Daily Development for Thursday, December 27, 2001

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

CONSTITUTIONAL LAW; TAKINGS; "INVESTMENT BACKED EXPECTATIONS:" The states take on the task of interpreting Palazzolo.:

(1) Animas Valley Sand and Gravel, Inc. v. County of La Plata, http://www.cobar.org/coappcts/sc2001/sc1217a.htm (Col. 12/17/01)

(2) Cwynar v. City & County of San Francisco, 109 Cal. Rptr. 2d 233 (Cal. Ct. App. 2001), review denied, 2001 Cal. LEXIS 6617 (Cal. Sept. 26, 2001)

(1) In Animas the zoning authority imposed a limitation on the use of plaintiff's property that prohibited sand and gravel operations on 32 of it's forty acres. The property was declared, in essence a nature preserve, and arguably had no value to plaintiff at all. Plaintiff had used the property for many years for the mining of sand and gravel. The lower courts, pre Palazzolo, had held that there was no taking because the eight acres still had some value to plaintiff.

The Colorado Supreme Court reversed because it interpreted Palazzolo as establishing a "two step" approach. First, the court is to ascertain whether the property has been reduced to zero or whether there is no public purpose served by the regulation. If either of these factors exists, the regulation is a per se taking. But, of course, environmental regulation serves a public purpose and it would be the rare case indeed where one's entire property is reduced to zero. Indeed, in this case, one of the opinions suggested that the county's purpose in leaving the plaintiff with eight acres to mine was to leave a significant enough residual value as to preclude a takings claim. Thus, the court concluded, there was no taking based upon the first step analysis. But the court noted that Palazzolo mandates a second step - an analysis of whether there has been a substantial deprivation of "investment backed expectations."

The second step is to be a "fact specific inquiry," evaluating a variety of considerations to ascertain whether the impact on the landowner has gone "too far," - as Justice Holmes put it. According to the majority opinion in Animas, the purpose of this second step is simply to identify the handful of cases in which regulation has stripped from the claimant all real value in the property, even though there might be a sufficient residual value to survive scrutiny in the first step.

"[T]he [Supreme]Court's current formulation of the fact-specific inquiry seems to contemplate a situation in which the property in question retains more than a de minimis value but, when its diminished economic value is considered in connection with other factors, the property effectively has been taken from its owner. It provides a safety valve to protect the landowner in the truly unusual case."

The Colorado court remanded because it concluded that the lower courts had never indulged in this second step analysis at all. It instructs the lower courts to compute how much value existed prior to the County regulation and how much value remains, and then to ascertain whether this change in value constitutes going "too far." But the court clearly indicates that only if the lower courts determine that the landowner's property has been reduced to a de minimus value should the courts go any further in their "fact based inquiry." Even here, they are instructed to look for ways in which in fact the regulation may have benefitted the landowner.

The Colorado Supreme Court's further guidance for the remand suggests that the application of the second step analysis will avail the landowner nothing, as the lower courts almost certainly will determine that the remaining value in the land is more than de minimus. The court decides in favor of the zoning authority all aspects of the "denominator" issue left open by the Supreme Court in Palazzolo. This is the question of whether, when one attempts to ascertain how much value has been lost, one should consider the total landholding of the claimant or only that portion directly diminished by the regulation. The court concludes that the entire parcel is the correct "denominator," and not only the mineral rights or only the 32 acres in which mining was prohibited. In short, the economic value of the remaining eight acre parcel is to be evaluated.

Virtually by definition, this will lead to a finding of significant remaining value - conceivably around 20%, if only the mining value is considered and the eight acres preserved for mining has not been substantially mined already. The court also takes a page from the concurring opinion of Justice O'Connell in Palazzolo and suggests that the lower court should take into account any valid regulatory restrictions that already might have depressed the potential value of the unmined 32 acres prior to the instant ordinance. Two judges dissented from this reading of the Supreme Court opinion, concluding that the U.S. Supreme Court had mandated a broader inquiring, involving a variety of factors, in defining what constituted going "too far." Justice Kourlis wrote:

"I agree that the appropriate test for measuring the landowner's entitlement to compensation includes: (i) the economic impact of the plan; (ii) the plan's impact on investment-backed expectations; and (iii) the net value of the land before and after the plan. I do not agree that such a formulation then leads only to compensation in rare circumstances where the landowner is left with next to nothing. In fact, in my view, Palazzolo specifically rejected that approach as the "per se" approach, and broadened both the inquiry and the class of compensable takings accordingly."

This inquiry to the concurring justices, ought to include a further inquiry into the legitimacy of the regulatory action itself and an analysis of the nature of property rights taken. Although the concurring justices would not necessarily mandate a different denominator, they would take into account the fact that all the mining rights in 80% of the landowner's parcel were destroyed. Although they would acknowledge the validity of the agency objective in issuing the regulation, they might take into account the presence of alternative regulatory approaches that might have achieved the goal with less damage to the landowner's interest.

The concurring judges also would have found greater protection from regulatory takings in the "taking or damaging" language of the Colorado Constitution's protection from government invasion of property interests. The majority concluded that the term "damaging" was limited to losses caused by physical state activities, not regulatory activities. The concurrence cited the recent Alaska decision in R & Y, Inc. v. Municipality of Anchorage, 2001 Alas. LEXIS 122 (Alaska Sept. 7, 2001), where the Alaska court relied upon that state's constitution as well as the U.S. Constitution in determining that a broad fact based inquiry should be made to ascertain whether a taking has occurred, and that the inquiry is not precluded by the simple fact that the remaining value in the property is more than de minimus.

(2) Cwynar is a less traditional regulatory takings problem, - addressing a measure passed by referendum designed to slow down the "yuppification" of San Francisco by restricting the ability of parties to take individual units off the rental housing market.

