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Valuation and Division of Employee Stock Options in Divorce - Stevens, Littman, Biddison, Tharp & Weinberg, L.L.C.
As retirement benefits provided fertile controversy in the 90’s, stock options are destined to become a primary focus in the new millennium.
I. ARE STOCK OPTIONS MARITAL PROPERTY?
Whether an employee stock option is characterized as being granted in consideration of past or future services depends upon the circumstances surrounding the grant and the effect of the option agreement. The determination may depend upon such factors as the flexibility and variety of option plans as well as the size of the company and its need to offer incentives to employees to remain as employees of the company.
(11) Options may be awarded as an inducement to lure an executive to a company. Options are also an effective tool to provide incentives to an employee to stay with a company, especially in the competitive high technology industry. Options granted during a term of employment may be a reward or bonus for work well-done (i.e., for past services) or as “golden handcuffs” to keep an employee from accepting a lucrative offer elsewhere (i.e., for future services).
a. Were the options granted at inception of employment or during a continuing term of employment?
b. Were the options a reward for a specific past service?
c. Are the options a substitute for salary?
d. Are the options a bonus or profit sharing reward?
e. Were the options an inducement to accept employment?
f. Were the options spread uniformly over time or front end?
II. HOW CAN A COURT DIVIDE AND VALUE STOCK OPTIONS?
Each method will be discussed in turn.
One approach to assigning a value on stock options is to determine its “intrinsic value,” which is simply the market value of the stock, less the exercise cost of the option and any applicable financing costs. Courts and experts have also used more complicated mathematical formulae to determine a stock option’s present value. Two main types of models exist: econometric and theoretical. Econometric models, or empirical models, use “regression analysis of historical relationships among economic variables to estimate statistically the expected value of an economic variable,” in this case, the expected value of stock options.(21) The two most widely used econometric models to value stock options are the Shelton Model(22) and the Kassouf Model.(23) The Shelton model is especially useful for valuing stock options of closely held companies. Most models use a variable known as the volatility factor, which quantifies the historical fluctuations of the stock’s price. The Shelton model does not use this variable. The information needed to determine the volatility factor is often not available when dealing with options issued by closely-held companies. Use of the Shelton model in this situation eliminates the need for the costly analysis, or outright speculation, which would be necessary to compute a volatility factor for the stock of closely-held companies.
Unlike the “net present value” method, the deferred distribution and reserve jurisdiction methods do not result in an immediate offset with other marital property. Under these approaches, the non-employee spouse will not receive any benefits until the benefits are actually paid to the employee spouse or the employee spouse becomes eligible to receive benefits.(30) Under the deferred distribution method, the court pre-determines the percentage the non-employee spouse will be eligible to receive once the benefits are paid or the employee spouse is eligible to receive them. The percentage used is commonly based upon the “time rule” formula.
No Colorado case has expressly determined whether the employee-spouse is required to exercise the options as soon as possible. Most stock options preclude the employee-spouse from transferring or assigning the option so that the trial court would not be able to simply order a division in kind.(34) One solution under the deferred distribution method is to have the court require the employee spouse to make a payment in cash to the non-employee spouse, based upon the predetermined “time rule” formula, as soon as the options are exercisable, whether or not the employee chooses to retain the options. Another alternative is to order the employee spouse to exercise the options and then transfer the underlying stock or sale proceeds to the non-employee spouse. Each of these possible solutions involves potential future court involvement and issues of employer cooperation.
c. Reserve Jurisdiction Method .
d. Examples of Distribution and Valuation Alternatives .
In In Re the Marriage of Chen , (37) the Wisconsin Court of Appeals upheld the use of the “if and when” method. The case concerned stock options that had been granted during the marriage but were not exercisable until dates after the divorce. The options were not transferable or assignable and expired if employment terminated. The trial court found that no reasonably accurate value could be assigned to these stock options, and therefore an award of a fixed sum would not be practical. The court then held that the employee spouse could exercise the options “if and when” he desired, subject only to employer and SEC regulations. Upon sale of the underlying stock acquired via exercising the options, the employee-spouse was to pay the non-employee spouse one half of the net profit. If the stock thus acquired had not been sold within 18 months of the date of exercise, the non-employee spouse could elect to be paid using the stock price 18 months from the date of exercise, or she could choose to wait until the stock was finally sold. If no net profit was made, no additional monies were due either party.
In Smith v. Smith, (44) the Missouri Court of appeals upheld a trial court decree finding that the employee spouse had the right to decide whether or not to exercise his stock options. However, if the employee-spouse elected to exercise any of the options, he was to give the non-employee spouse 30 days notice before acting. During those 30 days, the non-employee spouse could provide the employee spouse with the cash necessary to buy a one-half interest in that option on her behalf. If she did not provide him with the cash, she forfeited her right to the one-half of that option. Each party was to pay a share of the income taxes on the options. See also, DeJesus v. DeJesus(45) (New York Court used similar method and constructive trust to divide options); Callahan v. Callahan(46) (New Jersey court used constructive trust theory and with non-employee spouse prorated right to determine date to exercise options subject to SEC limitations).
Hug v. Hug(47) approved a valuation formula using numerator equal to period between commencement of employment and date of dissolution and a denominator equal to the period between commencement of employment and date when each option is first exercised times the number of shares which can be purchased on date option is first exercised.
e. Incentive v. Non-qualified Stock Options .
An important consideration when determining the current value or the future distribution strategy of employee stock options or restricted stock is the income tax treatment of these options. Employee stock options can take two forms, Qualified Stock Options (typically called “Incentive Stock Options”) and Nonqualified Stock Options.
Qualified stock options conform with certain guidelines in the Internal Revenue Code and are provided preferential tax treatment. Upon exercise of the option, there is no current income taxation of the options, and upon a qualifying sale of the stock received via exercise of the option, the increase in value is taxed at capital gains rates. The difference between the current price and the exercise price upon exercise is an Alternative Minimum Tax (“AMT”) preference item and may trigger AMT in certain circumstances. If the Qualified Stock Options are disposed of in a disqualifying disposition, they lose their preferential tax treatment and are taxed as ordinary income.
The “property” right at issue with regard to stock options is the right to choose whether or not to purchase stock shares which are offered at certain dates at specified prices. To divide this marital asset properly requires giving each spouse the right to choose whether or not to exercise the right to purchase the underlying stock. Because employee stock options are typically not assignable, and because division in kind is therefore not permissible, courts have developed alternative mechanisms to accomplish division.
The “net present value” method of dividing stock options is the preferable method where the stock and the options are readily capable of valuation. In situations where the options are not capable of valuation, the deferred distribution or reserve jurisdiction methods more equitably serve to divide the options. Reserving jurisdiction to divide the options should be the last resort, since the goal of finality is contravened when parties will inevitably need to return to court to value and divide the options. Under most circumstances, the time-rule formula can pre-determine the non-employee spouse’s share when options become exercisable and therefore is preferable to reserving jurisdiction.
1. Thanks to Craig A. Weinberg (Esq.), David Werber (Esq.), Bill Vincent (CPA), John Connell (CPA) and Miriam Mason (Esq.), for research and drafting assistance.
2. In re Marriage of Miller, 915 P.2d 1314, 1317 (Colo. 1996).
Determining and Dividing the Marital Pot, 25 Colo. Lawyer 87 (1996).
4. 14-10-113(2), 5 C.R.S. (1999).
5. In re Marriage of Huston, 967 P.2d 181, 183 (Colo. App. 1998).
7. In re Marriage of Miller, 915 P.2d at 1317.
8. In re Marriage of Miller, 915 P.2d at 1318.
10. In re Marriage of Miller, 915 P.2d at 1319.
11. In re Marriage of Miller, 915 P.2d at 1319, n. 9.
12. This list is not exhaustive, and no single factor is dispositive. See In re Marriage of Miller, 915 P.2d at 1319, n. 9.
13. In re Marriage of Balanson, ___ P.2d ____ (Colo. App. No. 98 CA 982, July 22, 1999). The author acted as counsel for the Husband (employee-spouse) in this case. Cross-petitions for a Writ of Certiorari are currently pending before the Colorado Supreme Court.
14. In re Marriage of Balanson, ___ P.2d ____ (Colo. App. No. 98 CA 982, July 22, 1999).
15. In re Marriage of Hunt, 909 P.2d 525 (Colo. 1995).
16. In re Marriage of Hunt, 909 P.2d 525, 531 (Colo. 1995).
17. In re Marriage of Hunt, 909 P.2d at 531.
18. In re Marriage of Hunt, 909 P.2d at 539.
19. In re Marriage of Hunt, 909 P.2d at 539, n. 14.
20. In re Marriage of Hunt, 909 P.2d at 540.
21. Pratt, Reilly, Schweihs, Valuing a Business: The Analysis and Appraisal of Closely Held Companies (2d ed.1989) (hereafter referred to as “Pratt”) at p. 452. 22. J.P. Shelton, The Relationship of the Price of a Warrant to the Price of Its Associated Stock, Financial Analysts J., May-June, July-August, 1967.
