AEP Texas Inc. v. World Business Lenders, LLC, Dufour Logistics, LLC, and Industrial Steel Products, LLC

• Court: Court of Appeals of Texas
• Decided: February 26, 2021
• Docket: 13-19-00210-CV
• Status: Published

Opinion

NUMBER 13-19-00210-CV

COURT OF APPEALS

THIRTEENTH DISTRICT OF TEXAS

CORPUS CHRISTI – EDINBURG

AEP TEXAS INC., Appellant,

v.

WORLD BUSINESS LENDERS, LLC, DUFOUR LOGISTICS, LLC, AND INDUSTRIAL STEEL PRODUCTS, LLC, Appellees.

On appeal from the County Court at Law No. 4 of Cameron County, Texas.

MEMORANDUM OPINION

Before Chief Justice Contreras and Justices Hinojosa and Silva Memorandum Opinion by Justice Hinojosa

Appellant AEP Texas Inc. (AEP) filed a condemnation suit against appellees World

Business Lenders, LLC (World Business Lenders); Dufour Logistics, LLC (Dufour); and

Industrial Steel Products, LLC (Industrial Steel). AEP appeals a judgment, following a jury trial, awarding appellees $493,499 for the condemned property. By two issues which we

construe as one, AEP contends the trial court abused its discretion when it failed to

exclude an unreliable expert witness opinion which led to an improper market value

award. We reverse and remand.

I. BACKGROUND

AEP is a privately-owned public electric utility company with eminent domain

authority. See TEX. UTIL. CODE ANN. § 181.004. According to the pleadings, AEP

determined that it needed to expand its La Palma Substation in San Benito, Texas to

further develop its ability to supply electricity in the Rio Grande Valley. AEP filed a

condemnation suit against appellees to acquire a 12.292-acre tract of land (the

Condemned Property) that was part of a larger 54.934-acre parent tract. World Business

Lenders owned the Condemned Property in fee simple, while Dufour and Industrial Steel

claimed an interest in the property as lienholders.

The trial court appointed special commissioners who awarded $208,000.00 as

damages for the taking. See TEX. PROP. CODE ANN. §§ 21.014–.016. AEP deposited this

full amount into the registry of the court. See id. § 21.021. Appellees then filed objections

to the commissioners’ findings regarding the total market value award of the Condemned

Property. See id. § 21.018. Upon appellees’ motion, the trial court allowed appellees to

withdraw their deposit while the case proceeded. The parties agreed to limit the trial issue

to the determination of market value for the Condemned Property. Each party retained an

expert to opine on the market value of the Condemned Property: AEP retained Leonel

Garza, III while appellees retained Arturo Palacios.

2 A. The Pre-Trial Hearing

On the day of trial, AEP and appellees each filed a motion to exclude the other

party’s expert. The trial court heard the motions in a hearing outside the presence of the

jury.

AEP argued to the court that Palacios’s report should not be admitted because the

three comparable properties Palacios used to make his estimation were not similar to the

Condemned Property, thus making his testimony and report unreliable. First, AEP argued

that Palacios’s three comparable properties were in a flood zone while the Condemned

Property was not. AEP pointed out that, to account for the difference in flood zones,

Palacios made “Site” adjustments and increased the price of the first comparable property

by $311,040.79, the second property by $228,503.79, and the third by $42,875.79.

Second, AEP noted that the Condemned Property’s highest and best use was listed as

commercial and/or industrial, while the comparable properties’ best use was deemed

agricultural. Third, Palacios testified that the Condemned Property was unique in that it

had been elevated ten to eleven feet. To account for this difference in topography and

elevation, Palacios made “the same $3.293 million adjustment to each Comparable Sales

property to make them similar.” AEP argued that this “Site Improvement” adjustment

“increased Comparable Sale #1’s price by 3,136%, Comparable Sale #2’s sale price by

1,756%, and Comparable Sale #3’s sales price by 882%, respectively.”

The trial court denied each party’s motion to exclude, 1 and the case proceeded to

a jury trial.

1 Because the motion to exclude Garza’s report or testimony is not at issue in the appeal, we do not recite these arguments. See TEX. R. APP. P. 47.1. 3 B. Trial

Palacios testified over AEP’s objections, reiterating much of the testimony he had

shared during the pretrial hearing. Palacios explained to the jury that he employed a sales

comparison approach to determine the fair market value of the Condemned Property. He

based his opinion on the sales of three comparable properties in San Benito. He stated

that, in his opinion, it was important for his evaluation to stay within the San Benito market.

