The Supreme Court Gets It Right On Takings - And Wrong - A View from "Inside the Curtilage": The Property Owner's Perspective

by Sheppard Mullin Richter & Hampton LLP

In Koontz v. St. Johns River Water Management District, the Supreme Court cleared up two important, nagging issues with wide applicability and importance to property owners across the country. First, the 5-member majority, led by Justice Alito, held that a government cannot avoid Fifth Amendment takings liability by denying a permit unless the applicant agrees to a potentially unconstitutional condition. The Court saw this as a procedural ploy to circumvent the effect of Nollan-Dolan. According to Justice Alito, denial of a permit because an applicant will not accept an unconstitutional condition does not insulate the condition from constitutional review any more than when the condition is imposed over the applicant’s objection and the permit is granted. In California, state law already generally allows applicants to accept a permit and still challenge illegal conditions under Nollan-Dolan, but many states saw the granting of the permit as barring a later challenge. The majority’s second ruling was the one that caused sparks to fly with the dissent. Justice Alito held that monetary exactions are subject to the same scrutiny under the Nollan-Dolan “nexus” and “rough proportionality” tests as land dedication requirements. This has generally been the rule for many years in states like California and Texas.

Interestingly, the 4-member dissent by Justice Kagan agreed with the majority that permit denials are subject to Nollan-Dolan if based on excessive demands for exactions of any kind. Nevertheless, the divisions on the court are apparently so severe that the majority and the minority could not agree on how to state the law, even though the minority spent the first two pages of their opinion explaining and recasting their “agreement” with the majority.

The majority and dissent agreed that there is no taking when the government simply proposes excessive conditions of approval that are rejected by the landowner. Although their reasoning is somewhat different, they were united in their view that the imposition of unconstitutional demands where a permit is denied is not a taking in violation of the Fifth Amendment because “nothing has been taken.” But here the majority and the minority appear to part company.

Thus, the majority chooses to view this case as one to be decided under the well established doctrine of unconstitutional conditions. In other words, even though there is no physical “taking,” i. e., title to property has not passed to the government, the government’s action in this and similar cases still places an unconstitutional burden on the property owner’s Fifth Amendment right not to have his or her property taken without just compensation. But the doctrine of unconstitutional conditions, though perhaps correct as a matter of policy, is much broader than the Fifth Amendment, affecting attempts to burden almost any constitutional rights, for example, under the First, Second, and Fourth Amendments. Historically, it has its roots in due process jurisprudence, where it fits more comfortably. Thus, even though Justice Alito still sees the problem as arising under the takings clause of the Fifth Amendment, the violation is “burdening” a constitutional right, not an actual taking of property or money.

Justice Alito skirts the issue of remedies, stating that the Court didn’t have to decide whether federal law authorizes damages for unconstitutional conditions because the property owner brought his claim under Florida law, which allows property owners to sue for “damages” whenever a state agency takes without just compensation. Whether that provision covered an unconstitutional conditions claim like the one at issue was therefore a question of state law that the Court declined to reach and referred to the Florida courts for resolution. But he also does not rule out the possibility of damages as a remedy for a Nollan/Dollan unconstitutional conditions violation.

The dissent had two objections to testing monetary exactions under Nollan-Dolan. On a legal level, Justice Kagan pointed to recent Supreme Court precedent holding that requiring companies to spend money, even large quantities of money, is not a taking. If requiring a company to spend money on government programs is not a taking of property, then it does not become a taking simply because it is imposed in lieu of requiring a dedication of real property. The proper analysis is under the due process clause, according to Kagan, not strict scrutiny under the Fifth Amendment. The dissent foresees major problems for local governments, which can no longer avoid higher scrutiny of exactions under the Fifth Amendment, instead of much lower scrutiny under the due process clause, even if there is no actual property transfer.

From the property owner/permittee’s perspective, the majority arguably got a lot right in Koontz. Even the minority was on the right track for much of its dissent. There has always been a question over the fairness of permitting government to insulate its imposition of constitutionally objectionable conditions on an entitlement by forcing an applicant to either “accept” the conditions prior to approval or face denial. Whether an applicant does or doesn’t accept the conditions prior to approval should not matter; the applicant should be free to challenge the conditions in either case.

The majority was also right in holding that in-lieu fees and monetary exactions, off-site or on-site, should be subject to the same rules as property exactions. Although the latter may be more directly attached to the land, any owner or developer will tell you the practical consequences are the same.

Though a closer call, the majority also got it right in holding that excessive exactions under Nollan-Dolan require a “per se” takings approach under the Fifth Amendment. Either the exaction meets the “nexus” and “rough proportionality” tests, or it does not. Any excess demand, including a monetary demand, is “per se” disallowed under the Fifth Amendment. A Penn Central “factors” analysis has no place in the proportionality calculation required by Nollan-Dolan and now Koontz.

