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The Urban Lawyer

Regulatory Takings and Vested Rights - An Update

by Robert H. Thomas

Robert H. Thomas is a land use and appellate lawyer at Damon Key Leong Kupchak Hastert in Honolulu, where he focuses on regulatory takings, eminent domain, water rights, and voting rights cases. He blogs about these topics at This article is a summary of the presentation he made at the 31st Annual Land Use Institute in Miami, Florida.


I. Federal Circuit: “Economically Beneficial Use” Means More Than Someone Might Buy the Property

THIRD TIME AROUND FOR LOST TREE’S TAKINGS CASE against the federal government. The first was the Federal Circuit’s decision concluding that a single Florida parcel owned by the plaintiff was the relevant parcel against which the impact of the Corps of Engineers’ denial of a § 404 wetlands dredge and fill permit was to be measured. The court overturned a Court of Federal Claims decision that concluded the relevant parcel was that single plot plus an additional nearby lot, plus “scattered wetlands in the vicinity” also owned by the same owner.

Second was the Court of Federal Claims, which on remand held that there was a taking, and that, after applying either the Lucas total wipeout or the Penn Central ad hoc test (the diminution in value caused by the denial of the permit was 99.4%), the just compensation owed to Lost Tree was in the neighborhood of $4.2 million. The court calculated the diminution by subtracting the parcel’s value without a permit from its value had a permit been issued.

The government appealed again to the Federal Circuit, which issued an opinion affirming the Court of Federal Claims, concluding that yes, there was a Lucas taking. The court did not consider the CFC’s Penn Central analysis, concluding it was not necessary to do so. It’s not a terribly long opinion, so please read the case yourself if your boat, like ours, is floated by issues such as “whether residual value arising from noneconomic uses precludes application of Lucas and requires application of Penn Central’s balancing test.” (No, held the court, it does not.

Nor is the ability to sell the parcel an “economic use.” The court rejected the government’s argument:

The government argues that a landowner’s ability to sell an affected parcel is an economic use that precludes Lucas’s per se treatment. According to the government, Lucas classifies a sale as an economic use. The government cites this court’s decision in Conti v. United States for the same proposition. See 291 F.3d 1334 (Fed. Cir. 2002). Because Plat 57 has residual value, the government argues Lost Tree’s ability to sell Plat 57 precludes Lucas’s application.

We disagree. The government’s argument incorrectly assumes that negligible noneconomic appraisal value enables a landowner to sell a regulated parcel. As the trial court found, Plat 57’s residual environmental value has been reduced by mosquito abatement measures, which left isolated hummocks and stagnant eutrophic pools. Lost Tree CFC II, 115 Fed. Cl. at 231 n.9. The government did not produce evidence indicating that Lost Tree could sell Plat 57 in such a condition. Speculative land uses are not considered as part of a takings inquiry. See Olson v. United States, 292 U.S. 246, 257 (1934).

Slip op. at 10. Why? Because “[t]ypical economic uses enable a landowner to derive benefits from land ownership rather than requiring a landowner to sell the affected parcel.” Id.

Finally, the Federal Circuit also rejected the government’s argument that the CFC should have calculated the diminution in value caused by the permit denial from the parcel’s purchase price and not its value if the permit had been issued. No, held the Federal Circuit, the “highest and best use” is the proper “before” condition, not the purchase price:

As the trial court understood, the government cannot rely on the regulatory taking at issue to reduce the fair market value of an affected parcel. See Fla. Rock Indus., Inc. v. United States, 791 F.2d 893, 905 (Fed. Cir. 1986).

All in all, a good case to add to your memory banks.

II. Wasting1 Away Again in Margaritaville: En Banc Denied in Lucas Takings Case over Compelling Dissent

Denials of rehearing and motions for en banc review from a state intermediate appellate court generally do not catch our attention. But Ganson v. City of Marathon, 222 So. 3d 17 (Fla. Dist. Ct. App. 2016), is the exception to that rule.

This is a long-running regulatory takings dispute between property owners in the Florida Keys — who made a Lucas claim that the City’s regulations prohibit economically beneficial use of their island — and the appropriately named City of Marathon.

The majority ruling is just what you’d expect in a disposition such as this: a one word per curiam “Denied,” with six judges concurring. The reason we’re discussing the ruling, however, is the three-judge dissent, which starts off like this:

This is a significant regulatory takings case, the holding of which is that a local government can regulate private property to an extent that is functionally comparable to the classic physical taking — without paying just compensation — so long as it does so incrementally over a period of time. This cannot be, and indeed is not, the law. I respectfully dissent from the denial of the Beyers’ motion for rehearing en banc, and write to explain my disagreement with this Court’s willingness to dispense with applicable Takings Clause precedent to reach a result that is contrary to the constitutional principle that excessive economic injuries caused by government action be compensated.

If that isn’t enough to grab your interest, the dissent contains a summary of the facts, which start in 1970 with the plaintiffs’ purchase of the land and the government’s subsequent efforts (starting in 1986, apparently) to prevent them from development, has a good rundown of regulatory takings law, and some editorializing about the state of federal regulatory takings jurisprudence (“not particularly coherent,” “genuinely enigmatic,” for example).

