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San Diego Wins High-Profile Eminent Domain Case

A San Diego merchant who has become one of the state's leading fighters against eminent domain has not only lost his appeal of a trial court decision upholding the taking of his shop, but he has also lost a $9 million award of compensation and attorneys' fees.

The Fourth District Court of Appeal ruled that Ahmad Mesdaq could no longer challenge the taking itself because he had withdrawn money that the San Diego Redevelopment Agency deposited into an account to compensate him. The unanimous three-judge appellate panel also determined that San Diego County Superior Court Judge John Meyer made numerous mistakes during the valuation phases of the litigation.

The Fourth District sent the case back to the lower court for a new trial on how much the redevelopment agency owes Mesdaq. In mid-October, Mesdaq asked the state Supreme Court to review the case. In the meantime, a settlement that Mesdaq reached earlier this year with the developer who has since acquired the site of his former cigar shop appears to be in doubt.

The story is one that, not surprisingly, has served as the basis for a documentary film. In 1983, Mesdaq received political asylum in the United States after the Soviets destroyed his home in Afghanistan. He attended college in San Diego and later owned several restaurants in the city's rebounding Gaslamp Quarter. In 2001, he acquired a building at Fifth Avenue and J Street for $1.3 million, and then went about overhauling the structure. In 2003, he opened Gran Havana, a cigar lounge and coffee shop that soon counted Gov. Arnold Schwarzenegger as one of its customers.

But the city's downtown redevelopment arm (Centre City Development Corp.) and developer GRH, LLC, had other ideas for the prime location close to the San Diego Padres new baseball stadium and the convention center. GRH acquired 35,000 square feet of land but still needed Mesdaq's 5,000-square-foot parcel to make room for a proposed 12-story, high-end hotel. GRH made offers to Mesdaq, but he declined them.

So, in April 2004, the San Diego Redevelopment Agency filed a complaint in eminent domain to acquire Mesdaq's property. The agency sought a "quick take," so it also deposited $3.1 million as probable compensation and asked for immediate possession. Mesdaq held on for a while but ultimately closed Gran Havana in 2005, and the redevelopment agency took possession of the property.

Three separate trials were conducted: a bench trial to determine whether the taking was for a public use, a second bench trial regarding Mesdaq's request for pre-condemnation damages, and a jury trial to determine just compensation. Judge Meyer ruled that the taking was legitimate, but that a cleanup order the redevelopment agency had issued was unreasonable and the jury could consider granting damages for it. Later, a jury awarded Mesdaq $7.8 million —  $4.2 million as fair market value for the property, $3.4 million for lost goodwill, $96,000 for lost furniture and equipment, and $78,000 for pre-condemnation damages. Meyer also awarded Mesdaq $1.2 million in attorneys' fees and costs.

Both sides appealed. Mesdaq challenged the trial court ruling that the agency had the legal authority to take his property, while the agency challenged the awards.

The Fourth District did not reach the merits of Mesdaq's appeal. The court noted that in August 2005, seven months after the court ruled the redevelopment agency could take the property, Mesdaq's lender, First National Bank, filed an application to withdraw nearly $1.2 million from the $3.1 million the agency had put on deposit. Mesdaq did not object and First National removed the funds to pay off the merchant's outstanding mortgage plus interest.

The withdrawal of funds ended Mesdaq's ability to challenge the taking under Code of Civil Procedure § 1255.260, according to the Fourth District. The court cited the state Supreme Court's recent decision in Mt. San Jacinto Community College Dist. v. Superior Court, (2007) 40 Cal.4th 648, 666: "‘An owner cannot have it both ways. It is reasonable to require the owner to choose one or the other: either to deny the condemner's right to take the property and litigate, or to take the deposit.'"

Mesdaq argued that he could continue to challenge the taking because he did not receive the funds, the bank did. But the court found no legal distinction. "The money withdrawn was used to satisfy Mesdaq's indebtedness," Justice Joan Irion wrote for the court. "Further, the payment of Mesdaq's indebtedness with the deposit funds was accomplished with Mesdaq's explicit consent."

On the redevelopment agency's appeal, the Fourth District reversed the lower court on the setting of the date of valuation, the determination of lost goodwill, legal fees and pre-condemnation damages. Again, the court leaned heavily on Mt. San Jacinto, which upheld the constitutionality of the state's "quick-take" procedure (see CP&DR Legal Digest, Aril 2007).

In a standard eminent domain proceeding, the property may be valued either at the time the proceeding commences or at the start of the trial. But in a quick-take, "the land is to be valued as of the date of the deposit of estimated value which permits an order for early possession," Irion explained, citing Code of Civil Procedure § 1263.110.

Judge Meyer implicitly found the $3.1 million deposit was adequate, but immediately prior to trial determined that the date of the trial would be the date of valuation. He reasoned that just compensation required the jury to consider the Gaslamp Quarter's rising property values. That was an error, the Fourth District ruled.

Irion again cited Mt. San Jacinto: "‘In a quick-take proceeding, the constitutional requirement that an owner receive "just compensation" does not support a court's decision to disregard the statutory mandate because, under the constitution itself, "just compensation" is made available to the owner at the time of the deposit.'" Because Meyer insisted on the wrong date of valuation, the jury's award of $4.2 million must be set aside, the court ruled.

To determine compensation for lost goodwill, Meyer permitted the jury to consider testimony from Mesdaq's expert regarding potential revenues from a restaurant on the site. However, Mesdaq did not have a restaurant or a liquor license. "[T]he goodwill statute does not contemplate compensation for hypothetical or potential as opposed to actual goodwill lost," the court ruled in throwing out the jury's award of $3.4 million.

Because the decision on attorneys' fees was based on awards that the court overturned, the trial judge ruling's on fees also was set aside.

As to pre-condemnation damages, Meyer had ruled the agency's issuance of a "Polanco notice," two months before it filed the eminent domain action was unreasonable and Mesdaq was eligible for damages. A Polanco notice informs a property owner in a redevelopment project area that the agency suspects the property is emitting hazardous substances, and the notice gives the owner 60 days to respond with a remedial action plan. The trial court determined the agency issued this notice as a negotiating tactic to lower the value of the property and, therefore, Mesdaq was eligible for pre-condemnation damages.

But the Fourth District said that a property owner is eligible for pre-condemnation damages only if the government's unreasonable action actually reduces the property value. "Here," Irion wrote, "there is no evidence that the agency's unsuccessful use of the notice as a negotiation tool diminished the fair market value of Mesdaq's property."

What happens next with Mesdaq — and the site — is unclear. Although the redevelopment agency cleared the site two years ago and sold it to GRH, it remains a parking lot. The developer's original deadline to commence construction on the planned 334-room hotel was the first of this year. GRH reportedly offered, and Mesdaq accepted, $7.8 million to end all litigation earlier this year. However, the redevelopment agency has not approved the settlement, which may be further threatened by Mesdaq's appeal to the state Supreme Court.

Mesdaq has continued to fight against the use of eminent domain for economic development purposes. He has appeared at numerous legislative hearings and is likely to be a player in the 2008 campaigns regarding eminent domain reform.

The Case:
Redevelopment Agency of the City of San Diego v. Mesdaq, No. D047927, 07 C.D.O.S. 10582. Filed August 31, 2007.
The Lawyers:
For San Diego: Bruce Beach, Best, Best & Krieger, (619) 525-1300.
For Mesdaq: Vincent Bartolotta Jr., Thorsnes, Bartolotta & McGuire, (619) 236-9363.

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