He explained that the Condemned Property was 12.42 acres and that its highest and best

use was commercial. The first comparable property he found was twenty acres, located

approximately 2.39 miles away from the Condemned Property, and its highest and best

use was agricultural. This property sold for $105,000 on August 3, 2018. His second

comparable property was 51.42 acres, located 3.44 miles away, was deemed agricultural

for its highest and best use, and sold for $187,537 on March 21, 2018. The third and final

comparable sale was 6.634 acres, located 1.52 miles from the Condemned Property; its

highest and best use was agricultural, and it sold for $373,165 on March 21, 2018.

Palacios expounded on the fact that the Condemned Property was a unique

property because it had been deliberately elevated about ten to eleven feet. In his report,

Palacios opined that

The subject property has the highest elevation within the entire City of San Benito. The elevation is the best[-]selling point of the subject property. The elevation of the subject property was man made. The various groups of engineers which included environmental, sewage, drainage, storm management, erosion, control, surveyors, and several others made the subject property the highest elevated property within the City of San Benito, Texas.

4 Palacios acknowledged in his report that, “in order to make each of the comparable

sales ‘similar’ to the subject property, each of the comparable sales needed to be raised

to the elevation of the subject property.” He made the “Site” adjustments to each

comparable sale to account for flood zone differences and the $3.3 million blanket “Site

Improvement” adjustments to account for the elevation difference. After making his

adjustments, Palacios concluded that the Condemned Property was valued at $868,940.

Garza, on the other hand, testified during trial that the Condemned Property was

worth $193,288. To make his report, he used one comparable property in San Benito and

two properties in the neighboring market of Harlingen, Texas. The properties were similar

in topography and elevation. The first comparable property in San Benito had its highest

and best use as “commercial/general retail” while the Harlingen properties were deemed

“light industrial.”

After the jury deliberated, it awarded appellees $493,499 for the Condemned

Property. AEP filed a motion for new trial and motion to modify the judgment. The trial

court granted the motion to modify because the original judgment failed to grant AEP title

and did not account for appellees’ previously withdrawn award from the registry of the

court. The motion for new trial was overruled by operation of law. AEP appeals.

II. STANDARD OF REVIEW & APPLICABLE LAW

A. Expert Opinion Testimony

Expert testimony must be relevant and reliable under Texas Rule of Evidence 702.

Gammill v. Jack Williams Chevrolet, Inc., 972 S.W.2d 713, 726 (Tex. 1998); TEX. R. EVID.

702. This includes the testimony of expert appraisal witnesses in condemnation actions.

5 Guadalupe-Blanco River Auth. v. Kraft, 77 S.W.3d 805, 807 (Tex. 2002). “Appraisal

expertise is a form of ‘specialized knowledge [used to] assist the trier of fact

to . . . determine a fact in issue.’” Id. (referring to TEX. R. EVID. 702). It is the trial court’s

responsibility to make the preliminary determination of whether the proffered testimony

meets the standards of relevance and reliability. E.I. du Pont de Nemours & Co. v.

Robinson, 923 S.W.2d 549, 556 (Tex. 1995); see TEX. R. CIV. P. 104(a) (stating that the

trial court is to decide preliminary questions concerning the admissibility of evidence).

“[R]eliability is an issue of admissibility for the trial court, not a weight-of-the-evidence

issue for the fact finder.” Greenberg Traurig of N.Y., P.C. v. Moody, 161 S.W.3d 56, 95–

96 (Tex. App.—Houston [14th Dist.] 2004, no pet.).

In the context of appraisals, a court is not required to rely on an adjustment when

the expert does not sufficiently show the adjustment’s application to the property at issue.

See Royce Homes, L.P. v. Humphrey, 244 S.W.3d 570, 579 (Tex. App.—Beaumont 2008,

pet. denied) (concluding an expert’s testimony was unreliable because his testimony did

not sufficiently explain why the percentage adjustment made was justified). An expert’s

failure to provide data without a supporting basis makes their opinion unreliable. See id.

Expert testimony is unreliable if “there is simply too great an analytical gap between the

data [relied upon] and the opinion proffered.” Hous. Unlimited, Inc. Metal Processing v.

Mel Acres Ranch, 443 S.W.3d 820, 835 (Tex. 2014) (citing Gammill, 972 S.W.2d at 726).

