Petitioners Brief — Puget Sound Power & Light Co. v. Public Utility District No. 1

13

IN THE

Supreme Court of the United States

OCTOBER TERM, 1941

PuGceT SOUND Power & LIGHT COMPANY,

a corporation, and OLD CoLONY Trust Com-

PANY, a corporation,

vs.

PUBLIC UTILITY District No. 10F WHATCOM

COUNTY, a municipal corporation.

Petitioners,

BRIEF IN SUPPORT OF PETITION FOR

WRIT OF CERTIORARI

L.

OPINIONS OF THE COURT BELOW

The judgment of the United States District Court

for the Western District of Washington, Northern

Division, was entered August 24, 1940 (R. 159-162).

The opinion (R. 1832), concurring opinion (R.

1851) and dissenting opinion (R. 1854) of the Circuit

Court of Appeals appear in the record and at 123 F.

(2d) 286. The judgment of the Circuit Court of Ap-

peals was entered October 24, 1941 (R. 1877). No

petition for rehearing was filed.

Il.

JURISDICTION

The jurisdictional statement appears in the preced-

ing Petition for Writ of Certiorari (supra, p. 5).

14

Il.

STATEMENT

The essential facts are stated in the preceding Peti-

tion for Writ of Certiorari (supra, p. 1). Further

facts regarding each point will be stated herein.

IV.

SPECIFICATIONS OF ERROR

1. The Trial Court erred in entering the Decree of

Public Use and Necessity on July 31, 1939, because

it affirmatively appears that the property sought to be

taken is not necessary or required by the District.

2. The Trial Court erred in limiting the jury’s con-

sideration of an allowance for contractor’s profit and

expense in the estimate of present reproduction cost

of property.

3. (a) The Trial Court erred in rejecting the testi-

mony of S. P. MacFadden, Vice President of the Com-

pany, that the severance damage to the Bellingham

office building would be $108,000.

(b) The Trial Court erred in striking the entire

testimony of the Company’s witness, 0. C. Scudder,

concerning severance damage to the Bellingham of-

fice building.

4. The Trial Court erred in reopening the District’s

case in chief after the close of the Company’s evidence

to permit the introduction of Resolution No. 37 of the

District (R. 1742-1744) which offered to enter into a

five-year contract with the Company for purchase. of

wholesale power at a rate subject to revision by the

state regulatory body, and in overruling the Com-

-

<i

15

pany’s objection to such reopening and to the intro-

duction of such resolution.

V.

ARGUMENT

1. There Is No Necessity for the District to Condemn the

Property of the Company.

The District is a municipal corporation organized

under the laws of the State of Washington for the

purpose (inter alia) of selling and distributing elec-

tric power. Its territorial limits are coextensive with

the boundaries of Whatcom County. On April 17,

1939, its commissioners adopted Resolution No. 24

declaring that the public interest, welfare, conven-

ience and necessity required the establishment by the

District of an electric public utility (R. 12). This

resolution also declared the estimated cost of acquisi-

tion of the Company’s property for that purpose to

be $3,250,000 (R. 19, 20). On the same day the Dis-

trict adopted Resolution No. 25 authorizing certain

attorneys to institute condemnation proceedings to ac-

quire such property, and Resolution No. 26, specific-

ally describing the properties to be condemned (R. 30,

34). All of the Company’s easements, rights of way

and highway franchises under which it operates its

properties are included in the property to be taken

(R. 17).

At the hearing on the District’s application for a

decree adjudging the taking to be a public use and

necessity the only showing made by the District on the

issue of “necessity” consisted of the above resolutions.

16

As stated by the Circuit Court of Appeals in the ma-

jority opinion (R. 1835):

“The franchises of the company under which

the Whatcom County properties are operated, are

not exclusive franchises, and there is no legal ob-

stacle to prevent appellee (District) from operat-

ing in the same territory. There is ample room

on the highways for appellee (District) to con-

struct another system, which could be built in

about a year and a half at a cost not greater than

the cost of acquiring the properties in question,

according to some of the testimony herein.”

