Monday, October 31, 2005
I'll have a lot more to say about the substance of the GELPI Takings Conference, but thought I'd mention two brief points, one serious, one not.
First, the serious point. When I was a practicing litigator, I rarely cared much about what the Supreme Court had to say on a particular issue. The Court tends to speak in broad generalizations, and what often matters most in the real world are the more detailed statements made by lower courts interpreting the Court's precedents. If, for example, I was litigating a securities law issue in the Southern District of New York, the Second Circuit's holdings on that issue were likely far more important as a practical matter than any Supreme Court case.
Naturally, after one year in academia I had started to forget the importance of lower court opinions. Like most people who write on takings, I focus on the Supreme Court's takings cases. One of the great virtues of the GELPI Conference is that the presenters are a mix of academics and practitioners. In a number of the presentations, I was struck by the body of lower-court takings law from the Federal Circuit and various state courts, which at times reach startling conclusions in cases that putatively follow the Supreme Court's vague takings precedents. It was a good reminder that there is a lot of important law out there that should get academic attention but that is typically ignored in our single-minded focus on the Supreme Court.
The second, not serious point. I was staying at the Sheraton Commander hotel, where I saw lots of Harvard undergrads meeting their parents for dinner. I had a very frightening moment when I realized that the parents seemed much closer to my age than the students.
Metaphorically speaking, that is. Michelman gave a talk at the GELPI Takings Conference raising an interesting issue about squaring the notion of public use articulated in Justice O'Connor's dissent in Kelo v. New London with that implicitly embodied by regulatory takings cases like Lucas v. South Carolina Coastal Council.
Michelman began by stating his view that Kelo was correctly decided as a matter of American Constitutional Law. He then noted that the issue of public use was rarely, if ever, discussed in regulatory takings cases (as opposed to cases, like Kelo, involving explicit exercises of eminent domain). He thought, though, that contrasting the Kelo dissent with cases like Lucas revealed a bind for someone who wants to argue for both a strict construction of public use and broad application of the regulatory takings doctrine as a limit on government regulation.
Litigants in regulatory takings cases usually have presumed that if a regulation is held to be a taking that the public use clause also would be satisfied. But for that to be so in an inverse-condemnation case like Lucas, Michelman said that the implicit meaning of "public use" must be "public purpose". In Lucas, South Carolina's Beachfront Management Act was held to be a regulatory taking of Lucas' property. At the end of the day, South Carolina ended up with the property after paying Lucas just compensation. This, said Michelman, must have been a taking for a public purpose, because the government did not actually intend to put the property to public use.
If this is correct, then it makes a notable contrast with the Kelo dissent. Michelman said that he wasn't accusing charging Justice O’Connor with error or inconsistency. Rather, he was suggesting that the comparison would be problematic to a strict constructionist or textualist like Justice Scalia, who joined O'Connor's dissent in Kelo and was the author of the opinion of the Court in Lucas. Michelman suggested that the two cases embodied inconsistent views of the scope of the public use clause that could only be explained with a normative understanding of the takings clause. This, he thought, put the strict constructionist Scalia in a box.
In the Q&A, I asked whether Justice Scalia could get out of the box by going back to the pre-First English view that the remedy for a regulatory taking is invalidation of the offending government action. Because the government never actually took anything under this view, wouldn't that resolve the public use issue? Michelman said that he didn't think that this would get Scalia out of the box because he thought that Scalia would want to permit South Carolina to engage in regulation like the Beachfront Management Act so long as it paid just compensation.
There was some discussion of whether Scalia could get out of the box by putting Lucas in the same public-use category as blight-clearance cases -- because the modern understanding of public use includes takings to prevent harmful uses, why not allow regulatory takings that also are intended to prevent harm? Michelman said that this wouldn't help Scalia because he rejected in Lucas the notion that prevention of harm standing alone could establish the constitutionality of a regulation.
Having thought about it for a few days, I'm not sure that this last point is correct. In Lucas, Scalia rejected the idea that the mere characterization of a regulation as harm preventing was sufficient to allow the government to use that regulation to render property valueless without incurring the obligation to pay just compensation. It seems to me that this is very different from asserting that the government cannot take property to prevent harm even if it does pay compensation.
I'm also not sure that the central premise of Michelman's analysis -- that the taking in Lucas was for a public purpose, not a public use -- is correct. South Carolina's Beachfront Management Act prevented Lucas from building on his property. If the Act was upheld, the land would remain vacant. If the Act was held to be a regulatory taking, a fair presumption at the time the case was before the Court would have been that South Carolina would pay compensation and leave the property vacant. This would seem to me to be as much a taking for public use as would be an explicit exercise of eminent domain to take property as a wilderness area. Put another way, I don't see anything inconsistent with even a strict notion of public use if the government takes property but ends up not doing anything with that property beyond preserving it in its natural state.
Of course, South Carolina ended up selling Lucas' property to private parties who developed the property. That, however, says more about the unwillingness of the South Carolina government to bear the burden that they put on Lucas than about the case as presented to the Supreme Court.
