THE WALL STREET JOURNAL's real estate journal - JUNE 31, 2001

"Cities often misapply eminent-domain rule"

- Dean Starkman

In the clash of eminent domain and private property, courts are sending cities a message: Enough.

[Cities] have [used eminent domain] by stretching the definition of a public use to include everything from bridges and highways to speedways, casinos and BMW dealers.

Under the right of eminent domain, a government can take private property for "a public use," the U.S. Constitution's standard for all takings. Cities, however, have increasingly used their power of eminent domain to transfer property from one business to another in the name of redevelopment, and they have done this by stretching the definition of a public use to include everything from bridges and highways to speedways, casinos and BMW dealers.

For years, courts deferred to municipal judgment in such matters. But in more than a half-dozen recent rulings, state and federal courts have taken a harder look at what exactly constitutes a public use and begun to set new limits on cities' power. Among the cases in which courts found that cities had gone too far:

- A Pennsylvania appeals court in February blocked the condemnation of a steel-fabrication plant for a hotel-office developer on the ground that a local redevelopment authority had improperly delegated its public powers to the developer.

- A federal judge in Manhattan issued a temporary order in February blocking Port Chester, N.Y., from condemning rental property in favor of a grocery-store parking lot under a state law that allows a newspaper ad to serve as notice to owners that their property could be taken.

- The Mississippi Supreme Court in May issued a stay blocking condemnation of a huge tract to make way for a Nissan Motor Co. plant, saying that redevelopment authorities may be taking land "substantially in excess of the immediate needs of the public use."

"What you're seeing is courts finally setting some limits to the exercise of eminent domain," says David L. Callies, a professor of property and land-use law at the University of Hawaii law school, Mr. Callies, who as a lawyer has represented both government agencies and property owners, adds: "They're saying, 'OK, if you've got a redevelopment scheme, we'll probably buy that. But we're not going to buy your virtually turning over the power of eminent domain to the private sector.'"

"The evidence is clear beyond dispute that Lancaster's condemnation efforts rest on nothing more than the desire to achieve the naked transfer from one's private party to another."

-Judge Stephen V. Wilson, U.S. District Court

The recent rulings may amount to just the beginnings of a backlash, but they mean that what was once an unquestioned power is now in doubt - a change that could affect the thousands of takings cases filed around the country each year, particularly those related to redevelopment. In California alone, for instance, cities and redevelopment authorities filed 1,090 eminent-domain cases last year.

A recent case in Lancaster, Calif., a city of 130,000 about 45 miles from Los Angeles, offers a closer look at the new judicial scrutiny.

The City Council there voted last year to condemn space in a shopping center occupied by 99 Cents Only Stores to make way for the expansion of the discounter's bitter rival, Costco Wholesale Corp., the mall's anchor. Costco had operated in the mall for almost a decade before 99 Cents Only opened a store there in 1998.

"Almost immediately" after its rival opened, Costco told the city it needed to expand, according to the ruling in the case by U.S. District Court Judge Stephen V. Wilson, in Los Angeles. Costco, based in Issaquah, Wash., demanded the 99 Cents Only space and threatened to move to nearby Palmdale if it didn't get it, the judge wrote. Ultimately, City Manager James C. Gilley informed 99 Cents Only officials they would have to leave. In June 2000, city officials voted to condemn the 99 Cents Only site.

Costco officials couldn't be reached Friday. Last month, Joel Benoliel, the company's chief legal officer, said the company wasn't a party to the case and had no "continuing interest" in it.

99 Cents Only, a 110-store discounter based in City of Commerce, Calif., sued in Los Angeles federal court last July, arguing the city had sought the property merely for Costco's private benefit and thereby violated 99 Cents Only's Fifth Amendment rights.

In December, two months before a scheduled trial, the city voted to rescind the condemnation votes, saying the other tenants had opposed Costco's expansion plans. But 99 Cents Only, concerned the retreat was merely a ploy, pressed ahead, seeking a permanent order barring the city from taking its property to convey it to Costco.

In court papers, the city argued that the case was moot. In any case, the city said, it had the right to the property because the site had been declared "blighted" back in 1983, before the center was developed, and could become blighted again if Costco left. "The possibility of losing Costco was of real concern," the city argued.

Last month, Judge Wilson permanently blocked any future attempt to take the 99 Cents store for Costco. In a 17-page ruling, he dismissed the city's contention that "future blight" could be a ground for taking. He then addressed the thorny public-use issue.

"The evidence is clear beyond dispute that Lancaster's condemnation efforts rest on nothing more than the desire to achieve the naked transfer from one's private party to another," he wrote. "Such conduct amounts to an unconstitutional taking purely for private purposes."

Lancaster has given notice that it will appeal. "The court has gone way beyond what the law permits," David McEwan, the Lancaster city attorney, said in an interview in June. "It's a troubling trend. I don't know where the courts are going with it." He added last week, "99 Cents produces less than $40,000 [a year] in sales taxes, and Costco was producing more than $400,000. You tell me which was more important."

Gideon Kanner, one of the 99 Cents Only's attorneys and a longtime critic of redevelopment agencies, says: "Finally, the courts are beginning to treat the subject seriously."