Tuesday, January 19, 2010

U.S. Supreme Court to Get a Doubleheader on NYS Eminent Domain Abuse? Pretext and Lack of Due Process PLUS No “Just Compensation”

(Above: Discussion panel after showing of "Battle of Brooklyn.")

We certainly don’t want to see the basketball arena or any portion of the Atlantic Yards mega-monopoly proceed one step further. Politicians and public agencies need to come to their senses and halt it immediately. But if Atlantic Yards did proceed a few more steps we wonder if it could just be possible that, as a result, New York State would be presenting the U.S. Supreme Court with an eminent domain doubleheader, two giant eminent domain cases to be concurrently heard that would jointly define the limits of the Supreme Court’s unpopular 2005 Kelo eminent domain decision.

Poetic Justice?

It would be sublimely fitting: Kelo, viewed as one of the very worst of the court’s decisions (43 states have restricted it in some fashion or other), getting its wings clipped via the gift-wrapped present of two cases rife with government misconduct from New York, the state which we are regularly told is “the worst abuser of eminent domain in the United States and believe me, that is a difficult race.” That exact quote is from Institute of Justice attorney Bob McNamara at a screening of the still-being-completed “Battle of Brooklyn” documentary about the eminent domain abusing Atlantic Yards mega-monopoly. (See: Friday, December 11, 2009, Battle of Brooklyn film prompts discussion of fighting eminent domain, New York's unfair laws, and "strange bedfellows" in the struggle.) Mr. McNamara also said, “It is abundantly clear that something needs to be done… New York’s system is fundamentally broken.” That is why we envision a Supreme Court doubleheader coming about.

The Synergistic Effect of Two

How do we envision this doubleheader coming about? It is pretty evident that there is a fair chance that the Columbia University case will go up to the Supreme Court for review with respect to the well-documented record of state officials conniving with Columbia to pretextually find “blight” in order to give Columbia properties it covets. At the same time the court would have an opportunity to address the abject lack of eminent domain due process in that case and in this state generally.

Next, if the Atlantic Yards megadevelopment continues to take steps forward and property is actually condemned, that litigation would then be ripe at about the same time to proceed to the Supreme Court on the issue of what is “just compensation” as required by the federal constitution. (The state constitution also theoretically requires it.) For Atlantic Yards, the question would be asked in terms of what is “just compensation” when the eminent domain is being used to force a transfer of property from one private owner to benefit another private owner (as opposed to land the public needs to own) and the question would be asked against the backdrop of the well-documented record of abuse in the Columbia case which involves exactly the same public officials engaging in almost exactly the same abuses.

The Atlantic Yards eminent domain litigation was initiated before the Columbia case. In the Atlantic Yards eminent domain litigation a lack of due process was an obstacle to the introduction of many pertinent facts similar to those now established in the Columbia litigation, but in an ensuing Atlantic Yards “just compensation” litigation there would be an opportunity to introduce such facts (in part by collateral estoppel against the state) in that condemnation award proceeding.

Supreme Court Review of Columbia Eminent Domain Case

The Court of Appeals is in a bind with respect to the Columbia eminent domain case in which the Appellate Division (the lower court) has so far held against Columbia and state officials in a scathing decision. The Appellate Division found abuse: Public agency officials colluded with a politically connected developer to engage in the “sophistry” of finding blight in order to transfer desirable property to that developer. It is essentially the same fact pattern as the Atlantic Yards and it involves the very same public officials who in the Columbia case were found to be acting with the bad faith of pretextually stated goals.

The Court of Appeals has a problem because it previously went out on a limb to decide in favor of those public officials in the Atlantic Yards eminent domain case on the theory that it needed to trust and defer to them (even when they espouse pretexts that manifestly make little sense). Therefore, it would now be extremely awkward for the court to find in the parallel Columbia case that those same officials acted pretextually and in bad faith in the same time frame, while performing essentially the same acts in a different borough of the New York City. (Technically, with respect to interrelated Freedom of Information Act manipulation, the Court of Appeals has already found that those officials cannot be trusted. (BTW, records coming out of the Columbia litigation show that officers of Columbia University- the developer in the latter case- met a number of times with officers of Forest City Ratner- the developer in the former case- Would those meetings be to compare notes on strategy?)

The Court of Appeals would almost certainly like to clear the decks of such a cognitive dissonance headache by overturning the Appellate Division’s Columbia decision (“Kaur”) and again finding that the state officials need to be deferred to no matter how starkly suspicious the eminent domain outrage, but they have a giant problem: Norman Siegel’s brilliant lawyering (financed by his client Nick Sprayregen- justice is not cheap) has created a rock-solid record of the public officials’ abuse and bad faith. Furthermore, Justice Catterson’s opinion trenchantly integrates that record into an unassailable argument that tolerating such abuse is antithetical to Kelo itself- In other words, exactly what the Supreme Court should be looking for, a concrete example of behavior beyond the limits of what their unpopular decision condones.

