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| This is not the dam we're talking about. |
TransCanada Hydro Northeast Inc. v. Town of Newbury, State of Vermont
By: Kelsey Bain
This case is about how to properly value flow easements for tax purposes. Riveting, I know, but bear with me. The taxpayer, TransCananda, appealed a trial court decision that valued its flow easements at $1,532,211. Essentially, TransCanada believed that valuation was too high. TransCanada’s fatal flaw however is that it relied almost entirely on poking holes in the Town of Newbury’s methods coming up with a value, rather than presenting reliable alternative methods to the court. Regardless of who wins, TransCanada is going to have to pay taxes on those easements, so they need to show the court how to calculate those taxes, not just claim the Town’s math sucks.
Before we get to in the weeds, here is a quick summary of everything you always wanted to know about flow easements but were too afraid to ask. When a dam is built, it causes intentional flooding upstream. Duh, now to the less obvious stuff. This intentional flooding is a trespass. (flashbacks to 1L Property?) A flow easement is a right to commit that trespass thus protecting the entrant from liability as long as the terms of the easement aren’t exceeded. A flow easement is an interest in real property. Flow easements have a height limit which is applicable to the height of the dam and the water contained by the dam, but not to the height of the lands subject to the flow easement. What does that mean? Basically, some lands covered by a flow easement lie above the level of the dam and are therefore unlikely to be flooded because of the dam. Despite this, a flow easement is applicable to all the land owned by the grantor and abutting the river, not just the land most likely to experience flooding.
The dam at issue here is the Wilder Dam on the Connecticut River in Hartford, Vermont, which is downstream from Newbury. The flow easements give TransCanada the right to flood land abutting the Connecticut River in Newbury. The easements were deeded to TransCananda in 1949 and 1950 and provided a height limit of 385 feet. The water behind the dam was typically maintained between 380 and 385 feet. Much of the land at issue in this case was actively used as productive farmland.
At trial, both TransCanada and the Town of Newbury presented evidence supporting their theory for how to value these flow easements. In coming up with these valuations, neither TransCanada nor the Town of Newbury could use comparable sales of flow easements along the Connecticut River in Vermont because there were none. So, they got creative.
At trial, TransCanada retained a hydrological firm to model river flow on the Connecticut River both with and without the Wilder Dam to determine what land was subject to flooding solely because of the Wilder Dam. TransCanada also retained an appraisal expert who divided the land along the Connecticut River subject to the flow easements into two categories: (1) land abutting the river up to 60 acres called “limited utility land” and (2) land further than 60 acres from the river. The appraisal expert used the hydrologist’s study and valued only the land that the hydrologist found was flooded solelybecause of the presence of the Wilder Dam. (Assuming that some flooding is natural or is a combination of natural and dam caused flooding.) All of this land fell into the limited utility category. The appraiser then used sales of comparable limited utility land along the Connecticut River and valued the land at $500 per acre for a total flow easement value of $9,500. In case you’re bad at math, that’s quite a bit less than $1,532,211.
The Town used a different approach. (Obviously, or we wouldn’t be here.) The Town reviewed the original easement deeds and related documents and determined that 1,964 acres of land were subject to the flow easements. The Town argued that because the flow easements entitled TransCanada to the same rights for each acre of land, each acre should be valued the same regardless of the likelihood of flooding. The Town’s appraiser relied on the per-acre price of sales of 26 flow easements along the Connecticut River in Massachusetts. Using these comparable sales, and adjusting for inflation, the Town valued the flow easements at $1,100 per acre for a total value of $2,160,000.
The trial court sided with the Town with some caveats. (We will get to the caveats more later). The trial court concluded that the presence of a dam always contributes to some degree, however small, in the duration and depth of flooding of land upstream from the dam. Therefore, the party responsible for the flooding is liable for all of the flooding. The trial court did give TransCanada a small break and determined that flooding beyond the 100-year floodline was negligible. Therefore, the trial court subtracted out the flooding of any acreage beyond the 100-year floodline. In valuing the remaining acreage, the trial court generally agreed with the Town’s theory but only accepted one of the 26 comparable sales selected by the Town’s expert. The trial court used the 1990 sale of a flow easement over 83.7 acres of land priced per acre. The trial court set the per-acre value at $836, declining to adjust for inflation, for a total valuation of $1,532,211.
TransCanada appealed the trial court’s decision on two issues: (1) Whether flow easements can be valued at a uniform per-acre rate over all of the land over which a taxpayer has an easement; and if so (2) Whether the per-acre value was properly determined based on the sale of a flow easement in 1990 in Massachusetts.
