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Takings Watch Newsletter -
2001 Feature Case Archive


DECEMBER 2001

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.”


NOVEMBER 2001

Rith Energy, Inc. v. United States (Fed. Cir. Nov. 5, 2001)

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 1355.)

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.


OCTOBER 2001

Federal Appeals Court Rejects Takings Challenge to Tobacco Disclosure Law

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 brands.

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.


SEPTEMBER 2001

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.


AUGUST 2001

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.


JULY 2001

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 a taking.

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.


JUNE 2001

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.


MAY 2001

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.

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