[*PG137]PALAZZOLO AND THE DECLINE OF
JUSTICE SCALIA’S CATEGORICAL
TAKINGS DOCTRINE

Michael C. Blumm*

Abstract:  This Article maintains that despite the fact that the Palazzolo decision gave the landowner victories by relaxing ripeness hurdles to filing takings cases and rejecting the government’s “notice rule”—under which the existence of preexisting regulations would defeat takings claims—the chief significance of the case is the Court’s signal that it will reject attempts to expand categorical rules in takings cases. According to this view, Palazollo will be remembered for the decline of Justice Scalia’s categorical approach to takings, as reflected in his Lucas opinion, and for the triumph of multi-factor balancing championed by Justice Brennan’s Penn Central opinion. A postscript to the Article contends that the Court’s Tahoe-Sierra decision, decided while the Article was in press, confirms these predictions.

Introduction

The Supreme Court’s decision in Palazzolo v. Rhode Island1 was a disappointment for all concerned. Palazzolo, of course, got the satisfaction of knowing that his case liberalized the law of ripeness in takings cases and also destroyed the government defense based on the so-called “notice rule,” the claim that acquisition of property after enactment of a regulation bars a takings claim based on that regulation. [*PG138]But while these results undoubtedly pleased Palazzolo’s Pacific Legal Foundation2 attorneys, he is unlikely ever to collect a dime, as the question of whether he has a compensable claim is now back in the Rhode Island courts, which were decidedly unenthusiastic about his initial claim.3

The State lost on the ripeness issue and, more significantly, on the notice rule, depriving it of an important categorical defense to takings claims.4 It is unlikely, however, that the State will have to compensate Palazzolo because the Court refused the landowner’s invitation to conceptually sever the wetlands at issue, which were burdened by the State’s regulation, from his adjacent unburdened uplands. Consequently, the Court overwhelmingly rejected Palazollo’s claim that the State’s denial of a permit to fill the wetlands amounted to a categorical taking under Lucas v. South Carolina Coastal Council, because his uplands retained substantial economic value.5

[*PG139] Thus, the Palazzolo result was decidedly a split decision. However, the language in the Court’s six opinions6 arguably signals that the categorical approach to takings cases championed by Justice Scalia in his Lucas decision no longer commands a majority of the Court. Therefore, the Lucas rule is likely to be confined to a narrow category of cases where landowners can demonstrate that a regulatory restriction unreasonably imposes a complete economic wipeout. The Court’s aversion to deciding takings cases on the basis of categorical rules means that the dominant litmus test for the merits of takings claims will be the balancing test announced by Justice Brennan in Penn Central Transportation Co. v. City of New York.7 Since government defendants historically fare well under this test, Palazzolo may come to be seen as an important turning point in takings jurisprudence.

This theory will soon be tested. This term, the Court will decide the Lake Tahoe moratorium case.8 If I am right about the significance of Palazzolo, the Court will reject the landowners’ attempt to obtain compensation due to the moratorium, since it is grounded on a categorical claim. If I am wrong, the validity of this comment will be short-lived. (The Court handed down its decision in the Lake Tahoe case while this Article was in press. The decision, which largely validated the prediction about the decline in Justice Scalia’s approach, is briefly discussed in the Postscript.)

I.  Justice Scalia’s Categorical Rule in Lucas

In the Lucas case, now fifteen years old, Justice Scalia’s majority opinion seemed to herald in a new era for landowners burdened with [*PG140]regulations. As the first decision of the Supreme Court to find a regulatory taking in over sixty years, and only the second ever,9 Lucas held that landowners were due compensation if a regulation deprived them of all economic value.10 Justice Scalia analogized such complete economic wipeouts to permanent physical occupations, which the Court had held to be categorical takings ten years before Lucas in the Loretto v. Teleprompter Manhattan CATV Corp. case, which involved a comparatively insignificant cable television wire that no doubt increased the value of the landowner’s property.11 Justice Scalia suggested that from the landowner’s point of view a “total deprivation of beneficial use is . . . the equivalent of a physical appropriation.”12

