73
* Director, Program for Judicial Awareness, Pacific Legal Foundation, and Adjunct Professor of Law, University of the Pacific, McGeorge School of Law. ** Class of 2001, William S. Richardson School of Law, University of Hawaii at Manoa. 1 438 U.S. 104 (1978). 2 Id. at 124 (citation omitted). 3 If there is anything approaching scholarly consensus on this subject, it is that an expectations test is singularly unhelpful in guiding courts toward a meaningful understanding of when compensation is required for a taking under the Fifth Amendment. See, e.g., Michael M. Berger, Happy Birthday, Constitution: The Supreme Court Establishes New Ground Rules for Land-Use Planning, 20 Urb. Law. 735, 758 (1988) (“[I]n no case has the Court made any effort to either define these terms or to give guidance to lower courts in determining their meaning.”); Richard A. Epstein, Lucas v. South Carolina Coastal Council: A Tangled Web of Expectations, 45 Stan. L. Rev. 1369, 1370 (1993) (“[W]e should be deeply suspicious of the phrase ‘investment-backed expectations’ because it is not possible to identify even the paradigmatic case of its use.”); Robert Meltz et al., The Takings Issue: Constitutional Limits on Land-Use Control and Environmental Regulation 134 (1999) (describing the investment-backed expectations criterion as “amorphous... [i]ts parameters remain uncertain even today”); Lynda J. Oswald, Cornering the Quark: Investment-Backed Expectations and Economically Viable Uses in Takings (continued...) New York University Environmental Law Journal 9 N.Y.U. Envtl. L.J. 449 (2001) *449 Great Expectations: Will Palazzolo v. Rhode Island Clarify the Murky Doctrine of Investment-Backed Expectations in Regulatory Takings Law? R. S. Radford * J. David Breemer ** Copyright © 2001 New York University Environmental Law Journal; R. S. Radford; J. David Breemer INTRODUCTION In Penn Central Transportation Co. v. New York City, 1 the Supreme Court stated that the degree to which a regulation interferes with “distinct investment-backed expectations” is a “significant” factor in determining whether the measure has taken private property in violation of the Fifth Amendment of the United States Constitution. 2 Although more than two decades have elapsed since Penn Central, neither courts nor commentators have been able to agree on the meaning or applicability of investment-backed expectations in takings law. 3 Despite these *450

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Page 1: New York University Environmental Law Journal 9 N.Y.U ...*Director, Program for Judicial Awareness, Pacific Legal Foundation, and Adjunct Professor of Law, University of the Pacific,

*Director, Program for Judicial Awareness, Pacific Legal Foundation, and Adjunct Professor of Law, University ofthe Pacific, McGeorge School of Law.

**Class of 2001, William S. Richardson School of Law, University of Hawaii at Manoa.

1438 U.S. 104 (1978).

2Id. at 124 (citation omitted).

3If there is anything approaching scholarly consensus on this subject, it is that an expectations test is singularlyunhelpful in guiding courts toward a meaningful understanding of when compensation is required for a takingunder the Fifth Amendment. See, e.g., Michael M. Berger, Happy Birthday, Constitution: The Supreme CourtEstablishes New Ground Rules for Land-Use Planning, 20 Urb. Law. 735, 758 (1988) (“[I]n no case has the Courtmade any effort to either define these terms or to give guidance to lower courts in determining their meaning.”);Richard A. Epstein, Lucas v. South Carolina Coastal Council: A Tangled Web of Expectations, 45 Stan. L. Rev.1369, 1370 (1993) (“[W]e should be deeply suspicious of the phrase ‘investment-backed expectations’ because it isnot possible to identify even the paradigmatic case of its use.”); Robert Meltz et al., The Takings Issue:Constitutional Limits on Land-Use Control and Environmental Regulation 134 (1999) (describing theinvestment-backed expectations criterion as “amorphous... [i]ts parameters remain uncertain even today”); LyndaJ. Oswald, Cornering the Quark: Investment-Backed Expectations and Economically Viable Uses in Takings

(continued...)

New York UniversityEnvironmental Law Journal

9 N.Y.U. Envtl. L.J. 449 (2001)

*449 Great Expectations: Will Palazzolo v. Rhode Island Clarify the MurkyDoctrine of Investment-Backed Expectations in Regulatory Takings Law?

R. S. Radford*

J. David Breemer**

Copyright © 2001 New York University Environmental Law Journal;

R. S. Radford; J. David Breemer

INTRODUCTION

In Penn Central Transportation Co. v. New York City,1 the Supreme Court stated that the degree to which aregulation interferes with “distinct investment-backed expectations” is a “significant” factor in determining whetherthe measure has taken private property in violation of the Fifth Amendment of the United States Constitution.2

Although more than two decades have elapsed since Penn Central, neither courts nor commentators have been ableto agree on the meaning or applicability of investment-backed expectations in takings law.3 Despite these *450

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3(...continued)Analysis, 70 Wash. L. Rev. 91, 107 (1995) (“[T]he meaning of the phrase remains uncertain, rendering itseffectiveness as a legal doctrine questionable at best.”); Jeremy Paul, The Hidden Structure of Takings Law, 64 S.Cal. L. Rev. 1393, 1504 (1991) (“Expectations analysis... suffers from well-known difficulties that raise seriousdoubts about its viability.”); Andrea L. Peterson, The Takings Clause: In Search of Underlying Principles Part I--ACritique of Current Takings Clause Doctrine, 77 Cal. L. Rev. 1299, 1324 (1989) (“It is not at all clear...what role‘interference with reasonable expectations’ plays in the Court’s takings analysis.”); Robert M. Washburn,“Reasonable Investment-Backed Expectations” As a Factor in Defining Property Interests, 49 Wash. U. J. Urb. &Contemp. L. 63, 86 (1996) (“[The] cases illustrate that there cannot be a set formula for determining when anowner’s expectations are reasonable.”).

For further discussions of the role of investment-backed expectations in takings law, see Steven J. Eagle,The Rise and Rise of “Investment-Backed Expectations,” 32 Urb. Law. 437 (2000); William I. Gulliford, III, Note,The Effect of Notice of Land Use Regulations Upon Investment-Backed Expectations and Takings Challenges, 23Stetson L. Rev. 201 (1993); Daniel R. Mandelker, Investment-Backed Expectations in Taking Law, 27 Urb. Law.215 (1995) [hereinafter Mandelker, Investment-Backed Expectations]; Daniel R. Mandelker, Investment-BackedExpectations: Is There a Taking?, 31 J. Urb. & Contemp. L. 3 (1987) [hereinafter Mandelker, Is There a Taking?];Gregory M. Stein, Who Gets the Takings Claim? Changes in Land Use Law, Pre-Enactment Owners, andPost-Enactment Buyers, 61 Ohio St. L.J. 89 (2000).

4See, e.g., Epstein, supra note 3, at 1372 (“The constant refrain that the Takings Clause protects onlyinvestment-backed or reasonable expectations has... been used by the Supreme Court to minimize the level ofprotection given to private property.”); Daniel R. Mandelker et al., Federal Land Use Law § 2A.03(4) (1986)(“Although this taking factor implies more, not less, protection for landowners, the Supreme Court and lowerfederal courts so far have applied it to uphold rather than strike down land use regulations.”); Washburn, supranote 3, at 67 (“Courts have rarely relied on reasonable investment-backed expectations as the sole factor inconcluding that a taking without just compensation has occurred.”).

5121 S. Ct. 296 (Oct. 10, 2000).

6See Palazzolo v. State ex rel. Tavares, 746 A.2d 707, 716-17 (R.I. 2000).

7Id. at 715.

8231 F.3d 1354 (Fed. Cir. 2000), modifying 208 F.3d 1374 (Fed. Cir. 2000).

problems, recent years have seen a growing judicial tendency to rely on this poorly defined doctrine to deny regulatorytakings claims.4

On October 10, 2000, the United States Supreme Court granted certiorari in Palazzolo v. Rhode Island,5 a casein which the high court of Rhode Island held that a property owner could have no reasonable expectation ofdevelopment--and hence no claim for a regulatory taking--when his land was subject to restrictive environmentalregulations that predated his acquisition of the property.6 This was true, the court maintained, “[e]ven if Palazzolo hadbeen denied all beneficial use of his property.”7

*451 While Supreme Court briefing in Palazzolo was underway, the United States Court of Appeals for theFederal Circuit handed down a diametrically opposed opinion in Palm Beach Isles Associates v. United States.8 In thatcase, as in Palazzolo, property owners brought a takings claim when they were denied development permits through

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9See 208 F.3d at 1378.

10Id. at 1379.

11Id.

12Palm Beach Isles, 231 F.3d at 1357.

13Id. at 1363.

14Id. at 1364.

15See Id. at 1365.

16Id. at 1367.

the application of regulations designed to preserve wetlands.9 The Court of Federal Claims had found for thegovernment in part because “the existing statutory regime precluded any reasonable investment-backed expectationsof being able to develop the property.”10 The Federal Circuit reversed, holding that the owner’s expectations--and byimplication, the nature of any preexisting regulatory regime--were irrelevant to a takings inquiry when application ofthe regulations deprived the property of all beneficial use.11

Modifying his original opinion upon the government’s petition for rehearing, Judge Plager put the expectationsissue into even sharper focus. Likening a regulatory deprivation of all use of property to a permanent physical invasion,the court noted that “[q]uestions of whether the owner had reasonable investment-backed expectations at the time theproperty was first acquired are simply not part of the analysis.”12 The modified opinion elaborated:

A purchaser who pays a substantial price for a parcel can be assumed to have expectations that the parcelcan be used for some lawful purpose. When government seizes the entire estate for government purposes,whether by physical occupation or categorical regulatory taking, it is not necessary to explore what thoseexpectations may have been. The purchaser may have had no particular expectations regarding immediateuse, but only purchased for long-term investment. Or the purchaser’s expectations may have been whollyunrealistic, and she may have paid more than the property is worth. It matters not. The Government isnot obligated to pay for her expectations, but only to pay for the property interest taken.13

Thus, the Federal Circuit concluded, “when a regulatory taking, properly determined to be ‘categorical,’ is foundto have occurred, *452 the property owner is entitled to a recovery without regard to consideration ofinvestment-backed expectations.”14

That this analysis directly contradicts the Rhode Island Supreme Court’s approach in Palazzolo was emphasizedby Judge Gajarsa in a dissent from the denial of rehearing en banc in Palm Beach Isles.15 Like the Rhode IslandSupreme Court in Palazzolo, Judge Gajarsa insisted that “[i]nvestment-backed expectations must be considered in allregulatory takings cases, even in those rare situations where the government has deprived a landowner of alleconomically beneficial use.”16 Recognizing the significance of the dispute, Judge Gajarsa closed with an appeal forthe Supreme Court to resolve the issue:

The Supreme Court has recently granted certiorari on a similar case relating to categorical takings.Palazzolo v. Rhode Island, Docket No. 99-2047 (Oct. 10, 2000). However, if the Supreme Court findsthat the Palazzolo case is not the proper vehicle for such a review . . ., it should consider this case as a

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17Id. at 1373.

18The first question presented in the petition for certiorari was “[w] hether a regulatory takings claim iscategorically barred whenever the enactment of the regulation predates the claimant’s acquisition of the property.” Palazzolo v. State of Rhode Island, No. 99-2047, Petition for Writ of Certiorari, at i (June 21, 2000) (emphasis inoriginal).

19505 U.S. 1003 (1992).

20U.S. Const. amend. V (“[P]rivate property [shall not] be taken for public use without just compensation.”).

21Frank I. Michelman, Property, Utility and Fairness: Comments on the Ethical Foundations of “JustCompensation” Law, 80 Harv. L. Rev. 1165 (1967).

22Id. at 1233 (emphasis added). For a more detailed summary of the theoretical underpinnings of Michelman’s“investment-backed expectations” concept, see Oswald, supra note 3, at 101-104.

23See Michelman, supra note 21 at 1211-13.

backstop vehicle to clarify the law in this clearly important legal issue in the law of regulatory takings.17

The dramatic conflict between Palazzolo and Palm Beach Isles, and Judge Gajarsa’s equally strong disagreementwith the latter opinion, are fully understandable in view of the confusion and conceptual obscurity that have surroundedthe doctrine of investment-backed expectations virtually from its inception. Much of this uncertainty is likely to beresolved by the Supreme Court’s consideration of Palazzolo.18 As this Article will demonstrate, such clarification bythe Court is overdue.

Part I of this Article examines the legal evolution of the concept of investment-backed expectations from itsorigin in Penn Central through the Supreme Court’s decision in Lucas v. South Carolina Coastal Council.19 Part IIreviews post-Lucas decisions and identifies recent trends in the application of the investment-backed expectationsdoctrine that have created new barriers between *453 aggrieved property owners and the guarantees embodied in theTakings Clause of the Fifth Amendment.20 Part III demonstrates that post-Lucas courts’ expansive application of theconcept of investment-backed expectations to defeat takings claims threatens to subsume the entire doctrine ofregulatory takings. Finally, Part IV calls for the Supreme Court to make Palazzolo v. Rhode Island the vehicle for amuch-needed reassessment of the place of investment-backed expectations in the regulatory takings calculus.

I

BACKGROUND

A. The Origin of Investment-Backed Expectations in Takings Law

The notion of investment-backed expectations as a factor in takings analysis originated in ProfessorMichelman’s influential 1967 article, Property, Utility and Fairness: Comments on the Ethical Foundations of “JustCompensation” Law.21 There, Michelman proposed a regulatory takings test that focused on the nature of the propertyinterest impacted by government regulation, rather than merely the extent to which the regulation may have diminishedthe property’s value: “[t]he test . . . does not ask ‘how much,’ but rather (like the physical-occupation test) asks‘whether or not’: whether or not the measure in question can easily be seen to have practically deprived the claimantof some distinctly perceived, sharply crystallized, investment-backed expectation.”22 In placing this emphasis onowners’ expectations, Michelman drew on the utilitarian tradition of Jeremy Bentham.23 Under this view, security ofexpectations is essential if property is to be efficiently utilized by its private owners for the betterment of society as a

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24See Id.

25See Id. at 1213.

26Id. at 1230.

27See Id. at 1233 (“[A]ctual establishment of the use demonstrates that the prospect of continuing it is a discretetwig out of his fee simple bundle to which the owner makes explicit reference in his own thinking, so thatenforcement of the restriction would, as he looks at the matter, totally defeat a distinctly crystallized expectation.”).

