Monthly Archives: July 2012

New Haven — Wrongheaded Then, Wrongheaded Now

The New York Times brings the news that New Haven, Connecticut — that wonderful state that gave us the Kelo case as well as the Bridgeport and Hartford redevelopment disasters — has seen the light. Yes indeed, brothers and sisters, they have seen the light! It finally dawned on them that when they built freeways, starting in the 1950s, in order to make downtown and its businesses readily accessible to suburbanites coming into the city in order to shop there, that also made the suburbs more accessible to city dwellers who, being no dummies, moved to the suburbs, where housing and life in genersl were better, and they used those freeways as a convenient way to reach their city employment. See C.J. Hughes, Righting a Highway’s Wrongs, N.Y. Times, July 18, 2012, at p. B5. Click here.  But retailers, likewise no dummies, then moved their businesses out to the suburbs (where their customers now lived), thus bringing about the now sadly familiar ruination of older cities, as suburbanites increasingly lived, shopped and paid taxes in the suburbs, using those freeways to get to work, and at the end of the day heading for home, leaving behind empty city streets.

To digress for a moment, no one that we know of foresaw this calamity, except for Detroit’s then Mayor, Edward J. Jeffries who in testimony before a congressional committee in the 1940s expressed his concern that construction of freeways linking city centers to suburbs, would also link suburbs to city centers, and motivate urban dwellers to head out and become commuters, leading eventually to abandonment and ruination of cities. Which is just what happened, particularly in Detroit. So Hizzoner may have been prescient and rightly concerned, but he tooks the feds’ money anyway, and spent it on the very freeways that he foresaw as Detroit’s “ruination.”

Anyway, to get back to the New Haven dispatch,  having realized what they had done, and evidently figuring that better late than never, New Haven highway builders have announced — what else? — the construction of another (this time sunken) freeway segment, with a platform above it, on which — disregarding the worrisome fact that “details are still being worked out,” there would be built  “streets, sidewalks and buildings.” This would also restore a direct connection to an area severed by the original freeway. As usual, pedestrian-friendly ambiance is being prognosticated. But get this: “The [new] highway will have fewer exits into the city and will lead directly into parking garages.” Will that work? Will New Haven suburbanites relish getting into cars in their own suburban garages, and exiting in a municipal garage in town, hoofing it in summer heat and winter frost to their city destination? Some no doubt will. But will enough of them do so to justify this caper? We shall see. We wish those folks luck, but we note that critics of the project worry that it “doesn’t call for enough apartments or the kind of stores that stay open late enough to create lasting streetfront vitality,” and thereby attract enough inhabitants — as opposed to in-and-out suburbanites, and restore urban vitality that is essential to a healthy city.

 

High Speed Railroad (Con’t.)

Comes now word from Sacramento that Governor Jerry Brown has signed the bill providing for funding the construction of the initial segment of the proposed California high-speed railroad. It authorizes $2.6 billion in bonds to fund construction of the railroad’s first segment in the Central Valley, and another $1.9 in such bonds for other, local railroad improvements (Brown’s consent to the latter was evidently the political price he had to pay for getting this legislation passed). No word on what the interest rate will be on those bonds. Jerry Brown Signs California High-Speed Rail Bill, sacbee.com, July 16, 2012 — click here.

Cute political touch: The signing ceremony took place in Los Angeles — at the Union Station, what else? and will be repeated in the Bay area. But not in the Central Valley where opposition to the high-speed choo-choo is intense.

Land-Use Law; As She Is Practiced in California

Herewith, an exchange between California practitioners, that is too good not to share. The underlying basic subject started as a discussion of land-use corruption in Florida (which is sort of an industry over there). The participants were land-use lawyers from all over the country, discussing stuff for an upcoming CLE program, when one of the folks involved, Robert I. McMurry who practices in Santa Monica, an experienced, first-rate land-use lawyer who happens to be a former star student of your faithful servant, offered the following observation:

