Brian Stark

October 16, 2001

I. Introduction

At the time of the Framers, the Takings Clause, as this portion of the Fifth Amendment is commonly called, was understood to only include appropriations of property by government, or "takings," that were physical in nature and took title from the property owner.[1]  The Fifth Amendment to the United States Constitution provides, in pertinent part, "nor shall private property be taken for public use, without just compensation."[2]  The United States Supreme Court stood by this interpretation for over almost a century and a half.[3]

Beginning in the late 1800's and early 1900's, the Supreme Court recognized governmental regulations could have a similar impact on a landowner's property as a physical invasion.[4]  More recently, the most hotly contested area of takings litigation is that of regulations imposed after the purchase of one's property.[5]  The question remains open whether the Constitution, due to an aura of growing sensitivity to environmental issues requires compensation for a landowner unable to develop a parcel that was purchased prior to the enactment of federal, state, or local environmental statutes.[6]

II. Awareness of Sensitivity to Environmental Issues

A. An Aura of Environmental Sensitivity

Even in the face of a growing sensitivity to environmental concerns the Takings Clause of the Fifth Amendment requires just compensation. Where a landowner purchased an ecologically sensitive parcel, it can be argued that the landowner should have known that those regulations already in place could become more strict; i.e. the landowner should have an awareness of an aura of growing environmental sensitivity.[7]  Deltona v. United States is an example of a landowner seeking to develop an ecologically sensitive parcel and being barred from doing so by regulations imposed after purchase of the property.[8]   Then the question becomes whether the Deltona Corporation have been compensated for the inability to develop based on a growing sensitivity to environmental issues that could tighten regulations and bar future development of the parcel.

Deltona Corporation purchased a parcel in 1964 and had reasonable investment-backed expectations as a matter of law to develop the property at that time.[9]   Deltona sought two dredge and fill permits that were required to complete a proposed development for which Deltona had entered into sales contracts for approximately ninety percent of the lots in the development.[10]   Both permits were denied based on a regulatory scheme that had been "substantially expanded" since the time that Deltona initially acquired title to the property.[11]   The Federal Claims Court rejected the takings claim Deltona brought, finding that the property as a whole still retained enormous economic value.[12]   The court stated: "Although at [the time of purchase] Deltona had every reason to believe that those permits would be forthcoming when it subsequently sought them, it also must have been aware that the standards and conditions governing an issuance of permits could change."[13]

The ruling in Deltona shows that after the finding of reasonable investment-backed expectations, the analysis moves on to the economic impact factor, upon which this case was decided.[14]   This case also is pointed to for requiring that landowner's should be aware of a growing sensitivity to future environmental concerns.[15]  The Deltona court stated that once land is subject to a permitting scheme, the owner might reasonably expect that the conditions for permit issuance will remain frozen.[16]   However, since Deltona was decided on other grounds, the case does not stand for the proposition that any regulation or permitting scheme in place at the time of purchase automatically immunizes all future regulation from challenge under the Takings Clause.  As a result, the issue remains open whether the Takings Clause can require compensation even in light of a growing sensitivity to environmental concerns.

Since Deltona was decided on the economic impact factor, it was unclear how future courts would apply Deltona's assertion that landowners should be aware that pre-existing regulatory climates might become more stringent.  The answer came with the Federal Circuit's decision in Good v. United States.[17]   In Good, the federal government denied a wetlands permit based on concerns that the proposed development in the Florida Keys would harm two species protected under the Endangered Species Act.[18]  Mr. Good bought the property in October of 1973; Congress passed the Endangered Species Act in December of 1973; the two species at issue were listed as endangered in 1990 and 1991; and the government denied the permit application in 1994.[19]

The Federal Claims Court determined that at the time Mr. Good purchased the property in 1973, federal and state regulatory regimes already imposed significant development restrictions, and the owner expressly acknowledged such in his purchase contract.[20]   Based on the pervasive pre-existing network of federal and state regulation, the strong regulatory interest of coastal development in Florida, and the fragile ecology of the Florida Keys, the trial court ruled that the land development business in Florida at the time of Good's purchase "is not different in kind from Ö highly regulated business enterprises."[21]

The Circuit Court affirmed the trial court's decision, holding that Mr. Good should have been aware at the time of purchase that the permitting standards might become more stringent.[22]   Similar to Deltona, the Circuit Court in Good recognized a lack of reasonable investment-backed expectations by requiring an awareness of a growing sensitivity to environmental concerns.[23]   Furthermore, investment-backed expectations, at the time of development, and not just at the time of purchase were also deemed to be relevant according to the court in Good.[24]   The investment-backed expectations of the landowner at the time of development are particularly relevant where the landowner could have recouped the purchase price prior to investing in development.[25]

Thus, in cases such as Deltona and Good, where the trend is towards greater environmental control, the landowner has both constructive and actual knowledge of an aura of sensitivity to environmental concerns, thereby diminishing any reasonable investment-backed expectations.  Once land is subject to a permitting scheme, according to these decisions, the landowner may not reasonably expect that the conditions for permit approval will not change.[26]   On the other hand, these cases do not suggest that any regulation at the time of purchase automatically immunizes any future regulation from challenge under the Takings Clause.

