A Kentucky court recently stopped a utility company from utilizing eminent domain to build an underground gas pipeline to transport natural gas liquids through the Commonwealth.  The case, Kentuckians United to Restrain Eminent Domain, Inc. v. Bluegrass Pipeline Company, LLC (Civil Action No. 13-CI-1492),  involved the challenge by plaintiff, a non-profit agency formed for the purpose of protecting Kentucky residents from“the threat of and attempts to exercise eminent domain by entities not in public service to Kentuckians,” to the efforts of the Bluegrass Pipeline Company to use eminent domain powers to construct a new 24-inch gas pipeline, which would transport the liquids from shale reserves in Pennsylvania, West Virginia and Ohio to the Gulf Coast.

Plaintiff’s declaratory judgment action sought a ruling on whether Bluegrass in fact had the power of eminent domain under Kentucky law.  Under Chapter 278 of the Kentucky Revised Statutes (“KRS”), a Public Service Commission is dedicated to regulating utilities, and only regulated entities that adhere to the requirements of the statute are “in public service” and authorized to use eminent domain. The statute provides: “Any corporation or partnership organized for the purpose of … operating oil or gas well or pipeline for transporting or delivering oil or gas, including oil and gas products, in public service, may… condemn the lands and material or the use and occupation of the lands.”

The plaintiff argued that Bluegrass was not in public service, was not regulated by the Public Service Commission and did not serve Kentucky customers or producers because it was an interstate operation.  It further contended that the natural gas liquids that would be transported through the pipeline were neither “oil or gas” nor “oil or gas products” as required by KRS 278.502.

Bluegrass opposed the motion, suggesting that there were genuine issues of material facts in play, and that its products were “oil, gas, or oil and gas products” under KRS 278.502.  It also contended that it was acting “in public service” because, as a common carrier, it would “furnish services to the public, potentially including manufacturers and producers in Kentucky.”

The Circuit Court concluded that Bluegrass lacked the power of eminent domain under Kentucky Law. The court noted that Chapter 278 of the Kentucky laws was enacted to protect consumers “against costly and unnecessary capital construction.”  It found that Bluegrass sought to benefit from the rights conferred on regulated utilities without subjecting itself to the responsibilities, duties, and regulatory oversight imposed by the KRS.

While this decision is not surprising, as it merely affirms that the power of eminent domain should only be wielded sparingly and that the statutory authority empowering condemning agencies to use condemnation powers should be scrutinized carefully, it has gotten the attention of many around the country, as utility companies have been undertaking efforts to increase and upgrade service and those efforts have involved the use of eminent domain in increasing frequency.  Bluegrass is said to be likely to appeal, so this one may be one to watch.

A copy of the Circuit Court’s opinion is available here.

See discussion on the case from our Owners Counsel of America colleagues Robert Thomas, in his Inverse Condemnation Blog, and Michael Rikon, in his Bulldozers at Your Doorstep Blog.

Here is a sampling of some of the media reports on the Bluegrass case:

 

 

 

The latest in a long-running dispute between the U.S. Army Corps of Engineers and lake-front property owners in Michigan, whose beaches have allegedly been washed away because of jetties installed by the Army Corps long ago, is a ruling from the United States Circuit Court of Appeals for the Federal Circuit that the takings’ claims are not barred by the statute of limitations. Banks v United States, Docket 2012-567 (Fed Cir. Jan. 28, 2014).

“Appellants are landowners along approximately four and one-half miles of the eastern shore of Lake Michigan, south of the jetties. This shoreline is eroding naturally, but Appellants allege the jetties block the flow of sand and sediment from the river and the lakeshore north of their properties. Specifically, they argue that the structures interrupt the natural littoral drift within the lake, leading to increased erosion on their properties, amounting to an unlawful taking under the Fifth Amendment.” [slip op. at 3].

Given the fact that the Army Corps’ work constructing harbor jetties on Lake Michigan began in the 1800s, it is no wonder that the United States argues that the property owners’ claims were barred by the statute of limitations.  But, the most recent project began in 1950 and was not completed until 1989, and the affect of that project was not discovered by the property owners until an impact report issued in 1999, which is when this litigation commenced.  The circuit court specifically held that the claims did not accrue until 1999.

