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Paducah Independent School District v. Putnam & Sons, LLC

Supreme Court of Kentucky

June 15, 2017

PADUCAH INDEPENDENT SCHOOL DISTRICT APPELLANT
v.
PUTNAM & SONS, LLC APPELLEE

         ON REVIEW FROM COURT OF APPEALS CASE NO. 2014-CA-001782-MR MCCRACKEN CIRCUIT COURT NO. 1 l-CI-00316

          COUNSEL FOR APPELLANT: Mark C. Whitlow Nicholas M. Holland Whitlow, Roberts, Houston & Straub, PLLC.

          COUNSEL FOR APPELLEE: Samuel Wright Farmer & Wright, PLLC Dan Biersdorf Biersdorf & Associates.

          OPINION OF THE COURT BY JUSTICE HUGHES REVERSING

         In March 2011, as part of a plan to replace its aging middle school, the Paducah Independent School District initiated condemnation proceedings against real property owned by Putnam & Sons, LLC, an Oregon Limited Liability Company (Putnam).[1] Following the Commissioners' report and award of $96, 000 to Putnam, the property was officially "taken" as of May 19, 2011. Exceptions to the Commissioners' report by both sides ensued, as did numerous continuances to accommodate attorneys and witnesses, as well as a continuance to allow for reassignment of the case to another judge of the McCracken Circuit Court. Ultimately, a bench trial was held in July 2014, the upshot being-an award of compensation damages to Putnam of $115, 000. Putnam appealed the award to the Court of Appeals, and .a unanimous panel of that Court reversed. In the panel's view, the trial court relied on outdated and otherwise incompetent evidence of the property's fair market value, thus necessitating a retrial of the compensation issue. We "granted the District's motion for discretionary review to consider its claim that the trial court's findings were in fact adequately supported by the record and appropriately addressed the parties' starkly competing appraisals of Putnam's loss. Agreeing with the District that the trial court's approach was both legally sound and properly grounded in the record, we reverse the decision of the Court of Appeals and reinstate the trial court's judgment.

         RELEVANT FACTS

         The property at issue is a 2.79 acre tract on the west side of South 31st Street in Paducah at the southwest corner of the intersection of Adams Street and 31st. The record reflects that Putnam's predecessor, Putnam 8b Son, an Oregon-based cabinetry-manufacturing partnership, purchased this tract and two others in March 1982 from the Modine Manufacturing Company. Modine, at one time a renowned maker of tractor radiators, had, since the 1940s, operated a radiator factory on the opposite, or east, side of 31st Street. The factory premises occupied an approximately 8.2 acre tract that extended south from Clark Street to the four-lane Jackson Street (U.S. Highway 62), and east from 31st Street some 500 feet to a spur of what was then the Paducah and Illinois Railroad Company (more recently the Illinois Central Gulf Railroad, Inc.). The main improvement on the factory premises was a single-story manufacturing facility of nearly 132, 000 square feet. This facility was divided into a relatively small office space at the south end, which fronts along Jackson Street, and storage and manufacturing space extending throughout the remainder of the building to the north. At some point four smaller out buildings, with an additional 20, 000 or so square feet of storage, were added to the north end of the property.

         The Modine facility was served by two parking lots. An approximately 0.19 acre lot at the northwest corner of Jackson and 31st Street served the facility's office portion, while the tract at issue in this proceeding, the 2.79 acre parcel across 31st Street from the factory and just south of Adams Street (sometimes referred to herein as the Subject Tract), served the factory's more than two hundred production employees. At the time of the taking, the smaller lot on Jackson Street had an asphalt surface; the Subject Tract had a gravel surface and a chain-link fence around its perimeter. Although the two parking lots are near each other on the west side of 31st Street, they are not contiguous; they are separated rather by property improved with at least one building that belongs to someone else.

         As noted and according to Putnam's appraiser, in 1982 Putnam's predecessor, the Putnam & Son partnership, purchased from Modine all three tracts-the large, improved tract on the east side of 31st Street and the two parking lots on the west side. Attracted especially by the ready rail access, the company bought the large parcel, in particular, to serve as a south-central storage-and-distribution center for its mainly Oregon-based cabinetry business. Through the years, apparently, Putnam 85 Son used the old Modine facility for some light manufacturing, as storage space to support the distribution its own products (through Sears and J.C. Penney stores, for example) and as warehouse space it leased to others. The partnership never used the facility for full-scale manufacturing and appears never to have required more than a handful of employees at a time. Over time, the percentages of the facility devoted to the different uses gradually tipped more and more exclusively toward warehousing.

         By about 2002, it appears, the Putnam 85 Son partnership was succeeded by the Defendant, Putnam & Sons, LLC. Tom Putnam, the "Son" of the original partnership, testified that in April 2002, not long after his father (the partnership's "Putnam") passed away, he transferred the partnership's property to the new LLC. He testified that the real property had been appraised at the time as worth $1.1 million and that he understood the transfer as pertaining only to his father's one-half interest. No such appraisal was introduced into evidence, however, and as noted by the District, the deed effecting the transfer is not so qualified. Its required certificate of consideration, [2] on the contrary, provides that the fair market value of the entire transferred property is $580, 000, of which, Tom Putnam testified, $30, 000 was personalty.