“Please understand that at least in California and I suspect in many of your jurisdictions this kind of ethics abuse is more endemic than exceptional.  I have worked in all three jurisdictions – Bell, Vernon and Cudahy – which Michael and Gideon have kept you updated on for the past several years in our efforts to keep pace with Florida in the highly competitive Corruption Derby.  In each case, while some of the specific allegation later made public were interesting news – resealing absentee ballots  is a new low –  I knew the level of corruption, the manner in which it was conducted, and in most cases who orchestrated it  (since I met with many of them)  and so did most people in the real estate business.  In one city the planning commission occasionally held “rump sessions” (and yes the pun was multi-intentional) at the Spearmint Rhino, an adult sex club whose ads always featured full bodied and full lipped women, during which the serious  business of exchanging favors/cash took place, followed by an adjournment to the actual city meeting at which the “deals “ were memorialized.  It was no secret how land use permits were handled in that town but no one ever blew any whistles for decades.  (Their justification for holding the meetings at the Rhino was that no one could ever provide the press or a court details about what got done there without admitting they had been at the Rhino at the time.)

“My point is that this stuff is commonplace and tolerated, if not accepted practice, in many cities in California.  The “in people” know all about it and so does the press and the DAs and the key  businessmen  in town.  And except in cases where somebody got hooked by accident and the press decided it was time run a scandal about local land use practices (Gideon and I triggered one that landed on the front page of the LA Times), nothing ever happened.   And nothing ever will.  It is the nature of local people running a process which generates a  lot of potential value for people who will make sure it inures to their benefit.  So let’s not pretend like Capt. Reynaud that we are shocked – shocked! – that there is gambling [going on in Rick’s saloon].  It is how business is done in many cases and in many jurisdictions.  So let’s not kid ourselves by tut-tutting  around articles about astounding local land use scandals.  They are the tip of the iceberg and we all know it, and which part of the iceberg becomes the tip at any given point is largely random.  (For example the city in which I got paid good  money to attend sessions at the Rhino – my client knew very well what he was being billed for and where – and which has a level of corruption several times larger than Cudahy at least in terms of dollars, is still in full business and undisturbed by any but the occasional article about its land use practices.   If you want to complain that I should have brought these corrupt practices to light you have a good point which we can debate in our ethics seminar – evil continues to exists when good people say nothing, yes?  Not that I can qualify;  I went on to represent the city instead.)”

To which we added our own response:

 “I thought I should mention for the record that in the case Mac refers to (where the two of us worked together), to the best of my knowledge we were on the good guys’ side. The scandal consisted of an LA City councilwoman blowing her cool in a deposition and mouthing off graphically about improper conduct in conducting city affairs. Sufficiently colorful to attract big-time attention of the local press, compleat with extensive quotations from the deposition. Fun was had. It cost her her seat in the next election. You can read all about it in McMurry & Kanner, Shootout at Warner Ridge, Los Angeles Lawyer, Jan. 1995, at 24. This was a cover story with a handsome picture of Mac (in an elegant double-breasted suit yet), as well as your faithful servant in his modest but tasteful professorial tweeds, and by today’s standards, in need of a haircut. If you’re interested, you may also want to see Warner Ridge Associates v. City of Los Angeles, 3 Cal.Rptr.2d 306 (1991) (ordered depublished by the California Supreme Court), affirming the trial court’s issuance of a writ of mandate. As for the inverse condemnation cause of action, the trial court granted summary judgment against the city, an event that precipitated prompt settlement.
“I am reliably informed that after years of litigation, a wasteful expenditure of gazillions of dollars, etc., the Warner Ridge property was eventually developed in a way the developer wanted it developed in the first place, which by an odd coincidence was as zoned when the whole kerfuffle started. Your tax money at work.

To which Mac added the following comment:

“All true, including Gideon’s haircut (his last haircut was for the Agins case in 1980; I again wore a tasteful suit). The developer (who went broke), the financing entity (which lost $40 million), and the city councilmember all bit the dust before it was all over, the City of LA had to revise its zoning code, and the project was sold to another developer who later  hired [my firm] again and made a fortune on the last version of the project but then went broke financing Arnold Schwarzenegger movies.

“And that is what happens when you win a land use case [in la-la land].”

