Wells Fargo Bank, National Association et al v. City of Richmond, California et al

Filing 49

Declaration of John Ertman in Support of 45 Reply to Opposition/Response, 46 Opposition/Response to Motion, 45 Motion for Preliminary Injunction, 46 Motion to Dismiss filed byDeutsche Bank National Trust Company, Deutsche Bank Trust Company Americas, Wells Fargo Bank, National Association. (Attachments: # 1 Exhibit A, # 2 Exhibit B, # 3 Exhibit C, # 4 Exhibit D, # 5 Exhibit E, # 6 Exhibit F, # 7 Exhibit G, # 8 Exhibit H, # 9 Exhibit I, # 10 Exhibit J, # 11 Exhibit K, # 12 Exhibit L, # 13 Exhibit M, # 14 Exhibit N, # 15 Exhibit O, # 16 Exhibit P, # 17 Exhibit Q, # 18 Exhibit R, # 19 Exhibit S, # 20 Exhibit T, # 21 Exhibit U, # 22 Exhibit V, # 23 Exhibit W, # 24 Exhibit X, # 25 Exhibit Y, # 26 Exhibit Z, # 27 Exhibit AA)(Related document(s) 45 , 46 ) (Tsai, Rocky) (Filed on 8/29/2013)

EXHIBIT D

From:
Sent:
To:
Subject:
Attachments:

Tim Higares [[e-mail]]
Thursday, August 23, 2012 2:51 PM
Joseph Ragazzo
FW: Eminent Domain & Underwater Mortgages
Jones Day response.pdf; Public purposes.pdf; O'Melveny response.pdf; Hockett
condensed[2].pdf; Friedman Testimony.pdf; ATT14220.txt

Informationa I

Tim Higares
Code Enforcement Manager
City of Richmond Police Department
(51 0) 620 - 6508
From: Bruce Goodmiller
Sent: Thursday, August 23, 2012 10:07 AM
To: Tim Higares; Trisha Aljoe; Bill Lindsay; Leslie Knight; Chris Magnus
Cc: Everett Jenkins; Bruce Soublet; Carlos A. Privat; Shannon Moore; Rachel Sommovilla
Subject: Eminent Domain & Underwater Mortgages

Below is an email received by the League from the General Counsel from the fmn that is proposing the undenvater
mortgage program. In addition to the attached documents, the email below contains various links that may assist
you in evaluating their proposal. Please note that the League has not taken any position on this and I am fonvarding
this email to you as infonnation only.

Patrick Whitnell
General Counsel
League of California Cities ~~~

From: Gene Miller [mailto:[e-mail]]
Sent: Wednesday, August 22, 2012 9:56AM
To: Patrick Whitnell
Subject: Eminent Domain & Underwater Mortgages
Patrick, I am the General Counsel of Mortgage Resolution Partners (MRP), and our organization was formed to assist
local governments in helping to address the significant negative impact of foreclosures and underwater mortgages on
many of our cities. I am attaching some information on the MRP program in order to provide a better understanding of
the details of the MRP program and also to clear up some of the misinformation that has been circulated in the press and
elsewhere.
I am happy to respond to questions about the program either via email at [e-mail] or via
telephone at 415-795-2029.
Attached are the following:
1. An abridged version of a much longer law review-like article by Robert Hockett. Here is a link to the entire article.

2. A general statement of public purposes (without citations)
3. Testimony of Eminent Domain Richard Friedman (Chicago)
1

4. Responses to legal analysis of each of Jones Day and O'Melveny & Meyers
http://www. mortgageresolution .com/
has additional resources, including FAQ, Fact vs. Fiction, and a blog where responses to various claims are often posted.
A note on costs of the program: There is sometimes a misunderstanding as to the manner in which legal costs are covered.
All legal costs, including the eminent domain action and other costs related to the transaction are borne by the funders
who provide the capital necessary to acquire the loans. If and when a local community elects to proceed with this program,
all direct legal costs of the transaction (other than the actual formation of a JPA if a group of communities elects to work
together) would be covered by private capital sources and not taxpayer dollars.
Please let me know if I can answer any questions about the program. Thank you,
Gene Miller
General Counsel
Mortgage Resolution Partners

2

Response to Jones Day: Contract Clause and Public Purpose
Jones Day, a law firm that represents many of the financial interests obstructing
resolution  of  the  nation’s  longstanding  and  ever  more  destructive  mortgage  crisis,  
recently published an opinion piece titled They Can't Do That, Can They? This piece
purports to question whether local California governments can legally purchase
mortgage loans under their long-familiar eminent domain authority.
Jones Day admits at the outset that local governments have undisputed authority to
acquire personal property like mortgage loans at fair value through eminent domain
under the law as laid down, for example, by City of Oakland v. Oakland
Raiders.[1] Mysteriously, however, the commentary then goes on to suggest that there
are  ‘plausible  arguments’  to  the  effect  that  purchasing  mortgage  loans  through  eminent  
domain might violate the U.S. Constitution's Contract Clause, or even its Takings
Clause for lack of a public purpose.
Jones Day's suggestions are nothing but  ‘Hail  Mary’  plays. And the fact that Jones Day
is an established law firm that must realize this suggests something important – namely,
that its opinion piece is meant more to attract clients than to contribute to bona fide legal
debate.
To begin with,  Jones  Day’s  Contract  Clause  argument  is  almost  comically  off  
base. Tellingly,  the  firm’s  commentary  fails  even  to  mention  the  most  authoritative  U.S.  
Supreme Court decision on the subject. In Hawaii Housing Authority v. Midkiff,[2] the
Court both considered and, decisively for present purposes, unanimously rejected the
argument that eminent domain takings can violate the Contract Clause. The Court
explained  that  ‘the  Contract  Clause  has  never  been  thought  to  protect  against  the  
exercise of the power of eminent  domain.’[3]
Next, as to the Takings Clause and its public purpose requirement, Jones Day does not
even pretend to dispute any local government's actual public purposes in pursuing a
homeownership protection program that involves acquiring and refinancing underwater
mortgage loans. Such a program serves the clear public purpose of arresting and
mitigating the still mounting health, safety and welfare costs of the devastating and still
worsening mortgage crisis. It allows homeowners to remain in their homes and
continue paying down their debts rather than being forced into default and
foreclosure. It also arrests and reverses the blight that plagues neighborhoods and
towns in which thousands of homes are foreclosed and then fall to ruin.
Jones Day simply passes over these obviously exigent public necessities in
silence. Unsurprisingly, therefore, it also says nothing about the obvious local economic
1

revitalization – not to mention boosts to the value of presently underwater loans – that
follows from reductions in homeowners' monthly mortgage payments to sustainable
rather than impossible levels. Also ignored by Jones Day are the massive long-term
positive impacts on real property values and, therefore, local revenue bases wrought by
a program like that under consideration. Jones Day studiously overlooks these public
benefits, presumably because to acknowledge them is to acknowledge that there is not
only a manifest, but indeed an urgently compelling, public purpose behind the
homeownership protection program.
Instead, Jones Day merely suggests, in classic dropped innuendo fashion, that the
program might lack a public purpose. Why? Because it will involve a joint effort by the
public  and  private  sectors  in  addressing  California’s  mortgage  debt  crisis.   This
suggestion, of course, requires that Jones Day entirely ignore applicable state and
federal law.
Doubtful? Just look at the law: In addition to setting forth the housing goals described
above that the program serves, California law explicitly directs the public and private
sectors to work together to achieve those goals:
The Congress of the United States has established, as a national goal, the provision of
a decent home and a suitable living environment for every American family and the
Legislature finds and declares that the attainment of this goal is a priority of the highest
order. The national housing goal, as it applies to California, is deserving of adoption by
the Legislature, with the accompanying commitment to guide, encourage, and direct
where possible, the efforts of the private and public sectors of the economy to
cooperate and participate in the early attainment of a decent home and a satisfying
environment for every Californian.[4]
Thus the California legislature has specified both the program's goals and the preferred
public/private cooperative means of achieving them. Under U.S. Supreme Court
precedent,  in  turn,  this  legislative  judgment  meets  the  Takings  Clause’s  public  purpose  
requirement  unless  it  is  ‘palpably  without  reasonable  foundation,’[5] which clearly is not
the case here.
A California local government, then, has both overwhelmingly compelling and obviously
Constitutional public purposes in pursuing the homeownership protection plan. This is
so even though – indeed, even in large measure precisely because – the scope of the
mortgage crisis is so immense that its solution requires cooperation from the private
sector. The  plan  also  falls  squarely  within  the  authority  of  the  Supreme  Court’s  
unanimous Midkiff decision, which approved compulsory purchase of immense tracts of
real estate in Hawaii using private financing. As the Court recently reiterated and Jones
2

Day conveniently ignores, 'it is only the taking's purpose, and not its mechanics, . . . that
matters  in  determining  public  use.’[6]
Jones Day, then, simply misunderstands – or, perhaps, simply misrepresents –
applicable Supreme Court precedent. The Court always defers to a democratically
elected government's determination of public purpose unless it is shown to involve an
‘impossibility.’[7] And where the exercise of eminent domain "is rationally related to
a conceivable public purpose, the Court has never held a compensated taking" to
violate  the  Takings  Clause’s  public  purpose  requirement.[8]
So, can local California governments legally purchase mortgage loans by eminent
domain? The answer is plain as day, even if not to Jones Day: Of course they can!

