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Jan. 2002 

Re:      SPECIAL REPORT: The U.S. Supreme Court’s Palazzolo Decision is a Mixed Blessing for Landowners and Property Rights 

Dear Friend of the Teichert Law Office: 

            The United States Supreme Court’s June, 2001 decision in Palazzolo v. Rhode Island,[1] did little to tame the proverbial “takings tiger.”  However, the decision has sweeping implications for property rights and real estate values, and is important to every property owner, farmer, real estate developer, or other person dependant on land use and development for a livelihood.  This Special Report will review key elements of the Palazzolo decision for your convenient review.[2] 

BACKGROUND LAW 

            In 1922, Justice Oliver Wendell Holmes, Jr. said that “while property may be regulated to a certain extent, if a regulation goes too far it will be recognized as a taking” of private property that must be compensated under the Fifth Amendment to the United States Constitution.[3]  Justice Holmes famous statement begs the question: how far is too far?   

Concrete answers to this question have been elusive during the eighty years since Justice Holmes raised it.   Nonetheless, a tradition has emerged wherein: (1) a regulation which denies the property owner “all economically beneficial or productive use of the land” will be recognized as a taking;[4] and (2) regulation which forces “some people alone to bear the burdens which, in all fairness and justice, should be borne by the public as a whole” will also constitute a taking.[5]  Courts may also consider a litany of other factors to find that a taking has occurred, even where regulations do not deprive an owner of all economically productive use.  These factors include interference with the owner’s reasonable investment-backed expectations.[6]   

BACKGROUND FACTS

            In Palozzolo, the Supreme Court considered a case where a property owner was denied a permit, first, to build a subdivision of seventy-four homes on a twenty-acre tract of waterfront property and, second, to build a private beach club.  Either proposal would have required the filling of salt marshes in violation of Rhode Island’s law protecting coastal wetlands. 

LEGAL ISSUES AND RULINGS

1.     Governments may not prevent takings claims by simply delaying the decision making process

In an earlier case, the Supreme Court held that a property owner could not sue to claim a regulatory taking of his/her property until “the governmental entity charged with implementing the regulations has reached a final decision regarding the application of the regulations to the property at issue.”[7]  This is so because it is not possible to know the impact of the regulation until the regulating agency has issued a final decision applying it.  However, there are limits to this doctrine.   

In the Palozzolo case, the Rhode Island Supreme Court held that the lawsuit was premature because the property owner had failed to submit a proposal that would result in filling substantially fewer wetlands than its two proposals that were denied.  The court did not consider the denial of the property owner’s building permit application to be a final decision, because the application was for a “grandiose development proposal, leaving open the possibility that lesser uses of the property might be permitted.”  The United States Supreme Court disagreed, holding that where an agency lacks the legal authority to allow development, the property owner may pursue a takings claim.  If there is doubt about “whether a more modest submission or an application for a variance would be accepted” the rejection of a more aggressive proposal will not trigger the right to file a lawsuit.  However, the Supreme Court also warned that “[g]overnmental authorities, of course, may not burden property by imposition of repetitive or unfair land-use procedures in order to avoid a final decision.”   This is an important statement because it prevents local governments from escaping responsibility for thwarting land use by unduly prolonging or avoiding its own authorization processes. 

2.   A land use decision depriving most of a tract of all economically productive use is not considered a taking if a significant use is permitted on any portion of the tract---for now 

Most of the property considered in the Palazzolo case was protected coastal wetlands and, under Rhode Island law, could not be developed.  However, a small portion of the tract was located on the uplands and, if a residence were built on it, would have had an estimated value of $200,000.  Based on this possibility, the Supreme Court decided that a taking of Anthony Palazzolo’s property had not occurred.   

This holding is the most troubling part of the Palazzolo opinion for private property owners.  Mr. Palazzolo had acquired the property with the intention of placing a seventy-four home subdivision on it, worth approximately $3,000,000.  When limited by regulation to building only one home, worth approximately $200,000, the Supreme Court nonetheless found that Mr. Palazzolo’s land had retained enough of its value to avoid a takings claim.  While making this holding, the Supreme Court said that “a State [sic] may not evade the duty to compensate on the premise that the landowner is left with a token interest” but found that the opportunity to improve a small part of the property to a value of $200,000 was more than a token interest.   

Mr. Palazzolo argued that the wetlands portion of his property was separate from the uplands portion, and that he should be able to claim a taking of the wetlands regardless of his options elsewhere on the property.  In the past, the Supreme Court has held that any decrease in the value of land occasioned by a regulation should be measured against the value of the entire tract to determine if the loss is substantial enough to be considered a taking of the parcel.  The Court also said, however, that it had “at times expressed discomfort with the logic of this rule.”  The Supreme Court declined to address the issue of whether Mr. Palazzolo had suffered a taking only of the wetlands portion of his property, because he had failed to raise that argument in the lower courts.  However, the Court’s brief discussion of the issue leaves open the possibility that, in a future case, the Supreme Court may hold that a regulation depriving an owner of all economically productive use of a distinct segment of his/her property is considered a taking of that segment.  That ruling would put substantial teeth back in the Takings Clause of the Fifth Amendment.  It would also place strenuous practical limits on the ability of local authorities to prohibit ground-disturbing activity in environmentally critical areas.  The Supreme Court will, therefore, not take the decision lightly.   