The creation of categorical takings is of great benefit to takings plaintiffs because government defendants cannot defeat such claims by a case-specific inquiry into the public interest supporting the regulatory burden.13 In fact, the categories create per se takings. On the other hand, if a claim does not fall within the permanent physical in[*PG141]vasion and complete economic wipeout categories, the Penn Central multi-factor balancing governs, in which the general good served by the regulation is balanced against the burden imposed on the landowner.14 Government defendants have generally fared well under Penn Central balancing.

Justice Scalia’s opinion in Lucas was the subject of spirited commentary.15 Admirers saw it as a long-overdue recognition of the need to compensate overburdened landowners. Detractors viewed it as a threat to legitimate land use and environmental regulations designed to “adjust[] the benefits and burdens of economic life for the common good.”16 Despite the predictions that Lucas represented a sea-change in takings law, the case had surprisingly little effect on the lower courts, with the exception of the Federal Circuit.17 I believe that the Palazzolo decision means that the Lucas legacy will continue to be small, since a clear majority of the Court seems quite uncomfortable with the categorical approach to deciding takings cases.

II.  The Palazzolo Decision

Justice Kennedy’s majority opinion addressed three issues: (1) whether the case was ripe; (2) whether Palazzolo’s claim was barred by the fact that he acquired title to the land after the wetland restrictions were in place; and (3) whether there was a Lucas-type categorical taking as a result of the State’s denial of a permit to fill the wetlands. I want to emphasize the latter two issues, since they pertain to the decline of the categorical approach to takings analysis. However, the first issue warrants mention, as it concerns how easily takings claimants may access federal courts.

[*PG142]A.  The Ripeness Ruling

The majority determined that the case was ripe—the primary reason why the Rhode Island Supreme Court ruled against Palazzolo18—because the State had made it clear, to a reasonable degree of certainty, that it would not allow any development on the eighteen acres of wetlands that Palazzolo owned.19 Thus, there was no need to submit an application for a smaller development of the wetlands, nor was there a need to submit any application at all concerning his two acres of upland property.20

The latter ruling drew a sharp dissent from Justice Ginsberg, who accused Palazzolo’s Pacific Legal Foundation attorneys of employing a “bait-and-switch maneuver,” a con game of “mov[ing] the pea to a different shell,” by arguing for the first time before the Supreme Court that there was a taking under the multi-factor Penn Central test.21 Previously, in the state courts, Palazzolo argued only for a Lucas-type taking, based on denial of all economic use.22 The effect of this switch was to make highly relevant the amount of development permitted on Palazzolo’s uplands, which previously was not an issue, since all the State had to argue to defeat a Lucas claim was that at least one home could be built on the uplands. Palazzolo’s attorneys disingenuously claimed in their petition for certiorari that Palazzolo was restricted to one home on the uplands.23 Yet the Supreme Court majority ruled that because the State had not challenged Palazzolo’s inaccurate assertion, the State inadvertently waived any objection to this false claim.24 This was too much for Justice Ginsberg, who warned, “[t]his Court’s waiver ruling thus amounts to an unsavory invitation to unscrupulous litigants: Change your theory and misrepresent the record in your petition for certiorari; if the respondent fails to note your [*PG143]machinations, you have created a different record on which this Court will review the case.”25

Palazzolo’s victory on the ripeness issue generated headlines.26 While a disturbing result, since it seemed to authorize litigants to create “facts” through assertions in petitions for certiorari,27 actually the case should affect ripeness doctrine very little.28 The Court observed, for example, that a land use authority may, prior to being subjected to a takings court challenge, “use[] its own reasonable procedures . . . to decide and explain the reach of a challenged regulation.”29 The Court also noted that “[t]he mere allegation of entitlement to the value of an intensive use will not avail the landowner if the project would not have been allowed under other existing, legitimate land use limitations.”30 Perhaps more significantly, the Court limited its ruling to federal ripeness principles, acknowledging that state ripeness or exhaustion rules may impose requirements beyond federal rules.31 So, quite conceivably, on remand the Rhode Island Supreme Court could have affirmed its earlier decision and ruled that the case was not ripe, but this time clarify that it was relying on state principles of ripeness, instead of remanding the case to the superior court.32

