Takings

The Supreme Court Should Take the Love Terminal Takings Case

A lower court decision the Supreme Court is currently considering reviewing has important - and dangerous - implications for property rights.

|The Volokh Conspiracy |

Love Field.

The Supreme Court is now considering whether it wants to review Love Terminal Partners v. United States, an important takings case decided by the Federal Circuit last year. The odds against any given case being taken by the Court are almost always high. But I hope this one beats them. If allowed to stand, the Love Terminal ruling would have dangerous implications for many future cases involving takings claims against the federal government. NYU/University of Chicago law professor Richard Epstein—probably the nation's leading takings scholar—has a good description of the somewhat convoluted facts of the case:

The deregulation movement of the late 1970s had its intended consequence of hastening competition among airlines. But it also created a backlash in one market, Dallas-Fort Worth, located in the backyard of [future] Speaker of the House Jim Wright. Wright feared that vigorous competition to the new Dallas/Fort Worth airport (DFW) would come from the Love Field airport, the home of the upstart Southwest Airlines, which was now poised for the first time to expand operations into the interstate market. Wright thought that flights from Love Field would reduce the air traffic at DFW, which in turn would reduce the revenues needed to fund the debt service on DFW bonds. So in 1979, he induced Congress to pass the Wright Amendment, which perversely restricted all flights out of Love Field outside of Texas and four contiguous states—Arkansas, Louisiana, New Mexico, and Oklahoma—to aircraft that had 56 or fewer seats….

By 2004, Southwest mounted an effective campaign to "free Love Field," which prompted American Airlines to make Southwest an offer it could not refuse. Both companies, the two airlines concluded, would be better off by cartelizing the market by dividing a limited number of gates at Love Field and DFW between them. In order to put this plan into action, however, the two airlines, the DFW Airport Authority, and the two cities (Dallas and Fort Worth) had to reduce the capacity of Love Field. They decided to do so by getting rid of twelve state-of-the-art gates—six at the main terminal and six on Lemmon Avenue—serving Love Field, which were owned by the company Love Terminal Partners (LTP). Flights from these gates could crater the American/Southwest alliance. So these five parties (Southwest, American Air, Dallas, Fort Worth, and DFW) prevailed on Congress in October 2006 to pass the Wright Amendment Reform Act (WARA) which provided that "The City of Dallas shall reduce as soon as practicable, the number of gates available for passenger air service at Love Field to no more than 20 gates. Thereafter, the number of gates available for such service shall not exceed a maximum of 20 gates." And shortly thereafter, Dallas condemned LTP's gates and promptly razed them. That's one way to ground the competition.

Sadly, an antitrust suit that LTP filed against the Five Parties Agreement was blocked on the ground that those laws were overridden when Congress blessed the deal under WARA. At this point, LTP had only one option, which was to seek just compensation for its demolished gates. In two careful opinions, in 2011 and 2016, Judge Margaret Sweeney in Federal Claims Court awarded LTP $133.5 million for the physical destruction of the gates. But LTP's case then crashed unexpectedly on appeal when, in 2018, Judge Timothy Dyk of the Federal Circuit upended the entire operation. Judge Dyk insisted that zero compensation was required for the simple reason that LTP could not prove that the gates in question had any market value prior to their destruction: No party is entitled to compensation for the destruction of worthless property.

As Epstein and others point out, the Federal Circuit decision sets a dangerous precedent in two ways. First, the main reason why Judge Dyk concludes that LTP's property rights had no value is that it was not making a profit at the time of the taking. But that ignores the fact that property that isn't making any profit at time X still has value because it might become profitable in the future. There was good reason to think that the gates owned by LTP would become more profitable over time. As Epstein points out, "we know that the zero valuation put on the property by Judge Dyk has to be wrong, because if the Lemmon Avenue gates were worthless, why would the five parties secure the passage of WARA to authorize their destruction?" LTP's competitors wanted the gates destroyed precisely because they did have value: as potential competition for other airport facilities in the area.

Many properties that do not make a profit at a given point in time still have positive market value. That value can and should be factored into the valuation of property for takings purposes. If it is not, the government can game the system simply by condemning land in a down year, when business is bad and the property in question is operating at a loss. It can then swoop in and take the property for free. Surely that result doesn't meet the Fifth Amendment's requirement of "just compensation."

