Wisconsin Supreme Court: The Whole Is Lesser Than The Sum Of Its Parts

When considering a redevelopment authority's condemnation of what is assumed by all litigants to be a valuable leasehold interest, how does a court determine the lessee is owed nothing, and conclude that nothing is "just" compensation (and indeed, the lessee must pay back the compensation it was previously paid, plus interest)?

Eminent domain mavens already know the answer: the "undivided fee" rule. You know, the doctrine that holds the whole is lesser than the sum of its parts.

The undivided fee rule is a legal fiction requiring a trial court to ignore reality -- when property is held by more than one interest, valuation is determined as if a single owner possessed everything, and the condemnor is not required to compensate each separate interest in the property. For example, if a condemned building is being leased to tenants, compensation is measured by the value of the undivided fee simple absolute value of the building, not the aggregate value of the building and the leases. The building owner and the tenants must divide up the condemnation award by contract.

In City of Milwaukee Post No. 2874 Veterans of Foreign Wars of the United States v. Redevelopment Authority of the City of Milwaukee, No. 2006AP2866 (July 17, 2009), a sharply divided Wisconsin Supreme Court applied the rule (aka the "unit rule") to conclude first that a tenant who owned an admittedly valuable long term lease ($1 rent per year, plus goodies) was not entitled to any compensation because the value of the building was zero and second, that application of the rule was not unconstitutional under the Wisconsin Constitution's takings clause.

It was an unusual fact pattern that brought the majority to this strange result, but there's a reason "hard cases make bad law" is more of a truism than a cliche. Here's the summary from the website of the Wisconsin courts:

In 1942, the VFW owned the building located on the property and used it as its post headquarters. In 1961, the VFW conveyed the land and improvements to Towne Metropolitan, Inc., which constructed an 11-story hotel.  In exchange for the conveyance, the VFW obtained a 99-year lease, with the option to renew for another 99 years.  Under the leasehold, the VFW paid $1.00 annually and the lessor would pay all real estate taxes, all utilities, and cover maintenance on the property.

The property operated as a Hilton Hotel and then as a Holiday Inn.  In 1986, Towne sold the property to Marquette University, which used it as a dormitory.  In 1994, the property was sold to the Maharishi Vedic University for $600,000.  Both sales required the new owners to assume the responsibility to comply with the VFW’s lease.  The Maharishi never occupied the building after its acquisition.

The Redevelopment Authority of the City of Milwaukee (RACM) eventually condemned the abandoned building.  As compensation, RACM offered Maharishi and the VFW $440,000 for the property.  In December 2001, a circuit court divided the $440,000, allocating $300,000 to the VFW for the value of its leasehold interest.  The VFW appealed the adequacy of this award to the Condemnation Commission, which requested instruction from the trial court as to how to value the property.  The trial court instructed the Commission to value the property using the unit rule. The VFW petitioned for leave to appeal this determination.  The Court of Appeals granted this request and ruled that the unit rule should be used but declined to address questions concerning the constitutionality of the application of the rule.  See City of Milwaukee Redev. Auth. v. Veterans of Foreign Wars Post 2874, 2003 WI App 225, 267 Wis. 2d 960, 671 N.W.2d 717, unpublished slip op. (Sept. 30, 2003).

In December 2004, the Condemnation Commission found the value of the property to be $15,000 less than the initial award.  The VFW appealed this conclusion and asked the trial court to declare the application of the unit rule in this case unconstitutional.  The trial court denied the motion and the case was tried to a jury on the question of the value of the property.  The jury returned a verdict that the hotel building at 2601 West Wisconsin Avenue had no value. Judgment was then entered against the VFW in the amount of $387,348.24, which included the $300,000 it had already been paid, plus accumulated interest and costs.

"Inquiring minds might ask," the court noted, "how the property at issue in the instant case can be worth nothing." Slip op. at 6. "The answer is that the property as a whole is worth nothing because it is financially infeasible to use the property either by remodeling the hotel building or by demolishing the building to get at the unimproved land." Id.

Barista's note: this approach seems straightforward enough; we just wish courts would use the same method in regulatory takings cases to analyze whether a regulation has deprived an owner of all economically beneficial uses of property. Instead, most courts go through all sorts of contortions (and keep these issues from juries, which tend to view the question of what uses remain more realistically than judges) to find that a regulation leaves an owner with some use -- however ridiculous that use may be from the standpoint of a reasonable property owner -- and thus no taking has occurred.

The majority acknowledged the lease had value (the dissent characterized the arrangement as a "prepaid, long-term lease"). Slip op. at 12 & n.10. However, the undivided fee rule meant that "fee worth nothing, lease worth nothing." The court concluded an exception was not warranted, and the application of the rule to these facts to leave the VFW with nothing did not violate the Wisconsin Constitution: "We conclude that the VFW receives just compensation when it receives no compensation for its leasehold interest in a property that has no value." Slip op. at 6. Although the majority acknowledged that a lease is a property interest, the latter portion of the opinion was devoted to recasting the property interest as a contract right, and a mere expectation. See slip op. at 28-30. And we all know that contract rights that are taken are, for the most part, frustrated expectancies, not a compensable property interest.

Read Justice Prosser's dissent for a more cogent deconstruction of the majority's opinion than we can make. Our only thought is that it's hard to wrap your mind around the concept that a condemnor can take a valuable property interest and by the taking it render it legally worthless because the undivided fee rule protects the state equally if not more than its citizens:

The majority cites Green Bay Broadcasting with approval. This is the case which the court admits, "The unit rule is designed to protect the interests of the condemnor and not to protect the interests of a condemnee." This quote is unnerving to people who believe that our constitutions were designed to protect property owners, not property takers.

Dissent at 23 (citing Green Bay Broadcasting Co. v. Redev. Auth, 342 N.W.2d 27 (Wis. 1983)). See also this report from the Wisconsin Law Journal, paying particular attention to the comment by Professor Gideon Kanner.

Finally, we're sorry, Justices Ziegler and Gableman, it's a cop out to say "we don't like the rule, but we apply it anyway because there's nothing we can do."  We thought the job of supreme court justice included evaluating doctrines and rules to see whether they make sense when applied to the facts in hard cases, and then making exceptions if they don't.