Comments are open, but as always require approval before posting, so there may be some delay. If you were at the conference and think I'm not representing Michelman's position accurately, please let me know.
Thursday, October 27, 2005
As expected, the presentations at the GELPI Litigating Takings conference have been outstanding. This post only covers the first two panels. Over the coming week, I'll report on the rest of the conference.
Lingle v. Chevron
Bob Dreher (GELPI) and R.S. Radford (Pacific Legal Foundation) were up first, discussing Lingle v. Chevron. For those unfamiliar with the case, the Court's pre-Lingle takings cases had suggested that a regulation that does not substantially advance a legitimate government interest is a taking. In Lingle, the Court rejected the substantially advance test as a takings test. I summarize Lingle and explain my own views of the significance of the case in this essay.
Dreher, who had been counsel to Hawaii in the Lingle litigation, began the discussion by explaining how the substantially advance test had crept into takings law through citation to early substantive due process cases. Beyond eliminating the substantially advance test from takings doctrine, Lingle may have enduring significance due its separation of takings doctrine from substantive due process doctrine. This separation may be reflected in takings cases in several ways. It resolves the relevance of cases like Euclid v. Ambler Realty to takings doctrine (i.e., no relevance at all). It greatly reduces the ability of the government to rely on early substantive due process cases like Mugler v. Kansas. And it makes the economic impact on the property owner the paramount consideration in the takings analysis. I agree with Dreher completely on all of these points.
Dreher also noted that the rejection of the substantially advance test was a big deal because it killed off a pernicious doctrine that had been used by the 9th Cir. to invalidate rent control regulations. I've never taken the substantially advance test very seriously, largely because it so obviously engaged in Lochner-style review of legislative actions that I had a hard time seeing contemporary courts using the test to strike down regulations. But other panelists discussed a number of state cases that seemed to apply the substantially advance test, so I'm coming around to Dreher's view that it was a big deal.
R.S. Radford, who had been a leading proponent of the substantially advance test, began his talk with a good-natured acknowledgment of Bob's win in Lingle. The introduction to his paper written for the conference begins with the following from Monty Python and the Holy Grail:
Arthur: Now stand aside, worthy adversary.
Black Knight: 'Tis but a scratch.
Arthur: A scratch? Your arm's off!
Black Knight: No, it isn't.
Arthur: Well, what's that then?
Black Knight: I've had worse.
Radford's argument was that the character of the government action (which is at the heart of the substantially advance test) will survive in regulatory takings cases, allowing the effectiveness or lack of effectiveness of a government action to play a role in the regulatory takings inquiry. Radford noted that the character of the government act is certainly relevant to issues like the applicability of the nuisance exception. More importantly, he thought that the effectiveness of the government action will always play into the fairness inquiry that underlies much of the Court's regulatory takings jurisprudence. In the Q&A, Dreher and Radford agreed that the character of the action would remain in Court's unstated fairness analysis, but they disagreed on whether the fairness inquiry should focus on the impact on the property owner or on the benefit conferred to the public by the regulation.
Following up on this fairness point, Frank Michelman asked a very interesting question during the Q&A about squaring fairness concerns with "background principles" like necessity and the nuisance exception that allow the uncompensated destruction of property. Dreher said that he was uncomfortable with the underpinnings of some of the necessity cases, though he noted that in firefighting cases, the courts may allow property to be destroyed without compensation because they don't want firefighters to be thinking about the cost of their actions. Radford added that in many fire cases, the property is likely to be destroyed anyway.
Kelo v. New London
Tom Merrill (Columbia) and Scott Bullock (Institute for Justice) next discussed Kelo.
Bullock focused on the Kelo decision itself, arguing that Kelo broke new ground in allowing economic development takings. While I agree that the Court had never previously allowed this type of taking, I think that Midkiff and Berman all but required the result in Kelo by articulating a highly deferential approach to public use (as discussed further here and here). So I think the Court might have broken even more ground new ground if it had disallowed the taking in Kelo. Bullock also criticized the way in which the Court seemed to think that fact that the agency exercising eminent domain had a detailed plan in place was relevant. I agree with his view that this is completely disconnected from the real world. Bullock wrapped up with a short discussion of the Kelo backlash, noting that 90+ percent of Americans disagree with the result in Kelo and that the backlash cuts across ideological lines.
Tom Merrill focused his discussion on the Kelo backlash, saying that the backlash has made him think about the different ways that academics and the general public frame eminent domain issues. He labeled the two approaches the utilitarian frame and the moral rights frame, which he noted had some similarity to Ackerman's distinction between the perspectives of the scientific policymaker and the ordinary observer. To the utilitarian, we have the institution of eminent domain to overcome holdout problems, and reconfiguration of rights should go forward any time there is a net benefit to society. As a result, the utilitarian would want public use to be broadly construed.