28See Id.

29Id. (emphasis added).

30See Id. at 1234. As one scholar formulated the critical inquiry: “Is the loss entirely prospective, or has theproperty owner sunk a lot of irretrievable investment in the project?” William A. Fischel, Regulatory Takings:Law, Economics, and Politics 50 (1995). See also Bernard H. Siegan, Property and Freedom: The Constitution,the Courts, and Land-Use Regulation 146 (1997) (“[I]nvestment-expectations law distinguishes between aninvestor and a speculator. The speculator does not have a distinct use objective when he purchases the property. The courts are much more sympathetic to the distinct expectations of the investor as contrasted with theopen-ended profit motive of the speculator.”).

31438 U.S. 104 (1978).

32Id. at 115-22.

33Id. at 123-24.

whole.24

It was not Michelman’s intent to argue that compensation is required whenever government interference withthe use and enjoyment *454 of property disrupts settled expectations.25 Rather, he sought to identify those situationsin which compensation is needed “to prevent a special kind of suffering on the part of people who have grounds forfeeling themselves the victims of unprincipled exploitation.”26 This was the significance of the “distinct,investment-backed expectations” criterion in Michelman’s schema. The best evidence of such expectations wouldattach to already established uses of land.27 According to Michelman, this explained the “special solicitude” accordedto existing non-conforming uses when new zoning regulations are enacted.28 Nevertheless, he shied away from a rulethat would compensate only for the elimination of property uses already in existence: “[A] ban on potential uses notyet established may destroy market value as effectively as does a ban on activity already in progress. The ban does notshed its retrospective quality simply because it affects only prospective uses.”29 The distinction between prospectiveregulatory restrictions that require compensation under a utilitarian calculus and those that do not is captured by the“investment-backed” qualifier, by which Michelman sought to exclude compensation to speculators who had notactively involved themselves in putting--or preparing to put--their land to some specific use.30

More than a decade after Michelman’s article appeared, the concept of investment-backed expectations madeits appearance in Supreme Court takings jurisprudence in Penn Central.31 *455 There, the Court was asked todetermine whether New York’s Landmark Preservation Law took private property by preventing the owners of GrandCentral Terminal from building a high-rise office building above the historic structure.32 Writing for the majority,Justice Brennan noted that the Court’s previous decisions had failed to establish a “set formula” for takings analysis.33

He found that a number of factors were, however, particularly significant in the Court’s “essentially ad-hoc, factualinquiries”: “The economic impact of the regulation on the claimant and, particularly, the extent to which the regulationhas interfered with distinct investment-backed expectations are, of course, relevant considerations. So, too, is the

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34Id. at 124 (citation omitted).

35See Id. at 128.

character of the governmental action.”34

Although he twice cited to Michelman’s article,35 Justice Brennan failed to further define what he meant bydistinct investment-backed expectations, or to clarify its importance relative to the other factors he had identified.Indeed, his

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36William K. Jones, Confiscation: A Rationale of the Law of Takings, 24 Hofstra L. Rev. 1, 50 (1995).

37260 U.S. 393 (1922).

38Penn Central, 438 U.S. at 127.

39See Pennsylvania Coal, 260 U.S. at 412-13.

40Id.

41Penn Central, 438 U.S. at 127 (citing Pennsylvania Coal, 260 U.S. at 414-15)

42See Michelman, supra note 21, at 1234 (“Thus, the claimant in Pennsylvania Coal, which supposed itself to owna mining interest before the incidence of the regulation, owned nothing of consequence afterward.”).

43438 U.S. at 130. This was apparently a nod to Michelman’s purported distinction between “speculation,” whichis not entitled to compensation if it goes awry, and “investment,” which can give rise to compensable expectationinterests. See Michelman, supra note 21, at 1233-34. See also Mandelker, Is There a Taking?, supra note 3, at 19(noting that Justice Brennan’s denial of constitutional protection for the planned “exploitation” of land echoesMichelman’s limitation that the land speculator is not entitled to takings clause protection”). The practical effectof this doctrine is that “[a]n owner who is deprived of an existing property interest retroactively has a muchstronger takings claim than one who seeks to restore a property interest that had been eliminated prospectively.” Siegan, supra note 30, at 133. This may accord with intuitive notions of fairness but does not sit entirelycomfortably with a doctrine based on expectations, which by their nature involve landowners’ plans for future usesof their property.

44See Penn Central, 438 U.S. at 130 (citing Goldblatt v. Hempstead, 369 U.S. 590 (1962); Gorieb v. Fox, 274 U.S.603 (1927); Welch v. Swasey, 214 U.S. 91 (1909)).

treatment of the subject was sufficiently opaque that more than one analyst has concluded that “it is hard to fathomwhat the court had in mind.”36 Still, some broad outlines of the nascent doctrine can be distinguished.

First, Justice Brennan cited to the landmark regulatory takings decision, Pennsylvania Coal Co. v. Mahon37 as“the leading case for the proposition that a state statute that substantially furthers important public policies may sofrustrate distinct investment-backed expectations as to amount to a ‘taking.” ‘38 In Pennsylvania Coal, a firm ownedthe right to mine for coal below the surface of privately owned and occupied land. 39 The State of Pennsylvaniasubsequently enacted a statute which prohibited mining that could cause subsidence in populated areas.40 Reviewingthe case in retrospect, Justice Brennan concluded that the Pennsylvania Coal Court found a taking “because the statutemade it commercially impracticable to mine the coal, and thus *456 had nearly the same effect as the completedestruction of rights claimant had reserved from the owners of the surface land.”41 In other words, the statute wasoverturned because it effectively destroyed the company’s ability to use its land for a specific, clearly anticipatedpurpose--which in Justice Brennan’s view (as well as in Michelman’s)42 was equivalent to a frustration of the firm’sinvestment-backed expectations.

Having seemed to find an anchor for expectations analysis in Court precedent, Justice Brennan then immediatelybegan to qualify the doctrine. He observed that “the submission that appellants may establish a ‘taking’ simply byshowing that they have been denied the ability to exploit a property interest that they heretofore had believed wasavailable for development is quite simply untenable.”43 Here he cited a series of cases in which the Court found notaking despite apparently severe disruption of property owners’ settled expectations.44 Justice Brennan then concludedon an oddly triumphant note:

These cases dispose of any contention that might be based on Pennsylvania Coal Co. v. Mahon, 260 U.S.

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393 (1922), that full use of air rights is so bound up with the investment-backed expectations ofappellants

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45Penn Central, 438 U.S. at 130 n.27.

46The property interest found to have been taken in Pennsylvania Coal was the so-called “support estate.” Thesupport estate had been recognized in Pennsylvania as a separate property interest only since 1917-- twenty-twoyears after Pennsylvania Coal executed the deed in question. See Fischel, supra note 30, at 15-18. See alsoRichard A. Epstein, Takings: Descent and Resurrection, 1987 Sup. Ct. Rev. 1, 19-20 (“Holmes said that the coalwhich had to be left in place in order to provide support for the surface owner had been taken. He did not mean tosay that the taking occurred because... the loss of this coal disrupted the operations of a given mine or threatened todrive the coal companies into bankruptcy.”).

47See Penn Central, 438 U.S. at 116.

48See Id.

49See Id.

50Jones, supra note 36, at 50.

51See Penn Central, 438 U.S. at 117-18.

52Id. at 137.

53See Id. at 137 n.34. Although the Penn Central opinion does not use the term, this consideration foreshadows the“ripeness” standards established for regulatory takings claims in the 1980s. See, e.g., Williamson County Reg’lPlanning Comm’n v. Hamilton Bank, 473 U.S. 172, 199- 200 (1985) (holding that the effect of regulations onowners’ investment-backed expectations cannot be measured until a final decision is made as to how theregulations will be applied to the property).

54

See Penn Central, 438 U.S. at 137. Unlike the TDRs at issue in a later Supreme Court case, Suitum v. Tahoe(continued...)

that governmental deprivation of these rights invariably --i.e., irrespective of the impact of the *457restriction on the value of the parcel as a whole--constitutes a “taking.”45

There is a hint of doctrinal schizophrenia in these passages, in which Brennan seeks both to groundinvestment-backed expectations in Pennsylvania Coal and to distance himself from that decision, which found a takingin the loss of only one discrete strand of the owner’s bundle of rights.46

Turning to the facts of Penn Central, Justice Brennan applied both his newly-minted analyticaltools--investment-backed expectations understood in the context of the parcel as a whole--to absolve New York Cityof liability for a taking. True, Penn Central had entered into a multi-million-dollar lease contract based on theprojected construction of the office building,47 had prepared two separate sets of architectural plans to effect theproject,48 and demonstrated that the railroad terminal had originally been designed to be surmounted by a twenty-storyoffice tower.49 As has been noted elsewhere, “[i]t is hard to imagine a more ‘distinct investment-backed expectation.”‘50 Balanced against these considerations, however, was the Court’s finding that the company’s expectation ofdevelopment had not been completely frustrated. Although the Landmarks Commission had rejected two proposals,for a fifty-five- and fifty-three-story tower, respectively,51 “nothing the Commission has said or done suggests anintention to prohibit any construction above the Terminal.”52 The record left open the possibility, for example, that atwenty-story tower such as that originally anticipated in the Terminal’s *458 design might be approved.53 Moreover,the extent to which Penn Central’s expectation of constructing a tower above the terminal was frustrated must beevaluated in light of the availability of transferable development rights (TDRs) which would allow construction to occurabove one or more of eight other properties the plaintiffs owned in the same vicinity.54 Finally, Brennan found it

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54(...continued)Regional Planning Agency, 520 U.S. 725 (1997), those available under the New York landmarks program were nota mere sham to avoid compensating property owners. See R. S. Radford, Takings and Transferable DevelopmentRights in the Supreme Court: The Constitutional Status of TDRs in the Aftermath of Suitum, 28 Stetson L. Rev.685, 690 (1999) (stating that in Penn Central, “the development the city would not permit on one site could simplybe shifted to another of the plaintiffs’ properties in the same part of Manhattan. The TDRs had direct utility to theowners of the Terminal, offering them other development opportunities in exchange for those they had beendenied.”).

55Penn Central, 438 U.S. at 136.

56It is clear that, “[b]y inference, the expectation, if any, that Penn Central may have had in developing the airrights above the terminal held less weight” than its expectation of continuing the property’s historic uses, althoughneither the basis of this inference nor the nature of the weighing process are spelled out. Jerold S. Kayden,Hunting for Quarks: Constitutional Takings, Property Rights, and Government Regulation, 50 Wash. U. J. Urb. &Contemp. L. 125, 131 (1996).

57See supra notes 27-30 and accompanying text.

58Penn Central, 438 U.S. at 136.

59

See Id. at 138 n.36 (speculating that Penn Central would be entitled to relief if its present use of the terminal ceasesto be “economically viable”).

60See Michelman, supra note 21, at 1229-34. See also Oswald, supra note 3, at 102 (noting that Michelmanexplored the investment-backed expectations factor “in the context of the diminution-in-value test”).

61See Eastern Enters. v. Apfel, 524 U.S. 498, 532 (1998); Phillips v. Washington Legal Found., 524 U.S. 156, 176(1998) (Souter, J., dissenting); Suitum v. Tahoe Reg’l Planning Agency, 520 U.S. 725, 733 (1997); Babbitt v.Youpee, 519 U.S. 234, 239 (1997); Concrete Pipe & Prods. of California, Inc. v. Constr. Laborers Pension Trust,508 U.S. 602, 645-46 (1993); Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1016 n.7, 1019 n.8 (1992);

(continued...)

significant that the city’s application of the landmarks law did not interfere with what must be regarded as PennCentral’s “primary expectation,” namely, the “present uses of the Terminal.”55

It is not self-evident, and Justice Brennan did not explain, in what sense continuing a preexisting use can be saidto be “primary” in an owner’s hierarchy of expectations.56 It is probable that Brennan’s analysis was here again derivedfrom Michelman, who, as previously noted, attached special weight to already established uses in his takings calculus.57

The Court also found it significant that the continuation of the property’s historic uses “permit[ted] Penn Central notonly to profit from the terminal, *459 but also to obtain a ‘reasonable return.” ‘58 In the parlance of future decisions,it comprised an “economically viable” use.59

In short, Brennan, like Michelman, employed a conception of investment-backed expectations that wasinexorably tied, and subordinate, to a larger economic impact analysis.60 The Penn Central Court evaluated the impactof the landmarks law on the property owners’ development expectations and concluded: (1) only a narrow range ofexpectations had been completely frustrated, while other plans for construction above the terminal might yet come tofruition; (2) to the extent the firm’s expectations of building in a particular spatial area had been foreclosed,comparable expectations might be realized through use of TDRs; (3) the owners’ fundamental expectation of beingallowed to continue to put their property to profitable use had not been foreclosed; therefore (4) there was no taking.Unfortunately, little of this was set forth with much clarity, and despite the Court’s repeated invocation ofinvestment-backed expectations over the years since Penn Central,61 the confusion that surrounded this standard at its

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61(...continued)Nollan v. California Coastal Comm’n, 483 U.S. 825, 853 (1987) (Brennan, J., dissenting); Bowen v. Gilliard, 483U.S. 587, 606 (1987); Hodel v. Irving, 481 U.S. 704, 715-16 (1987); Keystone Bituminous Coal Assoc. v.DeBenedictis, 480 U.S. 470, 493 (1987); MacDonald, Sommer & Frates v. County of Yolo, 477 U.S. 340, 349(1986); Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 226-27 (1986); United States v. Riverside BayviewHomes, Inc., 474 U.S. 121, 129 n.6 (1985); Williamson County Reg’l Planning Comm’n v. Hamilton Bank, 473U.S. 172, 191 (1985); United States v. Locke, 471 U.S. 84, 107 (1985); Ruckelshaus v. Monsanto Co., 467 U.S.986, 1005-14 (1984); Kirby Forest Indus. v. United States, 467 U.S. 1, 14-15 (1984); Hodel v. Virginia SurfaceMining & Reclamation Assoc., 452 U.S. 264, 295 (1981); Pruneyard Shopping Ctr. v. Robins, 447 U.S. 74, 83-84(1980); Kaiser Aetna v. United States, 444 U.S. 164, 175 (1979); Andrus v. Allard, 444 U.S. 51, 64 (1979).

