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State v. Luby's Fuddruckers Restaurants, LLC

Court of Appeals of Texas, Thirteenth District, Corpus Christi-Edinburg

June 15, 2017


         On appeal from the County Civil Court at Law No. 4 of Harris County, Texas.

          Before Chief Justice Valdez and Justices Rodriguez and Hinojosa


          NELDA V. RODRIGUEZ Justice

         This appeal concerns a trial court's award of damages for the State's taking of property belonging to Luby's Fuddruckers Restaurants, LLC. The trial court entered judgment on a jury verdict awarding Luby's $1, 334, 183 as just compensation for the taking and awarding $480, 000 on Luby's claim for lost profits. By two issues, the State appeals the award of lost profits. By one issue, Luby's cross-appeals the trial court's exclusion of certain language from the jury charge regarding the value of the cafeteria's kitchen equipment. We find no abuse of discretion in the jury charge, but we agree with the State that the award of lost profits constituted an impermissible double recovery. We affirm in part and reverse and render in part.

         I. Background[1]

         The subject of this suit is a Luby's cafeteria situated along U.S. 290 and 34th Street in Houston, Texas ("the cafeteria"). On August 7, 2012, the State filed this condemnation suit to take a strip of the cafeteria's parking lot for purposes of a project to widen U.S. 290. Both parties agreed that the taking also rendered the cafeteria incapable of operating in its current form; with a substantial amount of parking gone, the cafeteria could not comply with a Houston parking ordinance. Luby's further contended that the parking situation was inadequate to meet customer demand and would also breach a restriction in the cafeteria's deed which set minimum parking requirements.

         The State agreed with Luby's that the taking rendered the building and all improvements valueless in their current form and that Luby's was entitled to compensation for this loss. Luby's announced its intention to demolish the current cafeteria and rebuild a smaller facility on the same site which could comply with the parking ordinance, the deed restriction, and market demand. The State further agreed that Luby's was entitled to compensation for the cost to achieve the demolition.

         However, the parties disputed the amount of compensation owed. Special commissioners were appointed to value the taken property, and they returned a condemnation award of $1, 795, 853. Both parties objected to the award, and the case proceeded to the trial court. See Tex. Prop. Code Ann. § 21.018 (West, Westlaw through Ch. 49, 2017 R.S.).

         Prior to the jury trial, the State filed a motion to dismiss for want of jurisdiction. According to the motion, Luby's had lodged a counterclaim for lost profits; Luby's asserted that the demolition and rebuilding of the cafeteria would take twelve months to complete, and that Luby's was entitled to compensation for lost profits during this period. The State argued that no recovery for lost profits was allowed under Texas law. Luby's responded that recovery of lost profits was allowed under Houston Court of Appeals precedent. The trial court agreed with Luby's and overruled the State's motion.

         At trial, Luby's presented evidence that this location had net profits of $40, 000 per month. Luby's also presented evidence that it had begun preparation for the twelvemonth process of demolition and construction, during which the cafeteria would be closed and unavailable to generate income. Luby's asked the jury to award $480, 000 to compensate for lost profits during this process.

         The parties also presented evidence concerning the market value of the strip of land taken and, on the remaining land, the value of the soon-to-be demolished cafeteria and related fixtures. Luby's offered an appraisal expert, Mark Sikes. Sikes performed his valuation according to the "cost approach, " which focuses on the cost of replacing the taken property. Sikes valued the taking by comparing the market value of the cafeteria property before the taking and the market value after the taking. According to Sikes, the property value before the taking was $4, 137, 024, the value after the taking was $1, 179, 263, and the compensable taking was the difference between the two: $2, 959, 737. Included in this figure was roughly $444, 000 to compensate for various kitchen equipment, such as vent hoods, prep tables, and a fryer. Luby's contended that these pieces of equipment were permanent fixtures to the cafeteria building, and therefore the value of the equipment should be included in any award for the taken building.

         The State offered Mike Welch, its own appraisal expert. Welch testified that the cost approach was the least reliable of three approaches used to appraise property, the other two being the comparable sales approach and the income approach. Welch determined the cafeteria's market value by appraising the property under all three approaches and taking their weighted average, placing more weight on the comparable sales and income approaches. Following this method, Welch estimated the compensable difference in market value to be $1, 334, 183. Welch acknowledged that this valuation did not account for the kitchen equipment that Luby's claimed was worth $444, 000; he testified that most of this equipment was not truly affixed to the property and could be easily removed and salvaged, and therefore did not qualify as compensable fixtures. Welch did, however, include a walk-in freezer in his estimate, which he believed to be a fixture or permanent improvement.

