December 5, 2018

PLF asks the U.S. Supreme Court to revisit Penn Central

By Brian T. Hodges Senior Attorney

Forty years ago, in Penn Central Transp.  Co. v. City of New York (1978), the U.S. Supreme Court explained that regulatory takings cases are “essentially ad hoc, factual inquiries” wherein courts are instructed to consider a number of case specific factors, including “the economic impact of the regulation on the claimant;” “the extent to which the regulation has interfered with distinct investment-backed expectations;” and “the character of the government action.” The idea was to provide courts with the flexibility necessary to respond to “the nearly infinite variety of ways in which government actions or regulations can affect property interests.” Arkansas Game & Fish Comm’n v. United States (2012).

In practice, however, the Court’s ad hoc approach has resulted in standards that are vague, impossible to apply in a consistent manner, and an invitation to judicial subjectivity. And more often than not, those vague standards work to bar property owners from receiving any compensation. This test has strayed far from the purpose of the regulatory takings doctrine, which is to serve the interest of “justice and fairness.” Armstrong v. United States (1960).

PLF is currently involved in two cases asking the Court to shed some much-needed light on the murk of Penn Central. In Kelleher v. New York Department of Environmental Conservation, Denis and Carol Kelleher purchased an undeveloped parcel of residential-zoned waterfront property for $450,000 with the intention of building a house. At the time, the parcel was one of two vacant lots in an otherwise fully developed community located in the Town of Southhampton, NY. The lot borders Calf Creek, a tributary of Mecox Bay. Because of this location, the Kellehers ensured that (1) the property was zoned for residential use, (2) there were no encumbrances on its title, and (3) secured assurances from a town official that the lot was developable before making the purchase.

The Kellehers got all the local approvals needed to build their home, but state law required the Kellehers to also secure a tidal wetlands permit from the New York Department of Environmental Conservation (DEC). Although the state’s wetland regulations are almost identical to the town’s regulations, the DEC denied the application, rendering the property unbuildable.

The Kellehers filed a suit in New York state court, arguing that the DEC’s decision effected a regulatory taking under Penn Central. According to the trial court, the Kellehers “submitted a text book case proffering evidence as to every element of their taking claim,” presenting evidence that the DEC’s decision reduced the value of their property by an estimated 98%. The court, however, declined to address the merits under Penn Central, concluding that the DEC’s decision could not, as a matter of law, constitute a taking because it enforced wetland regulations that went into effect in 1977—well before the Kellehers bought their house. The trial court explained that “as post-regulation purchasers, [the Kellehers] bear the burden of proving that there was some compelling reason for them to expect that they could build a house on a parcel of land that was too small to meet the health-based septic system setback requirements, as well as other regulatory requirements.”

After the New York Court of Appeals refused to hear the Kellehers’ case, PLF filed a petition for a writ of certiorari with the U.S. Supreme Court, asking the Court to answer one of the most fundamental questions concerning a multi-part test: must a court consider and balance all three prongs when determining the effect of a regulation? Past cases from the U.S. Supreme Court indicate that the answer should be yes. But the lower federal and state courts are increasingly viewing the three-part Penn Central inquiry as a “one strike you’re out” test.

The Kelleher petition asks another long-nagging question whether enactment of a regulatory restriction will defeat a property owner’s expectation that he can use his property. The U.S. Supreme Court rejected the idea that local government can regulate property rights out of existence in Palazzolo v. Rhode Island (2001). But over the years, courts in New York and other states have resuscitated that defense by requiring landowners to show an absolute right to use their land in the manner desired under all regulations in effect at the time of purchase before they can state a viable claim for a taking. PLF’s petition argues that this rule must be rejected because it conflicts with the fundamental understating that enactment of a regulation cannot write property rights out of existence.

PLF is also participating in the case, Colony Cove Properties v. City of Carson, in which the Ninth Circuit Court of Appeals overturned a jury verdict awarding an apartment owner $7 million in just compensation. At issue was the city’s changing policy whether owners can include financing costs when applying for rent increases. At the time Colony Cove purchased the property, the city said you could. But afterward, the city changed its mind. Colony Cove brought a temporary regulatory takings claim against the city on the theory that its changed policy toward debt servicing effected a temporary taking because compelled Colony Cove to provide subsidized housing to the public with no return on its investment for the period of time that the new policy was in effect. The Ninth Circuit, however, held that Colony Cove could not rely on the status quo when purchasing an investment property—after all, the city is free to change its mind. Thus, Colony Cove’s expectation to operate the apartment building at a profit was not “reasonable” and could not support a takings claim.

PLF filed an amicus brief arguing that the Ninth Circuit’s reasoning renders the takings inquiry circular and meaningless. Indeed, the Ninth Circuit decision turns the very concept of “reasonable investment-backed expectations” on its head. Investors, at the very least, must be able to base their decisions on the past practices of a government entity, especially when those practices are published or directly communicated to the property owner before purchase.

Together, the Kelleher and Colony Cove petitions show just how confused the lower courts are about Penn Central. Despite being considered the “polestar” of regulatory takings law, the Court has largely refrained from elaborating on its “ad hoc” factors or explaining how the test is to be applied. This reluctance, although intended to preserve the flexibility necessary to respond to each case on its individual merits, has in turn “given rise to vexing subsidiary questions” regarding Penn Central’s application Lingle v. Chevron U.S.A. (2005). Time and time again, the victim of those “vexing” questions are owners who are deprived of their property without recourse. We are hopeful that the Court will take this opportunity to close some of the gaps in its wayward balancing test.

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