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  • Regulatory Takings: U.S. Supreme Court Announces New Test in Wisconsin Case

    Called “by far the most important property rights case of the term,” the U.S. Supreme Court ruled that two adjacent lots in Wisconsin should be considered as a single property for purposes of determining whether a compensable taking occurred.

    Sara K. Beachy

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    July 5, 2017 – A landowner’s reasonable expectations are king. That’s the essential holding in a Wisconsin-based case recently decided by the U.S. Supreme Court, which explored the issue of whether two adjacent lots should be considered as a single property in determining whether a taking occurred.

    In Murr v. Wisconsin,1 one of the final decisions released for the term, the Court ruled that Wisconsin courts correctly considered the lots as one property and that no compensable taking occurred. But the Court announced a new test that will alter how Wisconsin approaches these questions in the future.

    A constitutional and property law professor at George Mason University called the decision “by far the most important property rights case of the term.”

    The Murr Lots

    The Murr family owns two adjacent lots, Lots E and F, on the banks of the St. Croix River in Troy, Wisconsin. Lot F contains the family cabin, while Lot E is vacant.

    Sara K. Beachycom sbeachy axley Sara K. Beachy is an eminent domain and commercial litigation attorney at Axley Brynelson LLP, Madison. As an assistant attorney general with the Wisconsin Department of Justice, she represented the state in Murr v. State before returning to private practice in 2016. Reach her by com sbeachy axley email or by phone at (608) 283-6763.

    Located on a National Scenic Riverway, the Murr property is heavily regulated. The regulations at the center of this dispute are a St. Croix County land use ordinance and a parallel state regulation governing development of substandard (i.e. small) lots. Under the regulations, two adjacent substandard lots in common ownership are effectively merged into a single lot.

    The Murr siblings took ownership of both lots in 1995, bringing the lots into common ownership, triggering the substandard lot regulations, and effectively merging the two lots into one property. In the early 2000s, the Murrs decided to explore separately selling or developing Lot E. Citing the substandard lot regulations, the county zoning board denied a variance.

    The Murrs then sued the state and St. Croix County in circuit court for a regulatory taking. The court ruled in favor of the government, finding that no taking occurred. The court of appeals affirmed, and the Wisconsin Supreme Court declined review.

    The court of appeals’ unpublished, per curiam opinion had no precedential effect beyond the parties to the case. The matter seemed likely to end there.

    A pro-property rights group, Pacific Legal Foundation (PLF), had bigger ideas. PLF questioned the lower court’s treatment of the two lots as a single property. And a year later, the matter sat before the U.S. Supreme Court. Amicus briefs poured in.

    Over 20 amici weighed in, including the Wisconsin Towns Association, the Wisconsin REALTORS Association, and League of Wisconsin Municipalities, as well as the Cato Institute, the U.S. Chamber of Commerce, and state attorneys general from around the country.

    The Court heard oral argument on March 20, 2017. Four attorneys participated, including counsel for the Murrs, county, state, and U.S. Department of Justice.

    The Question Presented

    In a 5-3 opinion, the U.S. Supreme Court affirmed. Writing for the majority, Justice Anthony Kennedy began by reviewing the well-established standards for regulatory takings. Generally, courts have recognized regulatory takings in two circumstances: 1) when a regulation “denies all economically beneficial or productive use of the land”; or 2) the Penn Central test is satisfied. The Penn Central test includes analysis of: 1) the economic impact of the regulation; 2) the extent to which “the regulation has “interfered with distinct investment-backed expectations”; and 3) the character of the governmental action. Wisconsin courts have recognized both circumstances.2

    But neither Wisconsin nor federal courts have addressed the question presented in Murr: What is the proper unit of property against which to assess the effect of a challenged government regulation?

    Reasonable Expectations

    Justice Kennedy turned his attention to that question. He cautioned that courts should not “limit the parcel in an artificial manner to the portion of property targeted by the challenged regulation.” Yet states, he said, do not have unlimited authority to regulate property rights. The Court resolved that tension with an objective, multi-factor test.

    To define the property, courts should “determine whether reasonable expectations about property ownership would lead a landowner to anticipate that his holdings would be treated as one parcel, or instead, as separate tracts.” This determination requires courts to consider three factors: 1) the treatment of land under state and local law; 2) the physical characteristics of the land; and 3) the value of the land.

    Courts should “give substantial weight to the treatment of the land, in particular how it is bounded and divided, under state and local law,” Justice Kennedy explained.

    But an owner’s reasonable expectations must also “acknowledge legitimate restrictions” on his or her use of the property. Physical characteristics include the property’s relationship with other tracts, topography, and the surrounding human and ecological environment. When analyzing the land’s value, courts should give “special attention to the effect of burdened land on the value of other holdings.”

    The Court rejected the positions advanced by both the government and the Murrs as too formalistic. The state argued that the question should be solely decided by state property law. But such a position would allow government to “escape its responsibility” to justify regulation in light of “legitimate property expectations.”

    The Murrs, on the other hand, urged the Court to adopt a presumption that lot lines define the relevant property in every instance. As the Court noted, however, this presumption would have required the Court “to credit the aspect of state law that favors their preferred result (lot lines) and ignore that which does not (merger provision).”

    No Reasonable Expectation

    Applying the new test, the Court found that the Wisconsin courts properly treated the Murr lots as a single property. First, as the Wisconsin courts held, the state and local regulations effectively merged Lots E and F. The property was subject to the regulations only because of the Murrs’ voluntary act in bringing the lots under common ownership, after the regulations were enacted.

    As a result, the Court held, “the valid merger of the lots under state law informs the reasonable expectation they will be treated as a single property.”

    Second, the physical characteristics of the lots support their treatment as a single property. The Court took into account the lots’ contiguity, rough terrain, and location along the St. Croix River, a heavily regulated area long before the Murrs took title to the lots.

    Finally, the Court found that the impact on property value was minimal. Here, the appraisals played a starring role. Lot E contributed value and could be used in combination with Lot F, which mitigated the impact of the regulation overall.

    Considering the Murr property as a whole, the Court found that no taking occurred.

    The Dissenters

    Chief Justice John Roberts dissented, joined by Justices Clarence Thomas and Samuel Alito. Roberts was untroubled by the majority’s “bottom-line conclusion” that the regulation was not a taking requiring compensation.

    The majority, he conceded, “presents a fair case that the Murrs can still make good use of both lots.” Instead, he took issue with the majority’s “elaborate” and “malleable” approach to defining private property.

    According to Chief Justice Roberts, the majority “knocks the definition of ‘private property’ loose from its foundation on stable state law rules and throws it into the maelstrom of multiple factors that come into play at the second step of the takings analysis.” Roberts would have vacated the opinion below and remanded to the Wisconsin court of appeals to “identify the relevant property using ordinary principles of Wisconsin law.”

    Justice Thomas wrote separately to display his originalist colors. He asserted that the Court’s regulatory takings precedent has never been grounded “in the Constitution as it was originally understood” and expressed the desire for “a fresh look at our regulatory takings jurisprudence.”

    For more analysis, go to SCOTUSBlog or the blog at Inversecondemnation.com.

    Endnotes

    1 2017 WL 2694699 (June 23, 2017).

    2 See, e.g., R.W. Docks & Slips v. State, 2001 WI 73, ¶ 17, 244 Wis. 2d 497, 628 N.W.2d 781; Eberle v. Dane Cty. Bd. of Adjustment, 227 Wis. 2d 609, 622, 595 N.W.2d 730 (1999).