I. PALAZZOLO V. RHODE ISLAND, 121 S. Ct. 2448 (JUNE 28, 2001)

A. Overview

As it did in Dolan v. City of Tigard, 512 U.S. 374 (1994), and City of Monterey v. Del Monte Dunes at Monterey, Ltd., 526 U.S. 687 (1999), the U.S. Supreme Court produced another 5-4 victory for a regulatory takings claimant in Palazzolo v. Rhode Island, 121 S. Ct. 2448 (June 28, 2001).

The Palazzolo Court acknowledged that since the landmark ruling in Pennsylvania Coal Co. v. Mahon, 260 U.S. 393 (1922), it has given "some, but not too specific, guidance" on regulatory takings issues. 121 S. Ct. at 2457. True to form, the welter of opinions in Palazzolo, handed down on the last day of the Court's October 2000 Term, follows this tradition of providing some, but not too specific, guidance.

Palazzolo yielded no less than six opinions: the majority opinion by Justice Kennedy, dueling concurrences by Justices O'Connor and Scalia, and three dissents. The ruling does provide helpful guidance regarding the boundaries of the per se rule of liability under Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992). Beyond this limited holding, however, clarity is lacking. As discussed below, the Palazzolo Court not only jettisoned one of the few bright-line rules in takings case law (the so-called "notice rule"), but also danced around profound issues such as background principles and the relevant parcel definition in a superficial and confusing fashion. Like many previous regulatory takings cases, Palazzolo raises more questions than it answers. It threatens to confuse lower courts, embolden aggressive developers to bring more takings claims, and chill the efforts of public officials to regulate land use in the public interest.

In ruling for Palazzolo, the Court did not find a taking, but instead remanded the case for further consideration of his claim. Several factors, including the trial court's finding that Palazzolo's proposed development would constitute a nuisance, suggest that the state will prevail on remand.

The takings issue is not going away. The very next day after issuing Palazzolo, the Court agreed to hear Tahoe-Sierra Preservation Council v. Tahoe Regional Planning Agency, 216 F.3d 764 (9^th Cir. 2000), cert. granted, 121 S. Ct. ___, 2001 WL 69237 (June 29, 2001), a takings challenge to a moratorium adopted to allow for development of a regional plan to protect Lake Tahoe from destruction by uncontrolled development.

B. Facts and Background

1. The Property: Anthony Palazzolo owns property on Winnapaug Pond in Westerly, Rhode Island. The parcel includes 18 acres of fragile coastal wetlands and about two acres of uplands. The wetlands are subject to twice-daily tidal flooding and are part of one of the most valuable salt marshes in the state. Salt marshes are among the most biologically productive ecosystems on earth, rivaling even the richest agricultural land in organic output. About 70 percent of U.S. commercial fisheries, a multibillion-dollar industry, depend on estuaries and salt marshes for nursery and spawning grounds. Wetlands also help maintain the purity of lakes, rivers, and drinking water by filtering out contaminants. They protect against floods and shoreline erosion and provide critical habitat for waterfowl, shore birds, songbirds, and many other kinds of wildlife. For a discussion of the ecological importance of wetlands generally and the wetlands at issue, go to http://www.communityrights.org/JohnTeal.pdf

2. Application History: Palazzolo's corporation, Shore Gardens, Inc. (SGI), bought the property as part of a larger parcel in 1959 for about $13,000. SGI then sold off most of the easy-to-develop uplands. In 1971, Rhode Island enacted legislation protecting its coastal wetlands. Palazzolo acquired the property in 1978 when SGI dissolved. In 1983, he filed an application with the Rhode Island Coastal Resources Management Council to fill all eighteen acres of wetlands. The application did not specify the purpose of the proposed filling, and the state denied the application. In 1985, Palazzolo applied for permission to fill 11 acres of the wetlands to build a beach club. The state denied this application as well. No other landowner on Winnapaug Pond has been allowed to destroy wetlands on such a massive scale. For photos of the site and surrounding property, go to http://www.communityrights.org/Palazzolo.html

It is undisputed that Palazzolo may build at least one house on the upland portion of the property. As a result, the land is worth at least $200,000 (1986 dollars), more than fifteen times SGI's $13,000 investment.

3. The Lawsuit: Palazzolo sued the state under the Takings Clause of the Fifth Amendment to the U.S. Constitution ("nor shall private property be taken for public use, without just compensation"), contending that the state has "taken" his property by denying his development applications. He seeks $3,150,000 in compensation, the alleged value of the land if he were allowed to build a 74-house subdivision on the parcel.

