Disgorgement Damages for Trespass under California Civil Code § 3334

The previous article in this series discussed how California cases treated trespass claims seeking ]disgorgement and restitution before the legislature enacted  Civil Code § 3334 in 1992.

To recap:

  • There was the 1960 “dirt case” of Don v. Trogan Construction, where the court awarded “fair rental value” against trespassers, even though the vacant lot had effectively no rental value.
  • Then, there was the 1967 mineral-rights case in Whittaker v. Otto, which held courts may treat “honest” trespassers under a “mild” rule that allows them to deduct expenses from their trespass benefits, and may treat “willful” trespassers under a “harsh” rule, which allows the trespasser to take no deductions.
  • Finally, there was the 1993 wastewater case of Cassinos v. Union Oil Co., which tagged the trespasser with the price per barrel of proper wastewater disposal, even though the actual harm to the victim’s property could not be determined.

Since then, three cases have discussed the disgorgement under Civil Code § 3334, which provides that the detriment caused by a wrongful occupation of property includes the “benefits obtained” by the occupier.

Leaky pipelines are not a “benefit” subject to disgorgement: Watson Land Co. v. Shell Oil Co. (2005)

The Watson Center in Carson

The first case to apply “benefits obtained” under § 3334 was Watson Land Co. v. Shell Oil Co. (2005) 130 Cal.App.4th 69. Shell’s trespassing pipeline leaked gasoline underneath a shopping center owned by Watson. The jury awarded $3.9MM against Shell for remediation, but in addition to remediation, Watson also sought Shell’s “benefits obtained” under § 3334. In short, Watson argued that Shell benefited by not keeping its pipeline from leaking — i.e., by saving the approximately $4 million it would have had to spend on remediation. And via a complicated economic analysis about the time-value of Shell’s saved cash, Watson concluded Shell derived benefits much more than that. The jury agreed and awarded an additional $14 million as Shell’s “benefits.”

The Arco Refinery in Carson near the Watson Center

The court of appeal reversed, holding this was a nonsequitur – there was no link showing how failure to remediate worked a benefit beyond simply paying for the remediation. The court pointed out there was no evidence or argument of further benefits beyond remediation.

Looking first to the text of the statute, “benefits obtained” cannot include remediation, because remediation is a separate category independently described in § 3334(a): “The detriment . . . is deemed to be . . . the reasonable cost of repair or restoration . . . .” If the statute separately provides for remediation, the court reasoned, it could not have intended that plaintiff receive it under the “benefits obtained” clause in the statute also. That would be a double recovery.

The court also distinguished leaky pipelines from dumping wastewater. In wastewater-dumping cases, courts like in Cassinos had awarded disgorgement measured by how much the dumper would have had to pay to properly dispose of the waste. (For example, $1.75 per barrel for over 2 million barrels wrongfully dumped yielded an award of $3.6 million.)

But in Watson, “benefits obtained” could not include savings of costs of proper disposal as in toxic-dumping cases because there was apparently no evidence how Shell saved any costs – negligent leakage is not like opportunistic dumping in which the trespasser takes willful advantage of the trespass. Shell was “not using the leak to effectuate disposal or obtain some other financial gain separate from the failure to remediate the trespass.”

Importantly, Watson did not argue “benefits obtained” should be measured by the oil that flowed through his property. Instead, Watson’s economics expert argued a time-value-of-money theory. (Based on Shell’s cost of cash, plaintiff argued every $1 in remediation was worth over $4 by the time of judgment.)

The court rejected this, reasoning the benefits must be measured by the trespassing activity “itself”: “‘Benefits’ are not ‘obtained’ by reason of a wrongful occupation unless the trespass itself provided the trespasser with a financial or business advantage.” The court gives no further explanation, but it makes sense in view of Cassinos, where the dumping itself was the benefit – not the oil-production of which it happened to be a byproduct.

Leaky wastewater ponds ARE a “benefit” subject to disgorgement: Starrh and Starrh Cotton Growers v. Aera Energy, LLC (2007) 153 Cal.App.4th 583.

The court confirms § 3334 must be broadly construed in Starrh and Starrh Cotton Growers v. Aera Energy, LLC (2007) 153 Cal.App.4th 583. But at the same time, it limits “benefits obtained” to those established by a “direct link” to the trespass.

