RPLR September 2017

 

                                                     The New Mathematics of Takings Cases

                                                                      Roger Bernhardt

                                                                                Murr v Wisconsin

Land use attorneys had been eagerly waiting for the United States Supreme Court to decide Murr v Wisconsin (2017) ___ US ___, 137 S Ct 1933, in the hope that the decision would give them some helpful guidance on the “denominator” issue in takings cases, i.e., what property to use in calculating how much of a loss has been suffered. Well, we have gotten that decision, but I don’t think it supplies the guidance they were looking for.

In Murr (more fully reported at p 111), the town of Troy, Wisconsin, had refused to let the Murr family separately sell or develop either of their two lots that fronted the St. Croix River because each of those parcels—both substandard in size—was deemed merged under local law after being acquired by the same family, and thus had lost the earlier grandfather exemptions that had given them protected status. The Murrs claimed that this treatment constituted a taking of one of those two parcels (Lot E), which was worth about $40,000. For takings purposes, did this $40,000 loss constitute 100 percent of the $40,000 value of Lot E, or did it amount to only about 5 percent of the $800,000 value that the two parcels had together? The question of whether the state had taken away all the value of Lot E or only 5 percent of the value of the two lots is generally described mathematically as the denominator question: $40,000 was the numerator of the takings formula, but was the denominator $40,000 or $800,000?

(There is no similar denominator issue when there is a physical taking of property. If the government takes one acre of land from an owner, then it must pay the owner the value of that one acre; the amount does not change because of other acres that were or were not taken (unless that remainder suffered some additional “severance” damages). But when the taking is regulatory instead—i.e., when nothing has been physically occupied or removed but some regulation has significantly lowered the value of the “locus in quo”—then a formula becomes necessary to measure the extent of the reduction in value. (Indeed, if the compensation requirement in takings law were limited to physical takings, life would be considerably simpler for all parties.) But ever since 1922, when Pennsylvania Coal Co. v Mahon (1922) 260 US 393, 43 S Ct 158, came down, our rule has been that a regulation that goes “too far” amounts to a compensable taking of property.)

Determining whether a regulation has gone “too far” does not give much guidance to governments or owners, making obvious the need for a more precise and mathematical formula, one that compares “the value that has been taken from the property with the value that remains in the property,” as Murr described it. 137 S Ct at 1943. But that analysis, as the decision also observed, requires a court to determine “how to define the unit of property whose value is to furnish the denominator of the fraction.” 137 S Ct at 1944.

Murr’s New Denominator Factors

The State of Wisconsin proposed that the denominator in the Murrs’ taking claim consisted of the two lots, combined, because those two lots had been merged into one. The Murr family argued, conversely, that Lot E alone was the denominator, because it still maintained its own separate legal lot lines. The Court’s majority rejected both of these proposals as too formalistic and question-begging; they were to be replaced by a new “multifactor” standard, one that “considers state law but in addition weighs whether the state enactments at issue accord with other indicia of reasonable expectations about property.” 137 S Ct at 1947. These other indicia included not only (1) the parcel’s “treatment under state and local law,” but also its (2) “physical characteristics” and (3) “prospective value” (my numbering). 137 S Ct at 1938. These new standards dictated that the Murrs’ property should be treated as a single parcel (of the two lots) because of their merger, their common topography, and their combined value.

The Court’s three dissenters contended that this new math established a “litigation-specific” definition of property (two lots for general purposes but one lot for takings analysis) and amounted to a counting of the same factors twice over (once in the denominator and again in the overall formula). I am not a good enough mathematician to rule on that question, but legally, I think this new rule makes it much harder for parties to predict outcomes in taking cases. If regulators, or owners, or the attorneys for either, or judges are asked to opine on the question of whether there has been a taking of property, and are to start by first asking what property has been taken (the numerator) and from what property (the denominator), based on their consideration of the land’s (1) treatment under local law, (2) physical characteristics, and (3) prospective value, I doubt that this multifactor test will provide much clarity or predictability in that analysis.

To illustrate these, consider the situations in three past well-known Supreme Court decisions:

·       Penn Cent. Transp. Co. v City of New York (1978) 438 US 104, 98 S Ct 2646, reported at 1 CEB RPLR 124 (Nov. 1978), which held that the city Landmarks Preservation Commission’s rejection of plans for a 50-story office building over Grand Central Terminal did not amount to a taking of that space.