[1] See City of Oakland v. Oakland Raiders, 32 Cal. 3d 60 (1982).
[2] See Midkiff, 467 U.S. 229, 243 n. 6 (1984).
[3] See United States Trust Co. v. New Jersey, 431 U.S. 1, 19 and n.16 (1977).
[4] California Health and Safety Code Section 50002.
[5] See United States v. Gettysburg Electric R. Co., 160 U.S. 668, 680 (1896), quoted
with approval in Midkiff, 467 U.S. 229, 242 (1984).
[6] See Kelo et al. v. City of New London et al., 545 U.S. 469 (2005). See also Midkiff,
467 U.S. 229, at 244 (1984).
[7] See Old Dominion Co. v. United States, 269 U.S. 55, 66 (1925), cited with approval
in Midkiff, 467 U.S. 229, at 240 (1984) (emphasis supplied).
[8] See Berman v. Parker, 348 U.S. 26 (1954); Rindge Co. v. Los Angeles, 262 U.S.
700 (1923);Block v. Hirsch, 256 U.S. 135 (1921); cf. Thompson v. Consolidated Gas
Utilities Corp., 300 U.S. 55 (1937). See also Midkiff, 467 U.S. 229, 241 (1984)
(emphasis supplied).

3

Public Purposes
Specific California statutory findings on public interest in housing:
The Legislature specifically declares that housing is of vital statewide importance to the health,
safety, and welfare of California residents. Included:
Attaining the goal of a decent home for each family “is a priority of the highest order,” and the
Legislature  commits  “to  guide,  encourage,  and  direct . . . the efforts of the private and public
sectors of the economy to cooperate and  participate  in  the  early  attainment  of”  that  goal.    (Our
program is a joint public/private venture to attain that goal through keeping families in their
homes.)
“A healthy housing market is one in which residents of this state have a choice of housing
opportunities and one in which the housing consumer may effectively choose within the free
marketplace.” (This program will create greater housing opportunities and more choice for the
consumer, including refinancing choices in the market that are not currently available.)
A healthy housing market is necessary both to achieve a healthy state economy and to avoid an
unacceptable level of unemployment. (The program is expected to help the economy, particularly
in San Bernardino, which has an unacceptable level of unemployment.)
It is a public purpose to encourage the availability of adequate home finance for persons and
families of low or moderate income. (The program will provide finance opportunities in San
Bernardino, which is a moderate income area.)
Other general public purposes:
Negative equity is a driver of default and strategic default, which is within the rights of
borrowers in a nonrecourse state like California but nonetheless creates community problems
including reduced property values, reduced property tax revenues (including long term
reductions that will outlive the ultimate housing market recovery because of Prop. 13), and
vacant housing that leads to unsafe housing conditions, increased crime and other local costs.
Even absent default, negative equity harms the local economy and local employment because of
documented reduced expenditures on home maintenance and reduced spending in the local
economy.
The crisis is causing significant dislocation in the local housing market, particularly because of
the inability to sell homes without consent of one or more secured lenders. The Hawaii Housing
Authority v. Midkiff decision upheld the flipside public purpose of mitigating the inability to
purchase homes: “concentrated land ownership was responsible for skewing the State’s
residential . . . market, inflating land prices, and injuring public tranquility and welfare.”
The crisis is causing documented adverse health, educational, and emotional/marital impacts
from the crisis, with specific adverse impacts on children, particularly in California.

Response to O’Melveny: Contract Clause, Situs, and Valuation
SIFMA  has  commissioned  a  legal   memorandum  from  O’Melveny  &   Meyers  suggesting  
that local governments have no constitutional authority for the proposed acquisition of
mortgage loans to protect their residents and neighborhoods. O’Melveny   misstates  
both the facts and the law, and they are wrong on all counts. It is worth reviewing
several  of  O’Melveny’s  arguments  to  see  how  transparent  SIFMA’s  tactics  are.
Contract Clause. The memo omits the U.S. Supreme Court precedent directly on point
that   explicitly   considers   and   unanimously   rejects   O’Melveny’s   Contract   Clause  
argument,   concluding   that   it   has   “no merit”   because   “the   Contract   Clause  
has never been thought to protect against the exercise of the power of eminent
domain.”[1] SIFMA wants us to believe that cities can acquire a house to widen a road,
moving a couple out of a home in which they raised a family and a neighborhood of
lifelong friends, but cannot acquire mortgage loans to save that same home and
neighborhood from destruction. SIFMA’s   members   think   that   their   financial   assets   are  
more sacred than the family home. They are just plain wrong.
Location of Loans. The memo omits the controlling California Supreme Court
precedent,[2] under   whose   authority   mortgage   loans   are   located   at   the   borrower’s  
mortgaged home. Instead,   O’Melveny   cites   only   a   trial   court   decision   from  
Maryland.[3] This   typifies   SIFMA’s   myopia   on   the   entire   mortgage   crisis   – it is more
concerned with the view from around the Beltway than from the hard hit cities that the
mortgage crisis is destroying.
Value of a Loan. O’Melveny  values  an  underwater  mortgage loan based on nationwide
data   for   generic   home   loans,   concluding   that   “there   is   no   basis   for   assuming   the   loan  
will  default.” [4] But no one proposes acquiring generic national loans; communities will
acquire deeply underwater loans from private label securitization trusts, which default at
alarming rates. Fannie Mae projects 40-69% remaining cumulative default rates for
PLS loans originated in the peak bubble years.[5] Again, SIFMA reveals its myopic
view of the mortgage crisis with this transparently specious argument. Prime loans with
good payment histories in Manhattan or the suburbs of Washington DC might have low
default rates. But not the toxic PLS loans originated during the credit bubble that are a
principal cause of the underwater mortgage crisis.
O’Melveny’s   memo is untrustworthy on its face. Its remaining arguments are more of
the same -- misstating the facts and the law, and wrong on all counts. The memo is a
mere advocacy piece designed to intimidate local governments. Why? Every month
that SIFMA and its members delay this vital program in San Bernardino, another
hundred homeowners who could have kept their homes become delinquent. SIFMA is
1

trying  to  stop  governments  from  “seizing”   loans   – so that its members can continue to
seize homes.
We cannot look to national organizations or national government to solve the mortgage
crisis. They have not and will not solve it. We must look to and support local
governments. They are the closest to the crisis and to the people and neighborhoods
that it harms. The problem is local, and so is the solution.

[1] See Hawaii Housing Authority v. Midkiff, 467 U.S. 229, 243 n. 6 (1984) (emphasis
supplied).
[2] See City of Oakland v. Oakland Raiders, 32 Cal. 3d 656 (1982).
[3] O’Melveny   memo   at   12,   citing Mayor and City Council of Baltimore v. Baltimore
Football Club Inc., 624 F. Supp. 278 (D. Md. 1985).
[4] O’Melveny  memo  at  6,  citing http://www.marketwatch.com/story/despite-home-valuegains-underwater-hom....
[5] Federal National Mortgage Association Form 10-K for the year 2011 at F-60, Alt-A
loan data (and projecting even higher 72-78% remaining cumulative default rates for
subprime PLS loans).

2

Memorandum of Law and Finance

Breaking the Mortgage Debt Impasse: Municipal Condemnation Proceedings and
Public/Private Partnerships for Mortgage Loan Modification, Value Preservation,
and Local Economic Recovery
Robert Hockett*
Six years after residential real estate prices peaked and then plunged, U.S. primary and
secondary mortgage markets continue to languish in self-worsening slump.1 As the modifying
phrase “self-worsening” suggests, feedback effects constitute a critical component both of the
problem and of its stubborn persistence.2 These effects operate both as between property
prices and mortgage default rates, and as between primary and secondary mortgage markets
and broader local and regional economies.3
...