But we think you should read the entire dissent, because it peels back the usual judicial curtain and exposes how some takings decisions — seemingly inexplicable, except as a result designed to save the government fisc — get rendered. Here, according to the dissent, the owners are being “required to leave their property in its natural state.” The Special Master concluded, “[o]ther than the Applicant being allowed to enter into the property to camp, there is absolutely no allowable use of the property under the City of Marathon Land Development Regulations.” Yet the court earlier “went to great lengths to transform the [owners]’ categorical challenge into one controlled by the ad hoc, factual inquiry set forth in Penn Central.” (footnote omitted). “Unfortunately, despite the unmistakable parallels between the economic impact in Lucas and the economic impact on [these owners]’ property, [their] challenge was never considered under Lucas’s total regulatory takings framework.” There’s more, but really, you should just read the dissent.

III. In New York’s Second Department, Apparently There Is an Expiration Date on the Takings Clause

What is it about the U.S. Supreme Court’s decision in Palazzolo v. Rhode Island, 533 U.S. 601 (2001), that so many lower courts just don’t get?

We’ve read the opinion (multiple times, we assure you), and it seems straightforward enough to us: acquisition of land after the time the government imposes an allegedly restrictive regulation does not deprive the owner of the ability to challenge the restrictive regulation as a taking. The Court held that prohibiting a takings challenge would result in a “windfall” to the government, allowing the state to “shape and define property rights and reasonable investment-backed expectations.” Id. at 626. Thus, because the state cannot “put an expiration date on the Takings Clause,” the Court held that “[f]uture generations, too, have a right to challenge unreasonable limitations on the use and value of land.” Id. at 627.

Well, the message didn’t quite get through to New York’s Second Appellate Department. In Monroe Equities, LLC v. State of New York, No. 2016-00095 (Dec. 7, 2016), the court attempted to distinguish Palazzolo in a case in which the State Department of Health’s watershed regulations prohibit installation of a septic system on the plaintiff’s residentially zoned land. Without a sewage system, the local government cannot subdivide the land.

The owner alleged a Lucas total wipeout taking. The Court of Claims rejected the owner’s motion for summary judgment on liability and instead (after the court’s own research) dismissed the case because the offending watershed regulations had been adopted 85 years before the plaintiff purchased the property in 2005. Thus, the regulations were a Lucas “background principle” and the owner never owned the right to use the land to install a sewage system.

The Appellate Division affirmed, concluding that “the right to install a septic system was never part of the ‘bundle of rights’ the claimant acquired with title to the property and the claimant cannot succeed on its takings claim.” Slip op. at 3. The opinion relied on two New York cases to support that conclusion, Soon Duck Kim v. City of New York, 90 N.Y.2d 1 (1997), and Gazza v. New York State Dep’t of Envtl. Conservation, 89 N.Y.2d 603 (1997). But as Professor Steven Eagle has written, it is unlikely that these rulings survived the U.S. Supreme Court’s Palazzolo ruling four years later. Not to be deterred, the Appellate Division tried to distinguish that case:

Contrary to the claimant’s contention, the United States Supreme Court’s decision in Palazzolo v Rhode Island (533 U.S. 606) does not compel a contrary result. In Palazzolo, the Supreme Court declined to adopt a blanket rule that purchasers with notice have no compensation right when a claim becomes ripe and it expressly stated that a regulatory takings claim “is not barred by the mere fact that title was acquired after the effective date of the state-imposed restriction” (id. at 609). Nevertheless, the Court emphasized that it had “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” (id. at 629–630). Resolution of the instant claim does not rely upon application of a blanket rule. As discussed above, the record establishes that the right to install a septic system was never part of the bundle of rights acquired by the claimant.

Slip op. at 3–4.

Sorry, I don’t get it. Palazzolo held that the mere passage of time and title doesn’t mean a regulation is a background principle. But here, the Appellate Division held that the mere passage of title and 85 years meant that the watershed regulations were a background principle. How is that not “relying on a blanket rule” as the opinion claims not to be doing? The “as discussed above” to which the court was referring was this bit:

The claimant acquired title to the subject parcel of land in 2005, 85 years after the watershed regulations first went into effect. Furthermore, in opposition to the claimant’s motion, the defendant submitted evidence that the claimant’s parcel was once joined with abutting lands that were split into separate parcels in 1989. Thus, the right to install a septic system was never part of the “bundle of rights” the claimant acquired with title to the property and the claimant cannot succeed on its takings claim.

Slip op. at 3.

This issue isn’t going away. Other courts treat Palazzolo with the same (lack of) respect, paying lip service to the passage-of-title rule, but essentially ignoring it. One of these days, the Supreme Court is going to take this issue up, even if it is only to announce a rule that I thought it announced long ago.

IV. Designating Property for Future Acquisition, and Then Not Acquiring It, Is a Taking

Is designating property for a future taking itself a taking, or “mere” planning? That’s the question answered by the North Carolina Supreme Court in an important case, Kirby v. North Carolina Dep’t of Transportation.

This is the case about the “Map Act,” a statute that designates private property for future highway use and “restrict[s] plaintiffs’ fundamental rights to improve, develop, and subdivide their property for an unlimited period of time.” Slip op. at 1. The court concluded that “[t]hese restraints, coupled with their indefinite nature, constitute a taking of plaintiffs’ elemental property rights by eminent domain.” Id.