Welcome to la-la land , folks.

A Really Big “Big Dig”

As our regular readers know, we often take a sceptical view of government estimates of the cost of public projects. We were sensitized to this subject way back in 1966 when we read an article by Joseph C. Houghteling, entitled Confessions of a Highway Commissioner, in the Spring 1966 issue of CRY CALIFORNIA, at p. 29, in which he revealed that the cost of California highways was on average “32 percent above estimates, most of the increment coming from additional right-of-way costs.” Bear in mind that this hefty cost overage was paid in spite of the fact that then as now, many offers for land acquisition were of the lowball variety, and even though, at least in those days, some 90% of land owners in the path of new freeways accepted Division of Highway offers without litigation and without so much as hiring a lawyer.

Over the years we have kept track of such stuff and learned that underpayment was par for the course, as revealed in congressional hearings of the 1960s. Since then studies have shown the same thing in California (again), Minnesota, Utah and Georgia. For some of such stuff in California see 40 Loyola L.A. L. Rev. at pp. 1146-1148; it will give you an idea of how large condemnors’ underestimates of the cost of right-of-way acquisition can be.

But now the record has been set by the “Big Dig,” the underground freeway tunnel system in Boston. “Big Dig” was originally estimated in 1998 to cost $2.8 billion (in 1982 dollars). Nice try. By the time the project was completed, the cost came to $14.6 billion (in  1982 dollars) , after allowing $$6.0 billion for inflation. The cost of the tunnel came to $14.5 billion (of which $7 billion came from the feds). Current estimates by the House Committee on Post Audit & Oversight indicate that interest on the bonds that had to be issued to finance this project is running at $100 million per year and over the life of the bonds will come to $21 billion.

Your tax money at work.

For the story go to boston.com of July 7, 2012, Eric Moskowitz, True Cost of Big Dig Exceeds $24 Billion With Interest, Officials Determine. Click here.

Airports — The Good Old Days Are Gone.

The New York Times of July 10, 2012, Jane L. Levere, Vacancies at the Airport, reports that smaller airports — such as St. Louis, Cincinnati, and Oakland — have been experiencing a decline in airline traffic. Ditto for the Los Angeles area Ontario airport. Which is a big problem because airports rely to a large extent on landing fees paid by airlines, parking fees paid by air travelers, and concession fees, all of which decline as air traffic declines. But even so, airline terminals have to be maintained, whether used or just sitting empty. Not good.

Airlines increasingly tend to concentrate on larger hubs and are abandoning the smaller ones.

Housing Shortage in Detroit? Did They Say “Detroit”?

Citiwire.com of June 30, 2012, reports that — believe it or not — there is a shortage of housing in Detroit — rental housing, that is. Evidently, the still habitable multiple-unit housing stock is in demand by young people who are moving in and want cheap rental housing, so the availablility of $75,000 good homes in stable areas is of no interest to them. They want to rent because in spite of a few positive developments there isn’t much confidence in Detroit’s future. Still, Quicken Loans, Blue Cross, and Compuware have moved some 9000 employees into Detroit, and these folks have to live somewhere. Click on http://citiwire.net/columns/housing-shortages-in-detroit/

What’s With All the Chatter About Eminent Domain Takings of “Underwater” Mortgages?

If you follow news about eminent domain on line, and of late in the press, you surely must know about the proposal of some San Francisco investors to use the power of eminent domain to take “underwater” mortgages at their actual fair market value, not their nominal value. They would then (a) write them down and make them available in lower amounts to the people who own the “underwater” homes that are security for those mortgages, and then (b) bundle them into new marketable securities (bonds) and sell those to investors at a profit. Most of the on-line chatter has dealt with the question whether this would be a constitutionally permissible “public use,” and not without reason. While you may think that given the Kelo holding, anything goes as far as the courts are concerned, that may not be necessarily so.

