Horne v Dept of Agriculture: A Possible Aid to Obtaining Compensation for Trade Fixtures

On Monday June 22, 2015, the United States Supreme Court handed down the long-awaited decision in Horne, et al. v Department of Agriculture. The Court held that the Agriculture Marketing Agreement Act (“AMA”)’s requirement that raisin growers set aside a certain percentage of their crop for the government, free of charge, constituted an unconstitutional taking under the takings clause of the 5th Amendment to the U.S. Constitution.

This case presented a unique set of facts. Under the AMA, the Secretary of Agriculture is authorized to promulgate “marketing orders” that help maintain stable markets for certain agricultural products, including raisins. Under the marketing order, growers of raisins must set aside a certain percentage of their crops  (in 2002-2003, that percentage was 47%; in 2003-2004, that percentage was 30%). These set aside raisins are called “reserve raisins”, and the raisins the growers get to keep are called “free tonnage raisins.” Once set aside, a Raisin Committee then decides what to do with the raisins — they could donate them, dispose of them, or sell them in noncompetitive markets. The former raisin owner is then entitled to a percentage of the net proceeds after subtracting the government’s expenses for running the program. However, the percentage is at the discretion of the taker, and may in fact be worthless, as it was during one of the years at issue in the case. The proceeds were less than the cost of producing the crop one year, and nothing at all the next.

One year, instead of handing over their raisins for free, the Hornes refused to set aside their raisins on the ground that the reserve requirement constituted an unconstitutional taking of their property without just compensation. The Government fined the Hornes for the fair market value of their raisins ($480,000) as well as additional civil penalties ($200,000) for their failure to obey the raisin marketing order.

The Hornes took their case to federal court. The Ninth Circuit held that the reserve requirement was not a 5th amendment taking. The Ninth Circuit reasoned that the 5th amendment affords less protection to personal property than to real property, and that the Hornes were not “completely” divested of their property rights since they retained an interest in the net proceeds from the sale by the Raisin Committee.The Supreme Court reversed. The decision can be found here.

Below, we summarize the findings of the Court and pull out a few quotes of interest:

  1.  The Fifth Amendment applies to personal property as well as real property. The Reserve Requirement is a “clear physical taking” because “actual raisins are transferred from the growers to the Government” and “title to the raisins passes to the Raisin Commmittee.” The Court held this taking is of “such a unique character that it is a taking without regard to other factors that a court might ordinarily examine.” (Loretto v. Teleprompter Manhattan CATV Corp., 458 US 419, 432 (1982)).
  • The Court reasoned that the historical background of the 5th Amendment indicates it was a reaction to the government’s appropriations of personal property during the Revolutionary War.

The Takings Clause was “probably adopted in response to the “arbitrary and oppressive mode of obtaining supplies for the army, and other public uses, by impressment, as was too frequently practised during the revolutionary war, without any compensation whatsoever.” Blackstone’s Commentaries, Editor’s App. 305-306 (1803)

There is an interesting argument to be made by Claimants’ attorneys in States that do not recognize the right to obtain compensation for trade fixtures. If, as the Supreme Court has stated, any physical taking of private property for public use must be accompanied by just compensation, shouldn’t trade fixtures be compensated?

New York has a very liberal interpretation of what constitute trade fixtures. A tenant, or an owner, is entitled to just compensation for trade fixtures acquired in eminent domain proceedings. See Matter of Mazur Bros. Inc v. State, 97 AD3d 826, 828029 (2d Dept 2012): (“A government appropriation of real property encompasses the land and everything annexed thereto… Under the trade fixture rule, a claimant is entitled to compensation for trade fixtures it has a right under its lease to remove, but chooses not to remove… Trade fixtures owned by a tenant are valued separately from the realty… generally as specialty property, based upon reproduction cost less depreciation, which is also referred to as the ‘sound value.'” (citations omitted).

But many states do not compensate for trade fixtures, where courts instead hold that they are personal property. Certainly, if an integrated plant is taken the machinery and equipment should be compensable under Horne. After any eminent domain taking, the items installed for business purposes become little more than worthless salvage upon removal. Practitioners in this field should argue that items are compensable under Horne v Department of Agriculture.

Now back to the Supreme Court’s holdings:

2.    The fact that growers are given a percentage of the net proceeds after deducting for the government’s expenses in administering this program does not negate the fact that there has been a taking.

The fact that the growers retain a contingent interest of indeterminate value does not mean there has been no physical taking, particularly since the value of the interest depends on the discretion of the taker, and may be worthless, as it was for one of the two years at issue here.

3.  The facts cannot be characterized as a voluntary exchange between the government and citizens, i.e.: the raisin reserve cannot be a condition imposed in order  for the grower to have the “benefit” of an orderly raisin market. The ability to sell produce in interstate commerce is not a “benefit” the government can withhold unless growers waive constitutional protection.

  • Entertainingly, the Government put forth the argument that the reserve requirement could not be a taking because the growers could voluntarily choose whether to participate in the raisin market in the first place! They could sell their grapes to make wine, or sell them as table grapes, or, for that matter, they could just grow a different crop! The Court squarely rejected the “let them sell wine” argument. It stated:

Selling produce in interstate commerce, although certainly subject to a reasonable government regulation, is similarly not a special governmental benefit that the Government may hold hostage, to be ransomed by the waiver of constitutional protection. Raisins are not dangerous pesticides; they are a healthy snack. 

4.   The value of the taking is to be determined like all other takings under the 5th amendment: the owners are entitled to the fair market value of their raisins. The Government already calculated that amount when it fined the Hornes the fair market value of their raisins.

Justice Breyer filed a concurring opinion in part and dissenting opinion in part, in which Justices Ginsburg and Kagan joined. The point of Justice Breyer’s separate opinion was that the benefit derived to the raisin growers in having a stabilized raisin market (as a result of as a result of the Marketing Order) should be deducted from the fair market value of the raisins. If the benefit is greater, Justices Breyer, Ginsburg, and Kagan would hold that no taking had occurred. The majority decision responds that those issues are outside the scope of the litigation presented.

Justice Sotomoyor dissented, reasoning that the Marketing Order does not deprive the Hornes of all of their property rights, and therefore does not effect a per se taking under Loretto v Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982).

Posted in Eminent Domain, Future of the law, Personal Property, Recent cases, Trade fixtures, US Supreme Court cases
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