Does a 38% Value Loss Work a Taking?
This month's first Feature Case -- City of Glenn Heights
v. Sheffield Development Co., No. 10-99-232-CV, 2001 WL
1299437 (Tex. Ct. App. Oct. 24, 2001) -- is a disturbing ruling
brought to our attention by Robert F. Brown, who represents
Glenn Heights. The court concluded that the City's downzoning
of land from 1/6-acre lots to 1/4-acre lots constitutes a
taking, even though the court assumed that the downzoning
reduced the land's value by only 38%. The ruling threatens
downzoning and other smart-growth efforts throughout Texas
and may set a new record for finding a regulatory taking based
on such a relatively low value loss. On January 14, the City
will petition for review by the Texas Supreme Court, and CRC
will file an amicus brief supporting the petition on behalf
of the Texas Municipal League.
Reasonable Decisionmaking vs. Bad-Faith Delay
Is a ten-year permit delay a taking? Not where (1) there
is no evidence of bad faith, (2) the regulatory program involves
complex public health and safety questions, and (3) the permit
applicant was responsible for some of the delay, the Federal
Circuit concluded last month. The ruling in Wyatt v. United
States, 2001 WL 1456999 (Fed. Cir. Nov. 19, 2001), shows
that courts are capable of discerning the difference between
reasonable government decisionmaking and bad-faith delay.
The court stressed that “[g]overnment agencies that implement
complex permitting schemes should be afforded significant
deference in determining that additional information is required
to satisfy statutorily imposed obligations.”
Rith Energy, Inc. v. United States (Fed. Cir. Nov.
When government attorneys hunt for favorable regulatory takings
precedent, they typically don't start with the U. S. Court
of Appeals for the Federal Circuit, which has handed down
several notable clunkers over the years. But in Rith Energy,
Inc. v. United States, No. 99-5153, 2001 WL 1380899 (Fed.
Cir. Nov. 5, 2001) (on petition for rehearing), the Federal
Circuit favorably interpreted the Supreme Court’s recent ruling
in Palazzolo v. Rhode Island and provided helpful guidance
on a broad range of issues, including the per se rule under
Lucas, the parcel-as-a-whole rule, and the role of expectations
in takings analysis.
Rith claimed that the United States effected a regulatory
taking by revoking its mining permit after it had mined about
35,700 tons of coal, roughly nine percent of what it expected
to mine from its coal lease area. The government revoked the
permit to protect surrounding communities from harmful runoff.
In May 2001, the Federal Circuit affirmed the trial court's
grant of summary judgment to the government. (See 247 F.3d
Rith then filed a petition for rehearing in light of the
Supreme Court's June 2001 ruling in Palazzolo. The Federal
Circuit's most recent opinion responds to that motion and
provides one of the first comprehensive discussions of Palazzolo.
The Federal Circuit stressed that "Palazzolo is distinctly
unhelpful to Rith" on its per se claim under Lucas, stating:
"The Supreme Court held that because Mr. Palazzolo retained
some economic value in the regulated property, the denial
of a building permit in Mr. Palazzolo's case did not constitute
a categorical taking." Because Palazzolo's Lucas claim
failed even though he alleged a 94% loss in value, Rith's
Lucas claim failed as well notwithstanding an alleged
91% value loss.
Rith argued that the amount of coal it mined prior to the
permit revocation should not be considered in evaluating its
takings claim, but the Federal Circuit responded that it would
be "artificial" to divide the interests in the coal lease
in this way. This ruling reaffirmed the court's earlier conclusion
that the parcel-as-a- whole requires analysis of Rith's entire
bundle of property rights in the coal lease. The Rith
Court also ruled that expectations remain relevant to takings
analysis after Palazzolo, citing Justice O'Connor's concurrence
for the proposition that the relevance of expectations is
"well-settled.” The Court concluded by noting that the exercise
of the police power to address potential harm to a community
"is the type of governmental action that has typically been
regarded as not requiring compensation for the burdens it
imposes on private parties who are affected by the regulations."
At the same time the panel issued its recent clarification,
the full circuit denied en banc review, which means that absent
review by the Supreme Court (which seems unlikely), this is
the final word on Rith Energy. All in all, Rith
Energy should prove to be quite useful to government attorneys
called upon to explain the meaning of Palazzolo and defend
community rights against takings challenges.
Federal Appeals Court Rejects Takings Challenge to Tobacco
State and local officials interested in curbing the adverse
health effects of smoking should take note of the October
16, 2001 ruling in Philip Morris, Inc. v. Reilly, No.
00-2425, 2001 WL 1215365 (1st Cir. 2001). The ruling rejects
a takings challenge to a Massachusetts statute that requires
tobacco companies to disclose the ingredients in their products
on a brand-by-brand basis, information that the companies
claim to be trade secrets.