23. Sheen T. Kassouf, A Theory and an Econometric Model for Common Stock Purchase Warrants (Analytical Publishers 1965).
26. Fisher Black and Myron Scholes, The Pricing of Options and Corporate Liabilities, Journal of Political Economy, June 1973. The Black-Scholes model does not allow for dividends in the valuation. A variation of this model, the Noreen-Wolfson Model, does. Eric Wolfson and Mark Wolfson, Equilibrium Warrant Pricing Models and Accounting for Executive Stock Options, J. Acct. Res., Autumn 1981.
27. Davidson v. Davidson, 254 Neb. 656, 578 N.W.2d 848 (1998). Other decisions have criticized using the Black/Scholes Method in a marital context. Murray v. Murray, 128 Ohio.App.3d 662, 716 N.E.2d 288 (1999), citing, Chammah v. Chammah, 1997 WL 414404 (Conn. Sup. Ct. 1997); see also, Wendt v. Wendt, 1998 WL 161165 (Conn. Sup. Ct. 1997).
29. In re Marriage of Hunt, 909 P.2d at 540.
30. In re Marriage of Hunt, 909 P.2d at 531.
31. ____ P.2d ____ (Colo. App. No. 98 CA 982, July 22, 1999).
32. The Hunt Court approved a “Coverture Fraction” using a numerator (length of employment toward acquisition of pension during marriage) and denominator (total length of employment from eligibility for pension plan until receipt of benefits).
33. Malone, Employee Stock Options and Restricted Shares: Determining and Dividing the Marital Pot, 25 Colo.Lawyer 87 (October 1996). “Consider an employee who is hired in 1980 and marries in 1982. Her employer grants her stock options in 1987 that may be exercised after three years. However, in 1988 her marriage is dissolved. The employee-spouse would need ten years of employment before the stock option grant could be exercised, and six years of her employment were during the marriage. Applying the time rule formula, six becomes the numerator and ten becomes the denominator. The marital fraction of the options is 6/10. Thus 60 percent of the stock options would be marital property to be divided in the dissolution action.” cf. In re Marriage of Short, 125 Wash.2d 865, 872, 890 P.2d 12, 15 (1995)(The “time rule” formula is nothing more than a fraction whose numerator is the period of time between the commencement of the spouse’s employment by the employer granting the stock options and the date the parties were found to be “living separate and apart”, and the denominator is the period of time between commencement of employment and the date when each option is first exercisable, multiplied by the number of shares which can be purchased on the date the option is first exercisable.).
34. In re Marriage of Balanson, ___ P.2d ___ (Colo. App. No. 98 CA 982, July 22, 1999).
35. In re Marriage of Huston, 967 P.2d at 183-184.
36. In re Marriage of Balanson, ____ P.2d ____ (Colo. App. No. 98 CA 982, July 22, 1999).
37. 142 Wis.2d 7, 416 N.W.2d 661 (1987).
38. 64 Md.App. 122, 494 A.2d 721 (1985).
39. 64 Md.App. at 138, 494 A.2d at 728.
40. The court permitted use of an “intrinsic value” approach to calculating the present value of the options.
41. 64 Md.App. at 138, 494 A.2d at 729.
42. 119 Ill.App.3d 1043, 75 Ill.Dec. 581, 457 N.E.2d 1023 (1983).
43. In re Marriage of Frederick, 218 Ill.App.3d 533, 161 Ill.Dec. 254, 578 N.E.2d 612 (1991).
44. 682 S.W.2d 834 (Mo. App. 1984).
45. 163 Misc.2d 267, 620 N.Y.S. 2d 704 (1994).
46. 142 N.J.Super. 325, 361 A.2d 561, 563 (1976).
47. 201 Cal. Rptr. 676, 154 Cal.App.3d 780 (1984).
48. In re Marriage of Campbell, 905 P.2d 19 (Colo. App. 1995).

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DIAGNOSE v. To distinguish, as a disease, by its characteristic phenomena.
EQUIVOCATE v. To use words of double meaning.
FRIZZ v. To give a crinkled, fluffy appearance to.
NURTURE n. The process of fostering or promoting growth.
ORDEAL n. Anything that severely tests courage, strength, patience, conscience, etc.
PEDIGREE n. One's line of ancestors.
REFRACT v. To bend or turn from a direct course.
SENTENCE n. A related group of words containing a subject and a predicate and expressing a complete thought.
TRAIT n. A distinguishing feature or quality.
VITUPERABLE adj. Deserving of censure.
ALIEN n. One who owes allegiance to a foreign government.
COMPLICATE v. To make complex, difficult, or hard to deal with.
DIAGNOSIS n. Determination of the distinctive nature of a disease.
ERADICATE v. To destroy thoroughly.
FRIZZLE v. To cause to crinkle or curl, as the hair.
LITTORAL adj. Of, pertaining to, or living on a shore.
NUTRIMENT n. That which nourishes.
ORDINAL n. That form of the numeral that shows the order of anything in a series, as first, second, third.
PEDDLER n. One who travels from house to house with an assortment of goods for retail.

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This article is intended to inform appraisers and real estate-related professionals about the challenges involved in appraising expropriated property and the procedures necessary to support opinions of value associated with a partial taking. An expropriated property owner is entitled to the market value of the land taken, plus any diminution in value sustained by land not taken. Depending on the nature and extent of a taking, including the public works, the land not taken can have its value impacted. The extent of the impact on value is a function of whether the land not taken is a viable or non-viable remainder. After a partial taking, the remainder constitutes an entirely new property, which requires preparation of a separate stand-alone appraisal, independent of the appraisal of the original property.
Public works frequently result in property expropriations. Appraisals are required to assist in ascertaining the amount of compensation to which an affected property owner is entitled. In a property expropriation, a partial taking always leaves behind un-expropriated property. The land not taken can possess varying degrees of utility, depending on the nature and characteristics of the land, the presence and type of any improvements, and the spatial relationship of the land to abutting property, including the part taken. The land not taken in an expropriation of a property is known as the remainder. A partial taking that causes a natural severance will always have more than one remainder.
Every remainder should be viewed as a new property requiring an appraisal, prepared independently of the before-taking appraisal. The valuation principles employed in the initial appraisal should also be applied to the appraisal of the remainder, including identifying the larger parcel as part of highest and best use analysis of the remainder. Both appraisals, however, must comply with the relevant provisions of the applicable expropriation act, ignoring the scheme when it is appropriate to do so.
There are two types of remainders in a property expropriation. In this article, they are referenced as viable remainders and non-viable remainders. A viable remainder is one that is marketable as a standalone entity. A non-viable remainder is essentially the equivalent of a remnant or uneconomic remainder or uneconomic remnant, terms that are in common usage in jurisdictions throughout the United States.
For a remainder to have value, it must have four economic factors: (1) demand (it must be desired; fewer buyers create less demand); (2) utility (it must have use to buyers); (3) scarcity (it must be relatively scarce, as too much supply will depress the price); and (4) purchasing power (there must be a financial capability to buy; fewer buyers depress price).
Appraisers are called upon by expropriating authorities and by impacted property owners to prepare appraisals within a statutory framework. The role of the appraiser is to conduct a broad enquiry into relevant economic factors and develop well-supported opinions of value within that framework. This necessitates an understanding of valuation procedures unique to expropriation.
An opinion of market value of a property must be predicated on a highest and best use. Highest and best use is a fundamental question of fact that must be answered before an appraiser can offer an opinion as to market value. All relevant aspects of highest and best use analysis applicable to the expropriated property must be explored and sufficiently documented to support the opinion of market value.
An appraiser’s primary objective is to develop fact-based opinions of market value, but market value does not apply in a bilateral market. A bilateral market is one in which a single seller is confronted by a single buyer. In this situation, the value of a non-viable remainder is affected by the interdependence of the non-viable remainder and an adjoining property under different ownership, combined to form a single larger parcel. Conveyance of a property under this condition does not meet the test of market value, which assumes an active market of many buyers and sellers, and a choice of available properties.
Market value does not apply to a non-viable remainder, as it has no independent highest and best use. Instead, the value of a non-viable remainder is tied to the market value of a larger parcel by way of “value in contribution.” Contributory value is measured in terms of the amount the non-viable remainder adds to the value of the larger parcel or as the amount that its absence detracts from the value of the larger parcel.
