Federal District Judge Charles Breyer recently dismissed a lawsuit by mortgage lenders challenging the constitutionality of the City of Richmond’s plan to condemn over 600 underwater mortgages, while paying compensation far below market level. Judge Breyer dismissed the case on procedural grounds, because it is not yet “ripe” due to the fact that the city has not yet made a “final” decision to go ahead with the condemnations. Needless to say, this is mostly likely not going to be the end of the legal battle over this plan. When and if the City actually does move forward with the condemnations, the issue will indeed be ripe for adjudication and the holders of the mortgages will be able to attack the various constitutional defects in the plan. I discussed some of them in this USA Today op ed. See also this article by Richard Epstein, which covers a wider range of issues than I did. However, I am far less optimistic than Epstein that the plan will be invalidated on “public use” grounds, so long as Kelo v. City of New London remains in force. I do, however, believe that there is a very strong argument that the plan is unconstitutional under current precedent, because the compensation the city proposes to pay is far below fair market value. […]
The USA Today website just published my column criticizing the Richmond, CA’s plan to condemn mortgages:
The City of Richmond, California is threatening to use eminent domain to condemn over 600 mortgages on homes that are now worth less than the outstanding debt on the mortgages themselves. The city plans to write down the value of the mortgages and transfer most of the value to the current owners of the homes.That’s a move that could have nationwide implications for homeowners and those who aspire to join them if the idea spreads….
Various banks and investors have filed lawsuits arguing that the Richmond policy is unconstitutional. Some of their arguments have merit… Advocates claim that the program will actually pay for itself. But the idea that the city will be able to strip distressed mortgages from one set of owners and sell new smaller mortgages to investors at a profit is speculative at best. If the rosy scenario doesn’t materialize, taxpayers will be left holding the bag; future home buyers will suffer even if it does….
[T]he Richmond takings probably won’t be invalidated because they transfer property to private interests, even though the Constitution only allows takings that are for a “public use.” But Richmond’s plan has another constitutional defect: undercompensation. The Fifth Amendment requires the government to pay “just compensation” when it condemns property, which the Supreme Court has long interpreted as “fair market value.”
The City is offering to pay lenders 80% of the home’s currently assessed value, irrespective of the amount of money still owed on the mortgage, which is often far more than that. For example, if a home is currently worth $200,000 on the open market, and is mortgaged for a total of $400,000, the city would pay lenders $160,000. Even if the owner defaults, the
In an earlier post, I noted that one of the problems with the California City of Richmond’s plan to use eminent domain to condemn mortgages is that taxpayers will have to pay for it. However, some defenders of the plan – such as Mortgage Resolution Partners – the “community advisory” firm that has been hired to organize the plan for the city – claim that “no taxpayer funds will be used in connection with the [p]rogram.”
This claim is hard to credit, given that any time the government condemns property, it must pay fair market value compensation. Therefore, the city of Richmond will have to spend public funds to condemn the mortgages, at least initially. MRP’s position seems to be based on the idea that, after writing down the condemned mortgages, the City will transfer them to investors who put up money to buy the now-reduced loan, thereby offsetting the public funds spent on the taking. As the New York Times explains, the city could take a $400,000 mortgage on a home now valued at $200,000, condemn it while paying only $160,000 in compensation, and then restructure it into a new $190,000 loan that could be sold to private investors. Advocates assume that the city, MRP itself (which is to be paid $4500 per mortgage), and the investors could actually profit from the $30,000 difference.
Unfortunately, there are two serious flaws in this reasoning. First, it assumes that investors really will be eager to purchase the new mortgages at a price that will offset the city’s costs. This is far from certain. The very fact that the city has condemned these mortgages in the first place is likely to lead future investors to be wary of mortgages in this area. After all, the city could resort to eminent […]
A group of bond investors has filed a lawsuit challenging the California City of Richmond’s plan to use eminent domain to condemn mortgages:
Bond investors including Pacific Investment Management Co. and BlackRock Inc. (BLK) are seeking a court order blocking Richmond, California, and Mortgage Resolution Partners LLC from seizing mortgages through eminent domain, saying the initiative would hurt savers and retirees.
The city’s plan is unconstitutional, according to a complaint filed today by mortgage-bond trustees in federal court in San Francisco. The trustees, Wells Fargo & Co. (WFC) and Deutsche Bank AG, were directed to take the action by investors in the debt that also include Jeffrey Gundlach’s DoubleLine Capital LP, said John Ertman, a partner at Ropes & Gray LLP….