The Company contended in the lower courts, and

contends here, that the determination of the District

commissioners as to the necessity for taking the Com-

pany’s property was unreasonable and arbitrary. This

contention the Circuit Court of Appeals summarily

disposed of in the following language (R. 1838) :

“The company argues that the action of appel-

lee (District) was arbitrary because it was un-

necessary to take the properties since other com-

peting lines could be built. The argument, how-

ever, ignores the fact that it could reasonably

be concluded that it was necessary to take exist-

ing properties, thus avoiding competition, rather

than to build new lines and be faced with competi-

tion. We think a reasonable man could take that

view, and that therefore the decision of appellee’s

(District’s) commissioners is not arbitrary.”

The Supreme Court of the State of Washington has

adopted the rule of “reasonable necessity,” or as some-

times called, the rule of “comparative necessity.”

State ex rel. Weyerhaeuser Timber Company

v. Superior Court, 71 Wash. 84, 88, 127

Pac. 591, 592.

17

Reasonable or comparative necessity means that where

great damage will be done to the property owner with

relatively little good to the taker, there is a lack of

that legal necessity which the law requires.

Samish River Boom Company v. Union Boom

Company, 32 Wash. 586, 600, 73 Pac. 670.

Condemnation has been denied by the Supreme

Court of Washington in each of the following cases

upon the ground that no necessity was shown.

Seattle & Montana Railway Co. v. State of

Washington, 7 Wash. 150, 34 Pac. 551;

State ex rel. Portland and Seattle Railway

Co. v. Superior Court, 45 Wash. 270, 88

Pac. 201;

State of Washington y,. Superior Court, 128

Wash. 79, 222 Pac. 208.

In State of Washington v. Superior Court, 128

Wash. 79, 222 Pace. 208, supra, the state engineers

laid out a state highway on a straight line close to

a fruit cold storage warehouse, with the result that

the warehouse lost much of its value. Without sub-

stantial injury to the proposed highway, it could have

been routed farther away from the warehouse. Find-

ing no actual fraud the court nevertheless found arbi-

trary selection of the route and denied the right of

condemnation.

The evidence before the Court here shows without

dispute that the property of the Company could be

duplicated at reasonable cost and within less time

than has already been consumed in prosecuting this

condemnation proceeding. There is no legal reason

a

18

why the District cannot build its own system. On the

other hand, it is proposed by this proceeding to put

the Company out of business completely in Whatcom

County. The District seeks to take approximately

10% of the Company’s total customers or retail mar-

ket but will leave on the Company’s hands almost the

entire generating capacity built to supply this market,

thereby inflicting large severance damage.

The opinion of the Circuit Court of Appeals sig-

nificantly points out that the real reason for taking

the Company’s property is to avoid competition. Such

a purpose is nowhere expressed in the Washington

statute under which the District was created (Rem.

Rev. Stat., Sec. 11605, et seg.). A purpose to eliminate

private capital from any field of enterprise, and to

appropriate such field for a municipal corporation

exclusively will not be presumed. Such a legislative

intent must be clearly expressed. Moreover, monopo-

lies are prohibited by the constitution of the state.

Article XII, Section 22.

The Company also introduced evidence, which is

uncontroverted, showing that numerous advantages

inhere in the operation of a large unified system such

as that owned by the Company. It is more economical

to operate; it is able to render better and more con-

tinuous service; and most important, it is able to

serve at reduced rates. These advantages are not pos-

sible in the operation of a single-county property as

an isolated enterprise (R. 347, 348, 376-385). Dis-

memberment of the Company’s system, as is being

attempted by the Washington Public Utility Districts,

nee nee —

19

is a step backward economically and is not in the pub-

lic interest (R. 385, 386).

Since the decision of the Circuit Court of Appeals,

war has been declared by the United States on Japan,

Germany and Italy and the Pacific Northwest has

become one of the theaters of war. The Company’s

system is a vital defense industry serving numerous

governmental and industrial customers directly en-

gaged in the war effort and should therefore be pre-

served intact.

The disproportion between the benefit to the Dis-

trict on the one side and the damage and injury to

the Company and the public generally on the other is

so great, and the departure from the Washington rule

of necessity is so apparent, that this case should be

reviewed by this Court.

2. The Trial Court Erred in Instructing the Jury to Elim-

inate Contractor’s Profit.