B.The Notice Ruling

For years government defendants employed two categorical defenses to defeat takings claims without case-specific factual inquiries into the benefits and burdens of challenged regulations. First was the allegation that the proposed development was a nuisance-like activity. [*PG144]This per se exception for nuisance liability was discarded by Justice Scalia’s 1987 Lucas opinion, where he stated:

When it is understood that “prevention of harmful use” was merely our early formulation of the police power justification necessary to sustain (without compensation) any regulatory diminution in value; and that the distinction between regulation that “prevents harmful use” and that which “confers benefits” is difficult, if not impossible, to discern on an objective, value-free basis; it becomes self-evident that noxious-use logic cannot serve as a touchstone to distinguish regulatory “takings”—which require compensation—from regulatory deprivations that do not require compensation.33

Thus, government defendants lost one of their categorical defenses.

The second categorical defense was the notice rule, under which notice of preexisting regulations barred takings claims. The thinking was that preexisting regulations “inhered” in the title under Lucas, and thus were immune from takings liability. The Palazzolo Court rejected the categorical notice rule, by a five to four vote.34 According to Justice Kennedy, the Rhode Island Supreme Court’s endorsement of a “blanket rule” that post-enactment acquisition of property bars takings claim went too far, putting “a Hobbesian stick into the Lockean bundle” of property rights.35 The Court concluded that such a blanket rule against compensation would create unfair results for older landowners and those who must sell their land (as opposed to those who can afford to retain the land and litigate).36 Although the Court’s rul[*PG145]ing on ripeness may have generated headlines, its rejection of the notice rule was more significant. The result will be to force government defendants to defend their regulations on the merits.

The good news for government defendants is that the Court’s rejection of the notice rule does not necessarily mean that pre-acquisition notice is irrelevant in takings analysis. Justice O’Connor’s concurrence, which provided the decisive fifth vote on the notice issue,37 made clear that the time of Palazzolo’s acquisition of the wetlands was a relevant consideration in determining whether there was a taking under Penn Central’s multi-factor analysis. She wrote that it “would be just as much error to expunge this consideration from the takings inquiry as it would be to accord it exclusive significance.”38 This is because, according to Justice O’Connor, the regulatory regime in place at the time of land acquisition “helps to shape the reasonableness of [the claimant’s] expectations” under the Penn Central test, for “if existing regulations do nothing to inform the analysis, then some property owners may reap windfalls and an important indicium of fairness is lost.”39 Justice O’Connor’s perspective is a majority view, as the four dissenters expressly joined her.40

Moreover, it is hardly clear that notice of preexisting regulations is not a relevant factor even in the context of Lucas-type takings claims. The Court of course did not address this issue since, as discussed below, it rejected Palazzolo’s allegation of a Lucas-type economic wipeout. But Justice Kennedy’s majority opinion seemed to leave the door open by observing that there are qualifications on the notion that regulations producing economic wipeouts require compensation. Citing his own concurrence in Lucas, Justice Kennedy further opined that economic wipeouts warranted compensation only where the regulatory deprivation is contrary to reasonable, investment-backed expectations.41 If, for example, Palazzolo sold only his wetland acres to a purchaser with notice of the regulatory restrictions, the buyer would lack reasonable, investment-backed expectations. Justice O’Connor clearly was concerned about the manufacturing of [*PG146]such economic windfalls.42 And Justice Breyer, the only Justice to address the issue directly, stated that he could not see how such strategic transfers could warrant just compensation.43

