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A CATO Outsider’s Reflections on Eminent Domain

September 13, 2017

Yesterday, I enjoyed attending a CATO Institute closed-lunch event celebrating the publication of Eminent Domain: A Comparative Perspective (Cambridge 2017, Iljoong Kim, Hojun Lee and Ilya Somin, eds). The book, with separate contributions from experts in Germany, Korea, Taiwan, the U.S., and others, might be viewed as a companion Ilya Somin’s earlier thoughtful work, The Grasping Hand: Kelo v. City of New London and the Limits of Eminent Domain (Chicago 2015). 

 

The event featured representatives from conservative and libertarian institutions: Institute for Justice (IJ), The Pacific Legal Foundation, George Mason Scalia School of Law, and of course CATO. I was a graciously invited interloper. Although I spent 14 years on the George Mason Law School faculty, prior to its renaming, see here, I now teach at Maryland Carey Law. My jurisprudential philosophy broadly differs from those of the remaining attendees. The first 50 minutes of the lunch, which was run by a CATO representative along with Hojun Lee and Ilya Somin, two of the book editors, largely assented to the deep problem of property condemnation through eminent domain and expressed sympathy with the often displaced and under-compensated victims of proposed, and sometimes unsuccessful, large-scale development projects effectuated through takings. 

 

The new book describes 6 pillars of eminent domain law, which the various chapters then apply in differing national contexts. The pillars: “(1) public interest criteria for takings; (2) subjects of takings (the entities authorized to use the power to condemn); (3) just compensation; (4) due process in takings; (5) the distribution of the development surplus; and (6) the dispute resolution system.” (Eminent Domain p.2). The attendees expressed dissatisfaction with how each pillar is handled in most settings, with the possible exception of Germany, which seems the most protective or property rights. The early discussion focused largely on pillars 1, 3, and 5. The general concerns were (1) that takings are too often exercised prematurely, (2) that they are frequently used for projects that do not come to fruition (perhaps due in large part to the litigation prompted by these very organizations), and (3) that those who fall victim to the takings do not receive their fair share when compared with the actual or anticipated total gain to the corporate developers. Just compensation typically equates to fair market value, albeit with some variation among states. 

 

The classic account of eminent domain rests on the problem of “hold outs.” Imagine the need to assemble several contiguous tracts of land to create a railroad line, a park, a road, or a school. If each purchase had to be performed privately, a property owner in the middle of it all who held out could demand an enormous premium, sometimes called a “rent,” equivalent to the conversion value of all the lands involved in the project, assessed at prior fair market value, one the one hand, versus the aggregate higher value of the project as a whole for all the assembled lands (less the relevant acquisition and development costs), on the other. Eminent domain allows the state to avoid this by forcing the sale and instead paying the owner just compensation, typically assessed at fair market value. In effect, eminent domain converts what had been a property right into a liability rule. 

 

Although each of the prior listed uses likely satisfies traditional understandings of “public use,” this is increasingly untrue of litigated eminent domain cases. Many of these cases involve combined efforts by the state agencies, state-created entities that are formally private, and private developers to convert large tracts of contiguous properties, sometimes blighted, sometimes simply less well off, to facilitate a large-scale development. Those developments, if successful, are expected to generate major tax revenues, and these cases often involve whether that satisfies public use. The general legal consensus, reflected in Supreme Court case law, is that it does. The near consensus in the CATO conference room was contrary. The problem is that if tax revenue increases satisfy public use, that risks allowing one private party to claim an interest, backed with government coercion, in acquiring the land of another who prefers not to sell. 

 

This was the issue in Kelo v. City of New London, 545 U.S. 469 (2005), the lightening rod of modern eminent domain litigation. The case, which found its way to the Supreme Court, involved an apparent hold out, Mrs. Kelo (plus a few others) who refused to sell for a planned conversion of their property as part of a large-scale development centered around a Pfizer Plant and surrounding residential communities. The question before the Court was whether effectuating this larger project, which would ultimately benefit private interests as well, satisfied the public use requirement. Justice Stevens, writing for a majority, concluded it did. And then a storm broke loose.

 

About 50 minutes into the CATO lunch, all seemed to agree that Kelo was an unmitigated disaster. At that point, I elected to reveal myself, saying something along the following lines: “It was kind of you to invite me, and I assume that having done so, you know who I am. I’m not, nor have I ever have been, a libertarian or even a traditional conservative. And here’s the real clincher: I don’t think Kelo was wrongly decided.” My lunch companions looked a bit taken aback, and yes, the conversation was about to get interesting.

 

I told the attendees that although my analysis wasn’t addressed in the book, I had an alternative account of Kelo that I had previously shared with Ilya Somin, and that I had included in a prior published (and one forthcoming) work. It is this: The problem in such cases is that at some point, effectuating the taking, and perhaps the development project, becomes is a fait accompli. There have been major property acquisitions already, coupled with tax breaks, and plans for the development. We cannot go by what happens after the fact; the question is what we reasonably anticipate at this decision point. And at this point, what had been a hold-out game risks being transformed into a game of chicken. 