62See Washburn, supra note 3, at 71 (“The Supreme Court’s adoption of the investment-backed expectation factor...emphasiz[ed] the rights of property owners... suggesting that courts apply this new factor to strengthen the positionof the property owner against governmental regulation.”); Mandelker, supra note 4, § 2A.03(4).

63444 U.S. 164.

64Id. at 175.

65See Oswald, supra note 3, at 107 n.82 (arguing that the shift in terminology from distinct to reasonable“suggest[s] that the owner’s expectations should be gauged by some objective standard”). One problem withregarding “reasonableness” in this context as an objective standard is the broad subjectivity courts employ indeciding what considerations go into the calculus of reasonableness. For a (presumably nonexclusive) list of twelvefactors various courts have examined in making this determination, see Berger, supra note 3, at 765-66. See alsoEagle, supra note 3, at 442 (“While ‘expectations’ seem personal and subjective, ‘reasonableness’ seems rooted inthe context of social interaction and objective. In short, reasonable expectations are shaped by law or shape thelaw.”).

66Mandelker, Is There a Taking?, supra note 3, at 14.

inception has not diminished.

*460B. Investment-Backed Expectation from Penn Central to Nollan

1. Kaiser Aetna’s Sleight of Hand: “Distinct” Expectations Are Replaced By a “Reasonableness” Test

Although it plausibly can be argued that the investment-backed expectations inquiry originally had the potentialto “strengthen the position of the property owner against government regulation,”62 interpretation and application ofthis concept by the Supreme Court has tended from the outset to make it more difficult for property owners to prevailon regulatory takings claims. This tendency has been underscored by a gradual degradation in the Court’sunderstanding of the concept from its original foundation in Michelman. The first sign of this metamorphosis cameonly a year after Penn Central, when the Court decided Kaiser Aetna v. United States.63 In that decision theexpectations analysis was subtly altered by replacing the term “distinct” with “reasonable.” From that time forward,the takings inquiry shifted to whether restrictive land-use regulations frustrated an owner’s “reasonableinvestment-backed expectations.”64 Regardless of whether, as scholars have argued, this change in terminology wasmeant to reflect a shift to an objective standard,65 or represented the adoption of a “balancing test that weighs publicbenefits against private costs,”66 the effect has been to invite courts to rely on their own evaluation of the validity ofa claimant’s expectations, rather than examining the impact *461 of governmental restrictions in foreclosing distinctly

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67See Presbytery of Seattle v. King County, 787 P.2d 907, 915 n.29 (1990) (suggesting that “distinct” means the“expectation must have some concrete manifestation,” while “reasonable” suggests that the expectation “must beappropriate under the circumstances”).

identifiable planned uses of land.67

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68See Jentgen v. United States, 228 Ct. Cl. 527, 534 (Ct. Cl. 1981); Deltona Corp. v. United States, 228 Ct. Cl. 476,490-92 (Ct. Cl. 1981) (concluding that the implementation of wetlands regulations frustrated a property owner’sreasonable expectations of development, but finding no taking on other grounds).

69See, e.g., Price v. City of Junction, 711 F.2d 582, 591 (5th Cir. 1983) (concluding that a city ordinance thatallowed the confiscation of “junk vehicles” did not effect a taking because “by their very nature inoperable junkvehicles do not embody reasonable investment-backed expectations”); Sucesion Suarez v. Gelabert, 541 F. Supp.1253, 1260 (D. P.R. 1982) (concluding that landowners’ plans to remove sand from property were unreasonableand therefore unprotected under Puerto Rico law); County of Kauai v. Pacific Standard Life Ins. Co., 653 P.2d 766,780 (Haw. 1982) (holding developers had no reasonable expectation of developing property zoned for resort uses);Graham v. Estuary Props., Inc., 399 So. 2d 1374, 1383 (Fla. 1981) (holding no taking where a developer “had onlyits own subjective expectation” that the state would issue a fill permit).

70See Michelman, supra note 21, at 1243-44.

71See Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 136 (1978).

72541 F. Supp. at 1260.

73Id.

74Id. (citation omitted).

2. Early “Reasonable Expectations” Decisions in the Lower Courts

With the notable exception of the United States Court of Claims, 68 lower federal and state courts immediatelyseized upon the altered focus inherent in the new standard of “reasonableness” as a powerful rationale to denygovernmental liability for regulatory takings.69 In one illustrative case, a federal court imposed its own notion ofreasonableness to deny compensation when a regulation foreclosed the continued employment of a property in itspreexisting use--Michelman’s paradigmatic example of “distinct” expectations,70 dubbed “primary” by Brennan in PennCentral.71 In Sucesion Suarez v. Gelabert, the court concluded that property owners’ expectations that they couldcontinue to extract sand from their land as they had in the past were “unreasonable” and thus did not support a takingsclaim.72 The court emphasized that the plaintiffs had “no reasonable expectation” to continued sand extraction “withoutthere being some governmental restrictions and limitations.”73 Employing reasoning that would come into vogue almosttwenty years later, the *462 court explained that the owners’ expectations were unreasonable because they should haveanticipated that the government might curtail the expected continued use of their land:

[Plaintiffs] should have known, given the law of property of Puerto Rico regarding natural resources, thatthe operations they chose to conduct were subject to constant regulation, supervision and were intertwinedwith matters of public policy that at some time might not be balanced in their favor. Whatever“investment backed expectations” plaintiffs had in their land were unreasonable if they ignored the lawof Puerto Rico on the exploitation of natural resources.74

The interpretation (or misinterpretation) of Penn Central embodied in Sucesion Suarez and similar lower courtrulings of the early 1980s could have been mitigated by an early, forceful statement from the Supreme Court clarifyingthe proper place of expectations in the takings calculus. Unfortunately, such an explanation was not forthcoming;instead, the Court would soon render the doctrine even more uncertain.

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75467 U.S. 986 (1984).

767 U.S.C. §§ 136-136y (1994 & Supp. IV 1998).

77Monsanto, 467 U.S. at 990-97.

78Id. at 1005.

79Id. at 1005-1006 (quoting Webb’s Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 161 (1980)).

80Id. at 1006 (emphasis added).

81Id. at 1008.

8218 U.S.C. § 1905 (1994).

83Monsanto, 467 U.S. at 1008.

84Id. at 1005. The Court did conclude that Monsanto had constitutionally protected expectations of non-disclosurewith respect to data submitted between October 22, 1972, and September 30, 1978, since FIFRA expressly grantedconfidentiality during that time. See Id. at 1011-13. In conceding that the frustration of Monsanto’s expectationsof confidentiality could lead to a taking, the Court emphasized the firm’s “right to exclude others,” a rightcharacterized as “essential” and “central” to private property. Id. at 1011. For extended discussion of the Court’streatment of the right to exclude, see David L. Callies & J. David Breemer, The Right to Exclude Others fromPrivate Property: A Fundamental Constitutional Right, 3 Wash. U. J.L. & Pol’y 39 (2000).

3. Monsanto: Reasonable Expectations Incorporate a Constructive Notice Rule

In the 1984 case of Ruckelshaus v. Monsanto,75 the Supreme Court applied a conception of reasonableexpectations remarkably similar to that employed by the federal district court in Sucesion Suarez. In Monsanto, theCourt considered whether a pesticide manufacturer’s property was taken by provisions of the Federal Insecticide,Fungicide and Rodenticide Act (FIFRA)76 that authorized the Environmental Protection Agency (EPA) to publiclydisclose the company’s trade secrets.77 Invoking the Penn Central balancing factors, the Court focused on whetherdisclosure of the data interfered with Monsanto’s reasonable investment-backed expectations. 78 Noting that thisstandard demands more than a showing of “a unilateral expectation or an abstract need,”79 the Court concluded thatMonsanto had no reasonable expectation that the EPA would refrain from disclosing *463 data submitted after theenactment of amendments to FIFRA in 1972 authorizing such disclosures. According to Justice Blackmun’s majorityopinion, the amendments put the firm “on notice of the manner in which EPA was authorized to use and disclosedata.”80 Going a step further, the Court then held that Monsanto had no reasonable expectation that the EPA wouldrefrain from disclosing data submitted to it even before the enactment of the disclosure provisions:

In an industry that long has been the focus of great public concern and significant government regulation,the possibility was substantial that the Federal Government, which had thus far taken no position ondisclosure of health, safety, and environmental data concerning pesticides, upon focusing on the issue,would find disclosure to be in the public interest.81

The Court noted that the Trade Secrets Act,82 in existence before the 1972 FIFRA amendments, which providedcriminal sanctions for such disclosures, was not a “guarantee of confidentiality” sufficient to undermine the conclusionthat Monsanto should have foreseen the loss of its trade secrets.83 It therefore concluded that the “force” of itsinvestment-backed expectations analysis was dispositive in defeating Monsanto’s takings claim with respect to datasubmitted to the government prior to, as well as after, the amendments to FIFRA.84

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85See, e.g., Mandelker, Investment-Backed Expectations, supra note 3, at 219 (“Monsanto suggests actual notice isnot necessary because it held the statute put the company on notice it might have to disclose trade secrets. This isconstructive notice.”).

86Oswald, supra note 3, at 114.

87See Id.

88475 U.S. 211 (1986) (holding that a federal statute that increased the liability provisions of a pension fund did noteffect a taking given that the fund’s trustees could have anticipated the new financial obligations).

89483 U.S. 587 (1987) (holding that legislation reducing child support benefits was foreseeable and thus did noteffect a taking).

90See, e.g., New Jersey State Chamber of Commerce v. Hughey, 600 F. Supp. 606 (D. N.J. 1985) (concluding thatthe New Jersey Right to Know Act did not effect a taking by permitting disclosure of private information becausethose who submitted data to the state had no reasonable expectation that it would be kept confidential); In re Req.for Solid Waste Util. Customer Lists, 524 A.2d 386 (N.J. 1987) (concluding that agencies required to submitcustomer lists to a regulatory board had no reasonable expectation of confidentiality).

Monsanto thus established that a takings claimant’s otherwise reasonable expectations concerning the use ofhis or her property may be defeated if the claimant has constructive notice of a regulation that may authorizeinterference with that use.85 *464 More significantly, it suggested that constructive notice could be established simplyby the existence of a general regulatory scheme that might serve to authorize subsequent, specific regulatory restrictionsat some future time. Thus, the Court construed reasonable expectations to mean that “property owners, at least undercertain circumstances, ought to anticipate changes in the law.”86 Under Monsanto, such potentially foreseeable changeswould not constitute an interference with reasonable investment-backed expectations, even if they effectively eliminatea protected property interest.87 Finally, the constructive notice rule employed in Monsanto demonstrated that, whenjudged under the standard of “reasonableness,” the investment-backed expectations factor by itself could defeat aregulatory takings claim.

The Court applied Monsanto’s version of investment-backed expectations in Connolly v. Pension BenefitGuaranty Corp.,88 and then again in Bowen v. Gilliard.89 Both these cases, like Monsanto, involved personal property,and the lower courts quickly began applying constructive notice rules to claims alleging takings of personal property.90

Some went further, however, and used Monsanto’s constructive notice doctrine to resolve land use disputes against

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91

See, e.g., Pace Resources, Inc. v. Shrewsbury Township, 808 F.2d 1023, 1032-33 (3d Cir. 1987) (stating that“distinct, investment-backed expectations are reasonable only if they take into account the power of the state toregulate in the public interest”); Southwest Diversified, Inc. v. City of Brisbane, 652 F. Supp. 788, 796 (N.D. Cal.1986) (stating that “whether or not an investment-backed expectation is reasonable depends... on the extent towhich state law fostered and protected the expectation at the time the expectation was formed”); Furey v. City ofSacramento, 592 F. Supp. 463, 470 (E.D. Cal. 1984), aff’d, 780 F.2d 1448 (9th Cir. 1986) (concluding that alandowner’s expectation of developing in accordance with the county’s general plan was “not reasonable and notprotected by the Takings Clause”); Tirolerland, Inc. v. Lake Placid 1980 Olympic Games, Inc., 592 F. Supp 304,314-15 (N.D.N.Y. 1984) (concluding that motel owners’ expectations of profiting from high room rates duringOlympic games were not “diminished” by imposition of rent control because the owners chose to makeimprovements and remain open despite knowledge of imminent rent control regulation).

92592 F. Supp. at 469-71.

93485 A.2d 287 (N.H. 1984).

94Furey, 592 F. Supp. at 470. California law requires local zoning ordinances to be consistent with the generalplan. See Cal. Gov’t Code § 65860 (West 1997).

95Furey, 592 F. Supp. at 465.

96Id.

97Id.

98Id. at 466.

99Id.

100Id. at 470 (emphasis in original).

101Id.

property owners.91 Furey v. City of Sacramento 492 FN92] and Claridge v. New Hampshire Wetlands Board93 areillustrative.

In Furey, a U.S. District Court concluded that a California zoning law precluded a landowner from formingreasonable expectations of developing land in a manner contemplated by applicable city and county general plans.94

During the 1960s, the landowner and the city “confidently expected” that the owner’s property would be rezoned fromagricultural to residential and commercial uses.95 This expectation was manifested by “numerous planning documents”prepared by the city,96 and indeed, led the city to install sewers on the land at the property owner’s request andexpense.97 Despite its representations concerning the developability of the property, however, the city subsequentlydesignated plaintiff’s land as an “open space reserve.”98 Although this designation did not change the uses allowed onthe property, it rendered the owner’s investment in sewers “essentially worthless” and undermined the anticipatedfuture development of the property.99

In considering whether the plaintiff was entitled to just compensation for the complete frustration of hisinvestment-backed development plans, the court noted that “[i]n order for an expectation to be entitled to the law’sprotection, it must be more than simply ‘investment-backed;’ it must be reasonable.”100 Citing Monsanto, the courtexplained that “reasonable” meant “consistent with the law in force at the time of formation of the expectation.”101 Thecourt noted that plans showing plaintiff’s property would be rezoned did not give rise to any reasonable expectations*466 because, under California law, a landowner could not “obtain a vested right in the particular provisions of a

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102Id.

103Id.

104485 A.2d 287 (N.H. 1984).

105Id. at 291.

106Id. at 288.

107Id.

108Id.

109Id. at 290-91.

110Id.

111Id. at 291.

112See Id.

113Id.