If the Court of Appeals were to overturn Kaur, it is highly probable that the U.S. Supreme Court would then overturn the Court of Appeals and in so doing make it spectacularly obvious that the Court of Appeals was also wrong when it decided the Atlantic Yards eminent domain case. Though the U.S. Supreme Court could have overturned the Atlantic Yards case, it did not grant certiori to consider and overturn it when it had the opportunity. (The Supreme Court is not required to grant certiori and tends to pick the juiciest cases with the clearest records to present the issues. Cases like Kaur.)

Given Court of Appeals conundrum, it might be predicted that the court will attempt to sidestep a direct upholding of the government officials’ eminent domain abuse in Kaur. In fact, it seems as if it is already priming itself to do so with via a decision that would hold only that the eminent domain should be disallowed based on government officials’ abuse of due process. It is unclear how deeply the court would want to delve into the issue of due process. New York’s eminent domain procedure law provides no opportunity or evidentiary forums where individuals whose property is being taken can find, gather and have considered evidence that public officials are not acting as they are required to do: in good faith, without political favoritism and in an unbiased and nonarbitrary way.* That is a lack of due process that goes directly to the ability to challenge the worst abuses we typically see in the way that the eminent domain industry works in New York.

(* As one starter suggestion for more due process, without even getting into the critical question of an appropriate due process opportunity to directly test the true impartiality of state officials’ motivations, we particularly like the suggestion that, in addition to paying for studies to find and document “blight” for the record “in support of the project” the state should also pay for the potentially displaced neighborhood property owners to conduct a counter-blight study documenting for the record why “blight” does not, in fact, exist.)

Norman Siegel and the lawyers litigating the Columbia case managed to partially surmount the severe due process handicaps by using the state Freedom of Information Law to discover evidence to introduce into the record. State officials tried to block the Siegel team’s end run around the lack of due process by refusing to comply with the Freedom of Information Law and the Court of Appeals has very recently (after its Atlantic Yards decision and after the Appellate Division’s Kaur descsion), in a related proceeding with Mr. Siegel, held that the public officials were abjectly wrong in doing so. (See: Tuesday, December 15, 2009, Court of Appeals smacks down ESDC in FOIL case related to Columbia expansion.)

By holding that there was no due process in the Columbia case due to state officials’ refusal to comply with FOIL, the Court of Appeals could uphold the Appellate Division’s decision against eminent domain in the Kaur case without actually having to uphold the additional well-documented other misconduct of those state officials whereby they colluded to pretexually find “blight.” The court could address itself just to due process problems of the state officials’ non-compliance, specifically with FOIL, or it could go further and point out the many other due process problems with New York State eminent domain procedures such as the lack of an evidentiary forum to investigate the improper motives of political agencies when handing over property to politically connected developers.* But if it went further in this regard the court would be doing something the Court of Appeals did not do in the Atlantic Yards eminent domain decision. The court might attempt to provide a technical rationale for this discrepancy between the Atlantic Yards and the Columbia cases by saying that such due process issues were not adequately raised in the Atlantic Yards case but it would be painfully awkward.

(* The fact that this or other courts could at any time question eminent domain due process is one reason that even those in eminent domain industry who do not want to upset the profit-making apple cart may find themselves endorsing some kind of monkeying around with eminent domain reform, a placebo or distraction that muddies the waters without actually stopping the profit-generating abuse.)

Upholding the Appellate Division’s Kaur decision on due process grounds might insulate the Kaur decision (and thus all of New York’s practices) from immediate U.S. Supreme Court review. But what if Columbia and state officials are still set on assisting Columbia with its eminent domain takeover of West Harlem? The case could well return (after remand to the lower court) with a superficial attempt to cure the due process defects. If that happened, the record of the early abuses and impermissible motives on the part of public officials would always lurk in the background and as such this case would eventually be a prime candidate for the Supreme Court to consider the very necessary limits to Kelo.

Supreme Court Review of the Atlantic Yards Eminent Domain Case

The Atlantic Yards eminent domain case could reach the U.S. Supreme Court at about the same time for consideration of a different issue: The payment of “just compensation” to the condemned property owners. To think that this is entirely unrelated to the abuses we have already been discussing would be to evince a lack of understanding of the profit-seeking that drives eminent domain abuse. We have previously pointed out that when it comes to forcing one private owner to transfer property to another private owner “private profit is the gasoline that fuels eminent domain abuse” providing the “incentive for turning common sense upside down” in an eminent domain world where we now see “everything is topsy-turvy; almost every crucial concept is taken to mean its opposite.” (See: Wednesday, January 6, 2010, Noticing New York Testimony at Senator Perkins’ Hearing on New York State Patterns of Eminent Domain Abuse.)

