Hardy v. United States

In the United States Court of Federal Claims

No. 14-388L

(Filed: June 21, 2018)

*************************************

WILLIAM C. HARDY & BERTIE ANN *

HARDY et al., *

*

Rails-to-Trails; Cross-Motions for Partial

Plaintiffs, *

Summary Judgment; RCFC 56; RCFC 42;

*

Just Compensation; Delay Damages;

v. *

Appropriate Interest Rate; Prudent Investor

*

Rule; Compounding Interest

THE UNITED STATES, *

*

Defendant. *

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Elizabeth A. Gepford McCulley, Kansas City, MO, for plaintiffs.

Amarveer Brar, United States Department of Justice, Washington, DC, for defendant.

OPINION AND ORDER

SWEENEY, Judge

In this Rails-to-Trails action, 112 plaintiffs contend that they own real property adjacent

to a rail corridor in Newton County, Georgia. They assert that until 2013, the Central of Georgia

Railroad Company and its predecessors held easements for railroad purposes that crossed their

land. According to plaintiffs, defendant United States then authorized the conversion of the

railroad rights-of-way into recreational trails pursuant to the National Trail Systems Act, conduct

that resulted in a taking in violation of the Just Compensation Clause of the Fifth Amendment to

the United States Constitution.

Currently before the court are the parties’ cross-motions for partial summary judgment as

to the appropriate interest rate necessary to provide just compensation. Plaintiffs argue that the

Vanguard Balanced Index Fund (“VBINX”) or, alternatively, the Moody’s Composite Index of

Yields on Aaa Long Term Corporate Bonds (“Moody’s”), satisfies the Prudent Investor Rule and

would supply the proper rate by which to calculate damages for the delay between the date of

taking and the date of payment, i.e., delay damages. Defendant argues that delay damages

should be calculated using the rate set forth in the Declaration of Takings Act (“DTA”) or,

alternatively, the five-year Treasury Inflation Protected Security (“TIPS”) rate, compounded

annually. For the reasons explained below, the court concludes that the Moody’s rate is the

appropriate benchmark by which to calculate delay damages in this case. Therefore, the court

grants in part and denies in part plaintiffs’ motion for partial summary judgment and denies

defendant’s cross-motion.

I. BACKGROUND

Detailed descriptions of the statutory and regulatory context of this case, initial

acquisition of the land in question, and proceedings before the Surface Transportation Board are

provided in the court’s summary judgment ruling with respect to liability and need not be

repeated herein. See Hardy v. United States, 127 Fed. Cl. 1, 5-7 (2016). In that ruling, the court

determined that the Surface Transportation Board’s issuance of a Notice of Interim Trail Use or

Abandonment (“NITU”) on August 19, 2013, constituted a taking with respect to property

owners holding a cognizable Fifth Amendment property interest. Id. at 21-22. It further

determined which plaintiffs held such an interest. Id. at 10-21. The court later reconsidered its

ruling with respect to certain parcels, finding that additional plaintiffs held a cognizable Fifth

Amendment property interest as of the date of taking. Hardy v. United States, 129 Fed. Cl. 513,

518 (2016).

On November 18, 2016, the Surface Transportation Board issued a public notice of

correction of the NITU, modifying the NITU’s description of the location of the eastern terminus

of the portion of the rail line covered by the NITU—a modification that affected eleven plaintiffs

owning twelve parcels. Hardy v. United States, 131 Fed. Cl. 534, 536-37 (2017). The court

determined that the NITU’s modification impacted the duration of the taking, not whether a

taking had occurred, and that the eleven plaintiffs affected by the NITU’s modification suffered a

temporary taking from August 19, 2013, to November 18, 2016. Id. at 539-40.

The court then held an eight-day trial in Atlanta, Georgia from September 25, 2017,

through October 4, 2017, to ascertain the value of the property interests that were found to have

been taken. Six landowners, as well as experts for both sides, testified at trial. Posttrial briefing

is ongoing, and closing arguments are scheduled for August 16, 2018. Plaintiffs filed the instant

motion for partial summary judgment as to the appropriate interest rate during posttrial briefing,

and defendant cross-moved for partial summary judgment. Both plaintiffs and defendant

attached expert declarations to their filings. Plaintiffs submitted the declaration of Todd T.

Milbourn and defendant submitted the declaration of Jonathan A. Neuberger. Plaintiffs also filed

a response to defendant’s cross-motion and a reply in support of their motion, and attached an

expert rebuttal declaration. Defendant did not file a reply in support of its cross-motion. The

court deems oral argument unnecessary, and the motions are now ripe for adjudication.1

1

Defendant asserts that Rule 56(b) of the Rules of the United States Court of Federal

Claims (“RCFC”) generally precludes motions for summary judgment from being filed more

than thirty days after the close of discovery, and notes that discovery closed on June 1, 2017.

