Loveladies Harbor, Inc. And Loveladies Harbor, Unit D, Inc. v. United States

This is a regulatory taking case. It arose when the plaintiffs (Loveladies) sought a fill permit under § 404 of the Clean Water Act 1 from the Army Corps of Engineers (Corps) to complete the final stage of an ongoing real estate development project. The Corps denied the permit on May 5, 1982. Loveladies challenged the validity of that permit denial in a proceeding in Federal District Court under § 554 of the Administrative Procedure Act. 2 Loveladies Harbor, Inc. and Loveladies Harbor, Unit D, Inc. v. Baldwin, Civ. No. 82-1948 (filed June 15, 1982). The challenge proved unsuccessful. Loveladies Harbor, Inc. and Loveladies Harbor, Unit D, Inc. v. Baldwin, Civ. No. 82-1948 (D.N.J. Apr. 3, 1984), aff'd 751 F.2d 376 (3d Cir.1984) (table).

Loveladies then proceeded with a suit in the Court of Federal Claims, 3 which they had filed sometime earlier, Loveladies Harbor, Inc. and Loveladies Harbor, Unit D, Inc. v. United States, No. 243-83 L (filed Apr. 14, 1983), seeking monetary compensation from the United States (Government). That court denied cross motions for summary judgment, Loveladies Harbor, Inc. and Loveladies Harbor, Unit D, Inc. v. United States, 15 Cl.Ct. 381 (1988) (Loveladies 1), and after trial on the merits awarded Loveladies $2,658,000 plus interest in compensation. Loveladies Harbor, Inc. and Loveladies Harbor, Unit D, Inc. v. United States, 21 Cl.Ct. 153 (1990) (Loveladies 2). The Government here appeals this award.

Subsequent to the time this case was briefed and argued on appeal, two significant legal developments occurred which directly bear on the issues of the case. One was the decision by the United States Supreme Court in Lucas v. South Carolina Coastal Council, 505 U.S. -, 112 S.Ct. 2886, 120 L.Ed.2d 798 (1992), and the other was the decision by this court in banc in UNR Industries, Inc. v. United States, 962 F.2d 1013 (Fed.Cir.1992), aff'd sub nom. Keene Corp. v. United States, — U.S. —, 113 S.Ct. 373, 121 L.Ed.2d 285 (1992). Based on the decision in UNR, the Government moved to dismiss this appeal for lack of jurisdiction. Because of the importance of the jurisdictional issue, and the fact that other cases pending on appeal raised the same issue, this court, sitting in banc, called for supplemental briefing and argument. In a separately published opinion, we determined that this court’s jurisdiction had been properly invoked; the Government’s motion was denied, and the merits case ordered to proceed. Loveladies Harbor, Inc. and Loveladies Harbor, Unit D, Inc. v. United States, 27 F.3d 1545 (Fed.Cir.1994) (Loveladies 7). 4

We turn then to the merits, and in particular the effect of the Supreme Court’s decision in Lucas on the outcome of the case.

BACKGROUND

The property at issue in this dispute is a 12.5 acre parcel (the parcel) consisting of 11.5 *1174 acres of wetlands and one acre of filled land, located on Long Beach Island, Ocean County, New Jersey. A map showing the location of the parcel is appended to this opinion. As can be seen from the map, Barnegat Bay bounds the wetlands on the west, while single-family homes bound it on the east and southeast. The 12.5 acres is part of a 51 acre parcel owned by Loveladies, which in turn is part of an original 250 acre tract which Loveladies had acquired in 1958. 5 The balance of the 250 acres — 199 acres — had been developed before 1972 and the enactment of § 404 of the Clean Water Act.

In order to develop the remaining 51 acre parcel for residential use, Loveladies needed to fill 50 acres, the one acre having been previously filled, and that in turn .required Loveladies to obtain permission from both the New Jersey Department of Environmental Protection (NJDEP) and the Corps. That process proved to be lengthy and contentious, marked by several years of negotiation (with Loveladies submitting progressively less ambitious and less environmentally objectionable proposals), a 1977 permit denial, appeal of that denial to the Commissioner of NJDEP, and judicial review in state court.

