Murr v. Wisconsin: The ‘Whole Parcel’ Rule Prevails, At Least in This Regulatory Takings Case

Originally published by the George Washington Law Review

How should a court assessing a regulatory takings claim define the “property” allegedly taken to assess the degree of the economic impact the regulation has on it? That question has plagued the Supreme Court for nearly a century, with different and conflicting answers emerging, sometimes in relatively rapid succession. In Murr v. Wisconsin,1 the Court has provided its most comprehensive answer to the so-called “denominator” question so far, although even the analytical framework the Court provides leaves ample room for refinement in future cases.

Not until 1922 did the Supreme Court clearly establish that the Fifth Amendment’s prohibition on the taking of property without just compensation (which applies to the states through the Fourteenth Amendment) applies to regulations as well as physical intrusions and compelled transfers of title. The case in which it did so provided its first opportunity to address the definitional question referred to above. In Pennsylvania Coal v. Mahon,2 the Court held that a regulation amounts to a taking if it “goes too far” in terms of its economic impact on the regulated property. Justice Holmes, writing for the majority, held that a Pennsylvania statute restricting the mining of coal to prevent surface subsidence of residential and other properties amounted to a compensable taking because it made mining of the regulated tract by the coal company (which owned the mineral rights and the support estate but not the surface) commercially impracticable. Justice Brandeis, in dissent, argued that the Court should have assessed the statute’s impact by comparing the value of the coal that the statute said could not be mined “with the value of the whole property. The rights of an owner as against the public are not increased by dividing the interests in his property into surface and subsoil. The sum of the rights in the parts cannot be greater than the rights in the whole.”3

The question on which Justices Holmes and Brandeis disagreed became known as the “denominator” question because whether a regulation “went too far” in terms of its economic impact required a calculation of the percentage of the property’s value lost (or retained) as a result of the regulation. That calculation took the form of a fraction whose numerator was the value of the property after the regulation and whose denominator was its value before the regulation. The smaller the resulting percentage, the greater the economic impact the regulation had. Holmes concluded in Pennsylvania Coal that the property had no remaining value because coal in place is worthless if it cannot be mined. Brandeis argued that the denominator was not the value of the coal alone but of the entire property, including the surface, which retained value. According to his calculation, the value of the “property” subject to the statute was far greater than zero.

The Court was relatively quiet on the regulatory takings front for the next fifty years. But when another takings challenge resurfaced in 1978, the Court’s resolution of it again turned on its analysis of the denominator question. The issue in Penn Central Transportation Co. v. City of New York,4 was whether a New York City law restricting external changes to historic landmarks resulted in a taking of the property rights of the owner of Grand Central Terminal. The owner had submitted two plans to build an office tower over the existing terminal to an agency authorized to approve changes to landmark properties, but the agency rejected both. In ruling that the application of the landmark law to the terminal property did not amount to a regulatory taking, the Court refused to assess the law’s impact on the owner’s “air rights”–the right to build in the space above the existing terminal. The Court reasoned that “‘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 on . . . the nature and extent of the interference with rights in the parcel as a whole . . . .”5 Because the terminal could still be operated at a profit notwithstanding the regulatory restrictions, no taking had occurred. In its second opportunity to address the denominator question, therefore, the Court endorsed the analysis in Justice Brandeis’ dissent in Pennsylvania Coal, not Justice Holmes’ majority opinion.

Nine years later, the Court addressed a takings challenge in a case that presented a factual and legal context virtually indistinguishable from the one in Pennsylvania Coal. In Keystone Bituminous Coal Ass’n v. DeBenedictis,6 the Court held that a different Pennsylvania statute restricting coal mining that results in surface subsidence did not work a taking. The majority refused to regard the coal that had to remain in place as “the property” affected by the statute, determining instead that those coal deposits were only part of the coal found on the property, much of which could still be mined at a profit. “Our takings jurisprudence,” the Court opined, “forecloses reliance” on “legalistic distinctions within a bundle of property rights” in assessing takings challenges.7 Observers had good reason to believe after Keystone that the parcel as a whole rule was firmly in place as a key component of regulatory takings analysis.

But a crack in the whole parcel rule’s veneer appeared in the 1992 Lucas decision,8 in which the Court enunciated a per se takings rule. Any regulation that deprives an owner of all economically viable use of the regulated property is a taking. The application of that rule, of course, requires a determination of what the regulated property is. Justice Scalia, in a footnote, noted that “uncertainty regarding the composition of the denominator in our ‘deprivation’ fraction” had “produced inconsistent pronouncements by the Court” (comparing Pennsylvania Coal with Keystone).9 He postulated that “the answer to this difficult question may lie in how the owner’s reasonable expectations have been shaped by the State’s law of property–i.e., whether and to what degree the State’s law has accorded legal recognition and protection to the particular interest in land with respect to which the takings claimant alleges a diminution in (or elimination of) value.”10 Justice Scalia also characterized Penn Central as “an extreme–and, we think, unsupportable–view of the relevant calculus.”11 The Court found it unnecessary to delve further into the denominator question in Lucas because the regulation restricting development of beachfront property in that case applied to and affected the full fee simple absolute.

