Supreme Court Issues Significant Decision Regarding Regulatory "Takings"
 
July 5, 2001
 
Amy L. Edwards- Washington
Lawrence R. "Larry" Liebesman- Washington

In a multi-faceted decision with multiple concurring and dissenting opinions, the U.S. Supreme Court ruled on June 28, 2001, that the government may be required to compensate landowners for regulatory "takings" that interfere with their ability to develop their land. Palazzolo v. Rhode Island, No. 99-2047 2001 WL 721005. The Court’s decision hinged on two key issues: (1) whether the property owner’s claim was "ripe" for review, and (2) whether the property owner’s acquisition of title after the date of enactment of the restrictive environmental regulations had deprived him of the ability to file a "takings" claim. The Court ruled in the property owner’s favor on these two issues. Nevertheless, it remanded the case to the Rhode Island courts because the property owner had not yet established whether it could develop the "uplands" portion of his property (and therefore whether it had been denied all "economically beneficial use" of its property).

History of the Case

The case was brought by Mr. Palazzolo, the owner of 18 acres of coastal wetlands on the Rhode Island coast. Mr. Palazzolo had invested in a corporation that had bought the land in 1959. When the corporation failed to pay its income taxes, title to the property passed, by virtue of state law, to Mr. Palazzolo, the sole shareholder. This passage of title occurred after the Rhode Island Coastal Resources Management Council (the Council) had been created and had adopted regulations declaring salt marshes to be protected coastal wetlands.

The corporation that originally held title, and later Mr. Palazzolo, spent the better part of four decades wrangling with the town to obtain permission to develop the land. Initially, they submitted plans to subdivide the land into 74 lots, and later they submitted plans to build a private beach club on the property. In connection with these plans, Mr. Palazzolo filed various applications with the state to obtain permission to fill in the wetlands, but these applications were all ultimately denied.

After repeated denials of his plans, Mr. Palazzolo filed an inverse condemnation action in the Rhode Island state court, alleging that the state’s wetlands regulations had deprived him of "all economically beneficial use" of his property, without compensation, in violation of the Fifth and Fourteenth Amendments. The lower courts denied Mr. Palazzolo’s takings claims, determining that his claims were not "ripe" for review and that he had no standing to bring the claims because he had acquired title to the land after the date of passage of the regulations. The lower courts also found that Mr. Palazzolo had not proven that he had been deprived of all economically beneficial use, as testimony established that the "uplands" portion of the property was worth $200,000.

Justice Kennedy, who was joined in whole or part by five other justices, overturned the Rhode Island Supreme Court’s ruling, determining that (1) the Council had in fact issued a "final" decision regarding Mr. Palazzolo’s application to develop the property and (2) petitioner had a right to challenge regulations predating his ownership of the property.

Quoting from its opinion in Williamson County Regional Planning Comm’n v. Hamilton Bank of Johnson City, 473 U.S. 172, 186 (1985), Justice Kennedy stated that the key issue is whether the governmental entity "charged with implementing the regulations had reached a final decision regarding the application of the regulations to the property at issue." Palazzolo, supra at * 8. In this case, Mr. Palazzolo’s claim was ripe for review because there was "no indication the Council would have accepted the application had petitioner’s proposed beach club occupied a smaller surface area. To the contrary, it ruled that the proposed activity was not a ‘compelling public purpose.’" Id. at *9. The Court stated that a landowner need not go through countless rounds of repetitive land use review processes or further, futile applications with other agencies just to prove that its claim was "ripe." "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." Id. By the same token, an application to develop the upland portion of the property was not required since there was no uncertainty as to its permitted use or as to the estimated worth of the upland property. "Ripeness doctrine does not require a landowner to submit applications for their own sake." Id.

Even more significantly, the Court ruled that landowners have a right to challenge environmental regulations predating their ownership, even if they had notice of the land use restrictions. The Court recognized that it may take years to perfect a "takings" claim, and that it would be unfair to deprive future generations of the right to challenge unreasonable limitations on the use and value of their property. "[A] blanket rule that purchasers with notice have no compensation right when a claim becomes ripe is too blunt an instrument to accord with the duty to compensate for what is taken." Id. at *14.

Significance and Potential Impact of the Decision

This case is significant for two principal reasons. It establishes that: (1) a property owner does not need to exhaust every conceivable option for developing its land, when the outcome of such a process is clear, in order to have a "ripe" regulatory "takings" claim; and (2) a property owner who takes title after the enactment of regulations that may restrict his ability to develop his land may nevertheless have a basis for filing a regulatory takings claim.

Property owners should now be able to file "takings" claims without needing to file endless rounds of pointless applications in order to establish that they have been denied substantial economic value in their land. Denial of applications to use the property for its intended purpose, rather than passage of the overriding regulation, will trigger a determination whether a taking has occurred.

The Palazzolo decision has a potentially huge impact upon a broad range of environmental regulations, including wetlands regulations and land use restrictions applied at contaminated brownfields sites.

Finally, the decision is likely to cause more confusion than clarity in the short-term because of the substantial number of concurring and dissenting opinions. This confusion will be particularly apparent in cases involving pre-existing regulations, where the principal question will be the property owner’s reasonable investment-backed expectations. The Palazzolo decision is likely to have its greatest impact in resolving when a "takings" claim may be filed, but will shed very little new light on what type of regulation is likely to cause a "taking" in the first place or how to measure the impact of a "taking."

Ms. Edwards, Mr. Liebesman, and Mr. Rosenthal are partners practicing environmental law in Holland & Knight’s Washington, D.C., office.