More than 700 additives are used in tobacco products. The
challenged statute is designed to allow health professionals
to study the synergistic effects of certain ingredients in
particular brands. The tobacco companies allege that disclosure
would allow competitors to “reverse engineer” the popular
The ruling comes as a surprise because the appeals court
had previously affirmed a preliminary injunction that prohibited
enforcement of the statute based on the court’s conclusion
that the companies were likely to prevail on the takings claim.
In rejecting the claim on the merits, however, the appeals
court stressed that it had reconsidered the issue "with the
benefit of additional briefing, argument, study, and reflection."
It relied on a 1919 U.S. Supreme Court case, Corn Products
Refining Co. v. Eddy, which states that "the right of
a manufacturer to maintain secrecy as to his compounds and
processes must be held subject to the right of the State,
in the exercise of its police power and in promotion of fair
dealing, to require that the nature of the product be fairly
set forth." The appeals court also invoked a 1984 Supreme
Court ruling in Ruckelshaus v. Monsanto Co. that the
federal government could condition the right to sell pesticides
on the voluntary submission of confidential trade secrets,
as well as the use of that information by others. The Monsanto
Court held that no taking occurs so long as the manufacturer
is aware of the conditions under which the trade secrets are
submitted and the conditions are rationally related to the
public interest. The First Circuit concluded that Monsanto
controlled the case before it and required rejection of the
tobacco companies' takings claim.
Paradissiotis v. United States: Takings Challenges
that Implicate National Security Concerns
In the comfort of the post-Cold War era of tranquility, the
takings debate focused primarily on domestic police powers,
such as land-use regulation. We sometimes forget that federal
efforts to protect national security interests also are subject
to takings challenges. Indeed, the Supreme Court's takings
docket has never been as full as it was during the years immediately
following World War II.
These wartime takings cases are illuminating. Despite the
exigencies of the last century's most dangerous global conflict,
the Supreme Court never abandoned the Takings Clause's central
protection for landowners. Indeed, the Court was rigorous
in demanding that the government pay property owners even
for short-term expropriations of private property. The Court
did, however, establish a bright-line between expropriation
and regulatory impositions, requiring compensation for the
former but not the latter. Compare United States v. Pewee
Coal Co., 341 U.S. 114 (1951), with United States v.
Central Eureka Mining Co., 357 U.S. 155 (1958).
In recent years, courts have continued to give the government
a wide berth in protecting national security interests where
the government action does not constitute an outright expropriation.
For instance, in Paradissiotis v. United States, 49
Fed. Cl. 16 (March 27, 2001), a Cypriot citizen with business
ties to the Libyan government alleged a taking after the federal
Office of Foreign Asset Control (OFAC) prohibited him from
exercising certain stock options. The OFAC issued the order
pursuant to the International Emergency Economic Powers Act
(IEEPA) and two 1986 Executive Orders that freeze assets controlled
by the Libyan government and prohibit U.S. corporations from
business dealings with Libya.
Notwithstanding the severe economic loss suffered by Paradissiotis,
the court rejected the claim, concluding that order did not
interfere with his reasonable expectations: "Claimants who
deal in foreign commerce most often have knowledge at the
time of contracting that foreign relations between this country
and a foreign country might sour, and that the government
might intervene and interfere with contractual rights. Such
knowledge is enough to extinguish any reasonable expectation
for takings purposes." Although Paradissiotis argued that
he could not foresee the string of foreign policy events that
led to the blocking order, the court responded that the public
knew about the deteriorating relations between the United
States and Libya for the entire seven years that he owned
the options. Moreover, the Court emphasized that "national
security is the epitome of promoting the public good of the
United States" and requiring compensation for these orders
would eviscerate the IEEPA.
Keshbro, Inc. v. City of Miami: Sex, Drugs, and
the Takings Clause
We typically associate takings claims with zoning and other
routine land use planning techniques. But a recent case from
Florida reminds us that local officials face takings challenges
to a broad array of laws that protect our communities, including
laws to curb prostitution and drug abuse.
On July 12, 2001, the Florida Supreme Court issued a single
opinion in two consolidated cases that addresses the question
of whether the temporary closure of buildings under a nuisance
abatement statute designed to address prostitution and drug-related
activity may constitute a per se taking under Lucas v.
South Carolina Coastal Council, 505 U.S. 1003 (1992).
In Keshbro, Inc. v. City of Miami, 2001 WL 776555 (Fla.
2001), the City of Miami ordered the Stardust Motel, a fifty-seven
unit building, to be closed for six months in 1997. In the
companion case of City of St. Petersburg v. Kablinger,
the city ordered closure of an apartment complex based on
at least two cocaine sales within a six-month period in violation
of the city's nuisance ordinance. In both cases, the landowners
sued for inverse condemnation.