The Court ducked the question again in its 2001 decision in Palazzolo v. Rhode Island12 in holding that an owner who acquired property before the adoption of a regulation is not necessarily barred from challenging it as a taking. Justice Kennedy characterized the definitional problem as “the difficult, persisting question of what is the proper denominator in the takings fraction.”13 More ominously, he stated that the Court had “at times expressed discomfort with the logic of” the whole parcel rule and cited law review commentary critical of it.14 One would not have been unreasonable at that point to have concluded that the whole parcel rule probably did not have a long shelf life.

The Court tacked back in the other direction, however, the very next year in Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency.15 The Court held that even if a temporary moratorium on development of property near Lake Tahoe deprived it of all economically viable use while the moratorium was in effect, a per se taking under Lucas had not occurred because such a temporary restriction merely causes a diminution in value of the property as a whole. Justice Stevens reasoned that “logically, a fee simple estate cannot be regarded as valueless by a temporary prohibition on economic use, because the property will recover value as soon as the prohibition is lifted.”16 The Court in effect refused to sever the time during which the moratorium was in place from the remainder of the property’s lifetime. Chief Justice Rehnquist dissented, denying that a moratorium on development that prohibited all economic use for six years is one of “the longstanding, implied limitations of state property law.”17

All of these cases set the stage for Murr, in which a couple challenged a Wisconsin statute and county zoning ordinance that prevented them from developing one of two adjacent lots they owned near a wild and scenic river because it was smaller than the minimum size deemed suitable for development. The regulatory provisions included a grandfather clause relaxing the restriction for substandard lots held in separate ownership from abutting lands on the effective date of the restrictions. But the exemption did not apply to substandard lots which could be merged with adjacent lots in common ownership. The regulations also allowed property owners to seek a variance from the substandard lot development restrictions that would allow the sale or use of a substandard lot, but the county denied the Murrs’ application for such a variance. The Murrs sued, claiming a taking. The evidence showed that the two lots together as regulated were worth $698,000, as compared to $771,000 as unregulated separate lots. The substandard lot was worth $40,000 as a separate, undevelopable lot.

The Court, in a 5-3 majority opinion written by Justice Kennedy, held that no taking had occurred. In reaching that conclusion, the Court described a question that is often “outcome determinative” in regulatory takings cases: “What is the proper unit of property against which to assess the effect of the challenged governmental action?”18 Justice Kennedy, who had noted doubts about the logic of the whole parcel rule in Palazzolo, described that rule as applying “in some, though not all, cases. . . .”19 He discerned two concepts that emerged from prior cases as limits on efforts to segment the regulated property to increase the percentage of value lost as a result of regulation. First, the Court had refused to limit the parcel “in an artificial manner to the portion of the property targeted by the challenged regulation.”20 Second, it had “expressed caution” over “the view that property rights under the Takings Clause should be coextensive with those under state law.”21

Justice Kennedy concluded based on these concepts that “no single consideration can supply the exclusive test for determining the denominator.”22 Rather, courts must consider factors that include (1) the treatment of the land under state and local law; (2) the land’s physical characteristics; and (3) the prospective value of the regulated land.23 The first factor is relevant because a purchaser’s reasonable expectations must acknowledge “legitimate restrictions” affecting subsequent use.24 Physical characteristics matter, too. In a passage that is likely to be particularly welcome to governments adopting environmental restrictions on land use and proponents of such restrictions, the Court stated that “it may be relevant that the property is located in an area that is subject to, or likely to become subject to, environmental or other regulation.”25 The notion is that property purchasers should anticipate such restrictions, which will limit the future extent of permissible development and thus the maximum value of the regulated property. Attention to the value of the property under the challenged regulation includes the effect of the burdened land on the value of other holdings. In particular, the Court reasoned, in another passage that recognizes the value of environmental regulation, that “the effect of a challenged regulation may be tempered if the regulated land adds value to the remaining property, such as by increasing privacy, expanding recreational space, or preserving surrounding natural beauty.”26

The Court took issue with two “formalistic” approaches to resolution of the denominator question proffered by the litigants. It rejected the State’s position that the definition of the regulated parcel under state law (here, the fact that the Murrs’ original two lots had been merged under the regulations) should be determinative. In doing so, it dismissed the Lucas footnote addressing the denominator question as mere “dicta, unnecessary to the announcement or application of the rule that case established,”27 although it claimed that its decision was consistent with the respect for state law that the footnote prescribed. It likewise refused to endorse the Murrs’ suggestion that it recognize a presumption that lot lines define the regulated “property” in every instance, on the ground that such an approach is inconsistent with the Court’s repeated recognition that “reasonable land-use regulations do not work a taking.”28 The regulatory merger provision was such a legitimate exercise of governmental power that is a typical component of minimum lot size restrictions.

