Real Estate & Property Law

NY Supreme Court (Appellate Division): Eminent Domain Can't Be Used To Get Out Of A Contract

By Robert Thomas (inversecondemnation.com)

"Bust a deal and face the wheel."

 - Aunty Entity (Tina Turner) Mad Max: Beyond Thunderdome

You make a deal, you live with it. Or use legal means to try and avoid your obligations. But in New York, if you don't like a deal and can't get out of it, apparently you try and condemn the other side.

The New York Supreme Court (Appellate Division, Fourth Department) has invalidated an attempt to take property, in this case land used by Syracuse University for "cogeneration facility and steam plants." The taking, the court held, was purely private since it was an attempt by the condemnor to free its affiliate from its contractual obligations. Syracuse University v. Project Orange Associates Services Corp., No. 208 OP 09-01732, 2010 NY Slip Op 02225 (Mar. 19, 2010).

The deal made by the affiliate was economically "unsustainable," and it had attempted on several occasions to reform or bust it. When that didn't work, a statutory electric corporation with the power of eminent domain was created, and "approximately one year later, provided notice of its intent to condemn the subject property." And people wonder why property owners get so fired up when the eminent domain power is abused.

Here are the details:

We agree with petitioner that the underlying basis for the exercise by the POASC of its eminent domain powers is undoubtedly the outdated business model of its affiliate, Project Orange Associates, LLC (POA). The record establishes that POA entered into a series of 40-year lease agreements with SU in 1990 that allowed POA to construct a cogeneration facility on property owned by SU and to assume operation of two existing steam plants located there. In exchange, POA agreed to sell steam at prices substantially below what SU was paying to produce steam at the existing steam plants. SU both used that steam and sold excess steam to neighboring not-for-profit entities, all of which oppose the proposed condemnation. POA was able to provide that steam at a reduced price because of its expected profits from the sale of electricity under a 40-year contract between POA and Niagara Mohawk Power Corporation (NIMO) that required NIMO to purchase electricity produced at the cogeneration facility. The threat of a NIMO bankruptcy in 1998 caused POA and NIMO to reach a settlement that allowed NIMO to discharge its obligation to purchase electricity from POA in exchange for a significant settlement that permitted POA to provide SU with steam at a significantly reduced rate until July 2008.

The record further establishes that, by 2008, POA took steps to renegotiate its lease agreements with SU, which were unsustainable based on the demise of POA's contractual relationship with NIMO. Indeed, POA commenced a declaratory judgment action against SU in connection with one of its agreements with SU and in addition twice sought emergency judicial relief adjusting the steam price, withheld payment to the contractor responsible for operating the cogeneration facility and disputed certain water and electric charges for the facility. In May 2008, POASC was incorporated as an electric corporation under article 2 of the Transportation Corporations Law and, approximately one year later, provided notice of its intent to condemn the subject property.

The court also concluded that the condemnor lacked the statutory authority to acquire the steam distribution system at issue. New York law delegates the power of eminent domain to certain electric corporations "as may be necessary for its corporate purposes," but steam distribution is not an enumerated purpose of an electric corporation.

Full post as published by inversecondemnation on March 23, 2010 (boomark / email).