However, RCFC 56(b) is not an absolute bar on such motions; it provides that “[u]nless the court

orders otherwise, a party may file a motion for summary judgment at any time until 30 days after

the close of all discovery.” Because both parties seek a ruling with respect to the proper rate of

interest and attached expert declarations in support of their cross-motions, the court construes the

parties’ recent submissions as a joint motion to reopen discovery for the limited purpose of

determining the appropriate interest rate, and grants the motion. In any event, this opinion serves

as “order[ing] otherwise” for RCFC 56(b) purposes.

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II. STANDARD OF REVIEW

Summary judgment is appropriate when there is no genuine issue of material fact and the

moving party is entitled to judgment as a matter of law. RCFC 56(a); Celotex Corp. v. Catrett,

477 U.S. 317, 322 (1986). A fact is material if it “might affect the outcome of the suit under the

governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). An issue is

genuine if it “may reasonably be resolved in favor of either party.” Id. at 250.

The moving party bears the initial burden of demonstrating the absence of any genuine

issue of material fact. Celotex, 477 U.S. at 323. The nonmoving party then bears the burden of

showing that there are genuine issues of material fact for trial. Id. at 324. Both parties may carry

their burden by “citing to particular parts of materials in the record, including depositions,

documents, electronically stored information, affidavits or declarations, stipulations (including

those made for purposes of the motion only), admissions, interrogatory answers, or other

materials” or by “showing that the materials cited do not establish the absence or presence of a

genuine dispute, or that an adverse party cannot produce admissible evidence to support the

fact.” RCFC 56(c)(1).

The court must view the inferences to be drawn from the underlying facts in the light

most favorable to the nonmoving party. Matsushita Elec. Ind. Co. v. Zenith Radio Corp., 475

U.S. 574, 587 (1986). However, the court must not weigh the evidence or make findings of fact.

See Anderson, 477 U.S. at 249 (“[A]t the summary judgment stage the judge’s function is not

himself to weigh the evidence and determine the truth of the matter but to determine whether

there is a genuine issue for trial.”); Contessa Food Prods., Inc. v. Conagra, Inc., 282 F.3d 1370,

1376 (Fed. Cir. 2002) (“On summary judgment, the question is not the ‘weight’ of the evidence,

but instead the presence of a genuine issue of material fact . . . .”), abrogated on other grounds by

Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665 (Fed. Cir. 2008) (en banc); Ford Motor Co.

v. United States, 157 F.3d 849, 854 (Fed. Cir. 1998) (“Due to the nature of the proceeding, courts

do not make findings of fact on summary judgment.”); Mansfield v. United States, 71 Fed. Cl.

687, 693 (2006) (“[T]he Court may neither make credibility determinations nor weigh the

evidence and seek to determine the truth of the matter. Further, summary judgment is

inappropriate if the factual record is insufficient to allow the Court to determine the salient legal

issues.”). Entry of summary judgment is mandated against a party who fails to establish “an

element essential to that party’s case, and on which that party will bear the burden of proof at

trial.” Celotex, 477 U.S. at 322.

Further, RCFC 42 provides that separate proceedings, including trials, may be held for

separate issues, and the court finds that determining the appropriate interest rate for delay

damages is a separate issue from determining the value of the property interests that were found

to have been taken. Other judges of this court have followed a similar approach. See, e.g.,

Adkins v. United States, Nos. 09-503L et al., 2014 WL 448428, at *1 (Fed. Cl. Feb. 4, 2014); cf.

Textainer Equip. Mgmt. Ltd. v. United States, 99 Fed. Cl. 211, 223 (2011) (ruling on the

appropriate interest rate before determining liability for the alleged taking). Accordingly, the

parties’ cross-motions for partial summary judgment and attached expert declarations are

properly before the court.

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In ruling on cross-motions for summary judgment, the court “must evaluate each motion

on its own merits.” First Commerce Corp. v. United States, 335 F.3d 1373, 1379 (Fed. Cir.

2003). If neither party meets its burden, then the court must deny both motions. Bubble Room,

Inc. v. United States, 159 F.3d 553, 561 (Fed. Cir. 1998).

III. ANALYSIS

The Fifth Amendment to the United States Constitution prohibits the federal government

from taking private property for public use without paying just compensation. When payment of

just compensation is delayed, the property owner “is entitled to interest thereon sufficient to

ensure that he is placed in as good a position pecuniarily as he would have occupied if the

payment had coincided with the appropriation.” Kirby Forest Indus., Inc. v. United States, 467

U.S. 1, 10 (1984), quoted in Otay Mesa Prop., L.P. v. United States, 779 F.3d 1315, 1328 (Fed.

Cir. 2015). In other words, as defendant correctly observes, the delay damages should make a

property owner indifferent to the timing of payment. See Otay Mesa Prop., 779 F.3d at 1328

(“[I]nterest must be added to the damages award in order to compensate for the time value of

money and the potential opportunity the owner has lost to earn income on its damages award as a

result of the taking.”); Textainer, 99 Fed. Cl. at 222 (“[I]nterest is compensation for lost use of

the takings award between the date of the taking and the date of the payment.”).

