A win for private landowners

Published September 1, 2001

The U.S. Supreme Court gave a Rhode Island landowner a victory on two important Fifth Amendment Takings Clause issues and remanded a third issue for further review in the Rhode Island state courts.

In Palazzolo v. Rhode Island, SCt Dkt No 99-2047, the Court ruled landowners need not engage in myriad time-consuming and futile administrative challenges prior to pursuing a Takings claim in state and federal courts. The Court further ruled a property owner does not lose the right to pursue a Takings claim simply because the state imposed a regulatory taking on the property before the owner acquired legal title.

Finally, the Court remanded to the Rhode Island state courts the issue of whether a property owner whose land value plummeted from $3 million to $200,000 as a result of state regulation suffered a regulatory taking entitling him to just compensation.

Significant victory

The Court’s ruling on the first two issues represented a significant victory for private citizens. The U.S. Supreme Court had not previously ruled on either issue, but the Rhode Island State Supreme Court had ruled emphatically against property owners on both.

Had the U.S. Supreme Court upheld the state court’s ruling, property owners would face years and potentially decades of administrative obstacles before securing the right to challenge unconstitutional takings of property in state and federal courts. Upholding the Rhode Island decision also would have validated improper government takings simply because an initial property owner did not act quickly enough or steadfastly enough in pursuing and concluding an exhaustive legal battle with the state.

The court’s remand of the third issue, whether regulations causing a 93 percent diminution of a landowner’s property value represent a regulatory taking subject to just compensation, leaves unresolved a major point of contention between government and private citizens.

Denied permission to build

In 1959, Anthony Palazzolo and companions formed a corporation, Shore Gardens, Inc. (SGI), with the purpose of purchasing and developing for single-family homes 18 acres of land on a pond a few blocks from the Rhode Island coast. Soon thereafter, Palazzolo bought out his associates and became the sole shareholder.

Over the years, SGI’s intermittent applications to develop the property were rejected by various government agencies. In 1971, after SGI failed several times in its attempts to develop the land, Rhode Island created the Rhode Island Coastal Resources Management Council (Council) and charged it with protecting the state’s coastal properties. The Council’s regulations, known as the Rhode Island Coastal Resources Management Program (CRMP), designated salt marshes like those on SGI’s property protected coastal wetlands on which development would be severely restricted.

In 1978, SGI’s corporate charter was revoked and title to the property passed to Palazzolo as the corporation’s sole shareholder. In 1983 Palazzolo renewed his attempts to obtain permission to develop his property. When the Council rejected his renewed efforts, Palazzolo filed a state court action claiming the state had affected a regulatory taking of his property, entitling him to just compensation.

Compensation under the Takings Clause

The Takings Clause of the U.S Constitution’s Fifth Amendment, applicable to the states through the Fourteenth Amendment, prohibits the government from taking private property for public use without just compensation.

The clearest sort of taking occurs when the government physically encroaches upon or occupies private land for its own proposed use. In Pennsylvania Coal Co. v. Mahon, 260 U.S. 393 (1922), the U.S. Supreme Court recognized there will be instances when government actions do not physically encroach upon or occupy property yet still affect and limit its use to such an extent that a taking occurs. While property may be regulated to a certain extent, if a regulation goes too far it will be recognized as a taking.

The Supreme Court has given some, but not too specific, guidance to courts confronted with deciding whether a particular government action goes too far and affects a regulatory taking. First, a regulation that denies all economically beneficial or productive use of land will require compensation under the Takings Clause. Lucas v. South Carolina Coastal Council, 505 U.S. 1003, at 1015 (1992).

Next, where a regulation places limitations on land that fall short of eliminating all economically beneficial use, a taking nonetheless may have occurred, depending on a number of factors including the regulation’s economic effect on the landowner, the extent to which the regulation interferes with reasonable investment-backed expectations, and the character of the government action. Penn Central Transp. Co. v. New York City, 438 U.S. 104, at 124 (1978).

These inquiries are governed by the purpose of the Takings Clause, which is to prevent the government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole. Armstrong v. United States, 364 U.S. 40, 49 (1960).

Rhode Island courts reject Palazzolo’s claims

The Rhode Island State courts, including the Rhode Island Supreme Court, rejected Palazzolo’s claims on several grounds.

As an initial matter, the State Supreme Court ruled that Palazzolo’s claims were not ripe for judicial review because he had not exhausted his remedies with various state agencies. A Takings claim challenging the application of land-use regulations is not ripe for judicial review unless the government entity charged with implementing the regulations has reached a final decision regarding the application of the regulations to the property at issue.

The state court reasoned that, notwithstanding the Council’s numerous denials of Palazzolo’s applications, it was not yet settled as to what extent the Council would disallow development on the property. The court based its holding in part upon Palazzolo’s failure to explore uses for the property that would involve filling less wetlands than he had proposed.

The court suggested that while the Council at various times rejected Palazzolo’s effort to fill all 18 acres of his wetlands, and then rejected his proposal to fill 11 of the wetland acres, perhaps an application to fill five acres would have been approved. It relied upon prior U.S. Supreme Court observations that the final decision requirement is not satisfied when a developer submits, and a land use authority denies, a grandiose development proposal, leaving open the possibility that lesser uses of the property might be permitted. MacDonald, Sommer & Frates v. Yolo County, 477 U.S. 340, 353 (1986).

Additionally, the Rhode Island Supreme Court ruled that Palazzolo could not pursue a Takings claim because he acquired the property at issue after the Council’s regulations had taken effect. According to the court, because Palazzolo had notice of the Council’s regulations prior to his acquisition of the property (notwithstanding that the change in title was merely technical, in that Palazzolo as sole shareholder owned the property before the regulation took effect and before his title transferred from Palazzolo the sole shareholder to Palazzolo the private citizen), he had full knowledge of the current property value prior to making his acquisition.