During the course of the proceedings, NJDEP offered, as a compromise, permission for Loveladies to develop. 12.5 of the 51 acres. Loveladies initially declined that offer. Eventually Loveladies acquiesced to the 12.5 acre limitation, the dispute was resolved, and the permit, on September 9, 1981, issued. 6 See In re Loveladies Harbor, Inc., 176 N.J.Super. 69, 422 A.2d 107 (App.Div.1980), certif. denied 85 N.J. 501, 427 A.2d 588 (1981). The permit granted permission to fill and develop 11.5 acres in addition to the one acre which had been filled previously — this is the 12.5 acre parcel at issue — and to construct 35 single family homes thereon.

Loveladies then sought the requisite federal permit for the development project. As required, the Corps sought the views of the counterpart state agency, the NJDEP. NJDEP in its response acknowledged that they had issued Loveladies the permit as they were obligated to do under the terms of the settlement, but denied that the permit approval was in compliance with the state’s requirements. The response went on to explain that the 12.5 acre development would be “anachronistic,” a “throwback to the 1950’s — 1960’s style of shore development,” and closed by noting, “[a] denial of the federal permit appears appropriate under this Division’s understanding of the pertinent federal law.”

The Corps rejected Loveladies’ § 404 permit application on May 5, 1982. Loveladies again resorted to the courts. As previously noted, the § 404 permit denial was challenged in Federal District Court under § 554 of the APA, and that challenge was unsuccessful. Loveladies Harbor, Inc. and Loveladies Harbor, Unit D, Inc., v. Baldwin, supra. Between the time the District court made its decision and the appeal was decided, Loveladies filed a claim in the Court of Federal Claims for just compensation under the Fifth Amendment. That case proceeded to trial following issuance of the Third Circuit’s affirmance of the district court’s rejection of Loveladies’ APA claims.

In response to the parties’ cross-motions for summary judgment, the Court of Federal Claims initially addressed and decided several of the substantive issues in the case. The court concluded, however, that it would deny the parties’ cross-motions for summary judgment on the takings issue as factual questions remained regarding the economic impact of the permit denial. Loveladies 1, 15 Cl.Ct. at 396, 398.

Following a full hearing, those factual issues were resolved in favor of Loveladies. Loveladies 2, 21 Cl.Ct. at 153. The court found that the fair market value of the parcel prior to the permit denial was $2,658,000 *1175 whereas the value after the permit denial was $12,500. This greater than 99% diminution of value, “coupled with the court’s earlier determination of a lack of a countervailing substantial legitimate state interest,” led the court to conclude that there had been a taking. Loveladies 2, 21 Cl.Ct. at 160 (referring to Loveladies 1, 15 Cl.Ct. at 388-90). The Government appeals the judgment of the Court of Federal Claims.

DISCUSSION

At the outset we wish to make clear exactly what is at issue, and what is not. What is not at issue is whether the Government can lawfully prevent a property owner from filling or otherwise injuring or destroying vital wetlands. The importance of preserving the environment, the authority of state and federal governments to protect and preserve ecologically significant areas, whether privately or publicly held, through appropriate regulatory mechanisms is not here being questioned. There can be no doubt today that every effort must be made individually and collectively to protect our natural heritage, and to pass it to future generations unspoiled. The destruction of ancient civilizations by human misuse of the environment, such as that at Ephesus, teaches the need for public policies that work within the natural environment, rather than attempt radically to alter it. 7

The question at issue here is, when the Government fulfills its obligation to preserve and protect the public interest, may the cost of obtaining that public benefit fall solely upon the affected property owner, or is it to be shared by the community at large. In the final analysis the answer to that question is one of fundamental public policy. It calls for balancing the legitimate claims of the society to constrain individual actions that threaten the larger community, on the one side, and, on the other, the rights of the individual and our commitment to private property as a bulwark for the protection of those rights. 8 It requires us to decide which collective rights are to be obtained at collective cost, in order better to preserve collectively the rights of the individual. The role of the court is to implement and enforce that public policy as it appears in governing law, in this case in the words of the Constitution and the controlling pronouncements of the Supreme Court.

