Contractors & the Law

Change is eminent:

Recent ruling represents major shift in Alaska condemnation law

Arecent decision by the Alaska Supreme Court on the subject of eminent domain could have important implications for Alaska businesses. In “State of Alaska, Department of Transportation and Public Facilities v. Alaska Laser Wash, Inc.,” the court ruled that a business owner whose business had been condemned by the state government would not be compensated for many of the resulting damages (including lost profits) because the business could feasibly have relocated. The ruling represents a significant shift in Alaska condemnation law.

Like the federal government, the Alaska state government has the power of eminent domain, meaning it can appropriate private property when necessary to serve the public interest. However, Article 1, Section 18 of the Alaska constitution (the “Takings Clause”) specifically provides that such private property “shall not be taken or damaged for public use without just compensation.” While federal law also entitles the owners of seized property to “just compensation,” Alaska courts have historically interpreted the Alaska Takings Clause more liberally, finding that the inclusion of the term “damage” affords broader protections to property owners.

If the owner of seized property feels the state government has failed to follow the proper eminent domain procedures, or failed to fully compensate for lost property, the owner may file a so-called “inverse condemnation” lawsuit. Where the property owner is a business, such a lawsuit may allow the business to recover certain “special damages.” Special damages are losses beyond the value of the property itself, such as profits the condemned property was reasonably certain to generate. To recover these special damages, a business owner must show with reasonable certainty that a specific amount of loss resulted directly from a specific government appropriation. How a property owner should demonstrate this connection was the central issue of the “Alaska Laser Wash” case.

The case involved a successful car wash business located on a busy road in Anchorage. The site was particularly well suited for a car wash, as the property was highly visible and accessible to heavy commuter traffic traveling in both directions. The location was also close to several businesses, military bases and car dealerships. The Alaska state government (the “State”) chose to acquire the property as part of the Glenn Highway improvement project. The car wash’s owner claimed this announcement had a “profound and dramatic effect” on the business, causing the car wash to abandon its expansion plans, eliminate its marketing director and lose sales, market share and profitability. The State later acquired the property for $5.36 million.

During the acquisition process, the owner participated in a state relocation assistance program for the owners of condemned properties. The owner found several available sites that were correctly zoned for a new car wash, including a site on the same road as the condemned property. While he expressed confidence that a car wash would prosper at these locations, the owner ultimately chose not to relocate. He argued there was no single location as favorable as the condemned property, and that it would be too expensive to build multiple replacement locations. Instead, the owner sold the car wash business altogether. The new owners built a car wash at the available site on the same road as the condemned property, as well as on three other sites that the former owner had considered.

After the sale of the car wash business, the former owner brought an inverse condemnation action against the State for “business interruption and uncompensated losses and damages, including, but not limited to, temporary lost profits, lost business profits, lost business opportunities and value, lost goodwill, lost going concern value and other consequential and incidental damages.” The thrust of this argument was that, in addition to the value of the car wash property itself, the owner deserved compensation for losing the reputation and customer base associated with that specific location.

While both parties agreed that the former owner’s claims constituted “special damages” only recoverable if they resulted directly from the State’s taking, the parties disagreed on how this should be demonstrated. The State argued that the former owner could only recover special damages if he proved that relocating the car wash was not feasible. According to the State, if a business owner could possibly have relocated the business, then the state’s condemnation of the property did not directly cause the special damages. The fact that the owner could have relocated and retained these intangible assets but chose not to meant that the loss of those assets resulted from the business owner’s choice, not the original condemnation.

In response, the former owner argued that the question was not whether it was “feasible” to relocate, but whether it would have been “reasonable” to do so. Alaska law requires parties to minimize (or “mitigate”) any damages they experience, or risk losing the right to recover those damages from others. The former owner claimed that it was not reasonable under the circumstances for him to relocate the car wash, even if it would have been possible, and thus he was still entitled to damages.

The court agreed with the State that feasibility, rather than reasonableness, was the correct standard. Accordingly, it is now Alaska law that a business owner may recover special business damages when the State condemns his or her business only if it is not feasible for the business to relocate.

This represents a new and potentially damaging development for Alaska business owners. More than any other asset, a physical location is often what a business is fiscally built around. Whether or not a business owns the real property it occupies, the business may develop intangible assets intimately tied to a particular location. Now the special damages that would capture this loss will be unavailable if relocation was at all possible, even if doing so would be a poor business decision. This could potentially put a profitable business in the unenviable position of both losing its real property and being forced to reopen at a worse location or else risk losing access to any special damages whosoever.

If the state government follows the proper procedures, business or property owners are unlikely to prevent condemnation proceedings once they begin. Thus, owners must always be aware that the possibility of condemnation exists and must understand the factors that could prevent full recovery for the resulting damages.

This column provides information about the law designed to help users safely cope with their own legal needs. But legal information is not the same as legal advice — the application of law to an individual’s specific circumstances. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a lawyer if you want professional assurance that our information, and your interpretation of it, is appropriate to your particular situation.

J. Craig Rusk is a partner and co-managing partner at Oles Morrison, where he understands and skillfully navigates the legal and business challenges owners, general contractors, specialty subcontractors and international engineering firms face when involved in complex commercial enterprises. Working with private and government general contractors along the West Coast from Alaska to Mexico, Craig assists clients with structuring contracts and proactively identifying risks on the front end of projects, managing issues that arise throughout and ensuring that his client’s contracts are promptly enforced at the conclusion of a project.

Daniel Radthorne is an attorney in Oles Morrison Rinker Baker’s Seattle office. Daniel’s practice focuses on construction law, commercial litigation and government procurement. Prior to joining Oles Morrison as a summer associate, Daniel served as a criminal enforcement intern for the Transportation Security Administration’s Office of the Chief Counsel, where he investigated cutting-edge issues in privacy law and criminal procedure. His projects included a primer on jurisdictional variation in weapons classification which was disseminated to every TSA Field Counsel attorney in the United States.