(ii)such personal and business damages, resulting from the construction or use, or both, of the works as the statutory authority would be liable for if the construction or use were not under the authority of a statute.
For a property owner to sustain a claim for injurious affection arising out of a property expropriation, it must be demonstrated that the partial taking caused the remainder’s value to change. Generally, the following criteria must be satisfied for a valid injurious affection: (1) the remainder must be “held with” the expropriated land; (2) the potential loss in value of the remainder must be occasioned by the use or construction of the anticipated public works of the expropriating authority upon the expropriated land; (3) the potential loss in value of the remainder must not be too remote; and (4) the potential loss in value of the remainder must be permanent rather than temporary. As long as the expropriated land (the part taken) is part of one holding and is so inextricably linked to the remainder as to diminish the existing or potential use or marketability thereof, the property owner is entitled to compensation for the consequential injury to the part not taken.
Countless legal, physical and economic factors have the potential to affect the market value of a remainder. The factors and their importance differ depending on the type of property, its use or potential use, and the presence of improvements. Factors affecting rural properties often differ from those that affect urban properties. Some of the potential factors that can impact the value of a remainder include title restrictions, easements, exposure, accessibility, lot configuration, dimensions and size, topography, drainage, crop production, diminished utility of existing improvements, increased fixed costs, non-compliance with zoning provisions, and change in highest and best use.
also influence the value of the remainder, due to the time value of money and whether the public works restrict or enhance the utility of the remainder.
A viable remainder is a stand-alone larger parcel with an independent market value and highest and best use. However, if the part taken has a greater value as part of the “whole” property in its highest and best use prior to expropriation, the property-owner is entitled to the contributory value of the part taken and there is no injurious affection.
A non-viable remainder has no independent highest and best use, and has limited marketability. Unless it can be tied to an adjoining property as part of a larger parcel, for which a highest and best use can be established, a non-viable remainder will have nominal or no market value. Only land from an adjoining property that is not part of any other land expropriated can be considered in defining the larger parcel.
In all jurisdictions in Canada, no expropriating authority can compel a property owner to relinquish more land than is necessary to achieve the public purpose underlying an expropriation. Therefore, when a partial taking results in a non-viable remainder, a separate and independent estimate of value (i.e., value in contribution) is required of the non-viable remainder.
In some instances, it might be possible to initiate a “cost-to-cure” that will transform a non-viable remainder into a viable remainder. For example, if legal access can be re-established for a remainder that is landlocked, it may prove cost-effective to remedy the deficiency. This remedy is only beneficial if the cost-to-cure as a measure of injurious affection (damages) does not exceed the diminution in market value sustained by the remainder without curing the deficiency (i.e., lack of legal access). In addition to the estimated cost of curing the deficiency, determining if a cost-to-cure is appropriate should consider whether (1) a purchaser of the remainder could obtain all approvals necessary to implement the cure; (2) the cure can be implemented for a fixed price; (3) a purchaser would expect to be compensated for risk and entrepreneurial incentive in undertaking the cure; and (4) the cure can be achieved within a reasonable time frame (i.e., not remote). The overriding consideration is to ensure that the contemplated cure is both practical and warranted.
All three abutting properties taken as a “whole” for the same expropriation – no larger parcel identified.
Two abutting properties taken as a “whole” for the same expropriation, leaving one adjoining property and the non-viable remainder to be potentially combined as one larger parcel.
One abutting property taken as a “whole” leaving two adjoining properties and the non-viable remainder to be potentially combined as two larger parcels.
Only part of each abutting property taken for the same expropriation, with the three remainders to be potentially combined with the non-viable remainder to create one larger parcel.
Only part of two abutting properties taken for the same expropriation, with the two remainders to be potentially combined with the non-viable remainder to create one larger parcel.
Only part of one abutting property taken for the same expropriation, with the one remainder to be potentially combined with the non-viable remainder to create one larger parcel.
These permutations are by no means exhaustive, especially if there is more than one non-viable remainder, but the challenge of identifying the larger parcel is a prerequisite in assessing the prospects of a non-viable remainder, and estimating its contributory value. The contributory value on a non-viable remainder will also be influenced by the size of the larger parcel to the extent that the unit rate attributable to the “size” variable will decrease as parcel size increases, and vice versa, all other elements of value remaining constant.
In Canada, there is no corresponding appraisal instruction at either the federal or provincial level to identify the larger parcel. Instead, most expropriation statutes make indirect references to the larger parcel. For example, Public Works and Government Services Canada’s March 2007 Valuation Guidelines on Expropriation under Section 2.12 in respect of “a limited interest or a partial taking,” the value assigned to the security interest must be “in the same proportion that the value of the land taken bears to the whole of the land.” Further, Section 26(3) states that the part taken “if not marketable on its own, then it is valued at the greater of, the value it contributes to the whole property, or the value of equivalent land,” factors that are considered in defining the larger parcel.
The underlying foundational requirements established by the courts in defining the larger parcel are unity of ownership, unity of contiguity, and unity of use (highest and best use). The courts have ruled that the unities of ownership, contiguity, and use (highest and best use) need not be simultaneously present as of the date of valuation, as would be likely when dealing with a non-viable remainder.
Title restrictions: Legal use precluded by restrictive covenant or use limited to a specific legal use.
Legal permissibility: Use must be legal or capable of being achieved (i.e., rezoning and/or Official/Master Plan amendment) within a reasonable time frame.
Physical adaptability: Site and/or improvements, including off-site infrastructure, must be capable of supporting the use.
Externalities: Impact on use by external forces that effect property values.
Probability of use: Must have a greater than 50% chance of being achieved.
Timing of use: Must be achieved within a reasonable time frame.
Demand: There must be an active market for the use.
Financial feasibility: Prices and/or rents must be sufficient to support the use.
Sustainability: The use must be maximally productive over a long time frame.
Purchaser/user: The most likely purchaser or user must be identified.
Every partial taking differs in its impact on highest and best use analysis. If there is some doubt or uncertainty as to the physical or legal viability of a remainder for any economic use, independent advice from a qualified third party should be sought. Of course, as the appraiser is ultimately responsible for the opinion of highest and best use and the corresponding market value estimate, the appraiser must be satisfied that the conclusions of any third party are reasonable and appropriate before relying on them.
When confronted with a non-viable remainder, it may be possible to mitigate damages (injurious affection). This outcome can sometimes be achieved by estimating its contributory value to an adjoining property by combining the two to create a larger parcel, akin to an assembly involving separate rights of ownership. In this case, the larger parcel does not necessarily have, or require, unity of ownership.
For every potential larger parcel, highest and best use requires an analysis of the abutting property, with and without the non-viable remainder, accompanied by an estimate of market value of the abutting property (if it has its own highest and best use) and an estimate of market value of the larger parcel. The difference between the two estimates of market value represents the maximum contributory value of the non-viable remainder to the market value of the larger parcel. Every larger parcel that incorporates a non-viable remainder, with only one prospective purchaser, is characterized as a bilateral market, which can significantly impact the contributory value of the non-viable remainder. Where there is potential for more than one larger parcel, the contributory value of the non-viable remainder is enhanced by the prospect of more than one buyer.
A larger parcel that combines an abutting non-viable property (often the result of a partial taking involving the same expropriation) and a non-viable remainder of the subject property only requires an estimate of the market value of the larger parcel. In this scenario, both property owners are likely to enjoy equal bargaining power. Prorating the market value of the larger parcel, in its highest and best use, on the basis of an overall unit rate and applying the unit rate to the area of land in each ownership may be an appropriate method of determining the contributory value of each property, provided no improvements are involved.
The concept of the larger parcel is an integral part of highest and best use analysis. This analysis must reflect the most probable and financially feasible economic use. It establishes the basis for estimating both the market value of the larger parcel and the contributory value of the non-viable remainder. The maximum contributory value of a non-viable remainder as part of a larger parcel, before considering the appropriateness of a potential discount associated with a bilateral market, can be estimated by deducting all anticipated costs, including an allowance for entrepreneurial incentive, associated with consolidating title to both properties and achieving the highest and best use of the larger parcel.
In effect, the maximum contributory value of a non-viable remainder, pursuant to any adjustment for trading in a bilateral market, as part of a larger parcel represents the after-taking value of the remainder for inclusion in the before- and after-taking test applied in the appraisal of a partial taking. Depending on the interrelationship of the larger parcel and the non-viable remainder, it is possible to have a highest and best use for the larger parcel that differs from the highest and best use of the abutting property.