That said, in light of the proposed wave of dune replenishment projects scheduled to commence along the Jersey Shore, it will be interesting to see how the Lake Michigan property owners’ claims fare on remand.

We’ll keep you posted.

Taking Underwater Mortgages: Condemned to Failure?

Check out this post from our own Anthony DellaPelle which was just published in the American Bar Associations “In Limine” Blog.  This story comes close to home to us in New Jersey as the cities of Newark and Irvington are currently studying the feasibility of using eminent domain to take underwater mortgages.

The first case is In re: Petition for Referendum to Repeal Ordinance 2354-12 of the Tp. of West Orange.  The certified question: “Was plaintiffs’ action challenging the municipal redevelopment ordinance time barred and, if not, was the ordinance invalid because of the municipality’s failure to submit an application for approval of the issuance of bonds to the Local Finance Board in the Department of Community Affairs?”

The appellate division issued its Per Curiam opinion July 23, 2013, affirming the trial court’s determination that the suit was barred for two reasons: 1) the suit was  not timely filed; and 2) the Local Redevelopment and Housing Law expressly exempted redevelopment ordinances from referendum (N.J.S.A. 40A:12A-28).

The second case is Grabowsky v. Tp. of Montclair, and the certified question:  “Were these municipal officials disqualified from voting on this redevelopment ordinance because of their membership in a church located on property that is next to the site to be redeveloped?”

On this issue, the Appellate Division found that there was no conflict of interest sufficient to invalidate the municipal ordinance adopting an amended redevelopment plan as a matter of law:

“The critical and undisputed fact, ignored by plaintiff, is that the Church was neither an applicant nor an objector in the matter under review. Indeed, it took no position on the matter at all. The facts here plainly fall outside the general rule that “[w]here a board member is a member of a church or other organization which is either an applicant or objector, the member must be disqualified[,]” Cox & Koenig, Current N.J. Zoning & Land Use Administration 67 (emphasis added).

Although plaintiff has argued that the Church will benefit from the redevelopment project because, e.g., there are “obvious financial benefits to the Unitarian Church in having immobile, elderly neighbors next door,” we agree with the trial court that such interests are far too speculative for consideration in determining whether Fried and Lewis had a disqualifying conflict of interest. Similarly, we agree that Fried’s comment that his elderly mother could potentially reside in the facility fails to show that Fried pre-judged the issue, requiring his disqualification. See Kramer v. Bd. of Adjustment, 45 N.J. 268, 282-83, 212 A.2d 153 (1965). We therefore conclude that the alleged conflict of interest does not provide a ground for the invalidation of the Ordinance as a matter of law.” [Slip op. at 10-11].

It will be interesting to see where the Supreme Court goes with these two cases.

In a two-judge unpublished opinion (full text here), a New Jersey appeals court reviewed a property owner’s claim that the City’s tactic – of threatening acquisition by eminent domain during land use proceedings – was a taking of private property warranting payment of just compensation. (100 Paterson Realty, LLC v. City of Hoboken, Docket No. A-1016-12T2).  The trial court found no taking, and the Appellate Division agreed.

The property consisted of 6,000 s.f. of land area containing a 3,000 s.f. commercial building.  The property was zoned R3 and would permit residential development.  The property was identified as potential open space/parkland in the 2004 Master Plan.  Appellant purchased the property in 2006 for $2M with knowledge of the zoning and the master plan notation.

Later in 2006, Appellant submitted an application to the Zoning Board of Adjustment for approval of 14 residential units.  That application was withdrawn due to “push back” from the public.

In late 2007, Appellant submitted a second application to the Zoning Board, which called for a mixed-use development (retail/commercial museum use with residential), which requirement “multiple variances.”  A hearing on the application was scheduled for June 17, 2008.  However, on June 11, 2008, the City Council took several actions inimical to the property owners pending application.  The Council passed a resolution that authorized acquisition of the property for open space, and also passed a resolution authorizing appraisal of the property (a statutory predicate to exercise of eminent domain).  Then, the Council introduced an Ordinance to change the zoning of the property from R3 to “Open Space.”  One of the resolutions asked the Zoning Board to “postpone consideration of all applications” then pending.  Therefore, the June 17, 2008 Zoning Board hearing was adjourned without date.

