The scope of “background principles”Posted: August 16, 2014
The Second Circuit’s August 1, 2014, decision in 1256 Hertel Ave. Associates, LLC v. Calloway, illustrates a not uncommon problem in takings law – how the straightforward application of the Supreme Court’s established takings rules sometimes leads to, or at least suggests, problematic outcomes, and how creative courts sometimes avoid the problem.
The case involves the question whether an increase in New York State’s homestead exemption took private property by depriving a judgment lien creditor of the right to cash out its lien. By New York statute, a certain amount of a homeowner’s net equity in his or her home is protected from efforts by creditors to secure payment by forcing sale of the property; this-state created exemption is recognized in federal bankruptcy cases. In recognition of the reality of inflation, the legislature has increased from time to time the level of the exemption since it was established 150 years ago. In this bankruptcy case the debtor sought to take advantage of the legislature’s latest increase in the exemption amount to avoid paying a debt; the judgment lien creditor argued against applying the new exemption level on the ground that it would destroy the value of its lien and therefore result in a taking.
The Second Circuit suggests that this takings argument may fail on several grounds: that the Lucas argument might fail because the Lucas rule applies only to land and not to other, more limited property interests, such as security interests; or that the debtor perhaps had so little equity in her house that the increase in the exemption level caused the creditor no actual harm. But, ultimately, the Court rejects the takings argument, without definitively resolving the type of taking that might be involved, by concluding that the homestead exemption, including the periodic adjustments in the level of the exemption over time, represents a “background principle” of state law barring the takings argument. In the Court’s words, “Dating from 1850, New York’s homestead exemption has now become a ‘background principle[ ] of the State’s law of property,’ Lucas, 505 U.S. at 1029, that serves both to define the scope of a judgment lienholder’s property interest and its reasonable investment-backed expectations.” Thus, “[i]nherent in [the creditor’s] judgment lien was the implied limitation of a homestead exemption that predictably and necessarily must be adjusted from time to time to account for the changing values of the homes it protects.”
The case presents a puzzle. The Second Circuit assumed for the purpose of analysis that the legislative change in the level of the exemption could have destroyed the entire value of the creditor’s lien interest. Whatever the technical scope of the Lucas rule, a legislative measure that produces such a serious economic loss certainly presents a serious takings issue. But it seems implausible that a perfectly ordinary (indeed necessary) adjustment in the level of the homestead exemption to take account of inflation could produce a taking, Characterizing the homestead exemption – and all of the legislature’s periodic adjustments – as a “background principle” solves the problem by defeating the takings claim at the threshold. But how far does this reasoning go? Zoning laws are now 100 years old so perhaps every takings claim based on a change in a zoning ordinance can now be defeated by resort to background principles. Heck, maybe land use regulation in general has become a background principle, at least in some places, like California or Oregon. Probably not, but maybe.