On the issue of market value of the property to be

taken, both parties introduced evidence of the present

cost of reproducing the property. The Company’s

main witness on this phase of the case was N. T.

Veatch, Jr., who made his appraisal on the basis that

the work would be performed by a general contractor.

He explained why he did so as follows (R. 1147):

“I used the plan of reproduction by contract

because I feel certain that it would be the plan

followed by any prudent company in reproducing

the property. Any of the other plans would in-

volve what would be equivalent to the contractor

taking his first job and taking the job, the first

20

one, of some five million dollars of property. I

don’t believe that would be done by a prudent

organization.”

To the cost of labor and materials, Mr. Veatch

added 10% for the compensation and expenses of the

contractor and 34 of 1% for contractor’s bond. The

witness testified that of the 10% approximately 4%

would be required for the contractor’s general ex-

penses—his general office expense and his administra-

tion expenses—and that the remaining 6% would be

profit (R. 1167, 1168, 1295-1298, 1329, 1331).

Inasmuch as his estimate of the total reproduction

cost new was $5,356,711, his allowance for contrac-

tor’s profit and expense amounted to about $500,000

(R. 1153-1154, 1292-1295).

Mr. Veatch testified that in his opinion construc-

tion by a contractor was more economical and that

the net cost to the owner of the completed project

would be less than if some other method were adopted

(R. 1299-1302, 1319). He stated it to be the almost

universal practice in projects of this size to have the

work done by a general contractor (R. 1326-1328).

The testimony on this point is more fully set out in

the dissenting opinion of Judge Stephens (R. 1857-

1861).

The Trial Court instructed the jury that “general

contractor’s profit and cost of his bond should be

included only where the general contractor, if employed

would effect corresponding savings to the owner on

material and labor costs * * *” and directed the jury

21

to eliminate from the cost of reproduction estimates

any such allowances not represented by such cor-

responding savings on material and labor (R. 1768).

The effect of this instruction is well stated by Judge

Stephens in his dissenting opinion (R. 1861, 1862)

as follows:

_“The Court, however, in effect instructed the

jury to disregard all testimony of the witness re-

lating to the advantages of employing a general

contractor for the work cther than money savings,

over the reproduction new cost without a general

contractor and told the jury that the cost of re-

production new by contractor could include com-

pensation to the contractor and cost of bond up to

but not beyond the savings on material and labor

that he was enabled to make over the reproduc-

tion new cost without a general contractor.

“I am of the opinion that this constitutes re-

versible error. It takes away from the jury all

consideration of the testimony to the effect that

no prudent owner would construct the properties

otherwise than by general contractor, and this in

the face of Mr. Veatch’s testimony that it is the

universal custom to use a general contractor in

all sizeable projects. It takes from the jury the

question of whether the general contractor method

was the only practicable method of construction

and would be so considered with all of its ele-

ments of cost by the hypothetical willing parties

to a purchase and sale.”

The majority opinion of the Circuit Court of Ap-

peals fails to meet squarely the issue of the correctness

of the instruction but decides the point entirely on two

other grounds, namely (1) that the objection made in

a

22

the Trial Court was insufficient, and (2) that the in-

struction was based on Mr. Veatch’s testimony on

cross-examination. As to ground (1), the majority

disregarded the clearly sufficient exception taken by the

Company to the instruction (R. 1789, 1790). In this

connection Judge Stephens said (R. 1857) :

“T reject the suggestion that the instruction was

not sufficiently excepted to.”

As to ground (2), the majority opinion relies upon one

sentence from the testimony of Mr. Veatch. As pointed

out by Judge Stephens, this constitutes a misinterpre-

tation of Mr. Veatch’s testimony (R. 1857-1862).

In this fashion the Circuit Court of Appeals ap-

proved the instruction which required the jury to elim-

inate a substantial portion, if not entirely all, of the

allowance of about $500,000 for contractor’s profit,

expenses and bond, included in Mr. Veatch’s total ap-

praisal. This is contrary to the holding of numerous de-

cisions of courts and regulatory commissions that in a

reproduction cost estimate it is proper to assume the

project would be construed by a general contractor and

to allow for all elements of cost including a reasonable

sum for contractor’s profit and expenses. Among such

decisions are the following:

Cary v. Corporation Commission of Okla.

