L & S Water Power, Inc. v. Piedmont Triad Regional Water Authority, ___ N.C. App. ___, 2011 WL 1467366 (Apr. 19, 2011)
This is the latest condemnation case involving the Randleman Dam and Lake, a reservoir project straddling Guilford and Randolph Counties and constructed on the Deep River by the Piedmont Triad Regional Water Authority (the “Water Authority”). In this case, several hydroelectric power producers downstream of the dam filed an inverse condemnation action, alleging that the Authority had reduced the water flow of the Deep River past their facilities and had thereby taken the power producers’ riparian rights without filing a standard condemnation case or depositing any estimate of just compensation.
The Court of Appeals affirmed the Trial Court’s holding that the defendant Water Authority had taken plaintiff’s riparian rights and that plaintiffs were entitled to compensation for that taking based on the reduction in hydroelectricity that plaintiffs could produce.
Plaintiffs’ Riparian Rights
The Court of Appeals explained riparian rights and addressed defendants’ arguments about them as follows:
Riparian rights are vested property rights that arise out of ownership of land bounded or traversed by navigable water. In re Protest of Mason, 78 N.C.App. 16, 24–25, 337 S.E.2d 99, 104 (1985). Defendant argues that, pursuant to Dunlap v. Light Co., 212 N.C. 814, 195 S.E. 43 (1938), plaintiffs do not have a property interest in the natural flow of water and that a reduction in water flow is not a compensable taking. In Dunlap, a private landowner sought compensation from the power company for its exercise of eminent domain over waters of the Yadkin River. Id. at 815–16, 195 S.E. at 44. In that case, the power company closed the flood gates of the dam at night, decreasing the amount of water in the stream’s channel, and opened those gates in the morning, which accelerated the flow of water. Id. at 821, 195 S.E. at 48. The Supreme Court upheld the judgment of nonsuit for plaintiff’s cause of action for taking his riparian rights. Id. at 822, 195 S.E. at 48.
However, Dunlap does not stand for the proposition that a reduction of flow is not compensable. The Supreme Court affirmed the judgment of nonsuit because the plaintiff in Dunlap was unable to show that the defendant’s actions caused a permanent disturbance of the natural water flow. Id. at 821, 195 S.E. at 48. Plaintiffs’ cause of action in the present case is not analogous to Dunlap, as plaintiffs were able to present evidence at trial that defendant’s diversion of water has reduced and will continue to reduce the natural rate of flow in the Deep River.
(Emphasis added.)
Reasonable Use Rule does not apply to Condemnors
The Court of Appeals then addressed the reasonable use rule, noting that it does not apply to condemnors, like the defendant Water Authority:
Defendant contends that the trial court failed to properly apply the reasonable use doctrine. Under North Carolina’s “reasonable use” rule, a riparian owner is entitled to the natural flow of a stream running through or along his land, undiminished and unimpaired in quality, except as may be caused by the reasonable use of water by other riparian owners. Pendergrast v. Aiken, 293 N.C. 201, 216, 236 S.E.2d 787, 796 (1977); see also Bruton v. Light Co., 217 N.C. 1, 9, 6 S.E.2d 822, 827 (1940) (holding that a riparian owner is entitled to make a reasonable use of water adjacent to his property as long as he does not injure the rights of downstream riparian owners). A landowner can only be held liable for interfering with the flow of surface waters, if the interference is “ ‘unreasonable and causes substantial damage.’ ” Pendergrast, 293 N.C. at 216, 236 S.E.2d at 796 (citation omitted). In Board of Transportation v. Warehouse Corp., 300 N.C. 700, 268 S.E.2d 180 (1980), the trial court applied the reasonable use rule by instructing the jury to consider the damage from the diverted flood waters only if the State had “unreasonably interfered with the flow of surface waters.” Id. at 705, 268 S.E.2d at 183. Our Supreme Court reversed and held that the reasonable use doctrine does not apply in condemnation proceedings, by explaining that:
the doctrine of reasonable use adopted in Pendergrast defines the extent to which a private landowner may interfere with the flow of surface water on the property of another….
… Where the interference with surface waters is effected by [a government] entity, the principle of reasonable use articulated in Pendergrast is superseded by the constitutional mandate that “[w]hen private property is taken for public use, just compensation must be paid.” Eller v. Board of Education, 242 N.C. 584, 89 S.E.2d 144 (1955).
Id. at 705–06, 268 S.E.2d at 183–84; see also State of N.C. v. Hudson, 665 F.Supp. 428, 447 (E.D.N.C.1987) (“A municipal diversion of water for public water supply is not a riparian use, and if the diversion causes injury to downstream riparian owners the injury may be redressed in a court of law.”).
Method of Valuation
The Trial Court made the following critical conclusion of law about the method of valuing the riparian rights which the Defendant Water Authority took from the plaintiffs:
The direct impact of [defendant’s] taking of Plaintiffs’ riparian rights can therefore be valued by the loss of electricity capable of being produced by each of the Operational Plants as a result of the reduction of the natural stream flow of the Deep River across Plaintiffs’ property.
Effectively, the Trial Court was permitting plaintiffs to value their lost property rights based on their lost business income. This is, of course, generally not permitted by North Carolina condemnation law. The Court of Appeals, however, upheld the Trial Court’s conclusion. The Court of Appeals explained its decision, and this exception to the general rule against allowing valuing takings in North Carolina based on lost revenue, as follows:
When determining just compensation in a partial taking, the trial court can “admit any relevant evidence that will assist the jury in calculating the fair market value of property and the diminution in value caused by condemnation.” M.M. Fowler, 361 N.C. at 6, 637 S.E.2d at 890. “Accepted methods of appraisal in determining fair market value include: (1) the comparable sales method, (2) the cost approach, and (3) the capitalization of income approach.” City of Statesville v. Cloaninger, 106 N.C.App. 10, 16, 415 S.E.2d 111, 115 (1992).
In Cloaninger, we held that the capitalization of income approach was a permissible method to calculate the loss of the actual or projected income from a dairy farm that had been taken. Id. at 15, 415 S.E.2d at 114. Defendant’s argument that M.M. Fowler prohibits a jury’s considering evidence of lost business profits in condemnation actions is misplaced. The revenue derived directly from the property taken can be distinguished from the profits of a business located on the property. Contrary to the plaintiff in M.M. Fowler, plaintiffs in the present case are not seeking compensation for the value of the real property where their hydroelectric power plants are located, but seek compensation for the value of the property taken. See id. at 3–4, 637 S.E.2d at 888.
The amount of electricity that plaintiffs can generate is dependent upon the amount of water flow in the Deep River. The trial court found that the Randleman project has and will continue to significantly reduce the flow of water downstream. Therefore, the capitalization of income approach used by the trial court is a reasonable method to calculate plaintiffs’ compensation. We overrule this assignment of error.
Another Rare Illustration of a Property Owner Recovering Lost Revenues
North Carolina condemnation law does not permit a property owner to recover compensation for lost revenues for a business that happens to be located on the land taken. But it does permit recovery of lost “revenue derived directly from the property taken”. Few cases exist in which a North Carolina appellate court has found that a condemnee’s lost revenue was directly tied to the land, and therefore, was compensable. So, this case is significant not just because it addresses the taking of riparian rights, but also because it illustrates another instance of lost business income that is tied directly to the land taken, and, therefore, compensable.
Links to the Case
- PDF Slip Opinion from North Carolina Court of Appeals
- Opinion published by Westlaw (for those with a Westlaw subscription)
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