The second serious flaw in the Federal Circuit ruling is the holding that potential future changes in government regulatory policy cannot be factored into the valuation of property, for takings purposes. As Epstein notes (and is more fully explained in the petition for certiorari filed by LTP's lawyers, urging the Court to take the case), there was good reason to expect that the Wright Amendment might be repealed—or at least modified—even aside from the 2006 WARA legislation. Even if it is improper for LTP to factor in the liberalization enacted by WARA itself, it surely was essential to consider the preexisting likelihood of reform.

In modern times, government regulates almost every type of land use. It stands to reason that the market value of property will often include anticipated future changes in the regulatory regime. Sometimes, that reality will actually work to the advantage of the government (in cases where the market expects future regulatory changes to reduce the property's value). But in other cases—including this one—the market reasonably anticipates future changes that are likely to increase the property's value. Either way, an accurate assessment of market value requires consideration of anticipated regulatory change.

Such analysis is necessarily probabilistic. Market actors' assessment of future regulatory trends could be wrong. But the same is true of many other elements that factor into valuation, such as anticipated future market demand for a given property or the products it produces. For example, the value of farmland is in large part dependent on the anticipated future value of the crops it generates. Market participants can and do sometimes get such predictions wrong. But that does not mean that estimated future value should be ignored in calculating takings compensation.

While not as significant as its other two errors, the Federal Circuit also erred in concluding that LTP does not have a"physical takings" claim against the federal government arising from the destruction of its twelve terminals. Judge Dyk concludes that the federal government was not really involved in the physical taking, because the actual destruction was carried out by the City of Dallas. To my mind, this ignores the way in which Dallas, Forth Worth, the federal government, and two private airlines were all part of a common cabal, whose scheme to suppress competition could not have been carried out without the aid of legislation passed by Congress. Richard Epstein explains the point well in an amicus brief he authored on behalf of the Institute for Justice (a libertarian public interest law firm):

The Five-Party Agreement proves the obvious conclusion that the parties were in league to limit the exposure of the United States to any takings claim by declining to make the U.S. a full partner on the face of the agreement. But the U.S. was a full partner: It authorized the entire scheme, allowing the parties to escape the antitrust laws. It mandated the reduction in gates. Section 5(d)(1) of WARA explicitly stated that the FAA could not undertake actions "inconsistent" with the agreement or in any way "challenge" its legality.

If the five parties and the federal government are able to get away with this subterfuge, it is possible that the feds might use similar tricks to escape liability in future takings cases.

For reasons well-explained in LTP's cert petition, the big flaw in the Federal Circuit's ruling  is that it is at odds with existing Supreme Court precedent on the first two points discussed above. The Court has never issued a definitive ruling on exactly how to weigh anticipated future regulatory changes (an issue it could use this case to address). But it has certainly made clear that compensation is determined by "what a willing buyer would pay in cash to a willing seller." That amount unavoidably often incorporates consideration of potential future regulatory changes.

Normally, the Court does not take cases simply for the purpose of correcting errors by lower courts. There are just too many such errors for the justices to address more than a small fraction of them. But this one is worth nipping in the bud because it will otherwise set a dangerous precedent.

The Federal Circuit has jurisdiction over appeals of all takings cases filed against the United States. If the Supreme Court allows the Love Terminal decision to stand, its errors will become binding precedent for nearly all future takings cases against the federal government unless and until the Supreme Court decides to overrule it. That strikes me as a compelling reason to deal with this error sooner rather than later.

Overruling Love Terminal would not necessarily require the Supreme Court to reinstate the full $133 million compensation awarded by the trial court. There is plenty of room for reasonable disagreement over exactly how to value LTP's property. What matters most from the standpoint of the public interest is correcting the two major errors made by the Federal Circuit, that might otherwise set a dangerous precedent for future cases.

NOTE: For those interested, the Inverse Condemnation blog has links to the cert petition and lower court decisions in the case here. The Federalist Society has posted a video of its recent panel on the case, featuring legal scholars George Priest (Yale) and Peter Byrne (Georgetown), prominent attorney Elizabeth Papez (Gibson Dunn), and an introduction by George Will. Prof. Byrne offered an insightful defense of the result reached by the Federal Circuit. But even he largely avoided trying to justify its problematic reasoning on the two key points discussed above.