 

If the hold-out holds out too long, the developer might elect to develop around her land. This not only reduces the value for the developer, who has an unwanted house in the middle of the development, but also for the hold-out, whose property risks a complete, or at least substantial, diminution in value, well below prior fair market value. In effect, the hold-out finds herself in a bilateral monopoly with the developer, who becomes the only plausible buyer and who no longer has an incentive even to pay fair market value. If we accept the tax base increase as satisfying public use, consistent with extant case law, this implies that Kelo might be justified as resting on a parentalistic desire to protect the hold-out from holding out too long. If so, the disagreement concerns our priors, and whether one is libertarian or, instead, one is willing sometimes to allow the state to use its regulatory powers in this parentalistic manner. 

 

Although this did not convert the room, it made for an interesting final half hour. Those present challenged my analysis, with the following six arguments, which ranged in their level of seriousness. Here are the primary critiques along with my responses. In some instances, I give a bit more detail here due to time constraints at the lunch. 

 

1.

 

Argument: I am not adequately accounting for Mrs. Kelo’s subjective value. She might not have held out strategically seeking financial gain, but rather due to her genuine wish to remain in her home.

 

Response: There is no way to know, of course, whether a hold-out is acting strategically or based on subjective value, and so the best we can ever do is rely upon objective factors, such as the financial risks posed by holding out too long.

 

2.

 

Argument: Empirical evidence proves that some hold a higher subjective value, including those, who, like Mrs. Kelo, hold out longer.

 

Response: No. This is not possible. You might have survey data or data on duration of hold outs, but such data cannot prove or disprove the subjective motivation for holding out. There is also a deeper problem. Even assuming that Mrs. Kelo holds a high subjective value and that we reward her based on one of the proposed remedies that might let her share in the project’s higher expected conversion value (had the project succeeded, which it did not), this would then signal to all the others in future cases never to acquiesce in taking fair market value since they too will be so entitled. 

 

3.

 

Argument: That’s mistaken because some owners really need their money quickly.

 

Response: No. You are making the common mistake of assuming that you can change a rule without changing how people respond after you have done so. If you enact a rule that lets hold-outs share of the conversion value, you signal to all future property owners involved in large-scale-development takings that they too are entitled to their fair share, well exceeding pre-development fair market value. This will predictably make such conversion takings nearly impossible to negotiate. Libertarians might like that, but that goes to priors, not to the narrower question whether hold-outs, like Mrs. Kelo, should be specially rewarded. 

 

4.

 

Argument: My argument only succeeds when conversion projects fail, as failed projects are prone to decimate land value, not successful projects, which raise land values. 

 

Response: No, this is mistaken. To illustrate, take Disneyworld in Orlando, Florida. In that situation, the conversion was effectuated through secret straw purchasers rather than eminent domain. But assume otherwise, and assume that after all others sell, there is a final hold out. At some point, we might imagine Disney deciding to simply build around the holdout. Taking this to an extreme, we might imagine a home surrounded by Mickey’s house on one side and Minnie’s house on the other. As another example, near Baltimore’s Pimlico Race Track (home to the second leg, The Preakness, in The Triple Crown), there was a failed attempt to acquire a Pimlico neighborhood of small contiguous homes to create a parking lot that would support a new slots facility, which did not come to fruition. One older couple held out, and now their home is surrounded by what is, in effect, a cleared field of lots that previously had single family homes. In either case, no one is buying.

 

5.

 

Argument: That’s absurd. There are people who would adore living in the middle of Disney World, and perhaps this older couple enjoys living along the highway surrounded by an open field rather than by neighboring single family homes. The net value to these owners is likely higher not lower from holding out. 

 

Response: (This response is a bit more detailed due to time). No. This is fairly obviously mistaken. Consider the reality of living in Disney World. Unless you work there, commuting to work would be nearly impossible, and if you did work there, your children’s school commutes would be nearly impossible. Same for shopping, going out to meet with friends, or otherwise. Try to imagine commuting anywhere from a home in the middle of Disney World. As for the open field along a highway, this is admittedly subjective, but no, there will not be many (perhaps any) buyers for that home. In each case, the owners are stuck, at best, in a bilateral monopoly, with the other side no longer motivated even to pay fair market value. Financially speaking, these hold-outs played chicken, and lost. 

 

6.

 

Argument: I need empirical evidence to show such value diminutions in each case.

 

Response: (Again, this goes beyond the limited time I had). No, that is not how the relevant constitutional doctrines work. If we assume public use is met per existing case law, the standard is low level scrutiny. The government then needs a plausible rationale with the burden on the challenger, not the other way around. My analysis offers one, and that’s all that is required. You would like to change this and to instead put the burden on the government in each case. But that is not constitutional rule in this context, and that is not a change in the doctrine. In my view, the government should not have its admitted grasping hands tied to the point of never being able to effectuate a development project transfer via eminent domain.

 

Final comment: The attendees rightly maintained that there is lost value to those forced to sell. Of course, that’s true. But adopting the various rules they prefer would risk creating lost value in inhibiting beneficial and successful conversions. One would have to assess and weigh the costs on all sides, not just to those with whom this group of thoughtful libertarians rightly feel sympathy. Eminent domain is complex. This single post lists two books, and there are many more. 

 

I enjoyed the CATO lunch, and I thank Ilya Somin and CATO for inviting me, and all those in attendance for letting me shake things up a bit. I understand that some find takings deeply problematic and in violation of their strongly held commitment to property rights. I respect that. Even so, I believe that my analysis explaining how a hold-out game risks becoming a chicken game remains sound, helps to explain Kelo, and is preferable to alternative accounts.

 

I welcome your thoughts and comments. 

 

 

 

 

 

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