Here's the latest in a case we've been tracking, the City of Missoula, Montana's takeover of a privately-owned water system. In 2016, the Montana Supreme Court held that the city could exercise its power of eminent domain to take the property for a "more necessary" public use. The court allowed the city to take the company, and on remand, the lower court determined compensation. There was also a follow up case on who pays property taxes on land while it is being condemned (the owner, although it may eventually have a claim for a refund from the city once the condemnation is completed and title transfers).
In City of Missoula v. Mountain Water Co., No. DA-17-0272 (June 5, 2018), the Montana Supreme Court considered the payment of attorneys' fees and costs. After the owners--the water company itself and its "upstream" owner--rejected the city's offer of $50 million, the condemnation commissioners awarded $88.6 million to the water company (and $0 in separate damages to the parent owner of that company), and both owners sought reimbursement for their litigation expenses.
The city wanted to run the local water system, owned by an out-of-state entity. The city, not content with using its own in-house lawyers to prosecute the condemnation, called in the big guns. It hired "specialized legal counsel from Seattle, Portland, and Spokane, and experts from New York, Seattle, and Minneapolis." Slip op. at 3. "Two Missoula law firms were also added to the City's legal team." Id. In response, the property owners hired lawyers from "Denver, Chattanooga, Billings, and Missoula." These out-of-towners all charged rates higher than those in the locality, Missoula County. Slip op. at 4.
The ensuing eminent domain battle was a slugfest, a lawyer's dream:
Carlyle filed a motion to dismiss, and later a motion for summary judgment, seeking dismissal as a party on the ground it was not the owner of the assets for which condemnation was sought. Carlyle argued the action should be prosecuted only against its subsidiary, Mountain Water. The City opposed the motion, arguing that Carlyle, as the ultimate owner who made the integral decisions regarding the water system and sale, was a proper party to the action. The District Court denied the motions, ruling the City had sufficiently alleged that Carlyle was an owner and thus a proper party to the action.In August 2014, the District Court issued a scheduling order that gave the parties six months to complete their discovery and pre-trial filings, and scheduled a trial date shortly thereafter. The parties acknowledge that the litigation schedule was demanding, even for the large legal teams employed by both sides. The District Court recognized that the abbreviated time before trial was “undoubtedly demanding and difficult.” Ultimately, nearly 450,000 pages of discovery were exchanged, over 100 trial witnesses were identified, and 47 depositions were taken at locations across the country.
Slip op. at 4. Three-week bench trial, followed by an appeal to the Montana Supreme Court. The owners sought fees and costs.
Under Montana law, a "prevailing party" can recover its "necessary litigation expenses." Also under Montana law, however, those expenses are capped at the customary rate in the county in which the case was tried. The owners asserted this latter limit was unconstitutional, while the city responded by arguing that the upstream owner did not prevail since it was not awarded anything, and that the fees incurred were excessive (the old "they worked the file" argument often made by the losing party). The trial court sided with the owners -- they prevailed -- concluded their lawyers spent 25% too much time, and applied the local hourly rates, not the lawyers' actual rates. The court also denied the owners' request for discovery of the city's fees, so that the costs associated with each team of lawyers could be compared.
The court cut the award nearly in half.
The Montana Supreme Court considered Article II, section 26 of the Montana Constitution, which states, in part, "In the event of litigation, just compensation shall include necessary expenses of litigation to be awarded by the court when the private property owner prevails." (We like this provision, since it recognizes that the costs of litigation are not some kind of legislative largess, but are part-and-parcel of just compensation.) The Constitution does not define "necessary."
The court concluded that the definition of the term was not a legislative question, but one for the courts, and didn't need a statute to further define it. But even though it didn't need to, the Montana legislature had adopted a statute which defined "necessary" expenses as "reasonable and necessary attorney fees, expert witness fees, exhibit costs, and court costs." These expenses are capped at the local rate. This owners claimed this rate cap was an unconstitutional limitation on their right to just compensation, and that the intent of the provision was to allow an owner's actual expenses. The court rejected the argument, first concluding that the term was not meant to award fees actually incurred, only those which the court deems necessary:
Under the plain language of the provision, Property Owners are not entitled, as they argue, to reimbursement of the “full extent” of their litigation expenses, or the expenses they “actually incurred,” but, rather, only the “necessary expenses of litigation” as determined “by the court.” See, e.g., State by Dep’t of Highways v. Helehan, 186 Mont. 286, 289, 607 P.2d 537, 538 (1980) (“The award of attorney’s fees in a condemnation case . . . . is only authorized after notice and a hearing before the District Court . . . . the amount to be paid is not decided by the defendant in a court condemnation action, but by the District Court.”). An owner’s “actually incurred” expenses may inform a court’s determination of what is “necessary,” but do not control it. We agree with the District Court’s stated disagreement with the proposition that “‘reasonable and necessary’ is synonymous with whatever a client will pay without balking.”
Slip op. at 11-12.
The court also rejected the owners' facial challenge to the rate cap, concluding the that there might be instances in which the statute could be applied constitutionally (such as when the owner retains a local attorney or expert). The owners' as-applied challenge presented a more difficult question. The heart of their argument was that the local rate cap violated the "necessary" language in Article II, section 26, because it was "necessary" for them to hire out-of-locality talent to respond to the city's doing so:
On appeal, Property Owners argue, “[l]ike the City, the Property Owners recognized that they, too, needed the experience and resources provided by large firms outside Missoula.” Citing newspaper articles speculating on the City’s legal bills, they contend that they have “good reason to believe” that the City’s expenses equated with or exceeded their claimed litigation expenses.
Slip op. at 16-17.
The court found it important that the owners were denied discovery about the city's payments to its out-of-town talent. If the owners were required by the circumstances to hire their own outside (and higher-priced) team, they should have been able to find out what the city's lawyers were charging them, for comparison's sake. Id. at 17 ("In a uniquely complex Montana case, wherein out-of-state counsel played prominent roles in both prosecuting and defending the action, we think Property Owners were entitled to limited discovery about a relevant consideration to their necessity claim—the approach taken by the City to prosecute the action and the corresponding expenses incurred by the City."). Tit for tat.
In the end, the court punted. It declined to define "necessary" and "reasonable," and sent the case back to the trial court for a determination of whether it was necessary for the owners to retain lawyers who charged more than lawyers in Missoula County.
Next, the court affirmed the conclusion that the "upstream" owner of the water company was a prevailing party even though it was awarded no separate damages in the condemnation. It is the parent company of the water company, which was awarded compensation.
Finally, the court made short work of the city's argument that the owners' could not recover fees for out of state lawyers because they are not members of the Montana Bar. Limiting an owner to recovery for Montana attorneys does not in accord with the "modern practice of law" where people hire out of state lawyers all the time (Never mind that it was the city which first hired its own out of town lawyers.).