Thus, though it will no longer be an absolute bar to takings claims, notice of preexisting regulations will remain a factor in most takings claims. Furthermore, the multi-factor Penn Central test will not be reduced to a mere balancing between the importance of the public good served by the regulation and the economic burden imposed on the landowner.44 Instead, the test will continue to consider whether the landowner acquired the property with knowledge of the regulatory restrictions.45 The Court’s preservation of the notice rule in this context will supply an important governmental defense to takings claims, even if it no longer completely defeats them. Recognizing this fact, Justice Scalia took issue with Justice O’Connor’s siding with the dissenters. He argued that the timing of property acquisition should never be a relevant factor under Penn Central unless a preexisting regulation had become part of the “background” principles of state law that, under his Lucas opinion, always defeated a takings claim.46 Justice Scalia acknowledged that the total demise of the notice rule would enable savvy developers to secure unfair windfalls by buying land at discounted prices due to restrictions they intended to challenge as takings. He viewed this as a price worth paying to ensure against the government’s use of unconstitutional regulations.47 No other Justice agreed with Justice Scalia on this issue.

The continued relevance of notice of preexisting regulations, despite the demise of the notice rule, is significant for my purpose because it reflects the Court’s disillusionment with categorical, bright-line rules in the takings context. The Court dispensed with the notice rule as a categorical trump to takings claims, but it was unwilling to endorse Justice Scalia’s notion that notice of preexisting regulations is [*PG147]irrelevant.48 The Court’s dissatisfaction with categorical rules in the takings context extends both to rules favoring the government—like the nuisance exception and the notice rule—and those favoring landowners—like the Lucas economic wipeout rule, which I believe will continue to be narrowly construed. As Justice O’Connor explained, “[t]he temptation to adopt what amounts to per se rules in either direction must be resisted.”49 It seems to me that this sentiment signals a triumph of Justice Brennan’s Penn Central “ad hocracy” and the demise of Justice Scalia’s categorical approach under Lucas.

C.  The Size of the Property Ruling

The size of the property under consideration, also known as the “denominator issue,” is the key remaining unresolved issue in takings jurisprudence.50 This determination is directly related to the availability of categorical, Lucas-type takings claims, because the smaller the size of the property, the easier it is to allege a regulatory economic wipeout. The size of the property is also relevant in the Penn Central multi-factor claims because the size of the property determines a regulatory restriction’s economic impact, in particular whether there has been a significant diminution of value.51

Prior to Palazzolo, the Supreme Court seemed to have adopted a broad view of the relevant property size. In Penn Central, where the Court refused to consider the air space above Grand Central Terminal as relevant property, Justice Brennan’s opinion stated,

“Taking” jurisprudence does not divide a single parcel into discrete segments and attempt to determine whether rights in a particular segment have been entirely abrogated. In deciding whether a particular governmental action has effected a taking, this Court focuses rather both on the character of the [government] action and on the nature and extent of the interference with rights in the parcel as a whole . . . .52

[*PG148]Applying this principle later in Keystone Bituminous Coal Ass’n v. DeBenedictis, the Court rejected the coal company’s takings claim in part by refusing to view the relevant property as merely the restricted coal for purposes of analyzing a regulatory restriction.53 Nevertheless, the Court has not been entirely clear on the issue. In his Lucas opinion, Justice Scalia suggested that the state court’s view of the relevant size of the property in Penn Central—including other property that the claimant owned in the vicinity—was “extreme” and “unsupportable,”54 which seemed to be a direct contradiction of the Keystone reasoning.

Palazzolo asked the Court to consider the relevant property to be only his eighteen acres of wetlands, not including his two adjacent acres of wetlands. By “conceptually severing” the property in this manner,55 he hoped to convince the Court that the regulation worked a complete economic wipeout, warranting compensation under Lucas. The Court refused.56 According to Justice Kennedy, because Palazzolo’s uplands retained substantial development value (the trial court determined the uplands were worth $200,000), there was no deprivation of all economic use.57 With more than a “token” interest retained, there was no categorical taking.58 Since Palazzolo claimed that the developed value of his property was worth $3.15 million,59 a 93.6% loss in value was not sufficient to invoke the Lucas categorical rule. In fact, none of the Court’s six opinions suggested that this magnitude of loss was sufficient to trigger a Lucas taking.

