March 01, 2014

Koontz: An Evolution—Not a Revolution—in Takings Law

Mohammad O. Jazil

The U.S. Supreme Court’s decision in Koontz v. St. Johns River Water Management District, 133 S. Ct. 2586 (2013) stands for a simple and seemingly reasonable proposition: government should not do that which it cannot explain. Yet at oral argument, the United States warned that the Court’s decision “would constitute a radical change in the way standard, generally applicable regulatory programs are operated,” making it difficult to permit, for example, “coal-fired power plants.” Transcript of Oral Argument at 46, 48. The dissent explained that the majority opinion in Koontz would force governments to simply reject permits without first attempting to find common ground with applicants, resulting in vexatious litigation. And, in a New York Times editorial, a prominent law professor suggested that the decision in Koontz might literally cause garbage to pile up on Main Street. See John D. Echeverria, A Legal Blow to Sustainable Development, N.Y. Times, June 26, 2013. Given such dire consequences, one wonders whether a simple and reasonable proposition was worth establishing. It was. As this article explains, much of the criticism surrounding Koontz amounts to nothing more than momentary hyperbole. Koontz has not upended the well-entrenched administrative state, rendered government mute when dealing with the people it serves, or made government so impotent that it cannot provide essential infrastructure services like waste disposal.

Because Koontz is—or at least started as—a regulatory takings case, a short review of takings law is appropriate. There are two narrow categories of per se takings: one occurs when government action results in a permanent physical invasion of property, see Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982); the other occurs when government action deprives a property owner of all economically beneficial use of the property, see Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992). Regulatory takings occur under the Penn Central balancing test depending on the economic effects of a regulation, the regulation’s interference with investment-backed expectations, and the character of the governmental action. Penn Cent. Transp. Co. v. New York City, 338 U.S. 104 (1978).

In practice, governments easily avoid per se takings by refraining from permanent physical invasions of property and by leaving some residual value for property owners. The ad hoc Penn Central test rarely matters because it is the constitutional equivalent of a Hail Mary pass heaved in desperation against the stiff wind of government deference. See Mark Fenster, Takings Formalism and Regulatory Formulas: Exactions and the Consequences of Clarity, 92 Cal. L. Rev. 609, 611 (2004) (“the majority of regulatory acts enjoy deferential treatment in an ad hoc balancing test”).

Exactions, or conditions imposed on a land use, are different. According to the U.S. Supreme Court’s decisions in Nollan v. California Coastal Communication, 438 U.S. 825 (1987), and Dolan v. City of Tigard, 512 U.S. 374 (1994), whether or not a condition constitutes a taking is judged by a heightened scrutiny standard. To pass this heightened scrutiny standard, a condition must have both an “essential nexus,” Nollan, 483 U.S. at 837, and a “rough proportionality,” Dolan, 512 U.S. at 391, to the effects it hopes to avoid, minimize, or mitigate. And the government—not the applicant—must establish this “essential nexus,” and “rough proportionality.”

But, as recognized by Professor Mark Fenster, the U.S. Supreme Court’s decisions in Nollan and Dolan left open three important questions. First, the Court did not specifically address whether Nollan and Dolan apply to conditions other than those related to real property (e.g., to conditions related to the dedication of money and services). Second, the Court did not explain whether the Nollan/Dolan test applies only to conditions imposed on an individualized basis or whether it also applies to conditions imposed more broadly through legislation, rules, and ordinances. Third, the Court did not speak to whether an applicant must accept a permit before challenging an unconstitutional condition. Koontz resolved two of the three questions: whether an applicant must accept a condition before challenging it and whether conditions unrelated to dedication of a real property interest are subject to heightened scrutiny under Nollan and Dolan.

The Supreme Court’s decision in Koontz was the culmination of decades of litigation that began in 1994, when a property owner decided to develop 3.7 acres of an approximately 15-acre parcel in central Florida. Because the proposed development would affect the surrounding environment, including wetlands, the property owner applied to one of Florida’s five water management districts for permits designed to avoid, minimize, and mitigate environmental degradation. To obtain the necessary permits, the property owner offered a conservation easement to the district on the remaining eleven acres of his property. Unimpressed, the district offered to issue permits if the property owner would reduce the size of his development to 1 acre and dedicate the remaining 13.9 acres for conservation, or fund improvements to district property elsewhere, or agree to other “equivalent” offsite mitigation projects. Instead of accepting these conditions, the property owner sued the district under a Florida statute that allows property owners to recover “monetary damages” if a state agency, like the district, takes an action that is “an unreasonable exercise of the state’s police power constituting a taking without just compensation.” Fla. Stat. § 373.617(2).