In October 2008, Appellant’s partner on the Museum venture withdrew due to altered circumstances.  Appellant sued the City in November 2008 alleging that the City’s actions affected a taking of private property for which compensation was due, i.e. filed an inverse condemnation action.  The City responded by advising that the Open Space ordinance had been “tabled permanently” and that the pending application could proceed without delay.

The parties agreed to stay the litigation and discussions ensued.  The City obtained an appraisal of the property at $2.1M, but in January 2010 advised that acquisition was not possible due to funding issues.

In January 2011, plaintiff filed an “as of right” plan for development of 9 residential units, which meant that the Planning Board would be required to approve the plan as drawn.  In March of 2011, Planning Board adopted a Master Plan Reexamination Report that continued to recommend the subject for parkland.  In August of 2011, Appellant voluntarily withdrew the “as of right” plan because the threatened acquisition and “parkland” designation frustrated his ability to obtaining financing, and rendered development of the property “fruitless”.

The dormant inverse case was revived and the case proceeded to trial.  The owner presented two witnesses to advance his theory.  The trial judge rejected the owner’s claims, finding that the commercial building was rented during the entire episode and that while the City’s actions may have impacted the owner’s ability to develop the property as he wanted, it did not deprive the owner of all beneficial use of the property.

The Appellate Division echoed the trial court’s findings and also underscored the fact that the owner voluntarily withdrew his “as of right” residential development.  The Court also held – as a matter of law – that the owner’s claims that the City’s action frustrated his ability to finance the project were not compensable. (“Lost economic opportunities allegedly occasioned by pre-taking government activity do not constitute a compensable “taking” under either the United States or New Jersey Constitutions.”) (Slip op. at 13).

That final aspect of the decision is inconsistent with regulatory takings jurisprudence.  If government action has an economic impact and frustrates an owner’s reasonable investment-backed expectations, the government action is a taking requiring payment of just compensation under the New Jersey, and United States, Constitution.  However, it appears that the as of right application should not have been withdrawn and that was the final nail in the coffin for this property owner.

English: Ocean City, NJ, November 17, 2009 -- ...

Ocean City, NJ, November 17, 2009 — Damaged dunes from Tropical Depression Ida and nor’easter in Ocean City. (Photo credit: Wikipedia)

On October 28, 2013, the Superior Court of N.J., Appellate Division published an opinion in back to back appeals captioned Petrozzi v. City of Ocean City .  Both cases had their nascence long before Sandy casts its long shadow on New Jersey beaches and property owners.  Having no dune protection in place, in 1989, Ocean City reached out to the owners of the ocean-front property and asked whether they would agree to provide easements to the City to allow access to their private property and to build sand dunes for storm protection.  The property owners agreed with one significant proviso — the dunes would not block the property owners’ ocean views.  The City agreed to maintain the dunes so that they would never be higher than “three feet above the average elevation of the bulkhead.”  Therefore, the property owners gave a portion of their property rights to the City in exchange for the City’s promise to forever maintain the dunes at the agreed-upon elevation.

Most of the owners conveyed their private property to the City for the public good in 1991, before the Coastal Areas Facilities Review Act (CAFRA) was amended in 1994  to require DEP permission to maintain/reduce dune elevations.  Some of the owners did not make the conveyance until after 1994.

Due to natural accretion, the dune elevation steadily increased over the years.  In or about 2002, affected property owners demanded that the City sculpt the dunes back to the agreed-upon elevation.  However, CAFRA now required DEP permission, which the City sought in 2002.