·       Lucas v South Carolina Coastal Council (1992) 505 US 1003, 112 S Ct 2886, reported at 15 CEB RPLR 280 (Aug. 1992), which held that the decision that the owner of two coastal residential lots could not build single-family homes on either of them deprived him of all of the value of both lots.

·       Palazzolo v Rhode Island (2001) 533 US 606, 121 S Ct 2448, reported at 24 CEB RPLR 207 (July 2001), which held that an owner of coastal wetlands who was prohibited from filling and improving 11 of the 18 acres he owned was entitled to claim a taking even though he had acquired his land after the regulation had gone into effect.

Remember, I intend to use these cases not for their outcomes but only for their somewhat typical facts.

The Three Factors

Murr’s multifactor analysis describes the first factor to consider as “the treatment of the land, in particular how it is bounded or divided, under state and local law.” 137 S Ct at 1938, 1945. (The Murr majority then declared that the merger of the two lots was for a legitimate purpose, and supported a “reasonable expectation they will be treated as a single property” (137 S Ct at 1948), thus supporting a larger denominator of two lots rather than a smaller denominator of just Lot E.) Would that kind of reasoning have generated a similar reasonable expectation that the unbuilt tower in Penn Cent. was likely to be treated as part of a larger parcel that included the ground floor, which already existed, or rather that it was more likely be considered separately (as is often done with condominiums)? Which prediction would you have made about the denominator in Penn Cent.? Would the Murr approach have informed Lucas’s attorney that his denominator would be the both of his lots, or just one of them, especially if he had wanted (or not wanted) to improve the other? Lastly, would this analysis have warned the Rhode Island Council that Palazzolo’s denominator could be the 11 acres he could not fill or the entire 18 acres that he owned? I fear I would have to confess to any of my clients in those situations my uncertainties of whether their losses would be great enough to say the state had gone “too far” and at the same time independently determine the extent of their losses (i.e., their denominators).

Murr’s second factor was the physical characteristics of the property, including the “physical relationship of any distinguishable tracts, the parcel’s topography, and the surrounding human and ecological environment.” 137 S Ct at 1945. (This consideration again supported in Murr a larger denominator, based on the lots’ contiguity, their shared rough terrain and narrow shape, as well as their riparian location.) Would that kind of thinking lead one to suspect that the offices in the Penn Cent. tower might have their own (smaller) denominator, because the ground floors of that building housed railroad tracks instead of offices, or would their inclusion within the same walls justify a larger denominator? Would the two lots Lucas owned have a larger common denominator because both were coastal, or a smaller one if he intended to improve only one? Finally, would the fact that the 11 of Palazzolo’s acres were to be treated differently from the rest of the 18 mean that his denominator was 11 or 18?

The third Murr factor was value, including any offsetting benefits to the rest of the property in terms of privacy, recreation, or beauty, which seemed to mean comparing the value of the lots as separate versus unified. That may mean we need to consider

·       The effect (or noneffect) of the future upper floors on the value of the ground floor in Grand Central Terminal, in deciding whether the denominator there was the entire building or just the tower;

·       The effect on the value of one coastal lot of not improving the other coastal lot, or perhaps on the value of both lots; or

·       The effect of the filled or unfilled 11 acres on the rest of the project in Rhode Island.

Is this new math likely to make calculations any easier?

Finally, even if this kind of approach can be followed in some cases, what do we do when its factors yield results that are in conflict? What prediction do you make if you conclude that, e.g., the prior legal treatment of the property (the first factor) supports using a larger denominator but its physical features or values (factors two and three) justify using a smaller denominator? Will property owners or government agencies appreciate our wishy-washy and evasive opinions?

Virtues of The Fuddy-Dud Old Way of Thinking

It is not just people like me—isolated academics—who will probably be so troubled by this new complexity; risk-averse and predictability-loving parties are likely to react in opposite ways from their opportunistic or publicity-loving adversaries on the other side. The new uncertainties may affect all parties, but likely quite differently.

 40 Real Property Law Reporter 108 (Cal CEB Sept. 2017), © The Regents of the University of California, reprinted with permission of CEB.