Gideon’s Trumpet

In connection with our duties as editor of Just Compensation, it’s our sometimes enlightening and sometimes depressing task to read every reported eminent domain and inverse condemnation opinion handed down by the courts. And to paraphrase the title of that famous old song, folks, nobody knows the drivel we have seen doing that. But interspersed with the familiar judicial dross there are some items that are quite worthwhile — some expound and illuminate law, others discuss interesting factual situations, or appraisal practices. And then there are those rare bits and pieces that just cause you to chuckle. Here is one of them.

In School District No. 12 v. Security Life of Denver Ins. Co., 179 P.3d 1 (Colo.App. 2007) the school district set out to condemn two parcels, A and B. Prudently, the District was not sure whether it could afford both, so it prevailed on the trial ourt to instruct te jury to value parcel A as well as parcel B, and also determine severance damages to parcel B in case the District could only acquire parcel A. So far, so good.

The jury came back with $5,619,240 for parcl A, $1,655, 280 for parcel B, and $2,000,000 in severance damages to parcel B. Say what?! How could the severance damages to parcel B exceed its value? But wait, there’s more. The owners’ lawyers managed to persuade the trial judge that not only was this sverance damages verdict OK, but also — are you ready? — that the jury intended to award the owner both the value of parcel B and the severance damages to it.

It probably won’t come as a surprise to you that on appeal the Colorado Court of Appeals, said “nice try but no cigar,” and reversed. It held that the jury’s verdict was mathematically impossible. The jury had been instructed to find severance damages to parcel B only if the taking was of parcel A alone. But valuing parcel B in its entirety meant that there could be no severance damages to it — it had to be one or the other (a total taking or a partial taking), not both. So the awarding both the value of the entire parcel B as well as severance damages to it was a logical no-no. And so, valuation of parcel B had to be remanded for retrial.

Funny as all this may be, we can’t help but admire the sheer audacity of the owner’s silver-tongued lawyer who persuaded the trial ourt to enter a judgment for $3,655,280 as compensation for a parcel the jury found to be worth only $1,655,280.  As the late, lamented California Supreme Court Justice Otto M. Kaus once put it to a respondent’s lawyer defending clear error of a trial ourt, “Counsel, you won a trick case below, and I hope you enjoyed it while it lasted.” 

In some states the law provides that before you can try your eminent domain case in court you have to go through a proceeding before a non-judicial body of commissioners who determine just compensation for the taking. Then if either party is displeased with that decision, it can appeal to a trial court, demanding a real trial before a judge and jury. In Georgia, this preliminary round takes place in the form of an arbitration before a Special Master appointed by the court.

We often wondered if this procedure was doing much good, or whether it only prolonged and complicated the condemnation proceeding. We now have a partial answer from Georgia in the form of an article bluntly entitled Special Master Bias in Eminent Domain Cases, by S. Alan Aycock and Roy T. Black, respectively a real estate consultant and a professor of business at Emory University. It appears in Volume 33, No. 2, 2008, of the journal Real Estate Isues, at p. 53.

Aycock and Black conclude that on the average, the condemnor’s appraisal comes in at $32,722, the Special Master’s award at $51,304, and the final judicial award to the owner at $177,758. By our calculator, that means that on the average the final award is over five times the condemnor’s appraisal on which the offer is presumably based, and over three times the Special Masterr’s award. Wow!

The cause of it? Aycok and Black think it has to do with what they call the “moral hazard” of special masters being influenced unduly by the fact that they are appointed by Georgia condemnors, or at least with great influence by the condemnor in the selection process.

Aycock and Black thus join other investigators in Utah, Minnesota and California, who have reached similar conclusions with regard to the difference between condemnors’ pre-litigation offers and the outcomes after trial. The locales may vary, but the story appears to be the same: undercompensation is rampant.

     On May 13, 2008, we reported how the defenders of the wretched Kelo decision took to the pages of Right of Way magazine in an ostensible refutation of the facts underlying the Kelo controversy, claiming that the adverse publiity that Kelo received was unwarranted, and was drummed up by a biased press.  See Perception v. Reality: Media Bias in the Reporting of Kelo, by John Brooks and William Busch, Right of Way, May/June 2008. We covered it in our blog The Empire Strikes Back — Sort Of. We are now   pleased to follow up with the report that Scott Bullock, the lawyer who argued Suzette Kelo’s case before the U.S. Supreme ourt has provided a response in the July/August 2008 issue of Right of Way, p. 12, in an article entitled The Truth About Kelo.

