He Who Lives by the Sword, Dies

        It isn’t every day that we see a case of poetic justice, so we have to cherish those few that do come along. In City of Chicago v. Prologis, 890 N.E.2d 639 (Ill.App. 2008) the city took land for airport expansion, and some of that land lay in an area that was a part of the local village’s existing redevelopment project. As a result, once acquired for the airport, the subject land became publicly owned and was no longer on local tax rolls, so it generated no property taxes. No property taxes – no cash flow to the village – no money with which to service the outstanding bonds that had been issued to finance the redevelopment project. So the bond owners claimed compensation, arguing that their property (their interest in the bonds had been taken).

        The court rejected the claim, and held that these particular bonds did not create a security interest in the subject property. All they did was to provide a right in the bondholders to payment of interest and eventually of principal out of tax revenues, if any, originating in the redevelopment area. The court therefore concluded that what happened here was a frustration of the bondholders’ contractual right to be paid under the terms of the bonds, not a taking of their secured property interest in the taken land.

        We usually think it’s unfortunate when a taking of property causes uncompensated losses by wiping out someone’s reasonable expectation, but in this case we could be persuaded to make an exception. After all, people who invest in redevelopment bonds can be characterized as “vulture investors,” i.e., their benefits are derived from a process that involves eminent domain whereby the property of unoffending people is taken without full and fair compensation, so that ultimately the bondholders profit from the misfortune of others. So it seems to us that it is a touch of poetic justice when such bondholders wind up on the receiving end of the process which they make possible by financong it. Besides, they have the remedy in their own hands: refrain from buying redevelopment bonds that do not create a security interest in the land that is used for redevelopment. Alternatively, they can demand a sufficiently high rate of interest to compensate them for the risk that property within the redevelopment projects (that is acquired with funds generated by the sale of the bonds they buy) may be taken again by another public agency for a real public use. Absent such provisions in the bond indenture it’s a case of what the Romans used to call Sic friature crustum dulce.

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