Monthly Archives: July 2012

A Potentially Momentous Taking Case Waiting in the Wings

Remember the automobile industry bankruptcies? We do. We always thought that the bankruptcy court ruling that permitted GM to default on its bonds, while giving a sweetheart deal to the UAW was an outrage. True, our thinking was colored by the fact that Uncle Sam stole GM bonds out of our retirement fund and for all practical purposes gave GM’s assets to the UAW.  But we also thought, and still do, that it was a taking of the bondholders’ property for a public use, to wit, the rescue and preservation of the American automobile industry, notably GM and Chrysler. But there was a fly in the ointment. The claim of a taking had been raised in the bankruptcy proceedings, with the bankruptcy court rejecting it. So was that the end of the story? As it turned out, maybe not.

Enter the U.S. Court of Federal Claims with its decision in Colonial Chevrolet Co. v. United States, 2012 WL 668593 (Fed.Cl.). This was a case in which a group of former car dealers sued the feds on a taking theory, arguing that when the federal government required Chrysler and GM to terminate their dealerships as a condition of receiving financial assistance under the Troubled Asset Relief Program (TARP), that was a taking of the dealers’ property in the form of franchise contracts, ongoing automobile businesses, and automobile dealer rights under state law. Oh, pish, tosh, responded the feds. Didn’t we hear those taking claims in bankruptcy court and didn’t that court reject them, thus giving rise to defense of res judicata? As it turned out, the answer is “no.”

Bankruptcy courts regularly consider [and reject] takings claims, but a close reading of their opinions makes clear that when they make such rulings, they are explicit that they do so only for the purpose of resolving bankruptcy issues, and their decisions are not binding outside the bankruptcy context. In other words, the Court of Federal Claims lacks jurisdiction to review the correctness of a bankruptcy court’s ruling, but it may properly consider takings claims against Uncle Sam, that had not been passed on as part of the bankruptcy issues — the Court of Federal Claims is the only one that has jurisdiction to consider on the merits monetary claims against Uncle Sam on a taking theory. and bankruptcy courts lack jurisdiction to pass on Fifth Amendment taking claims that are not “internal to bankruptcy proceedings.” Here, “[t]he [bankruptcy] judges’ rulings in the Chrysler and GM bankruptcies were incidental to or unrelated to the taking alleged in this court.”

“Bankruptcy court rulings  should not be used by defendant to prevent plaintiffs from  pursuing their takings claims in this court. Defendants’ alleged involvement in and control of the companies’ bankruptcy proceedings may or may not be important in or even relevant in this case. Regardless, the Government cannot use rulings issued in bankruptcy proceedings to control prospective legal and factual findings in the Court of Federal Claims in a separate proceeding involving different causes of action.”

Which brought the court to the meat of the doctrinal aspects of this controversy: though the dealers “present unusual allegations that . . . create the prima facie feel of a takings case warranting just compensation[, w]e are not aware of a takings theory that resembles the legal and factual theories offered so far . . .” What now?

For once, we were pleased to see the court invoke the three-factor test of the Penn Central case so as to provide the plaintiff-dealers with an opportunity to make their case, even though the court was not aware of “a takings theory that resembles the legal and factual theories offered so far . . .” But not to worry. In Penn Central the Supreme Court “anticipated that unique cases would arise; it wrote, ‘[o]rdinarily the Court must engage in ‘essentially ad hoc, factual inquiries.'” Bottom line: if ad hocery is sauce for the government goose, it should also be sauce for the owner-gander. Sounds right to us.

In other words, if each case is to be decided on the basis of “factual inquiries” that have to be pursued to arrive at a conclusion whether a taking did occur, an inquiry on the merits must be pursued to enable the court to decide whether considerations of fairness and justice require that the loss created in pursuit of a proper public purpose be equitably distributed on the society that benefits from it.

“Plaintiffs may discover evidence pretrial that helps to develop a previously unknown taking theory of the type the Supreme Court urged us to consider ‘ad hoc’ and apply ‘the particular circumstances [of that] case.”

Follow up. A recent Forbes article notes that, though its current financial condition is sound, General Motors continues to lose market share and another bankruptcy may be in the offing. Our thanks to Todd Zywicki of the Volokh Conspiracy for bringing this bit of news to our attention.

GM’s market share is 18%, down from the once mighty 48.3% in the bygone 1960s. And as for Uncle Sam’s shares in GM, it faces at the moment an unrealized loss of 39%. Also, GM is increasingly relying on “sub-prime” loans to buyers of its products, and these are people — as we learned from the housing bubble — who are least likely to weather any future economic storms. Obviously, don’t expect any dismal news from GM before the election, but after that, who knows?

