The Kelo Case, Public Use, and Eminent Domain--Posner Comment

The Fifth Amendment permits the use of eminent domain, in which government takes private property without negotiation but must pay the owner the market value of the property, only if the taking is for a "public use." (The Fifth Amendment is applicable only to action by the federal government, but the Fourteenth Amendment, which applies to state and local government action, has been interpreted to incorporate the "public use" limitation on eminent domain.) In Kelo v. City of New London, which the Supreme Court decided on June 23, the city took private residential property as part of a redevelopment plan under which the property would be turned over to private developers for office space and parking. Whether the case was "correctly" decided depends on one’s theory of constitutional adjudication, which might in turn point one to the origins of the "public use" provision and to the Supreme Court's precedents. I want to abstract from the legal questions and ask three practical questions: When if ever is eminent domain proper? Is it ever proper when the private property taken is going to be transferred to another private entity rather than being kept by the government for some governmental use, such as a post office or an army base? And is the power granted local municipalities by the Kelo decision likely to be abused? Generally, government should be required to buy the property it wants in the open market, like anyone else. If it is allowed to confiscate property without paying the full price, it will be led to substitute property for other inputs that may cost less to society to produce but that are more costly to the government (a private rather than social cost) than land because the government has to pay the full price for them. This assumes that government in its procurement decisions tries to minimize dollar costs rather than full social costs, but the assumption is realistic. When the government does take property by eminent domain, it has to pay the owner the market value of the property, but that value will be less than the owner values the property--otherwise he would sell it to the government at market value and there would be no need for the government to incur the cost of eminent domain proceedings. Generally, property is worth more to the owner than the market price (which is why it's owned by him rather than by someone else), because it fits his tastes or needs best as a consequence of its location or improvements (which is why he bought it rather than some other piece of property) or because relocation costs would be high. Real estate is a heterogeneous good and so a particular parcel in the hands of a particular owner will generally yield him an idiosyncratic value that is on top of the market value. Eminent domain operates to tax away that value; if market value is $X and total value (including idiosyncratic) is $1.2X, then if the government takes it by eminent domain it pays for it in effect by spending $X out of the government's own coffers and $.2X out of the owner's pocket. This is an arbitrary form of taxation and one that, as I said, creates the illusion that an input is cheap because its money price is less than its social cost, and as a result causes a misallocation of resources. The only justification for eminent domain is that sometimes a landowner may be in a position to exercise holdout power, enabling him to obtain a monopoly rent in the absence of an eminent domain right. The clearest example is that of a right of way company, such as a railroad or a pipeline, which to provide service between two points needs an easement from every single one of the intervening landowners. Knowing this, each landowner has an incentive to hang back, refusing to sell to the right of way company except for an exorbitant price. Each hopes to be the last holdout after the company has purchased an easement from every other landowner--easements that will be worthless if it doesn't obtain an easement from that last holdout. Most right of way companies are private, which answers my second question: the rationale for eminent domain is unrelated to whether the party exercising the eminent domain power is the government or a private firm. Right of way companies are not the only private enterprises that can make an argument for the use of the eminent domain power. The argument is available in other cases in which a large number of separately owned contiguous parcels have to be acquired for a project that will create greater value than the parcels generate in their present use. It is impossible to tell from the opinions in the Kelo case whether that was such a case. Pfizer had decided to build a large research facility adjacent to a 90-acre stretch of downtown and waterfront property in New London and the City hoped that Pfizer's presence would attract other businesses to the neighborhood. The plaintiffs' residential properties were on portions of the 90-acre tract earmarked for office space and parking, and it might have been impossible to develop these areas for those uses if the areas were spotted with houses (the plaintiffs owned 15 houses in all in the two areas). The Court, however, did not discuss whether there was a holdout problem; it thought it enough to justify the taking that the City had a bona fide and reasonable belief that the planned redevelpment would generate net benefits for the City and its residents as a whole, although the plaintiffs of course would lose any idiosyncratic values that they obtained from their property. However, in the absence of a holdout problem, there is no need for eminent domain—private developers will rush in without need for City assistance if indeed the property would be worth more in a different use from the present ones. The Court was mindful of the possibility of abuse of the eminent domain power; it made clear that there would not be a public use if all a municipality did was take property from one person and give it to another, with no showing of an increase in overall value. But the Court did not consider whether development plans such as New London's actually on average increase value for the municipality that undertakes them, or rather are usually the product of rent-seeking political deals. Thus the actual impact of the Court's decision on economic welfare cannot readily be determined. It is possible that what really motivated the Court was a simple unwillingness to become involved (or to involve the lower courts) in the details of urban redevelopment plans; a flat rule against takings in which the land ends up in the hands of private companies would, as I have explained, be unsound. Another practical defense of the decision is that the more limitations are placed on the private development of condemned land, the more active the government itself will become in development, and that would be inefficient. If the City of New London had guilt office space, parking, etc. on land condemned from private owners, a challenge based on the "public use" limitation would be unlikely to succeed--unless the Court confined public use to holdout situations and was prepared to try to determine, case by case, whether a genuine holdout situation existed.

