I once wrote that there is a legal aphorism in criminal law that a good prosecutor could indict a ham sandwich. If this is so, in an eminent domain proceeding, an average condemnor could condemn a kasha knish.
The public purpose which is supposed to be a required element by our Fifth Amendment really doesn’t apply. See Kelo v. City of New London, 545 U.S.469 (2005). So it is hardly surprising that some governmental ninnies would think that in order to help its underwriter homeowner citizens, it would condemn their mortgages to help reduce the borrower’s loan balances.
Several California cities have decided to proceed in this effort. Mind you, most of the mortgages are current in payment. In other words, the planned condemnation does nothing to help borrowers who really need help, like those in foreclosure.
The city of Richmond, California, has, according to an article that appeared in the Los Angeles Times on August 7, 2013, asked the holders of more than 620 underwater mortgages to sell the loans to the City at a discount. The City would then write down the debt and refinance the loans for amounts in line with current home values. According to the L.A. Times, if lenders refuse, the City could use eminent domain to force the transaction.
Did the wise people duly elected to govern really think this action would go unchallenged? Banks representing some of the largest bond investors have filed suit against Richmond to block the planned acquisitions.
According to the Wall Street Journal, the lawsuit alleges that the proposed use of eminent domain is unconstitutional because it benefits a small group of Richmond Citizens at the expense of out-of-state investors, violating the law on interstate commerce. The lawsuit also argues that the loans are not being seized for a valid public purpose.
I think by the time this litigation is over, the mortgages will probably be paid off. The final comments on this brilliant idea to generate legal fees belongs to Professor Gideon Kanner, who wrote in his indispensable blog Gideon’s Trumpet: “Stop the BS about underwater mortgage eminent domain takings.”
As is always the case, Professor Kanner’s words are worth repeating:
For the last few days, the internet has been full of news items dealing with that proposed scheme. But the bad news is that most people writing on that subject talk about the right to take, and don’t seem to have a clue that the would-be takers of these mortgages — actually deeds of trust; we don’t use mortgages in California — will have to pay just compensation, i.e., fair market value, not some bargain basement figure pulled out of thin air. And by California constitution and statute, you have to keep two things in mind. First, the “just compensation” called for the state constitution has to be “first” paid — in full, and up front, that is — before any taking can occur (Cal.Const. Art. I, Sec. 19). Second, by state statute, the condemnor has to pay “fair market value” which is further defined by statute as “the highest price” (not a bargain price), that a willing but unpressured buyer would voluntarily pay to and be accepted by a willing but unpressured seller on the date of value, giving due consideration to the property’s potential uses, including its highest and best (which is to say, its most profitable) use. See Cal. Code Civ. Proc. Sec. 1263.320.
We note that if this harebrained scheme comes a’cropper, as it likely will, for one reason or another, it won’t be the first time Richmond got its greedy fingers burned playing with eminent domain abuse; see Richmond Elks Hall v. Richmond Redevelopment Agency, 561 F.2d 1327 (9th Cir. 1977), one of the leading cases in which the court took a dim view of a city trying to use its power of imminent eminent domain to blight private property, and then take it at its depressed value. Didn’t work out.
Are those folks trying it again? We don’t know for sure. But it seems clear that they intend to acquire “underwater” deeds of trust at below-market prices. So says the New York Times. Will it fly? Will the courts go for this sort of scam? We’ll have to wait and see, but we believe that not even California courts will stand still for that. Why not? Because under our law, if the condemnor tries to lowball too much, and makes an unreasonable pre-trial offer, it may have to pay the condemnees’ attorneys’ and appraiser’s fees, plus other litigation expenses, on top of the “just compensation” required by the constitutions. And, of course, any diminution in value brought about by the the market’s reaction to the imminence of the condemnation, cannot be considered in determining fair market value. The property has to be valued as if unaffected by the condemnor’s plans or by any preliminary steps taken toward the condemnation. Cal. Code Civ. Proc. Sec. 1263.330.