IV. The Plan’s Constitutional Basis and Legal-Procedural Details
The Municipal Plan makes essential use of the states’ and their instrumentalities’
traditional eminent domain authority.

*

Professor of Law, Cornell Law School; Resident Consultant, Federal Reserve Bank of New York; Fellow, The
Century Foundation. Particular thanks to Tobias Adrian, Greg Alexander, Sheila Bair, Tom Baxter, Sarah Bloom
Raskin, Mike Campbell, Mike Dorf, Bob Frank, John Geanakoplos, Laurie Goodman, Howell Jackson, Bob Litan, Meg
McConnell, Eduardo Peñalver, Nouriel Roubini, Sherle Schweninger, Bob Shiller, Joe Tracey, and Laura
Underkuffler. Last and anything but least, thanks to my frequent collaborator Daniel Alpert. Thanks as well to my
other, unnamed colleagues at Cornell, FRBNY, and TCF. Opinions expressed herein are those of the author and not
properly attributable to his affiliates absent express confirmation. Readers should also be advised that the author
is disinterested in what he is here recommending, but may subsequently undertake more legal, financial or
expository work in connection with the proposals offered and advocated herein.
1
Telling statistics are supplied in abundance below, Section II.
2
The structural dynamics are laid out below, Sections I and II.
3
Id. Mortgage markets causally interact with the broader economy with particular force because homes
are the principal form that wealth takes among that broad American middle class upon whose healthy consumer
expenditure both economic growth and employment depend. See Robert Hockett, Six Years On and Still Counting:
Sifting Through the Mortgage Mess, 9 HAST. BUS. L. J. __ (2012) (forthcoming). More again, infra, Sections I and II.

1

The eminent domain authority is of longstanding in both the civil and common law
traditions. Even as early an articulation of the authority as that found in Grotius’s De Jure Belli
et Pacis reads strikingly like contemporary articulations.4
An additional wrinkle is introduced in the American case, however, by the federal
system of government that we also embraced with our Constitution. Pursuant to the “dual
sovereignty” exercised by state and federal governments alike under our system, both sites of
sovereignty hold powers of eminent domain. All that differs between them, in essence, is the
identity of the relevant “public” – or, in the terms of Sections I through III above, the relevant
“collectivity” – on whose behalf each government acts as collective agent.
In essence, our constitutional arrangement is such as to observe principles of what in
other parts of the world are called “subsidiarity.”
The basic subsidiarian idea, which the U.S. honors under several distinct terminologies –
one such of course being “federalism” – boils down to this: Where satisfaction of some
particular interest requires addressing a collective action challenge that afflicts some group of n
persons and no more, in general the smallest unit of government with jurisdiction over those n
persons should be charged with satisfying that interest.
An important feature of the American rendition of subsidiarity for present purposes is
its vesting jurisdiction over matters of real property, trust and estates, contract, and
commercial law – the stuff of housing, home-ownership, real estate and mortgage finance –
almost exclusively with the states.5 Legal-doctrinally speaking, that vesting takes the form of
states’ reservation, via the Constitution’s 10th Amendment, of what is known as a residual
“police power” over matters not expressly or impliedly placed under immediate or optional
federal jurisdiction by other provisions of the Constitution.
4

Here is Grotius: “The property of subjects is under the eminent domain of the state, so that the state or
he who acts for it may use and even alienate and destroy such property, not only in the case of extreme necessity,
. . . but for ends of public utility, to which ends . . . private ends should give way. But it is to be added that when
this is done the state is bound to make good the loss to those who lose their property." See HUIG DE GROOT
(“Grotius”), DE JURE BELLI ET PACIS (“The Law of War and Peace”) (1625), available online at
http://www.lonang.com/exlibris/grotius/index.html. (For more on Grotius, see ROBERT HOCKETT, THE LITTLE BOOK OF
BIG IDEAS: LAW (2009).) Contemporary articulations of the eminent domain authority to follow.
5
Hence all states have their own property codes, and nearly all have their own versions of the Uniform
Commercial Code (UCC), Article 2 of which covers commercial contracts, Article 9 of which covers secured
transactions including mortgage-secured such transactions, and Article 3 of which covers negotiable instruments
including promissory notes of the sort mortgagors convey to mortgagees. Significantly, there is no “national”
property code, nor is there any national commercial code, the “uniformity” of the UCC signifying an aspiration of
the drafters and Permanent Editorial Board (PEB) that states voluntarily harmonize precisely because there is no
federally imposed uniformity. See generally Hockett, Six Years On and Still Counting, supra note 3.

2

It is not quite as commonplace, but at least is notorious to many a law student past the
first year, that some such matters are thought to be so essentially interstate in character as to
count as implicitly required to be kept uniform across states even when Congress has not
affirmatively acted so to require.6
But what is most striking against this backdrop is how much our constitutional order
nevertheless reserves to the states – and, in particular, how matters of contract, commercial,
and especially property law continue to be almost entirely matters of state law under that
order. We really do remain, in a significant sense, a sort of “compact of states.”
The Municipal Plan’s use of eminent domain authority will be subject both to the federal
and to the state constitutions – first the latter, then the former as a final check on the latter.
The California provision on point is article I, Section 19 of the state’s Constitution. Subsection
(a) thereof reads
Private property may be taken or damaged for a public
use and only when just compensation, ascertained by a jury unless
waived, has first been paid to, or into court for, the owner. The
Legislature may provide for possession by the condemnor following
commencement of eminent domain proceedings upon deposit in court and
prompt release to the owner of money determined by the court to be
the probable amount of just compensation.7

The “public use” and “just compensation” limitations are of course common – so much so that
the introductory discussion above, it might have been noted, employed the same terminology
without reference to any particular state or federal constitutional provision.
The applicable federal constitutional provision on point, the so-called “Takings Clause”
of the Fifth Amendment, is no more restrictive than the California provision.8 Indeed if
6

This is the domain of the so-called “dormant,” or “implicit” Commerce Clause, essentially interpreted as a
prohibition on protectionism on the part of states of firms located within them at the expense of competing firms
located in other states – a sort of GATT or WTO of the states. Notorious examples include South Carolina’s once
prohibiting delivery trucks of a particular size from using its highways, widely recognized as a means of protecting
local producers against imports from neighboring-state competitors. People who fret over “judicial activism” are
among those who most loathe the notion of a “dormant” Commerce Clause. If it’s asleep, let it lie until Congress
expressly awakens it, they in effect complain.
7
Cal. Const. art. I, § 19 (a).
8
U.S. Const., amend. V (“. . . nor shall private property be taken for public use, without just
compensation.”). What is perhaps most noteworthy about this clause is the fact that it presupposes that private
property regularly is, and accordingly may, be taken for public use, with the clause purporting to restrict the
common practice only by reiterating that just compensation is to be paid.

3

anything, it is less so. For the U.S. Supreme Court notoriously has interpreted the provision to
allow government condemnation of private residences for purposes of conveying them to
private parties in the name of economic development.9 California, by contrast, is more
arguably solicitous of homeowners’ interest in remaining in their homes. Hence it purports to
forbid Kelo-style taking in subsection (b) of the aforecited Section 19. 10 In general, however,
the U.S. and California provisions are sufficiently in agreement as to underwrite California
courts’ regularly citing to both state and federal decisions in cases involving the exercise of
eminent domain in the state.11
Next, as noted above, eminent domain authority is exercisable over all forms of
property – real or personal, simple or fragmentary, tangible or intangible. That, again, is the
case everywhere that eminent domain authority is recognized, be it in civil or common law
jurisdictions.
Under the federal rendition of this authority, for its part, the U.S. Supreme Court and
the Courts of Appeals have regularly held that the authority extends, for example, to contract
rights,12 insurance policies,13 shares of stock,14 businesses as going concerns,15 hunting rights,16
rights of way,17 and all manner of additional intangible. U.S. states follow the same
longstanding common law tradition as does federal law in this connection. 18 California’s
Supreme Court, for example, long has explicitly recognized that “[the state’s] eminent domain
law authorizes the taking of intangible property.”19
In view of the law’s drawing no distinctions between kinds of property that can be
condemned in eminent domain proceedings, it should come as no surprise that liens in
9