I. Takings Law at the Time of Trial

Any discussion of a takings claim necessarily begins with the Fifth Amendment to the Constitution, which concludes with the mandate: “... nor shall private property be taken for public use, without just compensation.” U.S. Const. Amend. V. 9 At the time the Constitution was written and for almost 150 years after, the concern was with physical occupation of private lands by the Government. We have elsewhere reviewed in some detail the historical development of the eminent domain doctrine, the distinctions between temporary and permanent takings, and some of the interplay between physical takings doctrine and the emergent law of regulatory takings. See Hendler v. United States, 952 F.2d 1364 (Fed.Cir.1991). That background need not be repeated here. In Hendler, claims of both regulatory and physical takings were raised, but the thrust of the decision was on the physical takings aspect. This case squarely raises a regulatory takings claim and only a regulatory takings claim; it is there that we will focus.

*1176 In 1922, in the case of Pennsylvania Coal v. Mahon, 260 U.S. 393, 43 S.Ct. 158, 67 L.Ed. 322, Justice Holmes stated this oft-quoted proposition: “The general rule at least is, that while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.” Id. at 415, 43 S.Ct. at 160. In 1926, the then innovative and rapidly-spreading practice of state regulation of private land use through zoning was challenged as fundamentally having taken regulation ‘too far.’ The Supreme Court, in part by analogizing zoning to the historic common law control of nuisances, upheld against a charge of facial invalidity the power of government to enact and implement zoning laws. Euclid v. Ambler Realty Co., 272 U.S. 365, 47 S.Ct. 114, 71 L.Ed. 303 (1926). However, with a nod to Justice Holmes, the Court noted that in an individual case, a zoning rule as applied could violate the protections provided by the Constitution.

Two years later, the Court struck down the specific application of the Cambridge, Massachusetts, zoning ordinance to Mr. Nee-tow’s property as violative of the Federal Constitution, Nectow v. City of Cambridge, 277 U.S. 183, 48 S.Ct. 447, 72 L.Ed. 842 (1928). For the next fifty years zoning fights were played out in the state courts, with little further guidance from the Supreme Court. Specific applications of zoning ordinances were upheld or struck down as the state courts determined, earning for some courts the epithet of super zoning board. See generally Richard F. Babcock, The Zoning Game (1962), and Richard F. Babcock and Charles L. Siemon, The Zoning Game Revisited (1985).

Two key questions eventually emerged in the discourse about Fifth Amendment regulatory takings: (1) were there objective legal criteria by which a regulatory taking could be identified, or was it necessarily an ad hoc inquiry left to the discretion of each court; and (2) was the remedy for a regulation that went too far a post hoc declaration of invalidity, leaving the property owner to bear the cost of the illegal restraint during the time (often years) it remained in effect, or could a court declare the restraint valid (that is, within the power of government to impose), but require the government to pay the just compensation referred to in the Fifth Amendment’s mandate.

In 1978 the Supreme Court reentered the debate with an initial answer to the first question. The Court, in Penn Central Transportation Co. v. New York City, 438 U.S. 104, 98 S.Ct. 2646, 57 L.Ed.2d 631 (1978), refined the notion of when a regulation ‘went too far.’ Three criteria would determine the outcome: (1) the character of the governmental action, (2) the economic impact of the regulation on the claimant, and (3) the extent to which the regulation interfered with distinct investment-backed expectations. Id. at 124, 98 S.Ct. at 2659. Accord Kaiser Aetna v. United States, 444 U.S. 164, 175, 100 S.Ct. 383, 390-91, 62 L.Ed.2d 332 (1979); PruneYard Shopping Center v. Robins, 447 U.S. 74, 83, 100 S.Ct. 2035, 2041-42, 64 L.Ed.2d 741 (1980).