 

 

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31 responses to “The Supreme Court Should Take the Love Terminal Takings Case

  1. The whole history of Southwest Airlines and Dallas Love Field is littered with inside dealing, cronyism, and flat out political corruption, and there are no heroes, but plenty of villains. And politicians on both sides of the aisle, from Jim Wright, former Democratic Speaker of the House, to Kay Bailey Hutchison, the Republican “Senator from American Airlines” (whose husband, Ray Hutchison made a fortune as bond counsel for the DFW Airport Authority), bear the stench of that corruption. This case is fascinating for its implications for 5th Amendment takings law, but the history of the political manipulations to screw over the traveling public for the benefit of American Airlines is enough to make one ill. NEVER, EVER TRUST THE GOVERNMENT OR POLITICIANS.

  2. […] June 1, 2019 Kimberly Rogers-Brown Supreme Court, WHITE HOUSE Leave a comment Link to original article […]

  3. the main reason why Judge Dyk concludes that LTP’s property rights had no value is that it was not making a profit at the time of the taking.

    This is just idiotic. Ask Uber shareholders. (I’m not one).

    Why do we allow judges who don’t know enough economics and finance to avoid this error to make decisions like this?

  4. I’m usually right there with Somin when he complains about eminent domain takings, but not this time. Problem is, the facts of this case aside, the demand for speculative future value would set a horrible general precedent, with far-reaching consequences.

    1. So you think the market value of something doesn’t consider “speculative future” earnings? Is the value of a business ONLY the profit it made in that year? Month? 3 year period? Some other arbitrary time cutoff?

      1. mse326, what is the customary way to determine the right payment for seized property? It’s an appraisal, right? In typical cases, the market bakes in all the speculative value and future changes kind of stuff. There isn’t more to be added, because both the increments and the discounts from reasonable speculation are already in the appraised value.

        Problem with this airport case is that no standard appraisal is possible. There are no comparables to provide a yardstick—unless maybe you could find some other airport-related case, which I assure you would turn out to be every bit as rigged and tangled up in politics as this one. That’s how the airport game is played everywhere.

        So, no, it would be a terrible idea to use this case as a precedent for how to pay for eminent domain seizures. Either you would have to shortchange the compensation in this case, or you would have to pay more based on consideration of speculative value, which looks like the right thing to do this time, but which shouldn’t typically play any part in eminent domain.

        1. You said it yourself. Speculative value is baked into market value. That is the point. It’s not just using what happened previously. That isn’t what the appeals judge did though. That’s the point.

        2. You are confused about how appraisals work. There are three approaches to appraisal: (1) sales comparison, (2) cost, and (3) income. An appraisal can be performed using any of those approaches.

          Your concern about speculation is effectively a non-issue. Certainty and risk can be accounted for in the appraisal.

          1. Can you help me out a little more, phoueue? Tell me with regard to the case in question, how certainty and risk will get accounted for in an appraisal. What would the appraiser actually do to measure certainty and risk, or even explain what they are, in this airport case.

            1. Risks and certainty are easy in this case: the taking occurred many years ago, so whatever your comparable is at the time of the taking now has a proven history.

              At the time of the taking you decide that the right comparable asset is an equal number of gates at Love Field, so now you can find out how much money they’ve made over the following 30 years (airport gates have a useful life of 50+ years, with retrofits, so these are like no term assets).

              Now with hard income from other structures, argue whether these gates would have made more or less but for the seizure.

              To say this another way, suppose that you decided to open a new business manufacturing things, built a factory, spending $100M to do so, and then the government demolishes it the day before you open. You’re arguing here that there should be no compensation, because you’ve never made any money from your property.

        3. “It’s too hard” is not a good reason not to pay the compensation.

      2. In this case, the wright amendment expired in 2013 (1978 +35 years).

        While the value based on the income stream in 2006 was zero, the future value was far greater. Granted valuing the asset based on speculation is difficult. Same as valuing land based on not knowing where the new highway is going to be build 10 years out, but speculation of future events factors into the willing buyer/willing seller.

        One common problem in compensation in takings is the value is based on current use instead of highest and best use. For example, the small house where the new stadium is being built may only be worth $50k as a single family house, but worth $200k for the land to build the new stadium.

    2. What value isn’t rooted in speculation? Amazon wasn’t making a profit in mid-2014. Would you have let the government take it and pay no compensation? What about my house? It only has value because people speculate that it will continue to be useful into the future.

