STATE OF NEW JERSEY, By the COMMISSIONER OF TRANSPORTATION v. 100 LARCH, L.L.C.

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-3758-06T33758-06T3

STATE OF NEW JERSEY, By the

COMMISSIONER OF TRANSPORTATION,

Plaintiff-Appellant,

v.

100 LARCH, L.L.C., a New Jersey

Limited Liability Company,

Defendant-Respondent,

and

VALLEY NATIONAL BANK, a National

Banking Association; AFD FURNITURE;

CITY OF JERSEY CITY in the County

of Hudson, a Municipal Corporation

of New Jersey,

Defendants.

______________________________

 

Argued March 10, 2008 - Decided

Before Judges S.L. Reisner, Gilroy and Baxter.

On appeal from the Superior Court of New Jersey, Law Division, Hudson County, L-1954-05.

Dale Laster Lessne, Deputy Attorney General, argued the cause for appellant (Anne Milgram, Attorney General, attorney; Patrick DeAlmeida, Assistant Attorney General, of counsel; Ms. Lessne, on the brief).

Joseph B. Fiorenzo argued the cause for respondent (Sokol, Behot & Fiorenzo, attorneys; Mr. Fiorenzo, of counsel and on the brief; Steven Siegel, on the brief).

PER CURIAM

Plaintiff State of New Jersey by the Commissioner of Transportation appeals from a condemnation award in favor of defendant 100 Larch, L.L.C. We affirm the $5.7 million award but reverse and remand for further proceedings with respect to pre-judgment interest.

I

On this appeal, the State contends that (a) the trial court committed plain error by charging the jury concerning the burden of proof, a concept inapplicable in condemnation cases; (b) defendant's counsel unfairly disparaged the State's case and the State's expert; (c) the defense was allowed undue latitude in cross-examining the State's appraisal expert; (d) defendant's expert was allowed to testify to matters beyond his report; and (e) the trial court erred in awarding prejudgment interest at the prime rate. We have reviewed the record with these contentions in mind, and have summarized the proceedings in the detail required to understand the issues.

As early as the pre-trial conference, on November 1, 2006, the trial judge asked counsel to submit their requests to charge. At that conference, the attorneys also discussed the significance of the capitalization rate, and defendant's claim that the State's expert artificially reduced the value of the property by over $1 million, by inaccurately representing the interest rates charged by Wachovia Bank. The defense put plaintiff's counsel on notice that defendant had subpoenaed a Wachovia employee to testify about this issue, although the employee was reluctant to testify.

In her opening charge to the jury, the judge instructed them that they must pay attention to the evidence so that they could decide which party met its burden of proof:

And this is so important because the burden of proof in this case, as in every case, is on any party who makes a claim to prove that claim by a preponderance of the credible evidence. In other words, if a party makes an allegation - - in this case, the questions will be about what the fair market value of this property is. If a party makes an allegation, then that party must prove that allegation by the preponderance of the credible evidence. . . .

If you find that the evidence on a particular issue is somewhat equally balanced, then that issue has not been proven by a preponderance of the evidence and the party making that allegation has failed in regard to its burden of proof.

Neither attorney objected to the charge.

In his opening statement, defendant's counsel explained to the jury that the capitalization of income valuation method involved choosing numbers and plugging them into a formula. In that context he stated, "remember one thing when you listen to the evidence, garbage in, garbage out. The formula is only as good as the data that goes into it and the assumptions that these experts made." He also told the jury that when he questioned the State's valuation expert, he expected to show that

there have been games played with the numbers. And by "games," I don't mean anything nefarious, but I mean what they've basically done is they've taken numbers that don't have any relationship to reality and they plug them into this formula to arrive at an unreasonably low valuation.

Defendant's counsel also reviewed with the jury the expected differences between his expert's opinion and the State's expert. In that context, he stated:

These are the things that I will prove. I will prove to you that the method employed by the State and the information they used to arrive at the valuation is wrong. And when I do that, . . . I'm going to come back to you at the close of this case and I'm going to ask you to return a verdict in favor of the property owner awarding just compensation in the amount of $5.8 million which represents the true fair market value. . .

There were no objections to defense counsel's opening remarks.

The State's first witness, Edward Crowley, an engineer with the Department of Transportation, explained the road construction project which necessitated condemning defendant's property. In that context, he explained to the jurors the location of that property and the fact that access to the property was from St. Paul's Avenue. However, on cross-examination he was asked about a driveway or roadway "in front of the property" that "accesses out to Route 1 and 9." He was then asked if that roadway "would provide the ability for people at this location to go out to 1 and 9, which is a major intersection in this area." He responded that only "very small vehicles" could use the roadway because of its narrow width. Defense counsel also showed the witness a map that the witness had never seen before, and asked him about an alleged easement on that map providing access to Routes 1 and 9. Crowley testified that according to "our plans," the easement belonged to Jersey City.

In further cross-examination, counsel asked the witness if the City of Jersey City might have given a further access right to defendant to use the easement. The witness did not know. Clearly, defense counsel was attempting to create an inference that the property was more valuable because it had direct access to Routes 1 and 9. Counsel in fact continued to ask the witness about the alleged easement on re-cross, showing the witness a deed purporting to create an easement in defendant's favor and, in response to plaintiff's objection, representing that he would "connect it up in my case."

The State's next witness was Noeline M. Fuller, an expert real estate appraiser. She concluded that the highest and best use of the property was to develop it as an industrial site with a substantial industrial building on the larger of the two lots. She concluded that the property's fair market value as of April 2005, when the complaint was filed, was $3.7 million.