The first criterion required that a reviewing court consider the purpose and importance of the public interest reflected in the regulatory imposition. In effect, a court was to balance the liberty interest of the private property owner against the Government’s need to protect the public interest through imposition of the restraint. This included considering not only the avowed need of the Government — the interest of the public being protected, see e.g., Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1014, 104 S.Ct. 2862, 2878-79, 81 L.Ed.2d 815 (1984) (factors to be considered included whether the Government had a legitimate interest in forced public disclosure of the company data) — but also whether the method of attaining the sought-after goal was reasonably designed to attain it. See Nollan v. California Coastal Comm’n, 483 U.S. 825, 837, 107 S.Ct. 3141, 3148-49, 97 L.Ed.2d 677 (1987) (requiring a “nexus” between the Government’s alleged public purpose and the restriction which it places upon the landowner’s right to develop the land).

The second criterion, economic impact of the regulation on the claimant, was intended to ensure that not every restraint imposed by government to adjust the competing demands of private owners would result in a takings claim. See Pennsylvania Coal, 260 *1177 U.S. at 413, 48 S.Ct. at 159 (“Government hardly could go on if to some extent values incident to property could not be diminished without paying for every such change in the general law.”). Reflecting in part the presumed facts in the cases, what emerged was a threshold requirement that the plaintiff show a serious financial loss from the regulatory imposition. This came to be phrased as a denial of “economically viable use of [an owner’s] land.” Agins v. Tiburon, 447 U.S. 255, 260, 100 S.Ct. 2138, 2141, 65 L.Ed.2d 106 (1980); Nollan, 483 U.S. at 834, 107 S.Ct. at 3147.

The third criterion, interference with distinct investment-backed expectations, was a way of limiting takings recoveries to owners who could demonstrate that they bought their property in reliance on a state of affairs that did not include the challenged regulatory regime. See, e.g., Concrete Pipe and Prods. of Cal., Inc. v. Construction Laborers Pension Trust for S. Cal., — U.S. —, —, 113 S.Ct. 2264, 2291-92, 124 L.Ed.2d 539 (1993) (no reasonable expectation in light of Congress’ legislation in the pension field); Connolly v. Pension Benefit Guaranty Corp., 475 U.S. 211, 226-27,106 S.Ct. 1018, 1026-27, 89 L.Ed.2d 166 (1986) (same); Ruckelshaus, 467 U.S. at 1005-6, 104 S.Ct. at 2874-75 (company did not have a reasonable expectation that EPA would keep submitted data confidential, in light of the prior legislative amendments: “A ‘reasonable investment backed expectation’ must be more than ‘a unilateral expectation or an abstract need.’ ” (quoting Webb’s Fabulous Pharmacies v. Beckwith, 449 U.S. 155, 161, 101 S.Ct. 446, 450-51, 66 L.Ed.2d 358 (1980)); Golden Pacific Bancorp v. United States, 15 F.3d 1066 (Fed.Cir.1994) (bank holding company and stockholders had no reasonable expectation that Federal Deposit Insurance Corporation would not take over insolvent bank); Ciampitti v. United States, 22 Cl.Ct. 310, 321-22 (1991) (landowner who purchased wetland with knowledge of the regulatory structure and with warning that the requisite permit was “virtually impossible to get” had no reasonable investment-backed expectations).

In legal terms, the owner who bought with knowledge of the restraint could be said to have no reliance interest, or to have assumed the risk of any economic loss. In economic terms, it could be said that the market had already discounted for the restraint, so that a purchaser could not show a loss in his investment attributable to it.

Since no taking was found to have occurred in the Penn Central case, the Court did not answer the second question raised above: whether, given a regulation that constitutes a taking, just compensation is required when demanded, or whether a declaration of invalidity is enough. This question was finally and definitively answered by the Court, after a number of false starts, 10 in First English Lutheran Church v. Los Angeles County, 482 U.S. 304, 107 S.Ct. 2378, 96 L.Ed.2d 250 (1987). The Constitution, said the Court, requires just compensation for a regulatory taking from the date it occurs until the date of the regulation’s rescission or amendment. A simple post hoc declaration of invalidity did not provide the remedy the Constitution mandated. Id. at 319,107 S.Ct. at 2388. See also Yuba Natural Resources, Inc. v. United States, 821 F.2d 638 (Fed.Cir.1987) (following First English).