We therefore have advocated that eminent domain reform requires taking “the private profit out of eminent domain” and rigorously erasing “absolutely all of that private-profit windfall.” A critical tool that should be used to address this is the requirement in the federal constitution (as well as appearing in parallel form in our New York State and most other state constitutions) that when private property is taken through eminent domain there must be “just compensation.” The issue of what actually constitutes “just compensation” is now ripe for U.S. Supreme Court review and, once again, the court’s Kelo decision helped set the stage.

Supreme Court Setting its Cap for a Case on “Just Compensation”

Here is something that lawyer Norman Siegel said toward the end of the discussion that followed the Battle of Brooklyn screening:
One quick thing, [Quick!] I think the next wave of litigation on eminent domain is to challenge the constitutionality of the “just compensation.” In other words, when I was at the Kelo argument in the Supreme Court, for about five minutes, three of the justices got into a conversation about, and recognized the unfairness of how government determines what “just compensation” is, and then finally one of the Supreme Court justices said to the other ones, “That’s not in this case,” and one of the justices, if I remember correctly, said “We’ll save that for another year or two in the future.” So, somewhere down the road, whether it is you in your town in Connecticut [referring to Carl Yacobacci- more on this latter], whether it’s Dan Goldstein [a plaintiff in the Atlantic Yards eminent domain case] if he’s still got the stamina to keep fighting, or whether it is Nick Sprayregen up in West Harlem, there will be a challenge, and I am encouraging people to challenge the constitutionality of how government determines “just compensation” because it’s basically unfair.
(Above: Attorney Norman Siegel with photo ILJ attorney Bob McNamara in background by Adrian Kinloch, part of a set used by Atlantic Yards Report.)

“Just Compensation” Isn’t Just

There is more than one thing to think about when you consider what ought to constitute “just compensation”: One is to recognize how inadequate the payments to the condemned property owners are in terms of compensating them for what they actually lose, to focus just on their hardship. These hardships are themselves unfair, but we suggest that what needs particular focus these days, more than it has previously been given, is the flip side of the equation, which is the unjust enrichment of the new private owner (usually an avaricious politically-connected developer) to whom their property is being transferred. Presenting what might be considered a novel concept, we suggest that in a just world no enrichment of the new owner ought to be allowed and that, to the extent that it exists at all, any enrichment ought to be paid over to the condemnees losing their property. (We’ll discuss this concept and indicate why we think it hasn’t gotten due consideration shortly.)

In his statement above, Norman Siegel was responding to an extended description by Carl Yacobacci concerning why the compensation offered in eminent domain cases shouldn’t be considered just. Mr. Yacobacci is the owner of Clark Development, a design and building firm. For six years he has been fighting an eminent domain taking of his business premises by the town of Derby, Connecticut. He noted that he has been assisted in his fight by Christina Walsh and the rest of the team of professionals at the Institute of Justice.

Unfairly Seizing Opportunities at Below-Market Prices

Mr. Yacobacci explained that he had been offered a price that was “well below market” from a politically-favored developer using the threat of eminent domain against him. That developer subsequently failed the town and is now out of the picture. Interestingly, in terms of our point that eminent domain should not be conduit of profit and benefits to a new owner (rather than directing all enrichment to the original owner), Mr. Yacobacci explained that the eminent domain taking he was fighting involved someone else proposing to make the same improvements and same use of the property denied to him:
“Someone is trying to take my property to build exactly the building I proposed and was turned down on by the city.”
This is similar to what happened in the Columbia University fact pattern. Columbia is seeking to take away Nick Sprayregen’s property even though Mr. Sprayregen sought approval from the City Planning Commission to himself build what Columbia is proposing. Columbia says it wants student housing. Mr. Sprayregen proposed to build that housing and provide it to them. If Mr. Sprayregen’s plans had been approved there would have been the development and use of the property that Columbia wanted but Columbia would not have captured the private profit eminent domain abuse windfall it sought by forcing a below-market transfer of Mr. Sprayregen’s property to them.

Pfizer’s “Dust Bowl” Politics

While eminent domain takeovers for private ownership purposes may be driven by private profit motivations, the effects tend not to be salutary for the community. Mr. Yacobacci pointed out that the effect of eminent domain in New London, another coastal Connecticut town nearby, made infamous by the Kelo decision that allowed eminent domain there, is now a “dust bowl,” Pfizer, the initiating private party that propelled the eminent domain taking, has walked and the result is a “negative tax base and negative jobs.” For some pictures of that devastation and our concurring analysis, see: Eminent Domain Abuse: The Gifts That Keep On Giving and the Gifts That Don’t (Monday, December 21, 2009).

