In 1922, the Court recognized that federal, state, and local regulation violates the Takings Clause of the Fifth Amendment (incorporated through the Due Process Clause of the Fourteenth Amendment to the States), when it “goes too far,” in Justice Oliver Wendell Holmes’s famously vague and circular formulation. Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 415 (1922). Many years later, the Court fleshed out the phrase in two seminal decisions: Penn Central Transp. Co. v. New York City, 438 U.S. 104 (1978) and Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992).
In Penn Central, a majority of the Court articulated a multifactor test for determining when a regulatory taking has occurred. The factors include, among others, 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.” In Lucas, a different, more conservative majority held that a per se regulatory taking occurs when a regulation deprives a property owner of “all economically beneficial uses” of his or her property. In such situations, the trial court need not resort to the application of the Penn Central factors.
In practice, claims that meet the Lucas standard tend to prevail, and those evaluated under the Penn Central factors fail. This is so because it is inherently more difficult to prove that government action is unreasonable—has “gone too far”—employing a multifactor test, than to demonstrate that a property has lost all economically beneficial use. Nonetheless, given that it is factually rare that a regulation strips property of all economically beneficial uses, vastly more regulatory takings claims are decided applying the Penn Central criteria than the rule articulated in Lucas.
Before determining whether a regulatory taking has occurred, however, a court must determine what property is the subject of the takings claim in the first place—what is the property that was potentially, constructively taken by regulation. This is the question presented to the Court in Murr. It is frequently referred to as the “denominator” in these cases, because it seeks to determine what property interest the takings claim should be measured against. The answer can have great legal and practical significance because the more narrowly framed the property interest is, the more likely a claimant may benefit from the Lucas rule, rather than be required to demonstrate a taking under the Penn Central factors. Moreover, the larger the property interest, the more the governmental regulatory interference is diluted by, and can be diffused across the value and use of the balance of the property. Thus cases can be won and lost in answering the denominator question alone.
In Murr, the Court is not acting on an entirely blank slate. Penn Central itself provides some guidance on this question. In this case, the plaintiff sought to separate its air rights over Grand Central Station in New York City from its fee interest in the property. The Court rejected this argument and held that the takings claim must be measured against the “parcel as a whole,” which was “the city tax block.” Likewise, a footnote in the Lucas decision suggests that “the answer to this difficult question may lie in how the owner’s reasonable expectations have been shaped by the State's law of property.” However, the Lucas Court held that it did not need to resolve the denominator issue because the plaintiff had a fee simple estate, “an estate with a rich tradition of protection at common law.”
Procedural Background and Issue Presented in Murr
In Murr, the precise formulation of the question is whether the petitioners’ property that is the subject of their claim is composed of one or both of their 1.25-acre adjoining properties on the St. Croix River in Wisconsin, near Minneapolis-St. Paul. One property is improved by a family cabin. The other property is vacant. The Murrs’ parents purchased the properties before the local authorities, pursuant to a suite of federal and state statutes, adopted a regulation that merged the properties for zoning purposes. This merger rendered the vacant lot unbuildable and unmarketable on its own. Before this litigation, the petitioners appealed St. Croix County’s interpretation of the merger provision and alternatively sought a variance from the relevant local board of zoning adjustment. These efforts proved unavailing, and the negative determinations of the local board were affirmed at the trial and appellate levels of the Wisconsin Judiciary. This alternative litigation ended in 2011. As a result, the Murrs filed a regulatory takings claim in Wisconsin State Court. The trial court granted summary judgment against them inter alia because, according to its view of the law, the Murrs’ claim had to be measured against their contiguous properties as a whole. So viewed, the governmental interference was too minor, as a matter of law, to amount to a taking. This decision was then affirmed by the Court of Appeals of Wisconsin, the state’s intermediate appellate court, in an unpublished per curiam decision. The Supreme Court of Wisconsin denied further appellate review.
