Tuesday, September 6, 2011

An Ignominious End For One Of The Supremes' Worst Eminent Domain Decisions -- Kelo

How many of you, whether commercial/investment real estate practioner, or investor, are aware of the Kelo decision of many years ago?

By some accounts, the most notorious (yes, I used the N word) decision made by the U.S. Supreme Court, outside of the horrid Dred Scott decision of the 1800s.

First off, lets review what eminent domain typically has meant -- until Kelo vs. City of New London (Connecticut). Eminent domain is the power of government to seize real property, if it cannot be purchased, usually to benefit something loosely defined as "the public good." The landowner is compensated at an appraised fair market value. The public good, historically, was for construction of a freeway, a highway off ramp -- typically something that had to do with public utility infrastructure.

Until Kelo.

Susette Kelo

Let me digress a moment. Notable emiment domain cases -- The very first emiment domain "taking" in the U.S. was the land that ultimately became Arlington National Cemetery. It was an estate during the Civil War owned by the Custis family, and overseen by Robert E. Lee, who married into that august line. Lee, who had chosen to lead the troops of the Confederate States of America, which had seceded from the U.S., was -- technically -- the enemy. Its property taxes, which Mrs. Lee dutifully went to pay, were not accepted (on purpose). Because the taxes were -- technically -- overdue, the estate was seized. And Federal bureaucrats, wanting to make a point, started burying Union dead on the property.

A "near" eminent domain situation occurred in Shanksville, Pa., in recent years. All property owners but one had sold or donated their land to the U.S. government for purposes of erecting a permanent memorial to honor the passengers on Flight 93 -- the flight where passengers, knowing the plane was likely headed to Washington DC or New York City and certain death -- fought the hijackers. Tragically, the plane crashed in a farm field, killing all aboard. But their bravery saved perhaps thousands who might have perished had the United Airlines aircraft been successfully used as a gas-filled missile against a government building. That memorial will be dedicated this coming Sunday, September 11, on the 10th anniversary of the 9-11 attacks upon the United States.

Anyway, the lone holdout at Shanksville was asking a king's ransom of the U.S Parks Service. He relented when informed that he had two choices. Since he wouldn't donate the land, he could accept the government's generous offer (it was), or the land would be taken and he would be paid market value. He relented and accepted the government's offer. And he was being chastised by pretty much every one of his fellow townpeople for utter greed in the face of a national tragedy, not that he necessarily cared.

In the late 1960s, there was a plan to build a new state highway north of Columbus. It would have plowed through my boyhood home (I was a boy then). A compromise was reached that had the freeway following alonside a river, then turning and following alongside a railroad bed. The compromise took very few homes and helped decrease the cost of the project. But the rear few acres of an enormous cemetery would need to be purchased for all legs of the freeway to be connected. The cemetery refused to sell. State law had to be changed to allow for the property to be condemned for use as a highway. You see, at that time there was no provision in the law, on the books since the 1800s, to be used for a public roadway. But if the city had wanted to put a dump on the cemetery property, it would have had no trouble. The cemetery was compensated and the the expressway was constructed. Today it is one of the most heavily traveled north-south roads in Central Ohio.

So, eminent domain. The term is taken from the legal treatise, De Jure Belli et Pacis, written by the Dutch jurist Hugo Grotius in 1625, who used the term dominium eminens (Latin for supreme lordship) and described the power as follows:

"... The property of subjects is under the eminent domain of the state, so that the state or he who acts for it may use and even alienate and destroy such property, not only in the case of extreme necessity, in which even private persons have a right over the property of others, but for ends of public utility, to which ends those who founded civil society must be supposed to have intended that private ends should give way. But it is to be added that when this is done the state is bound to make good the loss to those who lose their property."
Some U.S. states, including New York and Louisiana, use the term appropriation as a synonym for the exercising of eminent domain powers. The term "condemnation" is used to describe the formal act of the exercise of the power of eminent domain to transfer title to the property from its private owner to the government. This use of the word should not be confused with its sense of a declaration that property is uninhabitable due to defects. Condemnation via eminent domain indicates the government is taking ownership of the property or some lesser interest in it, such as an easement. After the condemnation action is filed the amount of just compensation is determined. However, in some cases, the property owner challenges the action because the proposed taking is not for "public use," or the condemnor is not authorized to take the subject property, or has not followed the proper substantive or procedural steps as required by law.

In Kelo, the argument was, indeed, that the proposed taking was not for public use. And that was the crux of the debate. Specifically, the subdivision being condemned was not to be used for a hospital, or a freeway, or a utility right of way. In fact, the subdivision was to be turned over to a private developer to be turned into a high profile development. The "public benefit" to the community was to be the far higher tax revenue that would come to city coffers. It was to be used as part of a comprehensive redevelopment plan that promised 3,169 new jobs and $1.2 million a year in tax revenues to New London.

After the city voted to take the property, a lawsuit was filed in 2000. To sum up, after several failed court appeals, the issue made its way to the United States Supreme Court, which in 2005 voted to affirm the lower court decisions, thereby okaying the taking of private property that could be turned over to private developers for economically beneficial purposes.

The Court held in a 5–4 decision that the general benefits a community enjoyed from economic growth qualified such redevelopment plans as a permissible "public use" under the Takings Clause of the Fifth Amendment. The City of New London eventually agreed to move Susette Kelo's (the case was named for her) little pink house to a new location and to pay substantial additional compensation to other homeowners.

A hue and cry rose up around the U.S., and a number of cities and states passed ordinances and laws to outright ban or sharply restrict government confiscation of real property for third party economic development. At issue was the argument of private property rights. That taking land for purposes other than that freeway or off ramp or what have you, for purposes of turning it over to private development, was nothing more than theft by legislative fiat. Much of the public viewed the outcome as a gross violation of property rights and as a misinterpretation of the Fifth Amendment, the consequence of which would be to benefit large corporations at the expense of individual homeowners and local communities

The Site Today

So why the history lesson? Why my passion on this subject? First off, there is without question a place for eminent domain. There is no doubt in my mind that it is necessary and is often used very effectively for the public good. Now, with that said, my developer friends may disagree with me on this, but IMHO "taking" land through condemnation in order to give it to private developers is morally wrong. Most Americans agree.

If you were aware of Kelo, did you hear the latest from that huge proposed development? First, this much has been well known -- Pfizer, the giant company that was to benefit from the court decision, pulled up stakes and left town in 2009 citing financial difficulties. Specifically, their tax credits were about to expire. The houses, of course, had been razed long before that.

With no developer willing to step in and work the project that the city had pushed for years, gaining it scorn from Americans from coast to coast, the land was left an empty lot. The Fort Trumbull project, as it was known, was a dismal failure. After spending close to $80 million in taxpayer money, there was been no new construction whatsoever and the neighborhood became a barren field. The entire lot area was eventually turned into a dump by the city.

What has changed in just the past few weeks adds insult to injury, for many. Following Hurricane Irene, which hit the east coast and New England just eight days ago, the City of New London designated the site as a place to dump storm debris, and citizens can be seen doing just that in this video on the local paper’s website.

An ignominious end to a judicial travesty. Familes moved, and for what? In a very perverse sense, the property now is truly being used for the public good. For the city has a place to dump its storm debris . . . .  That is public good.

The things that make you go Hmmm.

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