The North Carolina Court of Appeals earlier held the Act was a taking, and this resulted in a lot of shouting and gnashing of teeth that making the DOT actually pay just compensation would crash the system and cost the state a lot of money, so we were not terribly surprised when the DOT sought review by the N.C. Supreme Court.

After oral arguments, I predicted there was a “good chance” the court would affirm, especially after the DOT’s counsel conceded that one of the express purposes of the Act was to keep the eventual acquisition price of the designated properties low. Undeveloped property, after all, is usually cheaper than developed land. But an indefinite development moratorium — especially when its express purpose is to depress the eventual acquisition price — has real takings problems, as the North Carolina courts recognized.

The North Carolina Supreme Court started by noting “[t]he fundamental right to property is as old as our state” and citing Locke and Madison, “[f]rom the very beginnings of our republic we have jealously guarded against the governmental taking of property.” Slip op. at 10. The Act’s restrictions on the owners’ use and development was a taking: “‘Property’ clearly includes the rights to improve, develop, and subdivide, which were severely and indefinitely restricted here by the Map Act.” Slip op. at 11.

But that wasn’t the end of the analysis. The court also asked whether the DOT’s designations of property under the Act were an exercise of its police power or its power of eminent domain. I didn’t think this analysis was necessary, but no matter: the court held “[t]he language of the Map Act plainly points to future condemnation of land in the development of corridor highway projects, thus requiring NCDOT to invoke eminent domain.” Slip op. at 12. Moreover, “[t]he Map Act’s indefinite restraint on fundamental property rights is squarely outside the scope of the police power.” Slip op. at 13. Game, set, match. Next, remand for a parcel-by-parcel determination of just compensation:

By recording the corridor maps at issue here, which restricted plaintiffs’ rights to improve, develop, and subdivide their property for an indefinite period of time, NCDOT effectuated a taking of fundamental property rights. On remand, the trier of fact must determine the value of the loss of these fundamental rights by calculating the value of the land before the corridor map was recorded and the value of the land afterward, taking into account all pertinent factors, including the restriction on each plaintiff’s fundamental rights, as well as any effect of the reduced ad valorem taxes.

Slip op. at 15.

V. Peak Posner at the 7th Circuit: Cab Companies Were Chumps to Rely on a Government Monopoly to Protect Them from Competition

Here are two cases about a topic that’s been getting a lot of traction lately in legal circles: how to deal with the so-called sharing economy. You know, things like Uber, Lyft, Air BnB, and the like. There’s even “”

These set-ups make for some interesting decisions because they really draw competing philosophies into focus, even if they result in decisions where we see some merit in both arguments.

In Joe Sanfelippo Cabs, Inc. v. City of Milwaukee, No. 16-1008 (Oct. 7, 2016), and Illinois Transportation Trade Ass’n v. City of Chicago, No. 16-2009 (Oct. 7, 2016), the Seventh Circuit, in opinions authored by Judge Posner (did you really expect anyone else would draw this assignment?), concluded that holdovers from the legacy economy — the owners of city-issued taxi medallions and permits — did not have their property taken when the city allowed ridesharing services to operate.

The court acknowledged that the taxicab industry is “tightly regulated” by the municipalities. Indeed, you can’t operate a taxicab without a permit. And ridesharing services, although somewhat regulated, are certainly subject to less government interference in that you don’t need major municipal permissions to start chauffeuring people around. And that was the point the plaintiffs objected to: we relied on the controlled market and have property rights in our medallions and permits, they argued, and letting these interlopers do the same thing we do without also having to get a medallion is a taking of our government sanctioned quasi-monopoly.

The court rejected the claim. Although it agreed that the medallions are property, the court held no taking because owning a medallion is a property right to operate a taxicab and isn’t a property right to stop others from driving people around the city for money. “The City has created a property right in taxi medallions; it has not created a property right in all commercial transportation of persons by automobile in Chicago.” Illinois Transportation Trade Ass’n, slip op. at 5. The panel acknowledged that if the cities were to have outright confiscated the taxicab medallions (which would have prohibited the taxicab operators from operating taxicabs), it would be a taking. But allowing Uber and Lyft to operate things that look like taxis (but are not taxis) “is not confiscating any taxi medallions; it is merely exposing the taxicab companies to new competition — competition from Uber and the other TNPs.” Joe Sanfelippo Cabs, slip op. at 4.

The court held that ridesharing services are different animals than taxicabs, and Uber and Lyft are as different from cabs as dogs are from cats: you can’t physically hail down an Uber or Lyft vehicle on the street but must use a smartphone application to do it for you, and a taxi’s fare structure is determined by the city.

And that, to the court, was the critical difference. Because Uber and Lyft are not taxicabs, allowing them to drive people around the city for money doesn’t interfere with the rights of taxicabs to drive people around the city for money.

To the court, whether to regulate ridesharing services the same as taxicabs was within the discretion of the city in the same way that many cities require dogs to have a license, but not cats. And those who already relied on the regulatory system in place to invest in a medallion and thought this was a high barrier to entry into the driving-people-around-for-money market? Chumps.2 The court told them figuratively that if they think Uber and Lyft have a competitive edge over traditional taxicab services, they should get with the program and start competing!

As we mentioned earlier, these decisions draw us in opposite directions. We like takings, but we also like free market thinking. We’re not big on a lot of regulation, but we also favor a regulatory system, if it must exist, that allows investment without fearing the government will just decide one day to ignore its own regulatory requirements and exempt others similarly situated from regulations which govern you.

