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Court of Appeal Clarifies Narrow Scope of Regulatory Takings Claims

By: Rick E. Rayl, Bradford B. Kuhn
01/23/09

Last fall, the Monks v. City of Rancho Palos Verdes court found a regulatory taking arising from the City of Rancho Palos Verdes' development moratorium on properties within an area known for landslides. In so doing, the Monks court embraced a relatively broad reading of key regulatory takings cases finding, among other things, that a regulatory taking based on the government's preventing "all economically viable use" of the property could exist despite the fact that the government expressly allowed the owner to make some, limited use of the property.

To those who wondered whether the Monks decision might signal a new trend towards liberalizing regulatory takings law, a recent decision by a different Court of Appeal suggests the answer may be a resounding "no." In Shaw v. County of Santa Cruz (Jan. 19, 2009, H031108) __ Cal.App.4th __, the property owner sued the County for its failure to issue a ministerial permit to allow an electrical connection to a well on the owner's 74-acre property. Finding that the County acted without justification in denying the permit, the court issued a writ of mandate directing the County to issue the requested permit. The County complied, but the case proceeded on various legal theories, including an inverse condemnation claim asserting a regulatory taking for the years between the owner's request for a permit and the County's ultimate issuance of that permit.

In a lengthy opinion, the court rejected the takings claim, finding that the claim failed each test for establishing a regulatory taking. As the court summarized the law, a taking could arise under any one of at least four tests:

(1) Physical Invasion: A "permanent physical invasion" of the property, such as the government's allowing a cable line to be placed within a property;

(2) Economically Viable Use: A government regulation that deprives the owner of "all economically beneficial or productive use" of the property (i.e., regulation that renders the property valueless);

(3) Penn Central: The application of the three-part "factual inquiry" test established by the United States Supreme Court in Penn Central Transp. Co. v. New York City, which focuses on whether the severity of the burden qualifies as the functional equivalent of a classic taking; or

(4) "Anti-Development": The application of the California Supreme Court's "anti-development" test set forth in Landgate, Inc. v. California Coastal Com., in which the court focuses on whether the regulation substantially advances a legitimate government interest, or whether it reflects an undisclosed policy of limiting development.

The court found that the denial of the permit to connect the well (though wrongful) failed each of the tests. The court held that no compensable taking had occurred.

Case Background:

The Shaws owned a 74-acre undeveloped parcel in Santa Cruz. The Shaws sought to restore the property's native vegetation, and they used it to grow edible plants and herbs. Eventually, they planned to develop the property into a residential nature retreat. The Shaws spent considerable time and money clearing the property and installing a well. They also paid for the infrastructure to provide the property with enough electricity to power the Shaws' ultimate development plans. In 2000, the Shaws applied for a ministerial permit to connect power to the property in order to operate the well. The County denied the permit based on a zoning ordinance that prohibited electrical power from being connected to property without structures. (The ordinance was enacted in order to prohibit electricity from being used to make uninhabitable or unpermitted structures habitable.) The County informed the Shaws that they would need to apply for a different, discretionary permit, in order to obtain electricity. The Shaws did not pursue the discretionary permit, but instead sought an administrative hearing on the denial of the ministerial permit. After an unsuccessful administrative hearing, the Shaws filed a lawsuit claiming, among other things, that the County's actions resulted in a temporary taking. In the meantime, the Shaws brought in generators in order to provide power to the well.

Three years later, the trial court determined that the County misapplied the zoning ordinance. The court ordered the County to grant the Shaws' request for electricity. The County ultimately did so. The Shaws' lawsuit proceeded, and two years later, the trial court denied the Shaws' remaining claims. On appeal, the court focused most of its attention on the Shaws' inverse condemnation/regulatory takings claim, and the various theories under which such a claim could be established.

The Four Takings Theories:

(1) The Physical Invasion Test

The court quickly dispatched the simplest takings theory. After noting that any permanent physical invasion of property, "however slight," gives rise to a takings claim, the court explained that the Shaws did not contend that the County's conduct in denying their permit application resulted in any actual physical invasion.

(2) The Preclusion of All Economically Viable Uses Test

Though the Shaws did contend they met the "second" takings theory, the court rejected it quickly as well. As the court explained, "[i]t is the complete elimination of a property's value that is the determinative factor." The court noted that the Shaws were not deprived of all (or, indeed, any) economically beneficial use of their property as a result of the County's permit denial. There was no evidence that the denial resulted in any diminution of the property's value. More importantly, the evidence demonstrated "that the Shaws continued to use their property exactly as they had before. And they offered no evidence of a loss of return on their property investment or of a reduced value."

(3) The Penn Central "Factual Inquiry" Test

Moving beyond the two simple takings theories, the court proceeded to address at length the "essentially ad hoc factual inquiries" established by the Supreme Court's decision in Penn Central. The Penn Central test focuses on three factors: (1) the economic impact of the regulation; (2) the extent to which the regulation interfered with distinct investment-backed expectations; and (3) the "character" of the governmental action. These inquiries focus on "the severity of the burden that government imposes on private property rights."

With respect to the first factor, the court explained that there was no evidence that the Shaws' use of the property was impaired or that their commercial business was interrupted -- the Shaws' goal of restoring the property was successful despite of the permit denial.

With respect to the second factor, the court concluded that there was no connection between the Shaws' ultimate goals for the property and the denial of the electricity permit, and the Shaws could not point to any other similarly situated property owners who were treated differently. To the contrary, the evidence at trial revealed that the County had similarly denied such permits to other landowners seeking to provide power to undeveloped properties.

With respect to the third factor, the court explained that this was not a physical invasion, but rather simply a government imposed regulation, and thus the purported taking was not of a significant "character" to qualify under the third prong.

(4) The Landgate "Anti-Development" Test

Finally, the court addressed the Landgate test, which considers whether a government agency intentionally delays the granting of a permit by fabricating a dispute or otherwise arbitrarily imposing conditions on development to delay or discourage the development. The court explained that while the County was "woefully understaffed or poorly organized or both," the County had not denied the permit based on an undisclosed anti-development philosophy. The County had a legitimate public interest in enforcing the electricity permit ordinance, and the Shaws' request for electricity to power an entire 74-acre parcel, as opposed to just a well, without further explanation, did not add up. Thus, even under the Landgate test, there had not been a compensable taking. (The court also noted that some recent decisions have questioned whether the Landgate theory remains viable in light of the U.S. Supreme Court's decision in Lingle, but the court did not rule on the theory's continued viability in light of its conclusion on the merits.)

In the end, while on the surface it may seem strange that the government was held liable for a taking when it acted to prevent the potentially serious harm that could arise through the development of property known to be subject to landslides (Monks), but not for wrongly denying a property owner the right to provide electricity to a well (Shaw), the cases turned on very different factual findings. In Monks, the government's laudable goal of seeking to prevent harm could not offset the fact that its regulation left the owners with no viable use of their properties. In Shaw, the government's wrongful denial of the permit was actionable (the court issued a writ of mandate), but not as a taking, because the conduct did not deprive the owners in any meaningful way of the use of their property.

Rick E. Rayl is a Partner in Nossaman's Eminent Domain and Valuation and Real Estate Practice Groups and is an experienced trial attorney dealing with eminent domain, inverse condemnation and other real estate and business disputes. He can be reached at rrayl@nossaman.com or 949.833.7800.

Brad Kuhn is a member of Nossaman's Eminent Domain and Valuation Practice Group and specializes in business and commercial litigation with an emphasis on eminent domain, inverse condemnation and other real estate disputes. He can be reached at bkuhn@nossaman.com or 949.833.7800.

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