A. The Prudent Investor Rule Applies

The “guiding principle” in determining the appropriate interest rate is the Prudent

Investor Rule, which examines “how a reasonably prudent person would have invested the funds

owed by the government to produce a reasonable return while maintaining safety of principal.”

Sears v. United States, 124 Fed. Cl. 730, 734-35 (2016) (internal quotation marks and alterations

omitted). Defendant’s argument that applying the Prudent Investor Rule would require the court

to make individualized determinations for each plaintiff misses the mark. Courts do not “take[]

into account the risk inherent in the property being taken” nor the “risk tolerance of the property

owner” when determining the appropriate interest rate. Id. at 733 n.2. A reasonably prudent

person is just that—a reasonably prudent person, not a specific person or entity; the number of

plaintiffs and their individual characteristics are of no moment when applying the Prudent

Investor Rule.

Defendant proffers two more reasons why the court should not apply the Prudent Investor

Rule. First, defendant avers that the Prudent Investor Rule is a trusts concept applicable to

fiduciaries. Although defendant is correct that the Prudent Investor Rule applies in the trusts

setting, that fact does not prevent the rule’s application in the Rails-to-Trails context. See, e.g.,

id. at 734 (discussing several prior takings actions in which the Prudent Investor Rule was

applied), 736-37 (selecting an interest rate based on the Prudent Investor Rule). Second,

defendant suggests that “an objective inquiry that focuses on the value of the property—and not

the owner’s lost investment opportunities—is appropriate” for determining just compensation

and delay damages. Fed. Def.’s Resp. Pls.’ Mot. Partial Summ. J. (“Def.’s Cross-Mot.”) 22,

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ECF No. 202.2 Defendant’s reasoning is unpersuasive because (1) the Prudent Investor Rule is

an inherently objective inquiry that applies uniformly to all plaintiffs and (2) the loss of

investment opportunities is a fundamental component of delay damages. See United States v.

429.59 Acres of Land, 612 F.2d 459, 464-65 (9th Cir. 1980) (“It is assumed that a person who

received the pecuniary value of his property as of the date of taking would invest these funds in a

reasonably prudent manner.”). Indeed, previous rulings from the United States Court of Federal

Claims (“Court of Federal Claims”) have rejected proposed interest rates that were not based on

the Prudent Investor Rule. E.g., Textainer, 99 Fed. Cl. at 222.

In short, making a plaintiff whole—i.e., placing a plaintiff “in as good a position

pecuniarily as he would have occupied if the payment had coincided with the appropriation,”

Kirby, 467 U.S. at 10—pursuant to the Fifth Amendment requires application of the Prudent

Investor Rule.

B. The DTA Rate Is Inappropriate in This Case

The court now turns to the various interest rates proposed by the parties. Defendant first

suggests that the “proper interest rate is set forth” in the DTA. Def.’s Cross-Mot. 2. Under the

DTA, delay damages are pegged to the “weekly average one-year constant maturity Treasury

yield . . . for the calendar week preceding the date of taking.” 40 U.S.C. § 3116(a)(1) (2012).

When the delay between the date of taking and the date of payment is greater than one year, at

the beginning of each subsequent year (1) interest is compounded and (2) a new rate is applied

using the “weekly average for the calendar week preceding the beginning of each additional

year.” Id. § 3116(a)(2).

However, the DTA rate is mandated only in direct condemnation actions instituted in

federal district court. Id. § 3113; see also Vaizburd v. United States, 67 Fed. Cl. 499, 504 (2005)

(describing the DTA rate as the rate that has been “approved for use in statutory

condemnations”). Thus, by its own terms, the DTA does not extend to Rails-to-Trails actions in

the Court of Federal Claims. As inverse condemnations, Rails-to-Trails takings are markedly

different from eminent domain takings, i.e., direct condemnations. See Condemnation, Black’s

Law Dictionary (10th ed. 2014) (distinguishing between a condemnation effected by “the

exercise of eminent domain” and inverse condemnations). Congress could have applied the

DTA rate to inverse condemnation actions but did not do so. Accordingly, defendant’s statement

that the DTA “establish[ed] a uniform statutory rate of interest in eminent domain cases,” Def.’s

Cross-Mot. 8, while correct, does not advance its position. See Sears, 124 Fed. Cl. at 734 n.3

(remarking that the DTA applies in eminent domain cases but is “not binding on other types of

Fifth Amendment takings cases, such as” Rails-to-Trails actions).

2

Although defendant titled its filing as a response to plaintiffs’ motion for partial

summary judgment with respect to the appropriate interest rate, defendant indicated, at the outset

of its response, that it also “cross-moves for partial summary judgment on the same issue.”

Def.’s Cross-Mot. 1.