The court in Good incorrectly interpreted the investment-backed expectations factor from Penn Central, as Penn Central does not require an analysis of investment-backed expectations both at the time of purchase and at the time of development.[27]   By taking into account investment-backed expectations at the time of development, the Good court found that Mr. Good should have been aware of the growing sensitivity towards environmental protection and therefore could not have had reasonable investment-backed expectations of development.[28]   Had the court limited its expectations analysis to Mr. Good's investment-backed expectations at the time of purchase, the court would have found, similar to the court Deltona,[29]  that Mr. Good had reasonable investment-backed expectations.  Perhaps, the court in Good, similar to the court Deltona,[30]  would have found other grounds to dismiss the takings claim, but the awareness of the aura of environmental sensitivity would not have been found.  Since the proper inquiry under Penn Central is the expectations at the time of purchase,[31]  the Takings Clause of the Fifth Amendment requires just compensation even in the face of a growing sensitivity to environmental concerns if the other Penn Central factors are met as well.

B. Background Principles or Investment-Backed Expectations

The critical question regarding a landowner's knowledge of an aura of environmental sensitivity is whether this factors into the background-principles inquiry or the investment-backed expectations inquiry.  Where the knowledge of a growing environmental sensitivity falls determines when in the takings analysis it will be considered.

The background-principles defense provides that any takings claim can be defeated by showing that the "proscribed use interests were not part of [the landowner's] title to begin with."[32]   Justice Scalia, writing for the Supreme Court in Lucas, described this as an "antecedent inquiry in the nature of the owner's estate" that looks to "background principles" that were in place at the time a landowner purchased the property.[33]   Since the background-principles defense deals with interests that were part of the landowner's title, the question of knowledge of a growing sensitivity to environmental issues cannot possibly be a part of the background-principles defense.  It is impossible for mere knowledge to be an interest that is part of a title.  Interests that are part of title for purposes of the background-principles inquiry are allowable uses.  If the use that is being proscribed by a challenged regulation was not allowed as part of the landowner's title to begin with, there is no taking. Since mere knowledge does not fit within this, it cannot possibly be a part of the background-principles inquiry.

Rather, the proper place for consideration of the landowner's knowledge of a growing sensitivity to environmental concerns is in the reasonable investment-backed expectations inquiry.  When a landowner purchases property prior to the time a regulation is imposed, the landowner has a reasonable investment-backed expectation to develop that property.[34]   This is where, if at all, the consideration of a growing sensitivity to environmental issues comes in to the analysis.  The idea that a landowner's takings claim could be dismissed solely on the basis that sometime in the future after purchase of the property the regulations regarding development would tighten is unprecedented.  Nowhere in the Constitution is there a requirement that all landowner's own a crystal ball.  While the Just Compensation Clause preserves the government's power to regulate the use of land, this power is subject to the dictates of "justice and fairness."[35]   In requiring reasonable investment-backed expectations that include whatever the government may require in the future, the courts are violating the dictates of justice and fairness.  By so requiring, it would be impossible for any landowner to ever have reasonable investment-backed expectations, as there always would be a growing sensitivity to something that the landowner should have been aware of.  Hence, the Takings Clause of the Fifth Amendment requires just compensation even in the face of a growing sensitivity to environmental concerns if the other Penn Central factors are met as well.

III. Conclusions

From the founding of the United States, it has been evident that there is a great zeal and love for property.  This sentiment is best exemplified in the Takings Clause of the Fifth Amendment to the Constitution, which provides that no private property shall be taken for public use without the payment of just compensation.[36]   For much of the history of the United States, this clause has been interpreted to mean only physical appropriations of property.[37]   This changed in the late 1800's and early 1900's with decisions handed down by the U.S. Supreme Court, that held that certain regulations could have the same impact from a landowner's point of view as a physical appropriation.[38]   Thus began a wave of litigation that sought to define the line of where a regulation affects a taking.  This is a line that has yet to be established because it relies on an ad-hoc factual inquiry on a case-by-case basis.[39]

The Supreme Court has made many attempts to assist lower courts in determining where this line rests.[40]   Currently, the test for determining when a regulation affects a compensable taking is a combination of factors laid out in Penn Central v. New York City and Lucas v. South Carolina Coastal Commission.[41]   This test requires an inquiry into background principles of law; a determination of whether a total wipeout or categorical taking has occurred; the character of the governmental action; the economic impact of the governmental action; and whether the landowner had reasonable investment-backed expectations.[42]

