• 19 March 2009

Private Takings

Abraham Bell - Bar Ilan University Faculty of Law

Posted in ,

The popular firestorm surrounding the Supreme Court’s recent ruling in Kelo v City of New London1 focused on public incomprehension that the government may simply take property from one private property owner and transfer it to another private owner.

The legal community found the ruling less than surprising—it is well known that economic development may justify takings, even where the government subsequently transfers the taken property to another private actor. But even those generally familiar with the law still hold to the general belief that, as numerous cases have pronounced, the legal system does not tolerate “private eminent domain.” Even where such takings are mediated by government action, courts have no hesitation in pronouncing that “it has long been accepted that the sovereign may not take the property of A for the sole purpose of transferring it to another private party B, even though A is paid just compensation.”2

The truth is quite different.

Not only are private takings constitutional, they have long existed and continue to exist in the American legal system. Private takings—that is, takings carried out by nongovernmental actors—can be found in numerous eighteenth- and nineteenth-century laws that established mechanisms for nongovernmental entities such as ordinary corporations to take private property by eminent domain. Railroads, for instance, were often granted the power to take (for compensation) private lands that lay along the route of the intended rail line. Even today, the law permits many kinds of private takings. In addition to takings by utilities, railroads, loggers, and the like, the law also permits certain kinds of takings by ordinary private individuals. For instance, in Colorado, landowners may seize, for compensation, an easement over neighbors’ lands when they have a sufficient interest in the benefited property to entitle them to condemnation, as well as a practical necessity for the private way.3 Additionally, many governmental takings today are functionally private takings. Kelo, for instance, involved a New London, Connecticut urban renewal plan that included the takings of private residences for land to be transferred to private developers for office space.

Extant private takings can be divided into three categories. In instances of delegated private takings, the state directly authorizes certain types of private actors to take property by eminent domain. For instance, Alabama permits the exercise of eminent domain by electric companies, operators of water systems and sanitary sewer systems, and television satellite systems under the same rules as public takings.4 A second category involves a particular relationship or asset that warrants private takings. Private ways of necessity, like those recognized in Colorado, fall into this category. A third type of private taking is mediated by the government case by case. Here, as in Kelo, the state identifies a valuable private or private-public project and uses its power of eminent domain to transfer property to a private owner. For instance, New York’s Empire State Development Corporation recently approved the condemnation of land in midtown Manhattan (on Sixth Avenue, between 42nd and 43rd Streets) in order to turn it over to a private developer for building a fifty-one-story office tower for Bank of America.5

Understanding why private takings are not an anomaly provides an important insight into the nature and purposes of takings law, as well as its true boundaries.

Private takings, properly understood, serve the same function as ordinary public takings. The government’s power to take is generally justified on the grounds that the government needs certain assets in order to exercise its powers, and the government is sometimes prevented from acquiring the property through ordinary marketplace transactions by some bargaining flaw. For instance, the government may need the power of eminent domain to assemble land for an airport because the project might otherwise be foiled by holdouts—owners who refuse to sell in the hopes of extorting a portion of the project’s social benefit even though the owners have received what they would otherwise consider a good offer. Exactly the same circumstances—a potential buyer who values the property more than its current owner, but is unable to purchase it due to bargaining problems—can occur in the private sector. If the power to take property for compensation is a good solution for the bargaining breakdown in the public context, it is an equally good solution in the private context.

In fact, private takings may sometimes be an even better solution than public takings. Ironically, this is because private takers are likely to be more explicitly motivated by the bottom line than public decisionmakers. Under current law, the only substantial mechanism available for disciplining takers and discouraging excessive takings is the compensation requirement. In the private market, forcing the taker to pay compensation (preferably at the full subjective value of the property to its owner) should eliminate takings where the taker values the property less than its current owner. After all, what private taker would willingly pay more for a property than the value of the benefit she could realize from ownership? A government taker, by contrast, may be ready to overpay for political reasons; quite simply, there may be cases where a taking is worthwhile politically while senseless economically. In other words, due to rent-seeking by government agents or interest groups, there are times when the discipline of markets is more effective than the discipline of politics in curbing undesirable takings.

The trick to finding cases where private takings would be worthwhile is identifying situations where bargaining failures are likely to foil worthwhile transfers, while imposing a compensation requirement that prevents welfare-harming transfers. Specifically, a private taking power should be structured to be available only where the dual conditions of an appropriate taking are met: (1) the taker is the preferred owner of the property right (for reasons of justice or efficiency), and (2) strategic difficulties block the just or efficient transfer of property rights in the marketplace. To accomplish this aim, current usage of private takings provides a good guide. Private takings powers can be delegated to particular individuals, granted on the basis of certain relationships or assets, or authorized for a transaction or class of transactions.

Delegated private takings are the easiest to understand, and the hardest to police. Utility companies are the primary beneficiaries of such delegations today; in previous eras, public carriers such as railroads also generally received such powers. Such generous empowerments of private actors possess considerable potential for overbreadth. Not every acquisition of property by a utility involves strategic barriers that bar voluntary transactions, and not every acquisition of property by a utility or public carrier moves such property to its most efficacious owner.

