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Role of Contamination in Valuation of Property in Eminent Domain Proceedings

Environmental Law Update Thomas P. McElligott, Lauren G. Harpke

In a recent opinion, the Wisconsin Court of Appeals held that evidence of contamination and any related remediation costs are admissible in Wisconsin eminent domain cases. 260 North 12th Street, LLC v. State of Wisconsin Department of Transportation, Case No. 2009AP1557 (Sept. 14, 2010).

Under the Fifth Amendment's taking clause, a property owner in an eminent domain proceeding is entitled to receive "just compensation" for the condemned property. The goal of "just compensation" is to place the owner in a financial position that is similar to his or her financial situation before the taking. Generally, this has been interpreted as monetary compensation based on the fair market value of the property.

Determining "just compensation" for a blighted property is complicated by various characteristics of a contaminated site that make determining the fair market value difficult. For starters, there is little, if any, comparable market data for contaminated properties since each property is unique with different types and concentrations of contaminants. Furthermore, individual features of a contaminated property will require site-specific cleanup and treatment approaches that may vary greatly in terms of costs than those required for another contaminated property with different characteristics.

Another obstacle in determining just compensation for a contaminated property is the possibility of double liability as a result of cost recovery options for certain cleanup obligations. For example, consider a property owner who is compensated in an eminent domain proceeding by a reduced amount to account for contamination. If the new government owner decides to redevelop the property, it may remediate the contamination to levels required for future planned uses. Under Wisconsin law, the government may be able to recover certain cleanup costs from liable parties. However, if the government is able to recover costs from that former property owner, then the owner is essentially penalized twice - first, in the reduced just compensation amount and then again in the cost recovery proceedings.

As a result of the various challenges present in determining just compensation for contaminated properties, state courts that have addressed the issue are divided on whether evidence of contamination should be admitted in eminent domain proceedings. A few states do not permit admission of evidence regarding property contamination. The majority of states, and the side of the debate that Wisconsin has now joined, do allow for admission of evidence regarding property contamination in eminent domain takings cases.

In the recent Wisconsin appellate case, 260 North 12th Street v. DOT, the property owner argued that effects of contamination and related remediation costs should not be considered in determining just compensation in an eminent domain proceeding and, as a result, the trial court erred in admitting such evidence. The Court of Appeals, however, agreed with the Department of Transportation who argued that Wisconsin Statutes and case law allow for consideration of contamination. Wisconsin Statutes § 32.09(5)(a) states that just compensation in takings cases is equal to the "fair market value of the property taken." Wisconsin case law further characterizes the fair market value as the sum a willing purchaser would pay to a willing seller and indicates that any factor that would influence the property value should be considered. In 260 North 12th Street, the Wisconsin Court of Appeals held that evidence of contamination would affect the price a willing purchaser would pay to a willing seller and, therefore, is admissible evidence in determining the just compensation in an eminent domain proceeding.

Great Lakes Compact - Draft Permitting Rule Available for Public Comment

The Wisconsin Department of Natural Resources ("DNR") recently issued for public comment the draft administrative rule package for Wisconsin Administrative Code chapter NR 460 containing proposed regulations to implement the permitting component of the Great Lakes-St. Lawrence River Basin Water Resource Compact (the "Compact"). Water users in the Great Lakes Basin were previously required to register their withdrawals, and DNR issued automatic approvals to those existing withdrawals under Wisconsin Statutes § 281.344(5m). However, the automatic interim approvals are set to expire on December 8, 2011. As a result, any existing withdrawals must have a permit as of December 8, 2011, or they will have to reapply.

Under the Wisconsin Statutes, any person making certain withdrawals from Great Lakes Basin waters must have a water use permit by December 8, 2011. DNR is authorized to establish both a general permitting program and an individual permitting program for water use and withdrawals. DNR's recently proposed rules outline the requirements and application procedures for these permitting programs.

The DNR is authorized to establish a general permitting program for certain types of withdrawals, including any water supply system averaging more than 100,000 gallons per day ("GPD") in any 30-day period but less than 1 million GPD for any 30 consecutive days. Automatic coverage under the general permit program may be granted to a person who has an existing withdrawal that qualifies for automatic coverage, already has an interim approval, and submits certain facility specific information to DNR before November 1, 2011. DNR will process applications under the general permitting program within 45 days and will specify the withdrawal and baseline amounts for each notice of coverage. Any modifications to the notice of coverage will require DNR approval.

DNR is also authorized to establish a program to issue individual permits to withdrawals that do not qualify for a notice of coverage under the general permitting program. Additionally, an individual permit may be required for withdrawals located within a protective or management area that would otherwise qualify for a general permit. Similar to the general permitting program discussed above,  an owner of a facility may receive automatic coverage if it is an existing withdrawal qualifying for automatic issuance, the facility has an automatic approval, and if the facility submits certain facility specific information to DNR, including the same information required for a general permit and the methods proposed to determine water loss from consumptive uses. Consumptive uses include those that result in a failure to return the water to its original water basin because of evaporation, incorporation into products or other processes. Additionally, an owner applying for an individual permit will be required to show how the withdrawal meets the state or Compact decision, making standard if applicable. DNR will process applications for an individual permit within 60-90 days, and DNR will specify the withdrawal amounts and baseline amounts for withdrawals covered under individual permits.

Under both the general and individual permitting program, the proposed NR 460 will require a 30-day public notice and comment period. Additionally, public hearings may be requested.

The DNR's proposed rule on permitting under the Great Lakes Compact will be available for public comment until
October 31, 2010. Additionally, public hearings will be held on the proposed draft rule on October 13, 2010 in Milwaukee and on October 14, 2010 in Green Bay and Ashland. Additional information about the rule can be found here.

For additional information, please contact Tom McElligott at (414) 277-5531 / thomas.mcelligott@quarles.com, Lauren Grahovac Harpke at (414) 277-5183 / lauren.harpke@quarles.com or your Quarles & Brady attorney.