Finally, the State Supreme Court ruled that Palazzolo could not pursue compensation based on a total loss of property value because the parties were in agreement that his property was still worth $200,000.

High Court resurrects Palazzolo’s claims

Palazzolo then petitioned the U.S. Supreme Court to review the Rhode Island Supreme Court’s decision, and the federal High Court agreed to hear the case.

In a 6-3 majority opinion issued June 28, Justice Anthony Kennedy ruled that Palazzo was not required to engage in further wrangling with the Rhode Island Coastal Resources Management Council prior to presenting his claims in court.

Kennedy noted the Rhode Island court surmised the Council might allow development of a smaller section of his property than Palazzolo had proposed. However, “this is belied by the unequivocal nature of the wetland regulations at issue and by the Council’s application of the regulations to the subject property,” Kennedy observed.

Noted Kennedy, “Winnapaug Pond is classified under the CRMP as a Type2 body of water. A landowner, as a general rule, is prohibited from filling or building residential structures on wetlands adjacent to Type2 waters.” Although a landowner may seek a special exception from the Council to engage in a prohibited use, the Council is permitted to allow the exception only where a compelling public purpose is served. “The proposal to fill the entire property was not accepted under Council regulations and did not qualify for the special exception.”

Moreover, the Council had cited its compelling public purpose standard in subsequently rejecting Palazzolo’s request to develop only a portion of the property. “While a landowner must give a land-use authority an opportunity to exercise its discretion, once it becomes clear that the agency lacks the discretion to permit any development, or the permissible uses of the property are known to a reasonable degree of certainty, a Takings claim is likely to have ripened,” reasoned Kennedy.

No “expiration date” on Takings Clause

The Court further ruled that Palazzolo’s acquisition of title to the property after the Council’s regulations took effect did not preclude his Takings claim. Kennedy summarized the Rhode Island court’s decision as follows:

“Property rights are created by the State. By prospective legislation the State can shape and define property rights and reasonable investment-backed expectations, and subsequent owners cannot claim any injury from lost value. After all, they purchased or took title with notice of the limitation.”

The problem with this theory, reasoned Kennedy, is “were we to accept the State’s rule, the post-enactment transfer of title would absolve the State of its obligation to defend any action restricting land use, no matter how extreme or unreasonable. A State would be allowed, in effect, to put an expiration date on the Takings Clause. This ought not to be the rule. Future generations, too, have a right to challenge unreasonable limitations on the use and value of land . . . The State may not by this means secure a windfall for itself.”

Moving to the final issue, the majority ruled that while Palazzolo did not suffer a complete loss of property value due to the Council’s regulations, he still might be able to show that a regulatory taking had occurred.

Palazzolo noted that in Lucas the Supreme Court ruled that regulation completely stripping property of all its value, or merely leaving a few token crumbs of value, amounts to a regulatory taking. Palazzolo argued that the drop in his property value from over $3 million to $200,000 was so significant as to leave his property with mere token value. The majority disagreed.

While Palazzolo was denied permission to develop his land for numerous single-family homes, he retained the right to build a personal residence on a portion of the land. “A regulation permitting a landowner to build a substantial residence on an 18-acre parcel does not leave the property economically idle,” asserted Kennedy.

However, the fact that Palazzolo had not suffered a total loss in usage or property value did not settle the issue. Palazzolo could still pursue the Penn Central reasoning that a partial but not total loss in property value may still qualify as a regulatory taking.

Because the Rhode Island courts had dismissed Palazzolo’s case on other grounds, the courts never conducted the Penn Central analysis. The Supreme Court therefore remanded the case back to the Rhode Island courts for a determination whether the Council had affected a regulatory taking under the Penn Central analysis. Among the factors to consider would be the regulations’ economic effect on the land, the extent to which the regulations interfere with reasonable investment-backed expectations, and the character of the government action.

Property rights momentum continues

The U.S. Supreme Court’s decision, while not a total victory for Palazzolo, nevertheless was sufficient to hearten advocates of citizens’ property rights.

Roger Pilon, director of the Cato Institute’s Center for Constitutional Studies, concluded that Palazzolo won on two counts and the third was left for another day.

Nancie Marzulla, president of the Defenders of Property Rights legal foundation, agreed. “Once again, the Supreme Court has told the government that it cannot violate constitutionally protected property rights. Since 1987, property owners have won every case in the Supreme Court. It’s time government regulators got the message that the property rights of landowners cannot be destroyed in the name of environmental protection.”

Brian Bishop, director of Rhode Island WiseUse, applauded the decision as a victory for citizens’ property rights, but cautioned future battles remain to be fought. “Sadly, this is not the end of the regulatory state. This does not mean the state will stop harassing people and taking their property. It simply means they will be slightly more accountable in doing so.”

The High Court’s opinion strengthens grassroots efforts in various states to protect citizens from regulatory takings. In 1995, Florida enacted the Bert Harris Property Act, which provides compensation for citizens whose property values decline as a result of government restrictions. In 2000, Oregon citizens passed Measure 7, similar to the Florida Act.

Opponents of market-based environmentalism have launched a campaign to overturn the Florida law, and several Oregon cities and counties have filed a lawsuit seeking to have Measure 7 declared unconstitutional.

The complete text of the U.S. Supreme Court’s decision in Palazzolo v. Rhode Island is available in both HTML and Adobe Acrobat’s PDF format at http://supct.law.cornell.edu/supct/html/99-2047.ZS.html.