Bloomberg Law: States’ Property Seizures Highlight Sovereign Immunity Question

In a cage match between the judicially enforceable constitutional right to be justly compensated when one’s property is taken, and a state’s claim to sovereign immunity, which doctrine prevails? Two state property seizure cases are looking to get an answer from the US Supreme Court, which will decide whether to hear the cases during its “long conference” at the end of September.

The Supreme Court has alluded to the answer over the years—in favor of just compensation as the self-executing remedy to any governmental taking—but has never squarely announced this as a holding. As recently as last term’s decision in DeVillier v. Texas, the high court acknowledged the unresolved tension—and left it unresolved.

When the government takes private property for a public use, either “up front” by eminent domain or confiscating personal property or overly restricting an owner’s reasonable uses, the US Constitution requires it to pay just compensation.

The fundamental purpose of the just compensation requirement is to ensure that property owners aren’t singled out to shoulder economic burdens that should be borne by the public as a whole. The Supreme Court recently reaffirmed that when the government takes private property, it doesn’t get to choose whether to pay compensation—the Fifth Amendment requires it. And when the federal government or a local government refuses to pay for a taking, property owners can seek compensation in court.

But when state governments do the same thing, they can get off scot-free, leaving hapless property owners to bear the cost. The problem arises because of competing doctrines in the Constitution.

First, “sovereign immunity.” As a holdover from our British colonial past, states claim the “King’s prerogative,” by which they must first agree to be sued, a prerogative that extends to both federal and state courts. Although Americans are no longer subjects of a king—a sovereign—the Supreme Court interprets the Eleventh Amendment to prohibit suing a state unless it has waived its “sovereign immunity,” either expressly or by implicitly consenting to being sued by ratifying the Constitution or subsequent Amendments.

But the notion that a government can choose whether to be sued runs directly counter a second doctrine under the Constitution’s Fifth Amendment: that government pay just compensation when it takes private property for public use. This concept, like sovereign immunity, also derives from British legal tradition, but has an even longer historical pedigree—all the way back to the Magna Carta in 1215.

The Supreme Court held in the early 1800s that the Fifth Amendment’s just compensation requirement applied only to the federal government and property owners seeking compensation from a state must rely on the state’s constitution. The aftermath of the Civil War changed all that. After the reunited nation adopted the Reconstruction Amendments, the Supreme Court held that the Fourteenth Amendment’s Due Process Clause required states to pay just compensation for a taking.

Which brings us to the modern tension over whether just compensation for a taking prevails over a state’s claim to sovereign immunity. Owners across the country whose property was taken by their state government officials are crying foul and asking the Supreme Court to correct this nationwide injustice. Property owners recently filed several petitions asking the high court to resolve the question, and the court could announce its decision whether to hear them as soon as early October.

In O’Connor v. Eubanks, Dennis O’Connor challenged Michigan’s Uniform Unclaimed Property Act for withholding interest income when he reclaimed his property from state custody. Similarly, in Gerlach v. Rokita, Tina Gerlach sued Indiana officials for just compensation after they kept interest earned on her property while it was in state custody. In both cases, the lower courts held that the state’s sovereign immunity meant that the owners were out of luck and they couldn’t ask the court for the just compensation the Fifth Amendment says they are owed.

These types of unclaimed property statutes allow states to take “dormant” property such as unclaimed wages, insurance proceeds, and uncashed checks held by banks and insurance companies and hold the money until the owner comes to claim it. The state deposits the funds in an interest-bearing account and retains all the interest earned for itself. Although many deposits of unclaimed funds are small, the stakes are high—states have taken millions of dollars of accrued interest.

The court holdings that deny just compensation claims because of sovereign immunity can’t be reconciled with founding-era understandings about the conditional nature of the power to take property.

As the Supreme Court held, any taking includes an implied promise to pay. Because this promise is inherent in the state’s use of its power to take property, sovereign immunity can’t bar a just compensation claim. That is, the taking itself waives a state’s immunity from the resulting claim for just compensation, or functions as consent to that claim.

The current stalemate incentivizes bad government behavior. After all, if a state exercises its power of eminent domain and affirmatively condemns property for a public use, it pays just compensation to the owner. But if the state refuses to acknowledge it has taken property and forces the owner to sue, then it can claim immunity from paying just compensation. Guess which option the state is more likely to choose?

The principle of just compensation for a taking can’t be confined to a property owner’s hope or a wish for legislative grace. It is part of the bedrock upon which our constitutional government rests.

Illustrating the depth and breadth of the problem, the Gerlach case drew attention from a California property owner challenging that state’s unclaimed property law. Similarly barred from suing the state under the Ninth Circuit’s interpretation of the sovereign immunity doctrine, Alison Cole-Kelly’s recently filed petition asks the court to grant the Gerlach petition as well as her own to resolve the sovereign immunity question once and for all. It is high time the Supreme Court does so.

This op-ed was originally published in Bloomberg Law on September 13, 2024.