The decision of the Court of Appeals of Wisconsin, in pertinent part, hinged on the proposition that denominator of the Murrs’ regulatory takings claim per se includes their improved, contiguous land. According to the court, under the Supreme Court of Wisconsin’s gloss on Penn Central and its progeny, “contiguousness is the key fact.” However, under U.S. Supreme Court case law, the validity of this formulation of the rule is questionable. The decision by the New York Court of Appeals in Penn Central measured the takings claim against the plaintiff’s properties in the vicinity of Grand Central Station. See Penn Central Transportation Co. v. New York City, 42 N.Y.2d 324, 333–334 (1977). The Supreme Court did not adopt that position in Penn Central, instead focusing on the “parcel as a whole” and not other holdings. Moreover, the Court in Lucas opined that this aggregation of properties was an “unsupportable” “view of the calculus.” The Court granted certiorari to clarify the denominator inquiry.
Oral Argument: The Justices Struggle with an “Incredibly Complicated” “Area of Law”
The Court granted certiorari on the denominator question. However, throughout oral argument, the Justices strained to remain focused on this discrete question presented (even though Chief Justice John Roberts repeatedly attempted to bring the questioning back to the precise issue). The discussion immediately veered substantively into the merits of whether the Murrs had suffered a regulatory taking.
Kennedy posed a hypothetical about complementarity. At the outset, Justice Anthony Kennedy posed a hypothetical, involving the economics principle of complementarity, also known as assemblage in appraisal practice: Sometimes property can be worth more as part of an assembled whole than on its own. He discussed two contiguous lots, in common ownership, which become more valuable together ($500,000) than separately ($100,000). Kennedy asked, if the county wanted to build a “fire station” and took one of the lots, how much would that one lot be worth? He suggested that, under the Murrs’ theory, it would be worth $100,000 and the “State would be—would be getting the windfall.” This line of questioning, addressed to value and, thus, harm, was seemingly off-topic from the denominator question. However, Kennedy was subtly suggested that the inquiry into the property subject to the takings claim should take into account market forces, and he was concerned that the Murrs’ position “completely ignores market factors.”
Kennedy’s posing of this hypothetical was also, in part, borne of the facts of this case. In the summary judgment record, there was evidence that the Murrs would suffer only a 10 percent reduction in value by being compelled to aggregate their properties. However, the Murrs’ appraiser had opined that the inability to build on one of their properties left that property with 10 percent of its value as an otherwise buildable lot. This conflicting evidence would appear to present a classic triable issue and would seem to go to whether the Murrs suffered a cognizable injury under the Takings Clause, not what is the property subject to the claim in the first place. Nevertheless, this conflicting evidence also demonstrates that the Murrs may not prevail in this litigation, even if they prove victorious on the denominator question before the Court.
St. Croix County proposed “Penn Central squared.” The propensity of the Justices to venture into the merits territory was also caused by the legal positions taken at oral argument. The Respondent County of St. Croix and the United States Government, as an amicus in support of the respondents, both propounded multifactor tests to determine the denominator in the regulatory takings cases. However, these factors resemble, if not are identical to, the Penn Central factors, with the addition of geographic factors, such as contiguity.
Thus, these positions were vulnerable at oral argument to the criticism offered by the Respondent State of Wisconsin through the state solicitor general, as resulting in a “Penn Central squared” analysis in every regulatory takings case. In other words, according to St. Croix County and the United States, courts should engage in the full Penn Central inquiry to determine the identity of the property that is the subject of the takings claim, and then apply the same criteria to determine whether a taking of that property has occurred. Chief Justice Roberts appeared particularly receptive to this mode of criticism at argument, adopting the general’s catch-phrase to describe the county’s position.