Fuller explained the three valuation methods that she used to value the property. The cost method involved calculating the cost to buy the land and the replacement cost of constructing a new building comparable in function to the existing industrial building on the land. Based on three comparable land sales, she estimated the value of the land at $290,000 per acre or $833,500. She estimated the cost to build the building, including profit and soft costs, at approximately $4.4 million. However, after deducting depreciation on the existing building, she arrived at a value of $2.66 million. Then, after subtracting adjustments, she arrived at a total value of approximately $3.5 million for the land and building.

Fuller also testified that she used the sales comparison approach based on "three comparable sales of warehouse-type buildings similar to the subject [structure]." This approach resulted in a valuation of $3.63 million.

Finally, Fuller testified to her use of the income capitalization approach. This method requires calculating the net operating income generated by the property. She assumed that if the property were leased, the tenant would be given a net lease. She concluded that six dollars per square foot would be the fair net rental value, for a gross potential rental income of $483,576. Adjusting for average vacancy rates and expected expenses yielded a net operating income of $395,759. Fuller then explained how the "net operating income is capitalized into a value indicator based upon an overall rate." She applied a rate of 10.25%, using the "band of investment method" which Fuller explained as "what type of a mortgage could be obtained on the property together with what kind of a return the investor would expect, and you want to pay off that mortgage as well." She explained that an investor in a property such as 100 Larch would want a 9% return on investment, to compensate for the risk involved in operating a single-tenant property; that is, if the tenant leaves, the building is 100% vacant, whereas in a multi-tenant building, if one tenant leaves, there is still rent coming in from other tenants. She testified that in April 2005, the rates for twenty-year mortgages on small industrial buildings was between eight and ten percent. She averaged the projected rate to 9% for a mortgage loan amounting to 75% of the value of the property.

Fuller testified that the sources she used to calculate the 10.25% capitalization rate included the Corpasz study, rates posted on the internet, rates charged in connection with actual sales contracts with which she was familiar, and rates quoted by several banks. The property's value is derived by dividing the expected income by the capitalization rate. Dividing $395,759 by 10.25% yielded a value of about $3.86 million. Combining the three approaches, but giving most weight to the sales comparison approach which she felt was the most objective measure of value, Fuller came up with a valuation of $3.7 million.

During cross-examination, defense counsel sought to question Fuller about a survey map which the defense had provided to Fuller, that purportedly showed an access easement to Routes 1 and 9. His expressed purpose was to establish that the property, having access to a major highway, might be more valuable than comparable properties Fuller used in valuing 100 Larch. Plaintiff's counsel objected that the existence of an easement should not be placed before the jury, because the State's filed map did not include an easement and therefore the State was not condemning an easement even if one existed. Defense counsel conceded that his client was not seeking compensation for an easement.

On cross-examination about the income capitalization method, Fuller clarified that she derived the capitalization rate by considering two components: the mortgage interest rate that a bank would charge and the equity return rate, i.e., the rate of return that an investor in the property would expect to receive. She agreed that if the capitalization rate was higher, the fair market value would be lower. She also agreed, hypothetically, that if the correct capitalization rate were 8.25% instead of 10.25%, the appraised value of the property would increase by a million dollars.

When questioned as to the source of her information on the mortgage interest rates, Fuller responded that she was unable to produce some of them because they came from internet sources and she did not print copies of them. When confronted with her deposition testimony, she also admitted that she consulted with Brian Ianerone of Wachovia Bank concerning interest rates for Hudson County properties, but not specifically for this property. She also consulted with employees of Bank America and Independence Bank concerning the interest rates being charged in Hudson County.

Fuller's testimony was interrupted at this point, so that the defense could present testimony from Timothy L. Babjak, an employee of Wachovia Bank who would have been unavailable later in the trial. Babjak, a senior relationship officer, was familiar with "the bank rates that were being charged for commercial industrial loans" in April 2005. According to Babjak, the rates for a $4 million industrial loan with a 20-year amortization period were between 6.34% and 6.94%. The rates for a ten-year term were 6.65% to 7.25%. Babjak testified that he himself set the rates on Wachovia loans, based on information from Wachovia Capital Market about the cost of funds. However, an individual loan would only be approved after the underwriters had reviewed the borrower's financial information.

Thereafter, Fuller's cross-examination resumed and she was questioned about the existence of the 30-year Treasury bill on which she, in part, based her calculation of what rate of return investors would expect. She was also questioned about comparable rentals, which were an important component of her calculation of the property's projected gross income. Fuller prepared two reports for this case, one in 2003, which was not the basis for her testimony, and a second report prepared in 2005, from which she testified. She admitted that in the earlier report, she used different comparable properties which all had higher rentals per square foot than the comparables she used in her 2005 report. She also agreed that there was increased demand for industrial properties between 2003 and 2005. On re-direct, she contended that she used leases for different properties in her 2005 report because those leases were more current.

In comparing her 2003 and 2005 reports, Fuller also admitted that in her 2003 report she estimated a 14% deduction for expenses from the gross annual income of the property, while in the 2005 report she deducted 19% for expenses. She contended that the expenses were "[b]ased on what was reported in '05 as expenses." In essence, defense counsel led Fuller through a series of calculations designed to establish how much higher the property's valuation would be if she used lower expense numbers and/or lower capitalization rates in her formulas. Then, counsel elicited from Fuller an admission that the 7% to 11% range for capitalization rates, which she took from the Corpasz Market Report and used in coming up with her overall cap rate of 10.25%, was in fact copied in error from one of Fuller's previous expert reports about "a small local retail building."