The Florida trial court hearing the case found that the 3.7 acres the property owner hoped to develop had already been significantly degraded. St. Johns Water Mgmt. Dist. v. Koontz, 77 So. 3d 1220 (Fla. 2012). The trial court further found that any improvements to district property lacked an essential nexus and a rough proportionality to the environmental effects of the proposed development and that the district’s actions constituted a taking under Nollan and Dolan. The trial court ordered the district to issue the permit, agree to pay damages, or otherwise agree to modify its decision to avoid an unreasonable exercise of police power. The district agreed to issue the permit without the conditions after considering additional evidence regarding the amount of wetlands on the property. The trial court then awarded the property owner $376,154 in damages for a temporary taking of property.

On appeal, the district argued that its actions could not have constituted a taking under Nollan and Dolan for two reasons. First, the district explained, the property owner never accepted the conditions that the trial court found unreasonable. Second, according to the district, the conditions it proposed did not involve a physical dedication of land, but instead would have required the property owner to spend money to improve district property. A split panel of an intermediate appellate court disagreed with the district’s reading of Nollan and Dolan and affirmed the trial court’s decision. The Florida Supreme Court reversed. The Florida Supreme Court agreed with the district that Nollan and Dolan apply only to conditions that a property owner actually accepts and to conditions that involve the physical dedication of land. Surveying the split in authority on the issue, the Florida Supreme Court justified its decision as the most appropriate reading of the Nollan/Dolan test and the surest way of ensuring that government does not deny permits without discussion or negotiation, bringing “land development in certain areas of Florida . . . to a standstill” as a result. The property owner asked the U.S. Supreme Court to review the Florida Supreme Court’s decision.

U.S. Supreme Court’s Decision in Koontz

After granting the property owner’s petition for writ of certiorari, the U.S. Supreme Court reversed the Florida Supreme Court’s decision, holding “that the government’s demand for property from a land-use permit applicant must satisfy the requirements of Nollan and Dolan even when the government denies the permit and even when its demand is for money.” Koontz, 133 S. Ct. at 2603. All nine justices agreed that the Nollan/Dolan test applies regardless of whether the government approves a permit conditioned on the property owner’s conveyance of property (i.e., whether the government imposes a condition subsequent), or whether the government denies a permit until the property owner satisfies a condition (i.e., whether the government imposes a condition precedent). All nine justices also agreed that a government only takes property—entitling the property owner to just compensation under the Fifth Amendment to the U.S. Constitution—when the government issues a permit that fails to satisfy the Nollan/Dolan test. According to the Court, no property is taken—and not just compensation due—when the government denies a permit because a property owner refused to accede to an improper condition. In such circumstances, the property owner is simply entitled to a permit without the conditions and a monetary remedy under state law (if one actually exists). Stated differently, according to all nine justices, the Nollan/Dolan test applies to the imposition of an improper condition precedent, yet the improper condition precedent cannot result in a taking.

By a margin of 5–4, however, the justices disagreed about whether a permit conditioned on payment or expenditure of money triggers heightened scrutiny review under Nollan and Dolan. The principal disagreement between the majority and dissent centered on how best to distinguish an excessive monetary demand from a general obligation to pay money to the government—how best to distinguish a condition subject to heightened scrutiny under Nollan and Dolan from something like a tax to which a much more deferential standard applies. The majority warned that failing to extend Nollan and Dolan to monetary conditions would render the Nollan/Dolan test meaningless. If the Court were to limit the Nollan/Dolan test to conditions related to real property, then a government could easily evade this heightened scrutiny test by, for example, converting a condition for an interest in real property into a condition obligating a property owner to contribute money into a fund designed to acquire an interest in real property of value to the government. In other words, the government would get what it wanted without having to comply with the more restrictive Nollan/Dolan test, making the test superfluous in the process. The majority, therefore, concluded that drawing the distinction between a monetary condition and something like a tax was necessary, and the distinction between the two would turn on whether there exists a “direct link” between the government’s demand for relinquishment of funds and a “specific, identifiable property interest such as a bank account or parcel of property.” Koontz, 133 S. Ct. at 2600. The majority further reasoned that state law would help distinguish between an excessive demand and a tax, with the distinction being easier in practice than in theory.

