Cert petition filed for SCOTUS review of the “Undivided Fee Rule” in eminent domain

A new Petition for Writ of Certiorari has been filed with the United States Supreme Court requesting review of a Wisconsin eminent domain case, City of Milwaukee Post No. 2874 Veterans of Foreign Wars v. Redevelopment Agency, 768 N.W.2d 749 (Wis. 2009), in which the application of the “undivided fee rule” (also referred to as the “unit rule”) resulted in the award of $0 as “just compensation.” (SCOTUS Docket No 09-1204.)

The Petition, filed on behalf of the VFW by Michael Berger and Gideon Kanner of Manatt, Phelps and Phillips in Los Angeles, challenges the rule’s constitutionality, arguing that its application in this case deprived the VFW of a valuable leasehold interest in violation of the Constitutional guarantee of just compensation as set forth in the Fifth and Fourteenth Amendments. (Disclosure: Both Mr. Berger and Prof. Kanner are OCA Members.)

In a condemnation action, the application of the undivided fee rule requires that in the instance where multiple parties (e.g. fee owner and lessees) have an ownership interest in a property taken by eminent domain, the court may only calculate valuation as if the property had one single ownership interest and may not consider the value of separate interests, such as valuable long-term leases.

In the instant case, the VFW owned a long-term lease in a building located within the footprint of a redevelopment area in Milwaukee. The lease was for 99 years at the annual rate of $1 per year and provided for a renewable second term of 99 years. Additionally, under the lease, the VFW paid no utilities and no costs for upkeep or renovation, rather the owner was responsible for all utilities and costs. The property and building were acquired by the Redevelopment Authority using eminent domain. In valuing the property for the purpose of paying the property owner and VFW just compensation, it was concluded that the building was in such disrepair that the cost of asbestos remediation and demolition outweighed the fair market value of the property. Therefore, the owner and VFW were awarded nothing despite the undisputed fact that the VFW’s leasehold interest had significant value. Under the undivided fee rule, the VFW’s interest could not be worth more that the fair market value minus demolition and related costs of the property, and therefore, no award of compensation was due.

Prof. Gideon Kanner points out in his blog that similar to the former-Kelo property and neighborhood in New London, the site of the former VFW lodge in Milwaukee remains vacant. (See Former Hotel Site Remains a Vacant Lot, Tom Daykin, Milwaukee Journal Sentinel.)

Robert Thomas (OCA Hawaii Member) summed this issue up well in his blog:

When is a lease that everyone agrees is worth more than a million dollars totally worthless? When it’s an eminent domain case and the court applies the “undivided fee” rule, that’s when.

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