(3-Judge D.C., Okla.) 17 F. Supp. 772;

- Brooklyn Borough Gas Co. v. Prendergast

(3-Judge D.C., N.Y.) 16 F. (2d) 615;

Worcester Electric Light Co. v. Attwill (D.C.,

Mass.) P.U.R. 1929B 1.

aire poses . MERCURE RENEEEtea sen — |

23

3. The Trial Court Erroneously Rejected Testimony Of-

fered by the Company to Prove Severance Damage to

the Bellingham Office Building.

The Company owns a building known as the office

building in Bellingham, which the District is not seek-

ing to condemn. The Company claims severance dam-

age in the sum of $108,000 by reason of being left

with this specially constructed building after the tak-

ing of the rest of the Whatcom County properties of

the Company. Two witnesses, S. P. MacFadden, Vice

President of the Company, and O. C. Scudder, Belling-

ham realty dealer, gave testimony for the Company

on this issue but their testimony was stricken by the

Trial Court. There was no other testimony on this

point.

It should be noted that neither of the courts below

questioned the propriety of the allowance of this item

of $108,000 for severance damage. The Circuit Court

of Appeals followed its prior ruling in Puget Sound

Power & Light Co. v. City of Puyallup, 51 F. (2d)

688, which was another condemnation case involving

a different part of this same company’s system, hold-

ing that the company is not only entitled to the “mar-

ket value of the property taken” but is also entitled

to “the damage to its remaining property due to the

severance of the property taken” (51 F. (2d) 689).

The Trial Court said with respect to this item (R.

1624) :

“What the District is taking in this suit is the

system of Whatcom County. Now that system to-

day includes the ownership, operation and main-

tenance of a building specially built and designed

and at all times operated for the particular pe-

24

culiar service of this system which is being taken.

All of the remainder, substantially all of the re-

mainder of the system is being taken except that

building. Jt is an inescapable inference from all

of the evidence in this case that the company will

sustain some substantial damages, * * * in the

nature of severance damage growing out of the

fact that it is left with that specially constructed,

specially operated, specially maintained building

carved out of that system and left on the re-

spondent company’s hands.’ (Italics supplied)

a. Testimony of S. P. MacFadden

Mr. MacF adden is Vice President in general charge

of all operations of the Company (R. 1351). _He testi-

fied that in his opinion the severance damage’ to the

Bellingham office building would be $108,000 (R.

1455), but this testimony was stricken upon the

ground that he had not shown himself to be qualified

to testify to real estate values in Bellingham (R. 1458,

1466, 1468).

The striking of his testimony was erroneous because

Mr. MacFadden was clearly qualified to give his opin-

ion on the subject. As Vice President in general

charge of all operations of the Company, he occupied

the position of owner and therefore need not other-

wise qualify in order to give testimony with respect

to severance damage to Company property.

Weber v. West Seattle Land & Improvement

Co., 188 Wash. 512, 63 P. (2d) 418;

Wicklund v. Allraum, 122 Wash. 546, 211

Pac. 760;

Alaska-Juneau Gold Mining Co. v. Larson

(C.C.A. 9) 279 Fed. 420.

, z REN GENO a Sg BAe oar aan

- 25

In upholding the action of the Trial Court, the Cir-

cuit Court of Appeals refused to apply the Washing-

ton law as expressed in the foregoing decisions, assert-

ing that the witness gave not his own opinion but that

of experts. It is true that Mr. MacFadden employed

two real estate experts to assist him in estimating the

severance damage to the office building (R. 1463,

1464), but this does not disqualify him from testify-

ing on the subject.

Mr. MacFadden said at one point (R. 1463-1464) :

“I had two competent real estate men deter-

mine the figure of $108,000 for me and after go-

ing over it, I agreed it was the proper figure.”

(Emphasis supplied)

Again, he testified with respect to the assistance given

him by the real estate experts (R. 1464):

“Q. Does that serve as the basis of your opin-

ion?