As long as an adjoining property owner can benefit financially from acquiring a non-viable remainder, it is assumed that the adjoining property owner is a “willing buyer.” Typically, an adjoining property owner will pay something less than the maximum contributory value for a non-viable remainder to achieve a financial benefit.
The discount associated with conveyance of a non-viable remainder in a bilateral market depends largely on the extent the non-viable remainder enhances the value of the adjoining property. Where a non-viable remainder only marginally enhances the utility of an adjoining property, the value in contribution may be virtually non-existent relative to the maximum contributory value to the larger parcel. Conversely, if an addition of a non-viable remainder changes the highest and best use of an abutting property from residential to commercial as part of the larger parcel, it is likely that no discount to the maximum contributory value on a proportionate basis would be warranted.
The following text from a September 2000 report of the City of Ottawa describes a non-viable parcel (analogous to a non-viable remainder from a previous expropriation) and its disposition. Reportedly, the contributory value of the non-viable parcel was based on an appraisal, but there is no indication as to how the appraiser arrived at the value conclusion, and whether there was any discount associated with the conveyance of the non-viable parcel in a bilateral market.
In 1998 the Region bought the property…for the reconstruction of Hawthorne Road….The settlement [price of $226,550] was for land and buildings and included compensation for entitlements pursuant to the Expropriations Act. The buildings were demolished, road works were completed and a legal survey was undertaken to define any surplus land [remainder]….
The surplus property is a rectangular site consisting of 3,295 m2 [35,467 sf]…fronting onto Hawthorne Road between Stevenage Road and Hunt Club Road in the Cities of Gloucester and Ottawa. The property is zoned M4(1.0) & I-Hf(1.0) – Industrial. The parcel does not meet the minimum requirements for the zone, and cannot be developed on its’ own. It is therefore considered a non-viable parcel, of use only to the abutting owner.
The adjacent owners…contacted the Region and a purchase price of $80,000 was negotiated.
In some jurisdictions40, the policy pertaining to the disposition of a remnant parcel is specifically tied to the enhancement of highest and best use of an adjoining property: “[A] county governing authority is authorized to sell and convey parcels of small or narrow strips of land, so shaped or so small as to be incapable of being used independently as zoned or under applicable subdivision or other development ordinances or land use plans, or as streets, whether owned in fee or used by easement, to abutting property owners where such sales and conveyances facilitate the enjoyment of the highest and best use of the abutting owner’s property.” This policy of maximizing the value of a remnant parcel on disposition is consistent with the objective of reducing injurious affection when dealing with a non-viable remainder.
While the ultimate objective is to mitigate damages, reduce injurious affection sustained by a non-viable remainder, the process by which that objective is achieved is through enhancement of the market value of an adjoining property, when considered as part of a larger parcel. When estimating the contributory value of a non-viable remainder to an adjoining property, value in contribution is based on the highest and best use of the larger parcel, as suggested by the Ontario Ministry of Transportation: “If it is concluded that the remainder is not viable, the impact of adding the Ministry lands to each adjoining property must be investigated and analysed. The value of the remainder will be its value in contribution to the adjoining property (or properties) as part of a larger parcel. The objective of the appraisal will be to estimate the increase in market value to that adjoining owner’s holding if they were to acquire the Ministry lands.” Any financial benefit resulting from a reduction of injurious affection can only be applied to the remainder.
The admitted lack of relationship to the Expropriation Act as indicated in the quotation from his report.
The failure to establish many of the assumptions such as the zoning of the property.
The failure to consider that the property at issue is and always has been under agricultural production.
The lack of similarity between the comparables and the land at issue….
The admission that he was not appraising land of the shape or size of the land at issue.
The admission that, in his hypothetical, he assumed that land was marketable whereas the land at issue was not.
The three non-viable linear strips had no independent highest and best use. They should have been appraised as part of a larger parcel in its highest and best use, in a manner reflective of a non-viable remainder, but without any potential discount, and in compliance with the relevant expropriation act. Offering evidence as an independent expert witness requires an appraiser to assist the trier of fact with objective, relevant, and well-founded opinions of value.
The market value of a remainder juxtaposed against the before-taking value reveals the clearest and most accurate measure of injurious affection (damages) and betterment (enhancement in value) occasioned by a partial taking. Provided provision is made to account for the contributory value of the part taken, the property owner is always assured of receiving at least the market value of the land taken.
Identify the larger parcel(s) in the context of the remainder, while simultaneously conducting highest and best use analysis.
Identify the property rights to be appraised.
Identify relevant value-influencing property characteristics.
Identify the most likely purchaser(s) of the remainder.
Identify the appropriate method(s) of valuation.
Ascertain the type of market data to be collected.
Derive an estimate of value (i.e., market value or value in contribution).
When a remainder shows signs of betterment in the form of “special” benefits peculiar to it (i.e., benefits not enjoyed by the community at large), any injurious affection occasioned by the taking can be reduced by the amount of the betterment attributed to special benefits. The amount of any betterment can only be set-off against any injurious affection sustained by a remainder. Betterment cannot be applied to reduce a property-owner’s statutory right to always receive at least the market value of land taken.
A partial taking that results in two remainders, one whose value is disproportionately enhanced and the other whose value is disproportionately diminished, both relative to the before-taking value, the net effect of weighing the value of one remainder against the value of the other, may give rise to either injurious affection (damages) or betterment.
A partial taking appraisal prepared in compliance with the provisions of the relevant expropriation act and in compliance with recognized appraisal standards, with appropriately supported opinions of value presented in an unbiased, clear and convincing manner will assist the trier of fact in fixing the amount of compensation to which an affected property owner is entitled.
Public Works defined as “structures, as roads, dams, or post offices, paid for by government funds for public use,” http://dictionary.reference.com/browse/public+works.
2. Unlike in the US, where the Fifth Amendment provides: “nor shall private property be taken for public use, without just compensation,” in Canada, no property owner of land expropriated by statute for public purposes is entitled to compensation. Therefore, in Canada, the federal government and each province and territory has passed a variety of expropriation acts that define the elements of compensation, and there is an assumption that there will be compensation for expropriated land, unless specifically precluded.
3. In Gardiner Burton Agencies Ltd. v. Nova Scotia Power Corp. (1986) NSCA, the court ruling emphasized that the “after” value must be independently estimated, with the result deducted from the “before” value in determining the amount of compensation due for injurious affection.
4. The scheme represents the intended public purpose underlying the necessity or justification for an expropriation. In valuing the property before the taking, the influence of the scheme is to be ignored. After the taking, the value of the remainder takes the influence of the scheme into account, and any special benefits flowing from the scheme. See Windsor (City) v. Paciorka Leaseholds Limited, 2012 ONCA 431 (CanLII). Leave to appeal denied by the Supreme Court of Canada.
5. Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Appraisal Institute, 2010, p. 166).
6. Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Appraisal Institute, 2010, 167).
7. Appraisal Institute, The Appraisal of Real Estate, 13th ed. (Appraisal Institute, 2008, 15).
8. “Appraisals for expropriation can incur hypothetical conditions, and may require the appraiser to invoke the Jurisdictional Exception protocol [see 3.6],” CUSPAP, effective January 1, 2012, Appraisal Standard 7.12.4.
9. Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Appraisal Institute, 2010, 122).
10. Creative Stretch Fabrics Ltd. v. Pitt Meadows (District) (1994), 54 L.C.R. 128, (B.C.E.C.B.).
11. Also applied in McIlwaine v. Saskatchewan, 2000 SKQB 326 (CanLII); Holdom v. British Columbia Transit (2005), 85 L.C.R. 198, 32 R.P.R. (4th) 58 at para. 93 (B.C.E.C.B.); Lulu Island Holdings Ltd. v. GVSDD, 2007 BCSC 938 (CanLII).
12. According to Eaton, in the US, “it is well settled, at least within the context of an action for just compensation under the Fifth Amendment, injuries to a landowner’s business are not compensable.” Real Estate Valuation in Litigation, 2nd ed. (Appraisal Institute, 2005, 58).
13. This is known as the ‘Edwards Rule,’ and stems from the English Court of Appeal ruling in Edwards v. Minister of Transportation (1964) 2 Q.B. 135. Not all jurisdictions in Canada follow the Edwards Rule. For example, Alberta’s expropriation act is not as restrictive as the Edwards Rule, and compensates for injurious affection if it results from the taking or from the construction or use of “the works for which the land is acquired.” See Landex Investments Ltd. v. Red Deer (City), 1991 ABCA 199 (CanLII).
14. Todd, The Law of Expropriation and Compensation in Canada, 2nd ed., 1992, Carswell Thomson Professional Publishing, p.335.
15. Claims for personal or business damages should be addressed separately and not as part of the value of the real property.