Private takings authorized by asset or transaction are more promising. Where there is a high likelihood of a certain party enjoying unusually high benefits from an asset—in other words, where there is an obvious “ideal owner”—a private takings mechanism can potentially provide a lower-transaction-cost means of transferring the object to that ideal owner. This can be the case, for example, in “cybersquatting,” where entrepreneurs preemptively register popular internet domain names—often trademarked names—with the purpose of transferring the name at a profit to a third party (the owner of the trademark, or of the business associated with the name to be registered) and extorting a high price in the process. Private takings may be an appropriate means of preventing extortion in the ownership and transfer of domain names.

The most fruitful potential use of private takings is in specified transactions where bargaining failures are likely. The clearest example is the classic takings problem of land assembly. Land assembly is traditionally seen as the prototypical case in which takings are necessary to overcome strategic barriers to voluntary transactions or other transaction costs. Bargaining with each potential seller entails costs even in ordinary circumstances; in the case of land assembly, the costs are exacerbated by holdouts and other strategic bargaining practices. It is little wonder, then, that many land assembly projects have required public assistance in the form of case-by-case state exercises of the power of eminent domain. Nor is it surprising that legal academics, such as Michael Heller, Rick Hills, Amnon Lehavi, and Amir Licht have suggested various quasi-private takings mechanisms for assembling land. An alternative would be to grant a private takings power in land assembly projects, keyed to the size of the project, the number of landowners, and similar factors. For instance, would-be private takers might be required to file a public notice with zoning authorities 180 days before any proposed land assembly project, specifying the proposed area to be taken and the proposed compensation scale to be paid to landowners. In order to be eligible to file the notice, the private taker would need to specify a project that includes at least a minimum number of different owners—say, twenty—and perhaps a minimum spread of value—for example, with no individual owner possessing more than 15 percent of the total value. The filing would initiate a period in which competing bidders could offer to acquire the same collection of properties; a competing bid at a higher price would supplant the original bid and restart the clock. The ultimate taker would be required to acquire more than a minimum share of the land (perhaps 51 percent of both the built-up area and the land mass) in voluntary transactions before any land could be taken involuntarily. Finally, those owners whose land was taken in involuntary transactions would have a right of appraisal.

While these sorts of private takings may seem unsuited to a society that values private property, upon closer analysis they should be viewed as congruent with the way legal entitlements are protected throughout the legal system.

This is because legal entitlements are rarely entitled to absolute protection. As Guido Calabresi and Douglas Melamed noted so many years ago, the legal system offers two general types of protection for legal entitlements: property rule protection, which permits owners to refuse to transact and name their own prices; and liability rule protection, which permits other parties to seize the entitlement and pay a price determined by a court (or other third party).6 The legal system also frequently mixes and matches, adopting pliability rules that specify switching protection, from property rule to liability rule protection and vice versa, under specified circumstances.

Assets are often protected only by liability rule or pliability rule. For instance, while a railroad company may have undoubted legal ownership over a terminal, the rarely-used “essential facilities” doctrine in antitrust law may specify that under certain circumstances, the company will lose its property rule protection and be forced to permit others to use the terminal, in exchange for payment.

Takings are articulated pliability rules. A taking, in this context, temporarily relieves an owner of her property rule protection, and permits the taker to take the property as if it were only protected by a liability rule. After the taking, property rule protection returns to the asset, now in the hands of the taker. Viewing takings as an institutionalized pliability rule permits us to see its place in a larger scheme of legal protections that need not be restricted to the government. When the state creates a takings power, it simply adds to the existing rules by which legal entitlements are protected. A takings power, then, may be viewed not as an act that wrenches away property rights and places an asset outside the world of property protection. Rather, it may be seen as an act within the larger superstructure of property.

Caution is in order. Private takings—even if viewed as a property regulation rather than an extension of the regulatory power to seize through eminent domain—are no more intrinsically efficient than any other property regulation. An improperly structured pliability rule, a misplaced liability rule, or any other poor protection scheme may block efficient transfers of entitlements or encourage inefficient ones. Determining when and how to extend rights of private takings must therefore be analyzed with reference to the many factors—especially transaction costs—that have driven entitlement protection analysis over the years.dingbat

 

Acknowledgments:

Copyright © 2009 University of Chicago Law Review.

Abraham Bell is Professor of Law, Bar Ilan University Faculty of Law.

  1. 545 US 469 (2005).
  2. Id at 477.
  3. See Crystal Park Co v Morton, 146 P 566, 569 (Colo App 1915).
  4. Ala Code § 37-6-3(15).
  5. See Michael McDonald, Durst Deal Done, The Bond Buyer 25 (Dec 29, 2003).
  6. See Guido Calabresi and A. Douglas Melamed, Property Rules, Liability Rules and Inalienability: One View of the Cathedral, 85 Harv L Rev 1089 (1972).

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