See Todd Zywicki’s post of August 16, 2012, on the Volokh Conspiracy blog (, entitled GM Headed for Bankruptcy Again?  It contains links to the Forbes article.

Second Follow up. Check out of August  15, 2012, which reports Uncle Sam’s loss on GM stock so far as $25 billion. Uncle holds 500 million shares of GM stock, and to break even, it would have to sell that stock for $$53 each. But the price of a share of GM stock, as of early this week, was a mere $20.47.

Your tax money at work.

There Is Still Time to Sign Up for the ALI-CLE Land Use Institute in Chicago

On August 8-10, 2012, ALI-CLE will hold its annual Land Use Institute at the Chicago Millennium Knickerbocker Hotel. The program will include segments on eminent domain, and a “head start” program for attendees who are new to the field.

For further information, a copy of the brochure, and for enrollment, contact ALI-CLE, 4015 Chestnut St., Philadelphia PA 19104-3090, telephone  (215) 800-CLE-NEWS.

NY Appellate Division Says State DOT Acted in Bad Faith

When you get a chance, do take a look at Zutt v. State, N.Y. App. Div., 2010-10561 (Index No. 2146/10), opinion filed July 18, 2012. It’s a long opinion but it may be worth slogging through, particularly if you have an interest in the interaction of environmental and right-to-take eminent domain law. In this case, the New York courts — yes sir, New York — actually enjoined the State D.O.T. from proceeding with a condemnation for a proposed drainage easement. The court affirmed the conclusion of the trial court that the State failed to comply with state environmental laws, failed to provide the condemneees with a hearing to which they were entitled by statute, and did so in bad faith by misrepresenting the facts and arguing that the proposed taking was de minimis, even though it was not.

As the court put it, “[T]he State has unreasonably persisted in advancing the theory of prescriptive easement [sic] in two litigations subsequent to the determination against it after trial in 2006 that there was no prescriptive easement, and proceeded with planning for the proposed condemnation after [an earlier adjudication] without involving the public [or the owners] in the process. The State violated  the spirit and letter of [the State Eminent Domain Law] in making an unfounded determination of a de minimis taking, thereby avoiding the required public hearing, where [the owners] would have had the opportunity to present evidence of bad faith in a public forum. Moreover, the State failed to conduct any [environmental] review despite the recognition by DOT’s engineers of potential environmental impacts, hastily prepared a superficial environmental checklist only after faced with new litigation challenging its failure to comply with [State environmental laws], and proferred a baseless interpretation of its regulations . . . in order to  avoid any environmental review,” Slip Opinion, p. 11, citation omitted.

Any time a court takes a property owner’s rights seriously in the context of eminent domain, particularly in New York, that’s a cause for rejoicing. But the fact is that this was not an eminent domain case, but rather what New Yorkers call a CPLR article 78 proceeding, to review D.O.T.’s compliance with environmental laws. Which is a whole other thing legally. Here, courts actually review the State’s actions, as opposed to eminent domain cases where they merely rubber stamp them. Still, as the old expression goes, any port in a storm and all that. It’s good to see that the highway builders out to take private property can be held accountable to that property’s owners on any theory.

Follow up. For an article that analyzes this case in greater detail  see M. Robert Goldstein and Michael Rikon, Taking a Hard Look at Department of Transportation’s Eminent Domain Power, N.Y. Law Jour., August 2, 2012.


The Housing Bust: Who Done It?

As all lawyers know, when we ask people to testify in court, we ask that they swear to tell the truth, the whole truth and nothing but the truth. Why the legal gobbledygook? Answer: because as we lawyers also know, letting witnesses tell the truth while omitting selected parts of the story, enables them to leave their listeners with a false understanding of what really happened. We were reminded of this verity while reading Harold Meyerson’s op-ed in the L.A. Times of July 25, 2012, p. A13, entitled A Tale of Two Cities, in which Mr. Meyerson, a fully credentialled grandee of the Washington Post editorial pages, purports to inform us what brought Stockton and San Bernardino low, and caused them to file for bankruptcy.

You think it was municipal improvidence? A failure to control spending and to maintain reasonable municipal reserves for a rainy day? Overly generous salaries of unionized municipal workers? Unfunded pension liabilities? According to Mr. Meyerson, the answers are no, no, no and no. So who done it? It was the banks “that flooded these cities with subprime mortgages that were resold into the high-flying securities market,” says Mr. Myerson. Make no mistake, we are no apologists for banks. They deserve a lot of blame for what transpired, and many of their managers haven’t been properly punished for their misdeeds. But to blame “the banks” alone, as Meyerson does is to tell a partial truth, and thereby to conceal important causative factors in the “bubble” calamity that befell this state.

