Michael Lewis' new book, Flash Boys concerns high frequency traders using advance notice of a stock purchase to reap extra profits. Fittingly, the North Carolina Supreme Court's decision in Beroth Oil v. NCDOT was published last Friday, the week Flash Boys became the number one best-selling book in the country. Although unstated, the real issue in Beroth Oil is the same issue in Flash Boys - market manipulation and pricing.
In 1987, the General Assembly adopted the Transportation Corridor Official Map Act (N.C.G.S. 136.44.50 et. seq. (the "Map Act"). The 1987 session bill adopting the Map Act was entitled, in part, "An Act to control the cost of acquiring rights-of-way for the State's Highway System."
Beroth Oil and other property owners allege that NCDOT's recordation of a corridor map 16 years ago and failure to condemn their property lowered the market value of their property substantially. They claim that NCDOT inversely condemned their property - condemned it, but did not file a condemnation action.
Why would NCDOT engage in this alleged nefarious activity? NCDOT could manipulate the market by casting a long and dark shadow of condemnation blight over these properties to reduce the amount of Just Compensation which would be awarded to the property owners when NCDOT finally files its condemnation action.
Beroth Oil and the other named property owners requested the trial court certify a class action to include all property owners affected by the corridor map. The trial court declined and the property owners appealed. The North Carolina Court of Appeals affirmed the trial court.
Two Justices concluded that, without full development of evidence or trial, the Map Act was a statute of eminent domain and if the map's restrictions substantially interfered with the property owners' rights, an inverse condemnation had occurred. What is a substantial interference? Not much. It is an interference substantial enough to reduce the market value of the property. Therefore, they believed the case should be remanded to the trial court with this legal conclusion for the trial court to reconsider class certification.
The majority of the North Carolina Supreme Court concluded that "[h]ere, however, the takings issue is inextricably tied to the amount of damages: the extent of damages is not merely a collateral issue, but is determinative of the takings issue itself." The North Carolina Supreme Court affirmed the trial court's decision denying class certification and returned the case to the trial court for further factual and legal development.
But the underlying basic question is: Why have the Map Act? This is where Flash Boys and the Map Act intersect. Property owners and NCDOT officials have years of advance notice of a likely forced sale of property for a future highway. Just Compensation is fair market value. And either the seller, a property owner, or the buyer, NCDOT, can use this information to unfairly or deceptively manipulate market prices before a condemnation action is filed. The public policy challenge is finding a means to discourage such unfair or deceptive behavior – and to more accurately implement the constitutional requirement of Just Compensation.
If the history of the stock market is an accurate indicator, solving this public policy challenge will not be easy.
The case deserves significantly more attention than this superficial treatment. We are preparing a more in-depth analysis of this case and will distribute it as a client alert.