114Id.

general plan.”102 Accordingly, the court concluded that “plaintiff had no legally cognizable basis for the formation ofthe expectation that he would be permitted to change the uses to which his property could be devoted, and that any suchexpectation, investment-backed or otherwise, was unreasonable.”103

Similarly, in Claridge v. New Hampshire Wetlands Board,104 the New Hampshire Supreme Court held thatlandowners had no reasonable expectation of developing their property because, inter alia, they were on constructivenotice that their land was regulated as a wetland.105 The property owners in Claridge purchased land bordering a tidalcreek in 1971 with the intent of building a retirement home.106 In 1979, the owners applied to a local wetlands boardfor a fill permit necessary for construction of their planned single family residence.107 After the permit was denied, thelandowners challenged the denial as a taking.108 In reviewing the claim, the New Hampshire Supreme Court observedthat government action “will not cross the threshold of a taking without a showing that the owner’s substantial, justifiedexpectations concerning the property are thwarted.”109 In the court’s view, the state could not be “the guarantor, viainverse condemnation proceedings, of the investment risks which people choose to take in the face of statutory orregulatory impediments.”110 The court therefore ruled that “[a] person who purchases land with notice of statutoryimpediments to the right to develop that land can justify few, if any, legitimate investment-backed expectations ofdevelopment rights which rise to the level of constitutionally protected property rights.”111

The court subsequently found that the property in question was subject to both state and local wetland regulationsat the time of purchase,112 and that the landowners were therefore on *467 notice of the risks inherent in trying todevelop their property.113 The burden imposed on the landowners by the denial of the fill permit was “not different .. . from that embodied in the risk which [they] chose to take in buying this lot with notice of regulatory impedimentsand in waiting to develop the property in the context of growing public concern about wetland resources.”114

Consequently, the court found that being deprived of the opportunity to build on their land did not impose on the

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115Id. at 292.

116483 U.S. 825 (1987).

117Id. at 827-28. For an insightful account of the Nollans’ struggle to put their property to its intended use, firstcontending with the Coastal Commission and later with the California courts, see Timothy A. Bittle, Nollan v.California Coastal Commission: You Can’t Always Get What You Want, But Sometimes You Get What YouNeed, 15 Pepp. L. Rev. 345 (1988).

118See Nollan, 483 U.S. at 828.

119Nollan v. California Coastal Comm’n, 177 Cal. App. 3d 719 (Cal. Ct. App. 1986).

120Id. at 724.

121Id.

122Nollan, 483 U.S. at 857-58 (Brennan, J., dissenting).

123Id. at 858. Justice Brennan’s position was by no means an isolated one. Support for his view that the Nollanshad no legitimate expectation to build a home on their land was not lacking in contemporary commentaries. See,e.g., Jerry L. Anderson, Takings and Expectations: Toward a “Broader Vision” of Property Rights, 37 U. Kan. L.Rev. 529, 546-47 (1989). Anderson argued:

Under expectance analysis and the public interest condition, however, the Nollans’ property was nottaken. First, even though the Nollans expected to be allowed to build, their expectation was not legitimate.... They

(continued...)

plaintiffs a burden sufficiently onerous to constitute a taking.115

4. Nollan v. California Coastal Commission: Limiting Monsanto to Personal Property

Three years after Monsanto, in Nollan v. California Coastal Commission, 116 the Supreme Court rejected a lowercourts’ use of Monsanto’s constructive notice rule in the land use arena. The Nollans, owners of a run-down rentalbeach bungalow near Ventura, California, applied for a permit to replace the dilapidated structure with a personalresidence more in keeping with the other homes in their subdivision.117 The California Coastal Commission agreed toallow the reconstruction to go forward, but only if the Nollans would convey an easement to the state granting publicaccess across approximately one-third of their property.118 The California Court of Appeal upheld the Commission’sexaction against a regulatory takings claim,119 noting that the agency was authorized to demand such a dedication underthe California Coastal Act, as codified in the state’s Public Resources Code.120 The state court found it relevant that:

The Nollans’ property lies in an area where numerous dedications for public access have been made onnearly all the beach front parcels. Furthermore, . . . [a] limitation on the Commission *468 fromimposing lateral access in this case is contrary to the stated purpose of the Legislature in enacting theCoastal Act to provide maximum public access to and along the coast.121

The Supreme Court reversed. In considering the takings implications of the Commission’s exaction, JusticeBrennan emphasized in dissent that the agency had imposed similar conditions on forty-three of the Nollans’neighbors, thereby putting the Nollans “on notice when requesting a new development permit that a condition ofapproval would be a provision ensuring public lateral access to the shore.”122 Brennan argued that Monsanto compelledthe conclusion that the Nollans had no reasonable expectation that they could build a home without relinquishing titleto a large part of their property to the state.123

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123(...continued)should have known that buying ocean front property entails certain public use restrictions and that their use of theproperty would be subject to the public welfare. The panoramic view of the ocean is the “common stock” of allpersons and may not be destroyed to serve individual interests. Id.

124Nollan, 483 U.S. at 833-34 n.2 (emphasis in original). This is, of course, not the only rationale for assigningdifferent weight to constructive notice in cases involving real versus personal property. See, e.g., William K.Jones, supra note 36, at 71 (“[G]overnment policies protecting intellectual property (patents, copyrights, tradesecrets, and trade names) are more complex and malleable than policies underlying protection of moreconventional forms of property--raising questions as to how firmly based any owner’s expectations might be.”)

In penning the majority opinion, Justice Scalia squarely rejected Brennan’s position. Scalia specificallydismissed the applicability of Monsanto, noting that the latter case involved a governmental condition placed on “theright to [the] valuable government benefit,” while Nollan involved a condition imposed on “the right to build on one’sown property,” a right which could not “remotely be described as a ‘government benefit.” ‘124 Moreover, the Nollans’expectations were not defeated merely because they purchased coastal land long after the Commission had begunconditioning building permits. “So long as the Commission *469 could not have deprived the prior owners of theeasement without

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125Nollan, 483 U.S. at 834 n.2.

126See Mandelker, Investment-Backed Expectations, supra note 3, at 222.

127Consistent with Nollan, the Monsanto notice rule has continued to be applied in takings cases involving personalproperty. See Carpenters Dist. Council of New Orleans v. Dillard Dep’t Stores, Inc., 778 F. Supp. 318, 324 (E.D.La. 1991) (holding that the Worker Adjustment and Retraining Act did not interfere with merging businesses’reasonable expectations by requiring payments to laid-off workers because the businesses “could have anticipatedWARN’s impact on their respective situations”); Agi-Bluff Manor, Inc. v. Reagen, 713 F. Supp. 1535, 1541 (W.D.Mo. 1989) (concluding that an act which abrogated a Medicaid agreement between the State of Missouri andprivate health care providers did not frustrate reasonable expectations “given the extent to which Medicaidreimbursement is heavily regulated by both federal and state statutes”); Am. Cont’l Corp. v. United States, 22 Cl.Ct. 692, 697 (Cl. Ct. 1991) (concluding that bank investors’ reasonable expectations were not undermined whenthe government assumed control of a bank, given the “highly regulated” nature of the banking industry); Alaska v.Arctic Slope Reg’l Corp., 834 P.2d 134, 140 (Alaska 1991) (holding that Alaskan oil companies were on noticethat the state used confidential data in making state oil leasing decisions, and thus had no reasonable expectationthat the state would refrain from doing so). For a rare rejection of Monsanto in a personal property takings case,see Phillip Morris, Inc. v. Reilly, 113 F. Supp. 2d 129, 142- 44 (D. Mass. 2000).

128See, e.g., Parkridge Investors Ltd. P’ship v. Farmers Home Admin., 13 F.3d 1192, 1199 (8th Cir. 1994) (findingplaintiff’s investment-backed expectations were not reasonable because the holder of a FHA mortgage could haveforeseen “that the government might impair the partnership’s contractual options” by enacting new regulations twoyears after the mortgage was acquired); Ciampitti v. United States, 22 Cl. Ct. 310, 321 (Cl. Ct. 1991) (finding thatplaintiff’s distinct investment-backed expectations were not reasonable because, although the property waspurchased in reliance on the belief that riparian grants from the state to plaintiff’s predecessors in title would allowhim to develop the property, he had been warned that state and federal officials might refuse to issue necessarydevelopment permits); McNulty v. Town of Indialantic, 727 F. Supp. 604, 612 (M.D. Fla. 1989) (concluding that aproperty owner’s development expectations were “undermined by the fact that the land has been subject to land-useregulation since its purchase, and those regulations are subject to change”); Nat’l Adver. Co. v. Vill. of DownersGrove, 561 N.E.2d 1300, 1309 (Ill. App. Ct. 1990) (holding landowners who acquire property “with theexpectation of using it for a purpose not permissible under current zoning restrictions” are not entitled to assert aclaim based on investment-backed expectations); Parranto Bros., Inc. v. City of New Brighton, 425 N.W.2d 585,592 (Minn. Ct. App. 1988) (holding owner’s expectations were diminished because he purchased with knowledgethat city was preparing new land use ordinance and that “extensive restrictions” might be adopted); Rowe v. Townof North Hampton, 553 A.2d 1331, 1336 (N.H. 1989) (holding expectation of building on residential lot wasunreasonable because, although wetlands ordinance was not adopted until eleven years after plaintiff acquired title,“strong public policy of protecting wetlands” was in existence); Finch v. City of Durham, 384 S.E.2d 8, 17 (N.C.1989) (holding plaintiffs had no reasonable expectation of commercial development consistent with zoning ineffect at time of purchase because they were aware that planning commission had previously recommendeddownzoning).

As Professor Mandelker has noted, “[t]hese decisions disregard and undercut Justice Scalia’s Nollanfootnote. They come full circle from cases in which courts recognize [and extend constitutional protection to]

(continued...)

compensating them, the prior owners must be understood to have transferred their full property rights in conveyingthe lot.”125

Thus, juxtaposed against Justice Brennan’s futile invocation of Monsanto, Justice Scalia’s majority opinionplainly established that a landowner’s development expectations may be reasonable and thus protected by the TakingsClause even where the owner has constructive notice that the government can and may impose regulatory restrictions.126

Nollan thus limited Monsanto’s notice rule to the personal property context.127 Nevertheless, many post-Nollan courtshave stubbornly adhered to the notion that landowner expectations are ipso facto unreasonable if they come into conflictwith the government’s regulatory authority.128 One *470 such case is Midnight Sessions, Ltd. v. City of Philadelphia.129

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128(...continued)landowner expectations at the time of purchase.” Mandelker, Investment-Backed Expectations, supra note 3, at245.

129945 F.2d 667 (3d Cir. 1991).

130See Id. at 671-73.

131Id. at 671-72.

132Id. at 678 (quoting Pace Resources, Inc. v. Shrewsbury Township, 808 F.2d 1023, 1033 (3d Cir. 1987)).

133Midnight Sessions, 945 F.2d at 678.

There, investors purchased two properties with the intent of establishing separate dance clubs.130 After obtaining thezoning and building permits necessary to establish the clubs, the investors proceeded with improvements to theproperties. Yet, when the investors applied for a “dance hall permit” required by a state statute, the city denied therequested permits because of safety concerns.131

In considering whether the permit denial was a taking, the Third Circuit relied on one of its pre-Nollan decisionsfor the proposition that “distinct, investment-backed expectations are reasonable only if they take into account thepower of the state to regulate in the public interest.”132 Applying that rule in Midnight Sessions, the court concludedthat the dance hall investors did not have a reasonable expectation of operating their property in the way they hadanticipated:

[T]he appellees were operating in a known area of state regulation. . . . They decided to invest the fundsto construct dance halls although the statute clearly stated that a dance hall license *471 was not availableuntil a site conformed with the relevant laws, regulations and ordinances and was determined to be safeand proper for the purpose. While appellees’ expectations of dance hall licenses and profits areinvestment-backed, they cannot be reasonable in light of the City’s explicit power to regulate dancehalls.133

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134See, e.g., Store Safe Redlands Assocs. v. United States, 35 Fed. Cl. 726, 735 (Fed. Cl. 1996); Formanek v.United States, 26 Cl. Ct. 332 (Cl. Ct. 1992); Loveladies Harbor, Inc. v. United States, 15 Cl. Ct. 381 (Cl. Ct.1988); Gil v. Inland Wetlands & Watercourses Agency, 593 A.2d 1368, 1373 (Conn. 1991).

13515 Cl. Ct. at 381.

136Id. at 396 (citations omitted).

137593 A.2d 1368.

138

Id. at 1370.

139See Id.

140See Id. at 1370-71.

141See Id. at 1371.

On the other hand, some lower courts declined to override otherwise reasonable land use expectations based onMonsanto’s brand of constructive notice.134 For instance, in Loveladies Harbor, Inc. v. United States,135 the UnitedStates Claims Court concluded that the denial of a fill permit frustrated a landowner’s expectations of developmenteven though he did not pursue development until after restrictive state and federal wetland regulations had beenenacted. The court stated:

[P]laintiff’s reasonable, investment-backed expectations have been frustrated. Plaintiffs intended topurchase the land for development or at least for resale. The undisputed facts provided show that thepossibility for development no longer exists. The most these facts provide for is the resale of the propertyat a mere fraction of the property’s original value. The court must, therefore, reject the idea that a FifthAmendment takings claim can be avoided by requiring citizens to sell their property where thegovernment’s intrusion has reduced the value of the property to a mere fraction and where the propertywas left with no other available uses. For should this court rule otherwise, the Fifth Amendment wouldbe effectively turned on its head, and that noble protection of the citizenry would be renderedmeaningless.136

Similarly, in Gil v. Inland Wetlands & Watercourses Agency,137 the Connecticut Supreme Court concluded thatfrustration of a wetland owner’s investment-backed expectations of development could lead to a taking, even thoughthe land was subject to regulation at the time of purchase. In Gil, a property owner sought to develop 3.36 acres of land“classified, at the time of purchase, not only as a residentially zoned building lot, but as *472 wetlands, subject to theauthority” of the Inland Wetlands and Watercourses Agency of the Town of Greenwich.138 Shortly after purchasingthe property, the owner applied for and was denied a permit to build a single-family residence.139 The landownersubmitted three more applications, each time including modifications designed to lessen the impact of developmenton the nearby wetlands.140 After the fourth application was denied, the owner challenged the permit denial as a takingwithout just compensation.141

In considering the claim, the Connecticut court observed that “[a] deprivation of reasonable investment-backedexpectations may occur . . . when a wetlands agency denies a permit for land zoned as a residential building lot andpurchased solely for such a use as it may occur when a landowner’s property is reclassified to wetlands after it has been

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142Id. at 1373 n.7.