What’s missing in Mr. Meyerson’s narrative is the role of government, which was implicated in this disaster up to its eyeballs. So let’s take a look at that by asking two questions. First, why would bankers — who, whatever you may think of them, appear to be rational people — squander their money by handing it out as “subprime loans” to people who had no realistic prospects of repaying them? Were those bankers crazy? Like a fox. The explanation of their behavior is no mystery, and had Mr. Myerson bothered to read the printed output of his competitor, The New York Times, he would have been fully informed in the premises, as we lawyers are wont to put it. It was there in black and white, way back in 1999. Speaking in the context of assessing Fannie Mae’s prospective difficulties, were it to continue to expand its holdings of risky subprime loans, the Times cautioned over a decade ago:

“Fannie May, the nation’s biggest underwriter of home mortgages, has been under increased pressure by the Clinton administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth profits.” . . .”In moving, even tentatively, into this new area of lending Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of savings and loan industry in the 1990s.” Steven A. Holmes, Fannie Mae Eases Credit To Aid Mortgage Lending, N.Y. Times, Sep. 30, 1999.

And so, that “increased” government pressure motivated bankers to keep lending because they could sell their junky mortgages to Fannie and such, collect their fees, and bear no risk of default, that now being Uncle Sam’s problem. Or so it seemed.

A few years later came the stern warning of Gretchen Morgenson, one of our favorite financial reporters, who in 2004 wrote an article entiteld Housing Bust: It Won’t Be Pretty, N.Y. Times, July 25, 2004, at p. 1 (Sec. 3). The title says it all. And let’s not forget David Leonhardt, Is Your House Overvalued? N.Y. Times, May 28, 2005, at p. B1. So the fact that risks were mounting and things were beginning to spin out of control was no secret. While bankers surely took advantage of the situation, it was not entirely their doing. They were responding to pressure from Washington in order to avoid the dreaded sin of “redlining” and — on pain of being charged with discrimination — were pressured to keep on lending to people who had no prospects of repaying their loans, or even of servicing them for any significant period of time. Fairness, don’t you know.

Which is why bankers did not keep those “subprime” loans as part of their loan potfolios, but instead sold them to bundlers who used “tranches” of this junk as security for bonds they issued and sold to greedy investors who evidently gave no real thought to the question of why these bonds offered such high yields.

Second. Whether you sell mortgages or hot dogs, you have to have customers. So what was it that drove the unending stream of Californians, eager to pay outlandishly higher and higher prices for their homes, into the arms of increasingly predatory lenders? Some of it, of course, was supply and demand, but there was more to it. Californians with any sense of local history remember how in the not too recent past, it became a given that to buy a good (but not necessarily fancy) home in a good neighborhood over time became a road to riches — paper riches, anyway. Apart from market forces, “many economists say that [income tax laws] had a noticeable impact, allowing home sales to become tax-free windfalls.” David Leonhardt, 1997 Tax Break on Home Sales May Have Helped Inflate Bubble, N.Y. Times, December 19, 2008, at p. A1. And so they did.

Other government policies that caused home prices to soar, propelling would-be home buyers into the arms of less and less scrupulous lenders, consisted of the impact of land-use laws. Small, entry-level homes that were all the rage in the 1950s and transformed even working and lower middle-class America into a home-owning society, ceased to be built due largely to NIMBY opposition and local governments’ acquiescence in it. Better family homes that went for mid-five figure prices in the 1960s soared into the high six figures and beyond. Why? Among other things, because of restrictive government regulations that constricted supply even as demand for housing in desirable places was growing apace. Many Californians came to understand that if they wanted a nice home, it was then or never. Don’t take our word for this. Prominent Dartmouth land economist, William A. Fischel, demonstrated in his 1995 book, Regulatory Takings: Law, Economics, and Politics, particularly in Chapter 6, entitled Capitalizing on Land Use Regulation: Evidence from California, that the ongoing surge in California home prices was being caused by restrictive government regulations. He was not alone. Two Presidential Commissions on Housing reached the same conclusion. And the California courts’ policy of see no evil, hear no evil and speak no evil, when it came to judicial review of land-use regulations, no matter how extreme, intensified the effect. As the late Richard Babcock, the then dean of the nation’s land-use bar (and coincidentally, a supporter of government land regulations) put it: “In California the courts have elevated government arrogance to an art form.” And it was California Supreme Court Justice William P. Clark, Jr., who pointedly noted in his dissent in Agins v. Tiburon, 24 Cal.3d 266 (1979) that California judges’ uncritical endorsement of extreme land-use regulation policies would inevitably lead to a socio-economic cleavage between well-housed, affluent Californians and others. Which is just what happened, although neither Justice Clark nor anyone else at the time could predict how high California home prices would soar before the “bubble” popped. But the byproduct of it all was that those who wanted a piece of the American dream — a family home in the suburbs — had to pay more and more as time went on, and had no choice but to resort to increasingly sharp lending parctices. The rest is history.