Despite the consistency of the Palazzolo result with the reasoning in Penn Central and Keystone on the relevant size of the property, Justice Kennedy’s language was quite ambivalent about the issue.60 He noted that Palazzolo only raised the conceptual severance issue before the U.S. Supreme Court; it was not argued in the state courts.61 For this reason the Court presumed that the entire parcel was the basis for [*PG149]the takings claim.62 Moreover, Justice Kennedy referred to the size of the property issue as a

difficult, persisting question of what is the proper denominator in the takings fraction. Some of our cases indicate that the extent of deprivation effected by a regulatory action is measured against the value of the parcel as a whole, but we have at times expressed discomfort with the logic of this rule, a sentiment echoed by some commentators.63

This equivocation may signal that some members of the Court are ready to overturn Penn Central (a six to three decision) and Keystone (a five to four decision) on the size of the property issue.64 Such a reconsideration would be revolutionary, perhaps ratifying the partial takings theory adopted by Judge Plager of the Federal Circuit, and in the process casting a cloud over much environmental and land use regulation.65 But given the close link between the size of the property issue and the categorical approach to takings analysis, the Court’s rather clear rejection of the latter in Palazzolo makes a revolution in the size of the property seem unlikely.

III.  The Decline of Justice Scalia’s Categorical Approach

Justice Scalia has been advocating revolutionary changes in the takings doctrine since his appointment to the Court in 1986.66 This is a fairly remarkable development, for it belies his claimed fidelity to [*PG150]originalism.67 In his first term, Justice Scalia wrote the Court’s opinion in Nollan v. California Coastal Commission, in which he ruled that a condition in a building permit requiring the landowner to dedicate to the state a beach access easement worked a taking.68 Thus, he adopted a narrow view of the property at issue, disaggregating the landowner’s right to exclude, which the state wanted dedicated, from the development rights the landowner sought from the state.69 He also suggested, in that opinion, that notice of preexisting regulations was irrelevant to a takings claim.70

Five years later, in Lucas, Justice Scalia created a new per se categorical taking concerning regulations producing economic wipeouts, as explained in Part I supra. What is noteworthy here is that Scalia’s opinion was not joined by Justice Kennedy, so Justice Scalia wrote only for five Justices, one of whom, Justice White, has since retired.71 Justice Kennedy’s concurring opinion in Lucas complained that Justice Scalia’s resurrection of common law nuisance as the paradigm “background principle” insulated from takings compensation would erect a “static body of property law” ill-equipped for protecting fragile ecosystems.72 Moreover, Justice Kennedy maintained that a categorical taking could not be grounded only on a regulation producing an eco[*PG151]nomic wipeout; the regulation had to frustrate reasonable, investment-backed expectations as well.73

In Palazzolo, Justice Kennedy’s opinion for the Court repeatedly emphasized the need to judge regulatory restrictions on a reasonableness basis,74 the antithesis of the kind of categorical rule favored by Justice Scalia. Moreover, Justice Kennedy not only made clear that statutes could form background principles,75 he also confined the Lucas categorical rule to situations in which a regulation left land “economically idle.”76 In so doing, he ratified the interpretation of most lower courts that the Lucas rule of per se compensation is an extremely narrow one.77 For example, one recent court concluded that there was no Lucas-type taking where a dune protection law forbade any development but the undeveloped property retained value for “parking, picnics, barbecues, and other recreational uses.”78

Worse, from Justice Scalia’s perspective, Justice O’Connor’s concurrence specifically endorsed the kind of balancing implicit in a reasonableness approach to takings analysis.79 And she expressly rejected Justice Scalia’s categorical approach, writing that such “per se rules . . . must be resisted.”80 Without Justices Kennedy and O’Connor, the coalition of Justices that enabled Justice Scalia to author his Lucas opinion has vanished. Only Chief Justice Rehnquist and Justice Thomas remain. On the other hand, there seem to be six votes for using Penn Central balancing as the dominant mode of takings analysis. Justice Brennan, the author of Penn Central, seems to have triumphed over Justice Scalia from the grave.