The moral rights perspective, in contrast, focuses on the property owner, and views eminent domain as government coercion against innocent parties. At one extreme, this view could call for a ban on eminent domain outright. A more moderate position is that you only take when there is some good moral reason to do so, and the moral justification for the taking is stronger if the benefits are transferred to the public. In this context the fairness test is the opposite of that articulated in Armstrong, focusing not on the impact on the condemnee but on the distribution of benefits of the taking to the public. People holding this view favor a more strict interpretation of public use, and tend to think that this should be an issue for the judiciary to resolve.
Merrill than asked what to make of all this? He said that he is not ready to chuck utilitarianism out the window just because 95% of Americans disagree with it, but that he is open to a more constrained view of eminent domain. He said he would agree with a ban on eminent domain where the sole purpose is to raise tax revenue, and would agree to a ban on the economic development takings of homes. (I've discussed banning economic development takings of homes, but allowing it for other types of property, here and here.) He also suggested that he doesn't disagree with a ban on the use of federal funds for economic development takings, because it would make state and local governments focus on costs of development projects.
In the Q&A, an interesting question was raised about why increasing the compensation paid to homeowners hasn't been more popular in the legislative response to Kelo. Merrill thought it was because the post-Kelo backlash is being driven from a moral rights perspective, which is more focused on the absolute right of the property owner. Bullock agreed, saying that people are concerned about possession of their homes. Merrill did note, though, that there is some empirical evidence that opposition goes down to eminent domain as compensation goes up.
Merrill also noted in answer to a question that it was somewhat discouraging that legislative reform needs a highly unpopular Supreme Court decision to go anywhere, and gave credit to the IFJ's very effective P.R. campaign about Kelo. Bullock, who had used the home as castle metaphor in his earlier discussion, was also asked whether poor people have castles. He answered emphatically yes, noting the importance in this context of making sure blight clearance is used to take truly blighted property.
[Comments are open, but as always I have to review them before they post. Due to the HLS WiFi ban, discussed below, there will be some delay before I can get on-line to review comments]
So Harvard Law School has WiFi in all of their buildings, but does not allow access to guests or people attending conferences. So I'm at a public terminal in the basement of one of their buildings now. I'll post later tonight on the first day of the GELPI conference.
There are some changes this week as some articles posted more than 60 days ago drop off, but Michael Lewyn still tops the list in a big way.
1. (260) How City Hall Causes Sprawl: A Case Study, Michael Lewyn (George Washington University Law School)
2. (200) Suburban Sprawl, Jewish Law, and Jewish Values, Michael Lewyn (George Washington University Law School)
3. (178) Sprawl, Growth Boundaries and the Rehnquist Court, Michael Lewyn (George Washington University Law School)
4. (119) A Freedom-Promoting Approach to Property: A Renewed Tradition for New Debates, Jedediah S. Purdy (Duke University - School of Law)
5. (87) Home as a Legal Concept, Benjamin Barros (Widener University - School of Law)
6. (75) Efficient Trespass: The Case for 'Bad Faith' Adverse Possession, Lee Anne Fennell (University of Illinois College of Law)
7. (70) Testimony Before Pennsylvania House of Representatives State Government Committee Re: Eminent Domain, Benjamin Barros (Widener University - School of Law)
8. (63) Private Property, Development and Freedom: On Taking Our Own Advice, Steven J. Eagle (George Mason University - School of Law)
9. (47) Substituting Complements, Giuseppe Dari-Mattiacci and Francesco Parisi (Universiteit van Amsterdam - Amsterdam Center for Law and Economics, George Mason University School of Law)
10. (45) The American Transformation of Waste Doctrine: A Pluralist Interpretation, Jedediah S. Purdy (Duke University - School of Law)
Wednesday, October 26, 2005
I'm off to Cambridge for the GELPI's Litigating Takings conference at Harvard Law School. I won't be trying anything close to live blogging, but new laptop and internet access willing, I will be posting on the proceedings.
A few weeks ago, James Salzman's new article Creating Markets for Ecosystem Services: Notes from the Field made an appearance on the Weekly Top 10. Salzman's article is fascinating, and I highly recommend taking a look. Natural resources law people probably already will be familiar with the general idea of ecosystem services, but ordinary property folks like me might not be. Here is a short excerpt that gives a sense of the idea in the context of water quality:
Imagine that the municipal water supplier owns the upland forest, which naturally filters and cleans water as it flows through the upper watershed. Property owners in the farmlands are dairy farmers, grazing cows on their fields beside the stream that flows into the reservoir. The farmers could manage their land to provide an improved service of water purification by planting riparian vegetation buffers (i.e., erecting fences to protect strips of plants alongside the stream from grazing). Such vegetative buffers capture nutrients and reduce silt before they reach the watercourse. Downstream water consumers benefit from these actions, which provide them with clean drinking water that does not require extensive pre-treatment. Farmers might benefit from reduced streambank erosion.