The trial court rejected the claim, finding that the proposed subdivision would be a nuisance because its septic tanks would threaten the groundwater, the sole source of drinking water for the surrounding community. Even without the septic tanks, the trial court found that Palazzolo's proposed wetland destruction would be a nuisance because it would significantly reduce commercial and recreational fish populations in the area. The trial court also ruled that the permit denials did not work a taking because the property was still worth at least $200,000 as of 1986. Finally, the trial court concluded that the permit denials did not interfere with Palazzolo's expectations because he knew about the state's pre-existing wetland regulations when he acquired the property from SGI in 1978.

The Rhode Island Supreme Court rejected Palazzolo's takings claim as unripe for two reasons. First, Palazzolo never submitted a permit application for the subdivision proposal that lies at the heart of his takings claim. Second, the record fails to show the extent to which the state would allow the property to be developed. Alternatively, the Rhode Island Supreme Court ruled that Palazzolo's takings claim failed because he acquired the property from SGI after enactment of Rhode Island's wetland protection regulations. The court ruled that the pre-existing wetland laws are background principles that preclude takings liability and prevent Palazzolo from having a reasonable expectation to develop the property under Penn Central Transp. Co. v. New York City, 438 U.S. 104 (1978). Nor was Palazzolo deprived of all economically viable use.

4. The Three Issues Before the U.S. Supreme Court:

a. The Ripeness Issue -- Rhode Island argued that the case is premature because Palazzolo never applied for permission to build the subdivision proposal upon which his request for $3,150,000 is based. Recall that Palazzolo's 1983 application to fill all 18 acres of wetlands left the purpose of the fill unspecified. Nor did Palazzolo pursue any development proposals less intense than the beach club proposal. Palazzolo argued that the case is ripe because, in his view, the record shows exactly how much development would be allowed: one single-family home and nothing more. Rhode Island disputed this assertion and contended that Palazzolo might be able to build more homes on other parts of the property.

b. The Lucas Issue --Palazzolo contended that the wetlands rules worked a per se taking of his land under Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992), which holds that regulation constitutes a per se taking where it deprives a landowner of all economically viable use and value of the land (unless the regulation is justified by background principles of law). The State responded that no per se taking occurred under Lucas because Palazzolo may build at least one house on his property, and the land therefore is worth at least $200,000 (1986 dollars).

c. The Timing-of-Acquisition Issue -- As noted above, the Rhode Island Supreme Court ruled in the alternative that Palazzolo's takings claim failed because he acquired the property from SGI after enactment of Rhode Island's wetland protection regulations. Palazzolo argued in the U.S. Supreme Court that a landowner should be allowed to sue for a taking even if the owner acquires the property after enactment of the challenged regulation.

C. The U.S. Supreme Court's Holdings

In a majority opinion written by Justice Kennedy (joined by Chief Justice Rehnquist and Justices O'Connor, Scalia, and Thomas), the Court ruled in favor of Palazzolo on two issues, concluding that the case is ripe and that the Rhode Island Supreme Court erred in rejecting Palazzolo's takings claim simply because he acquired title to the property after the challenged wetland regulations were enacted. The Court ruled in favor of the State on the third issue, concluding that there was no Lucas taking because the property retains $200,000 in value. The Court remanded the case for further consideration of Palazzolo's Penn Central claim.

Justice O'Connor wrote a concurrence, concluding that the timing of Palazzolo's acquisition is relevant to the Penn Central analysis, but Justice Scalia also wrote a concurrence disputing this view. Significantly, all four dissenting Justices sided with Justice O'Connor in this debate. Justice Stevens penned a dissent concluding that the case is ripe but that the state court properly rejected the claims on the merits due to the timing of Palazzolo's acquisition. Justice Ginsburg authored a dissent (joined by Justices Souter and Breyer) concluding that the case is unripe. Justice Breyer also wrote a brief dissent noting that in his view, the Takings Clause does not allow landowners to manipulate their holdings unfairly to manufacture takings claims.