Bullock provides a point-by-point refutation of the original article. It’s well worth reading if you have access to Right of Way magazine. According to Bullock, the original article ontained a number of inaccuracies, the most telling of which, in our book at least, was that Brooks and Busch attempted to defend the Kelo taking as being for road widening. Not so, says Bullock — it was for economic redevelopment, just as it appears in the U.S. Supreme ourt opinion.

       All comes to him who waits. Here is an oddity for you. The Sacramento Bee reports that the Sacramento redevelopment agency which had acquired a market is now going to demolish it to make room for — are you ready? — one, count ‘em, one, single family home. The Bee dispatch lacks any details, but that must either be one tiny market, or one hell of a big house. And to make this news item even more tantalizing, the Bee says that the agency plans to build an affordable home. Affordable to whom? The Bee sayeth not. See Niesha Lofing, Market razed so home can be built, Sacramento Bee, July 10, 2008. 

     One of the famous lines in eminent domain law is the Supreme Court’s observation in United States ex rel. TVA v. Powelson, 319 U.S. 266, 280 (1943), that “The law of eminent domain is fashioned out of the conflict between the people’s interest in public projects and the principle of indemnity to the landowner.” That has a  superficial ring of fairness to it, but it actually presented the country with a false choice — there was no such conflict. The government did what it wanted and paid for the land it wanted for its projects.  Even in the Great Depression  that preceded Powelson, the federal government engaged in a huge program of dam construction and had no difficulty paying for their sites. Indeed, the problem was that it built too many dams (see Marc Reisner, “Cadillac Desert” (1993)), and is now facing the problem of having to tear down some of them.

We recently gained an additional insight into the situation upon reading a passage in Jane Jacobs’ book  “Cities and the Wealth of Nations” (1984), 116-117. It turns out that, in fact, the TVA dam construction program generated huge economic benefits and, far from consuming public funds, was immensely profitable to the TVA and also supplied cheap electricity to industry at half the price charged for electricity generated elsewhere. Even after demand for electricity outstripped supplies of power generated by TVA’s hydroelectric dams, and it built additional coal-fired generating plants, it could still offer power to its consumers at a 30% advantage. This attracted industry to the area, and though it did little to improve the lot of rural Tennesseans, it sure was good for industry.

So the moral of it all appears to be that “the people’s interest in public works” was in no peril, that TVA got a huge bargain, and made so much money that it became a leading power-generation giant on  land taken from the local folks whose homes were either razed or inundated by the waters rising behind the newly built TVA dams, and who under prevailing judicial construction of “just compensation” were left undercompensated . TVA’s success also stimulated increased coal strip-mining in the area, that produced the familiar environmental degradation. “The people’s interest”? Perhaps. But it appears that it was the TVA’s economic interest that predominated. But TVA’s great success came at a huge price, and that price was not paid by the government.

      The 24th annual American Law Institute–American Bar Association (ALI-ABA) Land Use Institute will take place this year on August 13-16, 2008, at the Fairmont Copley Plaza Hotel in Boston. The program will cover a variety of topics dealing with substantive as well as procedural and practice aspects of land use issues and problems. It will include updates on the law of eminent domain and inverse condemnation. This has been a consistently successful program that has attracted stellar speakers and has been highly rated by the attendees.

      For detailed information on the speakers and topics, and a copy of the program, contact ALI-ABA, 4025 Chestnut St., Philadelphia, PA 19104, telephone 1-800-CLE-NEWS. On line information is available at www.ALI-ABA.ORG/CP011/

     This program will also be available as a video webcast. For those who cannot attend, audio recordings of the program will be available, as well as the printed program handouts.

