The stakes had never been higher.

On appeal to the Virginia Supreme Court for a second time, the West Creek LLCs were asking for complete reversal of Circuit Court Judge Sanner’s comprehensive ruling in favor of the County, and also for final judgment setting the assessments (collectively) at $34.1 million. This could have cost the County millions of dollars in tax refunds and interest. The County defended, insisting that Judge Sanner had gotten it right, and the County’s $105.1 million collective assessment of the 144 parcels must be affirmed.

The Oral Argument

The main issue on oral argument appeared to revolve around whether a plaintiff in a tax appeal under Virginia Code § 58.1-3984 could bear their burden of proof by proving the assessments differed substantially from the proven evidence of fair market value. The trial court’s grant of the motion to strike regarding the northern one-third of the West Creek Business Park, based solely on lack of any evidence of how the assessment was determined, came under fire.

Based upon the questions asked, the Supreme Court seemed interested in settling the question of whether evidence of methodology is required to prove a “manifest error.” The West Creek LLCs argued no, pointing primarily at Board of Supervisors v. Telecommunications Industries, Inc., 246 Va. 472, 436 S.E.2d 442 (1993) and the statutory language from Virginia Code § 58.1-3984 which seemed to support its argument. The County argued yes, distinguishing the Telecommunications case as involving fungible items of personal property (personal computers) rather than unique real estate, and pointing in support to the many Virginia Supreme Court opinions describing the standard as “manifest error in the making of the assessment.”

After oral argument, both sides awaited the results, which came in a detailed opinion issued in September of 2008. In the opinion, the Virginia Supreme Court relied on its precedent, re-affirmed many well-settled points of tax law, and settled the question raised at oral argument.

The Opinion

The Court largely upheld the Circuit Court on the law, with one exception, and upheld the assessments, but remanded the forty cases decided on the motion to strike. Here are some legal highlights of the opinion.

Claims for Erroneous Assessment, Generally

The Court started by reciting very familiar principles of Virginia local government tax assessment law.

Courts are generally deferential to the judgment of the taxing authority. See West Creek Associates, LLC v. County of Goochland, 276 Va. 393, 410, 665 S.E.2d 834, 843 (2008) (“The value of property is a matter of opinion and there must necessarily be left a wide room for the exercise of opinion, otherwise courts will be converted into assessing boards and in assuming to act as such, would assume powers lodged elsewhere by the law-making branch of government.”).

As such, a taxing authority’s assessment is presumed to be correct. 276 Va. at 409, 665 S.E.2d at 842 (“A taxing authority’s assessment is presumed to be correct . . . .”); 276 Va. at 414, 665 S.E.2d at 845 (“In all cases . . . a taxing authority’s assessment is presumed to be correct . . . .”).

The taxpayer carries the burden of proof when claiming erroneous assessment. 276 Va. at 409, 665 S.E.2d at 842 (“[A] taxpayer has the burden to rebut that presumption by establishing that the real property in question is assessed at more than fair market value or that the assessment is not uniform in its application.”); Va. Code § 58.1-3984(A); 276 Va. at 409, 665 S.E.2d at 845 (“[T]he taxpayer has the burden of proof ‘to show that the property in question is valued at more than its fair market value or that the assessment is not uniform in its application, or that the assessment is otherwise invalid or illegal.” (citing Va. Code § 58.1-3984(A))).

The taxpayer must prove its case by a clear preponderance of the evidence to meet its burden of proof. 276 Va. at 409, 655 S.E.2d at 843 (“We have held that a taxpayer must show by a clear preponderance of the evidence that the taxing authority committed manifest error or totally disregarded controlling evidence in making the assessment.”).

Use of FMV to Establish Erroneous Assessment

This is the most signicant point of law addressed in the West Creek case, and settled the question raised at oral argument regarding whether proof of “manifest error in the manner of making the assessment” was mandatory.
Reconciling conflicting caselaw, the Court concluded that a taxpayer need not “prove what information the taxing authority considered and how it arrived at the assessment in question, i.e., its methodology,” to establish the erroneous assessment. 276 Va. at 413, 665 S.E.2d at 845.

Instead, the property’s fair market value may be used to establish the erroneous assessment. 276 Va. at 414, 665 S.E.2d at 845 (“[W]e have never explicitly held that manifest error cannot be established simply by evidence showing that the real property is assessed at more than its fair market value.”).

As a result, the Supreme Court of Virginia reversed and remanded the circuit court’s decision to strike forty claims at the conclusion of the plaintiffs’ case, since the decision was based solely on the grounds that West Creek had presented no evidence establishing Goochland’s methodology (i.e., “the manner of making the assessment”).

Since proof of an error in methodology was not the sole way the plaintiffs could have prevailed, the Court held that the circuit court erroneously granted the motion to strike based on lack of proof of methodology alone without considering (at that stage) whether the plaintiffs’ had proven a substantial difference between the assessment and the fair market value.

The Supreme Court stated that in accordance with the deference shown to the taxing authority, this difference between assessed value and fair market value must be substantial. 276 Va. at 414, 665 S.E.2d at 845 (“When a taxpayer attempts to prove manifest error solely by showing a significant disparity between fair market value and assessed value without showing that the taxing authority employed an improper methodology . . . the taxpayer cannot prevail ‘so long as the assessment comes within the range of reasonable difference of opinion . . .’.”).

An area to watch for in future litigation may be the issue of what constitutes a “significant disparity.”