An expert must “connect the data relied on and his or her opinion” and “show how that

data is valid support for the opinion reached.” Id.; Volkswagen of Am., Inc. v.

Ramirez, 159 S.W.3d 897, 906 (Tex. 2005); Gammill, 972 S.W.2d at 726. Courts are not

6 required “to ignore fatal gaps in an expert's analysis or assertions that are simply

incorrect.” Volkswagen, 159 S.W.3d at 912. “A flaw in the expert’s reasoning from the

data may render reliance on a study unreasonable and render the inferences drawn

therefrom dubious.” Mel Acres Ranch, 443 S.W.3d at 835. “Under that circumstance, the

expert’s scientific testimony is unreliable and, legally, no evidence.” Id.

Once a party objects to proffered expert testimony, the proponent of the testimony

bears the burden of demonstrating its admissibility. Robinson, 923 S.W.2d at 557; Kraft,

77 S.W.3d at 807. An appellate court reviews a trial court’s decision to admit or exclude

expert appraisal testimony for an abuse of discretion. Enbridge Pipelines (E. Tex.) L.P. v.

Avinger Timber, LLC, 386 S.W.3d 256, 262 (Tex. 2012). A trial court abuses its discretion

when it rules without reference to any guiding rule or principles or acts arbitrarily and

unreasonably. Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 242 (Tex. 1986).

B. Appraisals & Market Value

“Both the United States and Texas Constitutions require governments to

compensate landowners for takings of their property for public use.” City of Harlingen v.

Estate of Sharboneau, 48 S.W.3d 177, 182 (Tex. 2001) (citing U.S. CONST. amend. V;

TEX. CONST. art. 1, § 17). “[T]he normal measure of damages is the land’s market value.”

Id. (citing TEX. PROP. CODE ANN. § 21.042(b)). “Thus, the central damage issue in the

typical condemnation case is how to measure the market value of the condemned

property.” Id.

“The three traditional approaches to determining market value are the comparable

sales method, the cost method, and the income method.” Sharboneau, 48 S.W.3d at 182;

7 Religious of the Sacred Heart v. City of Hous., 836 S.W.2d 606, 615–17 & n. 14 (Tex.

1992). Texas courts favor the comparable sales method. See Sharboneau, 48 S.W.3d at

182. “If the goal of an appraisal is to ascertain market value, then logically there can be

no better guide than the prices that willing buyers and sellers actually negotiate in the

relevant market.” Id. Under this type of analysis, an appraiser finds information for sales

of similar types of property, then makes upward or downward adjustments to these sales

prices based on differences in the subject property. Id.

Comparable sales must be voluntary sales from a willing buyer to a willing seller,

occur near the time of the condemnation, be in the vicinity of the condemned property,

and include properties with similar characteristics. Id.; see also U.S. v. 33.90 Acres of

Land, 709 F.2d 1012, 1014 (5th Cir. 1983). “Comparable sales need not be in the

immediate vicinity of the subject land, so long as they meet the test of similarity.”

Sharboneau, 48 S.W.3d at 182. When forming an expert opinion, the “underlying data

should be independently evaluated in determining if the opinion itself is reliable.” Kraft, 77

S.W.3d at 808 (citing Merrell Dow Pharm. v. Havner, 953 S.W.2d 706, 713 (Tex. 2005)).

If, however, the properties are so different that the appraiser and the fact-finder cannot

make valid adjustments for these differences, then a court should refuse to admit the

sales as comparable. See Kraft, 77 S.W.3d at 808 (“The comparable sales method fails

when the comparison is made to sales that are not, in fact, comparable to the land

condemned.”); Sharboneau, 48 S.W.3d at 182.

III. ANALYSIS

On appeal, AEP claims that “by failing to use properties that were similar to the

8 Entire Tract, Palacios misapplied the comparable sales method and the trial court should

have excluded his testimony.” AEP argues that Palacios’s three comparable sales were

so dissimilar that they should not have been used as comparable properties. See Kraft,

77 S.W.3d at 808; Sharboneau, 48 S.W.3d at 182. AEP first notes that the Condemned

Property was not in a flood zone while all three comparable properties were in a flood

plain. AEP also notes that the Condemned Property’s highest and best use was

commercial/industrial while the comparable properties’ best use was agricultural. See

Sharboneau, 48 S.W.3d at 182. AEP further argues that the blanket “Site Improvement”

adjustment Palacios made to each comparable property made his testimony unreliable.