16. Ammouri v. Ministry of Transportation, 2008, OMB Decision LC060014. In Vaness v. Kamloops (City), 2002 BCSC 663 (CanLII), while acknowledging the difference in the before (without the dyke) and after (with the dyke) valuations is an appropriate measure of damages, the court rejected the appraiser’s evidence, which consisted of an analysis of unrelated waterfront lots province-wide as the basis for a 30% depreciation in value. The court awarded a nominal sum of $1,000. The appraiser was also criticized for exceeding his jurisdiction when he stated that “the primary function of his appraisal report was to assess the damage claim,” a role reserved for the court.
17. Kirk Corson, Rural Settings: Valuation of Partial Acquisitions and Damages, Right of Way (May/June 2008, 18-22).
18. In a 1994 study Determination and Evaluation of Remainder Characteristics Which Significantly Affect Right-of-Way Costs, prepared by Texas Transportation Institute, a survey of various groups, including appraisers and highway right-of-way government professionals, ranked in order of most importance as impacting the quantum of remainder damages: 1) change in highest and best use; 2) size of remainder; 3) location of access to abutting highway; 4) development capabilities; 5) shape of remainder; 6) width of remainder abutting highway; 7) grade level of abutting highway; and 8) length of remainder (depth from highway)/amount of access to abutting highway. http://d2dtl5nnlpfr0r.cloudfront.net/tti.tamu.edu/documents/1390-1.pdf.
19. Carol Lansing, and Mark Savin. Assessing and Mitigating the Zoning Impacts of a Partial Taking, Condemnation, Zoning and Land Use, 2009 Annual Review, American Bar Association. http://www.faegrebd.com/webfiles/lansing_reprint.pdf.
21. Cost-to-cure also has application where a viable remainder sustains some diminution in value, the loss of which can be mitigated completely or partially at a cost that is less than the corresponding diminution in value without incurring the expenditure to undertake the cure. See Gene Reilly, Wu Sun, Louis J. Pignataro, and Nicholas J. Monahan, Jr., ‘Partial Acquisitions of Right of Way in New Jersey,’ The Appraisal Journal (Appraisal Institute, January 2000), 64-71, for an analysis of the cost-to-cure involving partial takings for a number of different types of properties. A copy of the actual study can be downloaded at http://ntl.bts.gov/lib/21000/21400/21467/PB99119513.pdf.
23. Michael Wolff, ‘Value Vs. Size in The Real Estate Market,’ Right of Way (July/August 2007), 36-31, applying linear regression analysis. http://www.irwaonline.org/eweb/upload/0707-5.pdf.
24. The Appraisal Institute, Uniform Appraisal Standards for Federal Land Acquisitions (Appraisal Institute, 2000, 18).
25. See Caldwell & Ross Limited v. New Brunswick (Transportation), 2009 NBQB 329 (CanLII) for a discussion of the larger parcel and how market value is impacted by parcel ‘size.’ http://www.canlii.org/en/nb/nbqb/doc/2009/2009nbqb329/2009nbqb329.pdf.
26. Copy available at http://www.tpsgc-pwgsc.gc.ca/biens-property/documents/pubs-re39-eng.pdf.
27. Tony Sevelka, ‘Expropriation and Condemnation: The Larger Parcel,’ The Appraisal Journal (January 2003, 75-93).
29. Burmont Holdings Ltd. v. Chilliwack (District), 1994 CanLII 3326 (BC SC). Use restriction negatively impacts market value.
32. A nearby airport or crematorium would likely have a negative impact and preclude ‘residential’ development even it were a legally permissible use.
35. An economic use that fails to meet the initial tests of physical possibility and legal permissibility at a probability level greater than 50% is precluded from further consideration in the highest and best use analysis.
36. In Thoreson v. Alberta (Ministry of Environment), 2012 ABCA 170 (CanLII), the appeals court ruled that the property owner’s evidence was flawed and of limited assistance: “Despite acknowledging development of the subject lands depended on assessing both costs and demand, the…experts did neither. This…constitutes a fatal flaw in their analysis and I give their evidence little weight. Specifically the suggestion that but for the RDA/TUC [scheme] the subject lands would be fully developed and serviced as at March 31, 2004 is rejected. Therefore, the Plaintiffs’ appraisal of $400,000.00 per acre of the expropriated lands which assumed the full servicing and full development as of the effective date is of limited assistance to the…ultimate determination of value.” The lower court also cited the numerous steps necessary in the development process overlooked in bringing the raw land to a serviced state and fully developed as industrial lots. The court fixed the market value of the lands at $84,500 and $87,000 per acre.
37. A title search is required of each abutting property that has the potential to form part of the larger parcel, in concert with a non-viable remainder, to identify any legal constraints (title restrictions on use) and physical constraints (registered easements) relating to highest and best use analysis.
38. The terms non-viable property and non-viable parcel are used interchangeably, and have been variously defined as “a parcel of land, which, on its own, would not be eligible for a building permit” (Town of Milton); and “a parcel of land that is landlocked” (Infrastructure Ontario). The Ontario Ministry of Transportation defines “non-viable parcels are those that are not capable of independent development. They may be irregularly shaped, have limited or no access, or have other deficiencies preventing their independent use or development,” Real Property Appraisal Guidelines (February 2008, 26).
39. Gordon E. MacNair, ‘Value in Contribution & Landlocking,’ Right of Way (January/February, 12-17), describes a number of actual transactions of remnants trading at various discount rates in a bilateral market.
41. Ontario Ministry of Transportation, Real Property Appraisal Guidelines (December 2008, 26).
42. Moller v. Canada (Transportation), 2008 CanLII 88538 (AB LCB). See Alberta (Transport, Minister) v. Bonaventure Sales Ltd., 1980 ABCA 142 (CanLII), in which the appeals court mandated application of the concept of the larger parcel to value expropriated strips of land inappropriately assigned values as independently ‘saleable acreage’ by the Board. http://www.canlii.org/en/ab/abca/doc/1980/1980abca142/1980abca142.pdf.
44. Damages (injurious affection) arbitrarily computed as a percentage of the before-taking value or the residual value after estimating the contributory value of the part taken as part of the larger parcel fails to consider the value of the remainder in any meaningful way, and conceals the magnitude of the damages claimed without regard to the value of the remainder.
45. In F & F Realty Holdings Inc. v. Ontario (Ministry of Transportation), 1998 Carswell Ont 3046, 64 L.C.R. 52, the Board deemed the highway exit ramp constructed in connection with part of the land expropriated to have had both a positive (special benefit) and negative impact (injurious affection) on the 15.2-acre remainder, with the betterment attributed to 13.2 acres outweighing the injurious affection assigned to two acres, thereby, restricting compensation to the market value of the land taken (4.3 acres).
46. In Kodila v. British Columbia (Ministry of Transportation), 2007, BCSC, while the “before and after method” indicated that the diminution in value occasioned by the partial taking was $2,074, the court awarded the property-owner $7,818 as the contributory value of the land taken as part of a larger parcel.
47. The onus to prove betterment lies solely with the expropriating authority. Lafleche v. Ministry of Transportation and Communications (1975), 8 L.C.R. 77 at 86 (Ont. Div. Ct.); and Thunderbird Entertainment Ltd. v. Greater Vancouver Transportation Authority, 2012 BCCA 294 (CanLII).
48. All provinces, except British Columbia, and the federal government restrict set-off of special benefits to injurious affection. British Columbia allows set-off of special benefits against the total claim for compensation.

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Facebook, Inc. was sued in a class action last year over one of its advertising practices called “Sponsored Stories,” which typically consist of a Facebook Friend’s name, profile picture, and an assertion that the person (your Facebook Friend) “likes” an advertiser, coupled with the advertiser’s logo, featured on your Facebook page or News Feed. The idea is that the target of the advertisement (i.e., you) will be more influenced by the company’s advertisement because someone in your network (i.e., your Friend) “likes” that company. The disconnect is that “liking” a page on Facebook does not necessarily mean the user likes that company in the normal sense of the word. For example, one could “like” a page in order to get some promotional benefit from the company or learn more information about the company or its product.
The named plaintiffs, two of which are minors, alleged “Sponsored Stories” violated California’s Right of Publicity Statute, Civil Code § 3344; California’s Unfair Competition Law, Business & Professions Code § 17200, et seq. (“UCL”); and the common law doctrine of unjust enrichment. Generally, the plaintiffs alleged the way Sponsored Stories worked unlawfully misappropriated their names, photographs, likeness and identities for use in paid advertisements without their consent. Facebook moved to dismiss their claims, arguing lack of Article III standing, immunity under § 230 of the federal Communications Decency Act (“CDA”), and failure to state a claim upon which relief can be granted. Late last year, the California Northern District Court denied the motion except with respect to the unjust enrichment claim.
