Environmental Protection

Too Rich to Lose Money? AIG, the Takings Clause and the Roberts Court

The Takings Clause of the Constitution’s Fifth Amendment made national news last week with the spectacle of AIG playing Hamlet in debating whether “to sue, or not to sue” the federal government over the terms of the company’s bailout — a rather backhanded way of thanking American taxpayers for keeping the company from certain bankruptcy in 2008. Wisely, the company, facing widespread public outrage, chose “not to sue.” However, a lawsuit filed in 2011 by a group of AIG shareholders, led by the company’s former chief executive, will go on. The shareholders allege, in part, that the terms of the bailout were so onerous that they violated the Constitution — in lawyer-speak, that they represented an unconstitutional “taking” of the shareholders’ “private property… for public use, without just compensation.”


To see how ludicrous the shareholders’ claim is, remember that when AIG agreed to a federal bailout the company was facing bankruptcy, with only one creditor available to save it — the federal government. Had the government not stepped in, AIG would surely have gone bankrupt, and the shareholders would have been left with nothing. Therefore, the shareholders can’t argue that government aid wasn’t needed at the time — nor do they. Instead, they claim that the final terms agreed to by AIG — terms that granted the company $182 billion in loans and allowed it to stay in business — led to an unconstitutional taking of the shareholders’ private property because the terms excessively diluted their stock and the agreed-upon loans demanded a too-high interest rate from the company. Talk about biting the hand that fed you!


To understand why this ludicrous claim has not been laughed out of court, you have to shift from Wall Street to the land development world and to a decades-old “property rights” movement that has pushed to expand the scope of the Takings Clause. The next big Supreme Court case dealing with these issues — indeed, the most important such case to be reviewed by the Court since John Roberts became Chief Justice — Koontz v. St. Johns River Water Management District, will be argued tomorrow. This case has been spearheaded by the Pacific Legal Foundation (PLF), a conservative group that has worked for decades to turn the Takings Clause into a constitutional barrier to environmental protection.


While the amount of money in dispute in Koontz is far smaller than that at issue in the AIG case, the legal issues themselves are roughly the same: how broadly should the Takings Clause sweep and, in particular, under what circumstances can courts use the Takings Clause to second-guess the terms offered by the government during the course of its negotiations with private parties.


Coy Koontz, Sr. was a developer who sought a permit to dredge and fill more than three acres of protected wetlands in Florida. While the Water Management District wished to place reasonable conditions on Koontz’s development permit to mitigate related environmental harms to the community — conditions intended to comply with well-established state guidelines — Koontz wanted to develop his land free of these conditions. In the end, Koontz cut off negotiations and sued the District, alleging a regulatory taking. Without getting too far into the legal weeds, Koontz’s claim is a complete non-starter based on the text and history of the Takings Clause, as well as the Supreme Court’s takings jurisprudence.


The text of the Takings Clause itself is quite narrow, and since the Court’s unanimous decision in Lingle v. Chevron in 2005 regulatory takings, such as those alleged by Koontz, have been limited to situations in which a regulation’s impact on a property owner is “functionally equivalent” to the “classic taking in which government directly appropriates private property.” Given this framework, the key problem for Koontz is that the District took absolutely nothing from him. No one disputes that the District had the authority to deny Koontz’s permit application outright. Furthermore, following the permit denial, Koontz was left with the same wetlands property he had before starting the permit application process — property that, as Koontz himself concedes, retains some economic value.


To avoid a clear defeat, Koontz’s PLF lawyers have cleverly attempted to reframe his claim as a challenge to the mitigation measures proposed by the District during the course of the parties’ negotiations. This ploy is designed to allow Koontz to take advantage of a specialized set of tests developed by the Court in two cases, Nollan v. California Coastal Commission (1987) and Dolan v. City of Tigard (1994), which were decided at the heyday of the property rights movement in the Supreme Court, an effort that has since fizzled, at least until Koontz. The AIG shareholders have relied on a similar ploy in their suit against the federal government, alleging that the harms caused by the terms of AIG’s bailout were, to borrow language from Dolan, not “roughly proportional” to the related benefits — an argument rejected outright by the Court of Federal Claims, but one that becomes more plausible if PLF prevails in Koontz.


At bottom, this attempt to expand the reach of the Takings Clause is a bold effort to prevent the government from forcing developers to bear the costs that their development imposes on the community, and, in the case of AIG, to allow shareholders to dictate the terms of a government bailout. The Founders would be appalled at this risible effort to distort the Fifth Amendment.


This post was written with Tom Donnelly, Constitutional Accountability Center’s Counsel and Message Director. CAC filed a brief in Koontz on behalf of the American Planning Association, the City of New York, and the National Trust for Historic Preservation.

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