Condemning a Residential Mortgage Loan: Is It an Extraterritorial Taking?

By Sandez, Michael M. | American University Business Law Review, July 1, 2015 | Go to article overview

Condemning a Residential Mortgage Loan: Is It an Extraterritorial Taking?


Sandez, Michael M., American University Business Law Review


Introduction

Two cities in California and one city in Nevada have considered exercising the power of eminent domain to condemn residential mortgage loans but not the real property that serves as security for the loans. Two cities have rejected the idea,1 but the City of Richmond ("the City"), California in 2013 passed a resolution with guidelines for the condemnation of approximately 620 residential mortgages.2 Due to the unprecedented taking of mortgages after the financial crisis of 2008, these cities have caught the attention of the legal community. Most articles on this topic address several constitutional issues, with public use and just compensation being the two primary issues covered due to the requirements of the Takings Clause of the Fifth Amendment to the U.S. Constitution. This Article, however, primarily focuses on the fact that the residential loan promissory notes are most likely located outside Richmond's city limits, raising the issue of the taking of extra-territorial property: does a local municipality have the authority to take intangible property such as residential mortgage loans that are located outside its jurisdictional boundary? The context for the taking of mortgages is broader than the 2008 financial crisis. It is fitting, therefore, to briefly consider aspects of U.S. history and eminent domain law.

A. Background

Habitual deficit spending has led government officials of all levels within the United States to use every tactic available to acquire more revenue.3 Civil magistrates threaten and then take private property virtually whenever and wherever they want, seemingly without consequence to their politickí life. Stand up to them, and watch your world turn upside down, which is often the case even if you win the battle, and certainly is the case if you lose. The courts have nearly neutered the Takings Clause of the Fifth Amendment to the U.S. Constitution by an inordinately high degree of judicial deference and a low degree of judicial scrutiny. Consequently, there is now minimal protection for property owners, notwithstanding the accepted understanding at the formation of the nation that government's central function is to protect its citizens' lives and property, and to do so in the context of a limited and decentralized federal system.4 We have come to a far different time than when the emphasis- rhetorically and substantively-was placed on "life, liberty, and the pursuit of happiness."5

The national government of the United States was formed with enumerated powers. The Constitution, in Article I, section 8, delineates the power that the People granted to the newly formed government. The Founders, however, did not explicitly grant a federal power of eminent domain, it being understood as a self-evident matter that a government of enumerated powers needs property to establish itself and to carry out its functions.6 The Takings Clause alludes to a power that enables the acquisition of property when, as a protective measure, the Clause requires the national government to take private property only for a public use and only when it pays just compensation to the owner.7

The People, as the sovereign, must have reasoned that the power of eminent domain can be implicitly extended, since the national government was to be ratified as a limited government with certain identified powers and with the obligation to exercise its express and implicit powers in accordance with the "Laws of Nature and of Nature's God."8 The Founders understood the laws of nature and of nature's God to be transcendent principles that, among other'things, were to guide government officials and hold them accountable to ensure that the exercise of implicit powers was not inconsistent with the express powers granted in the compact that initially formed the government.9 Since the compact expressly limits the jurisdiction and authority of the federal government through the delineation of enumerated powers, it follows that its unwritten implicit powers must be limited, as well. …

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