No Love for this Government Taking
Business management guru Peter Drucker once likened trying to predict the future to driving down a country road at night with no lights. Investing in a business can feel like such a journey as the successful investor tries to maneuver around unseen obstacles. One thing that cannot be foreseen or steered around, however, is a court’s unprincipled ruling.
This is what happened to the Love Terminal Partners investors who operated the Lemmon Avenue Terminal at the Dallas Love Field Airport. These investors poured $17 million into constructing a six-gate facility, separate from the main airport terminal. They never realized an annual net profit, but remained optimistic. They continued to put money into their property and to make regular lease payments to the City of Dallas because they were confident of the eventual value of their investment.
In 1980, Congress adopted the Wright Amendment, a law meant to protect the Dallas/Fort Worth International Airport from competition. Under the law, planes leaving Love Field could only fly to nearby states and were limited to 56 passengers. Yet Love Field thrived despite this law.
When Love Terminal Partners took over the lease for what would become the Lemmon Avenue facility in 1999, they did so with the belief that the terminal would eventually become a money-maker. They lost an anchor tenant, but had patient capital and were willing to endure setbacks.
The worst of them was 9/11. The impact of the terrorist attack shook the biggest players in the airline industry to their core. For a secondary terminal in a secondary airport, it meant an empty terminal. But the investors in the Lemmon Avenue Terminal soldiered on. By 2006, it looked as if their patience was about to pay off.
In lifting the long-haul flight restrictions on Love Field, Congress enshrined into law a five-party agreement that included local municipalities, Southwest Airlines, and American Airlines. The repeal also mandated that the total gates at Love Field be reduced from 32 to 20, and that the leased property never again be used for commercial air passenger service. This was accomplished by taking and destroying the Lemmon Avenue Terminal.
Deprived by law of the use of their property, the Lemmon Avenue Terminal investors ceased making lease payments. They were forced to watch wrecking balls dispatched by the City of Dallas reduce an investment of years and tens of millions of dollars into rubble. After suing the government, the investors were found by the Court of Federal Claims to have a compensable loss of $133.5 million.
In May, 2018, the U.S. Court of Appeals for the Federal Circuit overturned that lower court ruling, deciding that because this investment had yielded no income, it was worthless. The court determined investors also lacked a “reasonable investment backed expectation” to use their property as an airline terminal.
The appeals court conceded that the new law “effectively barred plaintiffs from using the Lemmon Avenue Terminal for commercial air passenger service.” It then held, twisting logic like a pretzel, that the law did not constitute a per se regulatory taking because the property could not profitably have been operated as an air-passenger terminal before the change in the regulatory regime.
In other words, the court refused to consider that the same deregulatory law that would have given the terminal great value included one clause that the Lemmon Avenue Terminal investors had not envisioned – the mandated destruction of their property. The appeals court’s ruling conflicts with Supreme Court precedent that has repeatedly held regulations that deprive real property of all value constitute per se takings. To arrive at this decision, the appellate court had to ignore tenets enshrined in Lucas v. South Carolina Coastal Council. The Supreme Court has also repeatedly held that Fifth Amendment “just compensation” should be based on the fair market value of the property immediately prior to the taking. The court never conducted such a fair market-value analysis.
This case is now being appealed to the Supreme Court. If the high court allows this warping of takings law to stand, any business or investment property not currently generating cash could be subject to uncompensated seizure. Worse, the ruling allows this seizure to happen at the very moment the terminal would become profitable. Investors will rightly become skeptical of long-term projects, especially if they involve anything powerful municipalities and lobbyists might portray as a “public use.”
The justices have been asked to decide: May courts treat real property as worthless simply because the owner was not generating positive cash flow from the property at the time of the taking? Can courts ignore reasonable, investment-backed expectations that a regulatory environment is likely to change and, in fact, has been changed by the very law that effects the taking?
The high court should take up the investors’ petition to consider these questions, or else risk serious distortions in future takings.
Richard A. Samp is the chief counsel for Washington Legal Foundation (WLF), a non-profit, public interest law firm in Washington, D.C. WLF filed an amicus brief in support of Love Terminal Partners.