Eminent Domain’s Depressing Effect on Compensation

The negative effects of eminent domain abuse on the community as a whole often translates to a synchronous adverse effect on “just compensation.” Mr. Yacobacci, explained how he was now being told by the city of Darby that he would be given less compensation for his property because the threat of eminent domain had been used against the other properties surrounding him (for “economic development”?) so that he now was in a blighted area.
(Above: Carl Yacobacci, photo by Adrian Kinloch, part of a set.)

Loss of Control

In explaining how important the issue of inadequate compensation for eminent domain is Mr. Yacobacci pointed out that his business that is being condemned pays for his house and that if Darby takes away his business property he will lose his house because he can’t afford to move his business elsewhere. Here is more of what Mr. Yacobacci expressed, some of it in a more theoretically explored vein:
But you buy a piece of property as an investment, so that when you retire you get to sell that property at, you hope, a profit so that you can do something else. When people come in and take that prematurely under eminent domain, they take away your ability to possibly retire. They don’t give you `all of this money’ (and people think you get rich and retire off of it): Many times you can barely cover the mortgage that you owe on the property and they tell you to go and buy something else. Then go to try to buy a piece of property with 3% down: Especially in a bad economy no bank is going to give it to you. So you have a little bit of money and your retirement is dramatically affected by it. And that’s something a lot of people don’t bring up: We do buy property like we buy stocks and bonds. And how would you like to buy a stock for $2 and then it goes up to a hundred and somebody comes along and says, Man, that was really smart of you to buy the stock at $2, it’s worth a hundred, but-- you know what?-- I can’t pay you that: I am going to give you $10 and you should be happy because you made some money.

And that’s what eminent domain does to a lot of property owners.
One other thing that Mr. Yacobacci pointed out is that eminent domain is a never-ending cycle of perpetual exposure to abuse since, as he observed, “someone can always decide they want to put up a bigger building.” (Bigger even than whatever was just built using eminent domain.)

Mr. Yacobacci makes a number of valuable points. Particular points worth noting are that property is being taken “prematurely” to what were one’s legitimate expectations about holding that property and that “many times you can barely cover the mortgage” though you need to buy something else. In a down economy the mortgage can, indeed, be considerably more than what is covered by the award. This could be true even though one’s business or other income would have been sufficient to keep making the regular monthly mortgage payments necessary to avoid being forced into the loss of defaulting on the debt.

Businesses Succumbing to Eminent Domain

It is important to remember that businesses condemned by eminent domain frequently don’t survive (just as Mr. Yacobacci predicts his would not). For instance, an estimated 55 businesses (the figure reported by the Times itself may be low) were displaced by New York City to give the New York Times the Eighth Avenue site (between 40th and 41st) for its new tower (joint venturing with Forest City Ratner). Steve Malanga, a City Journal Senior Editor and a Manhattan Institute Senior Fellow, observed recently in the New York Post how many of these businesses “either never reopened or relocated and have since succumbed.” (See: When can't New York take your land, by Steven Malanga, December 7, 2009.)

“Just Compensation” Delayed is “Just Compensation” Denied

If you are one of the condemned, the loss of control over the timing of one’s affairs is a hidden uncompensated loss. It is also a loss that New York State eminent domain compensation procedures unfairly accentuate (one might say manipulate) for the probable purpose of paying condemned property owners even less than they otherwise might be able to negotiate or win in court. “Just compensation” should not only be “just” in terms of the amount received in order to be “just compensation;” it should also be just in terms when it is paid to the property owner whose property is being taken.

In New York property owners usually must move out of and give up the homes and business locations they owned to find new places to live or conduct their business well before they receive the full amount of the compensation* they will eventually receive for what is being taken away from them. The structure of the law is set up to use delayed compensation as an inducement for the deprived property owners to settle for less compensation than they could most likely win if they fought for the full award they could get by contesting the amount that they are offered. The amount of compensation and the delay with which it is provided therefore couldn’t be more intrinsically or intentionally linked.

(* We have written before about how the owners will at no point be fully compensated in the true sense for their losses because they will not be paid for many things like lost fixtures and other investments tied to the particular property, a business’s good will or its advantageously negotiated- cheap- leases, brokerage and lawyer fees to acquire new property, costs of changing employees or changing arrangements with employees, skittishness and lost business opportunities such as contracts and leases due to condemnation-caused uncertainty. The complete list which we have addressed before is much longer.)