Q: So the 7 to 11 percent, I'm sure was accurate on the report it was taken off of, but unfortunately found it's [sic] way into this report. Correct?

A: It's in this report, yes.

Q: And it would appear that that was a mistake, because you took it off the template from this other report, regarding a small local retail building. Correct?

A: Obviously, that is correct.

In cross-examining Fuller on her use of the cost approach, defense counsel also sought to impeach her testimony concerning the use of a 40% depreciation figure for the warehouse. Fuller testified that in calculating depreciation she used the Marshall Evaluation Services handbook. However, the Marshall book listed 14% as the depreciation for a warehouse that, like this property, had an effective age of 15 years with a life expectancy of 45 years. She also admitted that using the 14% depreciation figure would result in a $1.18 million increase in the value of the building. Defense counsel also cross-examined Fuller on her use of the comparable sales method. It appeared from the comparable sales information in her file that she chose to rely on the three properties with the lowest per-square-foot sales prices.

On redirect, Fuller testified that the property was a heavily-used older building which justified a higher rate of depreciation. She also explained that she did not agree with the numbers defense counsel had asked her to plug into her formulas as part of his hypothetical questions. In particular, she testified that investors would demand a higher rate of return than 7% because of the risk of investing in a one-tenant building. She reiterated that she based her valuation most heavily on the comparable sales approach.

On re-direct, Fuller also testified that the property did not have direct access to Routes 1 and 9. On re-cross, she was briefly questioned about a sentence in her 2005 report indicating that the property's owner had advised her that there was an access easement to Routes 1 and 9. On further re-direct, she testified that the lot that allegedly was the source of the access to Routes 1 and 9 in fact did not touch those roadways, was fenced in, and did not belong to 100 Larch. Defense counsel then had the witness explain the definition of an easement, and plaintiff's counsel had her clarify that other than information provided by the owner, she was not aware of any evidence that an easement existed.

Defendant presented testimony from Albert F. Chanese, Sr., who was qualified as an expert real estate appraiser "specifically in regard to commercial and industrial properties." He explained that the property was a furniture distribution warehouse, and that highway access was important to the location of a warehouse. He testified that the property was located off St. Pauls Avenue, a street that led to Routes 1 and 9, which in turn gave access to the New Jersey Turnpike. The property was also located in close proximity to the Holland and Lincoln Tunnels. Chanese did not testify about an access easement.

According to Chanese, as of April 2005, the market for industrial buildings was "exploding," because many industrial properties in the Hoboken-Jersey City area were being purchased for conversion to residential use, their industrial tenants were being displaced, and industrial buildings were thus in short supply. Therefore, the sale prices and rental values of industrial properties such as 100 Larch were increasing.

Like Fuller, Chanese testified that the highest and best use of the property was its existing industrial use. Unlike Fuller, Chanese opined that the sales comparison approach and the income approach were the only appropriate methods to value the property. Using the comparable sales approach, Chanese valued the property at $69 per square foot, or a total of $5.55 million. This compared to Fuller's valuation of $45 per square foot. Chanese explained in considerable detail how and why he chose as comparable sales three one-story warehouse distribution buildings in reasonably close proximity to 100 Larch and how he made adjustments to arrive at his per-square-foot valuation for each. Those values ranged between $65.39 and $71.76 per square foot. He also testified that an appraiser should try to avoid using two-story industrial buildings as comparables to one-story industrial buildings (as Fuller did), because the price per square foot "usually goes down" for the upper floors.

Addressing his second methodology, Chanese testified that he arrived at a valuation of $5.9 million using the income capitalization approach. Like Fuller, he described the formula as the net operating income divided by the capitalization rate. The operating income was based on rental per square foot, which Chanese opined was $6.75 based on three comparable rental properties. This yielded a gross income of about $544,000. Due to the strong demand for industrial rental property, Chanese assumed a 4% vacancy rate. He also deducted a 5% management fee and 2% for replacement reserves to pay for structural repairs. He disagreed with Fuller's deduction of a 5% commission, because that would typically be a capital expense, incurred only when a tenant needed to be replaced, rather than a yearly recurring expense. Chanese arrived at a net operating income of about $485,700.

Chanese testified that he used a capitalization rate of 8.25%, based on a blending of a mortgage rate and an equity rate. He assumed a mortgage interest rate of 6.85% based on his dealings with banks and his appraisals of industrial properties, during which he invariably would "go to the bank and ask what the rates are." At the time he valued the property, the prime rate was 5.7% and the rate for ten year treasury bills was 4.34%. Typically, the mortgage rates are set based on the ten year treasury bills, and in 2005 the banks were quoting rates between 2% and 2.5% above the treasury rate. He calculated the mortgage interest rate by adding 2.5% to the 4.34% treasury rate, which was the rate Northfork Bank would have quoted to an applicant at the time.

Chanese also testified that the equity rate was 8%. In arriving at that rate, he considered that although real estate was a somewhat risky investment, there was high demand for industrial real estate and therefore, investors wanting to invest in real estate would "bid the rates down", i.e, accept a lower rate of return on their investment. In turn, the lower rates required to obtain investment capital would drive up the value of the real estate. Chanese then explained in detail how he "blended" the 6.75% mortgage rate and the 8% equity rate to derive the capitalization rate. Assuming a 25-year mortgage loan covering 70% of the property's value, Chanese derived a capitalization rate of 8.25%. That figure applied to the net income yielded a valuation of $5.9 million.

