Big Victory for State and Local Governments in Murr

On June 23, 2017, the U.S. Supreme Court issued its decision in Murr v. State of Wisconsin, affirming the judgment of the Wisconsin Court of Appeals that enforcement of a “lot merger” provision in a county zoning ordinance did not result in a compensable taking under the Fifth Amendment. While seemingly narrow and technical, Murr represents the most significant takings decision from the Supreme Court in at least a decade.  The Court’s opinion has particularly important implications for future takings litigation involving land use and environmental regulations.  Here are the basic takeaways from Murr.  (Full disclosure:  I filed an amicus brief in Murr on behalf of a group of land economists urging the Court to embrace a more rigorous analysis of how land values are affected by regulation.)

The Background.

The facts of the case are straightforward. Four adult siblings in the Murr family jointly owned two adjacent building lots on the Lower St. Croix River, one with a house on it (Lot F), and one vacant (Lot E), both of which the Murrs had acquired from their parents in a series of transactions in the 1990’s.  Under the county zoning regulations, both of the lots were substandard in size.  Furthermore, because the Murrs held both lots in common ownership, they were “merged” – effectively treated as one lot – under the zoning’s merger provision.   When the Murrs approached county officials about developing Lot E, they were told the lots had merged and they were barred from building a house on Lot E (or selling Lot E to someone else). Disappointed by this regulatory obstacle, they brought suit under the Takings Clause.

The issue before the Supreme Court was whether the “relevant parcel” for the purpose of assessing the economic impact of the restriction was Lot E or Lots E and F combined. The Murrs, represented by the Pacific Legal Foundation, argued for Lot E alone while the government argued for combining the lots. Defining the relevant parcel as Lot E made the potential adverse economic impact of the restriction appear relatively severe, increasing plaintiffs’ chances of establishing a taking.  Defining the relevant parcel as both lots combined reduced the apparent economic impact (because the plaintiffs already had one house on the combined lots), virtually precluding a finding of a taking.

The Murrs argued that Lot E was the appropriate parcel because Lot E had been lawfully created under Wisconsin subdivision rules and state property rules should govern definition of the relevant parcel. The Court rejected this theory and instead ruled that the relevant parcel for takings purposes turns on “whether reasonable expectations about property ownership would lead a landowner to anticipate that his holdings would be treated as one parcel.”  More specifically, the Court said this inquiry should be guided by, among other things, how land is bounded and divided under state and local law, the physical characteristics of the property in question, and the potentially positive impact of a restriction on one of a claimant’s holdings on the value of an adjacent holding.   Applying this multi-factor analysis, the Court ruled that combined Lots E and F represented the relevant parcel, taking into account that the lots had merged under the county’s lot merger provision, the Murrs were aware that their lots bordered a national wild and scenic river and might be subject to stringent regulation, and the fact that the restrictions on Lot E contributed to the value of the development rights on Lot F.

Justice Kennedy wrote the opinion for the Court for himself and four other justices. Chief Justice Roberts wrote a dissenting opinion, joined by Justices Alito and Thomas.  He contended that lot lines established under local law “should in all but the most exceptional circumstances determine the parcel at issue,” meaning that in his view Lot E alone should have been regarded as the relevant parcel.  Justice Thomas wrote a separate dissent arguing, in typically iconoclastic fashion, that the Court has “never purported to ground” its takings precedents “in the Constitution as it was originally understood,” and suggesting that the Court should take a “fresh look” at takings doctrine.  Justice Gorsuch did not participate in the case.  Bottom line, the Court split 5 to 3 on the important “parcel issue” presented by the case.

The Major Takeaways.

The Parcel Status Quo Maintained. Murr basically reaffirms the traditional “parcel as a whole rule” in takings litigation. Murr breaks new ground by firmly grounding the parcel as a whole concept in a claimant’s “reasonable expectations about property ownership” and by enumerating three apparently nonexclusive factors for gauging a claimant’s expectations relevant to the parcel issue: the treatment of the land under state and local law, the physical characteristics of the land, and the effect of restricting use of one land holding on the value of an adjacent land holding.  In practice, however, these guidelines should generally lead courts to adopt parcel definitions in line with the traditional approach to the parcel issue prior to the Murr decision.  State and local law can support either a narrow or, as in the Murr case, a broader definition of the relevant parcel.  Consideration of the physical characteristics of the land and the economic interactions between adjacent land holdings will often support unified treatment of adjacent holdings.  Ultimately, it appears likely that the courts, under the Murr “reasonable expectations” approach, will typically treat a contiguous or otherwise connected set of land holdings as a single parcel for takings purposes so long as they are part of a single development project or investment venture.  Thus, it appears that the Court effectively endorsed the parcel approach it previously applied in Palazzolo, where the Court treated a property that had been subdivided into dozens of separate building lots as a single parcel for the purpose of takings analysis.  This approach also is consistent with how the overwhelming majority of lower federal and state courts have resolved the parcel issue in takings challenges to land use and environmental regulations.  In short, the Court in Murr offered a mainstream answer to the parcel question that is consistent with longstanding practice.

