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United States v. 564.54 Acres of Land

decided: December 30, 1974.



Hastie, Gibbons and Weis, Circuit Judges.

Author: Gibbons


GIBBONS, Circuit Judge

This interlocutory appeal which the district court certified involves a controlling question of law as to which there is a substantial ground for a difference of opinion. The appeal was permitted by this Court pursuant to 28 U.S.C. ยง 1292(b). The order appealed from arose in an action by the United States for the condemnation of three recreational camps in the proposed Tocks Island recreational area which were owned and operated on a not-for-profit basis by or on behalf of the Southeastern Pennsylvania Synod of the Lutheran Church in America. The land and improvements, according to the owner, have a special character designed specifically for camping purposes.

The order under review was entered during pre-trial proceedings on the government's request for a ruling that the cost of "substitute facilities" is not a proper measure of compensation for the taking of defendant's property, and that evidence at the trial should be restricted to fair market value as of the date of taking, or if that measure is unavailable, to depreciated replacement cost of the properties as improved on that same date. The district court held that the cost of substitute facilities measure of compensation was available only to a governmental condemnee. However, recognizing that if its ruling was in error a fruitless trial might result, the trial court certified the case for an interlocutory appeal on that issue. We reverse.

Appellant Southeastern Pennsylvania Synod of the Lutheran Church in America owned and operated three summer camps located on three separate tracts totaling 305.81 acres along the Delaware River in Monroe County, Pennsylvania. On June 15, 1970 the United States acquired the three camps by filing a notice of taking, and has offered compensation totaling $485,400. The condemnees have offered to prove that the camps have been operated on a nondenominational basis for many years at continuous losses, which losses have been underwritten by the Synod; that there is no ready market for such not-for-profit facilities; that by virtue of grandfather clauses in the Pennsylvania legislation governing recreational camps the Synod could have continued operating the camps with their present somewhat primitive facilities; that because of the same legislation as well as recently enacted federal environmental legislation the development of new camps would require far more elaborate facilities, especially for housing and sewage treatment; and that the cost of development of the new site will total in excess of $5.8 million. At this stage of the case there has been no ruling as to whether all of the items of cost included in appellant's $5.8 million estimate would actually be needed for the development of substitute facilities, but it is undisputed that $485,000 would fall far short of providing for them.

Whether the Lutheran Synod operates camping facilities at a loss because it believes camping builds character, or because it feels a charitable obligation to afford recreational opportunities to persons who would not otherwise be able to afford them, it seems clear that the reason for operating the camps is related to the Synod's religious mission. Thus the question presented is the extent to which owners of single purpose facilities, operated not-for-profit for a religious or charitable purpose (and having no ready market) are entitled to be indemnified when the federal government condemns the facilities. A closely analogous case would be the condemnation of an ancient church building still in active use for religious purposes.

Recently Justice Rehnquist wrote for the Court:

"Our prior decisions have variously defined the 'just compensation' that the Fifth Amendment requires to be made when the Government exercises its power of eminent domain. The owner is entitled to fair market value, United States v. Miller, 317 U.S. 369, 374, 87 L. Ed. 336, 63 S. Ct. 276 (1943), but that term 'is not an absolute standard nor an exclusive method of valuation.' United States v. Virginia Electric & Power Co., 365 U.S. 624, 633, 5 L. Ed. 2d 838, 81 S. Ct. 784 (1961). The constitutional requirement of just compensation derives as much content from the basic equitable principles of fairness, United States v. Commodities Trading Corp., 339 U.S. 121, 124, 94 L. Ed. 707, 70 S. Ct. 547 (1950), as it does from technical concepts of property law." United States v. Fuller, 409 U.S. 488, 490, 35 L. Ed. 2d 16, 93 S. Ct. 801 (1973).

See also Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470, 478, 35 L. Ed. 2d 1, 93 S. Ct. 791 (1973). The basic principle underlying the constitutional requirement of "just compensation" is one of indemnity.*fn1 The condemnee "is entitled to be put in as good a position pecuniarily as if his property had not been taken. He must be made whole but he is entitled to no more." Olson v. United States, 292 U.S. 246, 255, 78 L. Ed. 1236, 54 S. Ct. 704 (1934).

If the government condemns property for which there is a ready market (commodities are a classic example) payment of the fair market value is complete indemnity since, whatever its intended use, the condemnee can readily replace it in the marketplace. Some property, however, from its very nature, has no marketplace. An example is a single purpose facility requiring a large capital investment, such as a power generating station. Such facilities usually are operated for profit. When they cannot be valued in the marketplace a fair measure of the government's obligation to indemnify may be the present value of capitalized future earnings. Presumably the investors in a single purpose facility operated for profit will be able to take their capital investment, valued on the basis of the capitalized earning capacity of the facility in which they invested, and put it to another use. Finally, there are facilities which are unique, for which there is no ready market, and which are operated for motives other than profit. With respect to such facilities, neither a fair market value nor a capitalized earnings approach as the measure of the government's constitutional duty to indemnify will produce a fair result.

With respect to some unique facilities it may be possible to afford just compensation by calculating depreciated replacement cost to arrive at an approximation of otherwise unavailable proof of market value. For others, however, such a measure will not be fair. Typical of facilities which simply cannot be valued in the marketplace, or by capitalized earnings, or by depreciated replacement cost, are those erected for common public purposes by states or their public subdivisions; roads for example. Fair indemnification in such circumstances requires compensation sufficient to provide a substitution for the unique facilities so that the functions carried out by or on behalf of members of the community may be continued. Depreciated replacement cost often will not permit continuation of such functions. To meet the requirement of fair indemnification for the taking of community facilities the courts have developed the "substitute facilities" measure of compensation.

There has been a certain amount of confusion in the literature on condemnation with respect to use of the "substitute facilities" terminology as a measure of "valuation" rather than of "fair compensation." It should be apparent that the cost of substitute facilities in most instances will have no relationship to "valuation." Indeed, the Second Circuit in United States v. Certain Property, 403 F.2d 800, 803 (2d Cir. 1968), and the Ninth Circuit in California v. United States, 395 F.2d 261, 266 (9th Cir. 1968) have made it clear that even in those comparatively rare instances where there is a market value for the community facility taken (for example a possible sale of a public building for private use) the government's duty to indemnify is to provide the cost of a more expensive public substitute facility. The difference between the market value in a private use market, and the cost of a public substitute facility often will result from the fact that more stringent building codes will apply to the new public facility even though the old might have continued in use. The community entity is entitled to be made whole, and making it whole means more than forcing it to abandon its non-profit community use and accept what it could obtain in the marketplace from a profit motivated purchaser. Simply stated this method insures that sufficient damages will be awarded to finance a replacement ...

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