Considering that capitalization rate value together with the comparable sales value, Chanese concluded that the fair market value of the property was $5.7 million. On cross-examination, he admitted that in a 2004 appraisal he had valued the property at $4.15 million, or 28% less than his 2005 appraisal. Although he also admitted that he typically adjusted sales over time at a rate of 8% a year, not 28% a year, he contended that it was "common knowledge" that "Hudson County property values went up 25 percent a year."

In considering his comparable properties, he admitted that a property with direct access to a highway would be more valuable than a property situated on a local road. Chanese was questioned about his conclusion that a comparable property located directly on Routes 1 and 9 was nonetheless inferior to the 100 Larch property. He was also questioned about his 2004 report which opined that the fair rental value was $5.50 per square foot, as opposed to his 2005 report which concluded that $6.75 per square foot was the fair rental value.

He admitted that, in his 2005 report, unlike the adjustment he showed when comparing buildings using the comparable sales method, when he used the income method there was no grid or other explanation in his report explaining how he made his adjustments to the comparable properties to arrive at the $6.75 per square foot rental figure. In response to a hypothetical question, he admitted that if he made similar adjustments using the rental approach to those he made using the sales approach, he would have arrived at a lower rental value for 100 Larch than the $6 to which Fuller testified, and would have calculated a total income figure of $392,502. Chanese did not, however, agree that the adjustments in the hypothetical were appropriate.

Chanese also admitted that in his 2004 report he used the Corpacz Real Estate Investors survey and the Cushman & Wakefield report as a "check" on his calculation of the capitalization rate, but he did not cite those sources in his 2005 report. He explained that the rate was primarily derived from the price of Treasury bonds and from local sources, such as Northfork Bank because "it's a local market and those [the reports] are national surveys." He also explained that while he opined a 9% cap rate in 2004, the 2004 national reports were quoting an even lower rate of 8.71%.

On re-direct, Chanese clarified that according to the Corpacz survey, the average capitalization rate for the national warehouse market as of April 2005 was 7.83%. Had he used the Corpacz rate to calculate fair market value, he would have derived a value of $6.2 million, as opposed to the $5.9 million he actually calculated. Chanese explained that he did not use Corpacz as his definitive source because it was "always more accurate to use a local market to come up with a value." He also testified that Corpacz reported a national long-term mortgage rate of 5.6%, while Chanese actually used 6.85% in his report. Again, while using Corpacz would have resulted in a higher valuation for the property, Chanese did not use it because it was not "reflective of the local market."

On re-direct, Chanese was permitted to explain why his valuation increased so significantly between 2004 and 2005. As an example, he testified that one of the properties that Fuller had relied on in her report had been re-sold in September 2005 at a price almost $40 per square foot more than its June 2004 price. Using another of Fuller's comparables, he testified that a property located at 7572 River Road had sold at $44 per square foot in 2000, but was re-sold in 2004 at $95 per square foot. Consistent with Chanese's report, this averaged an increase of 28% per year. Although Fuller had not used these comparables in her 2005 report, the court held that plaintiff's cross-examination had opened the door to this line of questioning.

Chanese also explained how he derived his rental calculations for the buildings he used as comparables in deriving the fair rental value for 100 Larch. Over plaintiff's objection, the court ruled that cross-examination had opened the door to this testimony by questioning whether Chanese actually had any basis for his rental calculations. Chanese further explained that the building located directly on Routes 1 and 9 had an inferior location to 100 Larch, because the former only had access heading southbound, thus requiring truckers going north to get off the highway and make a u-turn.

Thomas A. Morabito, an executive vice president and senior loan officer at Community National Bank, was also called as a witness, specifically to rebut Fuller's testimony about her use of the income approach. In addition to his banking experience, Morabito taught a university course that included asset valuation and capitalization rates. Morabito's recitation of his experience and expertise in the banking and finance industries, as well as in the review of appraisals of industrial property and in valuation techniques, spanned twelve pages of transcript. He was then subjected to an extensive voir dire on his qualifications, all of which placed before the jury a lengthy and cogent exposition of his expertise in the financial industry. The court ruled that Morabito was qualified to testify as an expert "in the areas . . . [of] mortgage financing rates, [capitalization] rates, and customary expenses under the income approach."

According to Morabito, the 7% vacancy rate Fuller used in calculating rental income was excessive. Morabito opined that for a singe-tenant building, in an "extremely strong" market, a vacancy rate of "two and a half to four percent" was more realistic, with five percent being the outside upper limit. By estimating a higher vacancy rate, Fuller lowered her valuation of the property.

Based on his banking experience making loans in 2005, Morabito also testified that the 9% first mortgage rate Fuller used was "highly inconsistent with the marketplace and inappropriate." He explained that mortgage rates are competitive and are based on a spread over five or ten year treasury bonds. In 2005, those bonds were offering four and a half percent interest; Fuller's proposed rate of 9% was double that. Banks would typically loan money at 1.75 to 2.75, or at most 3 points over the Treasury bill rate. Thus, even if a loan on the subject property were risky, at most a bank would charge 7.5% interest. According to Morabito, the "appropriate average lending financing rate" in April 2005 was 6.75%.

