Ohio Supreme Court Reverses Norwood,
Says Government Can’t Take Property for
Purely Economic Benefits

By: Maureen P. Taylor

Reprinted from July 2006 ohioconstructionlaw.com

Full text of the Norwood decision

Highlights. Before a public construction project can get underway, the public owner must first have the property on which to build. For many projects, the public entity uses its power of eminent domain to obtain the property needed. In recent years, courts have broadly interpreted the power to take private property for a public use and for just compensation. But with a decision on July 26, 2006, the Ohio Supreme Court made it clear that this power is not without limits. The Court’s opinion, in addition to delivering a treatise on the roots of eminent domain, strikes down part of Ohio’s eminent domain statutes, reverses the decision of the Court of Appeals for Hamilton County, and returns their properties to two homeowners in Norwood, Ohio. The opinion does not prohibit any takings for purely public purposes—land for schools, sewer lines, or roadways, for instance—as it relates only to the use of eminent domain for purely economic reasons. Anyone involved in public construction projects will want to understand what the Court said in this landmark opinion.

What the Case Was About

On July 26, the Ohio Supreme Court issued a unanimous opinion in City of Norwood v. Horney, 2006-Ohio-3799, a case we wrote about exactly a year ago, in our July 2005 issue. In Recent Decisions Affirm Use of Eminent Domain for Economic Development, Kim Brown explained that the Court of Appeals for Hamilton County had approved the City of Norwood’s use of eminent domain to take property in an area determined to be “in danger of deteriorating into a blighted area” and to transfer that property to a private firm, Rookwood Partners, Ltd., that planned to develop the property into apartments, condominiums, offices, and retail space.

The homeowners were to be appropriately compensated for their property, but there still appeared to be a missing element in the equation: Where was the “public use” that normally justifies such a “taking”? The homeowners who wanted to keep their houses made this argument to the trial court and again at the Court of Appeals. They argued, too, that a finding that their property was “in danger of deteriorating” was too speculative; how could anyone know what might happen to the property in future years?

At both levels, they lost. The courts found that even if the individual structures were not blighted or deteriorating, if the area as a whole was “deteriorating,” then a public agency could use its eminent domain power to take the property for economic development purposes. Almost as soon as the Court of Appeals issued its decision, in May of 2005, the Ohio Supreme Court agreed to hear the homeowners’ appeal.

The U.S. Supreme Court Speaks Out

Just a month after the Court of Appeals’ decision in Norwood, the U.S. Supreme Court tackled a similar issue in a case out of Connecticut, Kelo v. New London, 125 S. Ct. 2655 (June 23, 2005). There, the question was whether a municipality’s decision to take property for the sole purpose of economic development could pass constitutional muster. The properties in question were not “blighted,” but New London itself had been designated a “distressed municipality,” and the proposed waterfront development—a conference hotel, 80 new residences, a Coast Guard museum, office and retail spaces, and parking—was designed to get the city out of its doldrums.

When the U.S. Supreme Court, in a 5-to-4 opinion, said that eminent domain could be used for economic development, even in areas that were not blighted, there was a wave of public reaction. The majority opinion had noted that states can impose “public use” requirements that are “stricter than the federal base line,” and several states that did not already have such requirements proposed amendments to their state constitutions.

What did Ohio do in response to Kelo? The General Assembly enacted a moratorium on any takings of private property in unblighted areas when the primary purpose was economic development. That moratorium is set to expire on December 31, 2006. The same bill also created a task force to study the use and application of eminent domain in Ohio.

What the Ohio Supreme Court Said

Kelo and its aftermath were clearly on the minds of the Ohio Supreme Court when it issued the decision in Norwood last week. Justice O’Connor, writing for a united Court, referred to Kelo early in a lengthy and scholarly opinion, noting that the cases before the Court—the appeals of two sets of homeowners had been consolidated—“raise social and legal issues similar to those in Kelo.”

Recapping the history of the planned redevelopment project in Norwood, the Court described the findings of a consulting firm, hired, at Rookwood’s expense, to conduct the urban renewal study necessary before the City could institute eminent domain proceedings. That study concluded that the neighborhood was deteriorating, following the construction of I-71, which runs through the area. The consultants admitted, however, that the neighborhood was “not a slum, blighted, or deteriorated area as that term is defined in the Norwood Code.” Still, it was “in danger of deteriorating into a blighted area.”