The plan advanced last month with Richmond backing offers to buy 624 loans, making it the first city to push the idea so far forward. Those offers would need to be refused before the city could follow through with its mayor’s vow to invoke its potential powers to force sales of the mostly non-delinquent loans, so that homeowners could get their debt balances cut to less than the current values of their properties…
The plan is also discriminatory because it targets only certain loans, the trustees alleged. It violates California and U.S. constitutional protections against impairing private contracts and the taking of private property for public use without just compensation, according to the complaint.
I criticized the Richmond plan on policy grounds here. In a later post, I explained why the plan is likely unconstitutional because the compensation the city proposes to pay falls below the “fair market value” standard required by the Fifth Amendment’s Just Compensation Clause. The news report quoted above seems to say that this is one of the causes of action advanced […]
In my previous post on the the California city of of Richmond’s plan to use eminent domain to condemn underwater mortgages, I noted that the plan is likely to be permissible under the Supreme Court’s decision in Kelo v. City of New London, which says that a taking is for a constitutional “public use,” so long as it might advance some “public purpose” that isn’t “pretextual.” It may well also be permissible under California courts’ lax interpretation of of public use under their state constitution. But I didn’t consider another possible constitutional problem with the Richmond plan: undercompensation [HT: multiple VC readers who have directed my attention to this problem]. When the government condemns private property, the Fifth Amendment requires it to pay “just compensation,” which the Supreme Court has long interpreted as “fair market value.” As Matthew Yglesias sugggests, in many cases the formula used by Richmond would result in compensation below FMV (which is usually defined, roughly, as what the value of the asset in question would be if offered up for sale on the open market).
Here’s the compensation Richmond is offering, as described by the New York Times:
The city is offering to buy the loans at what it considers the fair market value. In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default.
If the home is worth $200,000 on the open market, as in the hypothetical example above, it is likely that the fair market value of the $400,000 mortgage should be at least that much, or close to it. Even if the owner defaults, the lender can recover that […]
To the disappointment of court-watchers, the Supreme Court did not announce any high-profile decisions today. But it did issue a unanimous opinion in Horne v. Department of Agriculture, a notable Takings Clause property rights case. The Hornes are California raisin farmers seeking to challenge the constitutionality of a provision of the Agricultural Marketing Agreement Act of 1937 that requires them to turn over a portion of their raisin crop to the federal government in order to create an artificial scarcity in the market and prop up the price of raisins. They claim that this requirement violates the Takings Clause of the Fifth Amendment, which requires the government to pay “just compensation” whenever private property is “taken for public use” (the Hornes and other growers are not compensated for the expropriated raisins). The Supreme Court today did not rule on the issue of whether the Takings Clause was violated here. But it did unanimously overrule the Ninth Circuit’s decision that federal courts lacked jurisdiction to hear the Takings Clause case in the first place, because the Hornes were required to first pay the massive $483,000 fine imposed by the Agriculture Department, and then pursue various administrative remedies before getting their day in court. As Justice Thomas explains in his opinion for the Court, there were no meaningful alternative remedies available to the Hornes, because all such were closed off by federal statutes. In addition, “when a party raises a constitutional defense to an assessed fine, it would make little sense to require the party to pay the fine in one proceeding and then turn around and sue for recovery of that same money in another proceeding.” He might have added that imposing such a requirement would be a heavy burden on property owners who cannot afford to wait for years […]
How much should the government pay to compensate property owners whose land it has condemned? Legal scholars, jurists, and economists have been debating this issue for centuries. The Supreme Court has interpreted the Fifth Amendment’s value requirement of “just compensation” as requiring “fair market value” compensation – roughly the amount of money that the property could be sold for on the open market. Some critics argue that this standard leads to undercompensation, because many people value their property at higher than the market rate; if you valued your house at the market rate or less, you would probably have sold it already. On the other hand, some economists have argued that even fair market value compensation is too high, because it incentivizes property owners to overinvest in land that is likely to be condemned.
Taiwanese legal scholar Yun-Chien Chang’s new book Private Property and Takings Compensation is an excellent analysis of this longstanding debate. Chang does a first-rate job of assessing a wide range of compensation frameworks put forward by both economists and legal academics. Ultimately, he concludes that fair market value compensation is the least bad available approach, but argues that it should be supplemented with additional “bonus” payments, especially in the case of properties with high “subjective value,” such as homes where the residents have lived for a long time. He also brings to bear a wide range of empirical evidence from US and Taiwanese takings, showing that authorities in both countries tend to undercompensate property owners even relative to the fair market value standard, and that compensation policy is likely influenced by interest group lobbing.