In situations where background-principles do not bar recovery there has not been a categorical taking but instead a severe diminution in value, and the developer had reasonable investment-backed expectations of development, regulations imposed after purchase are compensable takings.[43]   This is precisely the case in Good and hence, how that court erred in its ruling.  The court's findings, while they seem logical, ignore the timing of the imposition of the regulation that barred development.  In situations where the regulation was imposed prior to purchase, the landowner's investment-backed expectations are obviously diminished as the market has already compensated for the regulation; this is not the case when a regulation is imposed after purchase.  The market does not compensate someone after they have already purchased their land.  In Mr. Good's case, there were no background principles barring recovery, there was not a categorical taking, but severe diminution in value instead.  Mr. Good has reasonable investment-backed expectations despite an aura of a growing sensitivity to environmental concerns.[44]   While the trend, even at the time of purchase, was toward greater control of environmentally sensitive areas, Mr. Good still had reasonable investment-backed expectations to develop his land.[45]   The idea that a landowner's takings claim could be dismissed solely on the basis that sometime in the future the regulations regarding improvement of the parcel would tighten is unprecedented.  Requiring that reasonable investment-backed expectations include whatever the government may require in the future, courts such as the one in Good would make it impossible for any landowner to ever have reasonable investment-backed expectations.  The Just Compensation Clause does not require landowner's to own a crystal ball in order to foresee future governmental regulation.

Given the current Supreme Court, and their interest in the issue of takings, this issue is sure to find its way before the Court soon.  When it does, the Court should realize that the market does not compensate a landowner for severe diminution in value when a regulation is imposed after purchase, and therefore, the governmental entity imposing the regulation should.

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[1] See Frank L. Michelman, Property, Utility, and Fairness: Comments on the Ethical Foundations of "Just Compensation" Law, 80 HARV. L. Rev. 1165, 1184 (1967).

[2] U.S. CONST. amend. V, cl. 4.

[3] See, e.g., Chicago, B. & Q. R. Co. v. City of Chicago, 166 U.S. 226 (1897); see also Northern Transportation Co. v. City of Chicago, 99 U.S. 635 (1879).

[4] See Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 415 (1922).

[5] See Good v. United States, 189 F.3d 1355 (Fed. Cir. 1999), cert. denied, No. 99-881 (April 3, 2000); see also Deltona Corp. v. United States, 657 F.2d 1184 (Ct. Cl. 1981).

[6] See id.

[7] See Deltona, 657 F.2d at 1191; see also Good, at 1362 ("[Good] had both constructive and actual knowledge that either state or federal regulations could ultimately prevent him from building on the property.").

[8] Deltona, at 1184.

[9] Id. at 1192.

[10] Id. at 1189-1190.

[11] Id. at 1190.

[12] Id. at 1192.

[13] Id. at 1193.

[14] Id. at 1192.

[15] Good, 189 F.3d at 1362 (citing Deltona, 657 F.2d at 1187).

[16] Deltona, 657 F.2d at 1193.

[17] Good, 189 F.3d at 1357.

[18] Id. at 1359.

[19] Id. at 1357-1359.

[20] See Good v. United States, 39 Fed. Cl. 81, 84 (1997); see also Good, 189 F.3d at 1362-1363 ("When in 1980 he finally retained a land development firm to seek the required permits, he acknowledged that 'obtaining said permits is at best difficult and by no means assured.'").

[21] Good, 39 Fed. Cl. at 84, 110-112; see also Ruckleshaus v. Monsanto, 467 U.S. 986, 1008-1009 (1984) ("In an industry that long has been the focus of great public concern and significant government regulation, the possibility was substantial that the Federal Government, which had thus far taken no position on disclosure of health, safety, and environmental data concerning pesticides, upon focusing on the issue, would find disclosure to be in the public interest.").

[22] See Good, 189 F.3d at 1361-1363.

[23] Id. at 1361 (reviewing courts should examine the entire "regulatory climate" not just the specific regulatory regime being challenged.).

[24] Id. at 1362-1363.

[24] Good, 39 Fed. Cl. at 112-113 ("[W]here a developer could recoup his initial investment in the property, but nonetheless chooses to continue to invest in development in the face of significant regulatory limitations, no reasonable expectations are upset when development is restricted or proscribed.").

[26] See Deltona, 657 F.2d at 1191.

[27] See Penn Central Transportation Co. v. New York City, 438 U.S. 104, 124-125 (1978).

[28] Good, 189 F.3d at 1362-1363.

[29] See Deltona, 657 F.2d at 1192.

[30] Id.

[31] Penn Central, at 124-125.

[32] Lucas v. South Carolina Coastal Commission, 505 U.S. 1005, 1027-1029 (1992).

[33] Id. at 1027.

[34] See Deltona, 657 F.2d at 1192.

[35] Andrus v. Allard, 444 U.S. 51, 65 (1979).

[36] U.S. CONST. amend. V, cl. 4.

[37] Michaelman, supra note 2 at 1184.

[38] See Mahon, 260 U.S. at 415.

[39] Penn Central, 438 U.S. at 124.

[40] Id.; see also Lucas, at 1017, 1027.

[41] Id.

[42] Id.

[43] See Good, 189 F.3d at 1360.

[44] See id. at 1359-1360.

[45] See id. at 1357-1358.