Comments

[Matt]

"If the City of New London had guilt office space, parking, etc. on land condemned from private owners, a challenge based on the "public use" limitation would be unlikely to succeed..."

I'm guessing Judge Posner means "built," not "guilt," though the slip/typo still offers an interesting, if unintentional, final note to the opinion.

[Paul Deignan]

1. Eminent domain is only proper when the use is public and when the compenation is just and the seizure is in compliance with other applicable public laws (due process)

2. No

3. Yes

Easy. 7 out of 9 middle school students would answer likewise after reading only the last portion of the 5th Amendment. (I'm hoping the next post will have something to do with how we might get those middle school students onto the bench).

[Bill]

Mike Kinsley, the columnist, said that municipal governments would rather SCOTUS have reversed because then they would have been able to get a better deal from developers. It'd be great to know what you two think of that claim which is also being discussed on the SCOTUS blog.

In particular:

(1) Are developers generally getting a bigger than desirable share of "gains from trade" than cities because they can negotiate with other competing cities. (Presumably various potential developers also compete with each other, no?)

(2) Legally speaking, could an opinion have been written on these facts that would have charged the lower courts with making sure cities were getting a good deal when using takings to economically develop?

(3) Would it be a good idea, practically speaking, to get the lower courts involved in that?

[Alan Robinson]

Perhaps the court did not discuss the holdout problem because "[p]etitioners are not hold-outs." (O'Connor, J., dissenting). Just kidding, (a little "errant language," maybe), they obviously are. And in reality, the Court does mention (or strongly imply) that there was a holdout problem here: "The NLDC successfully negotiated the purchase of most of the real estate in the 90-acre area, but its negotiations with petitioiners failed."

As to the more basic point, it seems to me that "confin[ing] public use to holdout situations," as you discuss, would (besides bearing little relationship to the underlying meaning of the words "public use") make no real difference at all. The government could simply offer to pay the market price, and if a landowner refuses, he becomes a "holdout" against whom eminent domain may be employed. But presumably the government already does makes purchase offers before suing in condemnation, as it appears to have done here. I'm not sure if you have something more in mind.

[David]

"[N]or shall private property be taken for public use, without just compensation."

Let's play Justice Scalia's game for a moment and just analyze the text here, without reference to any history or precedent. What in this clause limits the government's power to take property, as long as "just compensation" is paid? One could argue that "for public use" is surplusage. Note that the clause does not say, "private property shall not be taken except for a public use."

Alternatively, even if the clause could be read to limit the takings power, one could argue that "for public use" means simply "by the government" and nothing more. In a democracy, all takings by the government are in some sense for a "public use."

I am just making the textual argument, which the conservatives who love strict interpretations seem to ignore in this case. I'm not sure I agree with it, but Kelo is not necessarily a "liberal" decision if one actually reads the text of the Fifth Amendment..

[Will Baude]

David,

1, When has Justice Scalia ever suggested that the text of the Constitution ought to be abstracted from its history *and* its precedent?

2, You can't plausibly claim to be analyzing "just" the text while ignoring the anti-surplusage canon, which is about as old as the Constitution is, and an integral part of speaking legal English.

[Palooka]

I wonder if David has really read the clause as carefully as he thinks. While the clause REQUIRES the government give "just compensation" for takings of property it does not follow that aslong as "just compensation" is given the government has a right to one's property. For if this were true, then the Framers would have constructed a provision which would allow the government to take whatever property they want aslong as "just compensation" is given. That cannot be correct. Implicit in the clause is an assumption of a VALID "public use." Taking property for a school, a road, an airport, or a military base or project are in a different class than Kelo. After all, the takings clause was drafted as a augmentation of the already present doctrine of eminent domain, it did not create it. It would be interesting to see what uses were considered legal in Colonial America. Am I wrong in assuming that the Takings Clause is more a limitation on the then accepted government power of eminent domain rather than the origin of it?