The petitioners advocated for a rebuttable presumption that the lot is the lot. Whether right or wrong, the petitioners’ argument at least had the virtue of simplicity. The petitioners advocated for a presumption that the “parcel as a whole” is the individual lot that is the subject of the regulatory takings claim, with the government bearing the burden of proving that the lot is, in fact, part of a larger integrated economic unit with other property. Justice Sonia Sotomayor appeared skeptical about the notion that the Murrs’ presumption was truly rebuttable. In response, the petitioners gave the example of the hotel parking lot as a lot that would not be the denominator in a regulatory takings case under their presumption.
Nevertheless, in addition to being simple, the Murrs’ legal position appeals to common sense and the facts of merger cases. On its face, there is no viable claim against the grandfathered, substandard lot that is improved. As to this lot, there has been very little, if any, governmental interference with its use and development. It is only the use of the merged, unimproved lot, which for any other property owner would be buildable, that has been affected by regulation. Thus, as a matter of referential meaning, the lot is, in fact, the lot potentially taken, not the adjoining developed lot.
Justice Breyer reaffirmed his affinity for multifactor tests. At oral argument, Justice Stephen Breyer criticized the Murrs’ position because the Court had previously held that regulatory takings claims should not be determined by a “mechanical test.” See Penn Central, supra (referring to regulatory takings claims as involving “essentially ad hoc, factual inquiries”). However, this criticism seems to overlook the fact that the issue presented is not whether a taking occurred but instead asks this: What is the property that is the subject of such a claim?
To be fair, Justice Breyer nevertheless appeared poised to jettison the denominator inquiry altogether as a discrete threshold question and instead fold it into the Penn Central factors on the merits. Perhaps, given how this inquiry has bedeviled the courts—including the justices at oral argument in Murr—this position is not so unreasonable. Moreover, Penn Central itself did not proclaim the “parcel as a whole” as the “denominator” in regulatory takings cases, but rather treated defining the property as part of an undifferentiated application of a series of factors to determine whether regulation has “gone too far.” Justice Breyer nonetheless appeared alone in this position at oral argument.
The State of Wisconsin argued that zoning merger provision defines property. Also attempting to keep the analysis simple, the Respondent State of Wisconsin’s position was that the zoning merger provision itself had the effect of defining the “parcel as a whole.” Given the prevalence of zoning merger provisions throughout the several states, Justice Ruth Bader Ginsburg asked whether the merger regulation at issue could not be characterized as the type of “background State law” that would define the property potentially taken. However, the “background State law” referred to in the cases is not the law throughout the country but the specific law of the state at issue, because it is this law that creates the property rights potentially taken through regulation. Here, there was no preexisting merger provision under Wisconsin law that could have set the Murrs’ parents’ rights, in the first instance.
In a similar vein, Justice Elena Kagan queried why lot lines and what is at the registry of deeds alone should define the denominator. She wondered why the Court should not consider all of state law, including the merger provision, “the whole ball of wax,” to determine the identity of the property potentially taken. However, as the petitioners argued in their brief, there is something inherently tautological and dangerous about having the very regulation that is alleged to violate the Takings Clause define the property taken, the injury. The state injures a citizen and then gets to define the injury as harmless, all in one fell swoop of the regulatory pen.
Moreover, it is reasonably clear, from reading the entire footnote, that when he wrote about “reasonable expectations . . . shaped by the State’s law of property” in Lucas, Justice Antonin Scalia was referring to real property law, not regulatory law. Indeed, this confusion and dichotomy are likely very familiar to real estate litigators. In our practice, we constantly encounter people who wish to vindicate private property rights through regulatory claims and believe that they have obtained property rights because of regulation. However, in our experience, judges, particularly those experienced in this area, take a dim view of these types of arguments and attempt to maintain a clear line of demarcation between real property and regulatory law.
However, Murr underscores that this line is not practically clear. Increasingly, because state and local zoning laws first took effect, new lots are created in conformity with present-day zoning. In some jurisdictions, this conformity is even legally required, as a matter of real property law. Subdivision plans will not be approved without demonstrating zoning conformity. Such plans cannot be recorded and, then, used as a reference point for conveyances, unless they are approved. This indirect, though significant, causal relationship creates dissonance, which was on display during the Murr oral argument.