Notably, the District Court rejected Facebook’s argument that the plaintiffs lacked Article III standing, drawing a distinction between the plaintiffs’ allegations and other recent District Court privacy cases coming to the opposite conclusion under similar facts (Low v. LinkedIn, iPhone App Litig., and LaCourt v. Specific Media, In re Doubleclick, Cohen v. Facebook), on the grounds that the plaintiffs’ allegations were sufficiently particular with regard with what information Facebook used, how it used it, to whom their information was published, how they were economically injured by the use of their information to advertise to others (versus using one’s information to advertise to oneself), and how their information inherently had some commercial value (because a Sponsored Story ad was viewed by Facebook as more valuable, and therefore more expensive, than a generic ad).
A motion to intervene and oppose the motion for preliminary approval was filed in June, 2012 on behalf of the minor class members, whose interests are also represented in another related class action against Facebook and would be covered by the proposed release in the Fraley settlement. The minors are objecting for several reasons, including for example (1) the proposed settlement would not address the fundamental issue that minors lack the capacity to provide consent, and simply asking them to confirm they have parental consent is insufficient, and (2) that the Fraleyaction is limited to Sponsored Stories, whereas their related action, C.M.D. v. Facebook, challenges the use of children in advertising more generally. The intervention has the potential to blow up the proposed settlement and force the parties to start settlement discussions over again or proceed to class certification.
Both motions (for preliminary approval and intervention) are set to be heard on August 2, 2012.


The California Board of Accountancy is responsible for regulating the accounting profession in the public interest through its licensure and enforcement programs. In this course, we'll look at selected sections of the Accountancy Act and California Board of Accountancy Regulations, highlighting their effect on the practice of accounting and citing cases where misconduct has led to Board disciplinary action. Recent California Board of Accountancy disciplinary actions throughout this course serve as great examples of the types of situations and actions that can lead to discipline from the Board.
Approved by the California Board of Accountancy (CBA) in November 2016.
§ 3. Notification of Change of Address.
§ 5. Observance of Rules.
§ 12 General Experience Required Under Business and Professions Code Sections 5092 and 5093.
§ 12.1 Experience in Academia.
§ 12.5. Attest Experience Under Business and Professions Code Section 5095.
§ 19 Practice Privilege Forms for Individuals.
§ 38. Purpose of this Article.
§ 40. Enrollment and Participation.
§ 44. Notification of Expulsion.
§ 54. Confidential Information Defined, Exception.
§ 80. Inactive License Status.
§ 81. Continuing Education Requirements for Renewing an Expired License.
§ 87.5. Additional Continuing Education Requirements.
§ 87.6. Records Review Continuing Education Requirements.
§ 87.8. Regulatory Review Course.
§ 88. Programs Which Qualify.
§ 90. Exceptions and Extensions.
§ 94. Failure to Comply.
§ 95.4. Failure to Comply with Citation.
§ 95.6. Unlicensed, Unregulated Practice.
§ 99. Substantial Relationship Criteria.


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Mattera, Joanne. Rugweaving. Techniques for Two-Harness. Photo available. New York. Watson-Guptill. 1979. 4to. Hardcover. First edition. Full number line. Illustrated in black, white and color. Important reference work. Fine copy in fine dust jacket (in mylar).
Mattes, Danae. Danae Mattes. Terrain. Photo available. np. Self published. nd. 4to. Soft cover. First edition. Illustrated in black, white and color. Important reference work. Fine copy.
Mattes, Merrill. The Great Platte River Road. The Covered Wagon Mainline via Fort Kearny to Fort Laramie. Photo available. St. Paul. Minnesota Historical Society. 1969. 583 pps. Octavo. Hard cover. First edition. Illustrated. Important reference work. Fine copy in fine dust jacket (in mylar).
Mattes, Merrill. The Great Platte River Road. The Covered Wagon Mainline via Fort Kearny to Fort Laramie. Photo available. Lincoln. University of Nebraska Press. 1987. 583 pps. Octavo. Soft cover. Reprint. Illustrated. Fine copy.
Mattes, Merrill. The Great Platte River Road. The Covered Wagon Mainline via Fort Kearny to Fort Laramie. Photo available. Lincoln. University of Nebraska Press. 1979. 583 pps. Octavo. Soft cover. Reprint. Illustrated. Fine copy.
Matthews, Caitlin. The Encyclopedia of Celtic Wisdom. Photo available. New York. Barnes & Noble. 1996. Octavo. Hard cover. Reprint. Illustrated. Fine copy.
Matthews, Davis S. American Kelsey. A Romance of the Great San Joaquin Valley. Photo available. Stockton. Self published. 1915. Octavo. Decorated hard cover. First edition. Illustrated. Fine (owner name on end paper) copy.
Matthews, Fred. Northern California Railroads. The Silver Age. Volume II. Photo available. Denver. Sundance Books. 1982. Octavo. Decorated hard cover. First edition. Illustrated in color and black & white. Fine copy in glassine wrapper.
Matthews, John and Bob Stewart. Warriors of Arthur. Photo available. London. Blandford Press. 1987. Octavo. Hard cover. First edition. Illustrated in black, white and color by Richard Hook. Fine copy in fine dust jacket (in mylar).
Matthews, John. The Arthurian Tradition. The Element Library. Photo available. Shaftesbury. Element. 1994. Octavo. Hard cover. First edition. Illustrated in black, white and color. Fine copy in fine dust jacket (in mylar).
Matthews, John. Warriors of Christendom. Charlemagne, El Cid, Barbarossa, Richard Lionheart. Photo available. Poole. Firebird. 1988. Octavo. Hard cover. First edition. Illustrated in black, white and color. Fine copy in fine dust jacket (in mylar).
Matthews, Julian. Trees in New Zealand. Photo available. Auckland. Lansdowne Press. 1983. 176 pps. 4to. Hardcover. First edition. Illustrated in black, white and color. Important reference work. Fine copy in fine dust jacket (in mylar).
Matthews, Sara. Chile. The Art of Wine. Photo available. Santiago. Origo Ediciones. 2003. 127 pps. 4to. Hardcover. First edition. Illustrated in black, white and color. Important reference work. Fine copy in fine dust jacket (in mylar).
Matthiessen, Peter and Eliot Porter The Tree Where Man Was Born and the African Experience. Photo available. New York. E.P. Dutton & Co. 1972. 247 pps. 4to. Hardcover. Stated first edition (unpriced jacket). Illustrated. Fine copy in fine dust jacket (in mylar).
Matthiessen, Peter. African Silences. Photo available. New York. Random House. 1991. Octavo. Hard cover. First edition. Fine copy in near fine (very light sunning) dust jacket (in mylar).
Matthiessen, Peter. African Silences. Photo available. New York. Random House. 1991. 225 pps. Octavo. Hardcover. First edition. Fine copy in fine dust jacket (in mylar).

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Taxation — exemption — legislative grant of immunity in Hamline University charter — sufficiency of consideration therefor.
1. Conceding the necessity of valid consideration for a legislative grant of tax immunity to respondent university, the benefits which the legislature deemed would accrue to the people of the state by reason of the grant constituted sufficient consideration therefor.
Same — same — same — no abandonment of grant.
2. Abandonment of such a grant by the beneficiary should not be lightly assumed. Upon facts found by trial courts, evidence held to sustain findings that there was neither abandonment nor surrender by the beneficiary of such grant.
Statute — contract created by legislative grant — impairment.
3. A valid legislative grant amounting to a contract may not be impaired by subsequent legislation.
Corporation — dissolution — necessity of Judicial determination.
4. Generally, a corporation is not to be deemed dissolved or its corporate franchise annulled unless and until there has been a judicial determination that there is, in fact, valid cause for forfeiture, and such action may be taken advantage of only by the state in a direct proceeding for that purpose.
Same — same — powers of attorney general.
5. Our legislative policy is, and ever since territorial days has been, to place in the hands of the attorney general as the highest legal enforcement officer of the state plenary authority, in the name of the state, to bring appropriate proceedings to vacate the charter or annul the existence of a corporation violating its corporate powers.
Court — supreme court — policy as to overruling former decisions.
6. This court will overturn its former decisions only when convinced of former error, and especially when such decisions affect constitutional questions.
University — creation of Hamline University — validity of territorial act.
7. The federal act creating Minnesota's territorial status vested its legislature with broad powers in the field of legislation. It thereby bestowed upon that body adequate authority to create the respondent corporation, with all the functions necessary to effectuate its objects.