[*PG152]Conclusion

The decline of Justice Scalia’s categorical approach to regulatory takings jurisprudence, evident in the Palazzolo decision, should mean that the Tahoe Regional Planning Agency will successfully defend its development moratoria in the Lake Tahoe case because the landowners there are claiming a Lucas-type categorical taking.81 But that does not mean that some of those landowners could not successfully maintain takings claims concerning development restrictions under Penn Central balancing, particularly if the Court revisits the size of the property issue and disavows the broad approach endorsed by both Penn Central and Keystone.82 The decline of categorical analysis and the rise of balancing in takings analysis will make for less certainty, more litigation, and more case-by-case consideration, not necessarily fewer successful takings claims. But those characteristics would seem to be inevitable for a constitutional provision whose aim is to do justice and produce fairness.83

Justice Kennedy’s concern for protecting both reasonable regulations and reasonable landowner expectations,84 as well as Justice O’Connor’s concern for avoiding windfalls85 led both away from Justice Scalia’s categorical absolutism. It is no secret that these two Justices, who are at the philosophical center of the current Supreme Court,86 will decide the future course of Takings Clause litigation. They might decide to expand the scope of the regulatory takings doctrine by contracting the relevant size of the property, but that would seem a unlikely vehicle to ensure full consideration of the reasonableness of both the government’s restrictions and the landowner’s expectations because it would encourage the kind of strategic behavior that could produce the windfalls against which Justice O’Connor cautioned.

To effectively guard against landowner windfalls, while considering the overall fairness of a regulation’s effect on a landowner, a large [*PG153]view of the relevant property is necessary. This inevitably will mean that some large landowners must bear some burdens without compensation for which some small landowners receive compensation. But large landowners also derive large benefits from most regulatory schemes. The Takings Clause may demand equality of treatment, but only of similarly situated landowners. Large and small landowners are not similarly situated. As the Court searches for a mechanism to protect the small, non-strategic behaving landowner from unfair regulatory burdens, it ought not to turn away from the Penn Central/Keystone view of the size of the property. That large view provides an effective guard against economic windfalls. Whatever direction the Court pursues, Palazzolo makes clear that the future of takings doctrine no longer lies with the categorical approach championed by Justice Scalia.

Postscript

On April 23, 2002, the Supreme Court ruled, six to three, that there was no categorical taking resulting from the imposition of two moratoria on development totaling thirty-two months to facilitate formulation of a comprehensive land plan for the Lake Tahoe Basin.87 Justice Stevens’ opinion for the six-member majority adopted Justice O’Connor’s reluctance, as evident in her Palazzolo concurrence,88 to extend categorical rules in takings cases.89 In ruling that the case was best analyzed under the multi-factor Penn Central framework,90 the Court consigned Justice Scalia’s Lucas categorical rule to the “extraordinary case in which a regulation permanently deprives property of all value . . . .”91 The Court reiterated that even a decline in value of ninety-five percent would require analysis under Penn Central.92

The Court not only sided with Justice O’Connor’s aversion to deciding takings cases according to absolute rules and severely limited Justice Scalia’s Lucas rule, it also expressly adopted Justice Brennan’s large view of the relevant parcel, quoting from his Penn Central opinion, as set forth above.93 This seems to indicate that, as predicted [*PG154]above,94 the Court will not ratify “conceptually severing” property into discrete segments for takings purposes, despite Justice Kennedy’s ambivalence on this issue in Palazzolo.95 Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg’l Planning Agency thus confirms the assertion that the future of the takings doctrine lies in Justice Brennan’s multi-factor balancing, not in Justice Scalia’s absolutism.96

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