There are very good reasons, from the perspective of legal policy, to keep real property and regulatory law separate. Local, volunteer regulatory boards are neither equipped nor mandated with determining real property rights, and the regulations that they administer are animated by entirely different equities than real property law. However, bleeding into each other is unavoidable for these areas of law, and this informed the justices’ questioning in Murr. Coming from the vantage of keeping the bodies of law separate, Justice Kennedy lodged a question that appeared to intimate that, perhaps, all of the zoning merger provisions throughout the country may violate the Takings Clause rather than comprise background state law.
Nevertheless, Justices Ginsburg and Kagan’s questions, indicating an openness to viewing merger provisions as part of the law that defines the denominator, were also predictable under the facts of the case. The Murrs would appear to have some timing issues: They took title to the properties almost 20 years after the merger provision had been adopted. Therefore, notice of the change in the status of the lot was a matter that concerned Justice Sotomayor, in particular, at oral argument. However, there was repeated discussion about whether such notice under the Court’s decision in Palazzolo v. Rhode Island, 533 U.S. 606 (2001), is incapable of defeating, and is irrelevant to the success of a regulatory takings claim. Thus, the Court may be posed to elucidate the scope of the holding in Palazzolo in this case as well.
The case elicited pathos from Justice Alito. Through his questioning, Justice Alito demonstrated the most empathy with the Murrs’ circumstances of any of the justices. He seemed struck by the unfairness of merger provisions, in requiring the “McMasionization” of swaths of the country, depriving citizens of the choice between smaller houses on more, smaller lots, and bigger houses, on fewer, larger lots. Nevertheless, this questioning again bled into the merits analysis rather than the denominator question (although it may provide some evidence of where Alito is leaning in this case).
Chief Justice Roberts attempted to keep the case focused and simple. Chief Justice Roberts attempted to keep the discussion focused on the question at hand: what is the property, not whether a taking had occurred. His questioning seemed to reflect his agreement with the Murrs’ position that, when it comes to defining the property, people look to what is at the registry of deeds, not what is embedded in a zoning regulation. He repeatedly challenged the Wisconsin solicitor general, in the solicitor general’s position that the lot lines have no continued legal effect in this case. Roberts pointed out that, until the merger litigation that ended in 2011, the lots had been separately assessed for tax purposes. See Penn Central, supra at 131 (holding property subject to regulatory takings claim is “parcel as a whole— here, the city tax block”) (emphasis added).
Overall, the questioning followed the usual assumptions of judicial ideology. The left wing of the Court appeared more sympathetic to regulation than the right wing. The conservative justices seemed more interested in vindicating, formal, bright-line private property rights than the liberals, who took a broader, more functionalist approach in their questioning.
In fact, on one end of the spectrum, Justice Breyer made comments that appeared openly hostile to the relevancy of property rights, even in these in rem proceedings. Placing himself in the position of the State of Wisconsin, in implementing the merger provision, Breyer stated to the petitioners’ counsel that “[y]ou can build one [house]. One. And it doesn’t matter if you have six . . . parcels together or—one. One is what you can build because, after all, this Constitution is concerned about, to paraphrase Justice Warren, protecting people, not rocks.” However, when a court is defining the “rock” that may have been constructively taken, should the court not employ the law that, in fact, defines the “rock” rather than its use? The Court will soon answer this subtly complicated question.
This is merely a summary and discussion of only a small slice of the 70-plus minutes of riveting discussion at oral argument in Murr. As a means of thinking about and analyzing the nature of property, the Murr oral argument is a must-listen-to piece of U.S. real property law history. The Court’s ultimate decision in Murr also promises to have a huge impact on zoning throughout the country, if it reaches the merits of the denominator question and sides with the Murrs. Real estate litigators must stay tuned in.