Today’s post is by colleague William Wade, an economist in Nashville, Tennessee, who has thought a lot — and written extensively — about the just compensation and damages available in inverse condemnation and regulatory takings cases.
He provides his thoughts on a recent trial court decision in a closely-watched Texas water case, in which the appellate court earlier applied the Penn Central test to find liability, resulting in a remand to determine just compensation. As the title reveals, Bill takes issue with the way the issues were framed, and the conclusions the court reached. You may or may not agree with his conclusions, but Bill always considers these issues deeply, and his writings are always thought-provoking.
Find him online at energyandwatereconomics.com.
Bragg: Wrong Question, Wrong Result in Texas to the Detriment of Sustainable Water Supply
by William W. Wade, Ph. D.[1]
Earlier in March, the Medina County Texas District Court awarded pecan growers Glenn and JoLynn Bragg $2.55 million plus prejudgment interest in a regulatory takings case pertaining to the denial of a requested Edwards Aquifer groundwater permit.[2] The jury verdict made real the Texas Supreme Court’s 2012 Day Decision[3] ruling that land ownership includes an interest in groundwater in place that cannot be taken for public use without adequate compensation.
The Braggs’ 2016 outcome illustrates that when jurists ask the wrong question, litigators and juries provide the wrong answer.
Readers of this blog may remember that the Texas Supreme Court, on May 1, 2015, denied petitions by plaintiffs Mr. & Mrs. Bragg and defendant Edwards Aquifer Authority (“EAA”) to review an appellate court ruling.[4] This denial let stand the San Antonio Court of Appeals 2013 decision that EAA’s permit denials for the Braggs’ two orchards amounted to a regulatory taking under the standards of Penn Central.[5] As a result of the Texas Supreme Court’s denial, the appellate court’s remand to value Braggs’ damages for their taken water supply was the remaining issue in the Medina County District Court in February 2016.
Plaintiff testimony had consistently sought just compensation for Braggs’ water as a tradable commodity (akin to “Black Gold” for oil in the ground).[6] Defendant EAA had based damages for Braggs’ foregone water use on the replacement cost of leased water to irrigate their pecan orchards.[7] The difference between plaintiff and defendant economic loss estimates was nearly $4 million in the original trial court.[8]
The appellate court remanded for valuation of the pecan orchard land with and without access to EAA water.[9] The Braggs’ land was not the taken property right; the original trial court Penn Central takings decision reduced the amount of water the Braggs could withdraw from the Edwards’ Aquifer to irrigate their two pecan orchards.[10] The correct valuation method would estimate the present value of reduced farm income, past and future, with and without access to the claimed EAA water right needed for irrigation—not fair market value (“FMV”) of land values.
The appellate court remand direction was an economic error akin to a series of federal rental income cases, where the taken property right was the opportunity to exit a low income housing program and convert the rental units to market rental rates.[11] Yet, government counsel consistently valued the rental buildings with variants of FMV, when the standard economic method required valuation of the lost income stream.
The Medina County court awarded Braggs $2.55 million as the difference in appraised FMV of pecan farmland with and without access to EAA water.[12] Throughout the course of the litigation, Mr. and Mrs. Bragg have been growing their orchards to maturity with rented water at limited added cost. Having followed the case for years, their actual economic losses likely are greatly less than the award, if measured as the correct present value of lost income approach. The March 2016 County Court decision reveals that when appellate courts ask the wrong question, responding trial courts reach an incorrect finding. Economic loss of Braggs’ farm income should have been measured by standard Daubert-vetted lost income methods.[13]
In view of the importance of dependable water supplies for Texas, the outcome of the Medina County Court valuation is significant to more than the Braggs and EAA. Reliance on standard valuation approaches would enhance the balancing of private water rights with public needs for Texas water supply management. When courts ask the wrong questions they get incorrect answers. Unfortunately, wrong results can create precedent for more bad law. Penn Central takings cases entail a balancing of private property rights and public benefits. This cannot be achieved without competent economic approaches to value the private and public stakes in a sustainable water supply for Texas future.[14]
NOTES
[1] Wade is a water resource economist with an interest in the economic underpinnings of regulatory takings law. (wade@energyandwatereconomics.com)
[2] Bragg v. Edwards Aquifer Authority, No. 06-11-18170-CV (38th Dist. Ct., Medina Cnty., Tex. Decision March 2016.)
[3] Edwards Aquifer Authority v. Day, 274 SW.3d 742, (Tex. Feb. 23, 2012, “Day”))
[4] Edwards Aquifer Auth. v. Bragg, No. 13-1023, (Tex. 2015).
[5] Edwards Aquifer Auth. v. Bragg, 421 S.W.3d 118 (Tex. App.—San Antonio 2013, pet.denied); Bragg, 421 S.W.3d at 138-46 (citing Penn Cent. Transp. Co. v. N.Y.C., 438 U.S. 104 (1978)).
[6] Brief for Plaintiffs, Bragg v. Edwards Aquifer Auth., No. 06-11-118170-CV (Tex. 38th J. Dist. Ct. Apr. 15, 2010). See William Wade, “Liquid Gold or Water for Pecans: Valuation of Edwards Aquifer Water for the Braggs’ taken Orchards,” 45 ENVTL. L. REP. L. NEWS & ANALYSIS 10932, October 2015.
[7] Post-Trial Brief of Defendants, Bragg v. Edwards Aquifer Auth., No. 06-11-118170-CV (Tex. 38th J. Dist. Ct. Apr. 15, 2010).
[8] Bragg v. Edwards Aquifer Auth., No. 06-11-118170-CV, Amended Findings of Fact and Conclusions of Law (Tex. 38th J. Dist. Ct. Mar.11, 2011).
[9] Bragg, 421 S.W.3d at 152-53.
[10] Id. at 152.
[11] See, e.g., Cienega Gardens v. United States, 33 Fed. Cl. 196 (1995) and case following.
[12] Bragg Decision March 2016. The jury found the Home Place Orchard was worth $28,000/acre prior to regulation and $5,000/acre after regulation and the D’Hanis Orchard was worth $30,000/acre prior to regulation and $0 after regulation, for a total of $2.55 million in damages.
[13] See generally Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993); see also Fed. R. Evid. 702.
[14] See Joseph Belza, “A Texas Takings Trap: How the Court in Edwards Aquifer Authority v. Bragg Fell into a Dangerous Pitfall of Takings Jurisprudence,” 43 B.C. Envtl. Aff. L. Rev. 211, 216 (2016). (“If other courts adopt the Bragg interpretation of the Penn Central test, the doctrine of invalid regulatory takings will expand beyond its reasonable bounds. The resultant obligation by government agencies to compensate the individuals and industries they regulate could cripple lawmaking efforts, especially environmental regulation.”)