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Defendant asserts that the DTA rate applies in inverse condemnations just as it does in

direct condemnations because “the standard for measuring ‘just compensation’ is the same” in

both settings. Def.’s Cross-Mot. 13. Defendant unconvincingly attempts to equate direct and

inverse condemnations by invoking the minority opinion in City of Monterey v. Del Monte

Dunes at Monterey, Ltd. In Monterey, four justices of the United States Supreme Court

observed that direct and inverse condemnations were substantively the same because the ultimate

issue in both is determining the fair market value of the property taken on the date in question,

which is the amount the property owner is entitled to recover. 526 U.S. 687, 734-35 (1999)

(relying on Kirby, 467 U.S. at 10) (Souter, J., concurring in part and dissenting in part).

However, defendant overlooks that the minority opinion in Monterey focused on the principal

portion of the award, i.e., the “value of the property taken,” id. at 735 (internal quotation marks

omitted), and did not address delay damages.

Defendant—relying on Vaizburd, Textainer, and Waverley View Investors, LLC v.

United States—further contends that “special proof” is necessary to deviate from the “DTA rates

and methodology as the ‘default’ in takings cases.” Def.’s Cross-Mot. 7. However, defendant’s

reliance on those decisions is misplaced.

In Vaizburd, another judge of this court stated that the DTA rate, with compounding, is

used “[i]n the absence of special proof that a rate other than [the DTA rate] is appropriate.” 67

Fed. Cl. at 504. However, Vaizburd is distinguishable from the instant case for three reasons.

First, the taking in Vaizburd involved a physical invasion resulting from the accretion of sand on

the plaintiffs’ property. Id. at 500. Second, the time period in question was 1996 through 2005,

before the Great Recession of the late 2000s and early 2010s (the importance of which is

discussed below). Id. at 504. Third, “there was no presentation directed at the appropriate

interest rate, or whether it should be compounded.” Id. In the instant case, the taking involved

issuance of a NITU that prevented the vesting of plaintiffs’ reversionary interests in their land,

the time period in question is 2013 through at least 2018 (after the Great Recession), and the

parties have extensively briefed the issue of the appropriate interest rate and have submitted

expert declarations in support of their contentions. In any event, the Vaizburd court recognized

that determining the appropriate rate of interest is an issue “of fact, based on the particular

circumstances of the case.” Id. (relying on Dynamics Corp. of Am. v. United States, 766 F.2d

518, 520 (Fed. Cir. 1985)).

In Textainer, another judge of this court, as in Vaizburd, held that “[a]bsent special proof,

the statutorily-set rate in the DTA shall apply.” 99 Fed. Cl. at 223. Textainer concerned a

dispute regarding whether the federal government was acting in a sovereign or proprietary

capacity when it failed to return rented containers at the conclusion of a lease. Id. at 220. The

court found that summary judgment with respect to liability was inappropriate given disputed

material facts, noted that the parties had agreed on the valuation of the containers themselves,

and observed that the parties disagreed on the issue of interest. Id. at 220-21. With respect to the

latter issue, the plaintiffs argued for a 10.25% interest rate “to appropriately reflect the average

rate of return on containers from 2005 through 2010,” or a variation of the Moody’s rate as an

alternative, while the government supported application of the DTA rate. Id. at 221. The court

remarked that there was “no consensus . . . with regard to the appropriate interest rate to be

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employed in just compensation cases” and that there was “precedent to support the use” of either

the Prudent Investor Rule or the DTA rate. Id. at 222. Ultimately, the court sided with the

government because the plaintiffs’ suggested rate was not based on the Prudent Investor Rule

(since the plaintiffs sought compensation for “lost use of the taken property” rather than

“compensation for lost use of the takings award”), the plaintiffs “presented no evidence

supporting application of the Moody’s Corporate Bond Index rate,” and use of the DTA rate

“further[ed] the pursuit of uniform treatment of awardees in takings actions.” Id. at 222-23. In

the instant case, however, the plaintiffs base their proposed interest rates on the Prudent Investor

Rule and have supplied evidence in support thereof.

In Waverley View, another judge of this court determined that the federal government

was liable for a Fifth Amendment taking because the United States Army had installed gravel

access roads and monitoring wells on the plaintiff’s property.3 136 Fed. Cl. 593, 594 (2018),

appeal docketed, No. 2018-1785 (Fed. Cir. Apr. 6, 2018). The discussion regarding the

appropriate interest rate consisted of three sentences:

The parties also disagree about the appropriate rate of

interest. The court, however, consistently has determined that the

appropriate interest rate in Takings Clause cases is the rate set

forth in the [DTA]. Accordingly, Plaintiff is entitled to interest at

the DTA rate from November 13, 2014 . . . to the date of payment.

Id. at 596-97 (citations omitted). Although the court relies on Textainer in support of its

assertion that the Court of Federal Claims has “consistently . . . determined that the appropriate

interest rate in Takings Clause cases is” the DTA rate, id., Textainer actually provides that “no

consensus has emerged with regard to the appropriate interest rate to be employed in just

compensation cases” and that “there is precedent to support the use of either” the Prudent

Investor Rule or the DTA rate, 99 Fed. Cl. at 222 (internal quotation marks omitted). Textainer

teaches that the DTA rate is, at most, the “default” rate in takings cases—and not the

“appropriate” rate that should apply across the board in takings cases as determined in Waverley

View—with the caveat that “special proof” can provide a basis for deviating from the default.