I do have a few reservations about Chang’s analysis. For example, I think he should have included a more extensive discussion of what kinds of characteristics of a property should result in […]
Co-blogger Orin Kerr comments on the Ninth Circuit’s recent decision holding that a Los Angeles policy allowing the seizure of briefly unattended property belonging to the homeless violates the Fourth Amendment’s ban on “unreasonable” seizures. It’s worth noting that the policy also violates the Takings Clause of the Fifth Amendment, which requires government to pay “just compensation” when it takes private property for “public use.”
In this case, the government not only seized the property, but also destroyed it after seizure. Cases going back to the nineteenth and early twentieth centuries hold that government destruction of private property qualifies as a taking requiring just compensation. For example, the government must compensate property owners whose property is destroyed by flooding caused by a government-constructed dam. This is consistent with text and original meaning as well as precedent. An officially authorized seizure of property by government agents without any intention of ever returning it surely qualifies as a taking. And if the property is subsequently destroyed at the order of the state, it surely qualifies as a “public use.” As the Supreme Court put it in an often-cited 1871 case:
It would be a very curious and unsatisfactory result if in construing a provision of constitutional law always understood to have been adopted for protection and security to the rights of the individual as against the government, and which has received the commendation of jurists, statesmen, and commentators as placing the just principles of the common law on that subject beyond the power of ordinary legislation to change or control them, it shall be held that if the government refrains from the absolute conversion of real property to the uses of the public it can destroy its value entirely, can inflict irreparable and permanent injury to any extent, can, in
Famed property scholar Richard Epstein recently wrote an interesting post on an important Just Compensation Clause case that the Supreme Court is now considering whether to take:
[W]hen government [condemns private property] … it must pay just compensation to the landowner for the value of the property taken. That guarantee will, however, surely be eviscerated if the state is free to set compensation below actual value. To avert that evasion, the United States Supreme Court held in 1893 that in condemnation cases, “the compensation must be a full and perfect equivalent for the property taken.” In an 1878 decision, the Court had previously elaborated on this standard as follows: “The inquiry in such cases must be what is the property worth in the market, viewed not merely with reference to the uses to which it is at the time applied, but with reference to the uses to which it is plainly adapted; that is to say, what is it worth from its availability for valuable uses.”
The point here is simple enough. The value of property in all circumstances depends on the future uses to which it can be put. It is those potential uses that determine its value. To measure property values in ways that neglect that future development is to allow the government to take property at bargain prices….
Unfortunately, this lesson has been lost on the New York courts in River Center, LLC v. Dormitory Authority of the State of New York (DASNY) (2010). A petition for certiorari seeking to revisit the restrictive interpretation of the just compensation requirement in that case was filed by Harvard Law Professor Laurence Tribe. To show the broad nature of the appeal, that petition was supported by separate amicus briefs, one signed by former Attorney General Edwin Meese and a second
Among the cases up for consideration at the Supreme Court’s conference on Friday is Arkansas Game & Fish Commission v. United States, which seeks review of an interesting takings case out of the U.S. Court of Appeals for the Federal Circuit. In short, the case concerns whether the temporary flooding of property can constitute a taking for which compensation is required under the Fifth Amendment. A divided panel of the Federal Circuit said no, holding that flooding can only effect a taking if it constitutes “an actual permanent invasion of the land, amounting to an appropriation of and not merely an injury to the property.” As the petitioners and various amici notes, and Judge Newman argued in dissent, this is a difficult holding to square with prior Court decisions that temporary takings can be compensable.
Environmentalist groups are not usually very sympathetic to takings claims. Most such groups adamantly oppose compensation for regulatory takings, often out of fear that a compensation requirement would make environmental regulation too costly. Environmentalists have also been late to consider the potential environmental consequences of eminent domain. This case, however, presents a clear example of how enabling the federal government to evade the Fifth Amendment’s compensation requirement can facilitate environmental harm, and it does so without raising the sorts of regulatory takings claims that typically give environmentalists such fits.
The substantive argument in this case is that the flooding of land is the sort of physical occupation that can constitute a taking, even if it is only temporary. The land at issue in this case is a wildlife management area. The repeated flooding of this land by the U.S. Army Corps of Engineers has caused substantial damage and destroyed valuable wildlife habitat. Were the flooding recognized as a taking — albeit a temporary taking […]
Starr International, a firm headed by former AIG CEO Hank Greenberg, has recently sued the federal government, claiming that some provisions of the 2008 AIG bailout violated AIG shareholders’ constitutional rights (Starr was a major AIG shareholder at the time of the bailout). One of the claims Starr has advanced is that the takeover violated the Takings Clause of the Fifth Amendment by taking various shareholder rights without paying compensation. This claim raises several interesting issues, but on balance I doubt that it will succeed.
