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Whittemore v. Thompson

Supreme Court of Rhode Island

June 24, 2016

Laurence F. Whittemore, III et al.
David B. Thompson, in his capacity as Tax Assessor for the Town of Westerly. 1

         Washington County Superior Court, WC 11-252, WC 12-105, WC 13-152 Associate Justice Kristin E. Rodgers

          For Plaintiffs: Kelly M. Fracassa, Esq.

          For Defendant: Lauren E. Jones, Esq. Robert S. Thurston, Esq. Matthew T. Oliverio, Esq.

          Present: Suttell, C.J., Goldberg, Flaherty, Robinson, and Indeglia, JJ.[1]


          Paul A. Suttell, Chief Justice

         This case is before the Court on appeal by the defendant, David B. Thompson, tax assessor for the Town of Westerly, from a judgment of the Superior Court in favor of the plaintiffs, Laurence F. Whittemore, III and Kathleen M. Whittemore. The trial justice granted the plaintiffs' three petitions for relief from property tax assessments on their home at 5 Manatuck Avenue (the subject property) for the years 2009, 2010, and 2011. The petitions were consolidated for a nonjury trial and the appeals have also been consolidated. The defendant asserts that the trial justice erred: (1) in failing to dismiss the Whittemores' petitions after finding that the Whittemores did not prove the fair market value of their property; (2) when she rejected the opinions of both parties' experts, but instead devised her own method for determining the fair market value of the property; (3) when she rejected the 2008 appraisals of the property based on a flawed generalization; and (4) in failing to dismiss the third petition challenging the town's 2011 assessment because she erroneously found that the town's appeals forms did not include mandated statutory language. For the reasons set forth in this opinion, we affirm in part and vacate in part the judgment of the Superior Court.

         1 Facts and Travel

         "[I]n this world nothing can be said to be certain, except death and taxes."[2]

         The Whittemores moved quickly when they heard that the property at 5 Manatuck Avenue was going to be listed for sale. Each had spent significant amounts of time in Westerly, both growing up and as adults, bringing their children to Mr. Whittemore's parents' home in the Weekapaug section of town during the summers. In the summer of 2006, at a time when the Whittemores' children were young teenagers, the couple began looking for a property to purchase in the Watch Hill section of Westerly because their children had enjoyed past summers with their friends there. They viewed at least fifteen properties between 2006 and 2008, hoping to find a property that would not require renovation, because they believed they had only a few summers remaining before their children went to college. The Whittemores made offers on two properties, one for $3 million and one for $5 million, but both were rejected by the sellers.

         When their broker alerted them that the property at 5 Manatuck Avenue was going to be listed later in June, the Whittemores jumped at the opportunity to preempt any competition. The house on the property, which was built in 2002, was newer and larger than the other homes they had seen, but it nonetheless fit with the character of the neighborhood. The lot, which was about 100 yards from the beach, was slightly over an acre in size and the two-story house had six bedrooms, six bathrooms, and ocean views from the second floor. The $7.85 million asking price was much higher than the Whittemores had anticipated paying, but they made an offer of $7.1 million because the property was superior to other properties and fit their needs. Mr. Whittemore believed they were offering an amount in excess of the fair market value, but he felt that it was worth the extra expense because, at that time, housing prices had been increasing for many years, and he planned to keep the property in the family.[3] The sellers accepted the Whittemores' offer and they entered into a purchase and sale agreement for the property in June 2008.

         By the fall of 2008, the financial climate had changed radically. The Whittemores initially had planned to finance most of the sale price by liquidating some investment accounts; however, in September 2008, the liquid assets available to the Whittemores, like so many others, had dropped dramatically. As a result, to finance the sale by the agreed closing date, the Whittemores came to a financing arrangement with the sellers, whereby $4 million was financed by the sellers and they paid the remaining $3 million. Shortly thereafter, however, the Whittemores paid off the personal loan obtained from the sellers by securing a loan from Washington Trust Company. To approve the loan, Washington Trust obtained two appraisals, valuing the property at $6.9 million and $6.5 million.