Imagine that your home is taken away from you. Perhaps it is a co-op or a condominium. Maybe it is a single family home. You can imagine a similar set of difficulties for a business that needs to relocate. You know that whatever award you receive it will not be generous and therefore will not fully compensate you in any event, so it will be a financial setback no matter what. Further, what you are offered immediately is a still lesser amount than the still inadequate amount you can win if you refuse to settle and fight. With this as a given you must now search for and find a new home that you can afford with the minimized amount of cash you have been given, you must obtain new mortgage financing (an extra problem if your old mortgage was not covered), and you may need to be interviewed by a co-op board for approval where you will have to explain why your deteriorated financial condition should not be a concern to them.

If you are lucky and skillful enough you will be able to do all this (probably by retrenching and scaling back significantly), but you have one more problem; you may not know when you need to launch into all these financial acrobatics because you are unlikely to know or be able to control exactly when you are going to be given your condemnation award, either the first part of it or the final portion you will get after your contest for more concludes.

The Long and Torturous Road of Eminent Domain Uncertainty

Eminent domain acquisitions involve a many-step process with torturous uncertainty for the condemned property owners that is manipulated for the developer’s advantage when property is being taken for private use. To give you an idea, the Atlantic Yards project, which obviously was going to require eminent domain, was announced December 10, 2003, yet the developer was allowed a full three years to negotiate acquisition contracts to its advantage using the threat of eminent domain before the use of eminent domain was officially authorized by a public agency vote on December 8, 2006. Even then it was uncertain when that next step, official authorization, would come with Chairman Charles Gargano, the head of the authorizing agency, saying that eminent domain would not be authorized at that 2006 meeting the day before it actually was. Although much of the subsequent additional three years (from December 2006 till now) can be attributed to the condemned owners fighting against having their property taken away from them, these years still amount to additional uncertainty about timing. Even now, when the use of eminent domain may have been cleared by the most recent Court of Appeals decision, there is huge uncertainly about when the original property owners might be dispossessed. (They will probably be dispossessed in two phases.) Notably, when Columbia was asked to make the eminent domain process more bearable for the prospective condemnees by agreeing to adhere to a schedule that would govern the timing of its taking of property it flatly declined.

Inducing Condemnees to Settle For Less

All of this hardship which the law consciously imposes is intended to induce New York property owner condemnees to settle earlier for a smaller sum: By agreeing to take a smaller sum earlier condemnees may hope to regain some of what they have been deprived of, along with the rest of the value of their property: a modicum of control over their lives. That is because by agreeing to accept lower compensation they may get that compensation on an earlier identifiable date.

On the other hand, what is the value of the condemnees fighting for greater though delayed compensation? How much more are they likely to get? The amounts to be considered are quite substantial. Very likely, the owner will easily wind up with at least 40% more for their property. That is to say if the government offers them $2 million, by fighting they would receive another $800,000, for a $2.8 million total. Or they could even receive more than 10 or even more than 20 times what they were offered. If those latter figures seem high, we refer you to the website of Goldstein, Goldstein, Rikon & Gottlieb, a law firm that has always specialized exclusively in eminent domain. Their website is where some of those multiples can be seen. Figures showing how much more is tantalizingly held back by the government can be seen by clicking “read more” under “decisions” (what courts have awarded) and “read more” under “recent claims” (settlements reached). The figures may be somewhat self-selecting but there are more than four court awards exceeding 10 times what was offered, one of them being 21 times. The listed settlements range less widely (averaging at a figure of nearly 5 times the government offers) with half of them coming in between 2-3 times the original offer.

(Here is a thought: Until superceding legislative reforms can be managed, we wonder if it wouldn’t make sense for eminent domain opponents who want to support challenges to eminent domain in New York to set up a charitably funded revolving loan fund to fill the financial gap the justice system leaves. Monies could be advanced from such a pool to help tide over those opposing eminent domain with amounts more closely reflecting the larger awards they can expect to receive in their contests.)

And There Are Attorney Fees to Cover (And Lost Interest)

The compensation figures above may also be increased by an award of attorney costs and interest but neither of those recoveries represent actual compensation to the property owner for the value of their property, they only cover some of the transaction expenses associated with fighting and waiting for a the higher compensation received on a delayed basis after having their property condemned. The difference between the court awards and the settlements is that the court awards will typically involve the award of attorney fees to the property owner on top of the award while the owner’s attorney fees will have to be paid out of a settlement amount.

When we say that attorney fees will typically be added to a court award we mean that the rule is that courts will add them if the court award is 30% or more in excess of what the government offered to pay, which it is likely to be. Note that all the awards and settlements on the Goldstein laws firm’s web site exceed this figure. Typically the amount of the legal fees will be set at about 25-33.3 % of the difference between what the government offered and the final compensating amount for the property that the law firm collects.

