Murr v. State of Wisconsin: Esoteric Regulatory Takings Question Could Affect All Homeowners

The US Supreme Court is set to resolve a critically important question of regulatory takings law this term in the case, Murr v. State of Wisconsin, Dkt. No. 15-214. At issue is the “relevant parcel” inquiry, which is the threshold determination to the multi-factor regulatory takings test established by Penn Central Transp. Co. v. New York City (1978). That test directs courts to determine the impact of a regulation on the “parcel as a whole” by considering the character of the state action, the economic impact of the regulation and the regulation’s interference with the owner’s investment-backed expectations. Murr asks what the term “parcel as a whole” means in practice—does it limit the takings inquiry to the regulated parcel or does it allow the government to combine the owner’s interests in other parcels of land?

The answer to that question is currently subject to a nationwide split of authority among the lower courts, resulting in inconsistent decisions applying the Takings Clause of the US Constitution and creating an environment of uncertainty for both landowners and government alike.

The US Supreme Court has often analogized the takings inquiry to solving a fraction where the impact of the regulation provides the numerator and the relevant parcel provides the denominator. Keystone Bituminous Coal Association v. DeBenedictis (1987). Thus, “the definition of the relevant parcel of land is a crucial antecedent that determines the extent of the economic impact wrought by the regulation.” Lost Tree Village Corporation v. United States (Fed. Cir. 2015). A rule that allows the government to increase the size of the denominator by combining an owner’s interests in other parcels of property will have a very real impact on the takings calculus—for example, a regulation that deprives an owner of 9/10 of his or her property is much more onerous than one that impacts 9/20 or 9/100 of the property

The facts in Murr demonstrate how this fraction equation can be manipulated to diminish the apparent impact of a regulation on property. In 1960, William and Dorothy Murr purchased a 1.25-acre lot in a subdivision on the St. Croix River in Wisconsin and built a cabin on it. Three years later, the Murrs purchased an adjacent lot as an investment. The family did not build on that lot and the parents later gave the property to their children. When the children began to look into selling the lot to pay for repairs to the family cabin, the government said that they couldn’t sell or make any valuable use of the land. The government explained that regulations passed after the Murrs purchased their lots require a bigger “net project area” than either lot had by itself. Because the neighboring lots were commonly owned, the government combined them into one unit and, consequently, prohibited the development or sale of the investment lot.

The Murrs filed suit against Wisconsin and St. Croix County, arguing that the governments’ action violated the Fifth Amendment Takings Clause by depriving the Murrs of the value of the investment lot. The US Supreme Court has long recognized that a land-use regulation that “goes too far” can rise to a taking. Pennsylvania Coal Co. v. Mahon (1922). But defining “too far” has often proved difficult. Indeed, with a few exceptions, the court has eschewed any bright-line rules defining what is or is not a regulatory taking. Instead, the court typically relies on the Penn Central multi-factor balancing test.

In Murr, the definition of the relevant parcel was critical. If the “parcel as a whole” was limited to the investment lot, then the regulations clearly wiped out all value of the property. But Wisconsin court of appeals ruled against the Murrs, holding that they were not entitled to compensation, finding that the county ordinance had “merged” the two lots into one single lot. Because the Murrs could continue to use this merged property for residential purposes, they did “not suffer the loss of substantially all of the beneficial uses of his land.” Having changed the denominator from one parcel of land to two, the court concluded that the regulation only deprived the Murr’s of half of their overall property interests and did not therefore rise to the level of a compensable taking.

The US Supreme Court accepted review of the parcel-as-a-whole question after the Wisconsin Supreme Court refused to consider the appellate decision. The single question presented asks whether, in a regulatory taking case, the parcel-as-a-whole concept as described in Penn Central establishes a rule that two legally distinct but commonly owned contiguous parcels must be combined for takings analysis purposes.

In the decades following Penn Central, the US Supreme Court has repeatedly expressed discomfort with the parcel-as-a-whole concept, but never fully explained what that term means. One can glean from its earlier decisions, however, that the court never intended the rule to merge separate legal parcels into one lot in circumstances like those presented in Murr. Indeed, in Penn Central, the court offered only that

“Taking” jurisprudence does not divide a single parcel into discrete segments and attempt to determine whether rights in a particular segment have been entirely abrogated. In deciding whether a particular governmental action has effected a taking, this court focuses . . . [on] the parcel as a whole.

