Daily Development for Wednesday, November 7, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

CONSTITUTIONAL LAW; DUE PROCESS; PUBLIC PURPOSE:   Notwithstanding Kelo decision, proposed condemnee is permitted to show that the alleged public benefits for a particular project are a “pretext” and that in fact the real impact of the proposed condemnation is to benefit another private interest.

Franco v. National Capital Revitalization Corp, 930 A.2d 160 (D.C. 2007)

Franco owned a store located in a shopping center in D.C. known as Skyland Shopping Center.  There were thirty businesses in the center, and from the court’s description of them, one can conclude that this was not a “class A” retail mall.  There were a national chain pharmacy and national chain auto supply store, a post office, a KFC, and Franco’s store, Discount Mart, together with other, likely similar establishments.

A government created redevelopment corporation was created and given the right to acquire and assemble real estate, including through eminent domain, on order to carry out redevelopment activities. The corporation entered into a development agreement with four developers to redevelop Skyland shopping Center and five adjacent acres.  The idea was to prepare a plan to redevelop the site into a “first-class, quality mixed-use retail center.”

A year and a half after  this agreement was reached, the corporation introduced a Bill to the DC Council to support its exercise of eminent domain.  The bill declared that the taking of the properties was “necessary and desirable for the public use,” but, as the court noted, did not say why.  Perhaps massaged by District counsel, when the bill was actually adopted, it included new language specifically finding that the Skyland Shopping Center “is a blighting factor” in the local community.  The bill went on to recite the typical blight findings that the Center was characterized by underused, neglected and poorly maintained properties, fragmented and often absentee ownership, lack of responsibility for safety and the reduction of crime, trash and other blighting factors, and that the local authorities had been unable to secure the cooperation of current owners to deal with problems there.

The Bill went on to state that the assemblage of the properties into a new shopping center development “would further many important public purposes,” listing garbage and crime reduction, creation of jobs, more retail options, and economic revitalization of the overall community.  The process of review of the bill took about six months and there was a committee hearing.  But the court took pains to note that all the findings of blight and public benefit did not find their way into the bill until after virtually the entire review process - a month before final adoption and well after the hearing. 

Franco filed defended against the condemnation by arguing that the Skyland Shopping Center was not blighted and that there was no carefully considered development plan serving a public purpose supporting condemnation of the Center.   (In the meantime, the redevelopers had acquired a good portion of the rest of the Center.)  A trial judge dismissed the defenses and authorized an immediate taking.  The trial court commented that any inquiry into the legitimacy of the public purpose determination was foreclosed by Kelo.  Title in fact passed to the corporation, but on appeal Franco was able to stay the order for possession.

On appeal, the D.C. appeals court reversed the trial court’s order, concluding that, notwithstanding the decision in Kelo v. City of New London, 545 U.S. 469 (2005) , a proposed condemnee still can make a legitimate claim that the local authorities lack a foundation to make a determination that a taking of private property for purposes of redevelopment by other private parties.  The court characterized the available opening for the condemnee as the showing that the alleged public purpose is in fact a “pretext” for conferring a private benefit on other parties, and that no true public benefit is being served.   In such a case, regardless of whether a condemnee receives an appropriate price, a condemnation should not precede.

By the time the case reached the appeals court, the only issue left to decide was the defense regarding lack of public purpose.  The court assumed that the procedure used by the DC government and that Franco received procedural due process.  Indeed, he did participate in the hearing that was held. 

But the DC appeals court read Kelo as leaving open to judicial review the legitimacy of the governmental determination that the taking in question will serve a public, rather than a purely private purpose.  It quoted from the Kelo opinion the Supreme Court recognition that takings for private purposes are not authorized, including this pithy statement by Justice Stevens:

“Nor would the City [New London] be allowed to take property under the mere pretext of a public purpose, when its actual purpose was to bestow a private benefit.”

The court held that this permits a proposed condemnee essentially to challenge the legitimacy of the public agency’s assertion that a public benefit is served:

“[T]here may be situations where a court should not take at face value what the legislature has said.  The government will rarely acknowledge that it is acting for a forbidden reason, so a property owner must in some circumstances be allowed to allege and to demonstrate that the stated public purpose is pretextual.”

The court noted that the concurring opinion of Justice Kennedy went into more detail about the “pretext” issue, but asserted that it was relying primarily on the plurality opinion by Stevens.

The court admitted that the mere assertion that the taking does not meet a public purpose likely was insufficient to overcome the presumption of validity afforded to the governmental decision.  But it said that other facts raised by Franco in counterclaims (which may not themselves have been procedurally valid) fleshed out his allegations and permitted the court to decide what Franco intended to prove and then, on the generous standard of a motion to dismiss appeal, indulge all inferences in favor of Franco before deciding that he had no case.

Franco alleged that during the two years before introducing the bill to the DC Council, the redevelopment corporation had refused to discuss redevelopment with any of the extant owners but instead was focussed on a “sweetheart deal” with a development group that would in fact share its profits with the redevelopment corporation.  Franco claimed that the resale price to the developers was $25 million below true value.  He especially noted that the Council itself had never discussed the question of blight, nor evaluated whether the efforts of existing owners might be sufficient to resolve any issues if they existed.  The “findings” were tacked on at the end, Franco alleged, without any fact finding or discussion, just to validate a preordained approval. 

