his or her own percentage of fault. Although comparative fault applies in tort actions, strict liability generally applies to inverse condemnation actions with two exceptions - actions involving the exercise of police power, and actions regarding flood control or flood improvement efforts. It is important to note that strict liability applies in inverse condemnation actions only where the public improvement at issue substantially caused the damage, even if the improvement was only one of several causes. The author provides the following example: The City of Los Angeles cuts a road on a hillside in 1920. Ninety years later a property owner builds alongside the road. The property owner has a leaking pool that saturates the hillside with thousands of gallons of water, which collects underneath the house because of the design of the road. As a result, the over saturation of water causes a landslide destroying the house. The property owner sues the [c]ity for damages. A jury finds that but for the negligence of the homeowner, the landslide never would have occurred. But because the road built in the 1920's allowed the water to pool, the jury found the city to also be partly responsible for the damage. Because the city was partially at fault, the owner who saturated the hillside with water is able to recover 100% of his damages even though that owner was primarily at fault. AB 436 (Jones-Sawyer) PageK of? It should be noted that, under existing case law, a public entity would be liable in the above example for inverse condemnation only where there is substantial causation on the part of the public entity leading to the taking - meaning that the road would have to be a substantial cause of the damage (arguably because of a design defect or lack of maintenance that caused the pooling to occur). Thus, the question raised by this bill is whether a city should be fully liable for damages that are substantially caused by a public improvement. As discussed below, the potential liability associated with a public improvement is arguably calculated into a decision to construct a public improvement in the first place. This bill would seek to overturn 100 years of case law by providing that comparative fault applies to actions in inverse condemnation, and that in an inverse condemnation proceeding, a court or arbitrator shall reduce the compensation paid to a plaintiff in direct proportion to his or her percentage of fault, if any, in damaging the property that is ultimately found to have been taken for public use. The proposed application of comparative fault seeks to alter the way California's court have construed the "just compensation" requirement of the California Constitution, and thus, to the extent this bill seeks to modify a court's interpretation of the Constitution, it is unclear whether that change can be accomplished through a statutory revision. Regarding the requirement to pay just compensation, the California Supreme Court has previously noted: "[T]he determination of the scope of the just compensation clause rests on its construction 'as a matter of interpretation and policy.' The contending policies which guide that construction have often been described as follows: 'on the one hand the policy underlying the eminent domain provision in the Constitution is to distribute throughout the community the loss inflicted upon the individual by the making of the public improvements . . . . On the other hand, fears have been expressed that compensation allowed too liberally will seriously impede, if not stop, beneficial public improvements because of the greatly increased cost.'" (Varjabedian v. Madera (1977) 572 P.2d 43, 50-51.) From a policy standpoint, application of strict liability places the cost of a public improvement on the shoulders of the entire community, as opposed to on a few landowners. "The fundamental AB 436 (Jones-Sawyer) PageL of? justification for inverse [condemnation] liability is that the government, acting in furtherance of public objectives, is taking a calculated risk that private property may be damaged." (Yee v. City of Sausalito (1983) 141 Cal.App.3d 917, 920.) Unlike private individuals, public entities can take certain steps to mitigate the risk of liability for inverse condemnation awards, such as by securing appropriate insurance coverage. (See City of Laguna Beach v. Mead Reinsurance Corp. (1990) 226 Cal.App.3d 822, 829 [discussing the validity of an inverse condemnation exclusion clause in a municipal liability insurance policy].) The following excerpt illustrates how costs and benefits are weighed by a public entity when deciding to construct a public improvement: The evidence here showed City [of San Diego's] water delivery system was deliberately designed, constructed and maintained without any method or program for monitoring the inevitable deterioration of cast-iron