Absurd Application of a Stupid Rule is Unconstitutional, Says the Wisconsin Court of Appeals

As Justice Stevens observed recently, the Constitution does not prohibit stupid laws (N.Y. State Board of Elections v. Lopez Torres, 128 S.Ct. 791, 801 (2008)). And Lord knows, there are plenty of those embedded in eminent domain  law. As California’s late Chief Justice Roger Traynor once put it, there are things in the law that have never been cleaned and pressed and might disintegrate if they were. Here is one of them — the so-called “undivided fee” rule.

When a property in which several people have different interests (e.g., fee title, easements, leaseholds, etc.) is valued in eminent domain, conventional judicial wisdom has it that it is to be valued as if owned by one person, with the resulting single lump-sum award divided among the owners of the different interests in a second, apportionmenmt trial. Why that should be so has never been rationally explained. You could say that this rule exemplifies the old saying that “there ain’t no reason for it — it’s just our policy.” But it is a rule of convenience: in most cases it produces pretty much the same result no matter which valuation approach — “undivided fee” rule or the aggregate-of-interests approach — you use. When that occurs, the use of the “undivided fee” rule simplifies trials — at least for the condemnor, not the condemnees who still have to slog through two trials: one to determine value and another one to apportion the lump-sum award.

But this rule can be absurd when the value of a partial interest affects the value of the whole. Moreover, why assume a state of title that is contrary to fact? The absurdity becomes obvious when a leasehold is involved. On the one hand, leased property is usually valued by capitalizing the net cash flow under the lease and adding to it the present value of the landlord’s reversion at the end of the lease. But on the other hand, under the “undivided fee” rule we have to assume that there is no tenant and that the ladlord owns all interests in the building. But if we do that, what are we supposed to capitalize? Are we then supposed to assume that the landlord pays rent to himself?! And if so, how do we determine what that rent would be? And if we somehow conjure up rent other than the contract rent under the lease, wouldn’t we then be valuing, not the subject property, but rather some other, hypothetical building charging fictitious rents conjured up by the appraisers rather than actually charged by the landlord?

The Wisconsin Court of Appeals recently dealt with the “undivided fee” rule in City of Milwaukee Post No. 2874 Veterans iof Foreign Wars v. Redevelopment Authority of the City of Milwaukee (2008) 746 N.W.2d 536, and confronted its absurdity squarely. The property being taken (and valued) was an 11-story hotel building in which the VFW had a rent-prepaid headquarters under a 99-year lease with 60 years remaining, that called for a rent of $1 per year, making the leasehold quite valuable. For reasons that do not appear in the opinion, the jury returned a verdict of zero for the building, and because of the “undivided fee” rule, VFW was not permitted to offer evidence of value of its leasehold interest, and was awarded no compensation whatever for its valuable lease. VFW appealed, protesting the uncompensated confiscation of its leasehold that the court in an earlier opinion noted to be worth $8 million. (671 N.W.2d 717). Held: reversed.

The appellate opinion wended its way through much decisional law, but in the end concluded that the result was so inequitable that an exception in the “undivided fee” rule had to be carved out, and the VFW would have to be permitted on remand to try its case to determine the value of its leasehold.

What makes the “undivided fee” rule really bizarre is that the U.S. Supreme Court has held that this rule cannot trump the principle that, in Justice Holmes’ words, the Constitution deals with people, not with tracts of land, and that “[T]he question is, What has the owner lost?” Boston Chamber of Commerce v. Boston (1910) 217 U.S. 189, 196. Sounds logical to us. If a tenant (like the VFW here) loses its leasehold by eminent domain, why shouldn’t it be paid just compensation for it merely because it is a tenant? So why is Justice Holmes’ wisdom ignored on a large scale in the lower courts which continue to cling to the “undivided fee” rule in eminent domain cases?

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