Traditionally, this would be the end of the story. No benefits would be produced, for few land owners actually would plant riparian buffers. Farmers may well have been informed of the benefits of this practice for themselves and for downstream users, but it is unlikely that they would change their behavior because of the hassle and cost of fencing and the concerns over the loss of productivity from setting aside pasture. And those who did fence off their streams would bear all the costs, with no contributions from those downstream who benefit from the positive externalities of cleaner water.
So how could the government ensure clean drinking water? The traditional engineer’s approach (“I’ve never seen a problem I can’t build around”) would likely involve building a pre-treatment plant. An ecosystem service approach of riparian buffers, however, would likely be less expensive. But what role should government play in ensuring provision of services?
The traditional regulator’s approach would likely impose prescriptive regulations to require farmers to plant riparian buffers. One could equally rely on financial penalties, levying a tax on farmers who do not have buffers, or trying to persuade farmers to put in buffers. As described in detail in Part V, such approaches have largely proven ineffective in the past because of overbreadth, strong political opposition, and poor compliance behavior in the face of what are viewed as punitive or intrusive measures.
One could, however, view the issue from a totally different perspective. Why not, one might argue, simply recognize this situation for what it is—the provision of valuable services to consumers—and realize this through an explicit arrangement of payments for services rendered? Put another way, why not treat farmers’ provision of ecosystem services as no different from their provision of other marketable goods? Farmers are certainly well accustomed to contractual arrangements for their agricultural products. Dairy farmers sign contracts to sell their milk; potato farmers do the same for their spuds. Why not treat the provision of water filtration services as a similar business transaction, where farmers manage their land through riparian buffers and grass swales to “grow the crop of water quality” much the same as dairy and potato farmers do for their cash crops?
In many respects, provision of ecosystem services would be no different than supplying traditional farm produce, with the level of compensation dependent on the quality and level of services provided. In contrast to the earlier description of subsidies, ecosystem services
payments could focus directly on the quality and quantity of services delivered. Such exchanges would be arm’s-length payments for services rendered, creating an ongoing incentive for the landholder to manage the property so that service provision is ensured rather than the typical one-off application for funds in grants programs with (in practice) little follow-up by the funding body to ensure value for money. For cash-strapped farms, it becomes difficult to justify capital investments with long payback periods, uncertain returns, and potentially reduced land productivity. Service payments could address these common concerns by providing consistent funding sources. The farmers would begin to think differently about the nature of running a farm, as well, perhaps instilling new attitudes and priorities toward land management.
We covered some of Salzman's main points in my Property Theory class as part of our discussion of the role of property in the allocation of natural resources. Property typically comes up in natural resources theory in the context of giving people property rights in natural resources as a method of avoiding the tragedy of the commons. But as Salzman's example of the dairy farmers shows, natural resources issues are also often interwoven with land use issues. The idea of ecosystem services provides a new perspective on many land-use issues, and was helpful in our class discussion of the role of property in various natural resources issues, from global warming to management of the Chesapeake Bay's blue crab population.
One of the things I liked about Salzman's article is that it is a meld of theory and practice, providing reports on how actual ecosystem services projects have worked in the real world. It is also realistic, recognizing that ecosystem services aren't a magical cure-all for environmental and natural resources issues. That said, the concept of ecosystem services has great potential to reconfigure the debate on many property issues. Many people tend to approach the discussion of land use issues, like the preservation of wetlands or open space, from the perspective that a property owner developing land is causing harm to the environment and therefore doing something morally wrong. The difference between harm and benefit, however, often is in the eye of the beholder. Recognizing that when owners leave their land undeveloped they can provide a valuable service to society as a whole has the potential reduce the political controversy, and regulatory takings consequences, created by many land-use planning issues.
Anyway, this is a very interesting article. Check it out!
Tuesday, October 25, 2005
Jay P. Kesan (University of Illinois College of Law) and Andres A. Gallo (University of North Florida)have posted Property Rights and Incentives to Invest in Seed Varieties: Governmental Regulations in Argentina on SSRN. Here's the abstract:
This paper analyzes the evolution of property rights legislation in Argentina with respect to new seed varieties. In comparison to the United States, Argentina has weak protection and enforcement of property rights for new seeds. These weak property rights affect the registration and commercialization of new soybean seeds. We show how private producers of seeds react to differences in property rights between Argentina and the United States and also between corn and soybeans. As we show, investment efforts will concentrate on those crops with more secure property rights at the expense of the markets in which property rights are less secure. This effect has important consequences for a developing market producing in a global market.
Monday, October 24, 2005
[UPDATE: The substance of this post has been included as footnote 46 if this essay.]
This is the third in a series of posts on my research into archival information about the Court's decisionmaking process in leading takings cases. My first two posts discussed the Court's conference notes on Hawaii Housing Authority v. Midkiff and Berman v. Parker, two public use cases central to the Court's recent decision in Kelo v. New London. If you haven't read those posts, please note the caveats in my first post on Midkiff, which also apply to this post.