         In 2009, the Town of Westerly Tax Assessor, Charles Vacca, conducted a statutorily mandated townwide revaluation;[4] he reassessed the Whittemores' property at $5, 976, 600 on December 31, 2009 (the effective date), an assessment substantially higher than the assessed value of $5, 260, 900 that the property had when it was purchased by the Whittemores. The Whittemores objected to that assessment and, after an informal meeting with the tax assessor in the spring of 2010, the town agreed to lower the assessment slightly to $5, 905, 000.

         The Whittemores, still dissatisfied with the assessment, hired Stephen McAndrew, a licensed real estate appraiser who had experience in tax appeals. McAndrew filed an "Annual Return" with the tax assessor on behalf of the Whittemores on October 26, 2010, and he filed a formal appeal with the tax assessor the following day. After Vacca denied the appeal, the Whittemores appealed his decision to the board of assessment review. The Whittemores also appealed the 2010 and 2011 assessments, which remained the same amount as the 2009 assessment. Each year, plaintiffs filed an "Annual Return, " but after the March 15 yearly deadline, set forth in G.L. 1956 § 44-5-15. The board denied each appeal, and the Whittemores filed separate petitions in the Superior Court to reduce the tax assessment for each of the three years at issue.

         In April 2013, a three-day trial began in the Superior Court on the three consolidated tax-appeal petitions. The trial justice acknowledged that the petition for appeal from the 2011 tax assessment had been so recently filed that the town had not had the opportunity to answer the petition; as a result, the parties agreed to address the issue of the town's affirmative defense- that the Whittemores had failed to timely file an "Annual Return"-in posttrial briefing. In the prosecution of their case, plaintiffs offered three witnesses: Mr. Whittemore, McAndrew, and Vacca. The defendant called Vacca, Stephen Ferreira, the District Manager of Vision Government Solutions, a company specializing in mass appraisals, and David Thompson, the new town tax assessor.

         Stephen McAndrew's Testimony

         McAndrew testified that he conducted a retrospective appraisal of the property around the end of 2010, to determine its value as of December 31, 2009. In his appraisal, he described the Watch Hill neighborhood as characterized by mini-estates, with many properties being over an acre "with supporting improvements best-termed mansions." McAndrew described the prevailing market conditions as, "[t]he subject neighborhood is reflecting both stabilization and declining values. * * * Values exceeding [$1, 500, 000] are felt to continue to decline. Viewing into the foreseeable future, decline in the area is estimated on an annual basis to be 6%." At trial, McAndrew said that hindsight clarified market trends, but that his conclusion was ultimately the same as in 2010, explaining that values reached a peak in 2005, remained stable until the beginning of 2008, and then showed an "absolutely definable loss in value in the marketplace, " which McAndrew projected to be on an annual basis of about 6 percent, until around 2012, when values began to stabilize. He also testified that, in Watch Hill, the lower-value properties stabilized earlier, but the upper-level property values had not yet done so.

          McAndrew testified that the most accurate method of measuring value is by using the "comparable sales approach, " which he employed in his appraisal of the subject property. Because of the scarcity of sales in the area resulting from the prevailing market conditions, he said that he was required to look beyond Watch Hill to find comparable sales that represented similar locational characteristics, physical attributes, and value. He used three "comparables" in his appraisal, one located in Jamestown, one in Newport, and one in the nearby Shelter Harbor neighborhood of Westerly. He said he believed that all of the properties were in very desirable locations, either near or on the water, and that their sale dates were close to the target appraisal date of December 31, 2009. After making adjustments to the sale values for different locations and amenities, McAndrew determined that the adjusted values of the properties ranged from $4.6 million to $5.1 million, and he concluded that the direct sales method indicated an estimated fair market value of $4.9 million for the subject property.

         McAndrew also discussed several properties in the Watch Hill neighborhood that he decided not to use as comparables. The property at 7 Manatuck Avenue was assessed in 2009 at $6, 498, 200, following a sale of that property on April 18, 2008, for $6 million. He said he chose not to use that property as a comparable for the same reason that he would never use the Whittemores' purchase price as a comparable for other properties; because it was an aggressive price that could not be justified in the market. He explained that he had previously appraised 7 Manatuck Avenue in June 2007, before it was sold, for $4.4 million. Furthermore, the house at 7 Manatuck Avenue was completely rebuilt in September 2009 at a cost of $1.2 million, which, McAndrew testified, created a great deal of speculation about how much value was added by the improvements and reduced its usefulness as a comparable sale.