Spoiler alert: SCOV affirmed the trial court’s decision on both issues, essentially finding that TransCanada did not meet its burden of proof. In property valuation cases such as this, the town has the initial burden of production to produce evidence that the property was appraised at fair market value. Once this is accomplished, a presumption of validity attaches that the taxpayer must overcome. The taxpayer must “burst the bubble of presumption” by presenting evidence that the town’s value exceeds the fair market value. The burden of production then shifts to the town to show the valuation was correct, but the burden of persuasion always lies with the taxpayer.
Looking at the first issue, TransCanada argues that the trial court was wrong to assign a uniform value for every acre within the 100-year flood plain as the flow easements had no effect on the fair market value of the underlying land. SCOV disagreed. SCOV agreed with the Town’s position that the value of the land covered by the flow easements lies in the immunity from suit that those easements provide, and that immunity was uniform across the land regardless of whether flooding was likely.
SCOV also disagreed with TransCanada’s argument that only the small number of acres at peak water level affected solely by flooding from the dam should be considered subject to the easement. Instead, SCOV followed the trial court’s assessment that determining which acres are subject to the flow easements is not simply a matter of water depth, but also time under water. SCOV noted that every acre of land floods sooner and stays wet longer because of the Wilder Dam. Thus, all flooded land is wet longer because of the Wilder Dam and therefore subject to the flow easements.
SCOV agreed with the trial court that the value of flow easements lies in the avoidance of liability. The reasoning here is that without the flow easement a taxpayer responsible for flooding would be liable for any loss of land value, plus loss of use of land, and discomfort and annoyance to occupant. The flow easements protect against that liability, are provided for a particular place, and are needed wherever there is water containing a component of water from the dam. Because all the flooded lands here have a combination of both dam water and river water, the flow easements are for all of the land.
SCOV noted that its analysis does not rule out the theory that value of flow easement over a particular acre varies upon extent of dam owner’s liability exposure. However, the court pointed out that this theory was not available to TransCanada because: (1) TransCanada agreed at trial that the flow easements could be uniformly valued unless value over any given acre was zero; (2) TransCanada offered no evidence to support application of its theory; and (3) The Town’s appraiser introduced evidence that a uniform per-acre valuation was appropriate (i.e. the value lies in the rights conveyed rather than how the easement is used). Remember that presumption of validity attached to the Town’s appraisal? Well, TransCanada did not burst it. Because TransCanada did not meet its burden of persuasion SCOV affirmed the trial court’s decision to rely on a uniform per acre value for all acreage covered by flow easements except where the value was zero.
Now let’s take a look at the second issue raised on appeal: the calculation of the per-acre value. TransCanada argued that comparable sales of flow easements could not be used to calculate a per-acre value because they did not occur in a free market but were instead affected by dam owner’s right to obtain the easements by eminent domain. TransCanada instead compared sales of flow easements over limited utility land, coming up with a $500 per acre-value that it only applied to land abutting the river up to 60 acres. TransCanada offered no evidence or opinion on the value of flow easements beyond those 60 acres. Oops.
SCOV agreed with trial court and found that TransCanada provided no useful evidence of a per-acre value because it relied entirely on the sales of limited utility land. TransCanada only provided value for land abutting the river up to 60 acres, but not above (so a total of 19 acres), but SCOV accepted the trial court’s decision that 1,859 acres were subject to the flow easements. Because TransCanada offered no evidence regarding the value of the remaining 1,840 acres SCOV agreed with the trial court that TransCanada’s expert’s opinion was irrelevant. TransCanada did not overcome the presumption of validity attached to the Town’s appraisal.
In summary, SCOV affirmed the trial court’s decision on both issues. TransCanada, who had the overall burden of proof, didn’t win because it didn’t offer any evidence the court could use to determine the value of the easements. Because TransCanada did not prevail on the first issue, the amount of land over which the flow easements could be valued, it could only prevail on the second if it had evidence of the per acre value to be applied to the acreage accepted by the trial court. TransCanada only offered value for 19 acres, about 1,840 acres short. Once the trial court held that taxpayer had not rebutted the presumption of validity attached to the Town’s appraisal, it had to issue judgment for the Town. A stalemate wouldn’t have worked here because the Town needed a way to collect taxes.
Here are some good takeaways if you’re a taxpayer challenging a town’s valuation of your property: (1) It’s really hard so you probably just shouldn’t bother; and (2) You cannot just rely on poking holes in the town’s methods. Make sure to bring your own, better, methods to the table.
Quick side note on the trial court’s difference of opinion with the Town: The trial court found that almost all of the 26 sales of flow easements in Massachusetts used by the Town’s appraiser involved small amounts of property that skewed the median price too high. Therefore, the trial court only used the sale of one easement of over 80 acres, similar to the easement at issue here. The trial court also declined to adjust for inflation. The trial court found a per-acre value of $836 for 1,859 acres, for a total value of $1,554,124.
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