This post moves further back in time to Miller v. Schoene, 276 U.S. 272 (1928). Schoene involved the destruction of plaintiffs' cedar trees under Virginia's Cedar Rust Act. As the Court explained,
[C]edar rust is an infectious plant disease in the form of a fungoid organism which is destructive of the fruit and foliage of the apple, but without effect on the value of the cedar. Its life cycle has two phases which are passed alternately as a growth on red cedar and on apple trees.
Plaintiffs "challenged the constitutionality of the statute under the due process clause of the Fourteenth Amendment." I should note at this point that the Court's decision last term in Lingle v. Chevron calls into question the continued relevance of early substantive due process cases that on the surface resemble modern regulatory takings cases. (I discuss this further in an essay available on SSRN). This said, Schoene has been of interest in the regulatory takings context because the Court allowed the state to destroy plaintiffs' property without compensation beyond the costs of removal of the cedar trees.
Schoene is relatively easy to explain even under modern regulatory takings doctrine -- cedar plants infected with cedar rust certainly seem to qualify as a common-law nuisance, and mitigation of a common-law nuisance per se is not a taking. The case, however, presents an interesting contrast with Pennsylvania Coal v. Mahon, 260 U.S. 393 (1922). There, Justice Holmes' famous opinion of the Court held that a law that prevented the mining of coal in a manner that might cause subsidence under a dwelling amounted to a taking of the plaintiff coal company's property. As I'll explain further in a future post, I've finally been convinced that Mahon, like Schoene, was a substantive due process case, in that the Court was deciding whether the government act was a taking under the 14th Amendment's Due Process Clause rather than the 5th Amendment's Just Compensation Clause. I still disagree with many of the conclusions that scholars such as Bill Treanor, Robert Brauneis, and Brad Karkkainen draw from this fact, but, as I noted above, Lingle may have made this whole discussion less relevant to contemporary takings doctrine.
In any event, Holmes' famously cryptic opinion in Mahon has had a tremendous impact on modern regulatory takings law. In trying to figure out exactly what Holmes meant in Mahon, some people have looked to Schoene and noted that Holmes did not dissent in that case. Holmes' willingness to join the Court's opinion in Schoene is therefore of at least historical interest.
Conference notes do not exist from this era, but some evidence of each justice's views is preserved on the slips of paper used to circulate draft opinions to members of the Court. Most of these slips simply tell the author of the draft whether the replying justice will join in the proposed opinion. In Schoene, various justices wrote "yes", "I agree", or "I acquiesce" (the last from Justice Butler). Sometimes, however, a justice would write a substantive comment to the author of the opinion. Justice Holmes wrote a short note to Justice Stone, the author of the opinion in Schoene:
Good [illeg; presumably something like "I agree"]
It has been argued that destruction is not a taking. Answered in U.S. v. Welch, 267 U.S. 333, 339 in which I cite a Mass case where I [four more words that are hard to read; first appears to be "discussed" or "dismissed"; last appears to be "notion" or "motion"]
Welch involved a the destruction of a right-of-way easement by flooding caused by a government dam. At page 339 of the U.S. Reports, Holmes wrote:
A private right of way is an easement and is land. We perceive no reason why it should not be held to be acquired by the United States as an incident to the fee for which it admits that it must pay. But if it were only destroyed and ended, a destruction for public purposes may as well be a taking as would be an appropriation for the same end.
As support for this proposition, Holmes cites the "Mass case" referenced in his note to Justice Stone, Miller v. Horton, 152 Mass. 540 (1891). Miller v. Horton involved the destruction of plaintiff's horse, which was suspected of having a disease called glanders. It turned out that the horse was not infected in fact infected, and the plaintiff claimed compensation. Holmes, writing the opinion for the Massachusetts Supreme Court, recognized throughout his discussion that an infected horse was a nuisance, and could be destroyed without compensation to the owner. But what about a horse that was destroyed on the good faith belief that it was infected? Holmes wrote:
We cannot admit that the legislature has an unlimited right to destroy property without compensation, on the ground that destruction is not an appropriation to public use within article 10 of the declaration of rights. When a healthy horse is killed by a public officer, acting under a general statute, for fear that it should spread disease, the horse certainly would seem to be taken for public use as truly as if it were seized to drag an artillery wagon. The public equally appropriates it, whatever they do with it afterwards. Certainly, the legislature could not declare all cattle to be nuisances, and order them to be killed without compensation. [Citation omitted]. As we have said, it only declares certain diseased animals to be infected.
152 Mass. at 547-48. Holmes therefore concluded that the government had failed to establish a justification for their destruction of plaintiff's property.
Reading Schoene and Miller v. Horton together, it seems apparent that Holmes thought that the destruction of an actually diseased animal or plant was a taking of property but that no compensation was required because the government was acting to abate a nuisance. Where the property was not in fact a nuisance, compensation was due even if the government acted reasonably and in good faith.
Holmes therefore held a narrow view of the nuisance exception that is much closer to that articulated by Justice Scalia in the opinion of the Court in Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992), than that articulated by Justice Blackmun in dissent in that case. As I have argued before, Holmes also did not believe that any exercise of the police power per se was not a taking.
