Eminent Domain and the Underwater Mortgage

A number of cities in New Jersey, including Irvington and Newark, are considering using the power of eminent domain to aid homeowners whose mortgages are underwater. A mortgage is underwater when its unpaid balance is greater than the property’s market value. The underlying mortgages, however, are not necessarily in default.

The concept of using eminent domain to assist homeowners in danger of foreclosure was first introduced in San Bernardino, California when the County explored the idea of addressing negative equity by using private equity to help current borrowers in foreclosure blighted neighborhoods. The controversial plan was for municipalities to use the power of eminent domain to circumvent mortgage contracts, acquire loans from bondholders, write them down, and give them back to the bondholders. The proposal was abandoned by the County and two of its cities because of the unquantifiable risk that it introduced to the market and the lack of public support. The level of risk involved, the possible cost of implementing such a plan, pushback from the mortgage industry, and the threat of serious litigation have proven significant impediments to cause a number of cities to reject the idea of using eminent domain as a cure-all to the woes of the housing market.

Officials of other cities still find the possibilities of the plan appealing in theory, if not in practice. 

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If this isn't inverse condemnation, what is?

In 100 Paterson Realty LLC v. Hoboken, the Appellate Division addressed the standard for determining whether an inverse condemnation has taken place: whether the threat of condemnation has had such a substantial effect as to destroy all beneficial use and enjoyment of an individual’s property. Washington Mkt. Enters. v. City of Trenton, 68 N.J. 107,122 (1975).

In an inverse condemnation action, a property owner seeks compensation for a de facto taking of his or her property by a government entity with eminent domain powers. A claim of inverse condemnation may result from a direct, physical taking of or interference with property, or arise from a regulatory taking. A claim may also arise from accidental property damage or the abandonment of plans to condemn the property. However, not every impairment of value establishes a taking. To constitute a compensable taking, the property owner must be deprived of all beneficial use of the property. Government “plans” do not ordinarily constitute a taking of property. Danforth v. United States. The mere plotting and planning in anticipation of condemnation without any actual physical appropriations or interference also do not constitute a taking. Kingston East Realty Co. v. State, 133 N.J. Super. 234, 239 (App. Div. 1975).

The plaintiff alleged inverse condemnation and tortious interference with prospective economic advantage against the City of Hoboken. The plaintiff argued that the threatened acquisition of property for use as parkland by eminent domain during land use proceedings was a taking warranting payment of just compensation. The trial court held that a taking had not occurred and the Appellate Division affirmed.

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NJ beachfront owners hold out for eminent domain

One year after Hurricane Sandy made landfall in New Jersey on October 29, 2012, demands by public officials for the voluntary surrender of property are strident. Local mayors and the governor seek the conveyance of beachfront easements without just compensation. Property owners who are unwilling to surrender their rights are called selfish, mean-spirited, and worse on television, radio, online, and in print. Most “holdouts,” the owners of beachfront properties, residences, and local businesses, want the government to exercise its power of eminent domain. They want the guarantee of justice provided by the Constitution.

The United States Constitution, Article 5 states, “No person shall be...deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.” The New Jersey Constitution, Article 1, Section 20 states, “Private property shall not be taken for public use without just compensation. Individuals or private corporations shall not be authorized to take private property for public use without just compensation first made to the owners.” The process for awarding just compensation is set out in N.J.S.A. 20:3-1, et. seq. The statute requires the government to appraise the property to be taken and offer the owner fair market value plus any damages to the remaining parcel. The statute prescribes that any land taken be utilized for a public purpose.

The assurance of just compensation is crucial because private land owners in shore towns will forfeit all rights under perpetual easements. The individuals will retain title to the portion of the property taken subject to the easement. The land owners remain responsible for the land and must meet the typical obligations of landownership, including payment of property taxes, but they will have been deprived of virtually all beneficial use of the taken portion of their land.

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Probability of zone change in NJ eminent domain cases

The Supreme Court of New Jersey, in a 3-2 opinion written by Justice Jaynee LaVecchia, reversed and remanded Borough of Saddle River v. 66 East Allendale, LLC, overturning a jury verdict for just compensation in the amount of $5,250,000. Justice Barry T. Albin, joined by Chief Justice Stuart Rabner, wrote the dissenting opinion. (Download the opinion).