Notably, in deciding that case, the court refused to follow a New York rule that had allowed courts to aggregate an owner’s other property investments and later criticized the aggregative approach as “extreme” and “unsupportable” in Lucas v. South Carolina Coastal Council (1992). In Palazzolo v. Rhode Island (2001), the court noted “the difficult, persisting question of what is the proper denominator in the takings fraction.”

Given this backdrop, the parties’ arguments focus largely on the government’s authority (or lack thereof) to redefine an owner’s rights in property through regulations enacted after acquisition of the land. The Murrs argue that their rights in each lot were fixed when they took title. Thus, when the government enacts a regulation after acquisition, the fee title presumptively provides the “relevant parcel” for a takings inquiry. In response Wisconsin and St. Croix County argue that land-use regulations—whether adopted before or after the property is acquired—shape an owner’s reasonable expectations in regard to his or her property rights. Thus, according to the government, the Murrs’ expectation that the two lots would continue to be separate legal parcels of land was extinguished by the adoption of a regulation deeming the lots to have been “merged.”

That argument, however, hearkens back to Palazzolo, which rejected the notion that a “regulation, once enacted, becomes a background principle of property law.” Thus, it is unsurprising that the United States, which filed an amicus brief, acknowledged that the court had consistently rejected the circular approach of defining the relevant parcel by the terms of the challenged regulation. Instead, the United States suggested that courts determine the relevant parcel on a case-by-case basis, taking into account the spatial, temporal and functional aspects of an owner’s property interest.

The three proposed solutions will have very different impacts on the public. The state and county’s pro-regulation perspective seeks to preserve the flexibility that an aggregative approach provides for government to achieve its regulatory ends without having to pay just compensation for any resulting impairment of property rights. That approach, however, would allow courts to rule that there has been no taking without ever determining the actual impact to the regulated parcel. That is contrary to the purpose of regulatory takings law, which is intended to determine “the actual burden imposed on property rights…how that burden is allocated…[and] when justice might require that the burden be spread among taxpayers through the payment of compensation.” Lingle v. Chevron U.S.A. Inc. (2005).

The pro-regulation approach does more than just insulate the government from the risk of just compensation awards. If adopted, it would inject an unacceptable degree of uncertainty into land development projects. It is common for both residential and commercial development to occur in phases. Typically, lots are developed and sold in order to fund further development in a process that can last years. As lots are sold, the developer does not typically retain an ownership interest in all of the land and his economic expectations with regard to the first phase of the development are considered complete. However, it is common for a developer to retain an interest in individual parcels for future development long after a phase has been completed. Thus, although a developer may hold an interest in several adjacent properties over the course of the entire project, those interests will be temporally severed as phases are completed. They will also be severed by different investment expectations.

The approach advocated by the state and county would deprive developers of the certainty in their projects by allowing the government to impose severely restrictive regulations then avoid the compensation requirement by exaggerating the relevant parcel. Such a rule would harm more than the developer—it would also harm the public’s interest in new development, which is absolutely essential in the fight against the skyrocketing cost of housing throughout our nation.

The United States’ case-by-case approach would do very little to eliminate uncertainty. Under that approach, neither the owner nor the government would be able to predict how a court would determine the relevant parcel when faced with a potential regulatory taking. Moreover, the multi-factor threshold test would only operate to significantly drive up the cost of litigation on both parties.

By contrast, the approach argued by the Murrs would hold government accountable by confining the relevant parcel determination to the individual lot that is being subjected to burdensome regulation, thereby acknowledging and enforcing the constraints that the Fifth Amendment places on the government’s authority to regulate private property. Moreover, the Murrs’ approach recognizes that the configuration of any given parcel of property may change over time—particularly in areas where developable lands are limited and the population continues to grow—and argues that the metes and bounds as set by the current title should establish the relevant parcel.

Although the question at issue in Murr is somewhat esoteric, the answer has the potential to affect the public at large. Indeed, this issue crops up more frequently than one would assume. The Supreme Court is holding a petition filed by the United States challenging a favorable relevant parcel ruling for a Florida developer pending its decision in Murr. And a recent case from Washington State shows that the same questions are dogging courts across the nation. In Murr, the Supreme Court has the opportunity to focus the takings analysis in a predicable manner that would reduce uncertainty and avoid many of the harms associated therewith. For that reason alone, the US Supreme Court should hold that title presumptively defines an owner’s interest in his or her property.

Published by Jurist