And what of Mahon? On one level, it can be seen as consistent with Holmes' non-deferential approach to exercises of the police power in the takings context. It is interesting, though, that Holmes did not reference Mahon in his note to Justice Stone, leaving open the possibility that Holmes saw Mahon and Schoene as presenting distinct issues. If you have any thoughts on the relationship between Mahon and Schoene, please leave a comment.
[Comments are open, but I have to review them before they post, so there might be some delay]
Saturday, October 22, 2005
Friday, October 21, 2005
Holy cow! Michael Lewyn comes out of nowhere to take the top three spots on this week's Top 10. I have to say I'm a little embarrassed by #8 -- I put it up on SSRN because I thought it was worth sharing, but it's not really in the same league as an article. But I just post what I get from SSRN.
1. (236) How City Hall Causes Sprawl: A Case Study, Michael Lewyn (George Washington University Law School)
2. (189) Suburban Sprawl, Jewish Law, and Jewish Values, Michael Lewyn (George Washington University Law School)
3. (166) Sprawl, Growth Boundaries and the Rehnquist Court, Michael Lewyn (George Washington University Law School)
4. (117) A Freedom-Promoting Approach to Property: A Renewed Tradition for New Debates, Jedediah S. Purdy (Duke University - School of Law)
5. (95) At Last, Some Clarity: The Potential Long-Term Impact of Lingle v. Chevron and the Separation of Takings and Substantive Due Process, Benjamin Barros (Widener University - School of Law)
6. (74) Efficient Trespass: The Case for 'Bad Faith' Adverse Possession, Lee Anne Fennell (University of Illinois College of Law)
7. (73) Home as a Legal Concept, Benjamin Barros (Widener University - School of Law)
8. (70) Testimony Before Pennsylvania House of Representatives State Government Committee Re: Eminent Domain, Benjamin Barros (Widener University - School of Law)
9. (60) Private Property, Development and Freedom: On Taking Our Own Advice, Steven J. Eagle (George Mason University - School of Law)
10. (56) Unsubsidizing Suburbia, Nicole Stelle Garnett (Notre Dame Law School)
This may be more of a business law post than a property post, though it does involve mortgages. In addition to my public persona as a property geek, I have a secret identity as a business organizations professor and former corporate litigator. I usually leave business law commentary to Professor Bainbridge, the good folks over at The Conglomerate, the Business Law Prof Blog, and the Corporate Compliance Prof Blog, but I might occasionally dabble in it here.
I've seen a lot on the web lately about interest-only mortgages, which are the latest home financing craze. As their name implies, the monthly payments on interest-only mortgages only cover the interest on the loan; no principal is paid off. Most interest-only mortgages sold today are interest-only for the first ten years of the loan period, after which the borrower starts paying principal. Many interest-only mortgages also are ARMs, where the interest rate on the loan will increase as interest rate benchmarks increase.
I should say at the outset that interest-only mortgages can make sense for certain types of borrowers, especially those with short time horizons. I had one when I lived in New York, and it made a lot of sense for me at the time. But many financial institutions seem to be marketing interest-only mortgages as some kind of new wonder-product that allows ordinary consumers to save money on mortgage payments. As this post explains, however, interest-only mortgages are both expensive and risky for ordinary investors.
I want to focus here one potential consequence of the default and interest rate risks inherent in the current species of ARM interest-only mortgages. Imagine a person buying a $500,000 home, financing 80% with a 4.5% interest-only mortgage that is a 1 year ARM (that is, the interest rate is fixed for only one year). Say the initial monthly payments are $2,000 per month. Now imagine that housing prices decline dramatically and interest rates rise -- a not unrealistic scenario right now. Two years after closing, the person might have a house worth $400,000 (still the value of the outstanding loan principal) or less and a mortgage interest rate of 8.5% (remember not that long ago when that seemed like a good rate). So the person has no equity and payments of $3,000 per month. If the person can't make the higher payment, there goes the house. (As a side note, the last time interest-only mortgages were popular was in the 1920s. Hmmmm, I wonder what happened next.)
Now think back about what happened when the loan was first issued. The person was probably shown a schedule of payments based on the 4.5% interest rate and a truth-in-lending statement. Maybe the loan officer fully explained all of the risks involved and showed the person a schedule of payments based on an 8.5% interest rate. Then again, maybe not. One of the things that makes interest-only mortgages such a marketer's dream is that they allow a person to buy a big house with small payments. Who wants to rain on the sales parade by talking about falling housing prices and rising interest rates? I might be wrong, but some of the sales pitches that I've seen on the internet make me think that risks are not being adequately disclosed by at least some lenders.