Federal courts have long recognized that the Takings Clause applies to intangible property, including shareholder rights. However, Greenberg and Starr must still overcome several other difficult hurdles. First, there can be no taking if the property owner agreed to give up his or her rights to the government voluntarily. In this case, the bailout was approved by AIG’s board. As I understand it, Starr claiming that the board exceeded its legal authority. If they lose that part of their argument, there can be no taking.
If the transfer of rights is held to be involuntary, Starr could easily win if it could show that the takeover destroyed 100% of the value of their rights, as the Court ruled in Lucas v. South Carolina Coastal Council. However, it seems to me unlikely that they can prove any such thing, since the stockholders shares were not completely taken away. Assuming there was no 100% loss of value, the case would be analyzed under the three-factor Penn Central test, which considers 1) the economic impact of the government action on property, 2) the extent to which the government action undermined “investment-backed expectations,” and 3) the character of the government action. Application of the Penn Central test is often imprecise and murky. The bottom line, however, […]
This Friday, I will be speaking at a symposium on judicial takings at Duke Law School, sponsored by the Duke Journal of Constitutional Law and Public Policy. The symposium is open to both students and the public, and the schedule is available here. Among the other participants are leading property and constitutional law scholars such as Richard Epstein, Jedediah Purdy, Nestor Davidson, William Marshall, and Ernest Young.
In today’s Stop the Beach opinion, Justice Scalia (joined by the other three conservatives) criticizes Justice Kennedy for arguing that what Scalia consider “judicial takings” should instead be handled as violation of the Due Process Clause:
The second problem is that we have held for many years (logically or not) that the “liberties” protected by Substantive Due Process do not include economic liberties. See, e.g., Lincoln Fed. Labor Union v. Northwestern Iron & Metal Co., 335 U. S. 525, 536 (1949). [EDITOR: But cf. Schware v. Board of Examiners, 353 U. S. 232 (1957) h/t Tim Sandefur]
The “logically or not” part gets me; Justice Scalia is not a lower court judge. If he think it’s not logical to strictly segregate economic and non-economic rights, he has the power to do something about it.
Imagine, instead, Justice Kennedy writing this sentence in an abortion case, in response to Scalia:
The second problem is that we have held for many years (logically or not) that the “liberties” protected by Substantive Due Process include the right to have an abortion.
Roe has been around for thirty-seven years now, and it’s high time the conservative Justices stop pretending that a decades-old opinion, on which there is huge cultural reliance (as sexual mores have changed in part to reflect the availability of abortion) is somehow less “precedential” than equally bad opinions from the 1930s, 40s, and 50s.
Of course, Scalia does have an answer to this analogy–we should avoid any decision reminiscent of the dreaded “Lochner era”: “Justice Kennedy’s language … propels us back to what is referred to (usually deprecatingly) as “the Lochner era.”
And here’s my response to Scalia, from the second to last paragraph of my forthcoming “Rehabilitating Lochner:”
Lochner serves as a uniquely important negative exemplar of
In recent years, the Supreme Court has addressed many cases on property rights issues. But it has done very little with the Just Compensation Clause of the Fifth Amendment, which requires that owners be compensated when their property is condemned by the government. The longstanding rule has been that owners deserve “fair market value” compensation. Unfortunately, studies show that the government often pays much less than the market value. One of the most egregious examples of such undercompensation is the use of the so-called “undivided fee” rule, which holds that the value of a property must be estimated as if it had just one owner, even if in reality it contains multiple property interests. This leads to severely inadequate compensation for leaseholders who pay below-market rents. The value they get for their below-market leases is not captured in the market value of the property as a whole. In the many states that use the undivided fee rule to estimate compensation, such leaseholders often get little or no compensation for the loss of their property rights. The rule, therefore, grossly undercuts the core principle that all owners of condemned property rights deserve “just compensation” under the Fifth Amendment.
The constitutionality of the undivided fee rule is addressed in the recent case of City of Milwaukee Post No. 2874, Veterans of Foreign Wars v. Redevelopment Authority of the City of Milwaukee. The cert petition is available here. I have written an amicus brief urging the Supreme Court to grant cert, on behalf of the Institute for Justice, the public interest law firm that litigated Kelo v. City of New London and many other major property rights cases.
The facts of VFW (described in greater detail in the cert petition) well exemplify the constitutional flaws of the undivided […]