1. Ripeness

a. The Majority Opinion: The Court ruled that the case was ripe, but in so ruling the Court reaffirmed its prior holdings that a regulatory takings case is not ripe until "a court knows 'the extent of permitted development' on the land in question." 121 S. Ct. at 2458 (citing Williamson County Reg'l Planning Comm'n v. Hamilton Bank, 473 U.S. 172 (1985), and McDonald, Sommer & Frates v. Yolo County, 477 U.S. 340, 351 (1986)). The Court ruled that Palazzolo was ripe because it found no ambiguity in the record regarding the extent of permitted development: one single-family home and nothing more. It rejected the State's argument that Palazzolo might be able to build more than one house because the State failed to make this point clearly in its opposition to certiorari. 121 S. Ct. at 2460. The State also argued that the case was unripe due to Palazzolo's failure to apply for the 74-unit subdivision that formed the heart of its takings claim at trial. But the Court rejected this argument, stating that this failure goes only to damages, not ripeness. See id. at 2462. Because Justice Stevens agreed with the majority that the case was ripe, the ripeness ruling was 6-3.

On balance, the ripeness ruling seems largely limited to the facts of this case, particularly what the Court viewed as unequivocal evidence that the State would not permit filling of any of Palazzolo's wetlands. In good news for state and local governments, the Court reaffirmed "that a landowner may not establish a taking before a land-use authority has the opportunity, using its own reasonable procedures, to decide and explain the reach of a challenged regulation." Id. at 2459. Before bringing a takings claim, a landowner must follow the "reasonable and necessary steps to allow regulatory agencies to exercise their full discretion in considering development plans for the property, including the opportunity to grant any variances or waivers allowed by law." Id. "As a general rule," the Court wrote, "until these ordinary processes have been followed the extent of the restriction on property is not known and a regulatory taking has not been established." Id. Responding to concerns that a landowner might apply for a modest land use and then use the denial of the application to launch a takings suit based on a far more extravagant proposal, the Court reaffirmed that state-law ripeness or exhaustion principles may impose requirements beyond those imposed by federal ripeness rules under Williamson County. See id. at 2461-62. It stressed that it does "not intend to cast doubt" on the authority of a state to require landowners to "follow normal planning procedures or to enact rules to control damage awards based on hypothetical uses that should have been reviewed in the normal course * * *.”Id.at 2461.

b. Justice Ginsburg's Dissent: Justice Ginsburg took issue with the Court's conclusion that the record unambiguously shows that Palazzolo may build only one house on the land and nothing more. 121 S. Ct. at 2473-74. Noting that Palazzolo pursued only a Lucas per se claim in state court, she observed that the state had no incentive to flesh out the full extent of permitted development. See id. at 2474. The state's submissions, she argued, establish only a floor, not a ceiling, on permissible development. See id. at 2476.

Justice Ginsburg argued that Palazzolo, aided by new counsel, changed his claim from a Lucas claim to a Penn Central claim, thereby elevating the significance of whether he could build more than one house, and then misrepresented the record regarding the extent of permissible development. See id. at 2475. Responding to the majority's conclusion that it was now too late for the state to suggest that additional development might be allowed because it failed to raise this possibility in its opposition to certiorari, Justice Ginsburg argued that the Court's ruling

amounts to an unsavory invitation to unscrupulous litigants: Change your theory and misrepresent the record in your petition for certiorari; if the respondent fails to note your machinations, you have created a different record on which this Court will review the case.

2. The Timing of Palazzolo's Acquisition

a. Blanket Rule Rejected: The Court viewed the Rhode Island Supreme Court ruling as having established a "blanket rule" that a claimant's acquisition of title after enactment of the challenged regulation automatically bars a takings claim. 121 S. Ct. at 2463. The Court rejected this "sweeping rule," stating that "[t]he State may not put so potent a Hobbesian stick into the Lockean bundle" of property rights. Id. at 2462. The Court concluded that precluding all post-enactment purchasers from prevailing on a takings claim would improperly "put an expiration date on the Takings Clause." Id. at 2463. "Future generations, too, have a right to challenge unreasonable limitations on the use and value of land," the Court wrote. Id. The Court expressed concern that the process of ripening a claim might prevent the owner at the time of enactment from bringing a claim. Moreover, a blanket rule against recovery would create unfair results for older property owners and those who need to sell, as opposed to those with the resources to hold title. See id.

The Court treated as controlling precedent footnote 2 of Nollan v. California Coastal Comm'n, 483 U.S. 825, 834 n.2 (1987), which states that "prior owners must be understood to have transferred their full property rights in conveying the lot." It declined to view the discussion of background principles in Lucas as limiting Nollan. Not every pre-existing regulation is a background principle that precludes takings liability, the Court ruled. The Court did make clear, however, that background principles under Lucas are not limited to common law (as some have argued) and that it was possible that even the Rhode Island statute might be a background principle. 121 S. Ct. at 2464 ("We have no occasion to consider the precise circumstances when a legislative enactment can be deemed a background principle of state law or whether those circumstances are presented here."); see also id. (recognizing that "an existing, general law" may be a background principle). It described background principles "in terms of those common, shared understandings of permissible limitations derived from a State's legal tradition." Id. This "derived from" language suggests that background principles include not only pre-existing statutes and regulations that codify common law doctrines of nuisance and property law, but also those that represent a reasonable extension of those doctrines.