Two proceedings, one in the district court for Hennepin county (No. 33,531), tried before Edmund A. Montgomery, Judge, by the Trustees of Hamline University of Minnesota to register title to certain real estate; and the other in the district court for Ramsey county (No. 33,533), tried before Clayton Parks, Judge, by the state to enforce against the university payment of real estate taxes delinquent for the years 1939, 1940, and 1941. The issue involved in both proceedings is whether the real estate is exempt from taxation by virtue of a grant of tax immunity contained in the university's legislative charter. From a judgment in each case sustaining the claim of the university, the state appealed. Affirmed.
Michael J. Dillon, County Attorney, Frank J. Williams, Assistant County Attorney, and Karl W. Windhorst, Special Assistant County Attorney, for appellant State of Minnesota in Case No. 33,531.
James F. Lynch, County Attorney, and Andrew R. Bratter, Assistant County Attorney, for appellant State of Minnesota in Case No. 33,533.
G.A. Youngquist, Donald E. Bridgman, W.P. Westfall, John F.D. Meighen, James H. Hall, F.W. Thomas, and Fowler, Youngquist, Furber, Taney Johnson, for respondent.
We have here appeals from two judgments rendered in and by the district courts of Hennepin and Ramsey counties sustaining the claim of Hamline University of Minnesota (hereinafter referred to as "Hamline") that certain real estate owned by it is immune to general taxation. Since both cases involve that determinative factor as the basis for decision, we proceed directly to that issue.
The properties sought to be taxed are not directly devoted to any of Hamline's educational functions. We are concerned here only with real estate owned by it devoted to commercial and other kindred activities for which it receives rental income from its tenants. All these properties represent investments from its endowment fund, which, with other income investments such as mortgages, bonds, and the like, now amount to approximately $2,000,000. The value of its educational plant and facilities is nearly $1,000,000, but that, of course, is not involved in this litigation. The income from the mentioned properties, including that derived from other investments of its endowment fund, is needed and necessarily required by Hamline in carrying on its educational functions.
Hamline's freedom from the general burden of taxation shared by other taxpayers has for its foundation the legislative grant of claimed immunity contained in the territorial charter creating Hamline "a body politic and corporate" for the stated purpose of affording "ample facilities to perfect the scholar." L. 1854, c. 43, §§ 1, 4.
The provisions and requirements of the act were promptly accepted on May 9, 1854, when Hamline's trustees held their first meeting. On July 12 they decided to establish a preparatory department, then considered an immediate necessity, since high schools within the territory of Minnesota were practically unknown. That department was opened in November with an enrollment of "18 ladies and 21 gentlemen." The college proper opened in 1857, and its courses included "Mental and Moral Sciences, Belles Lettres, Ancient Languages, Mathematics, Natural Sciences, Law, Biblical Literature, Music, and German." Thus it became, and until 1869 remained, the only institution of college rank in this state. The first college class was graduated in 1859. During the following years the number of its students ranged from 18 to 60 in the college department, and from 73 to 182 in the preparatory department.
Financial difficulties beset the trustees almost from the start. The 1857 panic visited this region, then undeveloped and sparsely settled, as it did the country at large. When the effects of that had somewhat subsided, the Civil War broke out, further complicating the already precarious financial condition of the new college. Thus, in the spring of 1869, debts and operating expenses had so far depleted its treasury and even its credit that the commencement exercises had to be held in March instead of in June.
During the fall of 1869, because of the financial difficulties facing them, the trustees were in a dilemma. The new state had gone through the trying days of the Civil War and the Indian uprisings and had suffered generally from grasshopper and other insect plagues. With a depleted treasury and no credit upon which to lean, the trustees concluded to suspend the activities of the institution for the time being. However, they met officially many times and by various means sought to reopen the college, never surrendering their determination to make the institution a going concern. As a matter of fact, committees were appointed to get various cities in the state to make propositions of financial help in consideration of having Hamline moved from Red Wing, where it was originally built, to one of these new locations. The creation of an endowment fund was sought. Proposals came from Red Wing, Faribault, and Rochester. In 1871, the legislature passed Sp. L. 1871, c. 112, at the solicitation of the trustees, giving them authority to locate Hamline at such place as they might select, with certain conditions and limitations not important here. St. Paul and Minneapolis, now generally referred to as the "Twin Cities," then had a combined population of about 40,000 inhabitants. It was thought that this would afford Hamline a more satisfactory location than any of the other places we have mentioned. St. Paul offered to donate 80 acres of land (Hamline's present site), of the estimated value of $28,800. That proposal was accepted and the land conveyed. The money to meet this and other obligations came principally from these two cities, St. Paul raising $15,943 and Minneapolis $28,761. These sums, however, were made up mostly of pledges, many of which were never paid.
A campaign for an endowment fund was begun in 1871, and total pledges of about $104,000 were secured, but many of these were not paid. After an 11-year, uphill fight for existence, the brave and persistent men who founded the institution finally succeeded in reopening both the preparatory and college departments on September 22, 1880. Ever since then its educational functions have been steadily going forward. As an institution of higher learning it is now safely on the highway of financial stability. The services it has rendered for nearly 90 years and those which it may safely be expected to render for an indefinite time in the future greatly exceed the amount of taxes now or which are likely to be involved in the foreseeable future.
"* * * the legislative power and authority of said Territory shall be vested in the governor and a legislative assembly."
The territorial act giving rise to Hamline's claim of immunity to or exemption from taxation is found in L. 1854, c. 43, § 11, and as far as here material reads: "all corporate property belonging to the institution, both real and personal is, and shall be free from taxation."
"Laws shall be passed taxing all moneys, credits, investments in bonds, stocks, joint stock companies, or otherwise, and also all real and personal property, according to its true value in money; but * * * academies, colleges, universities, and all seminaries of learning * * * shall, by general laws, be exempt from taxation."
"Sec. 2. All laws now in force in the territory of Minnesota not repugnant to this constitution, shall remain in force until they expire by their own limitation, or be altered or repealed by the legislature."
"That the state of Minnesota shall be one, and is hereby declared to be one of the United States of America, and admitted into the Union on an equal footing with the original states, in all respects whatever."
With these constitutional and legislative directions in mind and aided and guided by both state and federal decision law, we approach the problems presented by counsel. While many interesting sidelight issues are discussed in their briefs and reliance placed thereon, we shall try to confine our consideration and determination only to those which we deem decisive of the main issue, i. e., whether Hamline's real property not directly devoted to its educational functions is immune from the state's power to tax it.
In the Hennepin county came (No. 33,531), counsel have urged that, even if the territorial grant should be held to be a valid contract of tax immunity, nevertheless, because Hamline failed for a period of more than 11 years to maintain and conduct its corporate functions as an educational institution, it should "as a matter of law" be held to have "forfeited" its "privilege to exemption from taxation," "regardless of the cause of the suspension"; and further, inasmuch as Hamline has thus failed, that the consideration for the grant has likewise failed.
1. As to the necessity of consideration to sustain a contract such as this, we see no need of much discussion. It is as necessary for this one as for other contractual engagements. In this case, however, the trial court found, upon adequate evidence, that Hamline's trustees have consistently, through all the difficult years of its early history, made real and effective efforts to build and maintain a worthwhile college, and that the tangible results of these efforts have been "large contributions" from private sources; that the college has carried a heavy teaching load and rendered a service to the state which otherwise the state would in most cases have been required to perform at heavy expense; that the institution has furnished "a consideration more than adequate" to balance the advantages granted by the statutory exemption; "and said contract has been and is a favorable one" to the state.
"There is no necessity of looking for the consideration for a legislative contract outside of the objects for which the corporation was created. These objects were deemed by the legislature to be beneficial to the community, and this benefit constitutes the consideration for the contract, and no other is required to support it."