In May of 2005, DEP denied the City’s requested permit.  Contemporaneous with the denial, several property owners sued to enforce the easement agreement.  At trial, the Superior Court dismissed all but four of the plaintiff’s claims reasoning that the 1994 amendments to CAFRA rendered the City’s ability to perform legally impossible.  The four plaintiffs excluded from that ruling were those that entered into the agreements after the CAFRA amendments, therefore impossibility was not a valid defense because the City knew they needed  a permit to perform.  As to those four plaintiffs, the judge presided over a trial on compensation for loss of view, loss of ocean breezes, and loss of access.  The judge found in favor of the property owners and awarded $70,000 to the first floor owners, and $35,000 to the second floor owners as compensation for their loss of view.

The Appellate Court held:  [T]he fact remains plaintiffs surrendered their right to compensation in reliance on Ocean City’s promise to protect their ocean views. Absent that reliance, Ocean City would have had to pay plaintiffs for depriving them of their views. If Ocean City may retain the benefit of this bargain despite its failure to perform its promise — even if performance was impracticable — without consequence, the municipality would reap a windfall at plaintiffs’ expense and plaintiffs would have given “something for nothing.”” (Slip op. at 19).

The appeals panel remanded the case back to trial, where the trial court is to value the “loss of, or interference with, their ocean views due to the accretive effects. But offset against the burdens suffered by plaintiffs are the potential gains conferred by the partial consideration performed by Ocean City to date, namely the non-speculative, reasonably calculable benefits arising from the municipality’s dune project. These may include the added wave/storm surge protection afforded by the accretive effect of the dunes. See Borough of Harvey Cedars v. Karan, 214 N.J. 384, 416 (2013).” (Slip. op at 20).

As the court noted, “In the first place, it is beyond question that plaintiffs suffered a loss of ocean view, that such a loss has value, and that the loss is compensable.”  This conclusion was consistent with a 1999 Appellate Division opinion in City of Ocean City v. Maffucci, where the court affirmed the compensability of a loss of ocean view caused by a taking of a dune easement.  But because the appellate panel disagreed with the trial judge’s valuation methodology, it ordered a new trial.

However, the Petrozzi court also confirmed that the compensation determination on remand must also abide by the ruling in Borough of Harvey Cedars v. Karan that “the quantifiable decrease in the value of their property — loss of view — should [be] set off by any quantifiable increase in its value — storm-protection benefits[.]” 214 N.J. at 418.

All in all, this latest opinion should serve to dispel some of the hype that followed this summer’s decision by the New Jersey Supreme Court in Karan.  While Karan prescribed a specific formula to be used in valuing dune replenishment easements, unlike much of the media coverage on the case, it did not conclude that the loss of ocean views is non-compensable.  Karan merely requires that any “reasonably calculable” benefit provided by the dunes be taken into account as an offset to the damage in value that the dunes have been proved to cause to oceanfront properties.

With approximately 1,000 new dune easement cases reported to remain along the Jersey Shore in the newest wave of dune replenishment cases, the recent Petrozzi case is instructive.

We’ll keep you posted.

See also the NJ.com article captioned: Ruling Gives Oceanfront Homeowners Compensation for Lost Ocean Views.

A New Jersey appellate court recently rejected a commercial tenant’s claims for relocation benefits and assistance arising out of a displacement caused by a redevelopment project in Wrightstown Borough, near the Fort Dix military establishment.   The claimant, Andrew Rosen, was the owner of Wright Cleaners, which had been operated at the same location since 1969.  He leased the property and, at the time of the events in this case, was a holdover tenant with a month to month lease.

The Borough adopted its redevelopment plan in 1999.  That plan provided that the Borough Council would serve as the redevelopment agency and the Council would retain a private firm to provide relocation assistance to the displaced parties.  In 2003, the Borough first notified Rosen that he would be displaced and was entitled to Relocation assistance, and provided him with information including that of the Borough’s redevelopment consultant.  Thereafter, the consultant undertook repeated efforts to assist Rosen in finding a replacement location, but Rosen never deemed any of these alternate locations suitable.  In 2007, Rosen’s landlord sold the premises to the Borough and terminated Rosen’s tenancy.  Shortly prior to the expiration of the tenancy, the Borough inspected the leased premises and found it to be dilapidated and unsafe, in danger of imminent collapse, and therefore ordered that the property be vacated, which it was, and boarded up.  Rosen did not remove his machinery, equipment or the dry cleaning inventory, but demanded approximately $250,000 for the installation of new replacement equipment.  The Borough’s appraiser estimated that the value of such equipment was less than $5,000, and would have cost approximately $4,000 to move.  10 months later, the premises was demolished, with all of Rosen’s personal property inside.