The adverse reaction to Kelo has come not only from the people, but also from a number of state courts who evidently believe that SCOTUS has gone too far. Thus, the supreme courts of Michigan, Illinois, Ohio, South Carolina, and Oklahoma have taken the position that redevelopment-style takings intended to transfer private property from its rightful owners to other private parties, in the hope that the new owners will put them to a more profitable use and thereby improve the community’s economic condition, do not meet the criteria of constitutionally permitted “public use” under their respective state constitutions. In other words, these courts evidently think that rdevelopment should primarily redevelop communities, not make money for redevelopers.

Also, the huge negative reaction to Kelo (some 90% of respondents held a negative view of that SCOTUS decision) may give appellate judges second thoughts. After all, shortly after Kelo came down,  Justice John Paul Stevens, the author of the majority opinion, noted in a speech to the Nevada Bar Association that on some SCOTUS decisions the court should take a “mulligan,” and a justice of the Connecticu Supreme Court has apologized to Susette Kelo in public. So, assuming a modicum of decency on the part of state appellate judges, there may be some second thoughts developing among them on how expansively the power of eminent domain should be interpreted in future cases.

Our crystal ball doesn’t work well enough to plumb this mystery, but it does not seem unreasonable to suppose that the justices may, just may, be thinking about a doctrinally and politically convenient way to curb the excesses of eminent domain law, without having to eat crow in public. And what better vehicle for doing that than saying “No” to a group of unsympathetic high flying financiers who want to harness the government’s power of eminent domain for their own financial gain?

The proposal for this newfangled application of the power of eminent domain is (at least at this time) aimed only at taking mortgages that are performing; i.e., mortgages on homes whose owners, though “underwater,” continue to make payments on their loans, so that everybody involved is content to continue the status quo. Which is another way of saying that what these guys are after is low-hanging fruit. So we will have to wait and see if they go ahead with this scheme, and if so, how it turns out. Remember that under existing constitutional law, it’s OK if the taking benefits private parties, provided such benefit is incidental to the public purpose. Here, that is not clear and it may be difficult to say whether the “incidental benefit” tail is wagging the “public use” dog.

But to us, the real problem is valuation. How do you value an “underwater” mortgage that is bundled with other mortgages which together form securirty for a bond? How will such a taking affect the value of the bond that will, after such a taking, be secured by fewer (and lower quality) mortgages than those in the original bundle? Sounds like the bondholders would be entitled to severance damages when the taking of part of their security diminishes the value of the remainder.

And of course, the market value of the  performing mortgages that have been targeted by this scheme, may not be as depressed as some folks think. A home financed by such a mortgage may be “underwater,” but a performing mortgage still produces a steady cash flow, so that if capitalized, it may indicate a higher value than the house using it as security for the purchase loan.

So we will just have to stay tuned and see how it all turns out.

Eminent Domain and the Obamacare Decision

 

After reading the above title you may think that in juxtaposing these two topics your faithful servant  has gone bonkers. But actually, this is only an illustration of our theory that there appears to be an eminent domain angle to just about everything, as demonstrated by Justice Ruth Bader Ginsburg’s concurring opinion in the Obamacare case (National Federation of Independent Businesses v. Sebelius, No. 11-393). There, at pp. 24-25 of the slip opinion she invokes the law of eminent domain, and explains that “this Court . . . upheld Congress’ authority under the commerce clause to compel an ‘inactive’ landholder to submit to an unwanted sale,” citing the Monongahela case (148 U.S. 312) which involved the condemnation of locks and dams on the Monongahela River in aid of navigation. we have no idea what “inactive” land owners are and how their “inactivity” makes them a proper target of eminent domain, as opposed to other, “active” land owners. And to rise in defense of the English language, Justice Ginsburg’s phrasing is rather strange. Why call a forcible eminent domain taking an “unwanted sale”? That’s like calling forcible rape an act of “unwanted love-making.”

To get back to the Obamacare fiasco, the Chief Justice corrected Justice Ginsburg, noting in footnote 5 of his majority opinion that “The fact that the Fifth Amendment requires the payment of just compensation when the Government exercises its power of eminent domain does not turn the taking into a commercial transaction between the landowner and the Government, let alone a government-compelled transaction between the landowner and a third party.” That sounds right. The use of eminent domain is an exercise of an inherent sovereign government power, not a “commercial transaction,” even if private parties, notably railroads and public utilities, and even individuals may exercise it for public uses when it is legislatively delegated to them. Civil Code § 1001.