Kelo v. City of New London, 545 U.S. 469 (2005).
Cal. Const. art. I, § 19 (b) (“The State and local governments are prohibited from acquiring by eminent
domain an owner-occupied residence for the purpose of conveying it to a private person.”). It should perhaps be
noted, if only in passing, that subsections (c) and (d) go on to limit subsection (b) itself somewhat, in the form of
familiar exceptions for public health or public works projects.
11
See County of Ventura v. Channel Islands Marina, Inc., 159 Cal. App. 4th 615 (2008). Given the post-Kelo
date of this cited decision, on the one hand, and the exceptions to subsection (b) of the section 19 of the California
Constitution’s article I cited in the previous note, there might be some reason to question whether California
takings law is indeed more restrictive than federal takings law under Kelo, as I suggested above.
12
See, e.g., United States Trust Company of New York v. New Jersey, 431 U.S. 1, 19 (1977).
13
See, e.g., Lynch v. United States, 292 U.S. 571, 577-79 (1934).
14
See, e.g., Offield v. New York, New Haven & Hartford R.R. Co., 203 U.S. 372 (1906).
15
See, e.g., Kimball Laundry Co. v. United States, 338 U.S. 1 (1949).
16
See, e.g., Swan Lake Hunting Club v. United States, 381 F.2d 238 (5th Cir. 1967).
17
See, e.g., City of Cincinnati v. Louisville & Nashville Railroad Co., 223 U.S. 390 (1912).
18
See, e.g., New York, N.H. & H.R. Co. v. Offield, 59 A. 510 (Conn. 1904) (Connecticut, condemning stock);
Spencer v. Seaboard Air Line Ry. Co., 49 S.E. 96 (N.C. 1904) (North Carolina, condemning stock).
19
City of Oakland v. Oakland Raiders, 32 Cal.3d 60, 68 (2008) (condemning a sports franchise).
10

4

particular, as merely one form of contractual obligation among many, all of which can be
condemned, are themselves regularly condemned.20 Among those liens are, of course,
mortgage loans and liens, as the U.S. Supreme Court and other state courts have recognized. 21
Hence, again, the explicit recognition by the California Supreme Court, too, that “[n]o
constitutional restriction, federal or state, purports to limit the nature of the property that may
be taken by eminent domain.”22
The only complication at all that is introduced into eminent domain analysis by
intangible property has to do with the effect that intangibility has on state courts’ jurisdiction,
since intangibles cannot be literally, spatially “located.” The law has long been aware of the
fact that intangibles are not tangible and accordingly not spatially located, however, and its
doctrines have responded accordingly.
Because the doctrines of due process, in personam, in rem, territorial and subject
matter jurisdiction through which it does so are particularly complex and technical both in
themselves and in their interactions, though, it will be well to defer fuller technical treatment to
the technical-legal appendix that is Appendix B.23 For present purposes it will suffice to observe
that in general, courts find the situs of a debt instrument to be in the domiciliary state of the
debtor,24 and the situs of real estate mortgage debt in particular to be the state in which the
mortgaged property is itself located.25

20

See, e.g., Phillips v. Washington Legal Foundation, 524 U.S. 156 (1998) (accrued interest on account
funds); Armstrong v. United States, 364 U.S. 40 (1960) (materialman’s lien); and the iconic Legal Tender Cases, 79
U.S. (12 Wall.) 457 (1870).
21
See, e.g., Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 602 (“If the public interest requires . . .
the taking of property of individual mortgagees in order to relieve the necessities of individual mortgagors, resort
must be had to proceedings by eminent domain.”); W. Fertilizer & Cordage Co. v. City of Alliance, 504 N.W.2d 808,
816 (Neb. 1993) (Nebraska Supreme Court holding that “a mortgagee’s lien on real estate is an interest that may
be subjected to a taking for a public purpose and, therefore, may be the subject of an eminent domain
proceeding.”).
22
Oakland Raiders, supra note 130, 32 Cal.3d at 67.
23
The author taught Civil Procedure I and Civil Procedure II in the legal academy during his final year as a
doctoral student. The first of those courses is in its entirety devoted to the subject of jurisdiction, which involves
not only codes of procedure, but such constitutional interests as due process. He trusts that the reader would
rather this full semester course be summarized in an appendix than over multiple pages within the present text.
24
See, e.g., the old chestnuts, beloved of all professors and students of Civil Procedure, Harris v. Balk, 198
U.S. 215 (1905); and Chicago, Rock Isl. & Pac. Ry. Co. v. Sturm, 174 U.S. 710 (1899). In California in particular, see
Waite v. Waite, 6 Cal.3d 461 (1972).
25
Here the jurisdiction is mediated by the unseverable link between mortgage and note. See Carpenter v.
Longan, 83 U.S. 271, 274 (“The note and the mortgage are inseparable.”); and Hyde v. Mangan, 88 Cal. 319, 327
(1891) (“The debt and security are inseparable; the mortgage alone is not a subject of transfer.”). For more on this
matter, and its consequent wedding of inherently state-centric property and commercial law, see Hockett, Six
Years On and Still Counting, supra note 3.

5

It will be noted that where the mortgage debtor is domiciled in the mortgaged home
itself, as is in fact required to qualify for loan modification under the Municipal Plan as
elaborated in Section III, both of the aforementioned grounds of state jurisdiction converge.
This entails that the state enjoys both in rem jurisdiction over the debt and the property
securing it, and due process-consistent in personam jurisdiction over the creditor/mortgagee,
both of these ultimately in virtue of the territorial jurisdiction it has over the space in which the
mortgagee and her home are respectively domiciled and located. Subject matter jurisdiction,
for its part, is here a matter of traditional state authority delegated to municipalities, more on
which presently.
Federal and state constitutional authority to exercise the eminent domain power over
intangibles like mortgage notes as contemplated by the Municipal Plan, then, is secure. The
same holds of power to transfer acquired such property – tangible as well as intangible – to
private entities. In the case of federal law, of course, the latest and most oft-cited word on the
matter is the U.S. Supreme Court’s 2005 Kelo decision mentioned above.
California’s authorization of the transfer of condemned intangibles is found in its Code
of Civil Procedure,26 and is well recognized by the state’s Supreme Court. 27
The next thing to note is that, as suggested by the citation just made to California’s Code
of Civil Procedure, statutory law promulgated by state legislatures affords further guidance to
use of the eminent domain authority. To keep with our sample state – California – then, the
applicable law is, as just effectively noted, found in the state’s Code of Civil Procedure, Sections
1230.010-1273.050, known as the state’s Eminent Domain Law.
This Law, for its part, first requires that express statutory authority authorize any
particular government instrumentality’s use of the eminent domain power.28 As for the
question of what such instrumentalities might do so, California conforms to the general
observations made above that (1) municipalities and joint powers authorities themselves
exercise these powers only insofar as states delegate them to them, while (2) most states do in
fact thus delegate them. Hence in California, municipalities and joint powers authorities (1)

26

See Cal. Civ. Proc. § 1240.120(b) (property condemnable “with the intent to sell, lease, exchange, or
otherwise dispose of [the same]. . .”).
27
Oakland Raiders, supra note 130, 32 Cal.3d at 681-82 (“So long as adequate controls are imposed [to
ensure transfer to private entity itself furthers public purpose], there is no reason why the ‘public purpose’ which
justifies a taking may not be so served and protected.”).
28
See Section 1240.020 (“The power of eminent domain may be exercised to acquire property for a
particular use only by a person authorized by statute to exercise the power of eminent domain to acquire such
property for that use.”).

6

exercise eminent domain authority “only when expressly authorized by law,” 29 while (2) they
are in fact expressly authorized by law to exercise this authority. 30
As in other states, statutory guidance also further contours the determination of what
counts as “just compensation” in California – that which must, again under both the Takings
Clause of the 5th Amendment to the U.S. Constitution and under Section 19 of Article I of the
California Constitution, be paid those whose property is condemned under the eminent domain
authority. California’s Eminent Domain Law provides that guidance in its Sections 1263.310 and
1263.320(a).
As mentioned above in Section III, the first stipulates that “fair market value” be paid for
the property taken. Also as mentioned above, the second unpacks “fair market value”
essentially as the highest price apt to be reached by willing counterparties bargaining under
conditions of unforced sale.31 There will be more to say on this in Appendix A, which treats of
valuation matters in greater technical detail.
The final limitation upon the eminent domain authority about which a bit more should
be said is the “public purpose” requirement mentioned above with our first, preliminary
characterization of the authority. While the requirement has always been implicit in the
doctrine of eminent domain itself – since well before anyone knew there would one day be a
United States of America – the requirement finds more specific expression, again, in specific
provisions of federal and state law.
The applicable federal law is simply the Supreme Court’s elaboration of the public use
requirement implicit in the aforementioned Takings Clause. The applicable state law comprises
(1) the aforementioned Section 19 of Article I of the state’s Constitution, (2) California statutory
provisions to be considered presently, and (3) state judicial constructions of (1) and (2).