  5. From Judge Dyk’s opinion: “And at no point during that time, including during the period when Legend was operational, did revenue exceed plaintiffs’ carrying costs so as to meet plaintiffs’ expert’s definition for an “economically beneficial use.” Since there was no adverse economic impact, there can be no taking.”

    Seems to be a failure to prove (absence of any, or sufficient evidence) rather than “could not prove” if so, the plaintiffs have had their bite at the apple.

    1. Judge Dyk really ought to have his house seized and razed. We could make it a cat sanctuary, like they did with Suzette Kelo’s house. After all, he’s not making a net profit on his home now, so without and adverse economic impact, there’d be no taking.

  6. “And at no point during that time, including during the period when Legend was operational, did revenue exceed plaintiffs’ carrying costs.“

    By this logic, EVERY real estate development has zero value until it reaches breakeven. Every development, from a residential subdivision to an urban high rise office building, involves the developer investing a lot of money well before any revenues at all start arising, and in the case of an office building, that building may be completed and open for some time before it is sufficiently leased up to reach breakeven. Using “enough revenues to cover carrying costs” as the minimum standard for any value at all is beyond idiotic.

    1. So Dan, when you can’t just get an appraisal and check the comparables, what principles ought to determine the value? That office building you mention might never break even. Its owner will undoubtedly expect a far better result. What should the standard be?

      1. Well, you could START with replacement cost – what would it cost to provide the plaintiff with a substantially identical property, with the same standards of construction and in a location with the same utility. The one place that you DON’T start from is the assumption that the value is zero.

      2. So Dan, when you can’t just get an appraisal and check the comparables, what principles ought to determine the value?

        Here’s a picture that might help you.

        1. Access denied.

          1. That’s weird, where the hell on the internet are you coming from?

            The diagram shows three methods of valuation of an asset, generally for use during a business acquisition (basically, if you’re thinking about buying a company or other asset, how do you figure out how much it’s worth). The diagram shows three methods as:

            Cost Approach – Cost to Build – Replacement Cost
            Market Approach (relative value) – Public Company Comparables – Precedent Transactions
            Discounted Cash Flow (Intrinsic Value) – Forecast Future Cash Flows

            I used to do M&A, and when buying a business, we always used cash flow (after restructuring) and replacement cost (for insurance). Future cash flow is necessarily partially speculative – Amazon would be worthless if the Star Trek Replicator went in sale tomorrow, after all, b no one says that the value of Amazon is zero.

            1. I got the same block with the further comment that “The owner of this website (corporatefinanceinstitute.com) does not allow hotlinking to that resource”

              Thanks for the description of the diagram.

    2. Seems to me the Judge was pointing out that the plaintiff’s expert (according to the expert’s own definition) simply failed to produce evidence of any damages.

      This is not to say it was not possible to do so.

  7. I don’t necessarily agree with every position Professor Somin has taken on this issue. But I do agree with his bottom line. Whatever the value of the property may be, it can’t possibly be zero.

    If the property had no value, it wouldn’t have been worth making the substantial efforts that were made to take it.

  8. Seems to me the Judge was pointing out that the plaintiff’s expert (according to the expert’s own definition) simply failed to produce evidence of any damages.

    This is not to say it was not possible to do so.

    1. That’s more or less what the judge said, but he said that by disregarding the findings of fact of the judge from the Federal Claims Court, who presumably was presented some evidence on which to base her finding for the amount awarded.

      Expert A: it’s worth $130M
      Expert B: is worth $0
      Trial Judge: I find expert A credible, and expert B not credible
      Appellate Judge: your credibility determination was wrong, the government wins.

      That’s one of the things that never happens, course in review may send it back for another look, but the credibility determination is always by the trial court.

  9. Yep, if in fact some evidence was presented.

  10. The Federal Circuit is like a broken clock that can’t keep time it’s right once in a while. Unfortunatly they are seldom right. All exclusive jurisgiction should be removed and the regular district courts should handle them.

  11. The simple solution to the valuation question is (was) to disallow the condemnation and tell AA and Southwest (or the City of Dallas) to negotiate with LTP to buy the gates.

    At some price LTP is not going to sit and hold gates they can’t lease, and at some price the city is going to tell them to keep the damn gates. My bet is they would have agreed on a number.

    There is no “holdout” problem here as far as I can see, so why is eminent domain even allowed?

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