Recall that Palazzolo acquired title to the land at issue through automatic operation of law upon dissolution of his corporation, not an ideal posture for a takings defendant arguing that the pre-transfer existence of the challenged law precludes liability. Justice Breyer mentions inheritance as another kind of transfer that should not always preclude challenge to a pre-existing law. In these circumstances, it is difficult to argue that the transfer greatly changes anyone's expectations about the property. On the other hand, acquisition of title through purchase often affects reasonable expectations associated with property, particularly where the purchase price is discounted due to laws in effect at the time of the transfer. As discussed in the next section, Justice O'Connor's concurrence shows that such changes in expectations are still highly relevant to takings analysis.

b. Justice O'Connor's Concurrence: As noted above, Justice O'Connor wrote separately to emphasize that the timing of a takings claimant's acquisition is relevant to the Penn Central analysis, stating: "[I]t would be just as much error to expunge this consideration from the takings inquiry as it would be to accord it exclusive significance." 121 S. Ct. at 2465. The regulatory regime in place at the time of acquisition "helps to shape the reasonableness of [the claimant's] expectations" under Penn Central. Id. at 2466. She expressed concern that "if existing regulations do nothing to inform the analysis, then some property owners may reap windfalls and an important indicium of fairness is lost." Id. at 2467. In other words, where a buyer purchases land at a discount due to restrictions in place at the time of purchase, courts should consider those reduced expectations (as reflected in the reduced price) in evaluating a takings challenge to those restrictions. Significantly, all four dissenters expressly agreed with Justice O'Connor regarding the relevance of the timing of acquisition to the Penn Central analysis. Presumably, public officials required to defend against takings challenges to long established land-use controls will find Justice O'Connor's concurrence to be an important arrow in their quivers.

Justice O'Connor stressed that in regulatory takings analysis, "the temptation to adopt what amount to per se rules in either direction must be resisted." Id. Her analysis will provide more fodder for commentators who have criticized the "ad-hocracy" of takings analysis.

c. Justice Scalia's Concurrence: In a typically biting separate opinion, Justice Scalia took issue with Justice O'Connor's approach and argued that the timing of acquisition is never relevant to takings analysis unless the pre-existing regulation constitutes part of the background principles of law that preclude a taking. He acknowledged that his rule might result in an unfair windfall to a savvy developer who buys land with knowledge of a restriction at a discounted price and then sues to challenge the restriction as a taking. But he stated that to deny relief on these facts would reward the government for its unconstitutional behavior. 121 S. Ct. at 2467-68. No other Justice joined Justice Scalia's opinion.

d. Justice Stevens's Dissent: Justice Stevens concluded that the case is ripe because at bottom, Palazzolo challenged the wetlands regulations themselves, not the denial of the permit applications. On this view, however, Stevens's stated that Palazzolo does not have standing to pursue the takings claim because he did not own the property at the time of the alleged taking (issuance of the regulations). 121 S. Ct. at 2470.

3. The Lucas Per Se Rule

a. Is a 93.6% Value Loss Enough? Lucas holds that a per se taking occurs where regulation denies a landowner all economically viable use of the land (unless the regulation is justified by background principles of law). Palazzolo's land is worth $200,000, less than seven percent of the $3,150,000 value Palazzolo claimed he could derive from the land if allowed to fill the wetlands. Is this loss sufficient to show a per se takings under Lucas? No. The Palazzolo Court affirmed the state court's ruling that Palazzolo was "not deprived of all economic use of his property because the value of [the] upland portions is substantial." 121 S. Ct. at 2457. Although the State may not avoid a Lucas taking by leaving the landowner with "a token interest," the $200,000 value of Palazzolo's parcel defeated his Lucas claim. His ability to build a home on the upland showed that his land was not left "economically idle" under Lucas. The Court rejected Palazzolo's contention that Lucas's economically-viable-use standard requires examination of whether the landowner is left with a reasonable return on investment. Id. at 2464-65.