Compare id. at 223, with Waverley View, 136 Fed. Cl. at 596-97.

In short, none of the decisions relied upon by defendant requires the use of the DTA rate

to calculate delay damages. Although the Vaizburd and Textainer courts both concluded that the

DTA rate was appropriate, those conclusions were (1) limited to the facts of each case and

(2) recognized that the default DTA rate would not necessarily apply given the right

circumstances (i.e., “special proof”). Additionally, the Waverley View court did not consider

whether another rate besides the DTA rate would be proper, but instead simply stated that it

would apply the DTA rate because doing so was appropriate.

3

Vaizburd, Textainer, and Waverley View were all decided by different judges, none of

which is the undersigned.

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In any event, it is well established that “ascertainment of ‘just compensation’ is a judicial

function.” Langenegger v. United States, 756 F.2d 1565, 1569 (Fed. Cir. 1985). Indeed, the

United States Court of Claims has stated:

The determination of just compensation, including the proper rate

of interest, is basically a question of fact. As such, the

determination of just compensation under the fifth amendment is

exclusively a judicial function. It does not rest with Congress to

say what compensation shall be paid, or even what shall be the rule

of compensation.

Miller v. United States, 223 Ct. Cl. 352, 399-400 (1980). That court acknowledged, however,

that “the rate of interest set by a statute can be applied . . . if such rate is reasonable and judicially

acceptable.” Id. at 400.

Defendant also argues that departures from the DTA rate that may have been appropriate

during the Great Recession are “no longer justifiable” because the “Federal Reserve has raised

the targeted federal funds interest rate five times from December 2015 through December 2017.”

Def.’s Cross-Mot. 11. Defendant’s argument is unfounded for two reasons. First, as of the end

of 2017, the effective federal funds rate was approximately one-fourth of the rate in place just

prior to the beginning of the Great Recession. Pls.’ Reply Gov’t Resp. Pls.’ Mot. Partial Summ.

J. (“Pls.’ Reply”) Ex. A (“Milbourn Rebuttal”) ¶¶ 28-29, ECF No. 207-1. Second, the increases

in the federal funds rate did not begin until well after the August 19, 2013 taking. Thus, even

assuming (for the sake of argument) that the federal funds rate increases over the past two-and-

one-half years had brought the interest rate to its pre-Great Recession levels, it would be of no

moment. Because payment in Rails-to-Trails cases is often delayed for several years, see, e.g.,

Furlong v. United States, 132 Fed. Cl. 630, 631 (2017) (reflecting a fourteen-year delay between

the date of taking and final approval of a settlement agreement), courts must consider the

economic circumstances during the entire interval.

To the extent that it is necessary for plaintiffs to offer “special proof” that the DTA rate is

insufficient to protect the value of their eventual award, plaintiffs have indeed come forward

with such proof. In his declaration, plaintiffs’ expert, Dr. Milbourn, compared the market yield

on one-year Treasury securities with the inflation rate:

Market Yield on

Inflation

Year One-Year

Rate

Treasury Securities

2013 0.15% 1.50%

2014 0.13% 1.60%

2015 0.25% 0.10%

2016 0.54% 1.30%

2017 0.83% 2.20%

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Pls.’ Mot. Partial Summ. J. (“Pls.’ Mot.”) Ex. C (“Milbourn Decl.”) at Ex. B Panel 1, ECF No.

193-3. The data provided by plaintiffs’ expert reflects that the DTA rate has failed to keep pace

with inflation in four out of five years over the relevant time period. The DTA rate also failed to

keep pace with inflation in each year from 2009 through 2012. Id. Dr. Neuberger, defendant’s

expert, does not dispute the accuracy of these figures.

Use of the DTA rate does not pass muster in this case because an objectively reasonable

prudent investor simply would not invest in a product that would result in a loss of purchasing

power. See Sears, 124 Fed. Cl. at 736. In other words, the failure of a hypothetical investment

“to keep pace with inflation over the pertinent period” demonstrates that such investment “is an

inappropriate basis for deriving interest as part of just compensation.” Id. Therefore, further

inquiry is unnecessary for the court to conclude that the DTA rate is an inappropriate measure of

delay damages in the instant case.