The dissent found the majority’s distinction between excessive monetary demands and taxes unconvincing. According to the dissent, courts would “struggle to draw a coherent boundary” between the two. Id. at 2608. And because state law is “all over the map” when it comes to drawing a distinction between monetary conditions and taxes, the dissent predicted that state law would not be very helpful. Much like the Florida Supreme Court, the dissent thus warned that the majority opinion in Koontz would simply deprive governments of the flexibility needed to find common ground with applicants to permit desired activities; outright permit denials would replace negotiation and compromise.

On remand, the Florida courts must now “comply with the principles set forth [by the U.S. Supreme Court in Koontz].Id. at 2603. The Florida courts could address whether the district ever demanded that the property owner give up something (including money) as a condition for obtaining the necessary permits. The U.S. Supreme Court majority did not specifically address the issue, but the dissent noted that the conditions were only presented as “broad strokes” as an invitation to begin negotiations regarding permit conditions. The Florida courts could also address whether Koontz is entitled to any compensation from the district under state law. The U.S. Supreme Court majority and dissent agreed that there was no taking entitling the property owner to just compensation under the U.S. Constitution; however, the majority remanded the issue of compensation under state law to the Florida courts while the dissent noted that the state statute the property owner sued under only entitles a property owner to damages if a taking had occurred. Finally, the Florida courts could avoid any thorny issues under the Nollan/Dolan test by simply finding that the property owner’s takings claim is barred because the property owner failed to first exhaust his remedies under Florida’s Administrative Procedure Act. Indeed, two of the seven Florida Supreme Court justices came to exactly this conclusion when the Florida Supreme Court originally decided the case. To this observer, a decision in favor of the district on exhaustion grounds appears to be the most likely outcome. Such a decision would be based entirely on state law and should thus preclude a second petition for writ of certiorari to the U.S. Supreme Court.

Effects of U.S. Supreme Court’s Decision

Regardless of how the Florida courts rule, the Supreme Court’s decision in Koontz should have far-reaching, but subtle, implications on how governments—local, state, and federal—deal with property owners. Koontz, like Nollan and Dolan before it, recognized a fundamental truth: property owners are at a distinct disadvantage when dealing with their government because the bargaining table is always tilted in favor of the government. In most cases, at the local, state, and federal levels, government is entitled to great deference in interpreting its ordinances, rules, and statutes. See Chevron v. NRDC, 467 U.S. 837 (1984) and its state-specific analogs. Anything remotely within the government’s area of expertise, including modeling and predictions, also entitles the government to great deference. See Balt. Gas & Elec. Co. v. NRDC, 462 U.S. 87 (1983) and its state-specific analogs. Findings of facts, conclusions of law, and any other positions the government takes are usually entitled to some deference simply because they are the government’s positions. See Skidmore v. Swift & Co., 323 U.S. 134 (1944) and its state-specific analogs. Constitutional law generally—with its rational basis standard of review for most economic injuries—and takings law specifically—with the Penn Central test—are no different. So, to prevent government overreaching, the Supreme Court ruled as it did in Nollan, Dolan, and now Koontz. Stripped of all legalese, these three cases simply require the government to explain why it is doing what it is doing. If there is an “essential nexus” and a “rough proportionality” between the condition a government hopes to impose and the harm it hopes to avoid, minimize, or mitigate, then the government’s action would stand. Only government overreaching would not.