Also strange is Justice Ginsburg’s assertion that “Congress has the authority to mandate the sale of real property to the Government, where the sale is essential to the improvement of a navigable waterway.” Emphasis added. “Essential?” Not really. At least since Bragg v. Weaver, 251 U.S. 57, 59 (1919) considerations of necessity have not been a part of the federal law of eminent domain. And in states that do have a statutory necessity requirement, it is largely hortatory — the generally prevailing rule is that necessity for a taking is not subject to judicial review, absent fraud on the part of the condemnor. Judges’ justification for such deference is that they lack institutional competence to pass judgment on the technical decisions establishing the need for a public project, its design, its location, its cost, how much land should be taken for it, and whether (to use statutory language) the project is most compatible with the greatest public good and least private injury — see Cal. Code Civ. Proc. § 1245.230(a)(2). For a good exposition of judicial thinking behind this rule, such as it is, see City of Chicago v. St. John’s United Church, 935 N.E.2d 1158, 1171 (Ill.App. 2010) (judicial review of necessity would lead to “interminable delays.”

Paradoxically, when it comes to reviewing public necessity for takings in the exceptional cases in which it is subject to review, such as, for example, in extraterritorial condemnations, judges display no such inhibitions. See City of Los Angeles v. Keck, 14 Cal.App.3d 920 (1971) (striking down the city’s determination of necessity and chewing it out for wasting public funds). Ditto in environmental law cases, where judges freely review, overturn, and generally pass judgment on the soundness of technical decisions of this kind. See the “interminable” litigation over the Century Freeway in Los Angeles – check out how many reported federal cases captioned Keith v. Volpe there are. But somehow judges are unable to do that in eminent domain. Odd, isn’t it?

In California, necessity for eminent domain takings used to be altogether nonjusticiable, even where the condemnation resolution was procured by fraud, bad faith and abuse of discretion. People v. Chevalier, 52 Cal.2d 299 (1959). Why the generally fair-minded California Supreme Court would embrace such a harsh and immoral rule has always puzzled us, but that’s the way it was until 1976 when an indignant legislature – incensed when it learned from the Law Revision Commission that courts had ascribed to it the intent to shield government fraud from judicial review — repealed the Chevalier rule and established “gross abuse of discretion” or bribery as proper criteria for challenging the validity of a condemnor’s necessity determination. Code Civ. Proc. § 1245.255(b), and § 1245.270.

But we were supposed to be talking about the Obamacare case, weren’t we? Actually, we leave the task of substantive kibbitzing to the intellectual grandees who comprise the credentialed commentariat and have been falling all over themselves in print, on the air and on the internet, instructing the Great Unwashed in the mysteries of Supreme Court politics and jurisprudence — or jurisimprudence, as the case may be — and explaining at length why a creature that looks like a duck, waddles like a duck, and quacks like a duck is (or perhaps is not) an ostrich, or why losing a big landmark case is a great strategic victory. Our concern is primarily with policy: the court bent over backwards to add a dollop of grease to the skids on which this deficit-ridden country is sliding down toward insolvency or runaway inflation. And we remain unimpressed by judicial protestations that the judges are only interpreting the law as written by the legislature. In this case, the law upheld in a 5 to 4 decision, was not the one the legislature thought it was enacting. The fact is that disclaimers notwithstanding, judges frequently do use policy considerations in making their decisions, so the old ”Let justice be done though the heavens fall” shtick is hard to take at face value. The California Supreme Court made no bones over the fact that “[i]f the question is one of first impression [the] answer depends chiefly upon matters of policy, a factor the nature of which, although at times discussed by the courts, is usually left undisclosed.” Bacich v. Board of Control, 23 Cal.2d 343, 350 (1943). Would you believe Bacich was an eminent domain case?