29

Oakland Raiders, supra note 124, 32 Cal.3d at 64. Also Civ. Proc. § 1240.020(b) (power exercisable “only
by a person authorized by statute to exercise [it].”).
30
See Cal. Govt. Code § 37350.5.
31
The statutory language reads thus: Fair market value is “the highest price on the date of valuation that
would be agreed to by a seller, being willing to sell but under no particular or urgent necessity for so doing, nor
obliged to sell, and a buyer, being ready, willing, and able to buy but under no particular necessity for so doing,
each dealing with the other with full knowledge of all the uses and purposes for which the property is reasonably
adaptable and available.” Further guidance is provided in the form of a stipulation that existing comparable
markets can be used in ascertaining the mentioned counterfactual “would.” Absent some such comparable
market, the Eminent Domain Law permits determination of “fair market value” as determined by any method of
valuation that is “just and equitable.” See Civ. Proc. § 1263.320(b). The discussion over Sections I through III
above, as well as that over Section IV below, would seem to have some bearing on what is just and equitable here.

7

The basic grounding of state and municipal exercises of eminent domain authority
amounts to a kind of combined subject matter, personal, and territorial jurisdiction. It is the
“police power” mentioned above in preliminarily characterizing the doctrine of eminent domain
generally. The U.S. Constitution’s 10th Amendment specifically reserves this power to the
states, and most of the states in turn delegate portions of this power to their municipalities
along more or less subsidiarist lines as elaborated above. California does this through its
constitution’s article XI, Section 7, which provides that “[a] county or city may make and
enforce within its [territorial] limits all local, police, sanitary, and other ordinances and
regulations not in conflict with general laws.”
As the catch-all “other ordinances” suggests, the police power is very broad – indeed a
“plenary authority to govern, subject only to the limitation that [the municipalities exercising
the power] exercise [it] within their territorial limits and subordinate to state law.”32 Hence it
permits municipalities authority “to enact laws to promote public health, safety, morals and
general welfare.”33
Presumably because (1) states and municipalities employ eminent domain authority in
exercising their police powers, while (2) these powers are themselves very broad per the
federal Constitution’s 10th Amendment, the U.S. Supreme Court’s construction of the eminent
domain public purpose requirement is very deferential to state and municipal legislative
judgments of public purpose. The best known exemplar is again the Court’s widely discussed
Kelo decision of 2005, in which the city of New London, Connecticut’s condemnation of homes
with relatively low market value for purposes of making land available to private developers
was upheld. The proffered public purpose in this case was economic development, which the
city thought a likely collateral benefit of the developers’ proposed facility. The Court for its part
recognized the interest in economic development as a legitimate “public use” for purposes of
the eminent domain authority.
Two other public purposes commonly recognized both by the Supreme Court and all
other courts in the U.S. are particularly apposite to the Municipal Plan. One is the long
32

Suter v. City of Lafayette, 57 Cal.App.4th 1109, 1118 (1997). Note that, structurally and functionally
speaking, the municipal/state relation is being characterized as analogous to the state/federal relation. All that
differs is the putative font of the authority in question, the conceit in the state/federal case being that the states
confer, along with “the People,” authority upon the “higher level” federal government, while in the
municipal/state case the conceit is the reverse, with the state delegating authority to the “lower level” municipal
governments. As mentioned earlier in this Section, however, the conceit is important, in that it imparts to our
federalism a tendency to treat states and their eminent domain as in a certain sense as or more “fundamental”
as/than the federal government and its eminent domain power. This might account for the high degree of U.S.
Supreme Court deference to state and local exercises of eminent domain, as discussed presently.
33
Community Memorial Hosp. v. County of Ventura, 50 Cal.App.4th 199, 206 (1996).

8

recognized public interest in reversing or preventing blight. So venerable is this particular
purpose that the City of New London itself appealed to it in justifying the action mentioned
above.
More common appeals to the blight reversal or prevention interest ground themselves
in actual abandoned or decaying homes, emptying neighborhoods, overgrowing lawns,
crumbling roads and other infrastructure, and the like. 34 Again, not only reversal, but also
prevention of developments such as these – both of which the Municipal Plan by its terms aims
to effect – counts as a public use par excellence for purposes of justifying exercise of the
eminent domain authority.35
The second public purpose routinely upheld as legitimate in challenges to eminent
domain exercise is the interest in eliminating dislocations in local housing markets stemming
from lienholders’, servicers’, and other parties’ unwillingness to consent to short sales, deeds in
lieu of foreclosure, and the like – as well as counterpart inability of mortgagors to sell at current
market value or otherwise transfer property in satisfaction of mortgage debt. Like the blight
reversal and prevention interest, so is this one straightforwardly applicable to cases in which
the Municipal Plan will be pursued.
Here the best known U.S. Supreme Court decision is that handed down in the case of
Hawaii Housing Authority v. Midkiff,36 in which the Court found sufficient public interest in the
State of Hawaii’s wholesale condemnation of landlords’ ownership interests in real property in
order to convey the property to tenants. The purpose of the condemnation and transfer was to
“reduce the concentration of ownership of fees simple in the State,” which Hawaii had found
“responsible for skewing the State’s residential fee simple market, inflating land prices, and
injuring the public tranquility and welfare.”37
Against the backdrop of Midkiff, it is difficult to imagine anyone’s finding the Municipal
Plan’s purposes anything other than fully public. The “landlords” in the present case, after all,
themselves overwhelmingly wish to write-down principal but are prevented from doing so by
the collective action challenges catalogued in Section II. They also, of course, hold property
rights that are much more attenuated than those of literal landlords, owning as they do only
repayment rights and security interests.

34
35
36
37

Here the chestnut case is Berman v. Parker, 348 U.S. 26 (1954).
Id.
467 U.S. 229 (1984).
Midkiff, id. at 232.

9

Current securitized mortgagees likewise are immeasurably more “absentee” than the
most absent of literal landlords, the form of their “absence” in this case – fragmented and
scattered all over the world as they are, knowing only their bond instruments, not the
properties that secure them – being precisely what stands in the way of their coming together
to write down principal as they would if they could. And finally, as noted above they are free
and invited in any event, per the terms of the Plan, to continue as owners by participating in the
investment that funds the Municipal Plan itself, the funders of which become the ultimate
resultant creditors.
So much for the federal construal of public purpose. As noted above, California’s
understanding of “public use” tracks that of the federal courts.38 There is accordingly little to
add in respect of its case law on point. It is worth noting, however, that the State’s Eminent
Domain Law (which we shall now label “EDL”) adds further statutory guidance, including with
respect to procedure. First, then, the EDL repeats the State’s constitutional requirement of
“public use.”39 Next, the EDL requires that any municipality or other State instrumentality such
as a JPA authorized to employ the authority adopt, before doing so, a “resolution of necessity”
that explains the public use for which property is being condemned.40
The resolution for its part is adopted in an open legislative session, after a public hearing
on the question of necessity in which reasons for condemnation are proffered, debated, and
assessed. These familiar legislative procedural requirements are of course meant to ensure full
transparency, reasoned democratic deliberation, and fair access to all who might wish to take
part in those community proceedings in which municipalities contemplate use of their eminent
domain authority.
If and when a resolution of necessity is then adopted, the municipality obtains an
appraisal of the condemnable property as described above in Section III, places the appraised
amount in escrow, and files a condemnation action in California Superior Court. 41 The
Municipal Plan can of course be adapted to incorporate within it all such procedural steps as

38

See, again, County of Ventura v. Channel Islands Marina, Inc., 159 Cal.App.4th 615, 624 (2008) (apart from
the aforementioned protection of residences from Kelo-style taking with a view to transferring to other private
parties, “California courts have construed the [counterpart federal and state takings provisions] congruently [and]
have analyzed takings claims under decisions of both the California and United States Supreme Courts.”).
39
See Civ. Proc. § 1240.010.
40
See Civ. Proc. § 1245.230. If the State Legislature has provided explicitly by statute that some particular
“use, purpose, object or function” is “one for which the power of eminent domain may be exercised,” then the
action is deemed to be a declaration by the Legislature itself that the use, purpose, object or function in question
in indeed a public use. See id., § 1240.010.
41
See Civ. Proc. § 1250.110.

10

might be prescribed by any other participating state’s and municipality’s eminent domain
statutes and ordinances.
But who will these participating states and municipalities be, and why might they
participate? This question takes us straight to our final Section – which, by describing more
fully the imminent consequences of continued delay in implementing some variant of the
Municipal Plan in cities still at the core of our ongoing mortgage foreclosure crisis, both (1)
implicitly identifies municipalities that should find the Plan most attractive, while (2) rendering
clear just how urgent the public purpose these cities will have for pursuing the Plan will be.