C. The Five-Year TIPS Rate Is Inappropriate in This Case

Defendant also suggests that the five-year TIPS rate provides a viable alternative to the

DTA rate because the TIPS rate “protects Plaintiffs against inflationary risks by providing return

adjustments based on actual inflation rates.” Def.’s Cross-Mot. 13. Dr. Neuberger explains that

while “five-year TIPS involve a longer term (and thereby less liquidity)” than one-year Treasury

securities as contemplated by the DTA rate, they also “offer protection against inflationary risk

in the form of adjustments to returns based on actual inflation rates” and “ensure that the

principal award is preserved in real (inflation-adjusted) terms between the date of the alleged

taking and the date of the award.” Def.’s Cross-Mot. Attach. A (“Neuberger Decl.”) ¶ 40, ECF

No. 202-1. TIPS provide both the “return of an inflation-adjusted principal value” and “an

annual coupon payment which is calculated on the basis of this inflation-adjusted principal each

and every year.” Milbourn Rebuttal ¶ 47.

Dr. Neuberger posits that the “annualized return on the five-year TIPS issued on August

19, 2013 was 1.06 percent.” Neuberger Decl. ¶ 41. Dr. Milbourn disputes that figure, and avers

that the annualized return on the five-year TIPS between August 19, 2013, and April 15, 2018,

was 1.49%. Milbourn Rebuttal ¶ 118. Dr. Milbourn’s estimate includes consideration of the

adjusted principal return and semiannual coupon payments. See id. Dr. Neuberger, meanwhile,

does not provide any details for his calculation. See Neuberger Decl. ¶ 41.

However, the apparent dispute regarding the actual performance of the five-year TIPS is

ultimately immaterial. The five-year TIPS failed to keep pace with inflation in three out of five

years from 2013 through 2017, even when using the higher 1.49% figure. Compare Milbourn

Rebuttal ¶ 188, with Milbourn Decl. Ex. B Panel 1, and Neuberger Decl. ¶ 41. Further,

assuming (for the sake of argument) that the five-year TIPS provides a rate of return

approximately equal to the inflation rate, the five-year TIPS still falls short. Although keeping

pace with inflation is a necessary condition for a hypothetical investment to serve as an

appropriate benchmark upon which to award interest for delay damages, see supra Section III.B,

it is not a sufficient condition.

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An objectively reasonable prudent person would not invest in a product that did not

provide adequate compensation for the risks faced in conjunction with that investment. Indeed,

the parties agree that plaintiffs should only be compensated for risks actually borne (although

they disagree on which risks plaintiffs did in fact bear). Compare Neuberger Decl. ¶ 64 (“The

guiding economic principle of the proper determination of interest is that it must be

commensurate with the risks actually borne by the Plaintiffs because of the delay.”), with

Milbourn Decl. ¶ 183 (“[T]he economic harm to plaintiffs is demonstrated by the

characterization of the risks actually borne by the plaintiffs, and the rate of interest used to

estimate the amount of delay compensation should be matched commensurately to these risks.”).

Further, an objectively reasonable prudent person would seek to obtain a return on the

investment beyond merely keeping pace with inflation, even if doing so entailed some degree of

risk. Milbourn Decl. ¶¶ 52-54.

Plaintiffs in the instant case face a liquidity risk as a result of the delay in payment

because federal law prohibits them from liquidating their claims through a sale or being pledged

as collateral for a loan. See 31 U.S.C. § 3727(a)-(b) (2012). Plaintiffs are entitled to be

compensated for this harm because it would not exist if payment had been made

contemporaneously with the taking. See Biery v. United States, Nos. 07-693L and 07-675L,

2012 WL 5914521, at *3 (Fed. Cl. Nov. 27, 2012) (“The court’s primary goal in determining a

correct interest rate is to employ an interest calculation that does not just yield a higher or lower

interest payment, but rather is the more accurate measure of the economic harm of the property

owners.” (internal quotation marks and alterations omitted)). Other judges of this court have

recognized that the detriment plaintiffs face with respect to liquidity should “be taken into

account in the court’s determination of an appropriate interest rate.” Sears, 124 Fed. Cl. at 736.

The court therefore agrees with plaintiffs that failing to account for liquidity risk in determining

an appropriate interest rate would “undercompensate them for their economic loss” suffered as a

result of the delay in payment. Milbourn Decl. ¶ 27; accord Milbourn Rebuttal ¶ 32 (“Liquidity

risk is a real risk imposed on plaintiffs and financial markets provide yield compensation for this

risk.”). Accordingly, defendant’s argument that “the illiquidity of a plaintiff’s claim, i.e., the

ability to transfer their lawsuit, is . . . not a factor in determining the appropriate interest on a

delayed payment,” Def.’s Cross-Mot. 16, is meritless.

In short, the court agrees with the parties that the five-year TIPS does not account for

liquidity risk. See Milbourn Decl. ¶ 21; Neuberger Decl. ¶¶ 40, 54. Further, plaintiffs face a

liquidity risk due to the delay in payment. An objectively reasonable prudent investor facing

such a risk would not select an investment that fails to consider such risk. Therefore, the court

concludes that an interest rate based on the performance of the five-year TIPS does not provide

adequate compensation for delay damages in the instant case.