Unless the lending institution has papered up this and other similar transactions very well, they are now exposed to a consumer fraud class action. In fact, this potential problem with interest-only mortgages reminds me of some life insurance sales-practices class actions I worked on early in my litigation career. Traditional whole-life insurance policies accumulate interest at a rate tied to the insurance company's rate of return on investments. In the early 1980s, interest rates were incredibly high and many people thought that rates would stay high. During this era, many insurance companies started marketing "vanishing premium" life insurance policies. The idea was that you would pay premiums for, say, seven years. At that point, enough money would have accumulated in the policy that at a high interest rate would be sufficient to cover the premiums for the rest of the life of the policy. Guess what? Interest rates went down. Insurance companies made less money on their investments (mostly bonds), so they started paying less on their policies. Premiums returned. Class actions ensued.
The key to the vanishing premium problem from a litigation standpoint was what the policyholder was shown at the time of purchase. Many policyholders bought based on "illustrations" that showed premiums based on the current interest rate continuing into the future. Some illustrations contained disclosure of the interest rate risk. Some did not. Mediocre disclosure is not going to protect a corporation of any sort in a consumer class action.
Life insurance companies paid out hundreds of millions in dollars (actually, probably a few billion) in settlements in the vanishing premium cases. These cases would be very small potatoes compared to the potential amounts at issue in litigation over interest-only mortgages. There is a nice symmetry between vanishing premium life insurance policies and interest-only mortgages. The former projected high returns in a high interest rate environment. The later project low payments in a low interest rate environment. Both assume that a historically-unusual interest rate environment will last forever. The fundamental disclosure issues are basically the same.
There is one big difference between the vanishing premium cases and interest-only mortgages. Federal Truth-In-Lending laws require a certain amount of disclosure of interest rate risk. They also may preempt many state-law consumer fraud claims. I'm not sure, though, that the currently-required disclosures would be sufficient to protect lenders from the added risks of interest-only mortgages. I'm also not sure that even if the Truth-In-Lending laws protected lenders from problems with interest rate disclosure that they would protect them from other sales practices that could be construed as misleading. Maybe they would -- if you have an opinion on this, please leave a comment.
If I was the general counsel or compliance officer of a financial institution that sells interest-only mortgages, the first thing I'd do is call a lawyer who litigated vanishing premium cases in the late-1990s and talk about mortgage sales practices (among others, pretty much any litigator at Debevoise & Plimpton would know about this stuff). And while I was at it, I'd also think about whether my disclosure statements adequately covered the risk of massive defaults if property values crash or interest rates spike.
If I was a plaintiffs' class action lawyer right now, I'd start polishing up a form complaint.
[Comments are open, but will not post until I have a chance to review them, so there might be a delay]
Thursday, October 20, 2005
Over on TaxProf Blog, Paul Caron has an interesting post on Denis Binder's paper The Changing Paradigm in Public Legal Education. Binder concludes in part:
Public law schools face major challenges in shifting from a low tuition, heavily state supported model to one of high tuition with variable state support. The challenges can best be viewed as risks, which if not properly handled, will result in long term damage to public legal education. If the public law schools increasingly mirror their private counter-parts, their ethos, their basis for existence, as a public institution will cease.
Jane Baron (Temple University School of Law) has posted Property and 'No Property' on SSRN. Here's the abstract:
This essay addresses the vexing question of whether property enhances freedom. Contemporary property debates tend to focus on what might be called the affirmative side of property rights - what they give (or ought to give) to owners vis a vis others and vis a vis the government. But if, as the Realists long ago suggested, property is social, involving relations between people, and if property involves politics, the exercise of power by some over others, then it makes sense to think about the negative side of property rights, the effects of not having any property to speak of. Persons owning very few things inhabit a realm of severe social and legal vulnerability, susceptible to the power of many (and, of course, the government) without having (m)any reciprocal power(s) over others. I call this situation "no property."
This paper seeks to describe the legal category "no property." Rather than enumerate its iterative disabilities, I enlist a recent novel, Valerie Martin's Property, in the hopes of describing "no property" imaginatively. The novel illustrates the ways in which legal states that deprive persons of the ability to own or to control property - slavery and coverture - render persons susceptible to the power of others. Notwithstanding enactment of Married Women's Property Acts and the end of slavery, many today - such as the homeless and the extremely poor–remain in a position of comparable legal and social vulnerability. For persons so situated, the freedom-enhancing aspects of property are more or less beside the point. What they experience as a legal matter is, to recur to some older terms, duties, no-rights, liabilities and disabilities. These iterative negatives together constitute a status, a status in which it becomes possible for them to be seen as, essentially, objects, not subjects.
Effective regulatory schemes take existing schemes of property rights into account. "No property" is such a scheme. Because it consists so largely of negatives, of rights and powers that people do not have, it is difficult to recognize it as such. But it is as serious a constraint on regulatory possibility as, say, the ownership rights of those affected by limitations on the cutting of old growth forests or by required reductions in factory emissions. If we want to "do something" about the poor and the homeless - whether it be banishing them to special "zones" or targeting services to them - we will need to understand the legal situation in which we find them. For this reason, I argue, we must continue to seek to understand and define the legal category of "no property."