V. The Plan’s Manifest Public Purpose and Urgent Necessity
We complete this Memorandum by discussing in a bit more detail what is currently
underway in those municipalities located at the center of our ongoing and self-worsening
mortgage foreclosure crisis. Specifically, we note the remarkable toll in family and
neighborhood suffering, ongoing and self-worsening value and revenue loss, and consequent
blight that rolling foreclosures are now actively bringing in their wake.
The first thing to note “on the ground,” then, is the great rise in home vacancy rates in
states hit most hard by the mortgage foreclosure crisis to date. U.S. Census Bureau data
indicate that nonseasonal vacant properties have increased 51% nationally from under 7 million
in 2000 to over 10 million in early 2010. 42 Ten states in particular – including California, in
keeping with our case study methodology – saw increases of 70% or more.43 Other “sunbelt”
and “sand” states – Arizona, Nevada, and Florida, for example – saw these larger increases as
well. The overwhelmingly greater part of the spike in all places, moreover, has occurred since
2006, when the bubble peaked and then plunged.44
Unsurprisingly, high foreclosure rates closely correlate with the growing vacancy rates
in question, accounting in many cases for as much as three-fourths of the increase.45 So too,
then, do high underwater mortgage rates, since these themselves correlate overwhelmingly

42

See Government Accountability Office, Vacant Properties: Growing Number Increases Communities’ Costs
and Challenges, Report to the Ranking Member, Subcommittee on Regulatory Affairs, Stimulus Oversight, and
Government Spending, Committee on Oversight and Government Reform, House of Representatives, November
2011 (hereinafter “GAO Report”). Also Federal Reserve Board, supra note 8; Dudley, supra note 8; and Alpert,
Hockett, & Roubini, The Way Forward, supra note 22.
43
GAO Report, id.
44
Id.
45
See sources supra, note 153.

11

with foreclosures as noted above in Sections I and II. 46 This is not only because people
ultimately leave foreclosed homes. It is also because the foreclosure process itself is a drawn
out affair, meaning that foreclosers are unable to place properties back on the market quickly
even where there might be demand.47 As it happens, however, there is little demand either –
another source of the spike in vacancy rates.48 All in all, then, these factors slow the rate at
which homes that are left come to be reoccupied, which of course adds up to spiking vacancy
rates.
Associated unemployment, in some cases responsible for foreclosures themselves while
in other cases attendant on economic slump that both reinforces and is reinforced by mass
foreclosure, is another source of spiking vacancy rates. 49 A tertiary cause appears to be
migration from hard hit cities that is itself a response to declining employment opportunities
which themselves interact symbiotically with foreclosure rates per the feedback effects
discussed above throughout Sections I and II.50 There are straightforward feedback effects
between these phenomena and spiking vacancy rates.51
Growing home vacancy rates of course represent considerable individual and familial
trauma. Involuntarily uprooted families are at least temporarily deprived of the most basic of
human needs – the need of shelter, a “home base,” a place to conduct stable family life. There
are countless studies documenting the incalculable psychological and physical toll on children,
in particular, wrought by foreclosure and eviction.52 The toll taken on adults is immense as
well. As a qualitative matter, this all perhaps goes without saying. As a quantitative matter, a
70% spike in home vacancy rates is of course much more than a 70% spike in rates of the
mentioned traumas. For prior to the spike, what vacancies there are will be less the result of
foreclosure than they are or regular economically induced migration.
Growing home vacancy rates also impose great pecuniary and other costs upon
municipalities.53 Although most if not all counties have on their books legal requirements that
owners before and after foreclosure maintain their properties, as a practical matter this doesn’t
46

See supra, Sections I and II, and sources there cited.
See notes 156 and 157.
48
GAO Report, supra note 153.
49
See sources cited supra, note 153, as well as supra, Sections I and II and sources cited therein.
50
GAO Report, supra note 153.
51
Id.
52
See, e.g., Janet Currie & Erdal Tekin, Is the Foreclosure Crisis Making Us Sick?, NBER Working Paper No.
17310, August 2011, available at http://www.nber.org/papers/w17310; G.T. Kingsley et al., The Impacts of
Foreclosures on Families and Communities, White Paper, The Urban Institute, May, 2009, available at
http://www.urban.org/UploadedPDF/411909_impact_of_forclosures.pdf.
53
See sources cited supra, notes 153 and 163.
47

12

tend to happen.54 Parties on either end of foreclosures have other things on their minds: The
foreclosed party, where to go next; the foreclosing party, how in heaven’s name to process all
the remaining foreclosures that impend.
The consequence is that municipalities themselves must maintain or demolish the
properties in question.55 Simply boarding up abandoned properties typically costs hundreds to
thousands of dollars per structure.56 Cutting grass, draining swimming pools, or removing
debris entails similar costs, some of them repeated regularly for each property. 57 Demolition
ultimately proves necessary for many properties, and entails costs well into the thousands of
dollars – even double digit thousands – for each property demolished.58 Some of these costs
are occasioned by the physical process itself, others by the administrative and judicial
requirements that have to be met before absentee mortgagee-owned property can be simply
destroyed.59
Before abandoned properties are properly sealed off or demolished, they also impose
significant safety costs on communities.60 Many of them act as “attractive nuisances,” to
employ the familiar tort law term, to minors and others. Others attract criminals and crime,
including not only drug-dealing and prostitution, but materials-stripping, vandalism and arson.61
These represent not only costs in themselves, but also costs in the form of increased law
enforcement expenditure on the part of affected municipalities.
Abandoned properties also, of course – partly in virtue of the tendencies just noted but
also of themselves – reduce the value of surrounding properties, often thus leading to further
desertion and migration: yet another self-worsening feedback or “snowball” effect once a
critical mass of abandoned properties is reached.62 The numbers are often impressive. One
study has found that even a single foreclosed home depresses prices of nearby homes from just
under one to as high as 8.7 percent.63

54
55
56
57
58
59
60
61
62
63

GAO Report, supra note 153.
Id.
Id.
Id.
See sources cited supra, notes 153 and 163.
GAO Report, supra note 153.
See sources cited supra, notes 153 and 163.
Id.
See sources cited supra, notes 153 and 163.
GAO Report, supra note 153.

13

Again, this is just one foreclosed home. Another study found that one demolished
home reduced the values of 13 surrounding properties by $17,000 per. 64 Yet another study
found that a single foreclosed, vacant home reduces the value of neighboring properties by 10
percent, and all homes within 500 feet of it by an average of .7%. 65 One could proliferate
references to studies of this sort with abandon,66 but the point is presumably made, and is at all
events hardly surprising.
Also hardly surprising is that all of this foreclosure, abandonment, and consequent value
loss results in municipal revenue loss. 67 Municipalities in America overwhelmingly finance their
operations through property tax assessments.68 Lose property dwellers, lose property values,
and you lose funding – all while needing more such funding to handle the costs wrought by the
abandoned homes themselves as elaborated above. And this is so notwithstanding loan
servicers’ being required to keep up property tax payments during foreclosure proceedings. 69
Of course, some federal programs are aimed at assisting hard hit localities in handling
the growing costs despite dwindling revenues.70 But these do not appear to be functioning well
and in any event simply represent shifts of the costs to the federal budget, rather than
eliminating the source of those costs.71 Why on earth would this be preferred to municipalities’
taking charge of and reversing their own declines on behalf of their citizens by pursuing the
Municipal Plan sketched in Section III?
The costs run through thus far all are attendant on actual foreclosure and actual
vacancy. But there are additional costs wrought by what might be called “shadow” vacancy, if
one might be forgiven for coining another neologism. 72 Here we refer to the much lower
investments of moneys and labor in home improvement or home maintenance that
underwater mortgagors make.73
The reasons are not hard to find. For one thing these mortgagors, strapped as they are,
are apt to be out of the house more either working extra hours or seeking such work. For
64

Id.
Id.
66
They are cited with abandon (pun intended) in the GAO Report, supra note 153.
67
See sources cited supra, notes 153 and 163.
68
Id.
69
GAO Report, supra note 153.
70
As discussed supra, Section II.
71
Id.
72
By analogy to “shadow inventory” and “shadow banking.”
73
See sources cited supra, notes 153 and 163. Also Goodman, sources cited supra, note 61; and Brian T.
Meltzer, Mortgage Debt Overhang: Reduced Investment by Homeowners with Negative Equity (August 2010)
(working paper, on file with the author).
65