Use of “Bulk Sale” Pricing as Evidence of FMV

The Code of Virginia requires that the property of different owners be assessed individually. 276 Va. at 414, 665 S.E.2d at 846 (“[P]ursuant to Code § 58.1-3290, the County was required to assess the 144 parcels individually.”). Specifically, Va. Code § 58.1-3290 provides that “[w]hen a tract or lot becomes the property of different owners in two or more parcels, subsequent to any general reassessment of real estate in the city or county in which such tract or lot is situated each of the two or more parcels shall be assessed and shown separately upon the land books, as required by law.” Besides this Code section, there were other statutes the Court agreed mandated an individual assessment for each parcel.

A property’s recent sale price is not controlling evidence of the property’s fair market value. 276 Va. at 415, 665 S.E.2d at 846 (“As we have previously stated, the recent sale price of real property is ‘merely one of the factors to be taken into consideration’ when determining whether such property has been assessed at more than fair market value.” (citing American Viscose Corp. v. City of Roanoke, 205 Va. 192, 196, 133 S.E.2d 795, 798 (1964)).

Because the purchase price of 34.1 million dollars reflected a “bulk sale” discount, it could not be used to establish the fair market value of the real property and carry the taxpayer’s burden of proof. See 276 Va. at 417, 665 S.E.2d at 847 (“[T]here is an inverse relationship between the size of a parcel and the purchase price, i.e., the larger the parcel, the cheaper the price.”); 276 Va. at 415, 665 S.E.2d at 846 (“Since the 34.1 million dollar figure represented the ‘bulk sale’ of the 2,500 acres, the County is correct in its assertion that the mere difference between the purchase price and the assessed value was not sufficient to show manifest error or disregard the controlling evidence.”).

In so ruling, the Supreme Court distinguished the case of Board of Supervisors v. Donatelli & Klein, Inc., 228 Va. 620, 325 S.E.2d 342 (1985), in which the sale of the subject property “was not a sale in bulk, because the sale of each individual property was negotiated separately to its ultimate purchase price.” 228 Va. at 625, 325 S.E.2d at 343. In contrast, the $34.1 million sales price for the West Creek Business Park was negotiated for the entire acreage of the park, and the parcels created later at closing for tax planning purposes.

In part because West Creek’s experts simply divided the $34.1 million purchase price among the individual parcels, the Supreme Court of Virginia affirmed the circuit court’s ruling regarding the remaining ninety parcels that West Creek failed to show that the property in question is assessed at more than its fair market value. The plaintiffs’ appraiser adopted not only the owners’ theory of valuation (“one business park, one property”), but also their opinion of value ($34.1 million total, then broken down by parcel), to the penny. The Court upheld Judge Sanner’s finding that such an expert opinion was simply not credible.

The plaintiffs failed to develop a credible opinion of value that could be compared to the assessed value. Therefore, the Court ruled that the plaintiffs failed to carry their burden of proof to show “substantial disparity” between the fair market value and the assessments.

After remand of the forty cases reversed by the Supreme Court, the plaintiffs ultimately agreed to dismiss them all. The final order was entered in Spring of 2009.

After almost eight years of litigation, the County of Goochland had prevailed.

(The author gratefully acknowledges the assistance of Eric Howlett and Kitty Bice in the preparation of this post.)

As County Attorney in Goochland County from 2001 to 2009, I was counsel in 248 erroneous assessment cases, resulting in two multi-day trials and two appeals to the Virginia Supreme Court, resulting in one incredible opinion issued by the Court in September of 2008, West Creek Associates, LLC v. County of Goochland, 276 Va. 393, 665 S.E.2d 834 (2008) (opinion here).

The tale has some twists and turns, so hang on for the ride.

Background (in brief)

In 2000, businessmen Bill Goodwin and Booty Armstrong (through 144 individual limited liability companies, including West Creek Associates) contracted to purchase 2,500 acres of real estate in Goochland County, consisting of 20 individual parcels at the time, for a purchase price of approximately $34.1 million from Bank of America, Trustee. All the West Creek Business Park was zoned industrial/business; some was improved, but most was unimproved. It was and inarguably is a first class, master-planned business park.

At settlement in June of 2000, the real estate was subdivided, not by subdivision plat, but by 144 separate deeds, each conveying a single parcel to a different limited liability company. As required by law, each of those parcels was shown separately on the land book. In 2000-2001, the County’s citizen board of assessors assessed each of the parcels during its general reassessment of the County. The collective taxable value of those parcels was assessed at $105.4 million.

The First Trial

The first 89 lawsuits were filed in August of 2001, and were consolidated for trial, which was held in April 2003, presided over by Circuit Court Judge-designate Charles Russell (former Justice of the Virginia Supreme Court). Just before trial, the various plaintiffs attempted to non-suit the 89 cases in order to re-file with all 144 parcels and pursue a previously-unexpressed theory, namely, that all 144 parcels should be valued collectively as a whole, and valued at the “price paid,” $34.1 million. Because the County had a pending counterclaim for increased assessments, Judge Russell denied the motion and presided over a four-day trial. At the conclusion, neither side was happy with the result. The West Creek plaintiffs appealed the non-suit ruling. The County of Goochland appealed the assessment reduction of approximately $34 million ordered by the court, only about half to one-third what the plaintiffs hoped to receive under their new theory.

The First Appeal

On appeal in 2004, the Virginia Supreme Court reversed the non-suit ruling, essentially giving the plaintiffs a “do-over” to present their “one business park” theory. The Court seemed very interested in reversing on the non-suit issue in oral argument, which would also reverse the $34 million assessment reduction ordered below. Understandably, near the end of argument, Chief Justice Hassell asked counsel for the West Creek LLCs, “Are you sure your client wants this?” The client did. The Court ordered the plaintiffs’ non-suit motion granted, and therefore did not reach any of the multiple (and I believe well-founded) assignments of error cited by the County.

In some ways, it was like both parties had entered a time warp and lost the previous three years of litigation.

Next time -
Part Two: Round Three, The Second Trial (2004-2006)