That last point is really the panel’s main thrust. See Joe Sanfelippo Cabs, slip op. at 9 (“A ‘legislature, having created a statutory entitlement, is not precluded from altering or even eliminating the entitlement by later legislation.’”). You shouldn’t rely on a regulation, unless the things you are relying on are welfare benefits or employment or other forms of “New Property.” (Then you can.) But not here. Why there’s a difference, we can’t really say.

VI. North Dakota: Entry Statutes Are Not Takings, Even If There’s a Physical Invasion

Entry statutes are in the news lately. In Property Reserve, Inc. v. Superior Court, No. S217738 (Cal. July 21, 2016), the California Supreme Court saved California’s entry statute from unconstitutionality by implying a requirement for a jury trial (and other eminent domain protections) when the entries that the condemnor seeks to undertake constitute takings.

In that case, the party seeking entry proposed to bore and fill holes on the property, meaning that the entries were undoubtedly permanent physical appropriations. This triggered the requirement that the entry conform to the eminent domain process, such as having a jury determine just compensation. Thus, the court understood that in the absence of its reformation of the statute (i.e., rewriting it), the entry process as applied would be unconstitutional. We’ll save for another post our commentary on the California Supreme Court’s approach.

But such details didn’t concern the North Dakota Supreme Court in its opinion applying that state’s entry statute in In re 2015 Application for Permit to Enter Land for Surveys and Examination, No. 20150311 (Aug. 18, 2016). That court analyzed the circumstances much more simply. In that case, the potential condemnor sought entry under the North Dakota statute to make test borings that would remove — and then later replace — two pints of soil. This, according to the court, was no big deal, and not a taking. “Removing one to two pints of soil for testing and replacing the soil after testing does not constitute a compensable taking.” Slip op. at 5. Thus, this activity fell within the definition of allowable “examinations” permitted by North Dakota’s entry statute with no jury trial, no compensation, or damages beyond what are allowed by the statute.

The problem is that the court determined that these borings were not takings by applying the ad hoc Penn Central regulatory takings test rather than the Loretto / Kaiser Aetna physical invasion test. “The soil boring proposed here is an ‘examination’ as described by N.D.C.C. § 32-15-16. Although the proposed soil borings penetrate the ground’s surface, the testing is nevertheless minimally invasive, or ‘limited.’” See slip op. at 5. We’re not sure that this is the correct analysis, even if we’re not convinced the result is wrong. Physical invasions, as the U.S. Supreme Court has repeatedly told us, do not depend on the size of the incursion, so “one or two pints of soil” should not be the determinative factor. Perhaps it was that the physical removal / invasion was not “permanent” because the removed soil was replaced with (apparently) the very same dirt? Ultimately, we don’t know because the court doesn’t say.

What we are left with is a sense that the court just wasn’t impressed that the property owners were going to be harmed by the entries. That may be true, but was Mrs. Loretto really going to be harmed by a small cable box on her apartment roof? Probably not, but that’s never been the physical takings test, has it? Absent the North Dakota court’s application of the correct standard, we don’t have much but a vibe, and the court’s tautology that these were not takings because they were examinations; and they were examinations because they were not takings.

VII. Michigan: Forced Employee Contributions to Retirement Fund—Still a Taking

There’s a lot of procedural history to digest in the Michigan Court of Appeals’ opinion in AFT Michigan v. Michigan, No. 303702 ( June 7, 2016), because it is merely the latest in a long string of opinions from that court, and the Michigan Supreme Court, interspersed with the Michigan legislature’s attempts to react. The opinion lays it all out, and we won’t repeat it here.

The short story is that the legislature adopted a statute that required public school employees to contribute 3% of their salaries to the retirement and health care system. Adding insult to injury, the withholding was labeled as an employer contribution.

The employees sued, alleging a taking, among other claims. The court of appeals agreed it was a taking, but while the case languished in the Michigan Supreme Court awaiting discretionary review, the legislature revised the offending parts of the statute. In a different case, the court of appeals upheld the statute, concluding that the revisions to the law “served to remedy the constitutional defects” that the court had identified in the earlier version. The Michigan Supreme Court affirmed. Shortly thereafter, the Michigan Supreme Court vacated the court of appeals’ earlier decision and sent the case back to that court to determine whether that case was moot in light of subsequent events.

The court held that no, it was not moot, and stuck by its earlier ruling, concluding that the statute, prior to its revision, effected a taking, at least while it was in effect. In other words, the statute was a taking for the period in which it required school employees to contribute 3% of their wages, even though that statute was later amended.

We’re going to skip over the court’s Contracts Clause analysis on pages 8 to 11 of the slip opinion and the substantive due process analysis (pages 14 to 15) and jump straight to the takings analysis. Here’s the summary:

  • Salaries are “specific funds” in which the employees “unquestionably had a property interest.” Slip op. at 12.
  • The court rejected the State’s argument that money was somehow a different kind of property than real property (we thought this was settled in Koontz).
  • During the time the mandatory withholding was effective, “[t]here is no doubt” that “three percent of plaintiff employees’ wages were ‘taken’ in the dictionary-defintion sense of the word.” Id.
  • This was not an assessment of money or a fee (which would not be a taking), but rather a case where the employees “had a contract-based property right in their own wages” that was taken from them. Slip op. at 13.