14

another thing, insofar as their underwater status induces uncertainty concerning how much
longer they are likely to be able to hold on, it likewise induces a search for alternative residence
and livelihood.
Finally, of course, it would simply not seem to be consistent with “human nature” to
invest one’s care and concern in a home that one senses s/he might very soon lose. For all of
these reasons, underwater mortgaged homes deteriorate much more rapidly than do other
homes even well before foreclosure. These homes are in a certain sense “vacant already,” in
that the owners in many cases will have psychologically detached themselves from them.
Heightened degrees of this same form of detachment of course bring on “walkaway” and
“strategic default” in some cases. It is, after all, financially rational to default on an underwater
mortgage, since one thereby “pays” with the lower-valued asset rather than the higher-valued
principal amount.74
This of course leads straight to the costs that foreclosure and “shadow” foreclosure
impose upon lenders themselves. Lenders naturally are well aware of these costs, and for that
very reason are apt to favor principal writedowns. The problem is that they cannot coordinate
to secure them, for reasons comprehensively adduced above in Section II. Insofar as some of
these lenders themselves reside in the municipalities in question, counties that exercise their
eminent domain authority pursuant to the Municipal Plan act authoritatively on their behalves
too. And this is of course not to mention the sense in which these municipalities will act
collaterally, in effect, to the benefit of all others who wish to see principal writedowns as well.
...

74

Indeed, “efficient breach” theories of contract reneging such as have proliferated in conservative, “law
and economics” approaches to contract in such schools as the University of Chicago have it that forgoing strategic
default is irrational.

15

TESTIMONY OF RICHARD F. FRIEDMAN
HEARING BEFORE JOINT COMMITTEE OF THE
COMMITTEE ON FINANCE AND COMMITTEE ON HOUSING AND REAL
ESTATE OF THE CITY COUNCIL OF THE CITY OF CHICAGO
City Council Chambers
August 14, 2012
Chairman Burke, Chairman Suarez, and members of the Committee on Finance
and the Committee on Housing and Real Estate:
My   name   is   Richard   Friedman   and   I   am   here   to   give  you   a   lawyer’s   opinion   on  
the legality of the proposal that is the subject matter of this hearing – to purchase
mortgages out of securitized packages of loans for fair market value, write them down
and create new mortgage terms for eligible homeowners who can benefit from reduced
monthly payments.
By way of background, I am an attorney practicing with the law firm of Neal &
Leroy, LLC. Our firm specializes in eminent domain and I have practiced eminent
domain law for most of my career. I have also written publications for lawyers and
lectured on the topic, in addition to teaching land use law.
My purpose in giving this testimony is to analyze the proposal, and counter the
misconceptions, misinformation and misinterpretations of cases and statutes that have
been circulated by opponents of the program.
I understand that you can never predict how courts will deal with new issues and
that the details of the proposal have yet to be worked out. Nevertheless, the outline of
the proposal is specific enough for me to be tell you with confidence that the courts are
likely to approve the proposal as both consistent with United States Constitution and
Illinois eminent domain law.
This innovative proposal raises four critical questions under Constitutional and
Illinois law.
First, is it a public use under the constitution for municipalities to condemn
mortgages from private mortgagee in order to reduce the burdens on the mortgagor?
Second, will such a condemnation result in the constitutionally required just
compensation to the mortgagee?
Third, does government have the power to condemn partial interest? This
question arises because a mortgage is only a partial interest in property. Moreover, since
frequently, the owner of the securitized package of loans is located out the state of
Illinois, may an Illinois municipality condemn property owned by an out-of-stater?
Fourth, does Illinois law, particularly, the newly enacted Eminent Domain Act,
allow condemnation of these mortgage interests?

The first question is perhaps the easiest. Is the proposal to condemn mortgages
for the benefit of homeowners consistent with the Fifth Amendment of the United States
Constitution,   which   permits   condemnation   only   for   “public   use.” Such condemnations
are not inherently unconstitutional.
The Supreme Court of the United States has been very consistent in its rulings
that  “public  use”  is  not  to  be  taken  literally,  but  is  interpreted  to  mean  “public  benefit.”
If elected officials in their judgment determine that the public benefit will be enhanced
by condemning property from one private owner for the purpose of allowing another
private owner to create a public benefit, the decision will be upheld.
For more than 50 years, the United States Supreme Court as well as the Illinois
Supreme Court have approved the concept of allowing the government to condemn
privately owned property in blighted urban areas and transferring it to others for
commercial and economic development, pursuant to a comprehensive development
plan.
In fact, since early in the history of our nation, condemnation was used to further
the public welfare through the intermediary of private enterprise. Perhaps the most
prominent example is the authority conferred upon private railroads and other utilities,
such as electrical or pipeline companies, to condemn private property for their own use
as part of their right-of-way or pipeline. The benefit to the railroads or utilities was
thought to be an advantage to the public generally even though property passed from
one private owner into the hands of another.
Additional examples occurred in the Twentieth Century. The United States
Supreme Court approved the use of the government’s eminent domain power to transfer
property from one private owner to another. For example the court approved the
government’s   condemnation   of   private property to be given to a railroad, whose
property was taken by the government for another purpose. [Dohany v. Rogers, 281
U.S. 362 (1930).] The Supreme Court also approved the condemnation of private
property to be given to town residents who had to be moved when their land was flooded
by a federal dam. [Brown v. U.S., 263 U.S. 78 (1923).] And recently, the Illinois
Appellate  Court  approved  the  City  of  Chicago’s  condemnation  of  private  property  to  be  
transferred to another private owner, to substitute for its parking lot that the City had
been acquire. [City of Chicago v. Midland Smelting Co., 385 Ill.App.3d 945 (2008).]
All of these cases illustrate that courts approve the use of eminent domain to
transfer private property from one private owner to another, when the purpose is to
advance the public welfare.
Any doubt that the proposed mortgage acquisition program is constitutional is
dispelled by looking at the Supreme Court’s  approval  of  the  State  of  Hawaii’s  action  in  
the 1984 case of Hawaii Housing Authority v. Midkiff, [467 U.S. 229 (1984)]. At that
time in Hawaii, land ownership was concentrated in the hands of only a few owners, and
homeowners could not own the land underlying their homes; they could only lease it.
The Hawaii legislature determined that the public welfare demanded that ownership of
the land be by people who live on it. The legislature determined that individual
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ownership promoted the general welfare. Therefore, Hawaii began to condemn the land
from the private owners to be transferred to the homeowners who leased it. What
Hawaii did was to change not the use, but simply the ownership of property. The United
States  Supreme  upheld  the  power  of  the  State  of  Hawaii  as  a  rational  effort  to  “correct  
deficiencies in the market determined by the state legislature to be attributable to land
oligopoly.” [Ownership[ concentrated in the hands of a few.]
What the Supreme Court approved in the Hawaii v. Midkiff case is little different
from the proposal that is under consideration by this joint committee. The City would
condemn underwater mortgages, hold them or transfer them, and adjust the mortgages
to give homeowners breathing space until their financial problems can be overcome.
Even more recently, the Supreme Court in the case of Kelo v. City of New London
[U.S. 125 S. Ct. 2655 (2007)], the court reaffirmed the principle that the public use
clauses of the constitution does not require that condemned property be put into general
use by the public.
Almost 60 years ago, a unanimous United States Supreme Court stated this
principle,   which   has   never   changed:   “the   concept   of   public   welfare is broad and
inclusive. When the legislature speaks, the public interest has been declared in terms
well-nigh  conclusive.” [Berman v. Parker, 348 U.S. 26, 32 (1954).]
On the basis of these cases and pronouncements, there could be little doubt that
courts will uphold the use of condemnation power to acquire mortgages in the public
interest.
The second issue raised by this proposal is the amount that the mortgage holders
will be paid when the City exercises its power of eminent domain. The Fifth Amendment
to the United States Constitution, of course, requires that private property cannot be
taken   unless   “just   compensation”   is   paid. Because of this constitutional protection,
mortgage holders do not have to be afraid that the City will acquire the mortgages at a
written down price.
There  has  been  a  lot  of  misunderstanding  about  the  term  “written  down.” What it
does not mean is that the government will pay less than market value. After it acquires
the mortgage, the City may choose to write down its value. But it must pay the owner
market value.
Both the United States Supreme Court and the Illinois courts have ruled that just
compensation means fair market value. Market value is what a willing buyer will pay to
a willing seller in an arm-length transaction. Thus, in the case of the holder of the
mortgages that are being condemned, they do not have to part with their mortgages for
less than they could sell them for in the open market.
Putting a value on mortgages should not be a difficult problem. In the first place,
when the mortgages where bundled into securitized bonds, they were give a value so
that they could be sold. In the case of mortgages to be condemned, sophisticated
appraisers will be able to determine their value. If there is a disagreement as to value,
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the judge or jury under Illinois law is available to make that determination. In fact,
condemnation trials are held many time a week in the Daley Center, and judges and
juries are hearing testimony and make the decision based upon evidence as to just
compensation.
The third issue is whether the City may condemn a mortgage. In most cases,
when the government condemns property, it condemns the fee interest, that is, the
whole property. But lawyers like to say that property is like a bundle of sticks. The
condemnation power can be exercised with respect to the whole bundle or some of the
sticks in the bundle. The power of government to condemn less than the fee interest is
common. The   United   States   Supreme   Court   upheld   the   federal   government’s  
condemnation of a leasehold, that is possession of real estate for a period of years.
[United States v. General Motors Corp., 323 U.S. 373 (1945).] Similarly, the Supreme
Court upheld the condemnation of a laundry business (not the property that the
business was in). [Kimbal Laundry Co. v. United States, 338 U.S. 1 (1949).]
Furthermore, it is very common for the government to condemn easements over
property, such as for roads. With respect to mortgages specifically, the United States
Supreme Court suggested in 1935 that eminent domain maybe exercised if the public
interest requires to take property of individual mortgagees in order to relieve the
necessities of individual mortgagors. [Louisville Joint Stock Land Bank v. Radford, 295
U.S. 555 (1935).]
From these cases, there can be little doubt that mortgages, like any other interest
in property, may be condemned and that fair market value will be paid to the
mortgagees for the interests that are acquired.
A related issue raised by the proposal before this joint committee is whether it is
possible to condemn mortgages when the mortgage owner is out of Illinois. The answer
is that it has never been a problem to condemn interests in land, even if the landowner
resides out of the state. Condemnation is what is known by the technical term as an “in
rem” proceeding, that is, a proceeding against property. As I described it earlier, a
mortgage is part of the bundle of sticks. It is an interest in estate. Property is local, and
this property interest is local, as well. For these purposes, the property does not care
who own it.
The proposal before this joint committee is to condemn mortgages, not solely the
loan secured by the mortgage. If the idea is to condemn the mortgage, it is
condemnation of a part of the real property. The real property resides locally.
To demonstrate this, it is only necessary to look at condemnation cases filed
every day in the circuit court. Condemnation cases are filed not only against the owner
of the underlying property, but of necessity also against anyone who has an interest in
the property such as mortgagees and other lien holders. Sometimes, the mortgage
holder resides out of state. It has never happened that a mortgage interest must be left
out of the condemnation case, because the mortgage holder resides out of state.
Similarly, in the mortgage foreclosure courtrooms of the Daley Center, mortgagees file
mortgage foreclosure cases, and some of those mortgages are those that more sold to
bondholder as part of securitized packages. Irrespective of whether the owner of the
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securitized bonds resides out of state, the mortgage holder can foreclose the defaulted
mortgage simply because the mortgaged property is in Illinois.
The fourth and final issue is whether the condemnation of mortgages is
permissible under the Illinois Eminent Domain Act. Here, we have less guidance,
because the act went into effect January 1, 2007, but we have not yet had any court
interpretations of the relevant portions of that law. Section 5-5-5 of the Eminent
Domain Act contains many subsections providing for the exercise of eminent domain.
There are two subsections, subsections (b) and (c), that appear expressly applicable to
the proposal now being considered. Which of these two subsections apply will depend
on several factors, including how these mortgages is held after it is acquired.
The first category, subsection (b), applies if the City owns and retains the
mortgage. In that case, the private financing entity would advise the City and administer
the mortgage on behalf of the City. Possibly, the City would retain the underlying title in
the mortgage but allow the private financing entity to be the beneficial owner, somewhat
in the nature of the common Illinois land trust. Subsection (b) applies when there is
“public   ownership   and   control”   of   the   interest   acquired. This would likely be the
preferable subsection, because it has a less rigorous burden of proof requirement.
The other category under Section 5-5-5 is subsection (c), which applies to
property   acquired   for  “private   ownership   or   control.” This would apply if the program
was structured so that the private financing arm would hold title to the mortgage after
condemnation and administer it. This could be considered less desirable category to
proceed under because it requires that the condemning body to prove the public benefit
by clear and convincing proof.
There are other aspects of the Eminent Domain Act to be considered, but that
they do not have to do with the question of public use, but are procedural and apply to
any kind of condemnation. These include the new requirement that property be value at
a date upon which the property is taken, that is, a date after the condemnation case is
filed, and that property held for a period of less than 5 years must be disposed of by
public bid. These procedures should be considered when evaluating the program, but
they are not legal impediments.
As a general matter, as you can see from my remarks, the City’s   acquisition   of  
mortgages, even part of a securitized package, is entirely consistent with eminent
domain law.

