California City Tramples Property, Contract Rights

Posted: Aug 28, 2013 9:14 AM

It’s easy to make fun of California, the “Land of Fruits and Nuts,” with its history of “flower power” and its “fragrance free zones”; where environmental whackos are exalted, and Second Amendment supporters demonized. What is not humorous, however, are efforts by officials in the Golden State to use the power of government to destroy property rights and legal contracts.

Welcome to Richmond, California. Officials in this city of 100,000 just northwest of Berkeley have concocted a creative use of the power of “eminent domain” – using it as a hammer to stop banks from foreclosing on property owners who have fallen behind in their mortgage obligations. The problem is, Richmond’s efforts clearly violate the intent and the language of the U.S. Constitution -- the Fifth Amendment to which permits government to take a person’s property only after providing “due process,” and only for a valid “public use” after paying “just compensation.”

Such constitutional provisions obviously mean little to Richmond’s Green Party Mayor, Gayle McLaughlin, who apparently believes taxpayer monies can be used to buy private mortgages at a deep discount in order to save homeowners who are “underwater” in their mortgage obligations to banks, including Wells Fargo. The city then would refinance the loans at a lower rate for the homeowners, who might otherwise have gone into foreclosure.

According to an analysis of this scheme in the Star Tribune, if the bank refuses to sell the loans to the city, the municipality then invokes the power of eminent domain to “seize” the mortgages, and pay the bank reduced “fair market value” for the properties. Lost in all this are the lawful mortgage contracts between the homeowners and Wells Fargo, which allow the bank to claim the properties through foreclosure when the homeowners default.

In McLaughlin’s scheme – reportedly cooked up by law professor Robert Hockett at Cornell University – the “public use” is not the construction of a highway or a government building. The “public use” for which a local government can forcibly purchase private homes at a discount and override the terms of arm’s length mortgage contracts between homeowners and lenders is – according to Hockett -- the “drag on the economy” created by “massive defaults” caused by “underwater loans.”

If the Hockett-McLaughlin analysis seems to make little sense based on any reasoned analysis of the constitutional “takings clause,” it is because it doesn’t.

However, the “Richmond Plan” is but the latest in a long line of eminent domain abuses by governments, and which all-too-often are sanctioned by the U.S. Supreme Court. “Eminent domain” now vies with the “commerce clause” as a favored tool used by governments at all levels, to diminish individual liberty and increase the power of the state over contract and property rights.

This is hardly a new phenomenon. The abuse of eminent domain moved into high gear beginning in the 1950s, when governments decided to employ the power of eminent domain as a way to control “urban blight” -- seizing run-down properties and replacing them with government-owned and -subsidized structures. This process has accelerated greatly in the intervening decades, as property owners have seen their previously constitutionally guaranteed right to control their own property trumped by all manner of do-gooders, from historic preservationists to environmental zealots and endangered species advocates.

Then, in 2005 in one of the worst Supreme Court property-rights decisions ever, a majority of the Justices determined it was constitutionally permissible for the City of New London, Connecticut, to kick Suzette Kelo and other homeowners out of their houses in order to sell the properties to Pfizer Corp., which promised to revitalize the area and eventually bring in more tax dollars to the cash-strapped city (which never happened). Defining “public use” as including corporate development for no purpose other than the lure of more tax dollars, stretched the “takings clause” to its furthest limit ever; until now.

Richmond, California is taking that eminent domain ball and running with it. Other cities still suffering the effects of the mortgage meltdown of 2008 reportedly are considering similar abusive legal actions. All of us who believe in property rights and the sanctity of contracts – two fundamental rights expressly guaranteed in our Constitution as against government abuse – should be cheering for Wells Fargo and other financial institutions as they fight Richmond’s property grabs in court.