We focus our legal analysis on this claim. In his report, Palacios added $3.293 million to

his estimated value of each of the three comparable sales properties to account for the

difference in the respective properties’ topography and elevation.

During the pre-trial hearing on the motion to exclude the expert’s testimony,

Palacios explained as follows:

Q. [AEP’s Counsel]. The subject property is so dissimilar to the comparable sales that you used that, in order to make them similar, you had to make adjustments to the tune of adding $3.3 million for the site aggregate to each of the comparable sales, correct?

A. Yes.

....

Q. And so you would agree with me without making those—you would agree with me that those are significant adjustments, correct?

9 Q. And so significant—well, you did roughly say $3.3 million—roughly 3.3 million figure in your appraisal report. Do you know what I'm referring to?

A. Yes, sir.

Q. Am I right to assume that that $3.3 million represents site aggregate of roughly 10 feet per comparable sale?

Q. Anywhere in your report is there any way that we can verify data that you provided the—how you arrived at that $3.3 million?

A. No, sir.

Q. I pass the witness, Your Honor.

REDIRECT EXAMINATION

Q. [Appellees’ Counsel]: Why [are calculations] not in your report, Mr. Palacios?

A. The reason it's not in the report is in my report as we— as [you] stated earlier about the different types of reports, before there used to be a self-contained summary and restricted appraisal report. Now what they did is they just now did an appraisal report and a restricted appraisal report. Within the appraisal report, USPAP tells us that we can go ahead and add additional information as to what type of a report that we are going to do. And I include in my appraisal report I state that this is a summary appraisal report. So I don't have to include all of my calculations in there. All my calculations are part of my work file, and so that's why they are not in the appraisal report itself.

In other words, Palacios provided a summary report that did not include the

calculations or methods he used to derive the $3.3 million adjustment across the board.

AEP notes that this adjustment increased the first comparable property’s price by 3,136%,

10 the second property’s sale price by 1,756%, and the third property’s sales price by 882%.

AEP also pointed out to the trial court that it never received Palacios’s work file during

discovery, so they were unable to properly cross-examine him on this significant

adjustment.

The trial court, as gatekeeper, should have excluded Palacios’s expert opinion

because it provided no data or calculations to explain why a difference in topography or

elevation would merit a blanket multi-million dollar increase across all three comparable

properties. See TEX. R. CIV. P. 104(a); Robinson, 923 S.W.2d at 556. Here, there was

“simply too great an analytical gap between the data [relied upon] and the opinion

proffered” by Palacios. See Mel Acres Ranch, 443 S.W.3d at 835; Gammill, 972 S.W.2d

at 726. The trial court did not have any “underlying data” it could independently review to

determine if Palacios’s significant “Site Improvement” adjustment for elevation was

reliable. See Kraft, 77 S.W.3d at 808; Havner, 953 S.W.2d at 713. Palacios’s testimony

regarding his appraisal and review of the Condemned Property and comparable

properties, as well as his general appraisal experience, did not adequately explain this

blanket $3.3 million adjustment. Thus, Palacios’s appraisal testimony was unreliable. See

Kraft, 77 S.W.3d at 808.

When a trial court erroneously admits evidence that should have been excluded,

appellate courts apply a harmless error review to determine if the error warrants reversal.

See TEX. R. APP. P. 44.1(a)(1). Erroneously admitted evidence is harmful if the error

“probably caused the rendition of an improper judgment.” See id. Here, given the fact that

the jury found the Condemned Property’s market value to be $493,499, a value roughly

11 halfway between Palacios’s appraisal of $868,940 and Garza’s appraisal of $193,288, it

is apparent that the jury relied on Palacios’s unreliable report when calculating its award.

Accordingly, we conclude AEP was harmed. See id.

We conclude the trial court abused its discretion when it deemed Palacios’s report

reliable and admitted his testimony and report into evidence when there was no

underlying data to support the $3.3 million adjustment. See Enbridge Pipelines, 386

S.W.3d at 262; Royce Homes, 244 S.W.3d at 579. The trial court, as gatekeeper, should

have excluded this report. See Enbridge Pipelines, 386 S.W.3d at 262. We sustain AEP’s

issue.

IV. CONCLUSION

We reverse the trial court’s judgment and remand for a new trial and any further

proceedings in accordance with our opinion.

LETICIA HINOJOSA Justice

Delivered and filed on the 26th day of February, 2021.