A dispute between owners of property in northern San Diego County and a public utility district is headed for a new trial after the Fourth District Court of Appeal overturned a $2.3 million award of damages and compensation to the property owners.

A jury awarded the property owners $2.3 million for inverse condemnation and breach of contract by the Fallbrook Public Utilities District, and for the district’s later taking of the property via eminent domain. However, the Fourth District ruled that San Diego County Superior Court Judge Lisa Guy-Schall erroneously interpreted an easement agreement that gave the landowners access via the district’s property. The error was a factor in the judge’s ruling that actions of the district to deny use of the easement constituted inverse condemnation. Thus, the Fourth District ordered a new trial on all aspects of the case.

At issue is land adjacent to Red Mountain Reservoir, near the town of Fallbrook. In 1977, two investors purchased 710 acres from movie director Frank Capra with the intent of developing estate homes. The following year, the Fallbrook Public Utilities District acquired 18 acres from the investors. Part of that deal included a 60-foot easement across the district’s property so the investors could access their land from Mission Road. After the investors died in a 1978 plane crash, the family of one of the investors ended up with the property. A few years later, the family agreed to sell 3 acres for a reservoir expansion project that obliterated the dirt road on the easement.

In 1999, the property owners, calling themselves Red Mountain LLC, began working toward a 44-lot subdivision on a portion of their property. They notified the district they intended to use Red Mountain Dam Road for access to the proposed subdivision. The district refused to grant access because hundreds of cars would be traveling within a few feet of the reservoir. The district uses the 22-acre reservoir to store water purchased from the San Diego County Water Authority. The district only lightly treats the water before providing it to customers.

In 2001, Red Mountain LLC filed a lawsuit alleging inverse condemnation and breach of contract. The district followed that with its own action to take 134 acres of Red Mountain’s property, which included some of the potential subdivision site, via eminent domain. The litigation was combined, and Judge Guy-Schall ruled that the 1978 agreement granted Red Mountain access on the dam road. But she also ruled that Red Mountain was bound by a 1949 “sanitary easement” intended to preserve the lake’s purity, a ruling that appeared to block any potential subdivision.

In late 2003, the district offered $900,000 to settle all litigation. Red Mountain asked for twice as much, so the matter went to trial. Judge Guy-Schall made a finding of inverse condemnation and directed a jury to determine whether there were damages. The jury awarded $1.4 million for inverse condemnation and breach of contract, and nearly $900,000 as fair market value for the land the district directly condemned. The court also awarded Red Mountain all litigation expenses, which totaled nearly $450,000.

The district appealed, and a unanimous three-judge appellate panel reversed the judgment.

The case turned on the court’s interpretation of the 1978 access easement. The district argued that the trial court’s interpretation was wrong because Civil Code § 1069 required the court to interpret the easement in the district’s favor. The Fourth District agreed.

Under § 1069, a grant is to be interpreted in favor of the grantee (here, Red Mountain), except when the grantor (here, the public utility district) is a public entity. If there is ambiguity, and the grantor is a public entity, then the grant is to be construed in favor of the government, according to the Fourth District. In this case, the district contended that the easement was granted only for personal ingress and egress, not to accommodate a housing development.

“[W]hen a grant by a public body is ambiguous, the controlling rule is the provision in § 1069 that every grant by a public body is to be interpreted in favor of the grantor,” the court ruled, saying that the property owners’ contrary evidence was “irrelevant.”

The Fourth District further reasoned that if the trial court had determined the easement access was limited to personal use, there was a “reasonable probability” that the court would not have ruled that refusal to grant the easement resulted in inverse condemnation. Thus, a new trial is in order.
Because the inverse condemnation question must be reconsidered at a new trial, the issue of compensation for the direct condemnation must also be retried because the jury had established the fair market value based on “mitigation land with no access.”

“If there was no inverse condemnation/breach of contract, Red Mountain would have had a contractual right to an access easement until Fallbrook directly condemned that right,” Justice Cynthia Aaron wrote for the court. “Under that scenario, a jury on retrial could find that the value of the property that was directly condemned was higher than the value the jury awarded for direct condemnation in the first trial.”

The Fourth District declined to consider Fallbrook’s argument that the sanitary easement precluded any subdivision. The issue was rendered moot by Fallbrook’s direct condemnation of the land within the sanitary easement, the court ruled.

The Fourth District did overrule the lower court’s award of litigation expenses to Red Mountain because a retrial could result in a different outcome.

The Case:
Red Mountain LLC v. Fallbrook Public Utility District, No. D044546, 06 C.D.O.S. 9065, 2006 DJDAR 13023. Filed September 25, 2006.
The Lawyers:
For Red Mountain: Steven A. McKinley, Asaro, Keagy, Freeland & McKinley, (619) 297-3170.
For Fallbrook PUD: Bruce Beach, Best, Best and Krieger, (619) 525-1300.