143Id. at 1374.

144Id. at 1373-74.

145505 U.S. 1003 (1992).

146Id. at 1016.

147See David L. Callies, Regulatory Takings and the Supreme Court: How Perspectives on Property Rights HaveChanged from Penn Central to Dolan, and What State and Federal Courts Are Doing About It, 28 Stetson L. Rev.523, 548 (1999) (stating that the Lucas Court “chose not to apply” the investment-backed expectations standard“because it characterized the regulatory taking as total”).

148See Id. at 547-48 (noting that “the economic impact of the regulation on the claimant and... the extent to whichthe regulation has interfered with distinct investment-backed expectations” would become relevant in cases where“an owner might not be able to claim the benefit of our categorical formulation,” because the property had not beendeprived of all beneficial use) (citation omitted). See also Id. at 557 (noting that Lucas “specifically rejected this[expectations] test for total takings”). For an argument that Lucas did not go far enough in divorcing thecategorical takings doctrine from expectations, see Epstein, supra note 3.

149505 U.S. at 1006-1007.

150See Lucas v. South Carolina Coastal Council, 404 S.E.2d 895, 896-97 (S.C. 1991) (reciting the stated purposesof the Beachfront Management Act).

151See Lucas, 505 U.S. at 1008.

purchased.”142 On the facts before it, the court recognized the “factual reasonableness of plaintiff’s expectations.”143

Further, while it ultimately remanded the case on the ground that the wetland agency’s rejection of four applicationswas not a final decision, the court emphasized that “a landowner, who purchased property with a reasonableexpectation of residential or commercial development, has suffered a taking if regulatory constraints allow him to usehis land only in its natural state without any economically viable use thereof.”144

C. Lucas: Limiting the Relevance of Investment-Backed Expectations to the Partial Takings Context

In Lucas v. South Carolina Coastal Council,145 the Supreme Court announced the rule that a regulation thatdenies an owner all economically viable use of land invariably constitutes a taking.146 Unlike the court in Gil, however,the Lucas Court expressly severed its economically viable use analysis from an *473 inquiry into the plaintiff’sinvestment-backed expectations.147 The latter consideration was found to be relevant only when regulated propertyretains some residual productive use.148

The dispute in Lucas arose in 1986 when David Lucas purchased two beachfront lots on the Isle of Palms, nearCharleston, South Carolina.149 His intention was to build single family homes on these lots, as every other propertyowner up and down the beach had already done. Lucas’ plans were thwarted when the South Carolinalegislature--citing, inter alia, the value of open beaches to the state’s tourism industry150 the Beachfront ManagementAct.151 This law directed the South Carolina Coastal Council to establish a coastal baseline, seaward of which

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152See Id. at 1008-1009.

153See Id.

154Id. at 1009.

155447 U.S. 255 (1980).

156Lucas, 505 U.S. at 1009.

157See Lucas v. South Carolina Coastal Council, 404 S.E.2d 895 (S.C. 1991).

158Id. at 901.

159Id. at 900. The South Carolina court did not base its holding on Lucas’ investment-backed expectations, and infact acknowledged in a footnote, “[i]f Lucas can demonstrate a deprival of all economically viable use of his land,there is no need to weigh factors such as the economic impact of the regulation and/or the regulation’s interferencewith investment backed expectations. Such a showing by Lucas would by necessity weigh these factors in hisfavor.” Id. at 900 n.3. Of course, Lucas had demonstrated a deprivation of all economically viable use of his landto the satisfaction of the trial court. See Lucas, 505 U.S. at 1007.

160See Lucas, 505 U.S. at 1015.

161Justice Scalia’s majority opinion was joined by Chief Justice Rehnquist and Justices White, O’Connor, andThomas. Justices Blackmun and Stevens wrote separate dissents on the merits, and Justice Souter filed a“statement” objecting to the Court’s consideration of the case on ripeness grounds. See Id. at 1003.

162Id. at 1015.

163See Id.

“occupiable improvements” were prohibited.152 The Council ultimately set the line landward of Lucas’ lots, thus barringhim from proceeding with development.153 Consequently, Lucas filed suit, alleging that the Act effected anunconstitutional taking of his property.154 Relying on the two-pronged test for takings liability coined by the SupremeCourt in Agins v. City of Tiburon155 and applied in Nollan, Lucas conceded that the Act itself substantially advancedlegitimate state interests, but contended that the state’s application of the law nonetheless violated the Takings Clauseby depriving him of all use of his land.156

*474 The South Carolina Supreme Court found that Lucas was not entitled to compensation under the FifthAmendment.157 The state tribunal found it dispositive that the Beachfront Management Act fell within the state’s policepowers.158 Private citizens like Lucas had no right, under this view of the Constitution, to use their property in waysthe state proscribed, nor to receive compensation for being deprived of that right.159

The United States Supreme Court reversed, agreeing with Lucas that the denial of all beneficial use of his landwas sufficient to establish a regulatory taking.160 Writing for the majority,161 Justice Scalia reviewed the Court’s priortakings jurisprudence and concluded that two categories of regulatory action had been identified as resulting in a takingwithout regard to the “public interest advanced in support of the restraint.”162 The first of these per se taking categoriesincluded cases where the government used its regulatory power to physically invade or occupy private property, orauthorized third parties to do so.163 The second consisted of regulations that “denied all economically beneficial or

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164Id.

165See Id. at 1017.

166Id. at 1019.

productive use of land.”164 Suggesting that a regulatory deprivation of productive use is the equivalent, from theowner’s point of view, of a physical invasion,165 Scalia concluded that “when the owner of real property has been calledupon to sacrifice all economically beneficial uses in the name of the common *475 good, that is to leave his propertyeconomically idle, he has suffered a taking.”166

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167See, e.g., William C. Leigh & Bruce W. Burton, Predatory Governmental Zoning Practices and the SupremeCourt’s New Takings Clause Formulation: Timing, Value, and R.I.B.E., 1993 BYU L. Rev. 828, 853-54 (1993).

168See Lucas, 505 U.S. at 1029.

169Id.

170Although the parties and various amici curiae in Lucas briefed the question of whether there is a “nuisanceexception” to the Takings Clause, the term does not appear in the majority opinion. It is first expressly mentionedin Justice Stevens’ dissent. See Id. at 1067 (Stevens, J., dissenting).

171Id. at 1030-31.

172Id. at 1029. The clear implication is that the relevant background principles must be grounded in the state’scommon law, an interpretation that is supported by several references in the majority opinion. See Id. at 1031(“The fact that a particular use has long been engaged in by similarly situated owners ordinarily imports a lack ofany common-law prohibition.... It seems unlikely that common-law principles would have prevented the erection ofany habitable or productive improvements on petitioner’s land; they rarely support prohibition of the ‘essential use’of land.”) (emphasis added). To prevail on remand, the State must make the same showing “as it would berequired to do if it sought to restrain Lucas in a common-law action for public nuisance.” Id. (emphasis added).

This understanding is also confirmed by the disagreement it provoked in the concurring and dissentingopinions. See Id. at 1035 (Kennedy, J., concurring) (“The common law of nuisance is too narrow a confine for theexercise of regulatory power in a complex and interdependent society.”); Id. at 1068-69 (Stevens, J., dissenting)(“The Court’s holding today effectively freezes the State’s common law, denying the legislature much of itstraditional power to revise the law governing the rights and uses of property.”). See also Douglas W. Kmiec, AtLast, the Supreme Court Solves the Takings Puzzle, 19 Harv. J.L. & Pub. Pol’y 147, 152 (1995) (noting that Lucas“accepts the property definition implicit in state common law, while rejecting (or at least limiting) its redefinitionby state or local legislation”); Leading Cases, The Supreme Court, 1991 Term, 106 Harv. L. Rev. 163, 274 (1992)(concluding that Lucas allocated the construction of property law to the state courts).

173See Lucas, 505 U.S. at 1032-36 (Kennedy, J., concurring).

174Id. at 1034.

On its face, this “categorical” standard for takings liability seemed to assure property owners of baselineprotection against total regulatory wipeouts without judicial inquiry into the owners’ expectations or the reasonablenessthereof.167 However, the Lucas Court immediately identified an exception to the doctrine it had just announced.168 Toavoid the requirement of compensation under the Fifth Amendment, restrictions that completely eliminate anyproductive use of private property “must inhere in the title itself, in the restrictions that background principles of theState’s law of property and nuisance already place upon land ownership.”169

Justice Scalia noted that the applicability of this “nuisance exception” 170 would depend on consideration of theharm posed by the proposed use of property, the suitability and social value of such uses, and the “ease with which thealleged harm can be avoided.”171 Beyond this, the Court did not elaborate on the meaning of “background principlesof state law,” except to say that such principles “cannot be newly legislated or decreed.”172

*476 In a concurring opinion, Justice Kennedy found the newly enunciated categorical rule too rigid and arguedfor continued reliance on the investment-backed expectations standard, even in cases of complete deprivation ofbeneficial use.173 In his view, “where a taking is alleged from regulations which deprive the property of all value, thetest must be whether the deprivation is contrary to reasonable, investment-backed expectations.”174 Kennedy proposedmeasuring the reasonableness of expectations not only by their consistency with common law principles, but “in light

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175Id. at 1035.

176Id.

177Id. at 1034.

178

Id.

179Id. at 1019 n.8.

180Id. at 1017 n.7 (emphasis added). As has been noted, “[t]he need to identify an appropriate ‘property interest’cannot be avoided entirely, and the Lucas suggestion--the owner’s reasonable expectations shaped by applicablestate law--may be a workable point of departure.” Jones, supra note 36, at 56 n.250. It is often overlooked thatLucas’ treatment of the denominator problem in terms of reasonable expectations shaped by law may be nothingmore than another appeal to common law principles. John E. Fee, Comment, Unearthing the Denominator inRegulatory Taking Claims, 61 U. Chi. L. Rev. 1535, 1555-56 (1994).

of the whole of our legal tradition.”175 Thus, under Justice Kennedy’s view-- but not that of the majority--state law otherthan that historically associated with nuisance prevention or other common law restrictions could justify the eliminationof all productive use of private land.176

In what turned out to be a prescient insight, Justice Kennedy conceded that this view of the role ofinvestment-backed expectations exposed property owners to the risk of uncompensated losses by legislative or judicialfiat. He concluded, “if the owner’s reasonable expectations are shaped by what courts allow as a proper exercise ofgovernmental authority, property tends to become what courts say it is.”177 Nevertheless, Kennedy was willing totolerate the circularity inherent in the investment-backed expectations concept in light of the need to balance the “rightsconferred by the Takings Clause and the police power of the state.”178

In contrast to the concurrence, the majority opinion carefully refrained from applying the “frustration ofinvestment-backed expectations” test to the facts of Lucas. The Court recognized the importance of this inquiry --butonly in cases where a *477 property owner experiences a denial of less than all use of property:

Such an owner might not be able to claim the benefit of our categorical formulation, but, as we haveacknowledged time and again, “the economic impact of the regulation on the claimant and . . . the extentto which the regulation has interfered with distinct investment-backed expectations” are keenly relevantto takings analysis generally.179

Moreover, in dicta, the Court suggested that expectations might provide a solution to the problem of determiningthe relevant property interest against which loss of economic use was to be measured, a determination that would decidewhether the total or partial takings test applied:

The answer to this difficult question [of the relevant property interest] may lie in how the owner’sreasonable expectations have been shaped by the State’s law of property --i.e., whether and to what degreethe State’s law has accorded legal recognition and protection to the particular interest in land with respectto which the takings claimant alleges a diminution in (or elimination of) value.180

The Court’s references to reasonable expectations therefore indicate that the concept is relevant outside thecontext of a partial taking only if it helps to establish whether a total taking is at issue. Once there has been adetermination that all economic use of the relevant parcel has been foreclosed, the expectations factor has no furtherplace in the analysis. Regardless of whether the investment-backed expectations doctrine is adequate to deal with

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181See, e.g., Epstein, supra note 3, at 1375 (interpreting Lucas’ footnote seven as “openly confess[ing]” the inabilityof the expectations doctrine to come to grips with the issue of partial regulatory restrictions on land use).

182See, e.g., Callies, supra note 147, at 548 (noting that the Lucas Court declined to apply the “frustration ofinvestment-backed expectations” standard because a total taking was at issue); Fee, supra note 180, at 1536 n.4 (“Ifthe regulation fails to prevent all economically viable use of a land parcel, there is no categorical taking underLucas. Nevertheless, a court may find a taking to have occurred under a multifactor balancing test, considering...interference with the owner’s reasonable investment-backed expectations.”).

183Callies, supra note 147, at 552 (emphasis added).

184The conceptual difficulty of applying the notion of reasonable expectations to total regulatory wipeouts isillustrated by the subsequent history of the Lucas case. No sooner did South Carolina acquire David Lucas’ lotsthan it sold them for residential development, in complete disregard of the Beachfront Management Act. See R. S.Radford, Land Use Regulation and Legal Rhetoric: Broadening the Terms of Debate, 21 Fordham Urb. L.J. 413,421-22 (1994) (book review). Does this imply that the state’s decision to develop the Isle of Palms propertymanifested a “reasonable” investment-backed expectation, whereas David Lucas’ plan to develop the same parcelsin exactly the same way was “unreasonable” ? This line of reasoning leads to the peculiar conclusion that realproperty subject to a confiscatory regulatory regime is always worth more to the government than to a privateowner, since the state cannot reasonably be expected to enforce its land use prohibitions against itself.