Morabito also opined that Fuller inappropriately used a 20-year amortization period for the hypothetical loan, whereas most banks use a 25 year amortization period. She also overestimated, at 9%, the return that investors would demand on their equity contribution. According to Morabito, most of his investment clients in 2005 were "thrilled" to get "returns of six, seven, eight percent." A realistic investor rate of return would have been seven to eight percent. Morabito testified that every assumption Fuller made "favored the State and that they lowered the valuation of the property by . . . increasing the capitalization rate," and he explained this conclusion in detail.

On cross-examination, Morabito admitted that he knew one of the owners of the 100 Larch property, and he was asked whether his purpose in testifying was to influence "these calculations in favor of a higher fair market value." He testified that his testimony "is designed to reflect what the market looked like at the time. And my opinion is that the information and the assumptions used here do not accurately reflect a market that I actively dealt in on a daily basis and made loans in." He stated that he came to testify, without payment, "out of a sense of fairness" because he did not believe "that the amount that the landlord received here is fair, based on the information that was brought in."

Following the testimony, plaintiff requested a limiting instruction that the jury could not consider "testimony regarding alleged easements which may or may not have existed as of the day of taking." Defense counsel conceded that the parcel map controlled and the parcel map did not show an easement out to Routes 1 and 9. The judge ruled as a matter of law that there was no such easement. She ruled that defense counsel could not argue in summation "even in a circuitous manner" that "the value should be taken into account because there is an easement. There is no easement." The judge did rule that defense counsel could note that in her report Fuller said there was an easement but later denied that there was an easement, because "[t]hat's a credibility issue." However, she allowed into evidence a blow-up of a page of Fuller's report which showed the easement, based on defense counsel's representation that he only wanted to use it to show the general lay-out of the land.

During the charge conference, the judge proposed to give the jury the standard charge on burden of proof. Neither side objected. Defense counsel requested a charge on "false in one, false in all." Plaintiff did not object. Counsel agreed that the description of what was being taken should refer only to the complaint map and not to the deed or the survey map.

In his summation, defense counsel reminded the jury that at the beginning of the case he promised that he would "prove" certain things; he then explained how he had proven them. He also told the jury that "you have a right when you evaluate experts if you believe that someone has not been straight with you, if they misled you in some way with regard to a critical portion of the testimony . . . you have a right to reject. . . all of their opinions." However, the vast bulk of the summation was a detailed discussion of the evidence and particularly a detailed, evidence-based analysis of the weaknesses of Fuller's testimony and the strengths of the testimony of Chanese and Morabito. In that context, counsel pointed out that Fuller had consistently made assumptions that resulted in a lower valuation of the property but that did not stand up under cross-examination.

Toward the end of his remarks, defense counsel pointed out to the jury that

when you sort through all of the evidence and you consider everything that's been presented to you, the State has failed to meet its burden of proof to establish that the property here is 3.7 million dollars. And quite to the contrary . . . what we have shown to you I believe . . . is a compelling case to demonstrate that this property when properly considered with the correct data going in rather than fictional data, that the real value of this property is 5.7 million dollars as of the date of the taking.

He also urged the jury to "send a message loud and clear to the State that when you take people's property you better well treat them fairly. You better well not come forward and seek to take their property away by providing fictional opinions on value to suppress what they're entitled to receive." Plaintiff did not object to defendant's summation.

Plaintiff's counsel argued that Fuller was unbiased, thorough and had no agenda. She argued that 100 Larch was in an inconvenient location, with no direct access to major highways, and that the explosion in the real estate market was for luxury high-rise housing, not old warehouses. She contended that Chanese was also selective in choosing comparables, because he only looked for buildings that sold for over $49 per square foot.

Echoing defense counsel's comments she stated "Ask yourselves who had an agenda and who's playing games here. And please remember the phrase counsel used, garbage in, garbage out because it's true. The conclusions that are drawn here are only as good as the data that goes into it." She also accused Chanese of "outright manipulation of figures" for the purpose of "achiev[ing] a higher fair market value." In discussing his use of data she claimed was inaccurate, she contended "Why does he make these adjustments? He makes these adjustments because it makes it possible to manipulate the bottom line in the net operating income and that then affects the value under the income approach." She contended that Fuller provided more specific support for her opinions, whereas Chanese provided relatively little detail, and she contended that Morabito's testimony was suspect because he was a business associate of one of the owners of 100 Larch.

At the beginning of her charge, the judge reminded the jury that counsel's summations were not evidence. Without objection, she also charged that "the burden of proof is on each party to establish any claims made by that party by a preponderance of the credible evidence." However, she made clear to the jury that they were not faced with an all-or-nothing choice between the two sides. After reviewing the testimony of the experts, she charged that

You must decide which of these experts' opinions is correct and may reject any other opinions or you may decide that neither is entirely correct and in that case, you may come up with another figure for the . . . fair market value of the property in question.

In giving the "false in one false in all" portion of the charge, the judge instructed the jury that if a witness "knowingly testified falsely" regarding a significant fact, they nonetheless "may give such weight to his or her testimony as you deem it is entitled. Again, you may decide to believe all of it, some of it or none of it at all." Neither party's summation mentioned the alleged access easement referenced in the survey but not the parcel map; in her charge the judge instructed the jury that the property was defined in the State's parcel map.

In less than two hours, the jury unanimously returned a verdict of $5.7 million. In an oral opinion placed on the record on February 5, 2007, the judge denied the State's motion for a new trial. She rejected the State's arguments that the verdict was against the weight of the evidence, and that Babjack was an expert witness rather than a fact witness as to the rates charged by Wachovia Bank. She also concluded that even if it was error to allow Fuller to be cross-examined about an alleged access easement, the error was harmless because the jury was not asked to value the easement and was instructed that the property was as designated on the State's parcel map which did not show an easement.