Case over (for now?).

VIII. New York Appellate Division: Applying New Workers Comp Provisions Retroactively Is a Taking

First, the good part of the recent opinion issued by the New York Supreme Court Appellate Division, First Department in American Economy Insurance Co. v. New York, No. 16095 (Apr. 14, 2016):

Plaintiffs also established that the amendment, as applied retroactively, violates the Contract Clause of the U.S. Constitution because it retroactively impairs an existing contractual obligation to provide insurance coverage “[w]here *** the insurer does not have the right to terminate the policy or change the premium rate” (Health Ins. Assn. of Am. v Harnett, 44 NY2d 302, 313 [1978] [internal quotation marks omitted] [asterisks in original]; see U.S. Const., art. I, § 10, cl. 1). Defendants failed to show that the impairment is “reasonable and necessary to serve” “a significant and legitimate public purpose *** such as the remedying of a broad and general social or economic problem” (19th St. Assoc. v State of New York, 79 NY2d 434, 443 [1992] [internal quotation marks omitted] [asterisks in original]). Indeed, the legislation’s stated purpose of preventing a windfall to insurance carriers was based upon the erroneous premise that premiums already cover this new liability.

Retroactive application would also constitute a regulatory taking in violation of the Takings Clause (see U.S. Const. Amend. V; N.Y. Const., art. I, § 7[a]; Eastern Enterprises, 524 US at 528–529 [“it imposes severe retroactive liability on a limited class of parties that could not have anticipated the liability, and the extent of that liability is substantially disproportionate to the parties’ experience”]).

Plaintiffs have therefore established that the amendment, as applied retroactively to policies issued before October 1, 2013, is unconstitutional.

Slip op. at 13 – 14.

New York state amended its workers compensation statutes, which since 1933 had provided for a special fund to cover claimants whose claims were closed and then later reopened. The fund—appropriately titled the “reopened case fund” — was funded by assessments against the insurance companies, and insurance companies relied on the existence of the funds when they established their premiums.

In 2013, New York amended the statute to close the reopened case fund to newly reopened claims (say that three times). This meant that any reopened claims that would have been transferred to the reopened case fund would become the obligation of the insurance carriers.

The insurance companies, unhappy because the premiums which they had charged to employers before the amendment did not account for their future liability for reopened claims, sued (presuming that the reopened case fund would cover those claims). They asserted the amendments imposed on them additional liability retroactively, which they claimed was a taking and impaired their existing contracts.

As noted above, the Appellate Division agreed. It rejected the state’s argument that this was just one of those economic regulations, and the court should as a consequence wash its hands of the matter. The court held this was the legislature imposing retroactive liability, or more precisely, the legislature ”retroactively deprived them of the entirety of the benefit of [the] right [to transfer eligible cases to the reopened case fund] and created a new class of unfunded liability.” Slip op. at 12.

IX. Texas: How to State a Penn Central Regulatory Takings Claim

The plaintiffs in FLCT, Ltd. v. City of Frisco, No. 02-14-00335-CV (May 26, 2016), owned two adjoining parcels in the Dallas-Ft. Worth area at the southeast corner what could be a very busy (and therefore profitable) intersection of two parkways. After checking with the city that the restriction in the commercial zoning code that prohibited the sale of beer and wine within 300 feet of a school wasn’t going to prohibit such sales if they sold the southern portion of the parcels for a school, the owners did so. The owners and their new southern neighbor, the school district, executed a development agreement that acknowledged that the sale of alcohol on the remaining parcels was okay. A building permit was issued.

A Racetrac gas / convenience store was what they had in mind. But the City amended the zoning code. And that was enough, apparently, to make the planning department change its mind about allowing the sale of alcohol near a school, which by then was under construction. Racetrac went elsewhere. (As it turns out, “elsewhere” meant on the other side of the intersection, the northwest corner, which is just outside the 300-foot zone.) The owners had more success lining up a 7-Eleven, which also would sell beer and wine. But when they went to the City for final approvals of their new plans, the City demurred. The City told the owners that it always prohibited the sale of alcohol near schools, and that if it had earlier told the owners otherwise, that was a mistake.

The owners sued, claiming a vested right to sell alcohol, and that prohibiting it from doing so was a regulatory taking of its property. The trial court dismissed for lack of jurisdiction, concluding that the case somehow wasn’t ripe, and that the owners didn’t have a takings claim because the right to sell beer and wine on the parcels wasn’t property. You bought the property subject to the limitation, and the city never validly said otherwise.

The court of appeals’ slip opinion is long (71 pages) and detailed. We won’t go into the parts that focus on local government law, but will focus on the takings portion that starts on page 59. There, the court concluded that the owners stated a valid ad hoc regulatory takings claim. The opinion analyzed each of the three Penn Central factors and concluded that there was enough in dispute that the owners could go forward.