185See, e.g., Thomas O. Sargentich, Taking “Takings Rights” Seriously: A Debate on Property Rights LegislationBefore the 104th Congress, 9 Admin. L.J. Am. U. 253, 254 n.7 (1995) (citing Lucas as stating “where a taking isalleged from regulations which deprive the property of all value, the test must be whether the deprivation iscontrary to reasonable, investment-backed expectations”). More careful commentators, while recognizing thatKennedy’s opinion was in fact merely a concurrence, have argued that it should have been the opinion of theCourt. See Holly Doremus, Restoring Endangered Species: The Importance of Being Wild, 23 Harv. Envtl. L. Rev.1 (1999):

Justice Scalia suggested that nuisance law, together with the right to respond to emergency situations,might supply the only relevant background principles. Justice Kennedy, concurring, took a broader view, statingthat ‘reasonable expectations must be understood in light of the whole of our legal tradition.’ Justice Kennedy’sposition is consistent with the Court’s prior cases, which have refused to grant compensation when any backgroundprinciple of property law supported the challenged government action. Id. at 79 n.433.

deprivations of less than all use of a fee interest,181 the Lucas majority plainly found it irrelevant to the rule that a denialof *478 all economically viable use requires compensation.182 On the contrary, the core holding of Lucas is that “whena regulation takes all economically beneficial use from an owner’s land, it is a taking under the Fifth Amendmentwithout further investigation,”183 unless the regulation does no more than foreclose uses that could have been prohibitedat common law.184

II

POST-LUCAS APPLICATION OF THE EXPECTATIONS DOCTRINE

Lucas had an immediate impact on the subsequent interpretation and application of the Takings Clause by lowercourts, but hardly in a way the majority could have intended. Although Justice Scalia’s opinion expressly limited therelevant sphere of investment-backed expectations in determining when compensation is required, subsequent lowercourt decisions have used language from Lucas to aggressively expand the scope of the expectations inquiry. JusticeKennedy’s treatment of investment-backed expectations in his concurrence has been cited in both law reviews and casedecisions as the holding of the Court,185 and in fact Lucas has been characterized in the legal *479 literature as an

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186See, e.g., Philip Weinberg, Del Monte Dunes v. City of Monterey: Will the Supreme Court Stretch the TakingsClause Beyond the Breaking Point?, 26 B.C. Envtl. Aff. L. Rev. 315, 331 (1999) (“Lucas, who purchased twobeachfront parcels two years before the statute was enacted, contended the state’s denial of permission to build onthose lots deprived him of all reasonable investment-backed expectations and thus constituted a taking.”)(emphasis added).

187See, e.g., District Intown Props. Ltd. P’ship v. District of Columbia, 198 F.3d 874, 883 (D.C. Cir. 1999); FloridaRock Indus., Inc. v. United States, 45 Fed. Cl. 21, 38 (Fed. Cl. 1999); Florida Dep’t of Envtl. Prot. v. Burgess, 772So. 2d 540, 544 (Fla. Dist. Ct. App. 2000).

188Florida Rock, 45 Fed. Cl. at 39 (recognizing that a takings claimant purchased land with the primary expectationof conducting mining operations and that such expectations were frustrated); Mekuria v. Washington Metro. AreaTransit Auth., 45 F. Supp. 2d 19, 28-29 (D.C. 1999) (concluding that shop owners’ expectation of having access totheir stores was reasonable and protected).

189See Michelman, supra note 21, at 1233-34; Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 125-28(1978).

190Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1017 n.7 (1992).

191See Id. at 1017-18.

expectations case.186 Given this widespread confusion over the legal theory of the case, it is not surprising that thedoctrinal thrust of the decision has been garbled.

Post-Lucas takings cases have almost uniformly looked to the owner’s imputed expectations as an element indetermining liability for compensation. Some of these decisions have tracked Penn Central in defining protected usesof property by reference to whether they constituted the owner’s primary expectations at the time the land waspurchased,187 and have sometimes concluded that such primary expectations cannot be foreclosed without triggeringthe requirement of just compensation.188 More often, however, Lucas has been invoked to support a trio of doctrinalinnovations that seem antithetical to the spirit of that decision. These are, first, a conflation of Penn Central’sinvestment-backed expectations analysis with Lucas’ inquiry into background principles of state law; second, areinterpretation of Monsanto-style constructive notice as inhering in the title to regulated property; and third, theacceptance of recent legislative enactments *480 as background principles sufficient to insulate government fromtakings liability. Together, these trends have elevated expectations analysis from its initial place as one element inPenn Central’s multi-factor balancing test and converted it into something resembling a procedural bar.

A. Conflation of Investment-Backed Expectations with Lucas’ “Background Principles” Inquiry

Distinct (and later, “reasonable”) investment-backed expectations, as originally enunciated by Michelman andemployed in Penn Central, required landowners to have taken steps to employ their property in some particularbeneficial use that was ultimately foreclosed by regulation.189 An analogous usage occurs in Lucas, which suggests thatthe relevant parcel for purposes of applying the categorical takings rule may be identified by:

how the owner’s reasonable expectations have been shaped by the State’s law of property--i.e., whetherand to what degree the State’s law has accorded legal recognition and protection to the particular interestin land with respect to which the takings claimant alleges a diminution in (or elimination of) value.190

With respect to takings liability under the Lucas doctrine, however, expectations play no part.191 Eliminationof all economically viable use of land invariably requires compensation under the Fifth Amendment unless the

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192Id. at 1029.

193Id.

194See, e.g., Front Royal & Warren County Indus. Park Corp. v. Town of Front Royal, 135 F.3d 275, 287 (4th Cir.1998) (holding land development rules at the time of purchase showed that the property owner did not have eitherexpectations or property interests sufficient to establish a takings claim); Outdoor Graphics, Inc. v. City ofBurlington, 103 F.3d 690, 694 (8th Cir. 1996) (holding that landowner did not have a protected interest inmaintaining billboards as a nonconforming use because he had no expectation of that use in light of preexistingrestrictions); Hansen v. Snohomish County, No. 43763-1-I, 1999 Wash. App. LEXIS 1915, at *7-8 (Wash. Ct.App. Nov. 8, 1999) (citing Lucas’ discussion of background principles to support a conclusion that, under existingzoning, landowners had no “rightful” expectation in commercial development); Texas Natural Res. ConservationComm’n v. Accord Agric., Inc., No. 03-98-00340-CV, 1999 Tex. App. LEXIS 6898, at * 13 (Tex. App. Sept. 10,1999) (citing Lucas for the proposition that “owner’s reasonable expectations shaped by uses permitted by statelaw”); Gazza v. New York Dep’t of Envtl. Conservation, 679 N.E.2d 1035, 1042-43 (N.Y. 1997) (holdingpreexisting wetlands statute undermined expectations and operated as a background principle).

195198 F.3d 874 (D.C. Cir. 1999).

196Id. at 877.

197Id.

198Id.

199Id.

200Id.

201Id.

challenged restrictions “inhere in the title itself,”192 as demonstrated by “background principles” of the State’s commonlaw of nuisance or equivalent proscriptions.193

In the years following Lucas, many courts have merged the “expectations” strand of Penn Central with the“background principles” strand of Lucas. 194 The result--particularly when *481 “background principles” are looselyconstrued to include any legislative enactments, of whatever vintage-- has been the creation of a recursive doctrine thathas had a devastating impact on the constitutional rights of landowners.

In District Intown Properties Ltd. Partnership v. District of Columbia,195 the D.C. Circuit Court of Appealsapplied a takings analysis that blends and intertwines the Lucas and Penn Central standards. A real estate partnershippurchased an apartment complex and an adjacent lawn near the National Zoo in 1961.196 In 1988, the partnershipsubdivided the property into nine separate lots, one of which contained the apartment building.197 Later that year, thepartnership applied for permits to build one townhouse on each of the vacant lots.198 The district’s Department ofConsumer and Regulatory Affairs granted the permits on March 7, 1989, but then referred the applications to theCommission on Fine Arts.199 Pursuant to its mandate to “prevent reasonably avoidable impairment of the public values”relating to the National Zoo, the Commission recommended that the building permits be denied.200 Meanwhile, a groupof concerned citizens filed a petition to designate the lots as a historic landmark.201 The Historic Preservation Boardgranted the landmark

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202Id.

203Id. at 877-78.

204See Id. at 880-82.

205Id. at 883.

206Id.

207Id.

208Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1027 (1992).

209Id. at 1029.

designation on May 17, 1989. Two months later, the permits were denied.202 Identical permit applications were deniedonce more in 1992 on the basis that they conflicted with the property’s landmark status.203

*482 In considering whether the permit denials effected a taking, the D.C. Circuit concluded that the partnershiphad not been denied all economically viable use of land because the lot with the apartment building was part of therelevant parcel for takings analysis.204 Turning to a consideration of investment-backed expectations, the court citedLucas as teaching that:

a buyer’s reasonable expectations must be put in the context of the underlying regulatory regime. See505 U.S. at 1030 (stating that the Takings Clause does not require compensation when the restriction isproscribed by background state law rules or understandings). District Intown purchased and subdividedits property subject to an existing regulatory regime that establishes that District Intown could have hadno reasonable expectations of development at the time it made its investments.205

On these facts, the court could not plausibly have maintained that the plaintiff’s right to build townhouses onits property was barred by the district’s law of nuisance or comparable common law principles, as required for thedefendant to avoid liability under Lucas. Nor could it argue that District Intown lacked distinct investment-backedexpectations to construct townhouses on the lots adjacent to where its apartment building already stood, as requiredto establish a claim for compensation under Penn Central. Instead, the court combined the two standards, holding thatthe presence of an “existing regulatory regime” constituted a “background . . . understanding”206 that established thatthe plaintiff “could have had no reasonable expectations of development at the time it made its investments.”207

Juxtaposed in this way, the Penn Central and Lucas standards combine to place an insurmountable barrier betweenlandowners and the constitutional guarantee embodied in the Takings Clause.

*483B. Constructive Notice of Regulation Is Elevated from an

Imputed Element of Owners’ Expectations to a Background Principle, and Is Ultimately Found to Inhere in the Title of Regulated Land

The Lucas majority stated that a regulatory denial of all economically viable use effects a taking unless an“inquiry into the nature of the owner’s estate shows that the prescribed use interests were not a part of his title to beginwith.”208 That is, the challenged restrictions must inhere in the title itself, in the restrictions that background principlesof the State’s law of property and nuisance already place upon land ownership.209

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210Id.

211Id. at 1029, 1031.

212See, e.g., Thomas E. Castleton, A Matter of Expectations: Interpreting the Statutory Preemption of LocalAssistance to Federal Firearms Regulators, 15 Alaska L. Rev. 345, 361 (1998) (“Applying the principlesarticulated by Justice Scalia in Lucas... [an individual] must ‘necessarily expect[ ] the uses of his property to berestricted, from time to time, by various measures newly enacted by the State in legitimate exercise of its policepowers.’ This expectation is part and parcel of the title acquired and determines the contours of the rights inherentin ownership.”) (quoting Lucas, 505 U.S. at 1027); David F. Coursen, The Takings Jurisprudence of the Court ofFederal Claims and the Federal Circuit, 29 Envtl. L. 821, 838 (1999) (“Even with newly imposed developmentrestrictions that do render property valueless, a taking cannot occur if the restriction ‘inhere[s] in the title itself, inthe restrictions that background principles of the State’s law of property and nuisance already place upon landownership.”) (quoting Lucas, 505 U.S. at 1029); Glenn P. Sugameli, Lucas v. South Carolina Coastal Council: TheCategorical and Other “Exceptions” to Liability for Fifth Amendment Takings of Private Property Far Outweighthe “Rule,” 29 Envtl. L. 939, 978 (1999) (“[T]akings claims cannot be based upon denial of permission to violatestatutes and regulations that were in effect when the property was acquired, because such restrictions areconsidered Lucas background principles.”) (citing Lucas 505 U.S. 1003).

213See Michael M. Berger, Annual Update on Inverse Condemnation, A.L.I.-A.B.A. Course of Study Materials,Inverse Condemnation & Related Gov’t Liab. SB14 (Oct. 1996) (“[T]he kind of defense one sees more and morefrom cities these days [is] a claim that the property owner never had any rights anyway.... Since Lucas, governmentagencies have been combing their archives in search of arcane matters that might be said to have been part of aproperty owner’s title and that severely restrict the use of land.”).

214Steven J. Eagle, Regulatory Takings §8-2(a) (1996).

215See Forest Props., Inc. v. United States, 177 F.3d 1360 (Fed. Cir. 1999); Superior-FCR Landfill, Inc. v. Countyof Wright, 59 F. Supp. 2d 929 (D. Minn. 1999); Creppel v. United States, 41 F.3d 627 (Fed. Cir. 1994);Broadwater Farms Joint Venture v. United States, 45 Fed. Cl. 154 (Fed. Cl. 1999); Kelly v. Tahoe Reg’l PlanningAgency, 855 P.2d 1027 (Nev. 1993); Alegria v. Keeney, 687 A.2d 1249 (R.I. 1997); Brunelle v. Town of SouthKingston, 700 A.2d 1075 (R.I. 1997).

However, the Court emphasized that the right to engage in a particular beneficial use could not be expungedfrom a property title by fiat, through “newly legislated or decreed” rules of law.210 Rather, such severe restrictions onlandowners’ rights must derive from nuisance law or comparable common-law principles.211 However, this restrictionhas typically been ignored or misconstrued by commentators,212 regulators,213 and the courts--many *484 of which haveheld that virtually any restrictive land use regulation, no matter what its origin or how recent its enactment, qualifiesas a “background principle” of state law that not only precludes application of Lucas’ categorical rule, but defeats anyclaim to compensation under the Takings Clause. This development has lent new virulence to the Monsanto-basedconstructive notice doctrine, as post-Lucas courts have showed an increasing willingness to deny takings claims on thegrounds that landowners had imputed notice of possible future land-use restrictions, either at the time of acquisitionor when development applications were filed. This is an ironic twist to a decision that was initially hailed asstrengthening constitutional protections: “[i]nstead of eliminating post-purchase ‘regulatory excesses,’ [[Lucas] mayhave redirected the inquiry towards whether the state was merely making ‘explicit’ limitations ‘already’ inhering inthe landowner’s title.”214

Takings claims since Lucas have been rejected routinely if courts determine that landowners had either actualor constructive notice of restrictive land use regulations.215 In one subset of these cases, specific challenged restrictionsare found to antedate an unknowing property owner’s formation of development expectations. Typically, the landowneris charged with awareness of the regulation and therefore precluded from asserting inconsistent expectations in a

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216See Dodd v. Hood River County, 136 F.3d 1219, 1230 (9th Cir. 1998); 767 Third Avenue Assoc. v. UnitedStates, 48 F.3d 1575, 1581 (Fed. Cir. 1995) (holding statutory authority authorizing government foreclosure offoreign government office existed at the time claimant formed rental expectations and provided notice of apotential loss of rental profits); Town Council v. Parker, 726 N.E.2d 1217, 1221-22 (Ind. 2000); Bd. of ZoningAppeals v. Leisz, 702 N.E.2d 1026, 1030-31 (Ind. 1998) (holding zoning ordinance provided for forfeiture ofunregistered nonconforming use); Hansen v. Snohomish County, No. 43763-1-I, 1999 Wash. App. LEXIS 1915, at*9 (Wash. Ct. App. Nov. 8, 1999) (holding there is no rightful expectation of making economically viable use ofland if it is precluded by existing zoning); R.W. Docks & Slips v. State, 617 N.W.2d 519 (Wisc. Ct. App. 2000)(holding expectations were limited by pre-existing dredging regulations).

