The Volokh Conspiracy

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 effect, subject it to total destruction without making any compensation, because, in the narrowest sense of that word, it is not taken for the public use. Such a construction would pervert the constitutional provision into a restriction upon the rights of the citizen, as those rights stood at the common law, instead of the government, and make it an authority for invasion of private right under the pretext of the public good, which had no warrant in the laws or practices of our ancestors.

Some court decisions recognize exceptions to this rule, as for example when the armed forces destroy property in time of war for reasons of military necessity. But no such exceptions apply here. The property seized from the homeless people did not pose any threat to public safety and its destruction wasn’t required by any military necessity or similar emergency.

The district court opinion does not make clear whether the property owners have asserted a claim for just compensation. When and if they do, the property owners deserve to win.

This situation is just one of many examples of how, contrary to conventional wisdom, judicial enforcement of constitutional property rights benefits the poor as much or more so than the wealthy. Rarely if ever would local governments engage in comparable uncompensated destruction of property belonging to the wealthy or the middle class.

UPDATE: I would note that, according to filings available on Westlaw, the plaintiffs have apparently filed claims for compensation under various state law causes of action. If they win, they may not be entitled to any additional compensation under the Takings Clause. Be that as it may, it’s worth noting that the Takings Clause also requires compensation in such cases.

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 by myself. This is an issue on which liberal, conservative and libertarian all see eye to eye.

The River Center dispute arose out of the condemnation of a valuable one-block site located in New York City several blocks south of Lincoln Center on New York City’s bustling West Side for a new dormitory for John Jay College... As Tribe wrote in his petition: “The developer at the time of the condemnation had invested years of work and many millions of dollars above the secured debt. By its legal rulings the New York Court has permitted all of this value and all of this investment in a rising market to be taken without compensation. . .”

The technique used to work this governmental sleight of hand was simple. The New York state courts treated this prime real estate site in active development as though it were “vacant land” on the ground that the arduous development progress would not come “to fruition in the near future....”

The New York courts dismissed as “speculative” all of the developer’s work in securing permits, preparing the site, obtaining interim financing and developing a viable marketing plan. That argument might make sense in those cases where there was no market indication of present value. But the real estate market is active in New York City and projects like this are always attractive to private investors who see risky, but large, returns down the road.

One of the few issues on which takings scholars across the political spectrum mostly agree on is that the Just Compensation Clause of the Fifth Amendment requires the government to at least pay market value for condemned property. There is disagreement over whether it should have to pay more than market value to compensate owners for loss of “subjective value” they attach to the property above its market price. But there is a broad consensus that the state should at least pay the market value. That’s why Richard Epstein, Laurence Tribe, and Edwin Meese all agree on this case.

And the market value of any property surely includes expected future uses, including uses that may not be 100% likely to occur. To be sure, the lower the likelihood of the future use, the less the possibility of it happening will add to the market value of the land in question. But that is no justification for excluding potential future uses from the market value calculation entirely.

If New York officials are allowed to get away with such shenanigans, they will be able to strategically time condemnations in order to lowball owners with potentially valuable future projects that have not yet come to fruition.

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 — the Army Corps might be less quick to flood such lands in pursuit of other policy goals.  Undeveloped land, such as wildlife habitat, is already more vulnerable to governmental expropriation than is more developed land because it’s cheaper.  But if the government does not have to pay for the temporary occupation of such land at all, it’s cheaper still.  The Court does not often agree to hear takings cases from the Federal Circuit, but given all the patent cases its heard in the past few years, perhaps it’s time for a slight change of pace.

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, is that the government usually wins, as I discuss in greater detail in this article. I’m no fan of Penn Central myself, both because it is vague and because it provides insufficient protection for property rights. But it seems unlikely that the Court will use this case as the vehicle for changing the test. There is, however, uncertainty about the application of the test to this case, since – as far as I know – federal courts have never applied the test to anything remotely resembling the AIG bailout.

Finally, if Starr proves that there was no voluntary transfer of rights and prevail under Penn Central, they will face one last major challenge: proving that they are entitled to a more than nominal amount of compensation. The standard rule is that a taking entitles the owner to “fair market value” compensation for the loss of their rights. But prior to the bailout, AIG was on the verge of bankruptcy. Therefore, any shareholder rights may have had little or no market value at that point. The rule is that the “fair market value” must be assessed as it existed prior to the taking. So courts will not take account of any additional value added by the bailout. However, I’m no expert on either AIG’s assets in particular or the valuation of stockholder rights more generally. So it’s possible that these rights had greater value than is apparent to me. Experts on corporate law and finance are welcome to weigh in on this point.

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.

The issue of judicial takings was of course recently addressed by the Supreme Court in the Stop the Beach Renourishment case, albeit without any clear decision. I commented on the case here.

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 constitutional error in constitutional law scholarship, op-ed columns and blog posts, and even in Supreme Court decisions. When the Justices (and others) use Lochner this way, as shorthand for what they consider the “activist” sins of their opponents, they are substituting empty rhetoric for meaningful constitutional argument.

Thanks to Josh Blackman for the tip.

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 fee rule. In 1961, a local VFW post in Milwaukee sold a property that it owned. As part of the deal, they retained a 99 year lease on the ground floor of the building at a nominal rent of $1 per year, with an option to renew for a further 99 years. They continued to hold meetings and other functions there. In 2001, the City of Milwaukee decided to condemn the property. But the city refused to pay any compensation to VFW for the loss of its valuable leasehold. In a closely divided 4-3 decision, the Supreme Court of Wisconsin upheld the city’s actions because Wisconsin courts follow the undivided fee rule.

In my view and that of IJ, this application of the rule violates both the general constitutional principle of just compensation, and the Supreme Court’s specific formula regulating compensation for the taking of leaseholds. The latter requires that “[t]he measure of damages is the difference between the value of the use and occupancy of the leasehold for the remainder of the tenant’s term, plus the value of the right to renew [if any] … less the agreed rent which the tenant would pay for such use and occupancy.” United States. v. Petty Motor Co., 327 U.S. 372, 381 (1946). Under that measure, Wisconsin courts estimated that the value of the VFW’s interest was $300,000 or more.

As I explained in detail in Part II of the amicus brief, numerous nonprofit organizations, small businesses, and low-income renters find themselves in the same position as VFW. Many of them have leases with below-market value rents. And property occupied by such groups is often targeted for condemnation under “economic development” takings of the kind the Court upheld in Kelo.

Because of the widespread nature of this problem, and the fact that numerous state supreme courts and federal circuit courts have ruled on the issue without coming to any kind of consensus (see Part I of the amicus brief), I hope that the Supreme Court will agree to hear this important case.

CONFLICT OF INTEREST WATCH: I should note that my work on the IJ amicus brief was pro bono, so this post is not an adjunct to a profit-making venture on my part. This was in fact the pro bono project that helped cause my blogging hiatus.

UPDATE: Property rights mavens and blogosphere aficionados might be interested to know that one of the lawyers for VFW is Gideon Kanner, a highly respected property scholar and litigator, and author of Gideon’s Trumpet, an excellent blog focusing on property issues. Gideon has a post about the case here.

UPDATE #2: the Inverse Condemnation Blog has a summary of another amicus brief supporting VFW filed by the National Association of Home Builders and the Wisconsin Building Association.