When the state or a municipality exercises the power of eminent domain, the determination sought through court action is the amount of just compensation, the value of the property evaluated in light of its highest and best use, which is ordinarily calculated in accordance with current zoning ordinances. However, if there is a reasonable probability that a zoning change will be granted, valuation may include an assessment of a change in the permitted use of the property, or a premium. In State by Highway Commissioner v. Gorga and State by Commissioner of Transportation v. Caoili, the Court held that a determination of reasonable probability of a zoning change must be made by the judge before the evidence is presented to the jury. The Supreme Court reiterated the gatekeeping duty addressed in both Caoili and Gorga:

The court must act as a gatekeeper to assess whether there exists sufficient evidence of a reasonable probability of a zoning change to permit an alternate use for a property taken under eminent domain to be considered when valuing property for just compensation.

In this case, the Supreme Court found that the trial judge did not perform his gatekeeping function at the proper juncture. He did not consider the record or conduct a preliminary N.J.R.E. 104 hearing before allowing the jury to consider the reasonable probability of a zoning change. Instead he deferred any decision regarding the defendant’s experts’ opinions that a change in zoning was reasonably probable until the trial was in progress. The Supreme Court remanded the case after finding that the expert’s opinions lacked a proper basis, and were speculative and conclusory. It also specifically held that the court’s gatekeeping function is to be exercised prior to the jury’s deliberation on compensation.

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NJ Supreme Court overturns Karan, changes rules on partial takings

The New Jersey Supreme Court reversed and remanded Borough of Harvey Cedars v. Harvey Karan and Phyllis Karan, thereby overturning a jury verdict, trial court and appellate decisions that awarded the Karans $375,000 for the taking of a beach replenishment easement and damages to the remainder. The partial taking amounted to 3,400 square feet, approximately one-fourth of the Karans’ oceanfront lot. The chief issue in the case was whether or not Harvey Cedars should have been permitted to present testimony concerning special benefits which protected the Karans’ property as a result of the construction of a 22 foot high dune between their home and the ocean. Karan argued that the dune partially obstructed his ocean views and diminished the market value of his property by approximately $500,000. Harvey Cedars sought to introduce testimony before the jury that these damages should have been offset by the benefit of having the home protected from future storms. The trial court rejected this testimony based on long standing case law in New Jersey: Projects such as this would be considered a general benefit to the entire island, and not a special benefit to Karans or any other beachfront owner. Today, the Supreme Court rejected the Karan argument and changed the long standing rule on benefits, which has been in effect for more than121 years:

We now conclude that when a public project requires the partial taking of property, `just compensation’ to the owner must be based on a consideration of all relevant, reasonably calculable, and non-conjectural factors that either decrease or increase the value of the remaining property. In a partial-takings case, homeowners are entitled to the fair market value of their loss, not to a windfall, not to a pay out that disregards the home’s enhanced value resulting from a public project. To calculate that loss, we must look to the difference between the fair market value of the property before the partial taking and after the taking. In determining damages, the trial court did not permit the jury to consider that the dune would likely spare the Karans’ home from total destruction in certain fierce storms and from other damage in lesser storms. A formula – as used by the trial court and Appellate Division – that does not permit consideration of the quantifiable benefits of a public project that increase the value of the remaining property in a partial-takings case will lead to a compensation award that does not reflect the owner’s true loss. Compensation in a partial takings case must be `just’ to both the landowner and the public. United States v. Commodities Trading Corp., 339 U.S. 121, 123, 70 S. Ct. 547, 549, 93 L. Ed. 707, 712 (1950). A fair market value approach best achieves that goal.

Because that approach was not followed in this case, we reverse the judgment of the Appellate Division and remand for a new trial.


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Eminent domain, special benefits, and beach replenishment

The New Jersey Supreme Court has granted Certification to the Borough of Harvey Cedars in the case of Harvey Cedars v. Karan (A. 120-11). At issue in the case is the longstanding policy in eminent domain cases that does not permit off-setting general benefits against damages that ensue from easement takings for dune replenishment and blocking ocean views from the beachfront homes. See Borough of Ridgewood v. Sreel Investment Co., 28 N.J. 121 (1958). In the Karan case, the Borough acquired an easement over one-third of Karans' property and constructed a 22-foot high dune which blocked the ocean views. The Borough, through its expert Donald Molliver, MAI, offered $300.00 as compensation for the taking and damages. Molliver opined that the damages were offset by the special benefit to the property for the project.

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Essex County Vo-Tech eminent domain complaint dismissed

New United Corporation v. Essex County Vocational-Technical School Board of Education [A-2014-10T2]

By William J. Ward and Winifred E. Campbell

Yesterday the Appellate Division unanimously dismissed a condemnation complaint filed by the Essex County Vocational-Technical Schools Board of Education (ECVS) for the acquisition by eminent domain of property owned by New United Corporation, consisting of 7.5 acres adjacent to Interstate 280, which was the former site of the United Hospital facility in Newark. Download New United Corporation v. Essex County Vocational-Technical School Board of Education.