The measure was designed to significantly limit the rights of owners of rental property to turn out existing tenants in order to occupy the property themselves or to permit occupancy of the property by relatives. The ordinance, according to plaintiffs, applied all the way down to single family houses. The City admitted only that it applied to two family houses and up. Previous to the ordinance, refusing to relet to tenants in order to accommodate occupancy by oneself or ones relatives generally was permitted. Under the ordinance, an owner could terminate a tenant's occupancy only for the owner's own occupancy, and then only once per building. Further, the owner had no right to terminate occupancy by tenants over the age of 60.

The plaintiffs included a number of parties who had been significantly injured as a consequence of the ordinance. A number of them were co- owners of property in which one of the other co-owners was already occupying a unit. Others were people seeking to accommodate sick relatives or to provide a convenient residence for their parents in the same building that they owned and occupied.

The state law did provide a mechanism for escaping rent control by taking the entire building off the rental market. But of course this mechanism was of scant use to parties who were dependent upon income from some of the units but wished to occupy others for their personal or family purposes.

The court found that the plaintiffs had adequately stated a potential case that the ordinance was a per se physical taking of their property and that it was a regulatory taking. The case was remanded for further analysis.

Of interest here is the court's discussion of the "two step" regulatory takings process following Palazzolo. The court noted that the test of whether a regulation has "gone too far" under the second step of the analysis depends upon an ad hoc analysis of the impact of the regulation on the property owner. It comment that a variety of factors may be relevant depending upon the facts of the case at issue, there is no comprehensive list to be mechanically applied.

The first analysis in the second step is the legitimacy of the government interest to be advanced. Here the court noted that there must be a nexus between the stated public purpose and the regulation in question. It raised significant questions about the existence of that nexus in this case. It noted that the occupancy restrictions were not a rent control measure per se, and therefore did not enjoy the presumptions of validity afforded in the past to such measures. The apparent purpose it arguably did serve was that advanced by the City to increase or preserve the stock of rental housing in San Francisco. But the court wasn't convinced that the ordinance would achieve that end. It suggested that the likely result would be to compel apartment owners to take their property out of the rental pool entirely in order to meet their personal and family needs.

The court then turned to the second part of the second stage analysis. Even assuming that the measure advanced legitimate state goals, the court indicated, there was still a question of whether it so intruded on individual private interests for public goals that it amounted to a compensatory taking. For this analysis, the court brought forth an elaborate list of factors (which it noted would not necessarily be exclusive) that the lower court should consider on remand.

(1) " '[t]he economic impact of the regulation on the claimant' "; (2) " 'the extent to which the regulation has interfered with distinct investment-backed expectations' "; (3) " 'the character of the governmental action' "; (4) "whether the regulation 'interfere[s] with interests that [are] sufficiently bound up with the reasonable expectations of the claimant to constitute "property" for Fifth Amendment purposes' "; (5) "whether the regulation affects the existing or traditional use of the property and thus interferes with the property owner's 'primary expectation' "; (6) " 'the nature of the State's interest in the regulation' [citations] and, particularly, whether the regulation is 'reasonably necessary to the effectuation of a substantial public purpose' "; (7) "whether the property owner's holding is limited to the specific interest the regulation abrogates or is broader"; (8) "whether the government is acquiring 'resources to permit or facilitate uniquely public functions,' such as government's 'entrepreneurial operations' "; (9) "whether the regulation 'permit[s the property owner] ... to profit [and] ... to obtain a "reasonable return" on ... investment' "; (10) "whether the regulation provides the property owner benefits or rights that 'mitigate whatever financial burdens the law has imposed' "; (11) "whether the regulation 'prevent[s] the best use of [the] land' "; (12) "whether the regulation 'extinguish[es] a fundamental attribute of ownership' "; (13) "whether the government is demanding the property as a condition for the granting of a permit."

In suggesting how these factors ought to be interpreted in the case at hand, the court says very little about the degree of reduction in value of the premises. Rather, it talks about such issues as whether the measure in question "substantially interferes with their reasonably and primary ownership expectations," such as the right to possess and occupy the property. It fact, it specifically rejects a value based analysis:

"The fact that Proposition G does not cause a complete economic property loss does not preclude these plaintiffs from establishing a regulatory taking. Indeed, "there are plainly a number of non-economic interests in land whose impairment will invite exceedingly close scrutiny under the Takings Clause." . . .

Comment 1: These two cases deal with quite distinct problems, but they clearly have very different views of how the Supreme Court has indicated courts should interpret the regulatory takings issue in the future. There is little question that a court in the remand of Cwynar that each of the plaintiffs will have more than a de minimus value in their properties, since the real impact in each case is felt by those who are denied their ability to force vacation of some of their units because they have other rent generating units that they need to continue to operate. It's not about money - it's about the fundamental question of occupancy.

But the editor suspects that this type of analysis might be adapted to the issues addressed in Animus as well. Is the declaration of property as a "wetlands" an effective denial of the right to occupancy? Should it be so regarded?

Comment 2: The editor's guess is that the Supreme Court, with its many voices only occasionally harmonizing on this issue, probably is striving for some kind of "bright line" test based upon value, and that in the end the California courts, if they're going to continue their broader analysis, will have to do so under the authority of their state's constitution. But in the takings game nothing is really all that certain. We're talking, after all, about a fundamental issue of the meaning of government.

Anyway, maybe the whole problem will go away for another reason. The editor heard tell that Attorney General Ashcroft has said that protection of wetlands may be inconsistent with the War Against Terrorism and therefore must be set aside. Gotta watch those bomb-throwing frogs!!!

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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