Alleged Takings of Private Contracts

In Pennington v. Gwinnett County, the Georgia Court of Appeals has obliquely revisited the endlessly interesting question of whether the government can “take” private contract rights.   This case was a laydown for the government, but it still provides a useful opportunity to highlight how difficult it is to prevail against the government in this type of takings case.

The Penningtons entered a contract with TMobile granting the company the option to lease a portion of the Penningtons’ property as the site for a cell phone tower.  TMobile repeatedly extended the option agreement, but never entered into an actual lease with the Penningtons, ultimately deciding to lease different property from the County for the cell tower site instead.   Understandably annoyed that the County’s entrepreneurial zeal had deprived them of some hoped-for income, the Penningtons sued the County for a taking.  The Court of Appeals affirmed the trial court’s rejection of the claim, adopting the entirely sensible reasoning that since TMobile had “complete discretion” under the option to not enter into a lease, the Penningtons could point to “no valid property interest” that would support their takings claim.  Easy, peasy.

But what if the Penningtons had entered into a lease agreement with TMobile and the County then took some action that upset that contract?  Would a takings claim lie?   Not necessarily.   In the old chestnut of Omnia Commercial Co. v. United States, 261 U.S. 502 (1923), the Supreme Court ruled that the government may be held liable for “appropriating” a contract expectancy, but cannot be held liable simply for “frustrating” a private contract.  The Omnia company had contracted with Allegheny Steel Company to purchase steel at a favorable price.  Following the United States’ entry into World War I, the government requisitioned Allegheny’s production of steel for a period of one year, preventing Allegheny from fulfilling its contract with Omnia.   Omnia brought suit against the United States, claiming a taking of its asserted property right to receive the steel it expected under the contract.  The Supreme Court rejected the claim; the requisition order had not, in the Court’s words, “appropriated” Omnia’s contract expectancy, but merely “frustrated” it.    Omnia might or might not have had a contract remedy against Allegheny, the Court reasoned, but the Takings Clause does not compel the government to indemnify contracting parties for any and all governmental acts that reduce the value of or even destroy contract expectancies.    If you think about, government truly could not continue to go on if parties who entered into a private contract could sue for a taking simply because the government has adopted a new policy (or built a new road, or closed a military base, etc. etc.) that adversely affects the value of the contract.

I think Omnia reached the right result and remains good law, but have argued that this important precedent could be placed on a more stable doctrinal foundation, for those who are really interested in this topic.