Sure and Certain Compensation
By M. Robert Goldstein an Michael Rikon
We were reading a real estate blog (GlobeSt.com) which referred to the recently enacted Public Authorities Reform Act of 2009. It made reference to the asserted fact that there were 1,098 public authorities in the State of New York. It also reported that according to the State Comptroller's website, there are 256 major public authorities and 764 entities with local jurisdiction, 70 entities affiliated with a state agency and eight entities with interstate or international jurisdiction. While we have not even attempted to read all of the enabling acts creating them, all those we have seen over a long period of time granted the power of eminent domain. They run the gamut from the MTA to a plethora of Industrial Development Agencies ("IDA") to the New York City Housing Authority.
As reported in Robert Caro's biography of Robert Moses, one of the original creators of these authorities, the purpose of creating them was twofold, taking their activities out of the politics of the legislature ("don't look at me, they did the condemnation") and providing a means for creating public improvements outside of the debt limit of the State. They started with entities such as the Triborough Bridge and Tunnel Authority and the Saw Mill River Parkway Authority and graduated to urban renewal authorities and industrial development agencies and agencies such as the Dormitory Authority, Metropolitan Transportation Authority and the NYS Thruway Authority.
None of these agencies could fund themselves by levying taxes. They depended for their financing upon legislative appropriations, bond issues for specific projects and tolls in the case of highways and bridges. Those bonds did not have the backing of the full faith and credit of the State and were deemed only moral obligations of the State. In the last great recession of the early 1980's, when New York City itself was on the verge of bankruptcy (remember the newspaper headline, "Ford says Drop Dead New York"), there were serious questions raised about the ability of some of these authorities to continue the scheduled payments on its bonds. The State made clear it would recognize its moral obligation in the event of default, which kept troubled authorities afloat.
But all of this brings to mind a very basic concept of Constitutional Law, as regards the right of eminent domain--the right to sure and certain compensation to a property owner whose property is taken by right of eminent domain. For this, we have to trace some history.
We start with Rogers v Bradshaw, 20 John R 735 (1823), as referred to in Chapman v Gates, 54 NY 132 (1873). It was written with the background that it was first in 1821, that the New York State Constitution was amended to provide, similar to the 5th Amendment of the U.S. Constitution, that private property could not be taken for a public use without just compensation. Prior to that, just compensation was provided as a matter of statute and common law as the 5th Amendment did not apply to the States until the late 1800's.
It was in this case it was decided that when property was taken by the State or one of its political subdivisions that compensation need not be made contemporaneously with its taking: "as the faith and solvency of the Town was pledged to the owner that payment therefore to him should certainly be made without hazard or doubt." Later in Sage v City of Brooklyn, 89 NY 189 (1882) and citing Chapman v Gates, supra, it was stated: "a law taking of a man's land without the pledge of the faith and credit of the State or one of its political subdivisions for the payment of the compensation--is not a sure and adequate provision dependent on no hazard casualty or contingency whatever, such as is required to meet constitutional prohibition against the taking of private property without making compensation", that in such circumstances, if the compensation was not paid at the time of the asserted taking, title was not divested and the property owner could reenter his property.
As an aside, we find in Bloodgood v Mohawk RR Co, 18 Wend 9 (1837), a justification of the use of the right of eminent domain to be for "a public benefit" (not "use") in affirming the taking of private property to turn it over to private developers of toll roads and bridges. The "benefit" was that the public could use those facilities. But were not those developers building for profit, and, does not the public shop in shopping centers? Originalists should read history.
But, we digress. The reason why the pledge of the full faith and credit of the State and its political subdivisions equated to sure and certain compensation was because they had the taxing power. It could always raise money to pay the condemnation award. But what about all of these public authorities?--they exercise the power of eminent domain and they are not backed by the full faith and credit of the State, at least not in the legal sense. Well, as was said in Sage v City of Brooklyn, supra, "Payment need not be concurrent with the taking, that it is sufficient if the law authorizing the taking also provides a sure, sufficient and convenient remedy by which the owner can subsequently coerce payment by legal procedures".
We remember the one time we had to call on such a remedy. There was a taking by a Long Island school district. The award in a condemnation was more than was anticipated by the district and budgeted. On our being advised that there was no money available in the budget to pay the award and that the district had already reached the limit of its ability to float bonds, we responded with an action to compel the district to float tax anticipation notes in order to pay the award. Somehow, the district found the money to pay the award.
But such a remedy is not available against these authorities. If there is no money available, they either must float a bond issue or depend on the State or the political subdivision to which they are attached to bail them out. There is no guarantee a bond issue would be floatable, since they would be for improvements not yet built and if not that, where are the funds to come from. The developer, if he is to build the project, is certainly not a sure and certain source of funding.