Evaporation ponds hold some of the “produced water” that is pumped out of the ground with oil. Credit: Todd D’Addario

Aera was a Shell subsidiary operating at Belridge Field in Kern County. Aera stored wastewater in unlined ponds, which polluted the already-poor-quality groundwater of its neighbor’s agricultural land. Aera had alternatives, but they were less efficient than polluting its neighbor’s land.

The trial court concluded the “benefits obtained” were “restricted to costs saved or avoided by the wrongful trespass.” The trial court rejected plaintiff’s argument that § 3334 may also reach Aera’s profits its ultimately enjoyed from the oil-production activities that produced the wastewater.

The Court of Appeal reversed the trial court’s ruling as too narrow. The court held “[t]here is nothing in Civil Code section 3334 or its legislative history to suggest that the phrase “benefits obtained” should be read narrowly.” Provided “there is a direct link between the financial benefit and the trespass,” “‘benefits obtained’ may include profits enjoyed by [the trespasser] that are directly linked to the wrongful trespass.”

Of course, the trial court still must find the benefits are “linked” to the use of the land. The “direct link” requires showing “the profit earned by the trespasser actually was tied to the decision leading to the trespass.” To determine this, it “is not enough to simply measure the profits earned in any given time period or proportion them to a particular part of the trespasser’s business.”

Thus, the court rejected the owner’s argument that, without owner’s land, Aera  “would have to shut down production of its wells and forgo the profits that accompany production.” The court held this “ignores the possibility that not all of the produced [waste]water . . . ended up in Starrh’s [property],” and “also ignores the alternative methods of disposal available to Aera.” “The unquestionable intent in [trespassing] was to maximize profits; however, this does not mean that no profits would be earned if other methods were selected.”

Starrh confirms the victim of trespass or wrongful occupation is entitled to the revenues derived, not just the cost of the alternative available to the wrongdoer. But the amount of the revenues linked to the trespass is a factual question.

Billboard revenues are a “benefit” subject to disgorgement: Bailey v. Outdoor Media Group (2007)

A billboard operated by Lamar Advertising, one of the parties in Civil Code 3334 trespass damages case of Bailey v. OMG
A billboard operated by Lamar Advertising, one of the parties in Civil Code 3334 trespass damages case of Bailey v. OMG

Confirming § 3334 is not limited to toxic-dumping cases, Bailey v. Outdoor Media Group (2007) 155 Cal.App.4th 778 imposed benefits-obtained damages against a trespassing billboard operator, who sold billboards after failing to renegotiate an expired lease. Like the trial court in Starrh, the trial court here chafed at disgorging the defendant’s revenues, and limited plaintiff’s damages to the value of the property.

This was error. The Court of Appeal reversed with instructions to award plaintiff the actual revenues the defendant recovered by wrongfully using plaintiff’s land.

Bailey holds that the benefits obtained were the revenues directly linked to the trespass. The trial court in its discretion may offset expenses, which defendant has the burden to establish by “credible evidence.”

But isn’t it unfair if a trespasser wants to pay a fair price to the owner and the owner simply refuses? Isn’t it unfair if the owner “made it impossible to negotiate” and “made demands that were well beyond any reasonable range”?

Not at all. Bailey:

A trespasser remains in possession of the property at its peril. In other words, if [the trespasser] wanted to reduce its liability to Bailey, it should have vacated the property. [The trespasser] chose to remain in possession and continue to negotiate with Bailey, despite his apparently outrageous demands. Stated bluntly, Bailey was in the catbird seat, and given his superior position, [the trespasser] remained in possession of the property at peril of ultimately being held liable for damages measured under section 3334 by the benefits obtained by reason of its wrongful occupancy.

A wrongful occupier of property, then, has no defense in pointing to the owner’s unreasonable refusal to negotiate.

Conclusion

Three cases do not make a well-developed jurisprudence, but they do provide some guidance how courts are likely to approach disgorgement and unjust enrichment under Civil Code section 3334:

Where the occupation is merely a byproduct of profitable activity and not the profitable activity itself, the plaintiff will have to explain how the profits are directly linked to the wrongful use of the property. In Watson, there was no direct link; in Starrh there was, but not nearly as much as the plaintiff hoped.

But where the occupation is the profitable activity itself, like operating a billboard on plaintiff’s land as in Bailey, the court will order disgorgement of all the occupier’s gains.

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Tim KowalTimothy M. Kowal is a civil litigator specializing in trespass, land use, and business litigation. You can contact Tim at (714) 641-1232 or tkowal@tvalaw.com.
(View more articles by Tim Kowal here.)

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