The intermediate appeals courts split. In Keshbro,
the appeals court found no taking because the prohibited uses
(“a brothel and drug house”) had no protection at common law
and did not inhere in the landowner's bundle of property rights.
In Kablinger, however, the appeals court found a compensable
taking based on an earlier case, City of St. Petersburg
v. Bowen, 675 So. 2d 626 (Fla. 2d DCA 1996), in which
the same appeals court found a compensable taking where the
city closed an apartment complex for one year as a nuisance.
The Florida Supreme Court affirmed both Keshbro and Kablinger,
notwithstanding their disparate outcomes. The Court rejected
the cities' argument that the temporary nature of the closures
precludes a ruling that the landowners have been denied all
economically viable use under Lucas. Relying on what we believe
to be a misreading of First English Evangelical Lutheran
Church v. County of Los Angeles, 482 U.S. 304 (1987),
the Court held that a temporary closure may constitute a Lucas
taking. The court expressed special concern over "the drastic
economic impacts" inflicted by the closure of ongoing concerns.
The Court expressly distinguished land-use planning moratoria,
which raise "an entirely different set of considerations"
that might warrant a different result. While troubling, the
ruling does not provide support to claimants like those in
the Tahoe moratorium case who argue that temporary restrictions
on development always constitute a per se taking.
Finally, the Court considered whether background principles
of nuisance law precluded takings liability. In the case of
the Stardust Motel, the Court stressed that operation of the
motel had become "inextricably intertwined" with drug and
prostitution activity. Thus, this nuisance activity justified
the closure and no taking occurred. The same was not true,
however, with respect to the apartment in Kablinger. Because
there was no record of persistent drug activity, the one-year
closure was not necessary to abate a drug nuisance and thus
constituted a compensable taking.
Keshbro illustrates that the Takings Clause is omnipresent,
but with a proper record local officials have considerable
leeway in protecting the quality of life in our communities.
U.S. Supreme Court to Hear Tahoe Moratorium Case
On June 29, 2001, the U.S. Supreme Court agreed to hear a
very important case -- Tahoe-Sierra Preservation Council,
Inc. v. Tahoe Regional Planning Agency, 216 F.3d 764 (9th
Cir. 2000), cert. granted 121 S. Ct. 2589 -- which raises
the issue of whether a reasonable development moratorium constitutes
The case involves two moratoria imposed to protect Lake Tahoe,
an exceptionally clear alpine lake in the Sierra Nevada Mountains.
Lake Tahoe is a national treasure. Mark Twain once described
it as "the fairest picture the whole earth affords." Unfortunately,
the Lake is becoming a victim of its own beauty because rampant
development in the Tahoe Basin is adding nutrients to the
lake, which spurs the growth of algae. Lake Tahoe is losing
a foot of clarity every year, and unless development is controlled,
the Lake will become opaque and green forever.
In 1981, the Tahoe Regional Planning Agency imposed two successive
development moratoria for a total of thirty-two months while
it prepared a regional development plan. Some 450 landowners
have brought a facial takings challenge to these moratoria.
The trial court found that the moratoria did not interfere
with the landowners' expectations because the average holding
period between lot purchase and home construction in the Basin
is 25 years. The court also found that the moratoria were
reasonable in scope and duration. As a result of these and
other findings, the trial court held that no taking occurred
under Penn Central's multifactor analysis. Nonetheless, the
trial court concluded that a per se taking occurred under
Lucas because the moratoria temporarily deprived the
landowners of all economically viable use of their land.
On appeal, the Ninth Circuit reversed, holding that the moratoria
do not constitute a per se taking under Lucas. The
appeals court ruled that it must consider the landowners'
entire bundle of property interests, including future uses
available after the moratoria ended. In other words, the landowners
could not engage in "temporal severance" by focusing exclusively
on whether they could use the land during the moratoria. In
rejecting the per se claim, the appeals court also relied
heavily on Agins v. City of Tiburon, which held that
"mere fluctuations in value during the process of government
decisionmaking, absent extraordinary delay . . . cannot be
considered as a 'taking' in the constitutional sense."
One key legal issue before the Supreme Court will be the
meaning of the Court's 1987 ruling in First English,
which holds that compensation must be paid for a temporary
taking. The landowners argue that when read in conjunction
with Lucas, First English requires compensation
for virtually any development moratorium. The Agency argues
that First English is far more limited in scope, holding
only that a taking must be compensated where the government
renders the taking temporary through government rescission
of the offending regulation. The Agency supports its position
with citations to numerous lower court rulings that reject
takings challenges to reasonable moratoria.