An Ironic Favor? Not at All

Given that legal fees are covered if a court awards a property owner 30% or more over what the government offers, it might therefore seem as if the government does a condemned owner a favor if it offers an insulting low amount: In other words, if a property owner recovers $1.3 million as a compensation award from a court, the property owner will also recover in addition approximately $99,999 in legal fees (assuming a 33.3 % contingency agreement) if the government offered only $1 million initially. However, if the government’s initial offer was only slightly over $1 million, then the property owner stands to recover no such figure for legal fees and then will have to pay legal fees out of the award, so the benefit of having gone to court will be a net additional recovery for the owner of only about $200,000 rather than $300,000.

While the government’s offer of an especially low price might seem like a favor by virtue of the above analysis that it will result in a higher award via the inclusion of legal fees, that is only if the case proceeds through to a final court award (including the appeals) and that could take a very long time. During that very long period of time the property owner will have collected only the lesser amount. How long might it take before there is a final court award? A recent case handled by the Goldstein law firm that involved condemnations for the Melrose Commons project in the Bronx was litigated for more than ten years and ultimately did not result in a final court award because it was settled instead. Rather than wait for a challenge to consummate, one’s inclination is likely to be to settle at some point along the way. We note that the settlements listed on the Goldstein firm’s website outnumber the court awards. Furthermore, if the government abandons the eminent domain taking then the property owner (with an otherwise disrupted life) may well have incurred attorney fees that won’t be reimbursed.

Whose Transaction Costs Should They Be?

An excellent question to ask is why condemned property owners should ever have to pay for their own attorney fees. No matter how one views things (even if one is supporting the use of eminent domain), the condemnation is theoretically for the benefit of the public. Why shouldn’t the public therefore pick up the transaction costs rather than the condemned property owner for whom there isn’t benefit? Forcing the condemned property owners to pick up their own legal fees only increases the loss they are already suffering.

Avoiding Court?

Presumably the potential for incurring unrecoverable legal fees is intended to keep condemned property owners out of court. As a practical matter, the typical one-third continency fee retainer arrangements condemned property owners enter into with counsel will off-load onto the counsel a certain amount of the risk of how much will be recovered to finally pay counsel (whether they are paid for by the condemnor or not). However, if the prospects for recovering adequate legal fees are low the property owner is going to have difficulty obtaining counsel unless he agrees to shoulder risk by paying legal fees on a non-contingency basis. This might happen if the value of property owned is relatively small and the amount offered by the government is close enough to a figure that will preclude the likelihood that legal fees will be recovered when the property owner recovers 30% or more than the government originally offered (i.e. close to 76.9% of a court award). That might mean, for instance, that a small property owner offered $100,000 for the property might stay out of court and leave unclaimed a without a fight an additional $27,000 in value inherent in what could be recovered for the property because the owner can’t front the legal fees for a challenge.

Coupling Eminent Domain With Density

The issue of compensation is complicated by another factor respecting the new style of private purpose conduit deals that are designed to channel the windfalls of eminent domain profit directly into private hands (without bid): We typically see that as an accompanying device to increase the windfall channeled to the developers, these deals couple eminent domain with tremendous up-zoning or density increases that government agency officials try to make special to the developer. While the density increases can pay for greater compensation to the displaced property owners and thus disguise to a degree the true extent of their loss, any increase in payments to original owners funded this way is actually paid for by money to which those owners ought to have been be rightfully entitled. (Further, there is no guarantee of how substantial an amount, if any, a purchasing developer will direct in this fashion.)

Before we proceed to consider this further it should be pointed out as background that simple stand-alone upzonings, without the use of eminent domain would normally serve to spur development and achieve, probably more effectively, the same development goals said to be the purpose of the eminent domain. The difference is that with a simple stand-alone upzoning the benefit of the upzoning would go to the original property owners rather than the interloping developer looking to be governmentally favored.

Original Owner Should Be Entitled to Value of Zoning Increases

If the density of the property is being increased to the density that reflects good city planning, then it should be considered that this was an increase that should have been anticipated and expected from the government. If the increase should have been expected upon request from the government and it can therefore be considered “probable” then there is case law that says that the upzoned value needs to be taken into account when compensating the original owners. That certainly is what should be the case. In a long-ago column in the Law Journal (April 2, 1974) attorneys from the Goldstein firm, Robert and Michael Goldstein, wrote pointing out that the problem of factoring zoning into valuation goes back only to New York City’s introduction of zoning in 1916, and notes “Condemnors have challenged this concept as `speculative,’ but that the courts have been quick to embrace it.” (See: Probability of Zoning.) For some of our own thoughts previously provided on this regarding Atlantic Yards see: Compensating Justly? What Is the Property Being Condemned at the Atlantic Yards Site Really Worth? (Sunday, November 1, 2009). Suffice it to say that these upzonings can increase the value of the property being condemned by many multiples.

