An overview of Chappell v. North Carolina Department of Transportation
(N.C. Supreme Court No. 51PA19, May 1, 2020)
Last Friday, May 1, 2020, the North Carolina Supreme Court issued its ruling in Chappell v. North Carolina Department of Transportation – the one we have all been waiting for. Well, maybe not everyone, but having attended the oral argument last December, we can tell you that it was standing room only. And it wasn’t just the usual suspects from the North Carolina Department of Transportation, the Attorney General’s office and the local condemnation bar, though they were there in force. Many property owners from all over the state with pending Map Act claims were there to see for themselves what was happening in our highest Court. They will not be disappointed. The Supreme Court’s ruling is both a big win for Map Act claimants, like the Chappells, and an invaluable road map for future inverse condemnation cases of all types.
What is the Map Act?
North Carolina adopted the Map Act in 1987 as a planning tool for NCDOT to designate property that it intended to acquire for future roadway projects. The idea was to limit development in those designated areas while the state conducted preliminary studies, and thereby significantly reduce the acquisition costs for the state when it came time to purchase properties for road construction. During that time, the designated property owners could not develop their land, add buildings, or subdivide their property without pursuing a costly and time-consuming process to obtain a variance from the state. As a result, these restrictions severely reduced the value of many of the properties caught in the snare of a Protected Corridor Map. Several of the Protected Corridor Maps remained of record for many years while their related highway projects languished in the development process, and property owners became frustrated at the loss of their valuable property rights. Some property owners, including Sarah and Ted Chappell, filed inverse condemnation lawsuits against NCDOT, arguing that the Protected Corridor Map designation was a taking of their property.
The Chappells’ Property
Sarah and Ted Chappell purchased property off Raeford Road in Fayetteville, North Carolina, in 1985. The Chappells’ property became subject to the Map Act in 1992 (and again in 2006) when NCDOT announced plans for a future corridor loop around Fayetteville. The Chappells were unable to further develop, subdivide, or even sell their property as a result of the Corridor Map. The Chappells’ daughter, Tricia Wood, is quoted in a Fayetteville Observer article, explaining that her parents were also unable to make necessary repairs and updates to their own home due to the fact that their home was directly in the pathway of the planned loop.
The Chappells filed an inverse claim against NCDOT in 2014. Originally, NCDOT argued that there was no taking. Two months prior to trial in 2018, NCDOT attempted to exercise its quick-take powers to acquire the Chappells’ property immediately through a permissive counterclaim. The trial judge refused to allow NCDOT to exercise its quick-take power to immediately obtain title to the Chappells’ property. The Chappells prevailed at trial for their inverse claim and were awarded a judgment for the takings in 1992 and 2006. The judgment also included a reimbursement of property taxes and pre-judgment interest of 8% compounded annually. NCDOT filed a petition for discretionary review to the Supreme Court of North Carolina. On appeal, NCDOT argued: (1) the trial court mischaracterized the nature of the taking; (2) the trial court erred in adding the Chappells’ discounted property taxes to the jury award of just compensation; (3) the trial court miscalculated the pre-judgment interest; and (4) the trial court erred when it refused to allow NCDOT to exercise its quick-take rights.
Supreme Court’s Decision
The North Carolina Supreme Court filed its opinion in Chappell v. North Carolina Department of Transportation, No. 51PA19, on May 1, 2020. Click here to read the full opinion.
The court first addressed NCDOT’s quick-take rights. The court did not buy NCDOT’s argument that the trial court improperly denied its statutory quick-take rights. The court said the issue was not about the denial of NCDOT’s right to condemn, but instead, the issue was about the proper procedure. Slip op. at 10. After review of the record, the court held that the trial court did not abuse its discretion “in ruling that any permissive counterclaim filed by NCDOT in [the Chappells’ case] could not be interposed at the last minute to disrupt the trial on the Chappells’ inverse condemnation claim.” Slip op. at 10-11.
The court next addressed the nature of the taking. NCDOT argued that the trial court mischaracterized the nature of the Map Act taking, but again, the court rejected this argument. In upholding the trial court’s evidentiary rulings, the Supreme Court of North Carolina articulated “what matters is whether the trial court correctly applied the law concerning how just compensation is measured, not the label given by the trial court or the parties to the taking that occurred.” Slip op. at 14. The correct measure of damages is the difference between the fair market value before and after the taking. The trial judge’s evidentiary ruling finding NCDOT’s expert’s testimony (which valued the taking based on a three-year negative easement and compared the Chappell’s property to floodplain properties) inadmissible was not an abuse of discretion because the “indefinite” Map Act taking was not a temporary easement and the floodplain properties were not analogous to the Chappell’s property. Slip op. at 19. It was also not an abuse of discretion for the trial court to allow the Chappells’ appraiser to testify “based on evidence that there was, in fact, no market whatsoever for the property.” Slip op. at 21. The court noted that NCDOT had the right to present evidence of fair market value based on other approaches (including the cost approach and income capitalization approach), but NCDOT failed to present any such evidence at trial. Slip op. at 19-20.
Lastly, the court addressed property taxes and the pre-judgment interest rate. The court recognized that the Chappells “were effectively paying taxes on property that had no value” and thus found it appropriate for the trial court to “compensate the Chappells for the actual taxes they paid at a time when their property had virtually no fair market value.” Slip op. at 24. The court reversed the trial court’s award of 8% interest compounded annually based on a prudent investor standard. The Court held that property owners may introduce evidence of a prudent investor rate based on debt instruments or obligations but not equity investments. Further, the rate may be compounded if a prudent investor would have realized compounded interest on the investment. Slip op. at 27. The court remanded the case solely for the determination of the appropriate compounded interest rate.
A Win for Property Owners
The North Carolina Supreme Court’s decision in Chappell is a win for property owners throughout the state for the following reasons:
- The court reaffirmed the touchstone rule regarding compensation for these types of claims: compensation is calculated as the difference between the fair market value of the property before the taking and the fair market value after the taking. Slip op. 16.
- The court recognized evidence that supported the determination that the Chappells’ property had a fair market value of $0 after the taking and affirmed the position that a determination of value based on a temporary easement was inadmissible.
- This decision limits NCDOT’s attempted unfettered exercise of its quick-take rights. While permissive counterclaims, including direct condemnation claims may be asserted in an inverse case, NCDOT cannot stretch the language of N.C.G.S. § 136-104 to derail pending inverse claims.
- This decision recognizes property owners’ right to have the property taxes they paid on property with zero value considered in their awards of just compensation.
- This decision reaffirms pre-judgment interest as an integral part of “just compensation” and refines the application of a prudent investor rate to the rate of return on “government and corporate obligations.”
Effect on Pending Map Act Claims
Moving forward, NCDOT will likely introduce evidence of the fair market value using multiple approaches, including the cost approach and income capitalization. However, there are still strong arguments to be made by property owners that the fair market value of these severely impacted properties in the aftermath of a Corridor Map designation was de minimis at best. After all, the Court noted in Chappell that there was “ample evidence” in the record to support the position that there was no market value for the Chappells’ property. Slip op. at 20. There will be further litigation regarding the proper calculation of pre-judgment interest and more battles over the use of permissive counterclaims in all inverse condemnation actions. Stay tuned.
*B. Joan Davis co-authored the North Carolina Advocates for Justice Amicus Brief filed in this case. She is a senior litigator and principal in the firm with over thirty years of experience in handling eminent domain cases. Marianna Baggett just completed her law school studies at Campbell and will soon be joining our firm as an associate. For more information about this case or other eminent domain/condemnation issues, please call 919-821-7700 or email: firstname.lastname@example.org.