The judge also concluded that the verdict was not a miscarriage of justice. Rather, the defense had presented ample evidence to support the jury's verdict, and Fuller's credibility was severely compromised on cross-examination. She found that the jury was very attentive, and their quick verdict was not shocking.

The trial court also addressed the issue of the pre-judgment interest rate. The State argued that the rate allowed by Rule 4:42-11 was appropriate, while the defense argued for the prime rate. The judge concluded that because interest rates had risen substantially and the State's "negotiation position did not lend itself to settlement of this case within a reasonable amount of time," the prime rate was more appropriate. She also relied on "testimony as to what would be required to make the defendant . . . whole." The State did not directly request a hearing on the issue, although counsel did argue that defendant should have submitted "expert testimony" in support of its claim for interest at the prime rate.

II

As summarized at the beginning of this opinion, plaintiff raises the following appellate points for our consideration:

I. THE TRIAL COURT'S CHARGE TO THE JURY CONCERNING BURDEN OF PROOF AND PREPONDERANCE OF THE EVIDENCE, WHICH SPECIFICALLY DO NOT APPLY TO CONDEMNATION CASES, WAS PLAIN ERROR.

II. THE TRIAL COURT GAVE 100 LARCH L.L.C.'S COUNSEL UNREASONABLE LATITUDE TO DISPARAGE THE STATE AND ITS EXPERT DURING CROSS-EXAMINATION AND SUMMATION.

A. The Trial Court Improperly Permitted 100 Larch L.L.C's Counsel To Make Disparaging Comments About The State And Its Expert During Opening And Closing Statements To The Jury.

B. 100 Larch L.L.C's Cross-Examination Of The State's Appraisal Witness Exceeded The Boundaries Of Propriety And Portions Should Have Been Held Outside The Jury.

C. 100 Larch L.L.C.'S Expert Was Improperly Allowed To Testify To Matters Outside His Report.

III. THE TRIAL COURT'S DECISION THAT THE STATE PAY PREJUDGMENT INTEREST AT THE PRIME RATE, RATHER THAN THE RATE SET BY THE COURT RULES, WAS UNSUPPORTED BY EXPERT OPINION AND IMPROPERLY PENALIZED THE STATE FOR ITS PRETRIAL SETTLEMENT POSITION.

Although plaintiff did not object at the trial to the judge's charge concerning the burden of proof, plaintiff contends on this appeal that the charge constituted plain error. See R. 1:7-2; R. 2:10-2. We agree that the charge should not have been given, but we find no plain error in light of the evidentiary record in this case.

It is well-established that in this State, the burden of proof charge is not to be given in condemnation cases. See Model Jury Charge (Civil), 9.10 - Condemnation Generally (April 1996). The reason for the rule was plainly articulated in Paterson Redevelopment Agency v. Beinstock, 123 N.J. Super. 457, 459-60 (App. Div. 1973):

[T]he instructions to the jury with reference to burden of proof were erroneous. In this State the basic issue in a condemnation proceeding is the amount of just compensation which the owner is to receive for the property taken by the condemning authority -- i.e., the fair market value where, as here, the property condemned is the whole of a residential property. N.J. Const. (1947), Art. I, par. 20; State v. Gallant, 42 N.J. 583, 587 (1964). The burden of proof concept has no place in such an inquiry. As stated by the Supreme Court of Alaska in State v. 45,621 Square Feet of Land, 475 P.2d 553 [,555] (1970):

In a condemnation proceeding * * * where the sole issue is determination of just compensation, procedural rules involving the concept of risk of failure to persuade are inapposite. Here the focal point of the trier of fact's inquiry is the ascertainment of just compensation. Thus, regardless of whether the condemning agency or the property owner meets a given burden of persuasion, Alaska's constitutional mandate requires that the owner be awarded just compensation for the property he has lost. In the usual condemnation case, the jury is confronted with conflicting opinions as to value. The jury is not faced with the necessity of finding a particular value or no value at all. As to the issue of fair market value, both the condemning agency and the property owners may produce competent evidence of the fair market value of the condemned property. Absent the production of such evidence by either party, the triers of fact will determine fair market value solely from the other party's evidence. The burden of production facet of burden of proof, rather than the risk of non-persuasion aspect, is the more meaningful concept in the trial of a condemnation proceeding.

In Paterson, we reversed the verdict based on the erroneous jury charge and a finding of prejudicial error stemming from the court's refusal to allow defense counsel to question plaintiff's expert concerning a property that we concluded was not comparable to the condemned property. It is not clear that we would have reversed based solely on the erroneous jury instruction. Ibid.

The general rule concerning the burden of proof was recognized by the Supreme Court in State v. Twp. of South Hackensack, 65 N.J. 377 (1974). "A word is perhaps in order as to burden of proof. In the ordinary condemnation case, where the only issue to be resolved is the amount of compensation that the condemnee is to receive, neither party carries this burden." Id. at 386. As a related principle, the trier of fact is not limited to choosing between the plaintiff's proposed valuation or the defendant's proposed valuation. See State, by Comm'r of Transp. v. Laino, 193 N.J. Super. 713, 715 (App. Div.), certif. denied, 99 N.J. 143 (1984). However, in the present case, the judge's charge clearly instructed the jury that they were not bound to choose either side's number but could arrive at a different valuation depending on their evaluation of the evidence.