         There were also three neighboring properties that had not been sold in the relevant time frame, and so McAndrew did not consider them as comparable sales. These properties were: (1) 15 Ocean View Highway, located just two houses away from 5 Manatuck Avenue; (2) 17 Ocean View Highway, immediately adjacent to plaintiffs' property and the property from which 5 Manatuck Avenue was subdivided in 2002; and (3) 8 Manatuck Avenue, located across the street. He noted that the assessment in each of those properties had been reduced in 2009 from its 2006 assessed values.[5] McAndrew believed the reductions resulted both from a reflection of the market downturn and because no improvements were made to the premises during that time. When asked how a review of those three properties affected his opinion of the value of 5 Manatuck Avenue, McAndrew testified, "[it] would tell you, as it's the charge of the assessor to be equitable, that using these neighboring properties, if the trend is down, then * * * the Whittemores' assessment * * * likely should have come down." McAndrew further testified that the increase in the assessed value in 2009 was solely attributed to the sale price because it was not attributed to any improvements after the purchase and was, therefore, "actually unprecedented anywhere."

         Stephen Ferreira's Testimony

         Stephen Ferreira testified for defendant as an expert in mass appraisals and about his direct involvement in the 2009 townwide appraisal. Ferreira explained that the result of a mass appraisal was primarily derived from sales analysis; however, many other factors go into the ultimate assessment. Mass. appraisals, he said, are unique because the process is designed to determine market value of all the property in a town using a consistent, standardized method in an effort to establish equity across the tax base.[6] Ferreira said that he had been involved in townwide appraisals in many municipalities throughout southern Rhode Island and that he believed the Watch Hill neighborhood to be a premier location in the state.

         Ferreira explained that the value of each property is designated by employing several factors, including the size and character of the lot, the level of development and landscaping, the views, etc.[7] The property received an adjustment of 9.99 for the character of the neighborhood because "[t]his is one of the highest neighborhoods in the Westerly program, and so that's giving a weight of essentially ten times the base price." The building value was similarly calculated, using several factors such as the character of its exterior walls, the type of house, number of rooms, number of stories, age, condition, and other amenities.[8]

         The process included a computer analysis of all the sales in Westerly to create a model of property values. Ferreira explained, "[t]he model is derived from the sales, and it's done in a modeling format to ensure that whatever tables are set up can be applied across the [b]oard to the non-sale properties in a consistent way." After statistical analyses are run on the sales, the model can identify "outliers, " either sales where someone got a very good deal or where someone paid more than it was objectively worth. Ferreira testified that outliers were not uncommon in high- end markets because "people will buy homes and completely gut them and redo them to fit their own tastes because they have the finances and ability to do that."

         He confirmed that the sale of 5 Manatuck Avenue for $7.1 million was such an outlier. However, the market in 2009 was difficult to model, he said, because another characteristic of high-end markets was that when the market crashes, as it did in 2008, properties are not put up for sale at the same rate as properties that are in lower value ranges. He said that there were fewer sales in the higher price ranges because people "had the ability to hold onto properties for extended periods of time" and wait until the market recovered. To make up for the insufficient sales data, the assessors had to look at other years, such as sales that occurred in 2008.

         Ferreira agreed with McAndrew's assessment that the 2008 market experienced a 6 percent decline, saying, "I think that's a reasonable number in terms of what was going on in that time period." Yet, he did not apply a 6 percent reduction to everything "because each community is complex, it has different aspects. * * * They're all very different areas, and each one is changing differently based on the market."

         Charles Vacca's Testimony

         Vacca testified that he was responsible for fixing assessments on all of the properties in Westerly and that the town had been required to conduct "revaluations" of all properties every three years since approximately 1998. The applicable statute required full revaluations in 2000 and 2009, involving the inspection and measurement of every property, and statistical updates in 2003 and 2006.[9]

         Vacca testified that a sale is the best indication of property value and that he gives significant weight to sales data in doing assessments. Because the town does revaluations so frequently, Vacca's office tracked sales continuously, receiving each new deed to update the office records on ownership and sales values. He testified about the importance of obtaining information about sales:

"It's incumbent upon an assessor's office to be aware of what transpired basically in every sale if you can possibly do that, and that's what we do. * * * [W]hen you get certain sales as we've talked about as being maybe outliers, we take a step further to find out, you know, what happened in this sale that we might be missing."