So before you give municipal unions a free pass, and join Mr. Meyerson’s denunciatioin of only the banks, before you voice the deserved criticism of greedy bankers, irresponsible mortgage brokers and bundlers, and of reckless home buyers who took on bigger debts than they could handle, or who foolishly refinanced their increased home equities in order to spend the money on good living, (all of whom bear a heavy responsibility for the mess we are in), do recall the role of government policies. Recall the anger directed by the Clinton administration, its allies, and the media at the lending industry for its “redlining” practices of denying credit to people living in areas that were down on the socio-economic scale, and who in the lenders’ honest judgment could not meet traditional credit standards. These people didn’t have the opportunity to use the best credit cards to build credit like they do now. Could it be that those old fashioned, flinty-eyed bankers were right when they at first refused to lend large amounts of money to people whose economic status suggested an inability to service their loans, even if in the end those bankers yielded to government pressure that they do so? Luckily nowadays you can get the help of companies like Upturn Credit and make sure your credit score is up to scratch, so that you’re never turned away by lenders, but in days gone by it wasn’t so simple and loans were not as easily accessible as they are now. Take a look at the Donkey Finance loan comparison to see just how accessible loans are in the current climate.

So, as they used to say in Fractured Fairy Tales on the Rocky and Bullwinkle cartoon show, sometimes things are exactly what they appear to be. And when people appear to lack the funds to buy pricy homes, it would seem to be only prudent not to lend them large sums they can’t begin to pay back, partticulaly in bad times which — as taught in the Bible by way of Joseph’s interpretation of Pharaoh’s dream — come upon us sooner or later. The rest is commentary.

Exurbs Grow Faster than Cities. Period.

It looks like the whoop-tee-do over the comeback of cities may be premature. We offer the following quote from Atlantic Cities — Nate Berg, Exurbs, The Fastest Growing Areas in U.S., July 19, 2012. Click on

We quote:

“The exurbs – those deconcentrated towns flung far beyond the urban core and just outside the suburban spread – have been growing faster than the rest of the country in recent years, even amid the housing bust and economic recession. According to a new analysis from the Urban Institute and researchers at the U.S. Census Bureau, these areas have seen growth rates that far outpace more densely populated areas as well as the nation as a whole.”

Condemnation of Underwater Mortgages (Cont’d.)

The avalanche of news stories (newsmagazines are increasingly getting into the act) continues unabated. We make no attempt to inventory, much less comment on them. But it seems proper to take note of the fact that much of this outpouring comes from people who obviously don’t know what they are talking about. So we offer these caveats for our readers.

First, eminent domain can be used to acquire all species of private property, not just land.

Second, when property is taken by eminent domain, the condemnor does not get to set the price unilaterally. The owners who are dissatisfied with a condemnor’s offer or deposit, can litigate over value, and can put on testimony by their own appraisers.

Third, in most states, value is determined by a jury (except in New York, Connecticut and Rhode Island). In some states there is an intermediate step in the process of valuation: before going to court the valuation evidence of both parties is heard by “Commissioners,” lay individuals selected for the job. In federal law, there is no right to a jury, but under Federal Rule of Civil Procedure 71A, valuation cases are usually tried to juries, although federal judges can appoint Commissioners instead. In Florida, that practice has been frequently abused by federal judges — which is another story, too complicated to go into here. But if you want to know, check out the Formatora case decided by the 5th Circuit.

Fourth, in the proposed takings of “underwater” mortgages, the right to take can probably be established under existing federal constitutional law, but query whether states will go along with it. A definite maybe, because among other things, a number of states have modified their law after Kelo to limit the exercise of eminent domain when it is sought to be used to transfer private property from one private owner to another.

