Daily Development for Friday, June 29, 2000

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

CONSTITUTIONAL LAW; TAKINGS; REGULATORY TAKINGS: A takings claim is not lost simply because the claimant acquired the property after the regulation was in place.

Palazzolo v. Rhode Island, 2001 WL 721005 (U.S. 6/28/01)

Landowner acquired certain wetlands property in 1978. At that time, there were regulations in place that required that permits be obtained prior to development of the property. Landowner applied for permits and the planning authorities denied them. Landowner applied several other times for permits over the years, and in each case they were denied. Ultimately, Landowner claimed a taking had occurred, and that it had lost all value in the wetlands acreage.

First, the Rhode Island Supreme Court had noted that, although the largest percentage of landowner's land was indeed wetlands, a small portion of it was not wetlands and was developable for construction of a single-family residence. The defendant planning authorities had estimated the value of that portion of the land at $200,000. Further, the landowner had never applied for a permit to carry out the development of a single-family home on the dry land portion of the property. Hence, the Rhode Island Court held, the case was not ripe, because landowner had not exhausted the possibilities in seeking to develop the property.

Second, the Rhode Island Supreme Court concluded, there was no taking because the landowner had not shown that the regulation in question was enacted after the landowner had acquired the land. The Rhode Island court viewed such a showing as a necessary precondition to any takings claim. Otherwise, it was argued, the regulatory scheme in existence at the time of purchase constituted part of the "background principles of state property law" under which the landowner took title, and denial of permits pursuant to those principles do not constitute a taking under Lucas.

Finally, the Rhode Island Supreme Court concluded that the fact that landowner still had $200,000 in value in the property indicated that the landowner had not lost all value in the property, and it did not matter that the balance of the property was undevelopable. There was no taking. $200,000 is more than "token value."

The U.S. Supreme Court, getting together (mostly) on one very important issue, and perhaps resolving two others as well, reversed and remanded. This note will discuss only the second issue, and other notes will cover the rest.

On the question of whether the transfer of the property subject to an existing regulation stripped the property of any takings claim, even when the regulation had reduced the property to zero (as the claimant here argued was the case), the court found eight votes, in various opinions, that concluded that transfer did not destroy the takings claim. This is a very important development, and resolution (or partial resolution) of an issue that has been kicking around in lower courts for some time, particularly on the eastern seaboard.

Four judges joined in an opinion by Justice Kennedy that the transfer of the interest subject to a regulation limiting the use of land cannot justify the government's enforcement of the regulation to the extent that a taking will occur. The opinion rejected the notion that the regulation can be regarded as part of the "background principles of state property law," since the consequence would be to permit the state to create "background principles" willynilly and avoid long term liability when the regulations finally bite, after the original owner has passed from the scene:

"Were we to accept the State's [proposed] rule, the post enactment transfer of title would absolve the State of its obligation to defend any action restricting land use, no matter how extreme or unreasonable. A State would be allowed, in effect, to put an expiration date on the Takings Clause. This ought not to be the rule. Future generations, too, have a right to challenge unreasonable limitations on the use and value of land."

Just Scalia wrote a separate opinion on this point, largely as a response to the special concurrence of Justice O'Connor. But it appears that there is a solid majority here.

Justice O'Connor, in fact, did concur in the result and in the notion that transfer of the property cannot strip the landowner per se of a takings claim. She noted, however, that the claimant in this case argued that 100% of the value was taken, and did not argue about "investment backed expectations." In her view, the fact that the property has been transferred subject to the regulations definitely should be part of the analysis when "investment backed expectations" are evaluated as part of the takings analysis. Transfer does not bar the claim, but in her view, it may weaken it:

"[T]he state of regulatory affairs at the time of acquisition is not the only factor that may determine the extent of investment backed expectations. For example, the nature and extent of permitted development under the regulatory regime visa vis the development sought by the claimant may also shape legitimate expectations without vesting any kind of development right in the property owner. We also have never held that a takings claim is defeated simply on account of the lack of personal financial investment by a postenactment acquirer of property, such as a donee, heir or devisee. . . Courts instead must attend to those circumstances which [sic] are probative of what fairness requires in a given case." As indicated, Justice Scalia disagrees that one who acquires property ought to be limited in making an argument based upon investment backed expectations. Speculation in the development value of land, he argues, is a fundamental part of the free enterprise economy, and landowners should not be penalized for engaging in such investment practices.

Justice Breyer, who joins in a dissenting argument on the first, ripeness, issue, notes a concurrence in Justice O'Connor's views, pointing out the legitimate concern that a landowner may attempt to sever a developable site from one that has been rendered undevelopable by reason of a challenged regulation. This, of course, might have some impact on the takings argument. Justice O'Connor's argument goes beyond this narrow circumstance, and it is hard to believe that Justice Kennedy or even Justice Scalia would disagree that parties cannot subdivide land into a takings claim that would not otherwise be justified.

Comment 1: It thus appears that as many of seven justices would not view the transfer of the property as a bar to a takings claim, although there is some disagreement as to whether the transfer might be relevant in some cases.

Comment 2: Of course, whether the property can be "subdivided" into a takings claim that might not otherwise exist depends in part on the resolution of the question of whether there is a taking when a portion of the property is rendered worthless by the regulation while other portions retain value. On this point, the court found generally for the government position. The claimant here apparently had $200,000 in value from the entire parcel, resulting from a small portion that could sustain a single-family house. The court appears to conclude that the claimant therefore had not shown that "all value" had been taken by the regulation. But it remands for analysis of the question, apparently not raised below, as to whether there were "investment backed expectations" that had been taken in any event by the regulation of the bulk of the parcel to an undevelopable state.

This is not a surprising holding, but leaves for another day the difficult questions of identifying what the "denominator" is in takings issues when the argument involves "investment backed expectations."

Comment 3: On review of the opinions, the editor is struck by the efforts of some on the Court to move toward an "overall fairness" evaluation leaving to a case-by-case analysis the question of whether the government has "gone to far;" while others on the Court favor a more rule oriented categorical approach.

The editor normally favors clarity and predictability, and thus loves rules. Most property lawyers do. But in this area, is it possible that rules will only provide a curtain behind which courts will reach exactly what they think is the fairest result? If that is likely, shouldn't we bring this process out into the open?

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

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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