The U.S. Court of Federal Claims has ruled in favor of the estate of Wayne Hage who gained fame by his persistent, principled fight against the feds who had been harrassing him and interfering with the operaion of his Nevada ranch, notably by making it practically impossible for Hage to maintain his irrigation ditches, eventually depriving his ranch of water.  The feds ordered that the ditches be maintained with hand tools only, which rendered the maintenance of water supply for Hage’s 7000-acre ranch, plus another 700,000-acre national forest land on which Hage grazed cattle under a federal permit impossible. Later, they fenced the streams serving Hage’s ranch depriving him of the water in which he had a usufructary right under controlling Nevada law. Eventually, they cancelled Hage’s grazing permit, but that was not the source of government liability. The severe interference with Hage’s use of his ranch was.

The action was filed in 1991, and the decision by U.S. Claims Court Judge Loren Smith was handed down on June 9, 2008 — a cool 17 years later. Justice thus may have been delayed, and Hage did not live long enough to enjoy his victory, but it was not altogether denied. Judge Smith ordered the feds to pay $4.2 million, with prejudgment interest which is estimated to add another $4.4 million to the recovery. Also, under federal law, winning plaintiffs in inverse condemnation cases are entitled to recover their attorneys’ fees, but those have not yet been calculated. 

For earlier rounds of this litigation see the U.S. Court of Federal Claims opinions reported at 35 Fed.Cl. 147, 35 Fed.Cl. 237, 42 Fed.Cl. 249, and 52 Fed.Cl. 570. The latest opinion may be found at Estate of Hage v. United States  2008 U.S. Claims Lexis 156.

It’s an enduring verity among economists that there ain’t no such thing as a free lunch. Somebody always has to pay for the benefits we seek. But when it comes to redevelopment, the woods are full of well heeled, high-level hustlers out to make a mega-buck or two at someone else’s expense. How do they do it? Simple. Modern redevelopment rests on two pillars: first, shortchanging the condemnees whose property is taken for redevelopment projects by paying them only partial compensation and acquiring their land on the cheap, and second, issuing tax-free bonds with which to finance the whole private profit-making shebang in the name of “public use.” That’s bad enough under any circumstances but it becomes obscene when the beneficiaries are mega-jillionaires who own professional athletic teams but who come schnorring to cities and get them to finance (read “pay for”) their multi-hundred-million dollar stadiums.

Case in point, the Los Angeles hustle where, in the words of the Los Angeles Times, “State officials . . . earmarked $30 million in voter approved housing bonds for a group with ties to Staples Center owner Philip Anschutz, for sprucing up the street next to his multibillion-dollar entertainment projects in downtown Los Angeles. . . . The funds come from a pot of $2.3 billion that voters gave the state permission to borrow for affordable housing in California.” (Patrick McGreevy, Subsidies May Aid L.A. Live, June 14, 2008, at p. B1). In case you are not a California real estate maven, maybe we should mention that ”affordable housing” in these parts is an oxymoron.

And in New York, we learn from today’s New York Times (Charles V. Bagli, A Question Mark Looms Over 3 Expensive Projects, June 14, 2008, at p. A17), that the promoters of Barclays Center, “expected to be the most expensive arena in the world,” and surprise, surprise, the folks behind the Atlantic Yards project in Brooklyn (see our blog of March 22, 2008,  Another Big Redevelopment Project Down the Tubes?) are getting bent out of shape because — are you ready? — Uncle Sam, meanie that he is, is no longer enamored of letting them finance their multi-hundred-million-dollar stadiums with tax free bonds, and is contemplating new regulations that would make interest on bonds used to finance such projects taxable, the same as interest on all other private bonds. Which means that if Uncle gets his way, the owners of big-league sports stadiums may actually have to pay for their own ball parks. Oh the horror of it!

Not to be outdone by the Brooklynites, the Bronxites are at it too. The New York Yankees, who are building a new stadium on what used to be a park, “are being helped along by hundreds of millions of dollars in taxpayer subsidies, and may be heading back to the public trough for more.” Editorial, Green Thievery in the South Bronx, N.Y. Times, June 14, 2008, at p. A26.  As of now, this caper will save the Yankees a cool $190 million over the 40-year life of their tax free bonds. And how can we leave out the Mets? They have lined up $547.35 million in tax free bonds for their new CitiField stadium, to say nothing of the City’s subsidy of $166.1 million for new parking.

