Could the Supreme Court Change the Penn Central Takings Test?

This post was reprinted with permission from Dwight Merriam, Esq.
There are three types of regulatory takings. The first is the physical invasion taking where a claim for inverse condemnation is made when the government enters or allows others to enter, your property. The leading physical invasion case is Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982), where a landlord in New York was required to take a shoebox-sized junction box for a cable system on the roof of her apartment building. The U.S. Supreme Court held that even the smallest physical invasion taking is compensable. The test for a physical invasion taking is the simplest of all: if the government physically takes your property, they have to pay for it. Period. End of discussion. We call it the per se test.
The second type of taking, hardly ever seen, is a hybrid between the partial taking caused by overregulation and the Loretto-style physical invasion taking. These are called “categorical takings,” and the leading case is Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992). David Lucas had two oceanfront lots in South Carolina, and the government told him that there was no way it would ever allow him to develop. The government also conceded that the property had no economic use as a consequence. Lucas sued and eventually made his way to the U.S. Supreme Court. The Court announced this new variant, the categorical taking, where property is rendered valueless as a result of government regulation. The test in Lucas, just like the one Loretto, is simply if your property is rendered valueless, the government has to write a check.
But nearly all inverse condemnation cases arise out of partial regulatory takings, as when a developer is required to set aside some large amount of open space in return for getting a subdivision approval or is permitted only a few townhouse units on a property that could easily be developed with 50 or more. In the most famous and first partial regulatory takings case, Pennsylvania Coal Co. v. Mahon, 260 U.S. 393 (1922), Justice Holmes offered the rule that launched an untold number of lawsuits and thousands of articles by tenure-seeking academics: “the general rule at least is that while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.”
This test was expanded upon in Penn Central Transp. Co. v. New York City, 438 U.S. 104 (1978). Penn Central sought a “certificate of appropriateness” from the New York Landmarks Preservation Commission to erect a tower, some 53 stories high, on top of the beautiful Beaux Arts Grand Central Terminal building. The proposal was rejected. Penn Central claimed a partial regulatory taking from its inability to make use of its development rights in the airspace above the terminal.
The U.S. Supreme Court enunciated a three-part test for determining whether there’s a partial regulatory taking. (1) The “economic impact” of the government action, principally in the diminution of value (2) the extent to which the action “interferes with distinct investment-backed expectations,” and (3) the “character” of the government’s action. The three-part test has proved difficult to apply with any predictability.
The diminution in value must be substantial. In HFH, Ltd. v. Superior Court, 542 P.2d 237 (Calif.1975), there was an 80% loss in value as a result of the regulation. No taking, said the California Supreme Court.
The investment-backed expectations test raises issues of when did the property know of the restrictions, were new regulations foreseeable, for what purpose was the property purchased, and should it apply at all to inherited property.
The character of the government’s actions is even harder to apply as a test. It has so many interpretations. Maybe the simplest is balancing the need for the government’s action, such as saving a sole-source acquirer, versus the private interest of some loss in development potential, like giving up three lots out of 100 to maintain a buffer around a well site.
But now, the U.S. Supreme Court has an opportunity to address the problems with the Penn Central three-part test. The Court has been asked to review a decision by the Massachusetts Appellate Court in Smyth v. Conservation Comm’n of Falmouth, 94 Mass. App. Ct. 790 (App. Ct. 2019). The soundbite history of the case is this: Janice Smyth’s parents purchased a residential building lot in Falmouth on Cape Cod in 1975 for $49,000 ($216,000 today). Her folks never built on it, while all the other lots in the subdivision were developed.
Janice Smyth inherited the lot and decided to build on it, but the town wouldn’t approve it, invoking a regulation that was adopted after she acquired her interest in the property. The only use she had remaining in the property was to establish a “playground” or a “park,” or maybe sell rights to abutting owners, with the resulting loss of 91.5% of the value. The Massachusetts Appellate Court, applying the Penn Central three-part test, found no taking, and reversed the jury’s verdict below, which had awarded Smyth $640,000 in damages for the lot appraised at $700,000. The Appellate Court reasoned that Smyth’s parents had paid $49,000 (in 1975 dollars) to purchase the lot 44 years ago and because, even with the denial today, it was still worth $60,000 (in today’s dollars), there was no diminution in value. Really, that’s what the Massachusetts Appellate Court said, completely ignoring the time value of money.
Moreover, the Court held there were no investment-backed expectations because Smyth inherited the lot. Presumably, the expectations died with her parents. And as to the character of the government’s action, well, there was no physical invasion, and environmental benefits come from not building on it.
The questions presented in the Certiorari petition are these, spot on with the problems inherent in the Penn Central three-part test:
“1. Whether the loss of all developmental use of property and a 91.5% decline in its value is a sufficient “economic impact” to support a regulatory takings claim under Penn Central.
2. Whether a person who acquires land in a developed area, prior to regulation, has a legitimate “expectation” of building and, if so, whether that ii interest can be defeated by a lack of investment in construction?
3. Whether the Court should excise the “character” factor from Penn Central regulatory taking analysis.”
This will be the case to watch in the coming weeks. You can follow it, case number 2017-P-1189, at the Supreme Court’s website. If the Court takes it, given the 5-4 split in favor of private property rights, Penn Central may be derailed.