The reviewing court admitted that, after Kelo at least, redevelopment is a valid public purpose, and can be carried out by the device of condemning private land and retransferring it to other private developers.  The court noted that the Supreme Court has cited 99 Cents Only Stores v. Lancaster Redevelopment Agency, 237 F.S. 2d 1123 (C.D. Cal. 2001), where the court had invalidated a proposed plan to acquire land in a shopping center area for the sole purpose of expanding an existing Costco store.  That trial court had concluded, based upon its analysis of the proposed public benefits, that the proposal was a naked power grab. 

But the court acknowledged that the concept of “pretext” suggests some element of purpose, motive or intent.  But it then concluded that intent can be gleaned from the court’s view of the legitimacy of the public agency’s determination. 

“[A] reviewing court must focus primarily on benefits the public opes to realize from the  proposed taking . . . if the property is being transferred to another private party, and the benefits to the public are only “incidental” or “pretextual,” a “pretext” defense may well succeed.  On the other hand, if the record discloses . . . that the taking will serve ‘ an overriding public purpose’ and that the proposed development ‘will provide substantial benefits to the public,’ the courts must defer to the judgment of the legislature.  Harder cases will lie between these extremes.” 

Comment 1: The court relied upon the Maryland decision in Mayor and City Council of Baltimore v. Valsmaki, 916 A. 2d 324 (Md. 2007) (The DIRT DD for 2/9/07).  But note that the Maryland decision arguably could be based independently on the Maryland constitution.  Can’t get away with that in D.C.  And, by the way, another federal court had approved the condemnation of Skyland Shopping Center more or less on the same issues in Franco v. District of Columbia, 456 F.S. 2d 35 (D.D.C. 2006)

Comment 2: The editor is perplexed.  If the court can evaluate the motives of the local government by evaluating the validity of its determination, how can we conclude that the local government is free to make judgments as to what is in the public interest free of substantive judicial review.  Aren’t we back to the 1930's “substantive due process” debate?  The editor is particularly struck that the court is reserving judgments even as to those cases that don’t hit the extreme.  Even where the public benefit is more than “incidental,” the court is free to find a pretext ([h]arder cases will lie between [the] extremes.”) Isn’t this a pretty naked end run around Kelo?  It’s one thing for a state court to conclude that it’s Constitution means something different than the Supreme Court has stated to be the meaning of the U.S. Constitution.  It’s another thing to buck the Court’s very recent so directly in a case applying U.S. Constitutional standards. 

In short, whatever good purposes might be served by this case, the editor feels it has not adequately shown how its analysis can be reconciled with the holding in Kelo.  The window Kelo left open cannot be this wide open. 

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters.  The same is true of all commentary provided by contributors to the DIRT list.  Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.

Parties posting messages to DIRT are posting to a source that is readily accessible by members of the general public, and should take that fact into account in evaluating confidentiality issues.

ABOUT DIRT:

DIRT is an internet discussion group for serious real estate professionals. Message volume varies, but commonly runs 5 to 15 messages per work day.

Daily Developments are posted every work day.  To subscribe, send the message

subscribe Dirt [your name]

to

listserv@listserv.umkc.edu

To cancel your subscription, send the message signoff DIRT to the address:

listserv@listserv.umkc.edu

for information on other commands, send the message Help to the listserv address.

DIRT has an alternate, more extensive coverage that includes not only commercial and general real estate matters but also focuses specifically upon residential real estate matters.  Because real estate brokers generally find this service more valuable, it is named “BrokerDIRT.”  But residential specialist attorneys, title insurers, lenders and others interested in the residential market will want to subscribe to this alternative list.  If you subscribe to BrokerDIRT, it is not necessary also to subscribe to DIRT, as BrokerDIRT carries all DIRT traffic in addition to the residential discussions.

To subscribe to BrokerDIRT, send the message

subscribe BrokerDIRT [your name]

to

listserv@listserv.umkc.edu

To cancel your subscription to BrokerDIRT, send the message signoff BrokerDIRT to the address:

listserv@listserv.umkc.edu

DIRT is a service of the American Bar Association Section on Real Property, Probate & Trust Law and the University of Missouri, Kansas City, School of Law.  Daily Developments are copyrighted by Patrick A. Randolph, Jr., Professor of Law, UMKC School of Law, but Professor Randolph grants permission for copying or distribution of Daily Developments for educational purposes, including professional continuing education, provided that no charge is imposed for such distribution and that appropriate credit is given to Professor Randolph, DIRT, and its sponsors.

DIRT has a WebPage at:
https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://cctr.umkc.edu/dept/dirt/

*************************************

Your e-mail address will only be used within the ABA and its entities. We do not sell or rent e-mail addresses to anyone outside the ABA.

To change your e-mail address or remove your name from any future general distribution e-mails you can call us at 1-800-285-2221, or write to: American Bar Association, Service Center, 321 N Clark Street, Floor 16, Chicago, IL 60610

If you are an ABA member, log in to the ABA Web site at https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://www.abanet.org/abanet/common/MyABA/home.cfm to edit your member profile. Otherwise, complete the form located at https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=https://www.abanet.org/members/join/coa2.html

To review our privacy statement, go to https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://www.abanet.org/privacy_statement.html.

If you have any problems, please contact the list owner at dirt-dd-request@mail.abanet.org.