So, again from the owner/permittee’s perspective, where did the majority possibly get off track? Despite priding itself on its practical understanding of land use permitting, the Court’s distinction between pre- and post- approval takings misses the mark. According to Justice Alito, wrongful rejection of a permit in violation of Nollan-Dolan does not cause a taking, because no property is conveyed. In other words, the applicant still has everything he or she had before. Justice Alito distinguished this situation from an approval subject to unconstitutional conditions, which he seemed to view as a completed taking, as though the transfer occurred when the last vote for the unconstitutional condition was recorded. This is not the case. All states allow landowers to challenge unconstitutional conditions attached to an approved permit unless the right is voluntarily waived. So, the transfer never actually takes place if the condition is challenged. The practical problem isn’t whether the condition is attached to a permit, or used as a basis for rejection, it is that most states do not allow the permit to go into effect while the permit condition is litigated. California allows conditions to be challenged while a project goes forward, but in many states the effect of a permit approval with an unconstitutional condition is the same as denial because the project cannot go forward in either case.

Justice Alito and Justice Kagan agreed that there is a distinction between a consummated taking and the denial of a permit based on an unconstitutionally extortionate demand. Where the permit is denied and the condition is never imposed, nothing has been taken. Justice Alito goes on to say that while the unconstitutional conditions doctrine recognizes that this burdens a constitutional right, the Fifth Amendment mandates a particular remedy—just compensation—only for takings. In cases where there is an excessive demand but no taking, whether money damages are available is not a question of federal constitutional law but of the cause of action—whether state or federal—on which the landowner relies. Because the property owner had brought his claim pursuant to a state law cause of action, the Court had no occasion to discuss what remedies might be available for a Nollan/Dolan unconstitutional conditions violation. The Court remanded it to the Florida Supreme Court for a determination of whether compensation was due under state law.

Whether good or bad, this is a step backward to takings law in the days before First English and Nollan-Dolan. Under this approach, because the property owner’s challenge to the excessive condition generally occurs before money or property is actually taken, damages under the Fifth Amendment, if any, would be limited to compensation for a temporary taking during the period of the legal challenge. In some states, California for instance, the time consumed by lawsuits to vindicate constitutional rights against government over-reaching is considered simply “part of the process” and not compensable at all. Even if allowed, temporary damages are generally limited to rental value without compensation for lost opportunity costs. Due process damages could reach a wider range of harms, but the Court majority remains committed to using a takings analysis, while the minority actually looks to due process jurisprudence as a way to limit damage claims almost entirely. Nevertheless, the majority’s opinion suggests that, if presented with the proper case, it would reach the question of remedies.

The Koontz case is important because it tells public agencies they are most likely to prevail under Nollan-Dolan if they show qualitative support for both land dedications and fees, showing “rough proportionality” and “nexus.” It will make ad hoc and individualized exactions harder to defend against a taking attack. Substantively, this is a big boost for landowners in the approval process. But the decision contributes little to clearing up the procedural morass that makes so many applicants accept extortionate demands as part of “business as usual.”

There is also another message for public agencies in the dissent: consistent with the old adage that no good deed goes unpunished, public agencies must be careful in how they propose and characterize alternatives in permit proceedings. Justice Kagan points out that when the government denies a permit and suggests an alternative, but it is rejected by the applicant, the question arises as to whether there has been an actual imposition of a condition. The majority accepts the Florida court’s characterization of the government’s action as a demand for Nollan/Dollan purposes, but also leaves open the possibility that the Florida courts, on remand, may choose to characterize it as something else. The corollary is that if the government does propose a true “alternative,” i.e., a way to avoid permit denial, it must take pains to ensure that the alternative meets the Nollan Dolan rough proportionality and nexus tests.

There may also be some bad news for permit applicants here as well. As Justice Kagan points out, there is one easy way for the government to avoid potential Nollan Dolan dilemmas: simply deny permits without proposing alternatives.

One final note: It was surprising to see Nollan-Dolan cited with apparent approval for the proposition that constitutional impropriety can be shown “if the condition substituted for the prohibition utterly fails to further the end advanced as the justification for the prohibition.” Evidently, despite its strong language, Lingle v. Chevron USA, Inc., (2005) 544 U.S. 528, did not put an end to means-ends analysis under the Fifth Amendment. One parenthetical in a single majority opinion doesn’t necessarily herald a revival, but it does show the persistence of the idea that regulations affecting property rights and values should at the very least achieve their goals before they are upheld.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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