Making Opportunities Special to Interloping Politically-Connected Developers

As part of their efforts to channel maximum profit to the interloping developers the government condemnors, in today’s big profit conduit deals, are likely to resist full compensation to the original owners by making the zoning increases or development possibilities special to their politically-supported developer. Ergo you wind up with Mr. Yacobacci or Mr. Sprayregen complaining, as we noted before, that the interlopers were being permitted to build what they themselves as original owners were denied permission to build when they sought government approval. Such collusive government tactics oughtn’t to be allowed: They serve only to promote games of political privilege and benefit, and in the end they help encourage the theft of property through eminent domain.

When the Density Gets Excessive

In today’s big-profit conduit deals we see that density is increased to the level that would reflect good city planning and then far beyond it. We see this very clearly in the case of Atlantic Yards and probably in the Columbia expansion as well. Again government officials hope to make this special to the developer. Clearly, as we have said, the compensation to the condemnees should include any increase in value associated with a good city planning style increase in density, but what about the excess density of such extreme ill-advised increases?

One answer is that excess density should never have been handed out all. What it represents is an unwarranted transfer of development opportunities from other properties in the vicinity of the development, properties whose ability to use the subway lines and schools, the city’s overall ability to tolerate density will have been usurped. Theoretically those who ought to be compensated are those neighboring property owners who have thus had their development rights circumscribed. That, however, would be a difficult thing to do.

We have another answer: Give the value all of that increased permissible density to the property owners whose property is being taken; don’t question the extreme density; presumptively treat that extra density for these purposes as good city planning (even if it isn’t). Treating that density as if it is good planning would then mean that the increased value should be rerouted to the condemned property owners. By so rerouting that benefit back to the condemned the attraction of extreme ill-advised density and bad city planning will be removed and with it some of the attraction of using eminent domain to provide windfall to politically connected developers.

What Is Needed to Get Up to Speed With the Times

This gets us to a major point we want to make. The law of eminent domain compensation does not reflect modern times and needs to be updated. Eminent domain that is used to force transfers from one private owner to another isn’t the same thing as eminent domain the way it historically was used, for true public use, the acquisition of property that would be publicly owned and used, like roads, fire houses, courthouses and police stations. The same rules for compensation should therefore not apply. The law on compensation should be different when the transfer being forced by government is from one private owner to another (if it should ever be forced at all).

We have already noted that as a routine matter owners who are removed from their property are greatly under-compensated for their actual losses. We have also noted that the forced transfers from one private property owner to another involved in today’s big profit conduit deals are set up so as to send windfalls to the new owner. Accordingly, we believe that the following old rule of eminent domain compensation (as set forth in a 2008 article on the Goldstein firm’s site) does not make any sense in this context:
The fundamental question then to be answered by the Court in valuing damages is "what has the owner lost?," not "what has the taker gained?" Boston Chamber of Commerce v. Boston, 217 U.S. 189, 195 (1910). This is so because the owner is to be put in as good a position pecuniarily as it would have occupied if the property had not been taken. United States v. Miller, 317 U.S. 369, 373 (1943).
(See: "What's It Worth - Who Wants To Know?" The Valuation of Real Property in Litigation
By Michael Rikon.)

Distinctions Necessary to Make Constitutional Sense

We think the above rule does not make constitutional sense as constituting “just compensation.” It doesn’t make sense when you are considering that for all practical purposes “the taker” who has “gained” in such equations in the new scenarios is not the government but a private party. Why should one private party suffer harm so that another private party can be benefitted when a precariously justified transfer is forced?

We interviewed attorney Mike Rikon of the Goldstein firm about compensation practices and he noted that judges in compensation cases generally think in traditional terms of trying to minimize the cost of condemnations to the government in order to protect the taxpayers and the public fisc. He said that the courts don’t seem to understand that with the new-style eminent domain everyone is now dealing with development transactions where designated developers are both getting all the benefits and incurring those expenses. In such cases, minimizing the cost of condemnations benefits a private party, not the taxpayers. Also, as we’ve said, it fuels eminent domain abuse.

The courts need to learn to make an appropriate distinction between the two kinds of cases. Below, again from the article by Mr. Rikon on his firm’s website (we cited above), is the kind of vintage rule the courts apply in determining compensation in all cases:
The constitutional requirement of "just compensation" requires that the property owner be indemnified so that he may be put in the same relative position, insofar as this is possible, as if the taking had not occurred.
As we have noted, application of that kind of rule regularly results in property owners incurring actual substantial uncompensated losses. Therefore, the only possible justice when the taking is done for the benefit of a private party is for the compensation to be the greater of either 1.) what the owner has lost, or 2.) what the taker has gained.