Here is how the redevelopment scam works. Typically, though not always, a would-be redeveloper with connections in City Hall  persuades the city to  declare an area that he covets as “blighted” which it may or may not be. Often, as MIT Professor Bernard Frieden put is, what these guys are after is not genuine blight that is a proper candidate for cleaning up, but rather ”blight that’s right,” meaning an area that is just sufficiently downscale to inspire a colorable claim that it is blighted, but actually is sufficiently upscale so that upon its redevelopment it will be attractive as a site for fancy shopping malls and such.  Then the city redevelopment agency proclaims that the “blight” must be eliminated by acquiring the private property within the project area and reselling it at a subsidized price — or giving it gratis — to the chosen redevelopers. So far, so bad. But it gets worse. All that wheeling and dealing takes money, so the city redevelopment agency issues bonds and uses the proceeds to finance the acquisition of the “blighted” land so the redevelopers — poor babies — don’t have to pay the going market rate for it. Since those are revenue, not general obligation bonds, the city gets to skip any voter approval before issuing them. Neat, eh?

Ah, but if you borrow money, whether your indebtedness is bonded or not, you have to pay it back. Or at least that used to be the theory before the recent orgy of seemingly sane bankers lending huge sums of money to people plainly unable to pay it back, if you’ll pardon a digression.

So to pay off those redevelopment bonds, cities use Incremental Tax Financing, known as TIF. Under this scheme all the property tax revenues in the redevelopment project areas are “frozen” and become the base of future taxation. Actually, nothing is really frozen — property taxes continue to be paid and continue to be raised. What happens is that the increment of those taxes, over and above the “frozen” amount doesn’t go to the usual municipal taxing authorities that pay for schools, fire and police protection, etc., but rather is diverted to the redevelopment agency which then uses that money as a grubstake for redevelopers who get the land they want but don’t have to pay for it themselves as the taxpayers save them that inconvenience.  Your tax dollars at work, as it were.

This is sophisticated stuff, so the general public is largely unaware that this sort of thing goes on. In the meantime, bonded municipal debt accumulates as new redevelopment projects are created. In California that debt went from $5 billion in 1985 to $61 Billion in 2004 — and counting. Someone will have to pay off that debt, and we leave it up to you to figure out who that someone will be — hint: if you’re having problems doing that, look in the mirror. And as long as you are looking in the mirror, guess who gets stuck with the bill when a redevelopment project fails and is unable to pay its debts?

And as these rivers of public funds are diverted from publicly beneficial expenditures into the pockets of redevelopers, redevelopment agency lawyers (and condemnors’ lawyers generally) are in court, whining to sympathetic judges (who are often former government lawyers themselves) that, gee golly, Your Honors, we just plumb can’t afford to pay property owners whose land is taken, full compensation for all their demonstrable economic lossess, because if we do that it will be curtains for the civilized society as we know it, or at least, as the California Supreme Court once absurdly put it, an embargo will have to be declared on desirable public projects. And so it goes.

So you may agree with Milton Friedman that there is no such thing as a free lunch, but the big boys in the redevelopment game know better — at least the lunch is free for them. As for you, the revealed wisdom from on high is for you to keep your mouth shut and pay your taxes — which, as the ongoing campaign rhetoric has it,  the forces of “change” can’t wait to increase. And that folks, is what the U.S. Supreme Court calls a “public benefit.”

Have a nice day.

Update. If you are interested in the details of TIF financing in redevelopment, see a new article by Alan Woolever, Tax Increment Financing, Government Grants, and Developer Tax Consequences: An Analysis of Statutes, Regulations, Case Law and Related Policy Considerations, 40 The Urban Lawyer 299 (2008). It turns out that redevelopers not only get to enjoy a free lunch vis a vis the condemnees and the hapless city inhabitants who rarely know what is going on, but they also get a break from Uncle Sam. Their city grants may be excludable from income when the time comes to pay federal income taxes. How sweet it is! 

“This case involves a problem which has plagued the judiciary of this state for some time without satisfactory resolution,” said the Missouri Supreme Court.  It was nice to hear that at long last the court recognized “the problem” and decided to do something about it, but their Lordships still don’t appear to understand that the problem is not theirs — it’s a problem of the affected — or more accurately, afflicted — property owners, and that it should have been addressed decades ago. 