Thus the state of takings law at the time this case was decided below was based on the following analytical structure:

a) A property owner who could establish that a regulatory taking of property has occurred is entitled to a monetary recovery for the value of the interest taken, measured by what is just compensation.

b) With regard to the interest alleged to be taken, there has been a regulatory taking if

(1) there was a denial of economically viable use of the property as a result of the regulatory imposition;

*1178 (2) the property owner had distinct investment-backed expectations; and

(3) in the balance between the property owner’s right to own and use the property without unwarranted governmental interference on the one hand, and on the other, the public interest asserted by the Government in support of the regulatory imposition, the liberty interest of the property owner should prevail.

■ Concerning the first criterion — denial of economically viable use of the land — the trial court in this case concluded that the relevant comparison for purposes of determining whether there had been a denial of economically viable use of the land by the regulatory imposition was a comparison of the value of the 12.5 acre parcel before and after the imposition. The court found that the fair market value before was $2,658,000, and after was $12,500. The diminution in value' of 99% was deemed sufficient to qualify under this part of the test for a taking. Loveladies 2, 21 Cl.Ct. at 160.

With regard to whether the owner had investment-backed expectations — the second criterion — the trial court concluded that the facts left little doubt that such expectations drove the project. Loveladies 1, 15 Cl.Ct. at 396. And regarding the third criterion — the balance of public and private interests — after a lengthy consideration of the competing values offered by the Government, on the one hand, for imposing the restriction and by the property owner, on the other, for protecting the interests of private property ownership under the circumstances, the trial judge concluded that “plaintiffs have shown that their private interest in developing and utilizing their property outweighs the public value in preserving these wetlands.” Loveladies 1, 15 Cl.Ct. at 399. Judgment was therefore rendered for Loveladies.

11. Takings Law Now Applicable to the Case on Appeal

June 29, 1992 marked the decision in Lucas v. South Carolina Coastal Council, 505 U.S. -, 112 S.Ct. 2886, 120 L.Ed.2d 798 (1992). Mr. Lucas had purchased two oceanfront lots with the intention of building a home for himself on one, and a house for sale on the other. Between the time he purchased and the time he was ready to build, the state enacted legislation aimed at preserving and protecting the fragile ecology of the beach and dune area. Pursuant to that legislation, a state agency had determined that no buildings could be constructed ocean-ward of a line drawn on the upland side of Lucas’ property, thus precluding Lucas from building on his property.

There was no question that Lucas had distinct investment-backed expectations for his property. And, despite the state’s argument that Lucas still retained the untrammeled right to use his property to view the waves and to cross upon it to the beach (and presumably to pay the real estate taxes), there was little doubt that the economic value of his property had been essentially destroyed by the regulatory imposition.

The only real question, then, was whether the state’s policy for preservation of the ocean-front ecology trumped Lucas’ property rights in such a manner that Lucas should bear the full cost of the application of that policy to his property. The trial court said no. If the state wished to pursue the policy in that manner, cost to property owners must be shared by all, not just the relatively few persons on whom the policy happened adversely to impact. The trial court awarded Lucas 1.1 million dollars for the taking.

The Supreme Court of South Carolina, in a split decision, reversed. That court held that the determination by the South Carolina legislature to preserve and protect the state’s ocean-front ecology reflected a paramount public policy which, when balanced against the private property rights of the individual, required that the property rights yield. Thus there was no governmental taking under the Fifth Amendment, and no compensation was owed. Lucas v. South Carolina Coastal Council, 304 S.C. 376, 404 S.E.2d 895 (1991).

When the Supreme Court accepted Lucas’ appeal, the case was understood to confront the Court with a much-heralded opportunity to clarify how courts were to balance public interest claims against liberty claims of private property owners, and to do it in a case *1179 in which the issue was sharply focused on fundamental ecological and environmental values. Instead, the Court recast the issue. The question, said the Court, was not one of balance between competing public and private claims. Rather the question is simply one of basic property ownership rights: within the bundle of rights which property lawyers understand to constitute property, is the right or interest at issue, as a matter of law, owned by the property owner or reserved to the state?