  • Character of the government action: The court held that it didn’t need to accept the owners’ claim that the city intentionally targeted them, but that it was enough that the city’s actions enforcing its zoning ordinance denied their allegedly vested use. “Thus, Owners alleged a refusal by the City that impacted their ability to use the Property in accordance with its applicable zoning classification. Whether the City actually had an enforceable first-in-time policy is a factual determination that goes to the merits of Owners’ claims and not the trial court’s jurisdiction.” Slip op. at 62.
  • Economic impact: The alleged diminution of 46% of value is enough to get by a motion to dismiss. Might or might not be enough to win, but it’s enough to go forward. Slip op. at 63.
  • Investment-backed expectations: The court concluded that the regulatory milieu and the owners’ knowledge of the applicable restrictions were part of their expectations, but that “Owners presented evidence that both times a purchaser or tenant reached the alcoholic beverage permit application process in conjunction with the planned development set forth in the preliminary site plan application, the City’s stated position that the separation requirements applied caused the prospective purchaser and tenant to back out.” Slip op. at 65. The owners weren’t required to have already applied for and received a permit in order to possess reasonable expectations that they’d be allowed to proceed, only that the governing regulations would allow their use. Slip op. at 66. “Nevertheless, we do not hold that a prior permit held by a property owner is not significant for purposes of this analysis but rather that the fact that a permit had not yet been granted at the time of the alleged taking is not outcome determinative of whether the owner’s investment-backed expectations are reasonable.” Id. at 66 – 67.

The court reversed the dismissal and sent the case back for trial. “Although whether a valid takings claim has been alleged is a question of law, here, fact issues exist that must be resolved by a fact finder, including the extent of the economic impact on the Property and whether the City had a first-in-time policy regarding development.” Slip op. at 69.

X. California: Vested Rights Are All About Timing

As land users know, the vested rights and zoning estoppel doctrines are all about timing. When did the government give the “green light” (however that is defined in your jurisdiction), what did the property owner do after that, and when did the government decide “hey, wait a minute, we’ve changed our mind” about that earlier green light?

Here’s an opinion from the California Court of Appeal that illustrates that principle. In Stewart Enterprises, Inc. v. City of Oakland, No. A143417 ( June 23, 2016), the court concluded that a property owner had vested rights to build a crematorium. The court rejected the city’s argument that a subsequently adopted ordinance requiring a conditional use permit for new crematoria prohibited the owner from going forward.

We won’t go into the details of the case, but vested rights mavens will be familiar with the basic tale: the crematorium was okay under existing law, and after purchasing the property, it obtained a building permit from the city. The city’s own ordinance provided that after a building permit is secured, “neither the original adoption of the zoning regulations nor the adoption of any subsequent rezoning or other amendment … shall prohibit the construction … authorized by said permit.”

But crematoria are the type of LULUs that can get neighbors up in arms, which predictably it did. Responding to these concerns, the city adopted an interim “emergency ordinance” that required a conditional use permit (CUP) for new crematoria. This was, the ordinance, noted, “necessary to preserve the public peace, health, welfare or safety … of the community.” Not thinking it fair that it should go get a CUP, the owner sued, alleging, among other things, that its rights had vested.

The trial court and the court of appeals agreed. The city focused its arguments on the police power and the necessity for the CUP requirement, but the court held that the city had not introduced enough evidence that allowing the already permitted crematorium to go forward would be detrimental to the public welfare. Slip op. at 10. This really wasn’t an emergency, at least an emergency of such magnitude that it would justify stopping the construction. There was no “menace to the public health and safety or a public nuisance.” Slip op. at 12.

The court also rejected the city’s claim that the new CUP ordinance “trumped” the permit vesting ordinance and any rights that the owner gained there. The court held that the city’s timing was all wrong. It’s not whether the CUP ordinance was a good idea, but whether it was adopted after the owner’s rights had already vested:

These arguments are misdirected. The determination of whether Stewart had a vested right in the building permit “is not made by looking at the effect of the [City’s] subsequent enactments but is made as of the time” Stewart obtained the permit. (Davidson, supra, 49 Cal.App.4th at pp. 647-648.) And under its plain terms, the permit-vesting ordinance conveyed a vested right because it shielded the holder of a lawfully issued building permit from having to comply with any subsequently adopted zoning regulations if such regulations would “prohibit the construction … authorized by said permit.

Slip op. at 8. That’s what vested rights are all about.

Finally, the court also rejected the city’s claim that requiring a CUP wasn’t a prohibition of the owner’s right to build. It didn’t ban building, only required the owner to go get another permit. Not so, held the court: “prohibit” here means “to prevent or hinder,” and to make the owner go get another permit would certainly do that. It couldn’t build the alreadypermitted crematorium until it did. “The possibility that Stewart could regain the right to build the crematorium if it applied for and was granted a CUP does not change this fact.” Slip op. at 10.

Build it, and they will come.

Final postscript: the city subsequently repealed that “vested rights” ordinance. The City Attorney is on the job, it appears.

XI. Tiki Island’s Prohibition of Vacation Rentals: A Penn Central Taking

Thankfully, the only “Tiki Island” we have in Hawaii is a miniature golf course. Because the name “tiki” should be reserved for such things, or for kitschy bars, or Trader Vic- knockoffs. And please, honest-to-goodness real municipalities should never be named Tiki Island. No matter how nice they appear to be. Just no. (Martin Denny, by the way, gets a pass — rock on, Mr. Denny.)

But there it is, the Village of Tiki Island, Texas, population 968, “a waterfront community in Galveston County consisting of about 960 homes, with approximately 40% full- time occupants, and 60% part-time occupants.”

