Earlier this month, the Second Circuit rejected a Takings Clause challenge to a New York statute that, by increasing the state’s homestead exemption, destroyed a lien holder’s property interest. Rather than resolving what sort of property interest the lien was or what test applied to the taking, the Second Circuit concluded that, regardless of the interest or its level of protection, the claim has to fail because the homestead exemption is a “background principle” that inheres in all titles.
A little background: In Lucas v. South Carolina Coastal Council, the Supreme Court held that any regulation that forbids all economic use of private property is a taking, regardless of the government’s interest in regulating the property’s use. However, it left open an important exception to that broad protective rule — a limitation contained in a “background principle” of state property law could not result in a taking, even if it destroyed all economically valuable use.
The Supreme Court had in mind long-standing common law restrictions on the use of property to protect other property owners and the public. Chief amongst these is the common law of nuisance, which forbids a property owner from unreasonably using her property to interfere with someone else’s enjoyment of his property. Take, for example, a factory that dumps chemicals and particles on its neighbors which damage the neighbors’ homes or require them to bear substantial clean up costs. This is a clear case of nuisance, which, for centuries, has entitled neighbors to demand damages and that the nuisance be shut down. Clearly the Constitution’s Takings Clause was not intended to destroy this important body of law protecting private property.
But the Court’s recognition of a background principles exception leaves open how long a restriction on the use of property must exist before it can restrict use without limit. In 1256 Hertel Ave. Associates, LLC v. Calloway, the Second Circuit considered whether a statute that protected homeowners from responsibility for their debts by exempting some of the value of their homes from bankruptcy is a background principle. The state legislature had recently increased the amount of the exemption, which caused a lender to lose the entire value of his lien. In rejecting his Takings claim, the court noted that New York had exempted part of the value of homes from bankruptcy since 1850. As a result of 164 years of regulation, the court held, the homestead exemption had become a background principle of the state’s property law, which, regardless of how much the state increased it, could not be challenged under the Takings Clause.
This ruling threatens to have a significant impact on property owners. As Prof. John Echevarria notes on his Takings Litigation blog, states have been closely regulating property use through zoning regulations for a century. If zoning itself could become a background principle, the Constitution’s protections against regulatory takings would largely evaporate.