9.4 Defining and Analyzing Regulatory Takings

• Library: Eminent Domain Law in Virginia (Virginia CLE) (2017 Ed.)

9.4 DEFINING AND ANALYZING REGULATORY TAKINGS

9.401 Two-Step Analysis. Following Lucas, the federal courts have endorsed a two-step analysis in evaluating any takings claim. The first step is to determine whether the right in question exists in the owner's fee and the second step is to determine if the government action rises to the level

[Page 391]

of a taking. As stated by the United States Court of Appeals for the Federal Circuit,

precedent indicates a "two-tiered" approach in analyzing a takings claim involving governmental action that results in land use restriction. First, a court should inquire into the nature of the land owner's estate to determine whether the use interest was part of the owner's title to begin with, i.e. whether the land use interest was a "stick in the bundle of property rights "acquired by the owner." Lucas, 505 U.S. at 1026, 112 S.Ct. at 2899. Second, if the claimant can establish the existence of such an interest, the court must determine whether the government action at issue constituted a compensable taking of that "stick." ¹⁴¹

9.402 Definition of "Property." While the United States Supreme Court has been far from clear about when the impact of a regulation requires compensation, it has consistently said that the term "property" within the Fifth and Fourteenth Amendments is not defined by federal courts but "by reference to existing rules or understandings that stem from an independent source such as state law." ¹⁴²

In Front Royal & Warren County Industrial Park Corp. v. Town of Front Royal, ¹⁴³ the Fourth Circuit reversed the district court's award of damages for a regulatory taking ¹⁴⁴ on the grounds that the property owner, IPC, had no Virginia property right in having sewer service provided by the government, even though an annexation order issued after IPC purchased

[Page 392]

the property provided that such service would be provided by the Town to IPC's land. According to the Fourth Circuit's interpretation of Lucas:

When IPC purchased its land in 1973 and 1974 and acquired its title, before annexation by the Town, it had not a legitimate expectation that the land came with the public provision of sewer service. Instead, inherent in the title was the implied limitation that the owner would have to provide for its own water and sanitary sewer waste disposal. This same factual basis also supports the conclusion that IPC did not suffer the defeat of its investment-backed expectations. When IPC purchased the land in 1973 and 1974, that investment could not have been backed by the expectation that its land would be provided with public sewer service. ¹⁴⁵

The Fourth Circuit's opinion must be read in light of the Supreme Court's subsequent opinion in Palazzolo in which it held that notice of the offending regulation is not a background principle of state law that serves as a per se bar to a takings claim. ¹⁴⁶

9.403 Definition of "Regulatory Taking." The case law has thus far not settled upon one neat and tidy definition for what constitutes a "regulatory taking." Instead, the case law relies upon categories of circumstances to define regulatory takings.

9.404 Post-Lucas Categorical Takings. As Justice Scalia noted in Lucas, the Supreme Court has eschewed any set formula for determining how far is too far, preferring to engage in essentially ad hoc factual inquiries to determine whether a regulatory taking has occurred. There are, however, two exceptions that constitute a taking per se: (i) an actual physical invasion of property and (ii) cases where the regulation denies all economically beneficial and productive use of land.

A. Physical Invasion of Property. The Supreme Court has held that regulations that effect a permanent physical occupation of property result in a per se compensable taking regardless of the economic impact on

[Page 393]

the property. ¹⁴⁷ In such a case, a court will not engage in a balancing test as provided for in Penn Central. ¹⁴⁸ Physical invasions, of course, are not regulatory takings. Rather, they are straightforward physical takings— merely precipitated by regulation—requiring compensation pursuant to the plain language of the Constitution. ¹⁴⁹

In Brown v. Legal Foundation of Washington, ¹⁵⁰ the Supreme Court recognized that the mandated transfer of interest from IOLTA accounts to the Legal Foundation was a physical invasion of property, akin to the occupation by the government of a small amount of rooftop in Loretto v. Teleprompter Manhattan CATV Corp. ¹⁵¹ However, in a ruling that appears contradictory to the rule in Loretto which held that any physical invasion, no matter how small, requires compensation, the Court in Brown held that no compensation was due to owners of the funds. The Court reasoned that no compensation was due to owner of the IOLTA fund because the Washington Supreme Court rule at issue required money to be put into IOLTA funds only when it could not otherwise earn interest. Therefore, the Court reasoned there could no "net loss" of revenue to the owner because IOLTA funds could not have earned net interest in the first place. ¹⁵²

B. Denial of All Economically Beneficial Use of Property. The Lucas decision established another per se rule by holding that a com-pensable taking occurs if regulation denies "all economically beneficial and productive use of land." However, that rule is subject to an exception: Compensation will not be required if the uses prohibited by the regulation also were precluded by "background principles of the State's law of property and nuisance." ¹⁵³

In Palazzolo v. Rhode Island, ¹⁵⁴ the Court held that the "background principles" exception is not invoked by mere passage of title after the

[Page 394]

enactment of a state law. In so doing, the Court rejected the notion, suggested in Lucas, of a bar to categorical takings claims where owners take with notice of the offending regulation. In particular, the Court held:

We have no occasion to consider the precise circumstances when a legislative enactment can be deemed a background principle of state law or whether those circumstances are present here. It suffices to say that a regulation that otherwise would be unconstitutional absent compensation is not transformed into a background principle of the State's law by mere virtue of the passage of title. A regulation or common-law rule cannot be a background principle for some owners but not for others. The determination whether an existing, general law can limit all economic use of property must turn on objective factors, such as the nature of the land use proscribed. A law does not become a background principle for subsequent owners by enactment itself. ¹⁵⁵

C. Definition of "All Economically Beneficial Use." The meaning of the term "all economically beneficial use" was not explained by the Lucas court, except by reference to the particular facts of that case where the property could only be used for camping. In Palazzolo, however, the Court held that $200,000 worth of development value remaining in a portion of the property was sufficient to bar a categorical takings claim, even though the landowner has sought $3,150,000 in damages. Thus, a regulatory takings claim alleging denial of economically beneficial use appears to require that all economically beneficial use of the property be taken from the landowner such that not even a single house or other valuable structure can be constructed on the property.

D. Other Categorical Taking Examples. Other examples of the application of the categorical taking category are discussed in the following paragraphs.

In Board of Supervisors v. Omni Homes, Inc., ¹⁵⁶ the Supreme Court of Virginia reversed the trial court's ruling that Omni had suffered a

[Page 395]

deprivation of all economically viable uses. ¹⁵⁷ The trial court based its ruling on the fact that expenditures the property owner had made in preparation for its preferred method of development made it impossible to yield a profit following the government action. ¹⁵⁸ In overturning the trial court, the Supreme Court of Virginia appears to have followed the message from the United States Supreme Court that the totality of uses an owner has a right to expect (i.e., his reasonable investment-backed expectations) are measured at the time of purchase ¹⁵⁹ and are not based upon how much debt a landowner runs up in pursuit of a development scheme that he erroneously thought was available. ¹⁶⁰ More significantly, the Supreme Court of Virginia measured the economic impact as the difference between the fair market value at the date of purchase and the fair market value on the effective date of the alleged governmental regulation as distinguished from the trial court's measuring of the difference between the value immediately before and the value immediately after the effective date of the alleged regulation. ¹⁶¹ The court's decision in Omni Homes appears to be a rejection of the majority opinion of the United States Court of Appeals for the Federal Circuit in Florida Rock Industries, Inc. v. United States, ¹⁶² which held that the economic impact of the regulation should be measured against...