D. The VBINX Rate Is Inappropriate in This Case

Plaintiffs aver that the VBINX is a “perfect and representative example of . . . a fund that

is both (1) consistent with all of the tenets of the [Prudent Investor Rule] and (2) matches the

actual risks applicable to” them. Pls.’ Mot. 3, ECF No. 193. According to plaintiffs, the VBINX

is a “diversified mutual fund,” has “low and certainly acceptable risk,” and “balance[s] the

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elements of return between production of income and the protection of purchasing power.” Id. at

9. Defendant argues that applying an interest rate pegged to the performance of the VBINX

would “overcompensate Plaintiffs for risks they did not bear.” Def.’s Cross-Mot. 18. The

parties are correct on the law, but miss the mark in its application.

Dr. Neuberger posits that, as a result of the taking that the court found to have occurred

on August 19, 2013, plaintiffs essentially hold a risk-free claim against the federal government

and should be compensated accordingly. See, e.g., Neuberger Decl. ¶ 30. Meanwhile, Dr.

Milbourn focuses on plaintiffs having “displayed a willingness to hold land as part of [their]

investment portfolio[s],” Milbourn Decl. ¶ 171, and argues that delay damages should be

calculated by focusing on the type of asset—land—that was taken, id. ¶ 122 (“It is appropriate to

consider the type of asset allegedly taken.”). Accord id. ¶ 152 (“Had the plaintiffs been fairly

compensated for the taking of their private land on August 19, 2013, the plaintiffs would have

likely sought to invest those proceeds in investments that at a minimum met their investment

objectives from holding land as part of their portfolio.”).

Both approaches are unsound. As explained above, plaintiffs are entitled to

compensation that will place them in the same pecuniary position as if the payment of just

compensation coincided with the taking; such a determination requires adherence to the Prudent

Investor Rule. In other words, rather than calculating delay damages by treating plaintiffs as

creditors of the federal government or as investors in real estate, the court must determine how

an objectively reasonable prudent person “would have invested the funds owed by the

government to produce a reasonable return while maintaining safety of principal.” Sears, 124

Fed. Cl. at 734-35.

Dr. Milbourn asserts that plaintiffs should be compensated for delay damages by

assuming that hypothetical investors

would have sought to invest [their principal damages awards] in an

investment fund that was diversified, managed to balance both

income and growth, managed to protect purchasing power,

incurred low management fees and transaction costs, was adeptly

managed by a financial professional, and adhered to each

individual plaintiff’s risk and return objectives for this component

of their overall investment portfolio as part of the strategy for the

entire portfolio.

Milbourn Decl. ¶ 69 (emphasis added). By arguing for an approach that considers individual risk

and return objectives rather than the perspective of an objectively reasonable prudent person, Dr.

Milbourn fails to properly analyze the Prudent Investor Rule as applied to a large group of

plaintiffs. Thus, his conclusion that the VBINX rate is a proper measure of the delay-damages

portion of the just compensation to which plaintiffs are entitled is unsupported. Since plaintiffs

bear the burden of demonstrating the amount of just compensation to which they are entitled, the

court must deny their motion for partial summary judgment to the extent that they seek an

interest rate equal to the performance of the VBINX.

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In any event, the composition of the VBINX betrays the notion that it would be an

appropriate hypothetical investment in this case:

[The VBINX] offers investors an easy, low-cost way to

gain exposure to stocks and bonds. The fund invests roughly 60%

in stocks and 40% in bonds by tracking two indexes that represent

broad barometers for the U.S. equity and U.S. taxable bond

markets. The fund’s broad diversification is important, because

one or two holdings should not have a sizeable impact on the fund.

Investors with a long-term horizon who want growth and some

income—and who are willing to accept stock and bond market

volatility—may wish to consider this as a core holding in their

portfolio.

Id. ¶ 156 n.58 (internal quotation marks omitted). Dr. Milbourn defines volatility as follows:

A standard way to characterize risk in investment plans is

to characterize the range of returns an investor sees when holding a

particular investment. Finance professionals rely on a measure

known as volatility (or standard deviation in statistics terms) to

capture the extent of the variability in possible returns in any given

year. Volatility is a measure of how spread out (or dispersed) the

rates of return on an investment could be in any particular year

relative to the average rate of return. Such a measure accounts for

how low the rates of return might go, as well as how high the rates

of return might go.

Id. ¶ 139. In the economic environment that has existed between August 19, 2013, and the

present, the VBINX’s volatility reflects that it “does not currently comport sufficiently with the

‘minimal risk’ criterion” even though “such an investment might otherwise be considered

‘prudent’ under some economic conditions.” Sears, 124 Fed. Cl. at 736. The fund’s broad

diversification, low fees and costs, and professional management are important factors, but the

VBINX’s volatility makes it unacceptable in the instant case because the VBINX will not

necessarily adequately “maintain[] safety of principal,” id. at 734 (internal quotation marks

omitted), moving forward.

In short, the court concludes that the VBINX rate is an improper benchmark by which to

measure delay damages in the instant case.