         Vacca agreed with McAndrew and Ferreira that a particular problem arises with sales values in the high-end market because some people were willing to spend an exorbitant amount of money to get the exact house they desire. He said that, when a sale is for a vastly greater amount than sales of neighboring properties, it would be unjust to raise neighboring assessments in response to that sale. Vacca testified that, when he met with Mr. Whittemore in April 2010, he was aware that the $7.1 million sales price was extremely high and that an assessment reflecting that sales price would be unfair, but he did not recall investigating the reasons behind the high sale price. He said that his office "recognize[d] that there was activity on Manatuck that we felt as though that the values could be substantiated." He recalled making a slight reduction to the building portion of the assessment after meeting with Mr. Whitemore, but could not remember why he made that adjustment.

         Vacca did not agree with McAndrew's approach of using properties that were beyond the Watch Hill area. He said that this was problematic because those properties could not be reliably used to determine value; he said that he never had looked outside of the Westerly area to assess properties in town. To compensate for the paucity of sales in the area around the time of the 2009 revaluation, Vacca said that he "looked at overall trends that took place, and we obviously looked at the two sales that we had on Manatuck, and we adjusted them." Vacca acknowledged that the sale of 7 Manatuck Avenue was an outlier, based on the fact that it sold for $6 million, substantially more than the $4.9 million assessment, and then the purchasers spent well over $1 million to rebuild the house. When asked why he gave the property at 8 Manatuck Avenue a lower assessment in 2009 than in 2006, Vacca responded that,

"at that point in time I had no waterfront oceanfront sales in the town. * * * [I]n this business, you absolutely need sales to justify your assessment. * * * You still have to defend what you do in value, and we did reduce that; I did not have the sales to defend an $8.8 million sale."

         Vacca then conceded that for each of the properties for which the town lacked comparable sales, his office reduced the assessment from 2006 by about 6 percent, based on a "general decline in the market."

         When asked about the two appraisals obtained by Washington Trust, Vacca said that he did not see them until after the Whittemores initiated their appeals, but that he believed those appraisals supported his assessment. Each appraisal used comparable sales from late 2007 to early 2008, but, on cross-examination, Vacca acknowledged that it was not apparent whether the appraisers made any adjustments for the market downturn by October 2008, when the Washington Trust appraisals were conducted. Vacca noted that several of the sales used in the bank appraisals were problematic. 2 Overlook Drive in Westerly was used as a comparable in both appraisals. Vacca said, "[K]nowing what I know about 2 Overlook and the sale and the circumstances of the sale, I would never have used those in any appraisal." Vacca acknowledged that the use of that property as a comparable skewed the fair market value estimates of both appraisals upward.

          David Thompson's Testimony

         Finally, Thompson, the new assessor, testified as an expert in real estate appraisals. He testified that, although appraisers endeavored to obtain comparable properties with the closest sale date to the date of the appraisal, he considered the date of the sale to be less important than the location of the property. Therefore, he said, he would not have made use of the comparables used by McAndrew in appraising 5 Manatuck Avenue. He said that he did not believe there had been a downturn in the economy in early 2008, and that Mr. Whittemore's own testimony demonstrated that there was a competitive market for high-end homes at the time that he purchased the subject property. However, he conceded that there was a real decline in the market in the fall of 2008 that continued into 2009.

         The Trial Justice's Decision

         The trial justice issued a written decision in December 2013, granting judgment in favor of plaintiffs in all three appeals. In a comprehensive decision, the trial justice discussed the evidence presented in significant detail and noted "that each of the witnesses before the [c]ourt appeared to be credible, prepared, and well-spoken." In analyzing the evidence, however, the trial justice found Vacca's opinion as to the value of plaintiffs' property to be "arbitrary and erroneous." She concluded that plaintiffs had sustained their burden of proving that their property was overvalued by the tax assessor.

         Based on the evidence submitted at trial, the trial justice found that the 2008 collapse of financial markets "stifled the national and state housing markets in general and the upscale Watch Hill market in particular." There was evidence of the decline in market values in the Watch Hill neighborhood from lowered assessments on the three homes in the immediate vicinity of the subject property. She noted that plaintiffs' assessment actually increased by 12.2 percent, "[i]n stark ...

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