[RWS]

Palooka: I agree with the last question: it's a limitation of that power, not the source of it.

The Volokh Conspiracy has many excellent posts on Kelo by some first-rate legal scholars: www.volokh.com. Probably just do a "contro+f" search for "Kelo" to find them on the page. Eugene Volokh in particular contends that this ruling should be applauded by libertarians, given that (as Judge Posner pointed out), if there is a strict limit on what constitutes public use, it would create an incentive for local government to take the property and own it, then rent it out to private parties. That would be an inefficiency, because more government ownership tends to lead to less efficient capital allocations.

I have one point to add to this discussion, which is more or less Justice Kennedy's federalism point. These are complex questions about what constitutes an appropriate limit on the police powers, what is public, and what is property. These matters are much better left to the states than the federal judiciary. The 14th Am. sort of inadvertently, in my assessment, stuck a whole lot of this into federal court. I think that the limits on the scope of government power at the state and local level are appropriate for state constitutional limitation and adjudication, not by federal courts, because different peoples and states will think of "public use" differently. Federal courts would do well to defer to localized views on how to define that term. The original drafters simply did NOT conceive of the 5th Amendment in the context of limitations on state/local power. Cities and the federal government are apples and oranges.

[Corey]

"The government could simply offer to pay the market price, and if a landowner refuses, he becomes a "holdout" "

You can't simply define "holdout" as someone who won't take market price. You can't just assume that "market price" is a fair price. People are perfectly justified in asking to be compensated for idiosyncratic values. (For example, "my late husband built this house for me.")

It is only a "holdout" situation when the owner is refusing to sell in bad faith because they are aware of the buyer's prior investment. Of course, it is nearly impossible for a court to tell the difference, which makes the whole framework of Kelo suspect in my opinion.

If you read the oral argument in the case, many of the questions were about how to limit cities from taking from A and giving to B simply because B would be paying a higher municipal tax. Or how much economic depression was required before "development" becomes a public purpose. Of course the actual opinion doesn't give any solution to those questions.

There are those who would argue that New London, being economically depressed, needs low income housing as much as it needs a new office park. No one is going to check and see if the jobs at Pfizer actually go to people from downtown New London or to people who were displaced. Although I am sure those who try to justify the decision will assume it.

In reality, the only benefit to citizens of New London IS likely to be the higher municipal tax base. Hopefully the money will be spent on new roads and services rather than on bribes to more private developers.

[Corey]

"Federal courts would do well to defer to localized views on how to define that term."

Great, but what happens when a state defines a term in a way that clashes with majority views in other states. Or a state starts taking property of out-of-state investors for the "public purpose" of "Texas land for Texans"? It can affect everyone. There was a really good reason for the 14th Amendment, and people who would say "well we are enlightened now and would never do that again" need to spend more time in inner cities or the rural south.

[Palooka]

RWS. I read Volokh fairly regularly, but I have not read everything up on Kelo. I did skim over Eugene's belief that this a win for libertarians, and I think there is something to that. Nevertheless, I have to disagree, to a point. I think it is wise not to have a "no takings for private/public use" rule. Sometimes that may be OK. For example, a private company running a public airport could be one such example, I think. Railroads are an excellent one which Posner brought up. I don't think that's really what has people up in arms, that private entities are involved. It seems to me that this case erodes what is traditional eminent domain, and why eminent domain exists. I think the reason we accept the validity of eminent domain is that sometimes there is a project which serves the "greater good" which should go forward even over the objections of property owners. Not every project is worth violating property rights, however. An airport, a military base, a police station, a sewer. Those are all things which serve public necessities--travel, security, public health. While economic development could certainly be a "greater good", most do not believe it is the kind of thing which is properly promoted under government's "eminent domain" powers. In other words, there should be some threshold the government has to reach. Health, safety, transportation, schooling are all traditional government responsibilities. Building hospitals, water treatment plants, police stations, and schools are all things which most would agree are appropriate extensions of government power. Can they same be said for Kelo?

[Palooka]

Are the advocates of Kelo saying that anytime the government thinks it has a better use for your property that it can invoke eminent domain? That's what it seems like to me.

[Tom]

Honestly, I don't see what the big deal is w/r/t Kelo. Many pundits are arguing against eminent domain generally. I think it's undisputed that New London could take this property and put up a school or park. Doing so would harm the home owners just as much as putting up an office development. The individual rights ship sailed on this issue a long time ago.