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EMINENT DOMAIN/CONDEMNATION

National Recognition
Neal & Leroy, LLC (“Neal & Leroy”) is nationally recognized for its experience and
knowledge in the area of eminent domain and condemnation. Since the firm’s founding
in 1938, Neal & Leroy has represented municipalities, special districts, and state entities
in consistently acquiring approximately 350 land parcels per year for public projects. The
firm also represents landowners in cases of governmental takings.
We have acquired large projects, including the assembly of over 650 parcels for the
O’Hare Modernization Project; the land acquisition for the Chicago Transit Authority
Green, Orange, Brown, Red, and Blue Transit Lines; and the Hillside Strangler and I-355
South Expansion Projects. Our attorneys have been instrumental in assembling large
tracts of land for other major projects, including McCormick Place, the United Center,
White Sox Park, Midway Airport, and countless schools, police stations, fire stations,
libraries, parks and open space, and commercial development projects.
We provide important administrative services to our clients in managing large acquisition
projects such as those for airports and sports facilities. We offer guidance regarding
federal requirements, manage the relocation reimbursement process, report on progress,
assist in the management and control of payouts, and assist in completing the assembly
for the project.
In addition, we have managed a quick take for individual and multiple parcel projects,
advising governmental bodies on securing quick take and managing the special expedited
process.
We believe that no other law firm in the state of Illinois has litigated the acquisition of
more individual real estate properties on behalf of public entities. Over the past fifteen
years, we have represented in court proceedings such public bodies as the City of
Chicago, Public Building Commission of Chicago, Chicago Board of Education, Illinois
Medical District, Chicago Transit Authority (“CTA”), the Chicago Metropolitan Pier and
Exposition Authority, Capital Development Board, Illinois Sports Facilities Authorities,

EMINENT DOMAIN/CONDEMNATION

Village of Oak Park, City of Berwyn, City of Des Plaines, City of Park Ridge, and City
of Burr Ridge with respect to acquisitions ranging in size from a single parcel to
hundreds of parcels. We have also represented other public officials in Cook County and
municipalities including the City of Evanston, the City of Countryside, the City of
Riverdale, the City of Hodgkins, and the City of Mount Prospect.
Experienced Litigator
Neal & Leroy has extensive experience litigating a wide range of contested matters on
behalf of both public and private sector clients. The firm has been a leader in the law
of property valuation, land use and public use law with our experienced litigators having
completed over 200 jury trials, and as many as 50 bench trials per year in both federal
and state courts.
We have litigated complex legal issues, including those involving the acquisition of
railroad rights-of-way, as well as intangible property interests such as routes of private
bus lines and landmark properties.
The firm has recently represented a Fortune 100 company in the defense of a land
acquisition by the State of Illinois, and the firm has also defended another corporate
client in an eminent domain claim initiated by the United States government.
Lecturer, Teacher, and Author
Members of Neal & Leroy have been highly recognized for over 20 years for their
frequent teaching, writing, and lecturing on multiple eminent domain topics to the bar
and to non-lawyers. Those topics include “Depositions of Expert Witnesses in a
Condemnation Matter,” “Evolving Standards for Just Compensation-Emerging Issues,”
“Federal Practice-A Parallel Universe,” “Introduction to Eminent Domain Law,”
“Eminent Domain for Economic Development and the New Eminent Domain Act,” “The
New Illinois Eminent Domain Act,” “Eminent Domain-New Court Decisions and
Regulations are Changing the Traditional Rules,” “Eminent Domain and Land Valuation
Litigation,” “Illinois Eminent Domain Practice,” and many others.

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EMINENT DOMAIN/CONDEMNATION

A member of the firm teaches historic preservation law in the graduate program of the
School of the Art Institute of Chicago and at the University of Chicago Law School.

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