Rosen thereafter challenged the Borough’s redevelopment plan’s validity in Superior Court, Law Division, but this challenge was denied and his relocation claims were transferred to the Office of Administrative Law (OAL).  There, the administrative law judge (ALJ) concluded that while Rosen was entitled to relocation benefits as a displaced person, no benefits were due because he never relocated his business.  In particular, the ALJ determined that Rosen’s refusal to consider certain replacement locations was unreasonable because his existing location was inferior in quality to the possible replacements.  The ALJ also noted that Rosen still had a right to make a claim because a displaced person is entitled to apply for relocation assistance within 12 months of permanent “resettlement”, which had not yet occurred.  The decision of the ALJ was appealed to the Appellate Division of the Superior Court of New Jersey, but the appellate panel affirmed the ALJ’s decision, noting that the decision below was supported by sufficient evidence in the record.

A copy of the Appellate Division’s opinion in  230-232 Fort Dix Street v. Borough of Wrightstown  is available here.

Today we may have learned why there has not been any noticeable progress in the government’s acquisition of approximately 1,000 dune easements in several municipalities on the Jersey Shore.  This afternoon, a settlement was reported between the Borough of Harvey Cedars and Mr. and Mrs. Karan, which resulted in the ruling this summer from the NJ Supreme Court holding that the benefits provided to a property can be considered as an offset to damages which are caused to a property by a partial taking.  The settlement was reported to be $1, although it is unclear whether any other, non-monetary benefits may have also been provided.  In any event, it appears that the Karans may have given in to the political and peer pressure and ridicule which had been thrust upon them, and upon other beachfront property owners, in the past year.

In addition to the settlement, New Jersey Governor Chris Christie signed an Executive Order today centralizing the acquisitions of the remaining needed easements.  According to the Order, it appears that they may be handled by the NJ Attorney General’s office, rather than continuing the past practice of having each municipality be responsible for acquiring the needed private property rights within its own borders.    We’ll see how it develops, and expect that some action will commence soon.

Here are links to the relevant documents and events:

MaryAnn Spoto’s NJ.com article reporting the settlement

The Governor’s Executive Order No. 140

The Press Release accompanying the Governor’s Order

We will let you know once we hear of any developments or new news on this front.

New Jersey Governor Chris Christie signed into law  bipartisan legislation (A-3615/S-2447) (full text here) this week that was intended to correct several due process and constitutional failures in the prior statute found by the New Jersey Courts in Harrison Redevelopment Agency v. DeRose, 398 N.J. Super. 361 (App. Div. 2008); and Gallenthin Realty Development v. Paulsboro, 191 N.J. 344 (2007).  in particular, the new law mandates that adequate notice to affected owners in redevelopment areas, and also clarifies the criteria for determining whether a blighted area exists under New Jersey’s Local Redevelopment and Housing Law.

The other significant provision of the legislation is that it gives local municipalities the option of using eminent domain in designated redevelopment areas, or proceeding with redevelopment without allowing eminent domain for assemblage of properties.  This measure is viewed as a way of increasing protection to existing property owners in redevelopment areas.

A Politicker NJ Press Release on the legislation is available  here.

Our prior blog post on the legislation with more detail and history is available here.

It has been several months since we last reported on the scheme to use eminent domain to seize “underwater” mortgages in various places around the country.  It appeared that the idea died out earlier this year, but it has recently come back with a vengeance.  In recent weeks, several California cities have advanced efforts to implement this plan, including the northern California City of Richmond, which has notified the owners of about 620 loans that the City would use eminent domain to take the loans if they refused to sell at a steep discount.  This has already prompted a federal lawsuit by investor groups, including Black Rock, PIMCO and others to obtain an injunction stopping the scheme before it even gets started.  This suit may only represent the tip of the iceberg in this underwater mortgage plan.