Wednesday, October 19, 2005
Like most bloggers, I spend a lot of time reading other blogs. In fact, I got into blogging in part because I figured that since I spend so much time reading blogs, I might as well write one (this very well might be a blogging cliche; I think I've heard it before, though I'm not sure).
So I was checking in at Althouse this morning, and came across this post on how often bloggers check Site Meter. I'm new to blogging, so all I knew about Site Meter was that it tracked the number of visitors to this site. Sadly, Althouse opened my eyes to the true procrastination potential of Site Meter. I can check where people visiting the site are geographically located. Even better, I can have this info posted on a map of the world! Someone from France visited yesterday! I can check if they were guided to the site by another site. Said person from France appeared to have arrived here from a Google search, and probably left unsatisfied. And I can learn all sorts of other fascinating but generally useless info. It's like crack -- I can't stop.
But I am having fun!
Marion County Circuit Judge Mary James ruled last week that Measure 37, a regulatory takings ballot initiative that was approved by Oregon voters last year, violates both the Oregon and United States Constitutions. The opinion is available here. Proponents of Measure 37 will appeal. I'm really not up on ballot initiative law, so I don't have a view either way about whether the judge was correct.
My Property Theory seminar this semester included a three-class unit on property in the human body. Most of our discussion focused on issues of alienability and commodification -- should it be okay to sell organs? To sell parental rights to a child (aka "baby selling")? To enforce surrogacy contracts? Etc. At the end of the unit, the students voted on each issue. I'm not sure what to take from the results, but I thought I'd share them:
Should a person be able to donate or sell the following body parts during life?
Blood or other things that regenerate?
Donate: 16 Yes, 0 No. Sell: 16 Yes, 0 No.
Tissue or organ where removal not likely to cause harm?
Donate: 16 Yes, 0 No. Sell: 16 Yes, 0 No.
Tissue or organ where removal may cause harm?
Donate: 16 Yes, 0 No. Sell: 11 Yes, 5 No.
Tissue or organ where removal likely to cause harm?
Donate: 14 Yes, 2 No. Sell: 8 Yes, 8 No.
Tissue or organ where removal will be fatal?
Donate: 5 Yes, 11 No. Sell: 5 Yes, 11 No.
Issues Relating to Donation of Organs After Death
Should we allow payment during life to people to agree to donate organs after death?
If revocable: 14 Yes, 2 No.
If irrevocable: 9 Yes, 7 No.
Do you favor a government regulation presuming intent to donate?
5 Yes, 11 No.
Do you favor a government regulation requiring harvest of organs regardless of deceased's intent?
0 Yes, 16 No.
In absence of evidence of intent of deceased, should the next of kin be able to "donate" in return for a fee paid to the estate?
6 Yes, 10 No.
Issues Relating to Procreation
Should parents be able to give children up for adoption?
16 Yes, 0 No.
Should parents be able to receive a fee as part of the adoption process? In other words, should parents be able to sell their babies?
8 Yes, 8 No.
Should parents be able to sell fertilized human eggs to another person so that person can have children?
15 Yes, 1 No.
Should parents be able to sell frozen embryos to the highest bidder regardless of intended use?
10 Yes, 6 No.
Should surrogacy contracts be enforceable in the following situations:
Child conceived with surrogate's egg, donated sperm?
8 Yes, 8 No.
Child conceived with surrogate's egg, "adoptive" father's sperm?
14 Yes, 2 No.
Child conceived with "adoptive" mother's egg, "adoptive" father's sperm?
16 Yes, 0 No.
Should prostitution be legal?
13 Yes, 3 No.
Some of the votes may seem shocking taken out of the context of our class discussion. For example, our discussion of allowing people to donate or sell organs where the removal would be fatal was done in the context of a hypothetical about whether a parent could rationally make that type of decision to save the life of a child. If nothing else, the votes show that on a number of issues, a group of law students educated in property theory hold some views outside of the mainstream. I think that's a good thing; others may disagree.
The Pocket Part is a new on-line feature of The Yale Law Journal:
As members of the legal community know, legal publications often contain "pocket part" supplements with up-to-date information and commentary. The Pocket Part plays an analogous role. It features op-ed length versions of Journal articles and responses from leading practitioners, policymakers, and scholars. The Pocket Part also serves as a forum for our readers and authors to discuss legal scholarship.
Abraham Bell and Gideon Parchomovsky currently have a post up on The Pocket Part on their recent article Of Property and Federalism. Here's an excerpt:
We suggest expanding owners’ flexibility by using a registry system similar to that used in corporate law. Property owners should be allowed to choose the state property law that will apply to any given asset, but will be required to register the fact in a publicly available registry. A California couple—or a couple from any other state for that matter—should be able to buy a car in New York and register that car as community property under California law, even if they never plan on returning west.
Under our proposed regime, whenever a new property right is created or acquired, the parties may choose to define the property right according to the full menu of property laws available throughout the country.