There's a built in rule of reason in ED situations. The local gov'ts consist of elected officials who will lose their jobs if they abuse this power. Lost in the discussion of Kelo is the fact that the commercial development almost certainly will do more to revitalize New London than these 15 homes will. If it doesn't, the officials who authorized it should be on the chopping block and legislation should/can be passed to prevent such a thing from happening again.

I don't understand why right-leaning Americans lose faith in elected bodied when their issues are in front of them.

[N.E.Hatfield]

No matter what is said on the issue of "Emminent Domain" and it does have its problems; it is still emminently superior to Nero's soultion to urban renewal and development. Perhaps that's what the Framers had in mind. ;)

[Bill Korner]

Literal, yet absurd, readings of the Constitution can be amusing.

One such "natural" reading of the Takings and Public Use Clauses would be:

So long as the government is taking property for NON-public uses, no compensation (just or otherwise) need be paid. So the result in Kelo could have been reached by a finding that New London was just handing over people's property for the benefit of the developers.

[Thomas J. Londregan]

I write concerning the misconceived hysteria about eminent domain.

Every home in America is not at risk as a result of the Supreme Court decision in Kelo, et al. vs. New London, et al. If the Kelo decision is the baseline, then before your home can be taken for economic development the following must occur.

1. Your home must be situated in commercial/industrial zone that has performed poorly with 80% commercial vacancy rate and 20% residential vacancy.
2. Your neighborhood is in need of $18,000,000 in environmental cleanup.
3. Your neighborhood has roads built and designed over 150 years ago that are inadequate to accommodate access to a new tourist destination state park.
4. Your neighborhood has water and sewer lines in need of upgrade.
5. Your neighborhood has areas below the flood plane that need to be filled.
6. Your city has unemployment double the state average.
7. Your city has suffered from a declining population.
8. 56% of your city’s land is exempt from taxation.
9. Your local government must have prepared and approved a municipal development plan that has two basic parts:
(a) public uses and public benefits, i.e., a 1,500’ public walkway along a river front (Thames River), public access to the water (Thames River), environmental cleanup, new roads and utility infrastructures;
(b) economic development for new jobs and tax revenue.
10. The plan is approved by the state legislature.
11. The plan is approved by the state executive branch.
12. Both the state legislative and executive branches agree to invest millions of state tax dollars in your neighborhood.
13. Both trial court and appellate courts of your state determine that the legislative branch did not abuse its power, act in bad faith or in an unreasonable manner.

In conclusion, the connection between economic development and the public use clause of the Constitution is a connecting bridge that must be filled with public uses and public benefits, along with economic development. If the only vehicle on that bridge is economic development, i.e., Justice O’Connor’s Motel 6 versus a Ritz Carlton, your plan will be in trouble. The majority clearly stated the law – you cannot take from “A” to give to “B”. That is not what happened in New London, Connecticut. Economic development will come at the end of the development phase after $70,000,000 is spent to clean, reshape and redesign, 90 acres of land all for the public benefit.

Thomas J. Londregan,
Director of Law for the City of New London

[John Kelsey]

I think the point is that there's not really a simple line to be drawn here. A railroad line, bridge, highway, dam, etc., is almost always being done for some economic gain on the part of the whole community. And I guess I don't see why the final transfer to a private entity changes anything, either. Whether the state builds a highway through my yard and operates it publically or lets a private toll-road operator run in privately, I can't see that it makes a heck of a lot of difference in my life. In this case, if the city weren't allowed to give the stolen (er, "lawfully purchased") property to some private developer, presumably they'd just do the old dodge where they lease it to the private developer for 99 years for $100 or some such thing. It wouldn't change much else, right?

This is really bad policy, basically an invitation for corruption. But that doesn't mean it doesn't win local elections, for the same public choice reasons we have farm subsidies and trade barriers.

--John

[Eric Rasmusen]

My take at http://www.rasmusen.org/x/archives/699 is similar to Judge Posner's, as, I expect, would the take of virtually all economists: the holdout problem is the big justification for eminent domain, and the big question is whether that is worth the risk of political abuse.

As Judge Posner said, though, the Court seems to have missed this. "Holdout" here means holding out for extortionary reasons, for more than the value to you, not just holding out for a price equal to its value to you, as in everyday language.

Did somebody try to explain this to the Court? Is it in the briefs? I don't recall seeing it even in the dissents. This may be an instance of a bad decision due to the judges' ignorance of economic theory.