Condemnation blight – what happens to city areas that have been designated for government acquisition, has been with us for a long time, and has historically been plaguing the affected property owners. When the government designates an area for acquisition, tenants depart, leaving behind vacant structures, and no new tenants can be secured since few people are willing to move into an area from which they are about to be evicted. This goes in spades for businesses whose owners realize that in the coming condemnation action they won’t be compensated for their business losses. As a result, vacancies rise, maintenance levels decline and the municipal designation of blight becomes a self-fulfilling prophecy. Some structures are abandoned, and others are sold to the cities which have been known to leave them unoccupied, making them a magnet for transients and vandals. To make things worse, some cities have harassed the owners in targeted areas with a rash of inspections and charges of building code violations, some going so far as to deny buildng permits, so that the hapless property owners would be charged with building code violations but rendered unable to make the needed repairs. Back in the 1960s, in the Midwest, there were even cases in which cities withheld trash pickup and police protection from the targeted areas. Then, if and when the cities finally got around to condemning those properties, they sought to acquire them at their municipally-depressed values. To the courts’ everlasting shame, at times this was permitted.

It all came to a head in 1964 in Detroit where, in the celebrated Foster cases (see Foster v. Herley, 330 F.2d 87 (6th Cir. 1964)), the federal courts said “Enough!” and created a right of action for de facto takings that can result from such municipal activities. Other jurisdictions followed suit but there were a few holdouts, Missouri among them. Now, it appears that the Missouri Supreme Court, usually a court that is not hospitable to the plight of condemnees, has entered the fray and for once has come down on the side of the abused property owners.  It’s about time.

In Clay County Realty Co. v. City of Gladstone, Mo. Supreme Ct. Docket No. SC88924, decided on June 10, 2008, the court joined the growing trend and held that the abused property owners do have a cause of action for just compensation against the city for its blighting activities. It this case the city declared the subject area blighted in 2003, but failed to make a deal with a redeveloper. So it tried again in 2005 when it again declared the area blighted, but never approved a Tax Increment Financing (TIF) project and never completed the condemnation of the “blighted” properties. Unsurprisingly, this resulted in a departure of tenants from the subject property (a shopping center), and a loss of rents. And oh yes, it was also alleged that the city harassed the owners with charges of code violations and interfered with their ability to attract new tenants. Where have we heard that one before?

When the owners sued, the Missouri Supreme Court, in a somewhat grudging opinion, conceded that what it called “aggravated delay” in acquisition of properties declared to be blighted, or other “untoward activity” in instituting the condemnation proceedings, can give rise to an action in inverse condemnation by the affected owners. These owners need not wait until the filing of condemnation proceedings to make their claim, but can take the initiative and sue when the proscribed municipal activities reach the level of unreasonableness.

The bottom line of it all is that the cost of uncertainties and delays in municipal acquisition of property have to fall somewhere, and though in the nature of things, some of them — but only some — may have to fall on the affected owners, when they reach a certain point they should properly fall on the city which is the party that (a) is responsible for them, (b) stands to gain from them, and (c) has the ability to spread the cost on the community that is said to benefit form them. It’s an old maxim of jurisprudence that he who takes the benefit should bear the burden. That shouldn’t be such a big deal, should it?

So here is our message to the Missouri Supreme Court: Welcome to the 20th century, guys. What took you so long?

Two postscripts. First, this case contains a comprehensive collection of case law dealing with this problem, which should be handy for practitioners. Second, if you want to read up on the legal principles underlying the problem of blight, we recommend Gideon Kanner, Condemnation Blight: Just How Just Is Just Compensation? 48 Notre Dame Law Review 765 (1973). It’s an oldie but goodie.

There is a new book out that, though of primary interst to Colorado eminent domain practitioners, should make a handy reference in any specialized law library. It is written by  Leslie A. Fields, an experienced practicing eminent domain lawyer in Denver. It is entitled COLORADO EMINENT DOMAIN PRACTICE (Bradford Publishing Co. 2007), and contains 263 pages including text, sample forms, tables and an index.  ISBN 978-1-932779-56-1.

Check it out.