E. The Moody’s Rate Reflects a Proper Measure of Delay Damages

The final rate discussed by the parties is the Moody’s rate. Plaintiffs aver that “the

Moody’s Rate protects [their] purchasing power under an appropriate [Prudent Investor Rule]

analysis,” but that it fails to “adequately compensate [them] for risks they were taking by holding

land as part of their investment portfolio.” Pls.’ Mot. 24. Defendant asserts that applying the

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Moody’s rate “would overcompensate Plaintiffs.” Def.’s Cross-Mot. 19. Defendant explains

that Moody’s “is designed to compensate investors for the risks of corporate default,” that

plaintiffs “did not actually hold an investment in the Moody’s bond index or bear its associated

risks,” and that the risk of default “does not exist for takings by the United States government.”

Id.

Dr. Neuberger emphasizes that the Moody’s rate

is calculated based on the returns on corporate bonds with the

highest credit ratings. Moody’s assigns a “Aaa” rating to corporate

bonds “judged to be of the highest quality, subject to the lowest

level of credit risk.” Corporate bond rates reflect . . . the returns

required by creditors as compensation for the risk that the borrower

will fail to meet its obligations.

Neuberger Decl. ¶ 107 (footnotes omitted). Dr. Milbourn stresses that Moody’s is “primarily

driven by illiquidity risk and not credit risk,” Milbourn Rebuttal ¶ 37, but notes that plaintiffs’

claims against the federal government are completely illiquid, unlike a Moody’s investment, id.

¶ 40. Indeed, Dr. Milbourn agrees with Dr. Neuberger that Moody’s is an “Investment Grade”

bond index “made up of only the safest corporate credits.” Milbourn Decl. ¶ 75. Dr. Milbourn

observes that the cumulative default rate on investment-grade bonds—i.e., those given an Aaa,

Aa, A, or Baa rating, in ascending order of credit risk—is only 1.0% after five years, and the

average recovery rate on defaulted bonds is 50%. Id. ¶ 76. In other words, an investor has a

99.5% expected recovery after five years for all investment-grade bonds. The five-year expected

recovery rate for Aaa bonds would be even higher because Aaa bonds are the highest-rated

investment-grade bonds. Thus, although Moody’s “factors the risk of corporate defaults into its

rate of return,” Def.’s Cross-Mot. 19, such a risk is de minimis for investment-grade bonds,

particularly those receiving an Aaa rating. Indeed, the default rate for Aaa bonds was 0% during

2016. Milbourn Rebuttal ¶ 54. The risk that the federal government will default is similarly de

minimis.

In addition to accounting for an illiquidity risk and a de minimis credit risk, the Moody’s

rate “produce[s] a reasonable return while maintaining safety of principal,” Sears, 124 Fed. Cl. at

734, because it has consistently provided a return on investment in addition to outpacing

inflation, Milbourn Decl. Ex. B Panel 1. Further, the Moody’s rate does not factor in the type of

investment—land—that was taken. Therefore, applying the Moody’s rate is consistent with the

Prudent Investor Rule.

In short, the court concludes that the Moody’s rate is the appropriate measure of delay

damages in the instant case. It will not depart from the consensus that has emerged since 2009 in

the Court of Federal Claims that the Moody’s rate is the appropriate benchmark by which to

award delay damages in the Rails-to-Trails context. See Pls.’ Reply 5-6, ECF No. 207

(providing a table of interest rates applied in Rails-to-Trails cases over the past ten years).

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F. Compounding Is Appropriate

As a final matter, the court addresses whether interest should be compounded. There

appears to be no dispute between the parties that compounding is appropriate in the instant case.

Dr. Milborn emphasizes that “[p]rudent investing is commensurate with compound interest”

because “an investor seeking to maximize the appreciation of capital and thereby future income

would choose to reinvest any gains each year.” Milborn Decl. ¶¶ 193-94. Meanwhile, the DTA

rate proposed by defendant provides for compounding, and defendant argues that interest under

the TIPS rate should be compounded as well. See Sears, 124 Fed. Cl. at 737 n.4 (“By advocating

use of [a particular benchmark] as the measure of interest, the government in essence concedes

that compounding is appropriate . . . .”).

Therefore, as in Sears, the court concludes that interest shall be compounded quarterly in

accordance with the Prudent Investor Rule.

IV. CONCLUSION

The court has considered all of the parties’ arguments. To the extent not discussed

herein, they are unpersuasive, without merit, or unnecessary for resolving the issues currently

before the court.

There is no genuine issue of material fact currently before the court. Plaintiffs are

entitled to delay damages between the date of taking and the date of payment at an interest rate

equivalent to the Moody’s rate, compounded quarterly, pursuant to the Prudent Investor Rule.

Neither the DTA, TIPS, nor VBINX rates are appropriate.

Accordingly, the court GRANTS IN PART and DENIES IN PART plaintiffs’ motion

for partial summary judgment and DENIES defendant’s cross-motion for partial summary

judgment.

IT IS SO ORDERED.

s/ Margaret M. Sweeney

MARGARET M. SWEENEY

Judge

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