[Alan Robinson]

Corey & Mr. Rasmusen:
I'm still not sure that an "extortionary motive" is particularly relevant to the definition of a holdout. If, as Posner suggests, the last farmer refuses to sell an easement needed to complete the railroad for less than $10 million, I'm not sure whether it matters if this is because he thinks he can extort that sum, or just that $10 million is the "idiosyncratic value" to him of not having trains roaring across his farm. The farmer is probably more of a jerk in the first instance, but I see no economic difference. Either way, he is holding out for more money.
I also think that market price is, economically, the appropriate threshold for defining a "holdout," even if it is not "a fair price" vis-a-vis the owner's subjective value, because otherwise if it were set higher there would always be a strong incentive at least to pretend to hold a very high subjective value of one's property.

[Palooka]

Whether the economic development plan is sound, or whether it will substantially benefit the city and its population are interesting questions. Let's say that the answer is yes on both counts in this particular case. I don't think that escapes the issue--that eminent domain has been expanded in a way that many people, of all political stripes, are uncomfortable with.

If the government believes it can make better use of your property, then it's apparently entitled to it. It should not come as a suprise that many feel that is a dangerous principle.

[Hummer]

Thomas J. Londregan,
Director of Law for the City of New London,

Nice try. You are taking private property that is not blight or slums or otherwise anything other than desirable to a private developer, and helping private interests that lined the pockets of local politicians. There wasn't other property that provided a large enough block of land? Or there wasn't as potentially valuable water front property?

Your project isn't a necessary evil. It is evil. It is government abuse. Put all "holdout" theory you want over it. There is no public use to this property. How libertarains could be happy I haven't the faintest. Libertarians would also oppose the government running shopping malls as landlords.

[TheWinfieldEffect]

"When if ever is eminent domain proper?"

When the use is public.

"Is it ever proper when the private property taken is going to be transferred to another private entity rather than being kept by the government for some governmental use, such as a post office or an army base?"

What about a hospital that has board members appointed by the governor but operates as a private entity? My bright-line test would be:"whenever an entity has soverign immunity, it may be the beneficiary of a taking".

"And is the power granted local municipalities by the Kelo decision likely to be abused?"

Not if citizens are actively involved in local politics. Indeed, many polities have empaneled Eminent Domain Commissions to promulgate new safeguards and restrictions on use of the eminent domain power.

As always, what Corey has said is wrong.

[N.E.Hatfield]

I may be wrong, but I get the feeling that most are misreading the Court on this decision. Such that, after it had satisfied itself on the adequacy of the procedures and processes in place in Connecticut and New London safe guarding the property rights of individuals, it had no choice but to find in favor of New London. To do otherwise, would destroy the basic legal principle of the superior dominion of the public and state over all lands in its jurisdiction.

However, the decision was not unanimous and as such, upsets the decision by eliminating the "Rule of 9". As to whether this was a concious act on their part, only they themselves know. What this does now is forces all the States and localities to review the procedures and process's that are in place in regards to Eminent Domain proceedings to guarantee that the basic property rights of the individual are properly safeguarded. Clever tactic on their part.

[TRC]

Coase?s theorem can provide grist for analysis of Kelo (http://en.wikipedia.org/wiki/Coase_theorem). A corollary of the theorem is that in the presence of transaction costs, government can minimize inefficiencies by allocating property initially to the party assigning it the greatest utility.

It could be argued, from a Coasian perspective, that New London had no choice but to confiscate the property of the holdouts (who were driving up transaction costs with incessant litigation) and were justified in allocating the seized property to private developers in order to lure Pfizer and increase the tax base of a community in steady decline.

Coase can also be applied to the qualified support given by Kennedy (http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=000&invol=04-108), who supported the decision but made clear that limits to government takings would be in order but *without* specifying what those limits would be and how they would apply. Without ?bright line distinctions? about the limits of government taking authority, transaction costs (principally in the form of endless litigation about who controls property) would go through the roof and government could, ironically, have *greater* incentive to invoke takings to assign property and
reduce inefficiencies. (In other words, in the presence of ambiguous rules about property and ownership, government allocation may be more efficient, in some circumstances.)

[Paul Deignan]

Thomas J. Londregan,

I'm wiling to wager that the next case of eminent domain that relies of Kelo will not satisfy the criteria you have laid out.

I'll even bet a $40 bottle of wine on it.

Care to put your money where your mouth is? (It would surprise a lot of people if you did--they would preceive it to be uncharacteristic).