From the perspective of the United States, the administrative state would remain unharmed for four reasons. First, Koontz in no way alters the deference to which federal agencies are entitled under federal administrative law. Second, it is important to note that federal agencies impose many of their conditions through rules promulgated under the Administrative Procedures Act or an agency’s organic statute. These legislative rules, whether U.S. Army Corps of Engineers’ rules to protect wetlands or U.S. Environmental Protection Agency rules for coal-fired power plants, are beyond the scope of the Koontz decision. Koontz did not address the issue of whether the Nollan/Dolan test applies only to conditions imposed on an individualized basis or whether it also applies to conditions imposed more broadly through legislation, rules, and ordinances. While the U.S. Supreme Court may indeed extend Nollan/Dolan further in a subsequent case, in distinguishing excessive monetary demands from taxes, the Court indicated that it would not extend Koontz to broadly applicable conditions. In particular, the majority explained, “the fulcrum this case turns on is the direct link between the government’s demand and a specific parcel of real property.” Koontz, 133 S. Ct. at 2600. A broadly applicable condition would arguably sever the direct link that distinguishes a condition from a general obligation to the government. Third, even if the U.S. Supreme Court did extend Nollan and Dolan to broadly applicable conditions, most agency rules would probably survive. Many rules endure notice and comment rulemaking, and then judicial review. Under the Clean Air Act, for example, rules for coal-fired power plants usually find their way to the U.S. Court of Appeals for the D.C. Circuit and sometimes to the U.S. Supreme Court. Often these rules are upheld as a proper exercise of agency power. It is highly unlikely that after a rule endures judicial review as part of the rulemaking process it would then fail to pass muster under the Nollan/Dolan test. Presumably an agency rule that is not arbitrary and capricious bears an “essential nexus” and “rough proportionality” to the harm an agency hopes to avoid, minimize, or mitigate. Fourth, ad hoc applications of agency rules (i.e., the issuance of permits), in most instances, would also pass muster under the Nollan/Dolan test. The requirements of administrative exhaustion typically require an applicant to first challenge a permit through the administrative process. A permit that imposes unreasonable conditions would either not be issued or would not be upheld on appeal. Conditions that pass full administrative review would thus be unlikely to be found deficient in a later constitutional challenge. As such, contrary to the assertions of the United States at oral argument, there would be no radical change in the way standard, generally applicable regulatory programs are operated. The administrative state would endure in much the same form.

As a general matter, governments would continue to negotiate with the people they serve. Take local governments, for instance. Local governments and property owners almost always share a common goal: increased development. Property owners reap the direct financial benefits of development. Local governments increase their tax base, generating more revenue with which to govern. It is thus in the interests of both local governments and property owners to continue to talk, resolve issues that might arise, and then move ahead with a given project.

The Supreme Court’s decision in Koontz simply makes discussions between governments and property owners fairer. Koontz requires that governments come to the bargaining table with a condition that is directly related to some harm and one that imposes a burden proportionate to the harm—a burden that forces the property owner to internalize the costs of externalities for which it is responsible but nothing more. Requiring governments to do their homework is not a bad thing, especially when conditions discussed in broad strokes probably do not rise to the level of a condition actionable under the Nollan/Dolan test, and property owners are often repeat players before the government who recognize the importance of an enduring, working relationship with the government.

Of course, litigation might sometimes follow over the precise contours of any condition the government does propose. But unless a condition is clearly unreasonable, the government is likely to prevail based on the deference most courts afford to its interpretations of applicable rules or ordinances and the application of these rules or ordinances to the specific facts of a case. Savvy property owners know this and thus would sue only to curb what they see as gross abuses. Knowing that they have a legal remedy to curb these gross abuses, some might even refrain from seeking to address agency overreaching through their state legislatures and Congress.

In time, government might even see the Koontz decision as a positive. In his groundbreaking work the Strategy of Conflict, Thomas Schelling, winner of the 2005 Nobel Prize in Economics, observed that sometimes limits on one’s flexibility and discretion can be a good thing. This might yet be true for government in light of Koontz. Koontz places a limit on the ability of government to impose unreasonable conditions on property owners, conditions a government might otherwise be tempted to impose in an era of declining budgets, and a legal paradigm designed to mask errors through judicial deference. With temptation for state-sanctioned mischief off the table, through a slight erosion of government flexibility, and a need for government to truly think through the conditions it proposes, negotiations between government and property owners can be more meaningful. Stated differently, by learning to give and not just take—by truly negotiating—government would make good public policy while avoiding reactionary litigation and corrective legislation.

Mohammad O. Jazil

Mr. Jazil is an associate with Hopping, Green, & Sams, P.A.