In the Condemnation Law, which was the original procedural statute before EDPL, the solution was to provide that title to the property did not vest in the condemnor until the award was finally fixed by the Court and paid. Subsequent legislation provided an alternative procedure whereby the condemnor took title and paid for it later, together with interest for the delay. That is the current procedure in Eminent Domain Procedure Law ("EDPL") with one exception.
EDPL §402(B)(2)(f), however, also provides "if a non-governmental condemnor subject to the jurisdiction supervision and regulation of the public service commission or the Commissioner of Transportation" (apparently referring to public utilities and railroads which also have the right of eminent domain) petitions to condemn it is to post a bond in the amount fixed by the Court to cover any default by the condemnor in paying a condemnation award. No provision was made for when the condemnor was one of the authorities, although from a sure and certain compensation point of view, they are no different from any nongovernmental condemnor.
In 1990, this subject became an issue in New York State Urban Development Corporation v Toh Realty Corp., 165 AD2d 733, 563 NYS2d 788 (1st Dep't., 1990), lve den, 77 NY2d 810 (1991). In that case, a challenge was launched to the proposed order of condemnation on the ground that there was no guarantee of sure and certain compensation in that UDC depended on the private developer to provide the funds to pay the condemnation awards. UDC originally posted an irrevocable letter of credit in the amount of $155,000,000 from the developer with its application to condemn, representing 20% in excess of the total amount of its appraisals. The trial Court directed a submission to it in camera of updated appraisals, based upon which the amount of the letter of credit was fixed by the Court at $241,000,000 representing 20% in excess of the revised appraisals. On appeal from the granting of the order of condemnation, the Appellate Division, without any discussion, stated: "Further, the constitutional requirement for sure and certain compensation was adequately provided for by the letter of credit."
The Court never indicated in its decision whether the appraisals submitted were only the real estate appraisals or they included the fixture appraisals. They did not include appraisals from the condemnees, nor do we know the total amount of the eventual awards. Of one thing we can be pretty sure, the total of all awards substantially exceeded 20% over the UDC appraisals. The developer did not default, the awards were timely paid and we never got to find out how one gets condemned property back when there is not enough money in the till to pay the awards and the condemnor has nowhere to go to make the payment. But one thing is clear, in hindsight. The Courts never did provide sure and certain compensation as of the time of the taking in the 42nd Street Project.
The same issue came up in Sun Company Inc v City of Syracuse IDA, 209 AD2d 34, 625 NYS2d 371 (4th Dep't., 1995) (we were one of the attorneys for the developer, Pyramid Companies). As described by the Court, the developer was to pay, prior to the taking, the amount of the condemnor's appraisals, which amounts were to be used for the statutorily required advance payments to be made after the taking. It also agreed to pay the amounts of the balance of the awards. As the decision reads, that was sufficient to guarantee payment. The decision as written is troubling as precedent. Taken at face value, it flies in the face of the well-established case law, which holds that a guarantee of payment by a private party is not sufficient to be a guarantee of sure and certain compensation. What the decision does not make clear is that there was more involved.
Later in Mobil Oil Corp. v City of Syracuse IDA, 224 AD2d 15, 646 NYS2d 741 (4th Dep't., 1996), involving the same project as in Sun, supra, the sure and certain compensation issue was once again raised. This time, the Court spelled out the payment methodology in the decision. Both sides were to submit to the Court their appraisals, not just that of the condemnnor as in Toh, with the Court fixing the amount of the bond to be provided to guarantee payment, taking into account both sides' appraisals. With recent events in mind, it is worth noting the Court's comment as to this: "Nor do we share the concern expressed by petitioners that a bonding company does not provide the same assurance of payment as a municipality, although, as petitioners argue and illustrate, the newspaper articles in exhibits to their briefs, insurance companies have gone bankrupt. We may take judicial notice of the fact that they have historically and satisfactorily met their burden of making good their liabilities as sureties in a multitude of commercial transactions, including construction contracts involving huge potential financial obligations. We would also take judicial notice of the fact that there are also municipalities that for one reason or another become unable to meet their financial obligations."
We wonder how a Court would write an opinion on this subject today, in view of the past years' events. Insurance on municipal bonds are now routinely disregarded by raters and buyers because it is not deemed a reliable source of payment. Banks are also suspect. Would the adequacy of a letter of credit or a bond be tied to whether the issuer was too big to fail? Of course, the real distinction between the municipality and the bonder or issuer is that the former has the taxing power and ultimately every property in the taxing jurisdiction stands surety for the payment of a condemnation award owed by the municipality. How these 1,098 public authorities will go about guaranteeing sure and certain compensation in view of recent events is yet to be seen.
Reprinted with permission from the December 23, 2009 edition of the New York Law Journal © 2009 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.