In United States v. 0.073 Acres of Land, No. 11-31167 (Jan. 28, 2013), the U.S. Court of Appeals for the Fifth Circuit held that a townhome association's right to collect maintenance assessments from its members was property under Louisiana law, but was not compensable property in an eminent domain action.
The case involved a 58-townhome community next to Lake Pontchartain in New Orleans. The area was damaged in Hurricane Katrina after the 17th Street Canal was breached, flooding the Lakeview neighborhood. As part of the recovery efforts, the Corps of Engineers began improving the adjacent pumping station, and to facilitate its access to the site, it condemned 14 of the townhomes. (We assume that's the vacant spot between the remaining townhomes and the pumping station/canal in the above photo.)
The Mariner's Cove Townhomes Association had the right to collect assessments from its members for maintenance and whatnot. This right ran with the land, and required each owner to contribute a proportionate 1/58th of his share. When the 14 units were condemned, the Association asserted that its property right to collect the assessment from those units was an interest in the taken properties. The Corps reached agreement with the 14 townhome owners, but not with the Association, so it filed an eminent domain action to determine whether it needed to pay for the Association's rights.
After the government took possession of the properties, MCTA filed an answer to the government’s complaints in condemnation. MCTA claimed that the government was obligated to pay the yearly assessments arising from the Declarations since the Corps’s occupation in September 2005, and for the reasonable lifetime of a townhomes association such as Mariner’s Cove, as compensation for the diminution of its assessment base. In the alternative, MCTA claimed that it is entitled to a lump sum payment which, if invested conservatively and adjusted for inflation, is a principal amount capable of generating annual interest sufficient to make up the shortfall in funds owed.
Slip op. at 6 (footnote omitted). The district court rejected the association's claim, holding that it had no continuing interest in collecting assessments as of the date of the taking, and that the assessments predating the taking were not compensable. The Fifth Circuit affirmed.
The court first held that the right to collect the assessments was a property interest under Louisiana law. You'd think that if something was "property" under state law, the Fifth Amendment would require just compensation to be paid if the interest is taken. Not so, held the court, because the "consequential loss rule" governed, and thus the property interest, although taken, was not compensable because the right to collect assessments was like a business loss and a frustrated contract. See slip op. at 13-14 ("[W]e find that the consequential loss rule applies because MCTA’s right to collect assessments is a real covenant that functions like a contract and, in the words of the Adaman court, is not "directly connected with the physical substance of the [land].") (citing Adaman Mutual Water Co. v. United States, 278 F.2d 842, 845 (9th Cir. 1960)).
Circuit split alert: the court recognized this is not a settled issue, and the majority of courts conclude that an interest such as the Association's is compensable. See slip op. at 14 ("Moreover, the decisions in other states addressing this question are legion and conflicting.") (footnote omitted). The court rejected the majority view, however, because having to pay for this property "might unduly burden the government's ability to exercise its power of eminent domain." Slip op. at 15. Besides, the court held, the right is like a service contract, not an easement tied to the land:
We believe that recognizing MCTA’s right as compensable under the Takings Clause would allow parties to recover from the government for condemnations that eliminate interests that do not stem from the physical substance of the land. This would unjustifiably burden the government’s eminent domain power. In addition, if we were to recognize MCTA’s right as compensable, we would give special status under the Takings Clause to what essentially is a contract, merely because it appears in a title document. Such a formality alone cannot justify requiring the government to compensate MCTA for the loss of its ability to collect assessments on the condemned properties. In the absence of apposite federal and state law, these concerns guide our decision. Thus, we hold that MCTA’s right to collect assessments is not a compensable interest under the Takings Clause, and that MCTA was not entitled to compensation for the loss of its assessment base.
Slip op. at 16-17.