217See District Intown Props. Ltd. P’ship v. District of Columbia, 198 F.3d 874 (D.C. Cir. 1999); Good v. UnitedStates, 189 F.3d 1355 (Fed. Cir. 1999); Avenal v. United States, 100 F.3d 933 (Fed. Cir. 1996). See alsoTahoe-Sierra Pres. Council, Inc. v. Tahoe Reg’l Planning Agency, 34 F. Supp. 2d 1226, 1241 (D. Nev. 1999)(holding that the foreseeability of a crackdown on development limited development expectations); Berrios v. Cityof Lancaster, 798 F. Supp. 1153, 1159 (E.D. Pa. 1992) (noting that “generally accepted standards of acceptableliving conditions in this area” partly undermined leaseholder expectations of remaining in “uninhabitable”housing); Kalorama Heights Ltd. P’ship v. District of Columbia Dep’t of Consumer & Regulatory Affairs, 655A.2d 865, 872 (D.C. 1995) (noting that “strong preservationist trends” limited expectations); Golf Club ofPlantation, Inc. v. City of Plantation, 717 So. 2d 166, 170 (Fla. Dist. Ct. App. 1998) (noting that expectations aredefined in part by whether the claimant knew regulations “would be enacted”); Karam v. New Jersey Dep’t ofEnvtl. Prot., 705 A.2d 1221, 1229 (N.J. Super. Ct. App. Div. 1998) (holding that riparian landowners’development expectations were undermined in part because “of the shift in policy from commerce to environmentalprotection and wildlife conservation that occurred during the 1970's”), aff’d, 723 A.2d 943 (N.J. 1999); Bd. ofSupervisors v. Omni Homes, Inc., 481 S.E.2d 460, 465 n.3 (Va. 1997) (stating that expectations are “subject to thegovernment’s power to reasonably regulate for the public interest”).

218See, e.g., Carpenter v. Tahoe Reg’l Planning Agency, 804 F. Supp. 1316, 1328 (D. Nev. 1992) (noting that theexistence of a restrictive regulatory scheme at the time property was acquired “does not imply, as a matter of law,that a reasonable buyer would have known about or foreseen future restrictions”); Florida Rock Indus., Inc. v.United States, 45 Fed. Cl. 21, 38 (Fed. Cl. 1999) (“The mere presence of such regulatory programs does not affectour [expectations] analysis.”); Forest Props. Inc. v. United States, 39 Fed. Cl. 56, 71 (Fed. Cl. 1997) (noting that “apermit-based regulatory system presents a situation in which it is fallacious to argue that the existence of theregulatory regime can deny a property owner the requisite compensable property interest”); Vatalaro v. Dep’t ofEnvtl. Regulation, 601 So. 2d 1223, 1229 (Fla. Dist. Ct. App. 1992) (holding property owner was entitled tocompensation under the Fifth Amendment where a permit to build a home was denied based on application ofwetlands regulations predating purchase of the property).

219See, e.g., Broadwater Farms Joint Venture v. United States, 45 Fed Cl. 154, 156 (Fed. Cl. 1999) (finding notakings liability and citing Forest Props. for the proposition that a “regulatory structure can thoroughly abrogate aproperty owner’s investment-backed expectations”); Florida Dep’t of Envtl. Prot. v. Burgess, 772 So. 2d 540, 542n.1 (Fla. Dist. Ct. App. 2000) (applying constructive notice rule and declining to follow Vatalaro).

takings claim.216 In another important *485 subset of these cases, the landowner is found to have been put on noticenot by the prior application of specific use restrictions, but by a general regulatory scheme or “climate.”217 A fewdecisions have rejected the mere existence of a general regulatory program as sufficient to render any subsequentexpectation of development unreasonable,218 but these are rarely followed.219 Virtually no post-Lucas lower courts havefollowed Nollan

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220See Nollan v. California Coastal Comm’n, 483 U.S. 825, 833 n.2 (1987); supra notes 116-27 and accompanyingtext.

221See Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1019 n.8 (1992); supra notes 160-84 andaccompanying text.

222100 F.3d 933 (Fed. Cir. 1996).

223Id. at 938.

224Id. at 934.

225See Id. at 937-38.

226Id. at 937.

227Id

228See Id. at 938. Following this resolution of their action against the United States, the Avenal plaintiffs filed atakings claim against Louisiana based on the same operative facts. See Avenal v. Louisiana, 757 So. 2d 1 (La. Ct.App. 2000). The state trial court and court of appeal upheld Avenal’s claim against the state’s motion forsummary judgment, finding that “[t]he ‘distinct investment-backed expectations’ of Penn Central... is irrelevant tothe question of whether a taking has occurred under Louisiana law.” Id. at 12 (citation omitted).

229See Good v. United States, 189 F.3d 1355, 1363 (Fed. Cir. 1999) (stating that “[i]n light of the growingconsciousness of and sensitivity toward environmental issues, [the landowner] must also have been aware thatstandards could change to his detriment”); Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg’l Planning Agency, 34 F.Supp. 2d 1226, 1241 (D. Nev. 1999) (“[A] lmost everyone in the Tahoe Basin knew that a crackdown ondevelopment was in the works.”).

in limiting the *486 applicability of constructive notice to cases involving personal property,220 or Lucas itself inrejecting investment-backed expectations as a relevant consideration in total takings cases.221

Avenal v. United States222 provides an instructive example of the expansive view of constructive notice that hasbecome increasingly common in the post-Lucas era. There, the Federal Circuit concluded that federal plans to alterthe salinity of parts of the Mississippi River put oyster harvesters on notice that their livelihood might be destroyed,thereby defeating their takings claims when their oyster beds were in fact wiped out.223 In Avenal, the completion ofa federal freshwater diversion project altered the salinity of parts of the Breton Sound Basin off the coast of Louisiana.As a consequence, commercial oyster beds in the area became unusable. Lessees of these beds sued for compensationunder the Fifth Amendment.224 In rejecting the claim, the Federal Circuit concluded that the leaseholders had noreasonable expectation of continuing to make productive use of their property, since federal plans to engage infreshwater diversion were underway at the time the leases were executed.225 In light of the notice provided by thegovernment planning, the court held that the leaseholders “knew or should have known” that the productivity of theirbeds might be destroyed.226 Accordingly, “these plaintiffs, in the words of Penn Central, cannot have had reasonableinvestment-backed expectations that their oyster leases would give them rights protected from the planned freshwaterdiversion projects of the state and federal governments.”227 There was, therefore, no taking.228

*487 Several recent decisions go farther than Avenal in suggesting that a landowner may be put on notice thatprotection under the Takings Clause will be foreclosed simply by increased public concern about land use issues229 or

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230See, e.g., Good v. United States, 39 Fed. Cl. 81, 84 (Fed. Cl. 1997) (finding no takings liability in part because“[l]and development... was a highly regulated business”). But see United States FId. & Guar. Co. v. McKeithen,226 F.3d 412, 418 (5th Cir. 2000) (“[T]he mantra that insurance is a regulated industry will not cover all sins ofretroactivity.”); Maritrans Inc. v. United States, 43 Fed. Cl. 86, 87-89 (Fed. Cl. 1999) (holding that shipownerswere not deprived of reasonable investment-backed expectations by existence of pervasive regulations that weregrowing more stringent over time); Maritrans Inc. v. United States, 40 Fed. Cl. 790, 797 (Fed. Cl. 1998) (holdingthat doing business in a heavily regulated field did not deprive the same shipowners of constitutionally protectedproperty interests in their ships).

231198 F.3d 874 (D.C. Cir. 1999). See also supra notes 195-207 and accompanying text.

232Id. at 883.

233Id.

234Id. at 884.

235Id. (citing Concrete Pipe & Prods. v. Constr. Laborers Pension Trust, 508 U.S. 602, 645 (1993)).

236District Intown, 198 F.3d at 884.

237Id. at 883-84.

238Id. at 883.

because the owner operates in a highly regulated field such as real estate development.230 In District Intown,231 the D.C.Circuit noted that the landowners “could have reasonably expected” that they would not be allowed to develop theirproperty, given the law authorizing the Fine Arts Commission to make recommendations about actions affecting thepublic values of the National Zoo.232 Moreover, the owners “knew or should have known that the property waspotentially subject to regulation under the landmark laws.”233 The court also found it significant that the property “wasthe subject of increasing public activity devoted to restricting development through landmark designation.”234

Explaining that “[b]usinesses that operate in an industry with a history of regulation have no reasonableexpectation that regulation will not be strengthened to achieve established legislative ends,”235 the court observed thatthe partnership was in the “real estate business, with a history of restriction of development *488 for the purpose ofpreserving historic sites.”236 The court held that the landowners were therefore on constructive notice that the Districtof Columbia might frustrate their investment-backed expectations by declaring their vacant lots historic landmarks afterthe owners had applied for development permits;237 and this in turn became a Lucas “background . . . understanding”foreclosing compensation.238 As the concurring judge observed, “the majority’s analysis begs the question whether anylandowner, in a world where zoning regulations are prevalent, could ever argue that a particular regulation was

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239Id. at 886 (Williams, J., concurring). It has also been pointed out that the majority’s view of theunreasonableness of the owner’s expectations is hard to square with the facts of the case:

It is strange, to say the least, for a court to conclude that a property owner could have no reasonableexpectation of development in circumstances where a subdivision was legally approved and building permits hadbeen approved before being reconsidered and withdrawn. If the permitting authorities believed the property couldbe developed at the time the request was submitted, then the property owner surely had some reasonable basis tobelieve the same thing. Robert K. Best, Takings and Economic Hardship: Protecting Property Rights Versus Protecting Historic Objects:Major Issues in the Developing Law of Regulatory Takings, A.L.I.-A.B.A. Course of Study Materials, HistoricPres. L. SF29 (Oct. 2000).

240District Intown, 198 F.3d at 886 (Williams, J., concurring).

241See Kalorama Heights Ltd. P’ship v. District of Columbia, 655 A.2d 865 (D.C. 1995); Mock v. Dep’t of Envtl.Res., 623 A.2d 940 (Pa. Commw. Ct. 1993); McQueen v. South Carolina Coastal Council, 530 S.E.2d 628, 634-35 (S.C. 2000).

242623 A.2d 940.

243Id. at 949.

244Id.

245655 A.2d 865.

246Id. at 872.

247Gazza v. New York Dep’t of Envtl. Conservation, 679 N.E.2d 1035 (N.Y. 1997); Kim v. City of New York, 681N.E.2d 312 (N.Y. 1997); Anello v. Zoning Bd. of Appeals, 678 N.E.2d 870 (N.Y. 1997); Basile v. Southampton,678 N.E.2d 489 (N.Y. 1997).

248See Steven J. Eagle, The 1997 Regulatory Takings Quartet: Retreating from the “Rule of Law,” 42 N.Y.L. Sch.L. Rev. 345 (1998).

‘unexpected.” ‘239 The rule resulting from the court’s hybridization of Lucas and Penn Central was conciselysummarized: “in partial takings cases, the government wins.”240

Other post-Lucas decisions have agreed that a vaguely hostile regulatory climate provides constructive noticesufficient to foreclose any reasonable expectation of development.241 For example, in Mock v. Department ofEnvironmental Resources242 a Pennsylvania court stated that “expectations are reasonable only if they take into accountthe power of the state to regulate property for the public interest.”243 The court subsequently concluded that landownerscould not have reasonably expected to develop 0.83 acres of wetlands, although they had purchased the *489 land longbefore the challenged regulatory restrictions went into effect, because “it is riparian land, which has been subject toregulation for centuries.”244 Similarly in Kalorama Heights Ltd. Partnership v. District of Columbia,245 the District ofColumbia Court of Appeals found that an owner could have no reasonable expectation of developing his property, andtherefore could not maintain a takings claim, because he knew or should have known of “strong preservationist trendsin the area.”246

New York’s courts have provided the most dramatic illustration of this trend. In 1997, the state’s highest courtruled in four separate cases247 (since dubbed the “regulatory takings quartet”),248 that restrictive regulatory schemesadopted at any time prior to the current property owner taking title come under the Lucas’ “background principles”exception, automatically defeating any subsequent takings claim stemming from the application of the regulations.

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249679 N.E.2d 1035.

250Id. at 1041 (citing Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1009 (1984)).

251See United States v. Riverside Bayview Homes, Inc., 474 U.S. 121, 127 (1985) (“[T]he very existence of a permitsystem implies that permission may be granted, leaving the landowner free to use the property as desired.”).

252Gazza, 679 N.E.2d at 1042.

253Id. (quoting Monsanto, 467 U.S. at 1005).

254Gazza, 679 N.E.2d at 1040-41.

255Id.

256Id.

257678 N.E.2d 870.

In one of these cases, Gazza v. New York Department of Environmental Conservation,249 the New York courtconsidered whether the denial of a building variance pursuant to a wetlands protection law amounted to a taking.Citing Monsanto, the court explained that reasonable expectations must be “examined in light of the interference withpermissible uses of the land by the subject regulation.”250 In what has become a standard move, the court at thatmoment shifted the inquiry from the reasonableness of the owner’s expectation that he could build a home on his landif a discretionary permit were granted,251 to the reasonableness of his belief that a permit would actually be issued:“[T]he mere fact that an agency may take such action *490 does not necessarily give rise to a reasonable expectationwhen the agency chooses not to so act.”252

The Gazza court then returned to Monsanto to support the proposition that obtaining a discretionary permit,which is required if the owner is to make any economically viable use of his land, falls into the category of a “unilateralexpectation or an abstract need,”253 as contrasted to a reasonable expectation. In essence, the fact that a regulatoryagency is given the discretion to deny a permit makes it ipso facto unreasonable to expect that such a permit mightissue.