The Court explained that the basis for the state’s reservation lies in the principles of common law nuisance. Property rights as a matter of law since Blackstone’s day have been understood to be subject to the power of the state to abate nuisances. If the imposed restraint would have been justified under the state’s traditional nuisance law, then the property owner’s bundle of rights did not include the right claimed, and no taking could occur. The Court remanded the case to the South Carolina Supreme Court to determine, under that state’s nuisance laws, whether the interest at issue was the state’s or the property owner’s. 11

In sum, then, to restate the law of regulatory taking as currently applicable to the case before us:

a) A property owner who can establish that a regulatory taking of property has occurred is entitled to a monetary recovery for the value of the interest taken, measured by what is just compensation.

b) With regard to the interest alleged to be taken, there has been a regulatory taking if

(1) there was a denial of economically viable use of the property as a result of the regulatory imposition;

(2) the property owner had distinct investment-backed expectations; and

(3) it was an interest vested in the owner, as a matter of state property law, and not within the power of the state to regulate under common law nuisance doctrine.

The effect, then, of Lucas was to dramatically change the third criterion, from one in which courts, including federal courts, were called upon to make ad hoc balancing decisions, balancing private property rights against state regulatory policy, to one in which state property law, incorporating common law nuisance doctrine, controls. This sea change removed from regulatory takings the vagaries of the balancing process, so dependent on judicial perceptions with little effective guidance in law. It substituted instead a referent familiar to property lawyers everywhere, and one which will have substantial (though varying from state to state) likelihood of predictability for both property owners and regulators.

With regard to the second criterion—investment-backed expectations—it is not disputed that Loveladies purchased the land involved with the reasonable expectation and intention of developing it over time for sale to purchasers of the improved lots; that the regulation constitutes an interference with their investment-backed expectations cannot be denied. There is, however, less agreement between the parties with regard to the first and third criteria. We will address each in turn.

A. Denial of Economically Viable Use and the Denominator Problem

In Lucas, the Court discussed but was not called upon to decide the question of whether a regulatory taking requires that there be a denial of essentially all remaining economic use, or whether loss of a substantial part, but not all, of the economic use may constitute a compensable partial taking. The earlier cases sometimes use language that suggests that was so, and sometimes did not. Lucas itself contains a discussion that ac *1180 knowledges both viewpoints. Lucas, 505 U.S. at - n. 8, 112 S.Ct. at 2895 n. 8.

In Florida Rock Industries, Inc. v. United States, 18 F.3d 1560 (Fed.Cir.1994), we concluded that, depending on the legal import of the final fair market value before and after the regulatory imposition on the particular property involved, a partial taking may have occurred. We explained that in making that determination there was “the difficult task of resolving when a partial loss of economic use of the property has crossed the line from a noneompensable ‘mere diminution’ to a com-pensable ‘partial taking.’ ” Florida Rock, 18 F.3d at 1570. The reference to ‘mere diminution’ is to those decreases in property value resulting from shared economic impacts which are the consequence of certain types of land use controls, those in which the property owner has in a sense been compensated by the public program “adjusting the benefits and burdens of economic life to promote the common good.” Penn Central, 438 U.S. at 124, 98 S.Ct. at 2659. The Court in Lucas described it as: “adjusting the benefits and burdens of economic life ... in a manner that secures an ‘average reciprocity of advantage’ to everyone concerned.” Lucas, 505 U.S. at -, 112 S.Ct. at 2894 (internal citations omitted). 12

On the facts of the case before us, the question of whether there has been a partial or total loss of economic use (in the latter case a ‘categorical’ taking, see Lucas, 505 U.S. at -, 112 S.Ct. at 2893; Florida Rock, 18 F.3d at 1568), depends on what is the specific property that was affected by the permit denial. If the tract of land that is the measure of the economic value after the regulatory imposition is defined as only that land for which the use permit is denied, that provides the easiest case for those arguing that a categorical taking occurred. On the other hand, if the tract of land is defined as some larger piece, one with substantial residuary value independent of the wetlands regulation, then either a partial or no taking occurred, depending on the test as described in Florida Rock, 18 F.3d at 1567 et seq. This is the denominator problem. 13

In this case, the G