The court ruling was based on the condemnor’s failure to engage in bona fide negotiations as required by N.J.S.A. 20:3-6, et al., of the Eminent Domain Act. The ECVS used its power of eminent domain with the intent to construct a county-wide regional school that would consolidate several existing technical and vocations schools in surrounding communities. In overturning the condemnation, the court stated, “[t]he record reveals nothing that remotely resembles bona fide negotiations by the Board of Education.”

The Eminent Domain Act requires the condemnor to engage in “bona fide negotiations” with a condemnee before commencing an eminent domain action. N.J.S.A. 20:3-6. This provision “encourage[s] public entities to acquire property without litigation…saving both the public and the condemnee the expense and delay of court action.” Township of W. Orange v. 769 Assocs., LLC, 198 N.J. 529 (2009).  A cornerstone to protecting the Constitutional rights of property owners is the requirement that government entities seeking to exercise their power of eminent domain deal “forthrightly and fairly” with property owners. Jersey City Redevelopment Agency v. Costello, 252 N.J. Super. 247, 257 (App. Dic.), certif.. den. 126 N.J. 332 (1991).

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US Supreme Court ruling on due process in wetlands regulation

Challenging a wetlands designation in eminent domain cases is often a key issue for property owners attempting to obtain just compensation for the acquisition of their property. While the decision of the Supreme Court  in Sackett v. EPA is not made in the context of eminent domain, the Court's findings with respect to the EPA could well be germane in cases that involve eminent domain.

Sackett v. U.S.Environmental Protection Agency
Supreme Court of the United States No. 10–1062.
Argued January 9, 2012—Decided March 21, 2012

by Winifred E. Campbell, Esq.

Last week the United States Supreme Court handed a decisive win to property owners battling to protect their due process rights against baseless environmental regulation. In Sackett v. EPA, the Sacketts were denied their due process rights when they attempted to challenge the Environmental Protection Agency’s (EPA) determination that the Sackett property was encumbered with wetlands. Download Sackett v. EPA.    

The Sacketts purchased a 0.63 acre lot in a residential, platted subdivision in Idaho intending to build a house. All permits were granted by the local municipality and gravel was laid in preparation for building the foundation of the home. Without warning, evidence, or explanation, the EPA issued the Sacketts a “compliance order,” demanding construction stop and the land be returned to its pre-gravel condition. According to their attorneys at the Pacific Legal Foundation, the Sacketts were told by the EPA that it controlled the land because the land is “wetlands.” Failure to comply with the EPA’s order racked up fines of $75,000 a day.

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Court upholds eminent domain award for beach replenishment project

Borough of Harvey Cedars v. Harvey Karan and Phyllis Karan,
Superior Court of New Jersey Appellate Division - A-4555-10T3
Decided March 26, 2012

by Scott A. Heiart, Esq.

Yesterday the New Jersey Appellate Division affirmed a jury award in the amount of $375,000 for the acquisition of an easement in order to construct a dune in conjunction with a beach replenishment project.  Download the decision.

In 1973, Harvey and Phyllis Karan built their “dream house” on the New Jersey shore in Harvey Cedars. Their home was uniquely situated with sweeping views of the beach, shoreline, and ocean. The Borough of Harvey Cedars, as part of a large-scale beach replenishment project in 2008, used eminent domain to take numerous easements from beach-front property owners to construct an enormous dune.

Harvey Cedars offered the Karans $300 for the taking, arguing any loss of views was de minimus and that they would receive a “special benefit” due to the added protection against beach erosion and future storm damage. The Karans argued the loss of view was so significant it reduced the value of their property by $500,000.

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House bill ends eminent domain for economic development

by Winifred E. Campbell, Esq.

The United States House of Representatives passed with bi-partisan support H.R. 1433, The Private Property Rights Protection Act, on February 29, 2012. The bill aims to bar the federal government from using eminent domain for economic development. The bill would also withhold federal development funding to states that take private property for economic development. The bill is now being considered by the Senate.

The proposed Private Property Rights Protection Act is in response to the 2005 U.S. Supreme Court decision in Kelo v. City of New London. In Kelo, the Court upheld the condemnation of private property for transfer to other private owners to support “economic development.” The Kelo decision was met with outrage across the country. Frequently, the use of condemnation for economic development benefits wealthy developers at the expense of the poor and politically weak.

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