Besides, another problem with this evasion of responsibility for the consequences of judicial handiwork is that at the rate the country is sliding into uncontrollable debt, one of these days the governmental heavens will fall and when they do it won’t be pretty for any of us. And that includes the courts that are experiencing economic pain as the folly of past government (and judicial) policy decisions regarding housing and land-use has been revealed as deeply implicated in precipitating a statewide fiscal storm that threatens imminent government insolvency, and is devastating California’s judicial budgets even as we write.

But policy is not everything, and we do have a doctrinal question stimulated by the Obamacare decision. Why is it that in eminent domain law, when Congress determines what is a ”public use,” that determination is deemed ”well-nigh conclusive,” and as such binding on the judiciary if it is merely “rationally related to the conceivable,” whereas in this case, repeated, explicit legislative and executive declarations that the intention of the law was to impose a penalty, not a tax, on those who fail to buy health insurance, can be disregarded by the court and blithely recharacterized as a tax? Why the dramatic difference in the deference to legislative determination? Could that have been a judicial policy choice rather than adherence to black-letter law? And whatever happened to the primacy of legislative intent in statutory construction?

To conclude where we started – commenting on the eminent domain aspects of this fiasco – Justice Ginsburg’s doctrinal misadventure only illustrates why we have been reluctantly driven to the conclusion that when the Supreme Court touches the subject of takings — whether in the form of direct or inverse condemnation — it tends to exhibit a reverse Midas touch: it messes things up. Similar views are held in surprisingly high places, nor is takings law the only subject thus to suffer at the hands of the Magnificent Nine. A letter to the editor in the New York Times of June 30, 2012, quotes none other than “the renowned tax law professor and practitioner,” Martin D. Ginsburg, who happens to be the husband of Justice Ginsburg, as saying, “Every time the Supreme Court touches the tax law, they crumb [sic] it up.” Welcome to the club, Mr. Ginsburg.

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Note: This post, in edited form, was published in the Los Angeles Daily Journal of June 28, 2012.

What Do You Know? They Do Respect Private Property in California

First of all, we want to assure our readers that we are not making this up. The Los Angeles Times reports that at long last city crews launched a cleanup of sidewalks in the skid row area of downtown Los Angeles. Alexandra Zavis, Skid Row Is Tons Cleaner After Sweep, L.A. Times, July 10, 2012, at p. AA4.

“Hundreds of hypodermic needles, gallons of human waste and numerous dead rats. These were among the items cleared from streets and sidewalks of Los Angeles skid row neighborhood during a 13-day sweep . . .”

“In all, nearly five tons of trash and more than 81 cubic yards of wastewater were collected from six miles of roadway and sidewalks [in the downtown skid row area] . . .”

This included “278 hypodermic needles, 94 syringes, 60 razor blades, 10 knives, 11 items of drug paraphernalia and a stash of marijuana.”

So you might ask why in the world would city sanitation folks allow this stuff to accumulate in such quantities? Answer: because of our great respect for private property, don’t you know.

“City officials had said cleaning crews were hampered by a federal court injunction last year that placed limits on the removal of items left unattended on skid row sidewalks. Residents had complained that their property was seized while they used a restroom, filled water jugs or appeared in court.”

This, folks, is a quintessentially la-la land story. Try to build something useful on your vacant land and you will learn in short order that if local government minions won’t let you, you have no property rights, certainly not in local federal courts in which, as one of their Lordships once put it, your property rights are viewed with thinly-veiled contempt. But leave your syringes, razor blades and other such stuff, to say nothing of your feces on the public sidewalk, and the force and majesty of federal law will be heard from to protect your property from overzealous city sanitation types. Only in California!

San Bernardino Files for Bankruptcy

The Los Angeles Times reports that San Bernardino became the third California City to file for bankruptcy. Phil Willon, San Bernardino Seeks Bankruptcy Protection, L.A. Times, July 11, 2012, at p. A1. The others are Stockton and Vallejo.

Hidden in the middle of this story is the following dispatch:

“City Atty. James Penman said city budget officials had falsified documents presented to the mayor and council for 13 of the last 16  years, masking the city’s deficit spending.”

“For the last 16 years the budget prepared for the council showed the city was in the black . . .”  “The mayor and the council were not given accurate documents.”