Absent an objection at trial, even where jury instructions contain error, we will not reverse if the error was not "clearly capable of producing an unjust result." See R. 2:10-2. "Courts uphold even erroneous jury instructions when those instructions are incapable of producing an unjust result or prejudicing substantial rights." Sons of Thunder v. Borden, 148 N.J. 396, 418 (1997)(quoting Fisch v. Bellshot, 135 N.J. 374, 392 (1994)).

"When reviewing a trial court's instruction to the jury, an appellate court must read the charge as a whole" and should not reverse "when the charge adequately conveys the law and does not confuse or mislead the jury." A litigant is not entitled to a charge in his or her own words, only to a charge which does not, on the whole, contain prejudicial error.

[Casino Reinvestment Dev. Auth. v. Lustgarten, 332 N.J. Super. 472, 487 (App. Div.), certif. denied, 165 N.J. 607 (2000) (citations omitted).]

Given these principles to guide our review, we find no plain error. Having thoroughly reviewed the record including the entire trial transcript, we cannot conclude that the error in charging burden of proof was "clearly capable of producing an unjust result." R. 2:10-2. This was not a close case. Even on a cold record, it is clear to us that plaintiff's expert was irretrievably discredited on cross-examination. Reasonable jurors could have concluded that she deliberately chose properties that were not comparable to 100 Larch for the purpose of driving down her valuation, and that she chose an indefensibly high capitalization rate for the same reason. By contrast, the defense experts were much stronger witnesses. The testimony of Babjack, a clearly impartial fact witness on the issue of the mortgage interest rates Wachovia was actually charging in 2005, was also particularly damaging to the plaintiff's case.

Perhaps as significantly, the error did not prejudice the State because there was no attempt to imply that the State had the burden of proof. Instead, defendant appeared to shoulder the burden, as its counsel repeatedly told the jury what he would "prove" to them and what he had proven. And, finally, as noted above, the judge's charge clearly explained to the jury that they did not have to accept either side's valuation, but could come up with their own number.

Taken in the context of this record, we conclude that any error in the charge was harmless in light of the State's weak case and the defendant's overwhelmingly strong evidence. Far from being a miscarriage of justice, the verdict is neither shocking nor surprising. The record strongly persuades us that the jury would have reached the same result even if they had received a completely correct charge. See State v. Macon, 57 N.J. 325, 338-340 (1971); Dorn v. Transp. of New Jersey, 200 N.J. Super. 159, 166 (App. Div. 1984).

We likewise find no merit in the State's contention that comments by defendant's counsel tainted the verdict. The vast majority of the allegedly objectionable remarks were actually fair comment on the evidence and entirely consistent with fair and zealous advocacy. Plaintiff's counsel raised no objection to any of defense counsel's remarks, and made her own spirited and zealous attack on defendant's witnesses in her summation.

We also note that plaintiff's counsel adopted and repeated defense counsel's remark about "garbage in, garbage out." In the context in which it was used by both counsel, the remark was clearly not an insult, but was a shorthand explanation of the importance of using accurate data in the various valuation formulas. While we agree that defense counsel's comments in summation about "sending a message" were inappropriate, they in no way rose to the level of the improper comments in Geler v. Akawie, 358 N.J. Super. 437, 468-70 (App. Div.), certif. denied, 177 N.J. 223 (2003), and do not satisfy the plain error standard.

Plaintiff's remaining arguments concerning alleged trial errors are without sufficient merit to warrant discussion in a written opinion, Rule 2:11-3(e)(1)(E), beyond the following comments. Any questions to Fuller about the alleged access easement were harmless error in light of the record. While the judge might have exercised her discretion differently and denied counsel's application to admit the survey in evidence, if it was error it was also harmless. She instructed the jury that the property being condemned was limited to the State's parcel map, which did not show an easement, and the defense made no valuation arguments based on the alleged easement. Chanese did not testify about it at all, and defense counsel did not mention it in his summation. Likewise, we find no abuse of discretion in the judge's decision to allow Chanese to further explain, on re-direct, the bases for opinions as to which he had been cross-examined.

Finally, we turn to the issue of pre-judgment interest. Interest on a condemnation award is required by the Constitution and by statute. See Casino Reinvestment Dev. Auth. v. Hauck, 317 N.J. Super. 584, 594 (App. Div. 1999), aff'd o.b., 162 N.J. 576 (2000). Interest "shall be fixed and determined by the court in a summary manner after final determination of compensation, and shall be added to the amount of the award or judgment, as the case may be." N.J.S.A. 20:3-31.

Depending on the circumstances, a hearing may be required. In Twp. of Wayne v. Cassatly, 137 N.J. Super. 464 (App. Div. 1975), certif. denied, 70 N.J. 137 (1976), we offered the following guidance:

Since rigid guidelines do not suffice and since the governing statute envisions a flexible approach, we start with the proposition that the appropriate rate of interest cannot be determined by an uninformed judge. Where, as here, the action has been pending for a substantial period of time in which the level of interest rates has been a changing phenomenon, a hearing should have been held during which expert evidence as to prevailing commercial and legal rates of interest would have been received. The statutory requirement that the rate of interest be determined "in a summary manner" does not necessarily imply a proceeding devoid of evidential input. After receiving evidence as to prevailing commercial interest rates, the prime rate or rates, and bearing in mind the applicable legal rates of interest, which should certainly be regarded as highly evidentiary, the judge should then select that rate or rates of interest which will best indemnify the condemnee for the loss of use of the compensation to which he has been entitled from the date on which the action for condemnation was instituted, less interest on all amounts previously deposited from the date of deposit. If no evidence is given as to the prevailing commercial rate, the court may conclude that the legal rate of interest reflects that rate, although the landowner is not entitled as a matter of right in all cases to an allowance of interest at the maximum legal rate. The interest rate selected should not, however, exceed the legal rate.

