III. Property
B. Acquiring property rights
1. Initial assignment (cont'd.)

    Pierson v. Post (no number) (Supreme Court of New York, 1805) -- first possession of fugitive resources. The issue of property rights to an animal you are in hot pursuit of.  (CU147)

1. What are the facts of the case? 
   (hunter=Post / taker=Pierson)
2. What did the appeals court decide?
3. What reason did the court give?
4. This opinion was divided. What economic reasoning did the dissenting judge offer?
5. Which side was more consistent with Haslem v. Lockwood?
6. Do you agree with the court decision?
7. Did the court decision itself rest on any economic arguments?
8. The court relied on many ancient Roman commentaries, but the dissent dismissed them--on what grounds?

Key trade-off that the courts must balance: Incentive benefits versus dispute resolution costs.

    Hammonds v. Central Kentucky Natural Gas Co. 255 Ky. 685 (1934) -- first possession vs. tied ownership. Hammonds sued that Central Ky had taken gas from under her 54 acres. (Contrasts first possession vs. tied ownership.)

1. What are the facts of the case?
2. What did the court decide?
3. Did the court assign property rights to oil and gas on the basis of first possession or tied ownership?
4. Does the court decision give Hammonds any income options?
5. Does first possession make economic sense in this case? Why?

    Applying ownership rules:
    tied ownership for stationary resources
    first possession for fugitive resources: water, oil, wild animals

    Example: water rights

    Water rights: 
    Old English common law: riparian owner could not substantially reduce downstream flow or sell to nonriparians. 
    19th century industrializaton --> "reasonable use."  "Under the reasonable-use theory, the riparian owner is entitled to use the water flow in any reasonable way." May transfer to nonriparian. (CU150)

    US water rights: 
    Eastern states: allow "reasonable use" that doesn't interfere with others
    Western states: allow exclusive actual use (P35); cannot claim for future use (P48)

Example (revised from P76-7)      Situation 1: Farmer: use value of water for irrigation: $100     City offers $160 for the water.     Recommendation for efficiency? Situation 2: On average, about 1/2 of water used by farms is return flow.     => return flow use-value multiplier = 2     => return flow benefits to downstream farmers = 2x$50=$100, lost for water sold to the city

    Recommendation for efficiency?
    Remedy: prevent sale to municipality unless it doesn't injure others -- that's the current law
    with low transaction costs, city can contract with all affected farmers

    Situation 3: Return flow from the city
    Ex: $25 to another set of farmers.
    Total return flow benefits = 2 x $25 = $50.
    Recommendation for efficiency?
    Remedy: let municipality sell return flow -- that's not the current law

2. Transfer of ownership

    Proof of possession: paper titles or physical possession. (P81)

    Legend of livery of seisin (delivery of title): title recorded by thrashing a child to instill memory of the recording. (CU151)
    Major contracts require witnesses. (CU152)

    "Bona fide" purchaser. (P79)

    Ex: You go to a swap meet / See $500 of stereo equipment you would like to buy / You ask to see the receipt to be sure it's a good deal / You buy it / The police come to your house and tell you that the equipment you bought was stolen, and the original owner wants it back.

    Who owns the stereo equipment?

    American rule: Buyer accepts risk. (CU153)
    Purchaser gets good title from an agent of the seller but not from a thief. (P79). 
    Buyer cannot acquire title from someone who doesn't have it. 
    Your option is to try to recover your money from the seller of the stolen equipment.

    European rule: Original owner accepts risk.  (CU153)
    In Europe, can acquire title with "good faith" purchase, making reasonable inquiry of valid title.

    American rule: buyer beware makes theft less profitable
    European rule: owner beware encourages precaution by owners
    In Spain: "American Rule" for merchant buyer of items stolen from households; "European Rule" for private buyer of items stolen from merchants. (CU154)
    American rule beneficial in cases such as art since one precaution is not to display the art. (P79)

    "title insurance": private insurance which provides compensation to current owners who turn out not to be true owners.
    Torrens system uses public fund to compensate true owner instead.
    Tradeoff--title insurance is more efficient since private, but Torrens system is better by allowing higher valued user (current user) to retain possession without transaction cost of buying the property. (P79)

3. Adverse possession

    Case:
    Houston and Baker v. United States Gypsum Co. 652 F.2d 467 (1981) -- (Stack Island)

1. What are the facts of the case?
2. What was the final decision of the appeals court?
3. Who had actual legal title to Stack Island?
4. So what reasoning did the court use to justify awarding the property to Houston and Baker?
5. Did Houston and Baker actually do anything with the island over the statutory period? If so, what?
6. Did U.S. Gypsum? If so, what?
7. Was Houston and Baker's conduct hidden or flagrant?
8. What benefit(s) does a decision of this sort generate?
9. What costs?

    Houston and Baker v. U.S. Gypsum illustrates acquisition of property rights by adverse possession.

    Adverse possession: gaining title to real estate by 
    (i) actual and exclusive possession 
    (ii) over a continuous statutory period 
    in a manner that is 
    (iii) hostile to the owner's use rights and 
    (iv) "open and notorious."

    = squatters' rights

    "Most adverse possessions are mistakes caused by uncertainty over boundary lines." (P78)
    Statute of limitations phases out stale evidence. (P78)

    Benefits of adverse possession: helps clear title and move property to highest valued use. 
    "In general, a rule for acquiring title by adverse possession lowers the cost of establishing rightful ownership by removing the risk that ownership will be disputed on the basis of the distant past." (CU155)

    Cost: owners must monitor land and eject trespassers. (CU155)