The landowners have retained new counsel, Michael Berger,
who argued First English (and other takings cases)
before the Supreme Court. In their petition for certiorari,
the landowners argue that the Agency effectively imposed a
"twenty-year rolling moratorium" because their land remained
restricted under the regional plans after the moratoria were
lifted. Although the restrictions imposed by the regional
plans are not part of the case before the Supreme Court, the
landowners can be expected to continue to characterize the
restrictions as, for all intents and purposes, permanent.
A photo of Lake Tahoe appears on page 2 of this newsletter.
More information on the Tahoe case and CRC’s Ninth Circuit
Brief on behalf of IMLA are available at www.communityrights.org.
GOOD AND BAD NEWS FROM PALAZZOLO V. RHODE ISLAND
On June 28, 2001, the U.S. Supreme Court produced a mixed
bag of rulings in Palazzolo v. Rhode Island, a takings
challenge to Rhode Island’s efforts to protect coastal wetlands
from development. The six opinions contain a bit of good news,
a bit of bad news, and a substantial amount of mush that unfortunately
will engender confusion and embolden aggressive developers.
Below is a brief summary. The opinions are available at http://www.communityrights.org/Palazzololistofopinions.html.
The best news for local governments is that the Court clearly
confined the Lucas per se rule of takings liability. Although
the Court noted that the government may not avoid a Lucas
taking by leaving the landowner with "a token interest," it
held that Palazzolo was not deprived of all economic use under
Lucas because he may build a house on his 20-acre parcel.
The Court’s treatment of the procedural question of ripeness
should have little impact on future cases. The Court ruled
that the case is ripe, but it reaffirmed its holdings in Williamson
County and McDonald that a regulatory takings case is not
ripe until "a court knows 'the extent of permitted development'
on the land in question." The Court found no ambiguity in
the record regarding the extent of permitted development:
one single family home and nothing more. It rejected the State's
contention that Palazzolo might be able to build more than
one house in large measure because the State failed to make
this point in its opposition to certiorari. Although the State
also argued that the case was unripe due to Palazzolo's failure
to apply for the 74-unit subdivision that formed the heart
of his takings claim at trial, the Court ruled that this failure
goes only to damages, not ripeness. This ruling seems limited
to the facts of this case.
The bad news from Palazzolo is that the Court rejected what
it termed the "sweeping rule" that a claimant's acquisition
of title after enactment of the challenged regulation automatically
bars a takings claim, stating that "[f]uture generations,
too, have a right to challenge unreasonable limitations on
the use and value of land." The Court expressed concern that
the process of ripening a claim might prevent the owner at
the time of enactment from bringing a claim. Moreover, a blanket
rule against recovery would create unfair results for older
property owners and those who need to sell, as opposed to
those with the resources to hold title. The Court did make
clear, however, that background principles under Lucas are
not limited to common law and that it was possible that the
Rhode Island statute might be a background principle. It described
background principles "in terms of those common, shared understandings
of permissible limitations derived from a State's legal tradition."
Justice O'Connor wrote separately to emphasize that the timing
of a takings claimant's acquisition is relevant to the Penn
Central analysis. Significantly, all four dissenters agreed
with Justice O'Connor on this issue.
The mush of Palazzolo is in dicta. For example, in disposing
of the Lucas claim, the Court declined to address Palazzolo's
argument that the wetland portion of the property should be
considered separately from the upland portion. In leaving
the issue open, the Court stated that some of its prior rulings
indicate that takings analysis requires consideration of the
parcel as a whole, but it noted that it has "expressed discomfort
with the logic of this rule.” The Court failed to note that
the parcel-as-a-whole rule is compelled by longstanding precedent.
Crazy Ruling from the CFC
In Tulare Lake Basin Water Storage District v. United
States, 2001 WL 474295 (Fed. Cl. April 30, 2001), the
U.S. Court of Federal Claims found a taking where federal
protections for endangered salmon and delta smelt resulted
in less water for farm irrigation from two water projects
in California. The water reductions were relatively small
and did not approach the denial of all economically viable
use typically required for a finding of a taking. Moreover,
unlike other cases in which federal actions have been deemed
takings of water rights, the government did not consumptively
use the water at issue, but instead only restricted the use
made by others. Nonetheless, the court ruled that the government
had effectively “seized” the water, a conclusion that allowed
the court to disregard the claimants’ ability to use most
of the water available to them under their water contracts.
The court also ignored several background principles of state
law, including the public trust doctrine and the reasonable
use doctrine, that deprived the claimants of any property
right to use the public’s water in a way that injures wildlife.
The court’s “seizure” theory has potentially troublesome implications
for municipal land use if it were expanded beyond the context
of water rights.