The plan, originally proposed by San Francisco-based Mortgage Resolution Partners (“MRP”)(ironically a private investment firm itself), calls for borrowing the government’s awesome power of eminent domain to seize mortgages which exceed the value of the  homes upon which the loans are secured.  The idea is to take the mortgage debt, not the home, and refinance the debt at the customary 80% of the current value of the real estate.  The entire process assumes that the mortgages can be taken at a steep discount merely because the value of the collateral — the homes – has fallen.  Oh, and by the way, the package (substituting the old, underwater debt, with new, improved debt) would be entirely arranged by MRP (for a fee of several thousands of dollars per loan) and handed over to the distressed cities on a silver platter.

Sounds easy, right?

Unfortunately, this plan is wrought with several significant flaws that suggest it is more likely to drown than survive.  First, any use of eminent domain requires that it serve a public purpose.  Whether taking a group of private mortgages from one group of investors and giving them to another serves any public purpose remains to be seen.  Plan supporters who suggest that this will be a panacea for the housing crisis in their areas may be surprised  when they realize that the credit and housing markets may actually suffer if the plan is implemented.  Traditional takings involve real estate acquisitions.  This plan proposed the taking of pooled mortgage debt – pieces of paper which are backed by investors in bonds in other similar instruments.    Without support from federal loan regulators  like the Federal Housing Finance Agency, which has consistently opposed the plan, about 90% of mortgages may be unavailable to borrowers in areas where eminent domain is used.  This could effectively strangle a homeowner’s ability to finance real estate purchases in those areas.  Public purpose served?  Strike one against the plan’s supporters.

The next major obstacle is also rooted in the U.S. Constitution, which in its Contracts Clause bars the government from enacting any law which impairs private parties’ obligations under contracts.  This is the precise purpose of the MRP plan — to void the “bad” underwater mortgage contracts and replace them with new ones.  One private party is out, and another is in.   To make matters worse, the Constitution also has a Commerce Clause which provides that state and local governments cannot unduly interfere with interstate commerce.  Here, the mortgages cover real estate in one state, but the owners of the “property” taken will be in scattered states, and implementing the plan in say California or Nevada may be discriminatory to persons in either those states or perhaps homeowners in other states who want to be saved before they sink, but have the bad fortune to have the exact same mortgage as their fellow citizens in the states where the plan is implemented, so they remain underwater.  This makes it seem like the count is now 0 and 2 against the plan’s supporters.

The last significant problem with this plan is that it is entirely premised upon taking the existing loans at a significant discount.  Say a mortgage is underwater because it has $300,000 of outstanding debt on a home now worth $200,000.  The plan supporters suggest paying the original investors $160,000 – about 80% of the current value of the home.  But why should the original investors agree to more than a 45% discount on their investment when it is still performing?  Last time I checked, the Constitution required that a property owner in a condemnation matter be paid just compensation —  the amount that would indemnify the owner for his or her loss.  If an owner loses a $300,000 asset that is performing (as most of the targeted loans are), why would he or she  take $160,000?  Will that scant amount indemnify him or her for the loss?  If not, the result is unconstitutional.  Add to the direct cost, the indirect cost of fighting off the litigation that has already spawned and is poised to multiply – even if the plan supporters pull a rabbit out of the hat and eventually win.  The only thing scarier than this strike three for the plan is the fiscal chaos it is all but certain to create if the “bargain” prices that have been hypothesized do not result.

Very few quick fixes end up working at all, and those that do, usually don’t last.  This one seems to have all the makings of another crisis, just about ready to erupt.  If that happens, the cities with underwater mortgage problems that hope for salvation may end up much worse off than they were to begin with.

For our prior blog posts on this topic:

Underwater Mortgage Plan Rejected by County That First Proposed It

Should Governments Use Eminent Domain To Acquire Underwater Mortgages?

Eminent Domain to Save Property Owners From Foreclosure?

Widespread Disagreement on Plan to Use Eminent Domain to Acquire Mortgages

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