Determining whether or not a government regulation constitutes a “taking” for the purposes of the Fifth Amendment can be a complex endeavor. The recent Second Department decision of Matter of New Creek Bluebelt, Phase 3 (Baycrest Manor Inc.), ___ A.D.3d ____, 2017 N.Y. App. Div. LEXIS 8042, (November 15, 2017), provides some guidance on three important regulatory takings issues.
The underling case was not a regulatory taking per se. Rather, the City of New York condemned property that was 100% wetlands. Had the City not taken title, the owner could have filed an inverse condemnation action against the N.Y.S. D.E.C. claiming that the wetlands restrictions were a regulatory taking. Therefore, in this condemnation action the just compensation was equal to the property’s value as regulated wetlands, plus that additional amount that the owner could have received as a result of the regulatory takings action. For the curious, this methodology is spelled out in Berwick v. State, 107 A.D.2d 79, 84 (2d Dep’t 1985).
To get to that point, the owner must first prove that the wetlands regulations constituted a regulatory taking. If someone buys a property that is regulated as wetlands, can the buyer still bring a regulatory takings action against the DEC? After all, the owner bought it with knowledge of the restrictions.
For a long time, in New York, the answer was “no.” In 1997, the Court of Appeals issued four cases on the same day that are sometimes known as the “Kim quartet:” Kim v. City of New York, 90 N.Y.2d 1 (1997); Gazza v. Dep’t of Envir. Conserv., 89 N.Y.2d 603 (1997); Basile v. Town of Southampton, 89 N.Y.2d 974 (1997); and, Anello v. Zoning Board of Appeals, 89 N.Y. 2d 535 (1997). Collectively, these cases held that held that a purchaser with notice of a pre-existing regulation cannot maintain a regulatory takings claim. Rather than purchasing a “bundle of rights” included the regulatory takings claim, the takings claim died with the seller and the purchaser was only buying “a bundle of limitations.”
In 2001, this line of legal reasoning was overruled by the U.S. Supreme Court in Palazzolo v. Rhode Island, 533 U.S. 606 (2001). Palazzolo held that a subsequent purchaser can bring a regulatory takings claim: “Just as a prospective enactment, such as a new zoning ordinance, can limit the value of land without effecting a taking because it can be understood as reasonable by all concerned, other enactments are unreasonable and do not become less so through passage of time or title. Were we to accept the State’s rule, the post enactment transfer of title would absolve the State of its obligation to defend any action restricting land use, no matter how extreme or unreasonable. A State would be allowed, in effect, to put an expiration date on the Takings Clause. This ought not to be the rule. Future generations, too, have a right to challenge unreasonable limitations on the use and value of land.”
In Baycrest, the City tested the viability of the Kim Quartet after Palazzolo, arguing that just compensation must be limited to the regulated value because a subsequent purchaser was precluded from bringing a regulatory takings claim.
The Second Department in Baycrest disagreed. In a lengthy discussion, it confirmed that Palazzolo controls and that a subsequent purchaser with notice can bring a regulatory takings claim.
The second important issue that Baycrest discussed is with respect to the concept of “background law.” As per the U.S. Supreme Court case of Lucas v. South Carolina Coastal, 505 U.S. 1003 (1992), a regulation is not a taking if it was already a part of the “background law” of the state. According to Lucas (and with a subsequent discussion in Palazzolo), a background law is not a newly enacted statute but rather a pre-existing common law grounded in public or private nuisance.
New York cases discussing background law are few and far between. Prior to Baycrest, the Second Department decided Monroe Equities v. State, 145 A.D.3d 680 (2d Dep’t 2016). That case held that a watershed regulating dating back to 1920 was part of the background law of the State and thus, not actionable as a regulatory taking. Missing from the decision, however, was a discussion of why it was background law. One can presume that it was because the watershed regulation was intended to protect the public water supply and thus, grounded in nuisance. But the decision itself was silent.
The next background law case was Baycrest. The City, citing to the Monroe trial decision, contended that the wetlands regulations were part of the background law of the State and not actionable as a regulatory taking.
The Baycrest court held that the wetlands regulations were not background law. In keeping with the discussion of this topic in Palazzolo, it reiterated that a law does not become a part of the State’s background law by enactment itself. A regulation cannot be a background law for some, but not for others. Thus, Baycrest and Monroe Equities form bookends for the discussion of background law in a regulatory takings action.
Lastly, Baycrest makes an important contribution to the framework under which regulatory takings claims are analyzed. When determining whether a taking occurred, Penn Central v. City of New York, 438 U.S. 104, 123-124 (1978) indicates that a court should consider the economic impact of the regulation, the regulation’s interference with reasonable investment-backed expectations and the character of the governmental action. However, analyzing these factors in practice is not always straightforward.
For many wetlands properties, Baycrest included, all development is prohibited. Consequently, the property has no economic use. But, because buyers will still buy them for various reasons, the properties do have some non-economic value. The presence of this value creates arguments on both sides as to “the economic impact of the regulation” and “reasonable investment backed expectations.”
Yet, the Baycrest decision did not place any weight on reasonable investment backed expectations. It held that the wetlands regulations constituted a regulatory taking because the regulations caused an 88% loss in value and because the regulations precluded any development on the property. Baycrest is now the second Second Department decision to find a regulatory taking absent any discussion of reasonable investment backed expectations. See Matter of New Cr. Bluebelt, Phase 4 (Paolella), 122 A.D.3d 859 (2d Dep’t 2014). The Baycrest court was within the boundaries of Penn Central in doing so. Under Penn Central, there is no set formula and no one factor is dispositive; the inquiry is ad-hoc.
Perhaps Baycrest provides an indication of where New York law may be headed in the future. In a recent federal case involving a property with no economic use, but some non-economic value, the court held that the lack of any economic use was enough to sustain a takings claim. Lost Tree Vill. Corp. v. United States, 787 F.3d 1111 (Fed. Cir. 2015). Baycrest’s omission of any discussion of investment backed expectations, combined with its lack of focus on the non-economic value that remained after the wetlands designation, may be a harbinger of New York law to come.