California Supreme Court Reaffirms Utilities' Right to Challenge Condemnation Efforts

Key Takeaway

In a unanimous decision on August 24, the Court ruled that when a public entity seeks to condemn privately owned electric, gas, or water utility property, the trial court must exercise its independent judgment to determine whether the utility owner has rebutted the statutory presumptions of public necessity – applying a preponderance of the evidence standard. The Court rejected the Court of Appeal's holding that the deferential "gross abuse of discretion" standard applies, reversing the appellate decision that had overturned a trial court judgment in favor of the utility.

This is a significant victory for privately owned utilities operating in California and reinforces the protections the State Legislature intended when it enacted the 1992 amendments to the Eminent Domain Law.

Background

The Town of Apple Valley adopted resolutions of necessity in 2015 seeking to acquire a privately owned water system then operated by Liberty Utilities (successor to Apple Valley Ranchos Water Company). After a 67-day bench trial, the trial court found that the Town did not have the right to acquire the system, concluding that Liberty had overcome the rebuttable presumptions and disproven multiple statutory elements by a preponderance of the evidence.

The Court of Appeal reversed, holding that the trial court should have applied the gross abuse of discretion standard – under which a public entity's findings are presumed valid and can only be disturbed if unsupported by substantial evidence. The appellate court also found error in the trial court's reliance on post-resolution evidence.

The Supreme Court's Holdings

1. The Gross Abuse of Discretion Standard Does Not Apply to a Utility's Challenge to the Right to Take

The Court held that nothing in the plain language of the condemnation statutes extends the gross abuse of discretion standard to a utility owner's challenge to the right to take privately owned utility property. This standard governs challenges to the validity of a resolution of necessity – a distinct statutory pathway from an objection to the right to take the property. A utility owner need not challenge the resolution itself; it may directly challenge whether the statutory prerequisites for the taking have been met.

2. Independent Judgment Review Under a Preponderance of the Evidence Standard Applies

The 1992 amendments to the Eminent Domain Law converted what had been conclusive presumptions of public necessity into rebuttable presumptions affecting the burden of proof for utility takings. The Court held that the natural consequence of creating rebuttable presumptions is that the trial court, as trier of fact, independently assesses the evidence to determine whether the utility has disproved the public necessity and more necessary public use elements by a preponderance of the evidence.

3. Legislative History Confirms the Legislature's Intent to Expand Utilities' Ability to Challenge Takings

The Court found that the legislative history of the current statutes confirms that their purpose was to give privately owned utilities "much greater ability to challenge any decision to condemn their property." Applying a gross abuse of discretion overlay would void the rebuttable presumptions.

4. No Separation of Powers Bar

The Court rejected the Town's argument that separation of powers principles constitutionally require judicial deference to a public entity's condemnation decision. The Court noted that it is within the Legislature's power to decide whether and to what extent to place limits on the eminent domain power. The Legislature exercised that power when it enacted the rebuttable presumptions for utility takings, and the courts are bound to enforce that legislative choice.

The Issue on Remand

While the Supreme Court reversed the Court of Appeal's judgment and vindicated the trial court's application of independent judgment review, the case is not fully resolved. The Court of Appeal had identified another ground for reversal beyond the standard of review: that the trial court erroneously relied solely on post-resolution evidence to find that Liberty met its burden.

The Supreme Court expressly declined to rule on whether reliance solely upon post-resolution evidence is admissible to rebut the statutory presumptions, noting that it "specifically limited review to not address this issue." The Court acknowledged that the answer to the post-resolution evidence question may be informed by its holding but stated that it "is best addressed by the Court of Appeal in the first instance."

Accordingly, on remand, the Court of Appeal must reconsider whether the trial court's reliance solely on post-resolution evidence – including Liberty's track record of managing the water system after the resolutions were adopted – constituted reversible error. This remains a live issue that could affect the ultimate outcome of the case.

Conclusion

Despite the remand on the above-referenced issue, this is a tremendous win for investor-owned utilities in California. The Supreme Court has decisively held that a utility facing condemnation has a meaningful opportunity to rebut the government's contention that a taking is "necessary" or that government ownership is "a more necessary public use than the use to which the property is appropriated." Under this clear guidance, utilities will do so under a preponderance of the evidence standard rather than the much higher gross abuse of discretion standard that the condemnor advocated.

Baker Donelson attorneys are actively monitoring developments in this area. If you have any questions or would like more information, please contact Adam Sanders.