Linda Fisher's article was originally printed in the October 2005 issue of MSCA News, a newsletter published by the Minnesota Shopping Center Association. Text posted with the MSCA's permission.

On June 23, 2005, the United States Supreme Court fired a shot literally heard ‘round the world. By a razor-thin 5-4 majority, the Court in Kelo v. City of New London upheld the use of eminent domain to acquire non-blighted property for economic development, even though the property would ultimately be conveyed to private developers. “They’re coming to take it away” sums up the decision’s extraordinary fall-out. Justice O’Connor’s blistering dissent received more attention than Justice Stevens’ majority opinion. “The specter of condemnation hangs over all property,” she wrote. “Nothing is to prevent the State from replacing any Motel No. 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory.” The headlines trumpeted: “ Seizing Land for Private Use OK!d,” “ Court Backs City vs. Homeowners” ( USA Today); “Supreme Court Rules May Seize Homes” (Chicago Tribune); and “Eminent Domain, A Big-Box Bonanza?” (CNN On-Line). The media gave citizens the distinct impression the Supreme Court had jettisoned the Fifth Amendment in a radical departure from prior law. Even majority Justice Souter’s New Hampshire farmhouse may be on the condemnation block for a project dubbed “Lost Liberty Hotel,” as suggested in a letter sent to Weare, New Hampshire officials.

In reality, the Kelo decision did not expand the government’s eminent domain power. Rather, it reaffirms over fifty years of prior precedent in which the Supreme Court had largely declined to second-guess the wisdom of state and local governments’ exercise of the eminent domain power. In fact, some legal experts, including John Echevarria, maintain that while Kelo does not stray from the judicial road map, it “represents a change in the direction of less, not more, deferential judicial examination” of the use of eminent domain for economic development. Justice Kennedy’s concurring opinion highlights the limits placed on the economic domain power. But first, an overview of pre-Kelo law and the Kelo decision.

The Law Before Kelo

The Takings Clause of the Fifth Amendment of the U. S. Constitution states: “[N]or shall private property be taken for public use, without just compensation.” The Supreme Court long ago rejected any literal requirement that property may only be condemned if it is to be used by the general public. The Court has instead equated “public use” with “public purpose.” There are several pre-Kelo cases in which the Supreme Court upheld the use of eminent domain, even though the property acquired would not be used by the general public.

Overview of Kelo Decision

New London, Connecticut has long been in economic decline. In 1990, the state designated it a “distressed municipality.” In 1996, the federal government closed a large naval facility. By 1998, the city’s unemployment rate was nearly double the state’s, and its population was at its lowest since 1920.

A non-profit development agency was established to help the city redevelop the area. In 1998, Pfizer announced it would build a $300 million research facility nearby. Hoping this would be a catalyst for redevelopment, the city held neighborhood meetings and public hearings to educate the public about the process. The state approved the “integrated development plan,” which called for a waterfront hotel, restaurants, shopping, marinas and office space. The city planned to long-term lease some of the land to a private developer. The developer would then lease the office space to tenants who were not identified when the plan was adopted. The redevelopment would create over 1,000 jobs, increase taxes, and revitalize the community.

The development agency successfully negotiated the purchase of most of the property, but nine owners refused to sell and condemnation proceedings were initiated under Connecticut law. The Connecticut Supreme Court upheld all of the takings, even though the properties were not blighted or poorly maintained.

The Supreme Court upheld New London’s use of eminent domain pursuant to a “carefully considered development plan” based on “thorough deliberation.” The Court refused to adopt a new bright-line rule that economic development takings are unconstitutional or require “heightened scrutiny.” Justice Stevens stated: “Promoting economic development is a traditional and long accepted function of government. There is, moreover, no principled way of distinguishing economic development from the other public purposes that we have recognized.” But the Court also said that states are free to further restrict eminent domain.

Post-Kelo Limits on Economic Domain

The Supreme Court did not give government a blank check to use eminent domain for economic development. Justice Stevens’ majority opinion notes:

• Government may not take property to confer a private benefit on a private party or “under the mere pretext of a public purpose.”

   

• One-to-one property transfers outside the confines of an integrated development plan” may not be valid.

   

• Eminent domain without comprehensive planning is constitutionally suspect.

   

• It’s important that the chosen developer be contractually bound to carry out the plan’s public purpose.

   

• Justice Kennedy provided the critical fifth vote. His concurrence stated that there might be a presumption of invalidity for some takings, such as certain one-on-one transfers. He identified factors that justified upholding New London’s takings. They include:

   

o     The taking occurred in the context of a comprehensive plan.

o     The plan addressed “a serious city-wide depression.”

o     The economic benefits of the project were not inconsequential.

o     The project beneficiaries were unknown when the city formulated its plans.

o     The city complied with “elaborate procedural requirements” that facilitate review of the record and the city’s purposes.

Minnesota and Federal Legislative Response

All is hardly quiet on the state and federal legislative fronts. Shortly after the Kelo decision, the Private Property Protection Act was introduced in the Minnesota Legislature. It proposes an outright ban on eminent domain, if the property acquired will be transferred to a private party. The post-Kelo political outcry in Minnesota has been so great, that many legislative watchdogs predict that some form of eminent domain restriction will pass in the 2006 session. This might include stricter standards for satisfying the state constitutional “public use” test and/or expedited review of condemnations by the state appeals court.

Four days after Kelo was announced, the Protection of Home, Small Businesses and Private Property Act was introduced in Congress. It prohibits eminent domain solely for private economic development and applies to all federal takings and all state and local takings using federal funds.

The eminent domain debate has been joined throughout the nation. The National League of Cities has urged Congress not to preempt state eminent domain authority. The American Planning Association (“APA”) supported New London before the Supreme Court and opposes pending federal legislation to prohibit economic development takings. APA advocates integrating eminent domain and land use planning and requiring additional compensation beyond the constitutional minimum in certain cases.

Property rights groups, such as the Institute of Justice, support a federal statutory check on state eminent domain power. They claim that regardless of the “incidental” public benefits associated with economic development takings, the monetary gains favor the private party transferee. As Justice O’Connor’s Kelo dissent noted, the danger is that those with disproportionate political influence will be the primary beneficiaries while the victims may be the elderly and minorities. History has shown, however, that the disputants in an economic development taking may both be significant, influential business entities.

Thoughts on the Post-Kelo World

Unless and until Congress, the Minnesota Legislature, or Minnesota courts change the rules, the local land use record is the key to a valid economic development taking. The record must be transparent to avoid the appearance of impermissible favoritism to private parties. The record should include:

• A comprehensive development plan documenting the public need for the redevelopment project.
• Evidence that the city reviewed a variety of development plans and chose a private developer from a group of applicants, rather than picking out a particular transferee before the process began.
• Substantial public participation in approval of the redevelopment plan and selection of the developer, including but not limited to citizen task forces, neighborhood meetings and public hearings.
• Documentation, preferably through an independent consultant, of the substantial projected public benefits of the redevelopment project.
• Documentation that the city considered alternatives to use of eminent domain, such as relocating or scaling back the project.

Stay tuned for more developments in the coming year!

Linda Fisher is a shareholder in Larkin Hoffman’s land use practice group. She represents developers and property owners in obtaining zoning, government approvals and environmental permits for all types of land development and redevelopment.