By contrast, if the Court had adopted the Pacific Legal Foundation’s position, and defined each lawfully subdivided lot as the relevant parcel (or at least as the presumptively relevant parcel), it would have produced a substantial increase in takings liability for government at all levels. Happily, the Court declined to make a radical change in this feature of takings law.

Economic Pros and Cons of Regulation Recognized. The Murr decision breaks new ground by recognizing more explicitly than the Court ever has before that land use regulations produce a complex mix of positive as well as negative effects on private property values.  A land use regulation may depress property values by limiting what an owner can do with her land. But it also can increase property values by protecting the amenities that make a community an attractive place to live and work and by restricting available development opportunities and making them scarcer and hence more valuable.

As just discussed, the Court recognized that the mix of negative and positive economic impacts of regulation will support a broad definition of the relevant parcel in many cases.   The Court explained:  “[C]ourts should assess the value of the property under the challenged regulation, with special attention to the effect of burdened land on the value of other holdings.  Though a use restriction may decrease the market value of the property, the effect may be tempered if the regulated land adds value to the remaining property, such as by increasing privacy, expanding recreational space, or preserving surrounding natural beauty . . . . [I]f the landowner’s other property is adjacent to the [owner’s] lot, the market value of the properties may well increase if their combination enables the expansion of a structure, or if development restraints for one part of the parcel protect the unobstructed skyline views of another part. That, in turn, may counsel in favor of treatment as a single parcel and may reveal the weakness of a regulatory takings challenge to the law.”

In addition, once the relevant parcel has been determined, the Court’s economic insights in Murr also should improve the fairness and accuracy of the courts’ analysis of whether a “taking” has occurred, in particular the assessment of the economic impact of a regulatory restriction.  A regulatory restriction typically applies not only to part of a claimant’s land, but also to many other property owners in the community.  For the reasons the Court has explained in Murr, enforcement of the regulation against others in the community will benefit the claimant.   Murr strongly suggests that these benefits received by takings claimants should be factored into the analysis of whether the application of the regulation to the claimant results in a “taking” of his property.

Parcel Rule is a Federal Law Rule. Murr makes clear that federal law, not state or local law, ultimately determines the proper definition of the relevant parcel for the purpose of takings analysis. The Court rejected both the Murrs’ and the State of Wisconsin’s efforts to tie the parcel definition to state and local property rules. The Court said that allowing state law rules to define the relevant parcel would give states or their localities too much authority to define the relevant parcel either too narrowly or too broadly, undermining the Supreme Court’s authority to define the scope of what is, after all, a federal constitutional protection. Instead, the Court articulated a multifactor test which evidently derives from the Takings Clause itself. Under this test, state and local property rules are relevant, but they are not determinative of the parcel question.  It is not entirely clear from Murr whether the parcel issue is part of the analysis of whether a government action amounts to a “taking,” or whether instead it is part of the threshold question of how to define the “property” the claimant possesses. In any event, regardless of how the result is rationalized in doctrinal terms, Murr makes clear that the parcel issue is ultimately governed by federal law.  Chief Justice Roberts, in dissent, took a different position, arguing that the definition of the relevant parcel should be governed by state law.

Lot Merger Provisions Upheld.   The Murr case offers a ringing endorsement of the constitutionality of lot merger provisions.  It is especially noteworthy that, even as the Court split on the proper approach to the parcel issue, the justices agreed unanimously that there was no taking in this case.  That common sense conclusion is hardly surprising.  Prior to Murr, no lower federal or state court had ever ruled that a lot merger provision results in a compensable taking, and it would have been surprising indeed if the Supreme Court had been the first court to do so.   As explained in the effective amicus brief filed by the State and Local Legal Center, lot merger provisions in local zoning ordinances are very widespread and have been around almost since the advent of zoning. And, setting doctrinal complexities to one side, lot merger provisions are eminently fair and just, which is the Supreme Court’s ultimate test under the Takings Clause.  When a community adopts zoning (and the Supreme Court has left no doubt that zoning itself is constitutional), there almost always will be some pre-existing lots that are too small to comply with new minimum lot-size requirements.  Regulators could simply bar use of these lots, imposing heavy economic losses on the owners, or allow the owners to develop the lots even though they are not consistent with the zoning plan.   Faced with this choice, local governments commonly permit the development of so-called “non-conforming” lots.  This decision is arguably fair, although it allows the owners of these lots to ignore the zoning rules being followed be everyone else while simultaneously reaping the benefit of their neighbors’ compliance with the rules.  The calculus is different, however, if citizens acquire adjacent substandard lots that together constitute conforming lots.  In that situation, it is fairer to treat owners of adjacent substandard lots as owners of conforming lots and subject them to the same rules that apply to everyone else, rather than allow them to reap double the special benefits conferred on owners of single substandard lots.  Small wonder that no Justice in Murr was inclined to assert that sensible, time-tested lot merger provisions result in a taking.