Something tells us that TI, TX’s smallish population and the resident-to-part-timers ratio had something to do with the fact that in 2014, the Village adopted an ordinance prohibiting the short-term rental of residences, an activity that apparently had been ongoing for some time prior. Homes that had been renting before 2011 were “grandfathered,” and the ordinance applied only to those who started renting after that date. As you might expect, this resulted in a lawsuit by homeowners subject to the new prohibition who asserted that it was a taking, among other things.

They filed suit in a Texas court to enjoin the ordinance. The trial court agreed and temporarily enjoined enforcement of the ordinance with respect to the plaintiffs who were actually renting their properties.

The Village appealed, and in Village of Tiki Island v. Ronquille, No. 01-14-00823-CV (Mar. 12, 2015), the Texas Court of Appeals affirmed. It’s a very long opinion (53 pages), and unless you want the details about whether the correct parties were named in the appeal, the timing of the appeal, and the like, you need not read all of it. Short version: the Village missed the deadlines for an accelerated appeal from an interlocutory order with respect to all but one of the plaintiffs, so the court of appeals lacked jurisdiction over those appeals and considered the takings issue only as to one homeowner.

The interesting part begins on page 24 of the slip opinion, the court’s analysis of the Village’s argument that the homeowner didn’t properly plead or prove a regulatory taking. The court concluded that her complaint adequately alleged that her prior and current use of the property (and not just future uses):

Hill pleaded that (1) she researched the permissible uses of her house before committing to buy it, ascertaining that short-term rentals were permissible, (2) she relied upon Village officials assurances that short-term rentals were permitted, (3) the ability to rent short term was a major part of her decision to purchase her house, (4) she engaged in short- term rentals before Ordinance No. 05-14-02 was passed, (5) she is contractually obligated for future short-term rentals, (6) the ability to rent shortterm enhances the value of her property, and (7) the prohibition on short-term rental decreases the value of her property. In other words, unlike in Mayhew, Hill challenges the Village’s interference with her prior and current existing use of her property, not just proposed future uses.

Slip op. at 28 – 29.

The court also concluded (starting on page 30) that the homeowner introduced enough evidence supporting her takings claim to obtain the injunction. The key legal factors were the economic impact of the short-term rental prohibition on the homeowner and her investmentbacked expectations, and the court held that she “presented evidence that the enactment of Ordinance No. 05-14-02 had an economic impact on the value of her property, and that she had a reasonable, investmentbacked expectation that she could engage in short-term rentals.” Slip op. at 40.

The court rejected the Village’s argument that her home was worth more than when she bought it (therefore the ordinance did not impact her adversely), and that her expectations were only that the home could be used for what it can be used for post-ordinance: a residence (and not a rental property). The homeowner introduced evidence that renting was legal when she bought the property, that the demand for short-term rentals is strong, that she made substantial improvements to the home to make it rentable, and that in the first nine months of 2014, she earned $25,000 in rental income. And even though the homeowner did not introduce evidence about the use of the house prior to her purchase, “the record does reflect that short-term rentals have long been done in Tiki Island, and that [the plaintiff] was doing short-term rentals for seven years before Ordinance 05-14-02 was passed.” Slip op. at 36.

Hill has been renting her Tiki Island home short-term since 2007. She bought it as an investment for the purpose of rentals, and made substantial improvements to the property. Tiki Island’s 2014 ordinance banning short-term rentals grandfathered certain identified properties that were already engaged in short-term rentals as of 2011. It is not evident from the record why Hill’s use of her home for short-term rentals was not grandfathered, as she was engaged in short-term rentals before the 2011 grandfathering cut-off. The Village’s excluding Hill from this grandfathered status, however, foreclosed Hill’s existing investment use of her property without an avenue for recoupment. We thus hold that she has identified a vested right for purposes of conferring the trial court with jurisdiction to enter a temporary injunction in her favor.

Slip op. at 52.

Bottom line: no appellate jurisdiction over most of the appellees so the injunction remains in place for them, and injunction affirmed for the other homeowner. Overall a good result for them. We’ll see if the court rules the same way when the permanent injunction hearing comes up.

XII. Vested Rights in North Carolina

In Sawn Beach Corolla, LLC v. County of Currituck, No. COA13- 1272 ( July 1, 2014), the North Carolina Court of Appeals considered vested rights and takings claims in a fact pattern than stretched back decades.

In 1966, the owners purchased 1400 acres for residential development. In 1969, the owners recorded a subdivision plat to make both residential and commercial uses. The county had no zoning ordinance in place at that time. The owners spent $425,000 on preliminary work and infrastructure, such as surveying, engineering, and grading. Big bucks in 1960s’ dollars.

The county adopted a zoning ordinance in 1971, zoning the property for “RO2,” which prohibits most businesses, including those contemplated by the owners. “Nevertheless, plaintiffs continued to believe that they would be allowed to commercially develop their property.” Slip op. at 4.

They were wrong. Flash forward to 2004. The owners sought to develop the commercial portions of the land by building a convenience store, offices, a post office, and a restaurant. The county said no. Three years of trying to convince the county otherwise was to no avail. The owners filed suit. The trial court dismissed for failure to state a claim, apparently accepting the county’s argument the owners had not exhausted administrative remedies, the defendants had immunity, and the statute of limitations had expired. You know the drill.