Fifth, the big problem is how to value those mortgages, and here is where it gets complicated, because the people behind this caper want to pick low-hanging fruit by condemning only those “underwater” mortgages that are current — i.e., those where the homeowners-borrowers are continuing to make regular payments on their loans. This process is vastly different in the United States, and loans in Sweden or similar countries, while still defaulted on, have a much lower rate due to the more stringent requirements imposed upon borrowers. Obviously, mortgages like that are more valuable than those in which the borrowers have defaulted. Also, if a particular mortgage has been “bundled” with others and put up as security for a mortgage-backed bond, the problems multiply, because it seems clear that the bondholders will claim [severance] damages to their remaining property, i.e., the uncondemned, remaining mortgages in the “bundle.” See United States Trust v. New Jersey.

Last, some of the reporters and on-line posters do not understand the difference between San Bernardino County (which is behind this caper) and the City of San Bernardino which is in bankruptcy.

These observations are not intended, and cannot in this limited space, give a detailed picture of what this caper portends. So if you want to be informed, be careful about what you read in the papers, as the old expression goes, and take the time and effort to inform yourself.

Follow up. We just came across a not-so-old news item reporting that 9 out of 10 home mortgages are held or insured by federal government entities, most of them by Fannie and Freddie. Roger Lowenstein, Cracked Foundation, N.Y. Times, April 25, 2010, at p. 11. Good luck on a one-horse county’s attempt to condemn those!

An Interesting Omission — the Kelo Case has Gone Missing

Today’s New York Times devotes most of a page to the topic of public opinion of Supreme Court’s decisions, listing some 18 big-time cases which are ranked in order of their respective rates of public approval. See Adam Liptak and Allison Kopicki, Public’s Opinion of Supreme Court Drops After Health Care Law Decision, N.Y. Times, July 19, 2012, at p. A21. Click on For the graphics table accompanying this article, click here: All the usual suspects are there: Sebelius, Roe, Grutter, Clinton v. Jones,  N.Y. Times v. Sullivan, Citizens United, Brown v. Board of Education, Boumedienne, and, of course Bush v. Gore — plus others. All are ranked on their rate of public approval from a low of 13% (Buckley v. Valleo, holding that independent political committees may spend unlimited sums on behalf of a candidate), to a high of 71% (Parents Involved in Community Schools v. Seattle School District, holding that race may not be used as a factor when assigning students to public schools).

But something is missing.

Try as we may, we find no mention or trace of Kelo v. New London. Wonder why? After all, Kelo was the case with the lowest rate of public approval in the past century. So why doesn’t it rate so much as a passing nod?

If you have an explanation of this curious omission, by all means do share it.

Mark Twain: “Whisky Is for Drinkin’ — Water Is for Fightin'”

Remember our earlier discussion of the kerfuffle over breaching dams on the Salmon River? Sure you do. Click on,  if you don’t. Anyway, act two is now afoot, this time involving breaching of dams on the Klamath River. It’s not easy to follow, but it goes something like this: the environmentalists — who else? — want those dams torn down because they impede the upstream migration of salmon to their spawining grounds, and the local Indians want them torn down to enhance their fishing rights. The local farmers want them to stay up because they provide irrigation water for their crops. The public utilities that built and own them, are sort of wishy-washy because to keep those dams up and keep selling the electric power they produce, they would have to get them relicensed and that — thanks to government bureaucracies — would cost more than tearing them down. Crazy enough for you? Only in America.

At one point the contending parties worked out a deal (involving the tearing down of four — count ’em, four — dams, an effort to which Uncle Sam was going to chip in $1 billion), but now, two years later nothing has happened, possibly due to Uncle’s financial embarassment. The problem also is that local folks think poorly of tearing down four perfectly good hydroelectric dams, and voiced their displeasure by voting out of office local politicians who went along with the deal, so the current ones are — shall we say? — less than enthusiastic abot the whole thing. Concludes the Times: “more court fights are inevitable . . . if the deal is not confirmed by Congress  — regardless of local political developments.”

For an admirably concise summary of this fight, check out William Yardley, Tea Party Blocks Pact to Restore a West Coast River, N.Y. Times, July 19, 2012, at p. A16 — click here.

The Doo-Doo Is Deeper Than We Thought

See Mary Williams Walsh and Michel Cooper, Gloomy Forecast for States, Even if Economy Rebounds, N.Y. Times, July 17, 2012, at p. A1. Click here.

Bottom line: “Things are worse than they appear . . .”

And the people who got us into this mess are the folks who, according to the courts, are so brilliant and perspicacious that their decisions regarding the creation of public works, their location, cost etc. are sacrosact, and once made are, according to SCOTUS, “well-nigh conclusive” — and as such beyond judges’ competence to review; see City of Chicago v. St. John’s United Church, 953 N.E.2d 1158, 1171 (Ill. App. 2010), noting explicitly that questions of condemnors’ ability to pay for the proposed project are not relevant.