Applying the three-factor test, the Court upheld the state courts’ determination that the regulation affected a single parcel, not two. The merger provision had a legitimate purpose. The lots were contiguous and located along a scenic river, such that the Murrs could have anticipated that regulation might limit their development rights. Finally, the regulatory restrictions were mitigated by the benefits of using the property as an integrated whole, allowing increased privacy and recreational space. Moreover, the application of the regulation reduced the aggregate value of the merged lots by less than ten percent. Indeed, the value of the aggregated lots as regulated was far greater (more than twice as much) as the summed value of the separate regulated lots.29 The Court also upheld the state courts’ conclusion that no taking of that single parcel had occurred under either the Lucas per se test or Penn Central‘s multi-factor test because the economic impact of regulation was not severe, the Murrs could not have reasonably expected to sell or develop their lots separately because the regulation predated their acquisition, and the regulation was a reasonable land use restriction adopted as part of a coordinated multi-government level effort to preserve the scenic river and surrounding land.

Chief Justice Roberts, joined by Justices Thomas and Alito, dissented.30 He would have resolved the definitional question in a “more straightforward” way, by defining the regulated property by reference to state law definitions of the boundaries of distinct units of land “in all but the most exceptional circumstances.”31 Justice Thomas dissented separately, urging the Court “to take a fresh look at our regulatory takings jurisprudence, to see whether it can be grounded in the original public meaning of the Takings Clause . . . .”32 The direction in which such analysis would take him is unclear.

The Court’s resolution of the denominator question in Murr should be heartening to state and local land use regulators. The framework the Court endorsed in Murr, however, may not have much more predictive value than the Court’s ad hoc approach to the resolution of regulatory takings claims that began when, in Pennsylvania Coal, it recognized that a regulation that “goes too far” is a taking, while providing almost no guidance for determining how far is too far. Justice Kennedy noted that no single factor is determinative, requiring case-by-cases analysis.

At the same time, the opinion contains several potential limits on its reach, which may allow future takings claimants to distinguish it. Several of those relate to the Court’s first factor, the treatment of the property under state and local law. First, in referring to one of the two “concepts” that had shaped past takings jurisprudence, the Court noted that “defining the parcel by reference to state law could defeat a challenge even to a state enactment that alters permitted uses of property in ways inconsistent with reasonable investment-backed expectations.”33 The example the Court provided was a state law that consolidates nonadjacent property owned by a single person in different parts of the state and then imposes development limits on the aggregate set. A litigant able to show such inequitable effects of deferring to state law presumably would have a stronger case than the Murrs for avoiding aggregation of affected property. Second, the Court regarded lot lines as a less than compelling basis for defining the denominator because lot lines have varying degrees of formality in different states and lot lines can easily be modified, “creating the risk of gamesmanship by landowners.”34 Other kinds of state laws relevant to the definition of property affected by regulation, such as Pennsylvania’s recognition of the support estate as a separate property interest in Pennsylvania Coal, might be less manipulable and therefore less troublesome to the Court. Third, a regulation that is not a well-established type such as a minimum lot size requirement might be harder to foresee, and therefore more likely to interfere with legitimate investment-backed expectations. The Court noted that the Takings Clause is meant to prevent leaving owners without recourse to avoid state laws that shape and define property rights in ways that upset such expectations.

A fourth limit relates to the Court’s second factor, the physical characteristics of the regulated land. A regulation of property that is not an obvious target of regulation, environmental or otherwise, as a result of its “human and ecological environment”35 might present a stronger basis for avoiding “whole parcel” treatment.

An additional set of limits relates to the Court’s third factor, the value of the property under the challenged regulation. Regulatory takings jurisprudence has always focused on the economic impact of the challenged regulation. If the regulated land fails to add value to unregulated land also held by the challengers, they are likely to have a more compelling case for avoidance of whole parcel treatment under the third factor. In such a case, there would be a greater disparity between the value of aggregated lots as regulated and the summed value of individual lots. The Court also reasoned that the Murrs’ land was subject to the merger rule only because of their “voluntary conduct in bringing the lots under common ownership after the regulations were enacted,”36 thereby diminishing their legitimate development and use expectations. The timing of their acquisition did not diminish the economic impact of regulation, but it weakened their contention that they had been subject to unanticipated and harsh regulatory treatment. Had the facts relating to any of these limits been different, the Court may have overturned the state court’s whole parcel treatment of the Murrs’ two lots.

Finally, the entire framework advanced in Murr to resolve the “denominator” question is not necessarily set in stone. Given the twists and turns in the Court’s past jurisprudence on the whole parcel rule, a future case reflecting a more accommodating view of segmentation of the regulated property would not be surprising.

Robert L. Glicksman, Response, Murr v. Wisconsin: The “Whole Parcel” Rule Prevails, At Least in This Regulatory Takings Case, Geo. Wash. L. Rev. On the Docket (June 27, 2017), http://www.gwlr.org/murr-v-wisconsin/.