Arizona Supreme Court Holds that Rule 68 Sanctions May Be Awarded in Favor of Landowner Based on Offer of Judgment in Condemnation Case.

The Plaintiff (“SRP”) brought a condemnation action to determine compensation owed to two L.L.C.s (“Miller Park”) for land condemned to build an electric transmission line in Buckeye, Arizona.  The trial court granted Miller Park’s motion in limine to exclude evidence from its April 2001 protest of the county’s property tax assessment of the property.  After trial, the jury determined that SRP owed Miller Park just compensation of $4.7 million – more than double the $2.3 million settlement proposed by Miller Park’s Offer of Judgment under Rule 68, Ariz. R. Civ. P.  The trial court, however, declined to award Rule 68 sanctions, reasoning that Rule 68 conflicted with A.R.S. § 12-1128(A), which permits discretionary cost awards in condemnation cases.

SRP appealed the exclusion of the 2001 tax-protest evidence and Miller Park cross-appealed the denial of Rule 68 sanctions.  The Court of Appeals held that the trial court did not abuse its discretion by excluding the evidence, but erred by finding Rule 68 sanctions could not be awarded.  On subsequent appeal, the Arizona Supreme Court accepted review and affirmed the Court of Appeals on both rulings.

The Supreme Court explained that the trial court did not abuse its discretion by finding the tax protest evidence inadmissible under Arizona Evidence Rules 402 (relevance) and 403 (risk of undue prejudice, confusion, or waste of time).  Whereas just compensation for a condemnation action determines fair-market value based on the highest and best use of the land, valuation for property tax purposes considers only a property’s current use.  Because the trial court did not specify whether it was excluding the evidence under Rule 402, Rule 403, or both, and SRP failed to ask the trial court to clarify any ambiguity in the ruling, the appellate court would uphold the decision if supportable under either rule.  The trial court acted within its discretion to exclude the tax-protest evidence because of its minimal relevance and potential to waste time and confuse the jury. 

The trial court erred, however, by finding Rule 68 in conflict with A.R.S. § 12-1128(A).  The Supreme Court overruled in part Pima County v. Hogan, 197 Ariz. 138 (App. 1999), which found Rule 68 sanctions impermissible in a condemnation action because of the apparent conflict with A.R.S. § 12-1128(A), and because allowing sanctions in that case against the landowner would arguably undermine the landowner’s constitutional entitlement to just compensation.  Because the sanctions here ran in favor of the landowner, the Supreme Court did not address whether sanctions against a landowner would remain impermissible under the “just compensation” reasoning of Hogan. 

Justice Bales wrote the opinion for the unanimous en banc Court.