pipes other than waiting for a pipe to break. Additionally, City received the cost savings from its "replace it when it breaks" method of maintenance, turning down numerous rate increases necessary to fund a different, more proactive approach to replacing these deteriorating pipes. In Holtz v. Superior Court (1970) 3 Cal.3d 296, the court reiterated that the fundamental policy underlying inverse condemnation is to distribute the costs of the public benefit among those benefited by the public improvement rather than imposing a disproportionate burden on the person damaged by the operation of the improvement. (Id. at p. 303.) . . . City's decisions to install a system without monitoring capabilities and to use a "wait until it breaks" method for detecting deterioration may well have been reasonable because the costs of a prophylactic approach may have outweighed its benefits. However, the rationale of Holtz, as well as its approval of the factually analogous case of Lubin, convinces us that "since the undertaking of the [project] at this lower cost created some risk, however slight, of damage to plaintiffs' property, it is proper to require the public entity to bear the loss when damage does occur." The burdens attending City's cost-saving approach should be spread to the community benefiting from lower water rates rather than imposing the entire cost on those property owners placed in harm's way by City's program. (Pac. Bell v. City of San Diego (2000) 81 Cal.App.4th 596, 607-608). AB 436 (Jones-Sawyer) PageM of? In the above case, the City of San Diego achieved cost savings for the community by accepting a certain level of risk that was arguably taken knowing the City would be held strictly liable for damage. This bill would insert the concept of comparative fault into that situation, thus, potentially reducing the financial exposure of a public entity if a plaintiff can be proven to be at fault to some extent in an inverse condemnation action. That additional inquiry into fault of the plaintiff necessarily means additional litigation, which would appear contrary to that portion of the bill that seeks to reduce litigation by promoting settlement. Furthermore, from a policy standpoint, reducing the financial exposure of a public entity would arguably encourage those entities to make riskier and riskier decisions, including taking a "replace it when it breaks" approach with regards to essential public improvements. While those approaches save the public money, they also create risk for those individuals who happen to live near the public improvement that is not being maintained. In contrast, the existing strict liability framework for inverse condemnation actions incentivizes caution in the planning and construction of public improvements. IS IT APPROPRIATE TO APPLY COMPARATIVE FAULT TO INVERSE CONDEMNATION ACTIONS? 4. Pending litigation This bill does not specifically state that its comparative fault provisions would apply only to actions filed after the effective date of the bill. In general, legislation is construed to be prospective unless the Legislature specifically states that it should be applied retroactively or is declaratory of existing law. In this case, courts interpreting this bill, including the Section 998 provisions, should arguably only apply those provisions to actions filed after the effective date of the bill. Applying these provisions to an already pending action would appear to unduly "change the rules" in the middle of the case. Indeed, this Committee has raised concerns about bills that interfere with pending litigation. Any such interference could result in a direct financial windfall to a private party, prevent a court from deciding an action based upon the laws in place at the time the cause of action accrued, or create a situation where the Legislative branch is used to circumvent the AB 436 (Jones-Sawyer) PageN of? discretion and independence of the Judicial branch. SHOULD THIS BILL BE AMENDED TO ENSURE THAT IT WOULD NOT IMPACT PENDING LITIGATION? Support : California Association of Joint Powers Authorities; California Association of Sanitation Agencies; California Special Districts Association; City of Camarillo; City of Santa Rosa; County of Los Angeles; League of California Cities Opposition : Desmond, Nolan, Lavaich, & Cunningham; Jenny & Jenny, LLP; Matteoni, O'Laughlin, & Hetchman; Palmieri, Tyler, Wiener, Wilhelm & Waldrone HISTORY Source : Los Angeles City Attorney Related Pending Legislation : None Known Prior Legislation : AB 328 (Smyth, 2011) would have applied the doctrine of comparative negligence and the provisions of Section 998 of the Code of Civil Procedure to actions in inverse condemnation. This bill died in the Senate Judiciary Committee. Prior Vote : Assembly Judiciary Committee (Ayes 7, Noes 1) Assembly Floor (Ayes 51, Noes 26) **************