Bidding Adieu to Impermissible Government Favoritism?

Rather than garnering benefit for the public from the use of eminent domain, it is obvious that public officials like those at ESDC are intent, instead, on garnering that benefit for the initiating developers. We can see that from the absence of bids. Columbia did not bid for the right to acquire a monopoly on the portion of West Harlem it wants and Forest City Ratner is being given rights to its entire Atlantic Yards megadevelopment without a true, effective or properly structured bid. Potentially, a bidding process could squeeze out of existence some of the channeling of objectionable private profit to politically-favored firms but we suggest that, even if such bids were done concurrently, setting the eminent domain compensation at a level that extracts and returns back to the original property owner the value transferred to another party by virtue of such unfair takings would do a better job and that it is an approach that is absolutely justified, even required, under the constitution’s stipulation that there must be “just compensation.”

It should be noted that this is eminent domain reform that the courts can (and should) deliver with no need to seek reform from the legislature. It is simply a natural and necessary concomitant to deal with the newly evolved rule that transfers for private use rather than for public ownership are now possible. The reform could come from the state courts or the federal courts.

Don’t expect panaceas when dealing with government. We would expect that government would attempt to adjust for any such evolved approach to “just compensation” by trying instead to confer benefits on favored developers with more subsidies, but if they did so such flows of money would at least be more obvious to the public. Plus, there would be an argument that condemned property owners would be equally entitled to those subsidies, perhaps through the kind of “just compensation” recapture of benefits we are talking about.

Why is Compensation to Condemned Property Owners So Inadequate?

We think that compensation to condemned property owners is as inadequate as it is for two reasons. First, in the old days when condemnation was being used to build something essential that the public needed and would have to provide such as a road or a police station, the courts were reluctant to saddle the public with costs that the taxpayers would have to bear. We are not saying this is fair, but we understand the impulse. Now that we have the new scenarios where eminent domain is being used for private benefit the perpetuation of that unfortunate historic impulse to under-compensate is re-endorsed by a real estate industry with lobbyists who are “rent seeking.” “Rent seeking” is the pursuit of special advantages (often monopoly-style and typically at the expense of the rest of society) via the manipulation of public policy rather than by earning profits through the actual production of wealth or value.

In other words, a pattern of doing harm that was once justified for some not very good reasons is now being perpetuated for some really terrible reasons. Anyone suffering from that pattern of harm ought to be able to seek reforms in a more neutral, less politically stacked environment.

Reforms Clearly Needed

Synthesizing, we would suggest a number of reforms in the area of eminent domain compensation. Among them:
• Condemned property owners should never have to pay for any of the reasonable legal or administration expenses associated with a government taking of their property.

• Compensation needs to be greater than it is now, sufficient to cover all of a property owner’s actual losses.

• Full compensation must be paid much sooner and in many cases should be linked much more closely to the government’s ability to displace the original owners from their property.

• Owners of condemned property need to be given greater control over the calendaring of when they will be compensated, without having to accept less money to do so.

• It is inappropriate for eminent domain to be used as a tool to generate windfall for a new private party owner of real estate while the original owner from whom a transfer was forced suffers any kind of loss, including the loss of any upzoning and development opportunities seized by the new politically-favored developer.
Asking for More

To end our dissertation on why “just compensation” in New York just isn’t just, let us say that since we don’t think compensation is currently fair we think that all condemnees should be asking in their legal papers for greater compensation than they now might expect to receive under the present system, but particularly those who are the victims of the new form of eminent domain abuse that is driven by private profit. We also think the backdrop of the documented abuse and connivance of ESDC officials in connection with Columbia and Atlantic Yards is the perfect backdrop against which to frame requests for an evolved rule.

Looking Forward to That Doubleheader

The misconduct of public officials with respect to Columbia and Atlantic Yards is such a perfect backdrop to ask for justice that we envision, as we said at the outset, that we may soon see a doubleheader of New York State-originated cases before the U. S. Supreme Court, the facts of each case informing the facts of the other with compounded significance. We envision that one of those cases will be the Columbia University expansion eminent domain case where the court would review and throw out the Columbia University-backed pretextual “blight” taking of properties in West Harlem while simultaneously objecting to how this was assisted by the connived squelching of “due process.” The other case would deal with the Atlantic Yards takings, whereby the court would establish a truly just standard for “just compensation.” The intrinsically related sets of issues of these two cases are exquisitely ripe for consideration. They would make a fittingly famous U.S. Supreme court doubleheader that would put New York State where it needs to be: On the road to desperately necessary eminent domain reform.

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