Kelo: The Unintended Consequences

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I chuckle whenever I hear Rush Limbaugh warn that the reasoning behind the Supreme Court’s Obamacare decision (National Federation of Independent Business v. Sebelius)can now lead to legislatures mandating the eating of broccoli. No more. The July 21 issue of the Economist reports how one California jurisdiction is taking the Kelo v. City of New London decision where few imagined it would go. And it is well to remember that where California innovates, the rest of America often follows.

In Kelo, the Supreme Court held that eminent domain could be used to transfer land from one private owner to another as a permissible "public use” to further economic development for the general benefits of a community under the “takings” clause of the 5th Amendment of the Constitution. It was a 5-4 decision, with Justice Kennedy providing the swing vote.

Traditionally, the power of eminent domain had been interpreted to justify the taking of private property only for direct government use — for roads, railways, government buildings, and such. But this concept had been undermined over the years, first by Berman v. Parker (1954), which allowed the taking of private property to combat “blight” (in the broadest sense), then by Hawaii Housing Authority v. Midkiff (1984), which allowed takings to break up oligarchies. Both concepts were vague, and subject to pure demagoguery. Subsequently, scores of in flagrante takings were never properly contested — until Kelo.

The majority opinion’s reasoning was based on the concepts of “minimum scrutiny,” the idea that government policy need bear only a rational relationship to a legitimate government purpose; and “judicial restraint,” the idea that judges should hesitate to strike down laws that are not obviously unconstitutional (though what counts as obviously unconstitutional is itself a matter of debate). Precedent also plays a major role in the application of “judicial restraint.” Even though a law may seem a clear breach of constitutional precepts, if it’s the result of a long-established and generally accepted trend, then “judicial restraint” can be used to uphold it — a curious, priority-reversing application of the principle. Applied in this manner, “judicial restraint” becomes a recipe for specious reasoning and sophistry. The same applies to “minimum scrutiny,” but with fewer qualifications.

In response to the Kelo decision, many states passed laws limiting or prohibiting the use of eminent domain to take private property for conveyance to another private owner. California, however, was not one of those states.

When housing prices burst in 2008, California took the biggest hit, and San Bernardino County was punched particularly hard. Entire neighborhoods were “blighted” by foreclosed properties, with boarded-up windows and unkempt facades. Property values plummeted, in some cases by 50% or more. Nearly half the mortgages in the county are now “underwater,” meaning that the value of the outstanding loan exceeds the market value of the properties.

“So,” the Economist explains, “the county and two of its cities (including Ontario) are considering an innovative proposal: to use the powers of eminent domain to seize underwater mortgages from investors and chop them down to size.”

The scheme was hatched by Mortgage Resolution Partners (MRP). As theEconomist elaborates, this is what would happen:

MRP would work with officials to identify mortgages ripe for seizure; at first, only homeowners who were up-to-date on their repayments would be eligible. MRP would drum up private investment to finance the mortgage purchases at prices determined in court (as in all eminent-domain cases). Once the loan is bought, the principal would be cut and the repayment terms eased. A win for the homeowner; a win for the local economy, thanks to growing consumer spending and (with luck) a revived construction industry; and a win for MRP, which earns a juicy fee from each transaction.

But there would be losers: mortgage providers and investors in mortgage-backed securities. If the scheme were implemented, the American Securitization Forum (the industry’s round table organization) fears it would choke off credit and depress house prices. And there are other problems.

As the Economist notes, “Thomas Merrill at Columbia Law School thinks MRP might struggle to convince a court that it has satisfied the ‘just compensation’ clause of the Fifth Amendment.” Additionally, affected mortgage providers could sue San Bernardino County and MRP for interference with valid contracts. It could be a costly nightmare for the municipalities that implement the proposed plan.

For these reasons the plan may go nowhere. County officialshave emphasized that no decision has been made, and there are signs that the process is stalled. However, merely the concocting of such a plan may open a door for some very ingenious applications of the already broad Kelo decision.

Are these really “unintended consequences”? No. Something like them could easily be predicted. To judicial originalists they are — with a nod to Donald Rumsfeld — unwelcome “known unknowns.” That is why, anticipating them, originalists advocate parsimony in the interpretation of law. To modern-liberal jurists, the consequences might also be “unknown unknowns,” but they are unknowns redolent with creative possibilities for increasing the power of the state to provide what modern liberals regard as social justice.




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Comments

Jon Harrison

Another insightful and well-written piece from the keyboard of Mr. Miller.

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