A. Yes, sir, that and my knowledge of the sit-

uation.” (Emphasis supplied )

For Judge Stephens’ dissent on this point, analyzing

the evidence, see R. 1870-1872.

b. Testimony of O. C. Scudder

O. C. Scudder had been in the real estate business

in Bellingham for over twenty years and was gener-

ally familiar with the market value of real estate in

Whatcom County (R. 1093-1099). In his opinion, the

depreciation in market value of the office building by

reason of the taking of the remainder of the Whatcom

County system of the Company was $108,000 (R.

1583-1585). He explained in detail the special con-

struction features which made the building useful

i

alates tor

Fa Bt TE Fe SMR ee pie et Oe ea

26

only as headquarters for the company’s electric opera-

tions in that district. He stated there was almost no

commercial purpose that the major portion of the

building could be used for other than its present use

(R. 1586-1600).

On cross-examination, Mr. Scudder testified that he

had arrived at the $108,000 figure by capitalizing the

estimated loss of rental value of $6,480 at 6% (R.

1591, 1610). On redirect examination, he testified

that this method is generally followed by members of

the real estate profession (R. 1615).

The entire testimony of Mr. Scudder was stricken

(R. 1625, 1626) and this ruling of the Trial Court

was sustained by the Circuit Court of Appeals for the

reason that “Scudder’s testimony did not comply with

the approved method of proof of damages authorized

by the law of Washington in condemnation proceed-

ings” (R. 1841). The Court apparently was of the

opinion that the witness must state the value before

and after the taking, but cannot himself make the

subtraction and testify only to the difference.

The Washington rule is that a witness, if properly

qualified, may state how much, in his opinion, the

property would be depreciated in value by the taking,

without stating the value before and after the ap-

propriation.

Seattle & M. Ry. Co. v. Gilchrist, 4 Wash.

509, 30 Pac. 738;

Ingram v. Wishkah Boom Co., 35 Wash.

191, 77 Pac. 34;

King County v. Joyce, 96 Wash. 520, 165

Pac. 399.

27

The courts below refused to follow the rule of these

Washington decisions. Judge Stephens, in his dissent-

ing opinion, fully discusses this point (R. 1862-1870).

4, The Trial Court Erred in Admitting the District’s Of-

fer of Wholesale Power Contract.

That a large, integrated public utility system suf-

fers a severance damage when a portion thereof is

condemned has been conceded by counsel for the Dis-

trict throughout this proceeding. The owner’s right

to compensation therefor is recognized in the Federal

Courts.

Monongahela Navigation Co. v. U. S., 148

U.S. 312, 326;

U. S. v. Gettysburg Elec. Ry. Co., 160 U.S.

668 ;

U. S. v. Powelson (C.C.A. 4) 118 F. (2d)

79, 86;

Puget Sound Power & Light Company v.

City of Puyallup (C.C.A. 9) 51 F. (2d)

688.

Three District witnesses estimated severance dam-

age, such estimates being in the neighborhood of

$100,000 (R. 821, 955, 1005, 1019). Three Company

witnesses were of the opinion that the severance dam-

age would be around $2,000,000 (R. 1454, 1665-

1680). One of the major considerations of witnesses

on both sides was the probability or lack of probabil-

ity that the District would buy electric power whole-

sale from the Company after severance—the District

Witnesses assuming that the District would continue

to do so, and the Company witnesses being of the

contrary opinion.

“ FE RAR EES 2 see eueb oc eEaM se SIS RESTA PT CRE RE LS £.

a

28

Toward the conclusion of the trial and after the

District had closed its case in chief the commissioners

of the District adopted a resolution offering to enter

into a five-year wholesale power contract with the

Company at a rate to be subject to revision by the

State regulatory body (R. 1744). Over the Com-

pany’s objection the District’s case in chief was re-

opened and the resolution was introduced in evidence

for consideration by the jury (R. 1741-1745). The

purpose was to minimize the jury’s award for sever-

ance damage. The Circuit Court of Appeals sustained

this ruling in these words (R. 1842):

“Evidence of this nature is admissible. Puget

Sound Power & Light Co. v. City of Puyallup,

9 Cir., 51 F. (2d) 688, 696. Compare State ex

rel. Peabody v. Superior Court, 77 Wash. 598,

138 Pac. 277.”

The Puyallup case referred to merely held that the

“probability or possibility” that the condemnor might

buy power from the Company could be considered by

the jury. It did not involve an offer by the condemnor

to enter into a contract to buy power, as does the in-

stant case.