RIBE’s Defense Strengthened. The Murr decision expands the significance of the claimant’s reasonable investment-backed expectations (“RIBE’s”) in takings analysis, enhancing the ability of government defendants to point to the regulations in place when the claimant purchased the property as a basis for rejecting a takings claim.  In Palazzolo, the Court (in an opinion by Justice Kennedy) famously rejected the-so-called “notice rule,” the idea that a landowner is barred from suing for a taking based on a regulation already in place when she purchased the property.   The opinion for the Court left uncertain whether, even if a pre-existing regulation is not a complete bar to a takings claim, it should be a factor potentially weighing against a takings claim.   Justice Scalia wrote a concurring opinion insisting that the fact that a rule was already in place at the time of purchase should be irrelevant in a regulatory takings case.  Justice O’Conner filed a separate concurrence taking the opposite tack, asserting that notice of pre-existing regulations should be a relevant consideration.  Because four dissenters in Palazzolo embraced Justice O’Connor’s viewpoint, most lower courts accepted Justice O’Connor’s position as probably representative of a majority of the Court.   But, until now, the Court had never squarely addressed the issue in a majority opinion.  In Murr, Justice Kennedy, speaking for the Court, stated that “[a] reasonable restriction that predates a landowner’s acquisition . . . can be one of the objective factors that most landowners would reasonably consider in forming fair expectations about their property.”   Furthermore, the Court specifically relied on this consideration in resolving the Murr case, pointing out that plaintiffs’ “land was subject to this regulatory burden . . . only because of voluntary conduct in bringing the lots under common ownership after the regulations were enacted.”   So, following Murr, there is no question that an owner’s knowledge of regulatory restrictions in place when she purchased the property will weigh against the owner’s subsequent takings claim based on that restriction.

Importance of Environment Recognized. The Murr decision recognizes the significance of the government’s goal of protecting ecologically fragile parts of the landscape, both for the purpose of defining the relevant parcel and in deciding whether a taking has occurred.  As discussed, the Court said one relevant factor in defining the relevant parcel is “the physical characteristics of the landowner’s property.”   The Court continued:  “These include the physical relationship of any distinguishable tracts, the parcel’s topography, and the surrounding human and ecological environment.  In particular, it may be relevant that the property is located in an area that is subject to, or is likely to become subject to, environmental or other regulations.”  Under this standard, the likelihood that a portion of a claimant’s land holdings might be strictly regulated due to environmental constraints supports treating an owner’s adjacent holdings as a unified parcel.  Thus, in Murr the Court said that the “rough terrain” encompassed by the Murr lots, and their location on a designated wild and scenic river, both supported defining the relevant parcel as Lots E and F.

The Court also said that the government’s environmental protection objectives are relevant as part of the takings analysis, observing that, in assessing the “character” of the county zoning under the Penn Central analysis, it was noteworthy that “the governmental action was a reasonable land-use regulation, enacted as part of a coordinated federal, state, and local effort to preserve the river and surrounding land.”

Time to Revisit Lucas? Murr raises a serious question about whether the Court may be prepared to revisit the apparently strict doctrine laid down twenty-five years ago in Lucas v. South Carolina Coastal Council.   In that case, in an opinion by Justice Scalia, the Court said that a regulation that denies an owner “all economically viable use” of his property should be regarded as a “categorical” taking, unless the government is responding to an emergency or the restriction parallels “background  principles” of nuisance or property law.   Based on this test, the U.S. Supreme Court overturned a ruling by the South Carolina Supreme Court that a state setback line barring developing along the ocean shore did not result in a taking.  Justice Kennedy concurred in the judgment in Lucas but expressed various reservations about the narrowness of Justice Scalia’s per se rule.  In his opinion for the Court in Murr Kennedy quoted twice from his concurring opinion in Lucas. First, in explaining that a claimant’s reasonable expectations about property ownership should be the guide in defining the relevant parcel, he quoted his statement in Lucas that “[t]he expectations protected by the Constitution are based on objective rules and customs that can be understood as reasonable by all parties involved.” Second, in explaining why the physical characteristics, including the environmental sensitivities, of land should be relevant in defining the relevant parcel, he quoted the following: “Coastal property may present such unique concerns for a fragile land system that the State can go further in regulating its development and use than the common law of nuisance might otherwise permit.”   Of course these are only brief snippets in a lengthy opinion. But they do appear in an opinion for the Court. And they reflect the current thinking of the Justice, as illustrated by the vote in Murr, most likely to decide the outcome of hotly debated takings cases before the Court.   At a minimum, Murr appears to open the door to reconsideration of the Lucas precedent and raise the question whether the Court, if presented with the Lucas case today, would be more likely to issue a decision tracking the thinking of Justice Kennedy or the views of the late Justice Scalia.