After setting out the facts of the cases, the opinion went into a comprehensive discussion of the tension between individual property rights and the state’s power to take property through eminent domain. Tracing the path of eminent domain from the country’s early years to the present, Justice O’Connor concluded that the understanding of what a “public use” is has broadened to the point that “in some jurisdictions, a belief has taken hold that general economic development is a public use.”

Was it a “public use” to eliminate what was seen as a “deteriorating area,” regardless of what use was planned for the taken property? The trial and appellate courts had appeared to think so, but the Ohio Supreme Court said that conclusion was an error, based in part on the lower courts’ assumption that they should give nearly total deference to the determination made by the City of Norwood.

The opinion went on to stress the importance of an independent review of such determinations by a court that feels free to disagree with the city. “Any doubt over the propriety of the taking [should be] resolved in favor of the property owner,” the Court said.

Here, the Court had serious doubts. It saw the taking as motivated solely by economic gain, and it clearly rejected this concept:

We hold that an economic or financial benefit alone is insufficient to satisfy the public-use requirement of Section 19, Article I [of the Ohio Constitution]. In light of that holding, any taking based solely on financial gain is void as a matter of law and the courts owe no deference to a legislative finding that the proposed taking will provide financial benefit to a community.

The Court went further, though, and found flaws in Norwood’s Code that permitted the taking of property in a “deteriorating area” or one “in danger of deteriorating into a blighted area.” Such a standard was too vague to give a property owner fair notice of a possible taking. The Court specifically held that “the term ‘deteriorating area’ cannot be used as a standard for a taking, because it inherently incorporates speculation as to the future condition of the property into the decision on whether a taking is proper rather than focusing that inquiry on the property’s condition at the time of the proposed taking.”

Next, the Court focused on the wording of the eminent domain statute and found a part of that to be unconstitutional as well. According to R.C. § 163.19, a property owner can appeal a trial court’s approval of a taking, but once the public agency has deposited into court the amount determined to be just compensation for the property, the property can be taken, and the owner cannot get an injunction to maintain the status quo until the appeal concludes.

Despite that statutory prohibition, the property in this case had not yet met the wrecking ball because the Ohio Supreme Court had stepped in and granted a stay until it reached a decision.

Noting that “but for our orders in this case, the appellants’ property would likely have already been razed,” the Court determined that this particular part of the Ohio statute violated the State Constitution’s separation of powers among the three branches of government. The power to issue or deny stays belonged to the courts, not to the legislature. But such a finding need not destroy the whole statute. The Court cut out that section of R.C. § 163.19, leaving the first sentence, which merely authorized an appeal of a trial court’s eminent domain decision.

The Effect on Eminent Domain in Ohio

Now that the Ohio Supreme Court has spoken, how will that opinion change the practice of eminent domain in the state? The U.S Supreme Court’s Kelo decision is still good law, of course, and it declared that a taking solely for economic development was not necessarily a violation of the U.S. Constitution. Now the Ohio Supreme has said that such a taking does violate the Ohio Constitution. What is the lesson for municipalities and others with powers of eminent domain?

Clearly, it is not enough to justify a taking that it does not violate the U.S. Constitution. Any action by an Ohio public entity must comply with both the Federal and State Constitutions. In the future, any public entity considering taking land for an economic use had better be able to justify the taking in some other way—the clearing of a truly blighted area, for instance.

Also, any cities with municipal codes that appear to approve of eminent domain based on a finding that an area is “deteriorating” or “in danger of deteriorating into a blighted area” will probably want to rewrite their codes. The State Supreme Court has said that such a standard is void for vagueness.

Finally, public owners should be aware that the process of eminent domain may take longer than it has in the past. When the Court struck down the section of the statute that prohibited injunctions to hold the bulldozers at bay during an appeal, it made appeals more worthwhile. Will this result in more appeals? That remains to be seen, but it is a possibility. If there is an appeal, the public project will most likely have to wait until the courts have had their say.

The Norwood decision may not be the last word on the issue of using eminent domain for economic development. The task force established by the General Assembly, partially in response to the U.S. Supreme Court’s Kelo decision, has been considering similar restrictions. So there may yet be additional legislative efforts to add restrictions.

Neither the Norwood decision nor the task force efforts are likely to mean the end of eminent domain as we know it in Ohio. But they do send out a warning that the courts and legislators will be watching such actions closely.