         In its new incarnation, the LLC seems essentially to have ceased to maintain the nearly sixty-year-old Modine building, the usefulness of which even for warehousing gradually diminished as the roof deteriorated and leaked. The record indicates that between January 2007 and August 2010, just prior to the commencement of this action, Putnam had its Modine property listed for sale, initially for $1.5 million in 2007, then gradually reduced to $975, 000 in the summer of 2010. During roughly the same period, the LLC's income from storage leases decreased from about $70, 000 to about $31, 000, Meanwhile, Paducah's School District was having aging-building problems of its own. According to Randy Green, the Superintendent of Paducah Public Schools at the time of the 2011 middle school project, portions of Paducah's Middle School were more than eighty years old. The building as a whole had been designated a "category five" by state officials-the worst building designation in the state system. According to Superintendent Green, the building had become unsafe, and its replacement was imperative. State school-building codes had changed during the years, moreover, so that even though the plan was to remove the old building and to build its replacement on the same site-Paducah Middle School sits on the southeast side of Lone Oak Road (U.S. Highway 45), a couple of blocks west of 31st Street and the Subject Tract-the then-current code required the new building to be supported by at least eleven acres, a considerably larger space than the old school occupied.[3]To meet that new, larger campus requirement, the District looked to acquire property for the most part east of the school extending all the way to Putnam's 2.79 acre tract on South 31st. The Superintendent testified that the District negotiated the purchase of thirty-three relatively small intervening parcels, most of which had been improved with modest, single-family residences, but the parties could not agree as to the value of the Subject Tract. The disagreement between Putnam and the District finally prompted the March 2011 initiation of condemnation proceedings.

         To a large extent, the parties' disagreement concerns whether the 2.79 acre Subject Tract can be valued independently of Putnam's neighboring properties, in particular the 8.2 acre tract across 31st Street, or whether it should be valued as still an integral part of a larger whole. The District, not surprisingly, argued for an independent valuation. Its appraiser, duly licensed and certified and possessing more than forty years' experience in the Paducah and McCracken County market, acknowledged that more than thirty years earlier the Modine Company had made an integrated use of the factory tract and its employee parking lot. He noted, however, that Putnam's own use of the factory tract had never depended on the 2.79 acre Subject Tract across the street, and he opined, based on his long experience in Paducah, that no such integrated use was then reasonably foreseeable for the area. Instead, he offered evidence of exchanges involving four other Paducah area vacant lots, which evidence, he asserted indicated a stand-alone market value for the Subject Tract of about $55, 000 (about $0.45/sq. ft. of land area-almost exactly the tax-assessment value of $54, 000), to which he would have added $5, 000 for the chain-link-fence improvement for a total value of $60, 000.

         Putnam, on the other hand, insisted that its compensation should be based on the value of its property as a whole before and after the taking. According to its appraiser, also licensed and well certified, although from outside McCracken County and so with less direct experience of that particular market, the factory tract, given its fairly direct access to Interstate 24 and to a couple of Paducah's U.S. Highways, could, in conjunction with the graveled 2.79 acre tract, be made into a regional or even national warehousing facility once the building's roof was repaired. The 2.79 acre Subject Tract was essential to that use, according to the appraiser, because such warehousing facilities require a relatively high ratio of open space to building space in order to accommodate the temporary storage of large, long-distance semi-trailers. Without the Subject Tract, the Putnam appraiser testified, warehousing was still the best use for the factory tract-assuming its building was repaired-but the lessened ability to accommodate large trailers would limit the facility to a more local shipping and storage market. Citing sales from cities well outside Paducah, such as Henderson and Madisonville and even Bowling Green, Bardstown, and Elizabethtown, the appraiser claimed that national/regional warehousing facilities were worth in the neighborhood of $10/sq. ft. of building area, whereas local storage facilities were worth only about $5/sq. ft. Having made what he claimed were appropriate adjustments for roof repair, Putnam's appraiser testified that the before-taking value of Putnam's entire property as a potential integrated regional warehousing facility was about $1.1 million, whereas the after-taking value of the factory tract (plus the smaller parking lot) as a potential primarily local storage facility would be only about $350, 000. Subtracting the latter amount from the former, the appraiser maintained that Putnam's compensation for the taking of the Subject Tract should be about $750, 000.

         It so happened that a little more than a year after the taking, while the case was still pending, Putnam in fact sold the factory tract and the smaller parking lot for $435, 000. In light of that sale, Putnam conceded at trial that the factory-tract-plus-smaller-parking-lot remainder had been worth that amount-$435, 000-immediately after the taking, thus reducing, the compensation to which it was entitled under its integrated-property theory from $750, 000 to $665, 000.