The court of appeals reversed the dismissal in part, holding that the owners exhausted their administrative remedies and “sufficiently pled” their vested rights claims. There was no need to avail themselves of more administrative procedures, “because the Currituck County Board of Adjustment would not be authorized to hear plaintiffs’ common law vested rights claim.” Slip op. at 10. The role of the agency is only to interpret and apply the zoning ordinance and whether to grant a variance. These types of boards do not have jurisdiction to adjudicate constitutional claims. Seems about right to us.

As to vested rights, the owners alleged:

their property was not zoned at the time they made their expenditures to prepare the business lots. They have alleged that this use was lawful at the time the expenditures were made and that the expenditures were made in good faith reliance on that fact. They have alleged that they expended over $400,000 on the development. They allege that they are prejudiced by the zoning ordinance because their intended commercial use would not be permitted under the ordinance.

Slip op. at 17–18. That was enough, because under North Carolina decisional law, a vested rights claim is based on substantial expenditures made in reliance on a lack of zoning.

The court also concluded that the defendants were not immune from the federal constitutional claims (42 U.S.C.§ 1983, equal protection, due process).

The court upheld the dismissal of the owners’ claim that the county had to allow business development of the property because for years it had taxed the property as business property.

XIII. Minnesota: Zoning Requirement to Obtain CUP Does Not Affect Nonconforming Use Owner’s Property Rights

A key win for property rights in the Minnesota Supreme Court’s decision in White v. City of Elk River, No. A12-0681 (Dec. 4, 2013). In that case, the court concluded that a municipality could not revoke a campground’s nonconforming use as penalty for alleged violations of the conditions of the conditional use permit. The court also held that a nonconforming use is an independent property right, not a mere privilege as a product of a CUP ordinance.

The campground had been operating since 1973, well before the city adopted zoning. Seven years later, the city adopted an ordinance that banned campgrounds. Three years later, the city amended the ordinance to allow campgrounds as a conditional use (which required a CUP). But later, the city amended the ordinance yet again to bar campgrounds entirely. During the time that a CUP was required, the campground got one from the city subject to certain conditions, including that campers could not live at the campground permanently and that all vehicles must have wheels. Years later, the city discovered that several campers pretty much lived at the park and that several RVs did not have wheels. It terminated the CUP as penalty for the campground’s violations of the condition.

The campground sued the city, asserting that it did not need to get a CUP to continue a use that predated the city’s zoning ordinance, and that the city’s termination of the CUP as a penalty for violating its conditions was arbitrary. The trial court agreed, but the Court of Appeals held in favor of the city.

The Supreme Court concluded that the campground, as a use predating the zoning ordinance, was a valid nonconforming use, entitled to continue even though prohibited by the new ordinance. It accepted the campground’s argument that it had nonconforming use rights that were not affected by its voluntary compliance with the ordinance and getting a CUP. “We conclude that a landowner does not surrender the right to continue a nonconforming use by obtaining a conditional use permit unless the landowner validly waives that right.” Slip op. at 12. In other words, the campground owner’s rights were not dependent on the zoning ordinance, and even if it did not get a CUP, it could have continued to operate.

The court concluded the campground did not waive its rights merely by getting a CUP:

Under our established waiver jurisprudence, Wapiti Park’s application for the conditional-use permit, standing alone, cannot constitute a valid waiver. Although Wapiti Park knew of its nonconforming-use rights as a campground in 1984 when it applied for the conditional-use permit, the City has not proved that Wapiti Park intended to waive those rights. And nothing in the record evinces such an intent or even creates a genuine issue of fact that, by applying for and accepting the conditional-use permit, Wapiti Park subordinated its rights to the City’s zoning regime. Thus, the conditional- use permit did not itself alter the campground’s status as a nonconforming use and did not govern that use from 1980 to the present — including when the City revoked the conditional-use permit in 2010.

Id. at 13 (footnote omitted).

The court also concluded that the city did not have the authority to terminate the nonconforming use by revoking the CUP, even if the basis of the revocation was the permittee’s violation of the conditions. There are only four ways to terminate under Minnesota law: (1) taking the property by eminent domain; (2) discontinuation for more than a year; (3) damage greater than 50%; or (4) a judicial determination of nuisance. Or the owner and the city can agree to terminate. None of those applied, and because the state enabling statutes do not allow termination by revocation of a CUP, the court concluded the city had no power to do so:

Had the Legislature intended the revocation of a conditional-use permit to be a permissible method by which a municipality could terminate a nonconforming use, it easily could have said so. Recognizing this newly proposed mode of terminating a nonconforming use under the guise of statutory construction would impermissibly add language to the governing statute that does not exist.

Id. at 15 – 16. Cities can temporarily enjoin nonconforming uses if they violate regulations designed to protect health, welfare, or safety, but that power does not extend to the permanent shutdown.

Overall, a good decision for property rights.

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  1. We know the lyrics to the Buffet song are “wasted away,” but we took artistic license with the title, since we think “wasting away” more accurately describes the situation here where the property owners have been engaged in a Marathon struggle.
  2. Chief Justice Roberts made “chumps” a legal term of art, see Arizona State Legislature v. Independent Redistricting Comm’n, No 13-1314 (U.S. June 29, 2015) (“What chumps!”) (Roberts, C.J., dissenting).