b. Use vs. Value: The plaintiff's bar sometimes argues that for the government to avoid application of the Lucas per se rule, a landowner must be able to derive value from the land by developing it. On this view, Lucas may apply even where the land retains significant "speculative" value (the value speculators might pay in the hope that the restrictions will be lifted) or where a neighboring property owner offers to purchase the land to acquire a permanent viewshed or buffer zone for adjacent property. Others argue, however, that any significant value is sufficient to defeat a Lucas claim, regardless of whether the property is buildable, because sale for value is an economic use. Palazzolo does not resolve the dispute because the land retained development value, but it is noteworthy that in articulating the Lucas per se rule, at one point the Palazzolo court spoke exclusively in terms of value without regard to whether the value is derived from the ability to build. 121 S. Ct. at 2457 ("the [state] court was correct to conclude that the owner is not deprived of all economic use of his property because the value of upland portions is substantial.").

4. Other Observations

a. As is often true in regulatory takings cases before the U.S. Supreme Court, both sides are claiming victory. Pacific Legal Foundation (PLF), which argued the case for Palazzolo, hails the ruling as a landmark decision and reportedly believes that "smart growth is now doomed." Paul Mulshine, Supreme Court Decision Changes a Lot, The Star Ledger, July 3, 2001. Although PLF is certainly entitled to claim a win, it seems hyperbolic at best to toll the death knell for smart growth and other land-use controls. The Rhode Island Attorney General's Office expressed satisfaction with the Court's rejection of Palazzolo's Lucas claim and confidence that it will prevail on remand.

b. In disposing of the Lucas claim, the Court expressly declined to address Palazzolo's argument that the wetland portion of its property should be considered separately from the upland portion because Palazzolo failed to make this argument in the state courts. In leaving the issue open, the Court stated that some of its prior rulings "indicate" that takings analysis requires consideration of the parcel as a whole, and it noted that it has "expressed discomfort with the logic of this rule." 121 S. Ct. at 2465 (citing Lucas, note 7). The Court also cited two articles that advocate use of an "affected portion" standard. Id. The Court failed to note (but Justice Ginsburg did note in dissent, id. at 2475, n.2) that after Lucas, the Court unanimously reaffirmed the parcel-as-a-whole. Lower courts almost universally apply the parcel-as-a-whole rule, but the Palazzolo discussion might well create future confusion on this point.

c. It is somewhat surprising that none of the six opinions discusses the value of wetlands or the extensive record evidence of the damage that would be caused by Palazzolo's proposed filling. Although this harm was not directly relevant to the legal issues before the Court, one might hope for some recognition of the stakes involved in the case from the community's perspective. Instead, the Court includes a rather bizarre and irrelevant history of Westerly, Rhode Island. Id. at 2454.

d. In his concurrence, Justice Scalia compares the state to a "thief" (id. at 2468), a remark reminiscent of his comparison of California to an "extortion[ist]" in Nollan. See 483 U.S. 825, 837. His highly charged rhetoric suggests that he continues to view much land-use regulation as little more than a thinly veiled land grab by public officials.

e. Justice Kennedy's statement that "[t]he State may not put so potent a Hobbesian stick into the Lockean bundle" may win the rhetorical-flourish-of-the-year award. 121 S. Ct. at 2462. Expect developers and other claimants to quote it often in their briefs, even developers who have not read Hobbes's Leviathan or Locke's Second Treatise on Government.

5. The Bottom Line

Planners and government officials won a clear victory on the Lucas per se rule with a holding that significantly cabins the scope of liability under that rule. On ripeness, the Court ruled for Palazzolo on the facts but reaffirmed its basic ripeness doctrine and the right of state and local officials to fashion their land-use procedures as they see fit. On post-enactment acquisition, the Court rejected a blanket rule of per se non-liability, but it recognized that regulations may serve as background principles where they are "derived from" a State's legal tradition. Five Justices re-affirmed Penn Central's ruling that pre-existing regulations are relevant to the issue of whether a Penn Central taking has occurred. Finally, in declining to address the relevant-parcel issue, the Court served up unhelpful dicta that might well confuse lower courts and embolden takings claimants.

The State of Rhode Island is likely to prevail on remand, particularly given the trial court's finding that the proposed fill would constitute a nuisance, the absence of any evidence as to the viability of Palazzolo's beach club proposal, and the speculative nature of Palazzolo's subdivision proposal. It is possible that the state even could prevail on ripeness grounds if it can show that state ripeness law (as opposed to federal ripeness principles under Williamson County) requires Palazzolo to apply for permission to build the 74-unit subdivision before bringing a takings claim based on that proposal.

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