         Even assuming that Putnam's properties were not integrated so that a stand-alone appraisal of the Subject Tract was appropriate, Putnam's appraiser took serious issue with the District's appraisal. According to Putnam's appraiser, among the major driving forces in Paducah's economy were its two regional hospitals, Western Baptist Hospital, to the northeast of Putnam's property toward downtown, and Lourdes Hospital, to the southwest and closer to Interstate 24. Even the District had observed that these two hospitals made Paducah the largest medical center between St. Louis, Missouri and Memphis/Nashville, Tennessee. Putnam's appraiser opined that the Subject Tract's location only a block off the commercially well-developed Jackson Street (U.S. Highway 62) and its strategic position directly between the two hospitals made it a choice location for medical office or retail development. It was thus, according to Putnam's appraiser, quite unlike the differently situated vacant lots to which the District's appraiser had compared it, and quite like some of the city's most valuable vacant properties in other areas. Such properties, according to Putnam's appraiser, could be worth in excess of $300, 000/acre, but in his view the Putnam lot was most comparable with lots sold at prices suggesting a value of $217, 800/acre, or about $5/sq. ft. of land area. At that rate, even standing alone, the Subject Tract (121, 682 sq. ft.) was worth $608, 410, or more than ten times the District's appraisal.

         As has been observed many times, "[determining the value of real estate is not a science, " Portland Nat Gas Transmission Sys. v. 19.2 Acres of Land, 318 F.3d 279, 281 (1st Cir. 2003). Confronted with appraisals as disparate as those in this case, a fact-finder could be forgiven for thinking that it is not even much of an art, or if an art, a creative one rather than a practical. The trial court here, in its Findings of Fact, Conclusions of Law and Judgment explained why neither party's appraisal approach struck it as persuasive.

         The court rejected, to begin with, Putnam's bid to have its properties evaluated as an integrated whole, noting that there was no evidence that the 8.2 acre factory tract had depended on the Subject Tract since Modine ceased operations in the 1980s. Further, the court noted that zoning ordinances introduced by the District indicated that the smaller parking lot left to Putnam would adequately support even a full-scale warehousing operation (as understood by the zoning authorities) at a refurbished Modine facility. The court also rejected Putnam's $608, 000 stand-alone evaluation of the Subject Tract, on the ground simply that Putnam's sale in 2012 of its remaining holdings of more than eight acres for $435, 000, made it unreasonable to believe that a year earlier a quarter of that acreage (2.79 acres to be exact) had been worth $175, 000 more. In the trial court's view, the District's appraisal was equally unhelpful because the appraiser's ostensibly comparable sales "were not arms-length transactions (or even sales at all) or they involved properties where the highest and best use was not the same high level of commercial use that is enjoyed by the Subject Property."

         Thus left in the lurch by the parties, the court relied on the only evidence before it of transactions actually involving Putnam's properties. It noted, first, the deed that Tom Putnam executed in April 2002, whereby the Putnam & Son partnership transferred the partnership's entire holdings to the new Putnam & Sons, LLC. Aside from the small amount of personalty that Tom Putnam testified was included in the transfer, the deed indicates, as the court observed, that in 2002, "Putnam valued all of the Modine properties at $550, 000." The court also noted the 2012 sale of the 8.4 acre remainder-factory tract plus small parking lot-for $435, 000. Assuming that those values-$550, 000 for the whole in 2002 and $435, 000 for the remainder in 2012, could serve as reasonable approximations for their May 2011 counterparts, the trial court arrived (by subtraction) at a May 2011 value for the taken 2.79 acre Subject Tract of $ 115, 000. That that amount for a tract roughly a fourth of the size of the remainder turned out to be roughly a fourth of the amount Putnam had received upon sale of the remainder, provided at least some confirmation, the court believed, for its assumptions regarding 2011 values. It also provided reasonable assurance of fair and just compensation for Putnam's loss.

         As noted, Putnam appealed from that ruling, and the Court of Appeals reversed. The appeals panel expressed concern that in rejecting Putnam's integration theory the trial court gave too much weight to how Putnam had actually used the property-in a very limited warehousing capacity-and had not paid sufficient heed to Putnam's appraiser's testimony. He had testified to the potential use of the property for full-scale warehousing on a regional basis, a use that would require (according to the appraiser) both the factory tract and the Subject Tract and would thus affect the market value of both.

         The appeals panel also rejected the trial court's assumption that Putnam's 2002 valuation of its Modine properties could be considered a reasonable approximation of their value as a whole in May 2011. The 2002 deed was unreliable, the panel believed, both because of its age ("It is difficult to fathom that the entire property was worth the same amount in 2011 as it was in 2002.") and because it "represented a transfer between interrelated companies." This latter fact called into doubt, in the panel's view, whether the 2002 deed could even be thought reliable evidence of fair market value in 2002, much less in 2011. ("There was no testimony that this transfer represented the actual fair market [value] of the ...


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