The Penn Central Mess

       Time for the next installment of our saga about failed eminent domain controversies. This one involves inverse condemnation, no less a jewel in the crown of jurisprudence — if you’ll forgive our sarcasm — than Penn Central Transportation Co. v. City of New York, 438 U.S. 104 (1978), the case that was declared retrospectively by the Supreme Court to be the “polestar” of inverse condemnation law. The controversy started when Penn Central railroad, faced with declining rail traffic, filed for bankruptcy along with several other railroads in the Northeast, and realized it had a problem. The cost of operating the Grand Central Terminal was higher than the income it produced, and Penn Central – being a regulated public carrier as well as a bankrupt – could not just stop the unprofitable operation. So it made a deal with a developer who would build a 50-story office building on top of the Grand Central Terminal. But the city Historical Preservation Commission would not permit it. So Penn Central sued, arguing that the ordinance relied on by the Commission guaranteed it economically reasonable use, defined in terms of excess of income over expenses. And since Penn Central’s “excess” was negative, it was locked into a perpetual deficit condition, so it seemed like an open-and-shut case of taking of Penn Central’s property. The trial court agreed, and that’s when the fun began. 

            The trial court decision was so obviously correct that the city was ready to settle, but under pressure from local influential environmentalists, it decided to appeal. The New York Appellate Division reversed on a point of valuation law. Penn Central, said the appellate court, should have used a different accounting approach. It should have imputed a rent payable by its railroad operation  to its real estate operation. But, as pointed out by the dissenting judge, all that would not have made any difference because even under that approach there still would have been an ongoing operational deficit, albeit a smaller one. 

        When Penn Central took its case to the next court level, the New York Court of Appeals, all hell broke loose. That court ignored the issue raised by the record and the parties’ submissions, and went off on an ideological toot, straight out of Henry George. It asserted out of the blue that Penn Central was not entitled to a reasonable return on its property, but only on that increment of its value attributable to private, not public influences, and that Penn Central would have to separate these elements of value even though the court conceded that they were “inseparably joint.” How to separate the inseparable, the court did not explain. Economist William Wade has aptly termed that decision to be judicial “economic lunacy,” see Penn Central’s Economic Failings Confonded Taking Jurisprudence, 31 Urban Lawyer 277, 282 (1999).

            So Penn central took its case to the U.S. Supreme Court where it was born again and raised an entirely new issue – it argued that the city took the air rights above Grand Central Terminal. Normally, you can’t raise new issues in the U.S. Supreme Court, but in this case the Court accepted the case for review anyway. In later public disclosures, the  Supreme Court clerks who worked on the case made clear that at the time they did not understand the importance of this case and thought that, as one of the Justice Department lawyers who worked on it put it, it was a “ho-hum” case. Why then did the court accept the case for a decision on the merits, is obscure. If you are interested in the details of that fiasco, see Looking Back on Penn Central: A Panel Discussion with Supreme Court Litigators, 15 Fordham Environmental L. Rev. 287 (2004) — containing a transcript of a roundtable discussion among counsel who argued Penn Central and the Supreme Court clerks who worked on it.

        The rest is history. The Court held that since Penn Central changed its position and conceded that it was getting a reasonable return on the terminal, there was no regulatory taking. All this is an oversimplification of what happened, compelled by space limitations. If you want the gory details, do read Gideon Kanner, Making Laws and Sausages: A Quarter-Century Retrospective on Penn Central Transportation Company v. City of New York, 13 William & Mary Bill of Rights Journal 653 (or 679) (2005). We are told that reprints are available from the British Library.

            But the point of this post is not just the litigational saga, but also what happened after it was over. The city’s victory in the Supreme Court only confronted it with the fact that at the time the architecturally glorious Grand Central Terminal was a neglected mess, favored as sleeping quarters by the homeless, and reeking of stale urine in places. Furthermore, Penn Central was broke and could do nothing by way of its clean-up and restoration. So the city had to face reality and took over the terminal, spending its own money to restore it – which is what should have been done to begin with. For a description of this segment of the Penn Central saga see Chapter 4 of The Zoning Game Revisited, By Richard F. Babcock and Charles L. Siemon, (1985), pp. 59-75. Though we don’t agree with everything Babcock and Siemon have to say, they are well informed gents, and we recommend that you read what they have to say.

        So in the end the city wound up worse off than it would have been had it accepted the trial court’s judgment (which Penn Central was willing to waive) and allowed Penn Central to proceed with its project. What’s the moral of it all? A kings’ ransom was spent on litigation, the New York Court of Appeals produced an absurd ideological Georgist tract that has not been applied in subsequent cases, the U.S. Supreme Court produced a confusing opinion that decided nothing and confounded the law (the Court couldn’t even articulate the elements of a regulatory inverse condemnation action – it only listed three “factors” that no one understands — pleading its inability to formulate a coherent rule), and in the end Penn Central did not have to pay for the terminal’s restoration – the city did.

        Today, the terminal is leased by the Metropolitan Transit Authority which is operating it at a substantial deficit that is vastly greater than that suffered by Penn Central when it operated it, and the costs of its restoration are being absorbed by the public.

       Stories are supposed to have a moral and so does this one. The process of preservation and maintenance of a civilization’s great artifacts is not cost-free, and it is up to the community that cherishes them to absorb that cost rather than trying to fob it off on have-nots who are incapable of shouldering the economic burden. In other words, there is no free lunch, or as New Yorkers put it in their quaint patois, for nuttin’ you get nuttin’. One would like to think that New York has learned that lesson. But did it?