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Supreme Court Decision Rejects Harsh Rule That Would Have Barred Regulatory Takings Claims By Property Owners Who Took Title After Regulations Were In Place



January 14, 2001

Ever since 1922, when the Supreme Court first recognized the concept of a “regulatory taking” – a taking of private property triggering the Fifth Amendment’s just compensation requirement through government restrictions on the property’s use, without any physical appropriation or occupation – the Court has struggled to articulate standards for determining just when such a taking has occurred. Justice Holmes’s famously obscure formulation in that landmark case – “if a regulation goes too far it will be recognized as a taking,” Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 415 (1922) – has been given a certain degree of definition, most notably in Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992), which held that a restriction that eliminates all economically viable use of a parcel constitutes a compensable taking, and Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978), which set forth a multi-factor test applicable to restrictions that do not effect a Lucas-type “total” taking. In its 5-4 decision in Palazzolo v. Rhode Island, 533 U.S. (June 28, 2001), the Court resolved two threshold issues in a way that should make it easier for property owners to assert regulatory takings claims.

The petitioner, Anthony Palazzolo, had twice been denied permission in the 1980s to fill wetlands on his property to develop a beach club, under regulations that went into effect in 1971. (He never submitted a proposal to develop only the upland portion of the parcel.) A corporation formed by Palazzolo and some associates had purchased the property in 1959, after which Palazzolo became the sole shareholder, and the corporation unsuccessfully sought permission to develop the property three times in the 1960s. Palazzolo himself acquired the property in 1978, when the corporation’s charter was revoked and title passed to him as sole shareholder. After the second denial, he brought a Lucas claim in state court, where his claim was rejected.

Disagreeing with the Rhode Island Supreme Court, the Court held, first, that despite Palazzolo’s failure to seek permission to develop only the upland portion of his property, his claim was “ripe” for adjudication. Previous decisions had held that a property owner cannot bring a takings claim until the reviewing court can know what sort of development, in the view of the regulatory agency, is permissible on the property. Justice Kennedy, joined in the majority by Chief Justice Rehnquist and Justices O’Connor, Scalia, and Thomas, wrote that these earlier cases did not bar Palazzolo’s claim on ripeness grounds. There was no uncertainty, said the Court, about the extent of permissible development on Palazzolo’s property: the regulations flatly barred any filling of wetlands for his proposed beach club, and it was clear that he could build just one house on the upland portion. In a sharp dissent, Justice Ginsburg, joined by Justices Souter and Breyer, said that the record was in fact ambiguous on this point; Palazzolo might be able to construct more than one house on the upland portion of his parcel. Therefore, she wrote, his claim would not be ripe until he sought and received a determination from the State of what he could build there.

Of wider applicability is the Court’s second holding: Palazzolo’s claim was not barred simply because he acquired the property after the regulations had gone into effect, and thus was on notice of their applicability when he took title. The Court rejected the contrary blanket rule set forth by the Rhode Island Supreme Court as unfair (especially where title passed to the current owner not via a purchase but by other, often “accidental” means, such as a will or, as in Palazzolo’s case, by operation of law). Eight Justices agreed on this point (only Justice Stevens dissented), but they were far from unanimous in their views on how the fact of post-regulation acquisition should be considered in a takings analysis. Justice O’Connor (concurring) and Justice Breyer (dissenting) wrote separately to note how it should figure into the court’s analysis of the owner’s “reasonable investment-backed expectations,” one of the factors in the Penn Central test. In his own dissent, Justice Scalia said that it should not be considered at all.

Finally, affirming the Rhode Island court’s conclusion that Palazzolo had not proven a “total” taking under Lucas, the Court sent the case back to state court for consideration of Palazzolo’s Penn Central claim – a claim he first asserted before the Supreme Court.

The law of regulatory takings is only slightly less murky after Palazzolo. The complicated, fact-sensitive tests of Penn Central and Lucas remain the controlling legal standards. In Palazzolo, however, the Court has clarified some important threshold issues. In particular, by allowing claims by owners who acquired the subject property after the relevant regulations went into effect, the Court opened the door to many takings claims that would otherwise have been barred. It is still unclear whether and how the owner’s post-regulation acquisition should be weighed under either Lucas or Penn Central.