         At the charge conference, Luby's proposed a jury question and a jury instruction, both of which related to Luby's claim for the kitchen equipment. The proposed question would have modified the main jury question and asked the jury to value the whole property "including the building and the fixtures and the constructive fixtures within the building." The proposed instruction would have explained the legal definition of a compensable "fixture, " with language drawn from Texas case law. It would have also informed the jury that under certain circumstances, personal property can be "constructive fixtures"-that is, not directly attached to the property, but still intended to be a permanent improvement that is compensable in a taking. The trial court refused the question and the instruction.

         For the condemnation claim, the jury returned an award of $1, 334, 183, which was the amount proposed by the State and its experts. Separately, the jury also awarded $480, 000 for lost profits, which was the amount proposed by Luby's. These appellate proceedings followed.

         II. Claim for Lost Profits

         In its first issue, the State argues that in light of the main condemnation award of $1, 334, 183, any award for lost profits was an impermissible double recovery. The State argues that in partial takings cases, the general rule forbids any independent claim for lost profits. Luby's argues that under State v. Whataburger, recovery of lost profits is allowed when a taking causes "material and substantial impairment of access" to the property. 60 S.W.3d 256 (Tex. App.-Houston [14th Dist.] 2001, pet. Denied). According to Luby's, Whataburger should lead us to conclude that since the cafeteria must be destroyed, this qualifies as a substantial impairment of access, opening the door to an independent award of lost profits. In response, the State argues that a careful reading of the Whataburger court's reasoning should instead lead us to conclude that lost profits are not allowed under the facts of this case. We agree with the State.

         A. Applicable Law

          If a governmental entity condemns only part of a tract, adequate compensation is required for both the part taken and any resulting damage to the remainder. Cnty. of Bexar v. Santikos, 144 S.W.3d 455, 459 (Tex. 2004). But not all damages to remainder property are compensable. Id. Whether damages can be recovered depends on what kind of damage is involved. Id. Compensability is a question of law for the court, and it is subject to de novo review. Id.

         Damages to remainder property are generally calculated by the difference between the market value of the remainder property immediately before and after the condemnation, considering the nature of any improvements and the use of the land taken. Id. Texas recognizes three approaches to determining the market value of condemned property: the comparable sales approach, the income approach, and the cost approach. State v. Cent. Expressway Sign Assocs., 302 S.W.3d 866, 871 (Tex. 2009) (citing City of Harlingen v. Estate of Sharboneau, 48 S.W.3d 177, 182 (Tex. 2001)). Under the comparable sales approach, the appraiser finds data for sales of similar property, then makes upward or downward adjustments to these sales prices based on differences in the subject property. Sharboneau, 48 S.W.3d at 182. The comparable sales approach is preferred, id., but when this approach is unworkable, courts will accept testimony based on the income approach and the cost approach. Id. at 183. The income approach is appropriate when the property would, in the open market, be priced according to the rental income it generates. Id. This approach involves estimating the rental income of the property and applying a capitalization rate[2] to determine market value. See Cent. Expressway, 302 S.W.3d at 870. The cost approach looks to the cost of replacing the condemned property minus depreciation, and it is best suited for valuing improved property that is unique in character and not frequently exchanged on the marketplace. Sharboneau, 48 S.W.3d at 183. All three approaches are designed to approximate fair market value, which is the amount a willing buyer would pay a willing seller for the property. Cent. Expressway, 302 S.W.3d at 871.

         Texas law allows income from a business operated on the property to be considered in a condemnation proceeding in two situations: (1) when the taking, damaging, or destruction of property causes a material and substantial interference with access to one's property, lost profits may be awarded as damages, id. (citing City of Austin v. Ave. Corp., 704 S.W.2d 11, 13 (Tex. 1986)), and (2) when only a part of the land has been taken, evidence relating to lost profits is admissible, not as a separate item of damage, but as a means of demonstrating the taking's effect on the market value of the remaining land and improvements. Id.; see City of Dallas v. Priolo, 150 Tex. 423, 426- 27 (1951). Absent one of these two situations, income from a business operated on the property is not recoverable and should not be included in a condemnation award. Cent. Expressway, 302 S.W.3d at 871. Courts have applied this rule for two reasons: first, because profits from a business are speculative and often depend more upon the capital invested, ...

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