3.     The state cannot avoid takings claims by legislatively defining property rights out of existence

The Supreme Court reiterated that the state “may not [legislatively] transform private property into public property without compensation.”  The State of Rhode Island attempted to argue that a property owner could not claim that property had been taken by the state through regulation, if the owner had acquired the property after the regulation was enacted.  The theory of this argument was that regulation re-defines property rights, and that purchasers should frame their investment backed expectations in view of the rights of ownership as re-defined by regulation.  The Supreme Court rejected this analysis. 

The Supreme Court held that a property owner could “assert that a particular exercise of the State’s [sic] regulatory power is so unreasonable or onerous as to compel compensation” even if the owner acquired the property after the regulation was enacted.   According to the Supreme Court, the test for whether a new regulation results in a taking of property is as follows: 

Just as a prospective enactment, such as a new zoning ordinance, can limit the value of land without effecting a taking because it can be understood as reasonable by all concerned, other enactments are unreasonable and do not become less so through passage of time or title. 

The Court made it clear that the state cannot “put an expiration date on the Takings Clause” by making regulations immune to challenge by owners purchasing or inheriting property after the regulations are enacted.   The court appears to have adopted a reasonableness standard to evaluate whether a law or regulation goes too far in reshaping property rights.  

In a prior case,[8] the Supreme Court held that the right to compensation for regulatory action resulting in the loss of all economically beneficial use of property is limited only by the background principles of state property law.  For example, the ownership of land does not include the right to commit a public nuisance; and regulation prohibiting a nuisance does not result in a right to compensation, no matter how much it diminishes the value of land.  However, the Court has made it clear that many current land use restrictions are not among the background principles of property law.  The Palazzolo opinion did not attempt to further define the background principles of state property law.  The Court held that “a regulation that would otherwise be unconstitutional absent compensation is not transformed into a background principle of the State’s [sic] [property] law by mere virtue of the passage of title.”[9]  This is a significant ruling for private property owners, because it prevents the state from gradually shrinking the universe of property rights for owners acquiring property after the enactment of restrictive land use limitations.   

SUMMARY AND CONCLUSIONS

            An owner may not ordinarily bring a case claiming compensation for a regulatory taking of property until the regulating agency has issued a final decision with respect to the permitted uses of the land.  If the owner’s development plan is rejected, but there is a reasonable chance that a more modest proposal might have succeeded, the decision will not be considered final until the owner has offered the more modest proposal and it has been denied.  However, an owner need not make proposals that have no realistic chance of being accepted.  Additionally, the government cannot avoid takings claims merely by using delays and unfair procedures to avoid making final decisions. 

            For the present, an owner cannot receive compensation for the taking of a distinct segment of property (by regulations depriving that segment of all economically beneficial use), so long as there is another segment of the property that has more than a “token” economic value.   However, the Supreme Court has hinted that it may be willing to revisit that rule in a future case.  Regulation that makes a distinct segment of a tract economically valueless ought to be considered a taking of that segment.  If the government used its power of eminent domain to take private land for a nature preserve, there is no doubt that courts would consider this a taking requiring compensation under the Fifth Amendment, even if the government took only a small portion of the tract.  A regulation that creates the same result should not be treated differently simply because the legislative technique was different. 

            A regulation that denies a tract of land all economically beneficial use is considered a taking, unless the prevented uses are prohibited by the background principles of state property law.  However, many current land use regulations are not part of the state’s background tradition of property law.  The Palazzolo decision holds that acquiring property after the adoption of new regulations does not transform those regulations to background principles of state property law, nor does it make unconstitutional regulations part of the owner’s recognized investment backed expectations.  This rule discourages an erosion of property rights that would otherwise occur through the adoption of value destroying regulations, which would be binding on future owners notwithstanding the Fifth Amendment. 

THIS NEWSLETTER 

              I sent this newsletter because you, or someone you know, believed that you would benefit from occasionally receiving information about developments in the field of land use and planning.[10]  If you know of anyone else who might like a free subscription to this newsletter, please let me know by telephone or email.  Please include your friend’s full name and mailing address. 

                I hope that this newsletter was helpful to you.  If you have an idea for a future article, or would like to author an article yourself, please feel free to communicate with me using any of the information in this letterhead. 

 Sincere Regards,

JEFFREY B. TEICHERT

Attorney at Law