The Circuit Court of Appeals has erroneously in-

terpreted and applied the law of the State of Wash-

ington. The ‘‘just compensation” to which the owner

is entitled must be paid in money.

Washington Constitution, Art. I, Sec. 16;

State ex rel. Peabody v. Superior Court, 77

Wash. 593, 613, 138 Pac. 277.

The owner cannot be compelled, against his will, to

accept any substitute in lieu of money. An executory

- 29

promise by the condemning party in favor of the

owner, which has the effect of diminishing or miti-

gating severance damage, is not admissible in evi-

dence and cannot be considered in reduction of any

compensation to which the owner would otherwise be

entitled.

Lewis, Eminent Domain, Sec. 756;

State ex rel. Peabody v. Superior Court, 77

Wash. 598, 613, 138 Pac. 277;

In re Seattle, 102 Wash. 286, 288, 172 Pac.

1161;

Blomskog, Erickson & Cotton v. Seattle, 107

Wash. 471, 473, 182 Pac. 571;

Board of Directors of St. Francis Levee Dis-

trict v. Webb (C.C.A. 8) 188 Fed. 67.

In State ex rel. Peabody v. Superior Court, 77

Wash. 598, 138 Pac. 277, supra, the Washington Su-

preme Court held that an offer by the city condemnor

to grant certain rights to the owner of a street rail-

way after condemnation of a portion thereof could not

be considered by the jury on the issue of the amount

of severance damages which would be suffered by the

owner, and that consideration of such an offer by the

jury would be “clearly inimical to the constitutional

provision prohibiting the making of compensation for

property taken other than in money” (77 Wash. 615).

The Court further said (77 Wash. 615, 616):

“The whole of the property is taken, not a part

merely, and the part taken fixes the measure of

the compensation. The emount of such compen-

sation cannot be lessened by a tender of some-

thing the Railway may not want, and which it

must pay for if accepted.”

30

Board of Directors of St. Francis Levee District v.

Webb (C.C.A. 8) 188 Fed. 67, swpra, was a condemna-

tion proceeding brought by the levee district. One of

the issues was the amount of damage for obstruction

of natural drainage to the remainder of the property

which would be caused by the construction of the

levee. At the close of evidence the district filed in

open court a written offer and agreement to improve

the drainage and to permit the court to enter appro-

priate orders enforcing the obligation. The Eighth

Circuit Court of Appeals held that the issue was prop-

erly withdrawn from the jury and said (188 Fed.

68):

“The offer of the levee district was properly dis-

regarded. It does not appear that the plan ac-

cording to which the condemnation proceeded

and the levee was built specified as part thereof

permanent means of draining the land. The con-

demnation was not qualified or limited in that

way. When the case was tried the landowner

was entitled to an assessment of his damages in

money, not in obligations or promises possibly

productive of future litigation.”

The Circuit Court of Appeals below recognized the

probable conflict between its holding and that in the

Peabody case when it used the word “compare.” The

Ninth Circuit has refused to follow the Washington

law as established in the foregoing decisions and is in

conflict with the Eighth Circuit Court of Appeals, as

above indicated.

_

31

CONCLUSION

The Circuit Court of Appeals has rendered a two

to one decision on a matter of great importance to the

people of the State of Washington. The decision is in

conflict with decisions of other circuit courts of ap-

peals and the courts below have failed to follow the law

of the State of Washington as set forth in the State

Constitution and decisions of the Supreme Court of

the State of Washington. Clearly this calls for an ex-

ercise of this Court’s power of supervision.

It is respectfully submitted that the Petition for

Writ of Certiorari to review the decision of the Cir-

cuit Court of Appeals for the Ninth Circuit should

be granted.

ELMER E. Topp,

FRANK E. HoLMan,

Counsel for Petitioner

Puget Sound Power & Light Company.

E. L. SKEEL,

Counsel for Petitioner

Old Colony Trust Company

Of Counsel:

LOWELL P. MICKELWAIT

FERD J. SCHAAF

JOSEPH W. KINDALL |