2. Nor do we believe that the record justifies the state's assertion that "as a matter of law" Hamline has abandoned its charter rights. The findings specifically negate that claim. Our opinion in Trustees of Pillsbury Academy v. State, 204 Minn. 365, 283 N.W. 727, is cited by counsel as their authority. True, there is language in that opinion casting doubt upon many of our prior cases, such as County of Nobles v. Hamline University, 46 Minn. 316, 48 N.W. 1119; State v. Bishop Seabury Mission, 90 Minn. 92, 95 N.W. 882; and State v. W. L. Harris Realty Co. 148 Minn. 20, 180 N.W. 776, wherein this court held and gave effect to grants of tax immunity to institutions of Hamline's class. But a careful reading of the Pillsbury case will disclose that the only basis upon which the opinion was founded was that Minnesota Central University, created by and granted immunity from taxation under L. 1854, c. 36, of the territory "was not continued in existence" by Sp. L. 1878, c. 69, since, under the later act, "a new corporation, now Pillsbury Academy, was created." Therefore, it was said, the 1878 act ( 204 Minn. 366, 283 N.W. 728), purporting "to grant to the new corporation an immunity from taxation of all its property, of whatever kind and however used, was unconstitutional under Minn. Const. art. 9, §§ 1 and 3, as it then stood." We also said ( 204 Minn. 375, 283 N.W. 732), "before 1867, there had been a complete abandonment of its project by the Minnesota Central University. For that very reason, all its property was transferred unconditionally to the 'Baptist Centennial Committee of the State of Minnesota,' " and ( 204 Minn. 376, 283 N.W. 732) "the abandonment of its project by the Minnesota Central University made its exemption repealable and repealed"; hence the "immunity was defunct — had been for ten years in 1878" when the new corporation was created. The question here presented was discreetly left open, the court saying ( 204 Minn. 374-375, 283 N.W. 732), "We pass that point without decision * * * because it has not been argued."
Abandonment of such a right as was given to Hamline by the representatives of the people should not be lightly assumed. The suspension of its teaching function could not well be said to be a surrender of its charter rights. The suspension was not a voluntary one; rather, it was caused by forces beyond the control of any human agency. In this connection, it is interesting to note that our state university was created by L. 1851, c. 3, of the territory. It was given a grant of 46,000 acres. In addition, it had for its support the state's power to tax. Yet from the time of its creation until 1869 no college department was opened. There were only two graduates at its first commencement in 1873. (See Forty Years of the University of Minnesota by E. Bird Johnson, pp. 17-31.) In the opinion of Dr. Folwell, president of the university from 1869 to 1884 ( 4 Folwell's History of Minnesota, p. 60, et seq.), the history of the university from 1851 to 1868 was "mostly a pitiful story of how, as the result of a series of errors and blunders, next to nothing was accomplished and a great debt accumulated."
During these same years Hamline was actually functioning in both its preparatory and college departments. As we have already noted, it was the only school of college rank from the time of its creation to and including 1869. During that period it rendered valuable service to the state in that some 200 of its graduates were teaching in the public schools of the state.
We think the evidence sustains the findings that there was neither abandonment nor surrender of the grant.
3. The adoption of the state constitution, upon which reliance is placed for the present claim of right to tax Hamline's property, could not change its granted rights if these were contractual obligations. This seems clear, since our constitution was adopted in 1857, when Hamline was functioning in full compliance with its charter obligations. Perry v. United States, 294 U.S. 330, 55 S.Ct. 432, 79 L. ed. 912, 918-919, 95 A.L.R. 1335.
"* * * the general rule is that a corporation is not to be deemed dissolved until a forfeiture is judicially ascertained and adjudged [citing cases] and a cause of forfeiture can only be taken advantage of by the state in a direct proceeding for the purpose."
"* * * in the absence of any action on the part of the state, a surrender or abandonment of its corporate franchise, and an acceptance thereof by the state, cannot be presumed from its transfer of its property and continued nonuser of its franchise. It remained an inactive corporation, and had the right to resume the exercise of its franchise * * * unless the state interfered." And, notwithstanding the fact that this was a savings bank which for 16 years had not used its corporate franchise, we said: "It did not do any act which incapacitated it, or rendered it legally impossible, to resume business."
Since no proceeding of any kind has ever been brought by the state's highest legal enforcement officer against Hamline, we may safely assume that it has traveled the straight and narrow path of corporate rectitude. Add to this the fact that there has been no legislation, not even since the 1906 wide-open tax amendment ( cf. Reed v. Bjornson, 191 Minn. 254, pp. 258-259, 253 N.W. 102, 104-105), tending to limit or in any way affecting Hamline's charter grant of immunity, and we can see no compelling reason on this score for overturning the decisions of the triers of fact.
6. Counsel in the Ramsey county case (No. 33533) think that the trial court was led into error, to the county's lose, because the court felt that it was bound by County of Nobles v. Hamline University, 46 Minn. 316, 48 N.W. 1119, supra. We are urged to reexamine that decision because that "case is not sound and should not now be followed"; that it "was not adequately considered" by this court, since the sole basis for the result reached was founded upon First Div. St. P. P. R. Co. v. Parcher, 14 Minn. 224 (297), a case which is said to be "not an authority for the proposition raised in the Nobles County case and that anything said therein pertaining to the subject [tax immunity] was dictum." The opinion in that case was written by Mr. Justice Berry more than 60 years ago. That the court gave the case careful consideration is abundantly shown if one will take the time carefully to review what was there decided. We refrain from quoting from it, since the opinion is available to both bench and bar. We have read and reread the opinion, and we freely confess that we are favorably impressed with it.
In the Nobles county case the opinion, written by Mr. Justice Mitchell, bears date June 8, 1891. It has stood the test of time for nearly 53 years. Are we now to discard it? Justice Mitchell's name and fame forbid the thought that he overlooked the vital questions there presented. They were the same as those here involved, except that in this case Hamline has urged as an additional reason for affirmance the doctrine of res judicata of what was there determined.
That case was followed in State v. W. L. Harris Realty Co. 148 Minn. 20, 180 N.W. 776, where the same exemption as that involved in the Nobles county case was again questioned and again sustained. The opinion, written by Mr. Chief Justice Brown, was filed January 7, 1921, more than 23 years ago. From that time until now no case has come before us challenging these decisions.
"It has been the policy of our people, from the organization of the territory to the present time, to encourage and by all proper means assist in the support and maintenance of educational institutions. Such was the policy of the federal government prior to the organization of the state, for it was enacted by article 3, Ordinance of 1787, providing for the government of the Northwest Territory, of which Minnesota formed a part, that 'religion, morality and knowledge being necessary to good government and the happiness of mankind, schools and the means of education shall forever be encouraged.' "
"* * * the spirit of the times when it was adopted, as shown by the attitude of the territorial legislature and the people, should be infused into it, and reasons of practicability and effectiveness, so far as consistent with the usual canons of construction, applied in determining its purpose and meaning."
The "encouragement" to be given such institutions "ought not to be limited to mere formal acts of recognition or praise on the part of the state or people, but to broad acts of such potentiality as will result in substantial benefit and assistance to them."
We should not be "unmindful of the desirability of continuity of decision in constitutional questions." Only "when convinced of former error" should we overrule a line of decision law of many years' standing. Smith v. Allwright, 321 U.S. 649, 665, 64 S.Ct. 757, 765. In the words of Mr. Justice Roberts in his dissent ( 321 U.S. 666, 64 S.Ct. 766), we should be careful not to permit "intolerance for what those who have composed this court in the past have conscientiously and deliberately concluded," nor should we indulge in "an assumption that knowledge and wisdom reside in us which was denied to our predecessors."
Mindful of these principles, we conclude that we should follow our former cases, not overrule them.
We have not overlooked Trustees of Phillips Exeter Academy v. Exeter, 90 N.H. 472, 11 A.2d 569. (See also 27 A. [2d] 569.) The question there presented and decided was whether the general assembly in 1781, before New Hampshire became a state and before our national constitution was adopted, could grant a perpetual exemption from taxation. There the grant was declared void because the assembly granting it was only a delegated agency and for that reason could not enact irrevocable laws. Our case is founded upon an entirely different base. Here there was a grant by the representatives of the people under the powers conferred by the federal government. In addition, the people of the state, in adopting their constitution, recognized and assumed the validity of all existing contract obligations and rights created thereby.
"Under the ordinance, the legislature of the territory was vested with general legislative powers, restricted only by the articles contained in that instrument. It had power to grant an act of incorporation, with all the functions necessary to effectuate its objects. There can be no question, therefore, that the corporate powers vested in the plaintiffs, by the legislature of the territory, were legitimately conferred. And these powers were not affected, and could not be affected by the constitution of the State. It provided that 'all rights, contracts, and claims, both as respects individuals and bodies corporate, shall continue as if no change had taken place in this government.' "
We think that what the court there decided well fits the facts found by the trial courts in these cases. Here, as in the cited case, there was a broad grant of power given our territorial legislature by the national government, extending "to all rightful subjects of legislation." There is no suggestion that congress "disapproved" our legislation. And here too, as in that case, under § 1 of the "Schedule" of our constitution, our people solemnly "declared that all rights, actions, prosecutions, judgments, claims and contracts, as well of individuals as of bodies corporate, shall continue as if no change had taken place." The creation of Hamline, with all the functions necessary to effectuate its objects, was well within the power vested in the territorial legislature by the federal act.
It follows that there should be an affirmance in each case.

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