[Id. at 474-75 (citation omitted).]

Likewise, we ordered a plenary hearing in Jersey City Redevelopment Agency v. Clean-O-Mat Corp., 289 N.J. Super. 381, 400 (App. Div.), certif. denied, 147 N.J. 262 (1996):

Where, as here, the action has been pending for a substantial period of time during which the level of interest rates has been a changing phenomenon, we have mandated plenary hearings for the presentation of expert evidence as to the prevailing commercial and legal rates of interest.

See also Twp. of W. Windsor v. Nierenberg, 345 N.J. Super. 472, 480 (App. Div. 2001), certif. denied, 171 N.J. 443 (2002) (noting that while a hearing on interest was appropriate, "the Legislature clearly did not envision protracted, costly proceedings").

While we held that a hearing was required in Cassatly and Clean-O-Mat, we reached a different conclusion in Hauck, supra, where we concluded that a decision based on certifications was sufficient:

We are satisfied that the Law Division properly fulfilled its statutory function. In reaching this conclusion, we recognize that the statutory requirement mandating interest be fixed "'in a summary manner'" does not reasonably imply "a proceeding devoid of evidential input." Twp. of Wayne v. Cassatly, 137 N.J. Super. at 474. However, the record indicates that the Haucks filed documentary submissions in support of their claim and that these analyses were fairly considered by the Law Division.

In allowing interest commensurate with the rates set by Rule 4:42-11, the Law Division cited the fact that unlike Cassatly, where interest rates substantially increased during the pendency of the condemnation action, id. at 474, interest rates had remained stable during the pendency of these proceedings. The court also stressed that the Haucks' unreasonable demands, twice the amount of the ultimate verdict, substantially contributed to the length of the proceedings. See State v. Nordstrom, 54 N.J. 50, 57 (1969) (the State's highest offer of settlement was less than one-fifth the jury verdict).

[Hauck, supra, 317 N.J. Super. at 595.]

In Hauck, we deferred to the trial court's decision because it was not either clearly mistaken or "so plainly unwarranted that the interests of justice demand intervention and correction." Ibid.

In this case, we are unable to defer to the trial judge's decision on interest. Unlike Hauck, the record does not contain sufficient evidence to support the court's determination to base the interest award on the prime rate. Defendant did not submit any expert proofs, by way of certification or otherwise. The only evidence submitted was a certification of counsel with some internet printouts attached which purported to show the various interest rates available between 2005 and the date of the judgment. This was not what was contemplated in Cassatly. Moreover, we cannot agree with the judge's reasoning for awarding the prime rate. The State made a settlement offer that was considerably higher than the value to which Fuller eventually testified; it was not accepted. We see no merit in the conclusion that interest at the prime rate was appropriate because the State's attorney was unable to obtain additional settlement authority within what the judge considered a reasonable time prior to trial. Consistent with Hauck and Cassatly, we conclude that expert reports are required. If the parties agree and the record they create is sufficient, the court on remand may be able to decide the issue based on the expert reports without a testimonial hearing. See Hauck, supra; Nierenberg, supra. However, absent agreement, the court should hold a testimonial hearing.

Accordingly, while we affirm the condemnation award of $5.7 million, we reverse the award of interest and remand for the limited purpose of conducting further proceedings to determine the appropriate rate of interest on the award.

Affirmed in part, reversed in part.

 

According to Crowley, Larch Avenue was 70 feet wide, which was wider than the usual 50-foot width of most streets. The 70-foot width allowed trucks to turn around and provide deliveries to plaintiff's warehouse on the property.

On the November 6, 2006 trial date, defense counsel objected to introduction of the State's map in evidence, contending that it was not the filed condemnation complaint map and that the existence of the easement was a critical issue in the case as it related to the property's value.

The property consists of two lots separated by Larch Avenue. The State condemned the entire property.

On two occasions, the judge sustained objections to defense counsel's use of the term "shortchanged" in connection with the State's valuation of the property, and directed him to rephrase his questions.

Fuller deducted a commission expense in her second report but not in her first report. This added expense factor decreased her appraised value of the property.

A mortgage loan typically would only cover a percentage of the purchase price. The remainder of the purchase price would be the buyer's equity investment. The capitalization approach assumes that the equity investor would expect to earn a reasonable rate of return (the "equity rate") on that investment.

According to Morabito, the Treasury was not even issuing 30-year bills as of 2005, although Fuller purportedly based her equity return rate on the 30-year treasury bill. He testified that Treasury stopped issuing 30-year bills in 2002 and resumed issuing them in 2006.

The Court held, however, that where the State condemns a municipal facility, the State does have the burden of proving that a replacement facility, such as a newly-constructed road built to replace an older roadway, is adequate such that monetary compensation is not required. Ibid.

Likewise, the judge's version of the "false in one false in all" charge did not actually use that phrase, nor did it instruct the jury to reject the testimony of a witness who testified falsely. Rather, the judge instructed them to give the testimony such weight as they deemed appropriate. Thus, the jury was not precluded from picking and choosing among portions of Fuller's testimony if they found any of it believable.

(continued)

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A-3758-06T3

May 12, 2008