The Gazza court also aggressively employed Lucas’ terminology to cut away not merely the owner’s expectationsconcerning the use of his property, but also the underlying property rights themselves. Invoking the Lucas exceptions,the court stated that “[t]he relevant property interests owned by petitioner are defined by those State laws in effect atthe time he took title and they are not dependent on the timing of state action pursuant to such laws.”254

Because the claimant took title after wetlands regulations had been enacted, “the only permissible uses for thesubject property were dependent upon those regulations.”255 This statement is especially noteworthy with respect to twopoints. First, the state’s statutory enactments were no longer said merely to defeat the claimant’s otherwise reasonableexpectations concerning the use of his land, as some courts had applied the notice rule since Monsanto. Instead, thestate, by virtue of enacting a law, is now said to have eliminated a property interest that formerly inhered in the titleto the land. Second, the significance of the final clause of the court’s pronouncement that “they are not dependent onthe timing of state action pursuant to such law”256 is that the relevant property interest is stripped from the landowner’stitle even if the regulation in question has never been applied to restrict the use of the property in any way. The barepossibility that the statute may impose a future use restriction is enough to strip subsequent owners of their propertyinterests altogether, with respect to such potential uses.

*491 In Anello v. Zoning Board of Appeals,257 another of the 1997 “takings quartet,” New York’s highest courtsought to justify its rule that statutory enactments could negate liability under Lucas by reference to the difficulties of

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258Id. at 871 (citation omitted).

259See id

260

See Id. at 871-72.

261681 N.E.2d 312, 315-16 (N.Y. 1997) (emphasis added).

262Id. at 315.

263Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1029 (1992).

264Kim, 681 N.E.2d at 315.

265519 N.W.2d 367 (Iowa 1994), cited in Kim, 681 N.E.2d at 315.

266Hunziker, 519 N.W.2d at 368-69.

267Id. at 370.

268See Id. at 370-71. Justice Snell in dissent correctly but vainly objected that “[t]he language of the Lucas case(continued...)

applying the reasonable expectations inquiry. The court stated that “if property owners were permitted to assertcompensatory takings claims based on enforcement of preexisting regulations, the traditional takings analysisarticulated in Penn Central, and its inquiry into ‘the extent to which the regulation has interfered with distinctinvestment-backed expectations,’ would be rendered hopelessly circular.”258

Curiously, the court then proceeded to apply an equally circular analysis in adopting a rule that allows the Stateto insulate itself from takings liability by the very act of establishing regulatory mechanisms that would, if applied tospecific properties, violate the Takings Clause. Like Gazza, the Anello opinion found both that constitutionallyprotected property interests had been eliminated by virtue of the state’s enactment of legislation259 and that the ownerstherefore had no reasonable expectations to make beneficial use of their land.260

In Kim v. City of New York, a third case decided the same day as Gazza and Anello, the New York courtdetermined that “in identifying the background rules of State property law that inhere in an owner’s title, a court shouldlook to the law in force, whatever its source, when the owner acquired title.”261 In the court’s view, “it would be anillogical inquiry if the courts were to look exclusively to common-law principles to identify the preexisting rules ofState property law, while ignoring statutory law in force when the owner acquired title.”262 The court recognized thatthe Supreme Court in Lucas had emphasized that the sort of background legal principles that could defeat a takingsclaim cannot be “newly legislated or decreed,”263 but declined to follow the high court because such a doctrine would“elevate the common law above statute law.”264

*492 The New York Court of Appeals in Kim grounded its treatment of the “background principles” issue inpart on a 1994 decision of the Iowa Supreme Court, Hunziker v. State.265 In Hunziker, a landowner was prevented frombuilding a home in a residential subdivision because a state archaeologist determined his lot was the site of an Indianburial mound.266 The Iowa court found no liability under the Fifth Amendment because the law authorizing the stateto deprive citizens of all beneficial use of their land in such circumstances had been enacted in 1978, thirteen yearsbefore it was applied to Hunziker.267 The court cited Lucas in holding that the constructive notice provided by the state’sunilateral assertion of authority was sufficient to strip Hunziker of that part of his bundle of rights which wouldotherwise have allowed the construction of a home on a subdivision lot--as well as his right to a remedy under the FifthAmendment.268

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268(...continued)relied upon is dictum expressing an undefined exception to the general rule that compensation must be paid for ataking.” Id. at 372 (Snell, J., dissenting).

269498 S.E.2d 414 (Va. 1998).

270See Id. at 415.

271See Id.

272See Id.

273See Id.

274See Id. at 415-16.

275Id. at 417 (quoting Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1027 (1992)).

276Bell, 498 S.E.2d at 417-18.

277Id. at 417. The ordinance was enacted in 1980, subsequent to the Bells’ corporate application, but two yearsprior to their first application as individual owners.

278Id. at 418.

279See Id. at 417.

280Id. at 418.

In City of Virginia Beach v. Bell,269 the Virginia Supreme Court applied a similarly flawed interpretation ofLucas. In 1979, a corporation partially owned by the Bells purchased two lots situated seaward of coastal sand dunesfor the purpose of erecting residences.270 After an initial attempt at development was thwarted, title to the lots passedto the Bells as individuals in 1982.271 In the meantime, the city had enacted an ordinance that required developers toobtain a dune permit before using or altering sand dune areas.272 The city rejected the property owners’ developmentplans again in 1982.273 When the Bells sought the required building permits a third time, the local wetlands boarddenied the necessary dune permit, prompting the Bells to sue for compensation under the Fifth Amendment.274

*493 In rejecting the argument that the permit denial effected a categorical taking under Lucas, the Virginiacourt cited Lucas as holding that compensation is not required when “the proscribed use interests [are] not a part of[claimant’s] use interests to begin with.”275 Bell goes on to assert that the Lucas Court required South Carolina toground its development restrictions on fundamental principles of nuisance and property law only because David Lucashad taken title prior to that state’s enactment of the Beachfront Management Act.276 In Bell, on the other hand, thecity’s dune protection ordinance “predated” the Bells’ acquisition of property.277 Therefore, the city did not have to“prove the existence of any nuisance or property law” rationale to invoke this statute as foreclosing the Bells’ rightsunder the Fifth Amendment.278 Rather, since the form of the Bells’ ownership changed after passage of the law, theyhad been stripped-- by operation of “background principles of state law”--of the right to make any productive use oftheir land.279 Since landowners cannot, under Lucas, suffer a taking of rights they do not possess, “the City, by enactingthe Ordinance, took no property from the Bells.”280

The Supreme Court will address essentially the same scenario in Palazzolo. There, the plaintiff had held title

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281See Palazzolo v. State ex rel. Tavares, 746 A.2d 707, 709-10 (R.I. 2000).

282See Id. at 710.

283See Id. at 710-11.

284See Id. at 711.

285Id. at 715.

286See Id.

287Id. at 717.

288In South Carolina, for example, the State Supreme Court has twice held that the existence of statutes requiringlandowners to obtain permits to fill wetlands deprives landowners of any relief under the Fifth Amendment if theirapplications for permits pursuant to the statutes are denied. See Wooten v. South Carolina Coastal Council, 510S.E.2d 716, 718 (S.C. 1999); Grant v. South Carolina Coastal Council, 461 S.E.2d 388, 391 (S.C. 1995).Similarly, the North Carolina Court of Appeals found no taking when a property owner was prevented fromprotecting a beachfront resort hotel from destruction via erosion. A regulatory scheme authorizing suchrestrictions was on the books at the time the hotel was built, making the right to protect the property from naturaldestruction “not part of his title to begin with.” Shell Island Homeowners Ass’n v. Tomlinson, 517 S.E.2d 406, 416(N.C. 1999) (quoting Lucas).

289See Preseault v. United States, 100 F.3d 1525, 1538 (Fed. Cir. 1996) (noting that Lucas does not support thenotion that federal law can serve as “background principles”); Forest Props., Inc. v. United States, 39 Fed. Cl. 56,71 (Fed. Cl. 1997) (noting that state law contains Lucas “background principles”).

290See Front Royal & Warren County Indus. Park Corp. v. Town of Front Royal, 135 F.3d 275, 287 (4th Cir. 1998)(holding that property owners took title with the “implied limitation” that they would have to pay for sewer linesand thus could not base a takings claim on a court order requiring a city to provide the lines); Outdoor Graphics,Inc. v. City of Burlington, 103 F.3d 690, 694 (8th Cir. 1996) (finding that the right to put up billboards did notinhere in a taking of claimant’s title because a preexisting law prohibited such uses).

to the relevant property through a closely held corporation since 1959.281 The corporation’s charter was revoked in1978, passing legal title to Anthony Palazzolo, who had been the parcel’s de facto owner for nearly two decades.282

During the time Palazzolo held title to the land through his corporation, the State of Rhode Island adopted a numberof regulatory initiatives requiring approvals to develop wetlands.283 In 1986 the state denied Palazzolo’s developmentapplication, in effect requiring him to leave the land in *494 its natural condition.284 The Supreme Court of RhodeIsland found that there was no takings liability “[e]ven if Palazzolo had been denied all beneficial use of hisproperty,”285 because the regulatory scheme was put in place before he acquired personal title via the revocation of hiscorporate charter.286 The court implicitly reasoned that the newly adopted regulations became “background principlesof state law” the moment they were enacted, stripping rights away from Palazzolo’s title as it lay in his corporate vault.Effective the moment his form of title changed, Palazzolo “had no inherent development rights derived from any rightsthat existed prior to his acquiring title to the land in 1978.”287

This review has been sufficient to illustrate that the issues posed by Palazzolo are far from unique. Still othersuch cases could be cited.288 Although several courts have rejected the notion that federal statutes can comprise“background principles” within the meaning of Lucas,289 the great majority have recognized recent state enactmentsas sufficient to divest takings claimants of a compensable property interest--or at least of a constitutional remedy forits loss.290 This interpretation of “background principles” effectively converts Lucas’ total taking *495 exception intoa rule precluding landowners from establishing a taking whenever they have constructive notice of potentially

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291See Sugameli, supra note 212, at 979 (noting that courts reject takings claims on the basis of preexisting statutesunder the background principle exception and the reasonable expectations doctrine).

restrictive regulation. As such, Lucas’ “background principles” exception has conceptually merged with theconstructive notice rule for defeating reasonable investment-backed expectations enunciated in Monsanto andsubsequently rejected in the land use context by Nollan.291

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292See Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 124 (1978). See also Good v. United States, 39Fed. Cl. 81, 95 (Fed. Cl. 1997).

293Penn Central, 483 U.S. at 124. These somewhat generalized concerns were brought into sharper focus in Aginsv. City of Tiburon, 447 U.S. 255 (1980), when they were reformulated to ask whether a suspect regulation fails tosubstantially advance legitimate state interests or denies the owner economically viable use of his land. Id. at 260. See also R. S. Radford, Regulatory Takings Law in the 1990s: The Death of Rent Control?, 21 Sw. U. L. Rev.1019, 1025 (1992).

294See, e.g., Loretto v. Manhattan Teleprompter CATV Corp., 458 U.S. 419 (1982); Kaiser Aetna v. United States,444 U.S. 383 (1979). Recast as the “substantial advancement” standard of Agins, the Court also applied thiscriterion to find regulatory takings in Eastern Enters. v. Apfel, 524 U.S. 498, 537 (1998); Dolan v. City of Tigard,512 U.S. 374, 388-96 (1994); and Nollan v. California Coastal Comm’n, 483 U.S. 825, 834-37 (1987). If the“character of the governmental action” standard is further broadened to implicate questions of fundamentalfairness concerning whether a property owner has been improperly singled out to bear a public burden, it may besaid to have weighed in favor of a taking in a larger number of cases.

295See Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1019 n.8 (1992) (noting that dissenting JusticeStevens erred in assuming that “the landowner whose [economic] deprivation is one step short of complete is notentitled to compensation”). See, e.g, Florida Rock Indus. v. United States, 18 F.3d 1560, 1569 (Fed. Cir. 1994)(noting that logically, the amount of compensation awarded “should be proportional to the value of the interesttaken as compared to the total value of the property”); Yancey v. United States, 915 F.2d 1534 (Fed. Cir. 1990)(finding a compensable taking where government-imposed safety regulations caused a turkey breeder to suffer aseventy-five percent loss in value).

296See, e.g., United States FId. & Guar. Co. v. McKeithen, 226 F.3d 412, 416-19 (5th Cir. 2000); Maritrans Inc. v.United States, 43 Fed. Cl. 86, 87-91 (Fed. Cl. 1999). See also Broadwater Farms Joint Venture v. United States,No. 96-5100, 1997 U.S. App. LEXIS 19859, at *8-9 (Fed. Cir. July 31, 1997) (remanding to the trial court for afinding of no takings liability without evaluating all three Penn Central factors). On one occasion, a reviewingcourt applied the three Penn Central factors, the two-part Agins test, the Supreme Court’s two categorical takingsrules, and ten other factors “the high court has found relevant in particular cases,” before determining that notaking had occurred. See Kavanau v. Santa Monica Rent Control Bd., 941 P.2d 851, 863-65 (Cal. 1997).

III

THE APPLICATION OF IMPUTED EXPECTATIONS AND NOTICE RULES BY POST-LUCAS COURTS THREATENS TO SUBSUME

THE ENTIRE CORPUS OF FIFTH AMENDMENT TAKINGS LAW

In Penn Central, the Supreme Court stated that investment-backed expectations were only one of “several”factors significant to an ad hoc partial takings inquiry.292 Other factors deemed at least equally important to the analysisincluded the character of the governmental action and its economic impact on the landowner.293 It is no easy feat fora takings claimant to satisfy the full Penn Central balancing test. The “character of the government action” inquiryhas generally militated in favor of liability only when there has been a permanent physical invasion or occupation.294

Similarly, a compensable taking is only rarely *496 found by consideration of the economic impact factor when lessthan all beneficial use of the property has been destroyed.295

In light of this, it is both puzzling and disturbing to note the apparent eagerness with which many courts haveembraced investment-backed expectations, especially as imputed via constructive notice rules, as dispositive of FifthAmendment takings claims. While a full application of all three Penn Central factors can occasionally be found inpost-Lucas takings decisions,296 a significant number of these recent cases rely solely on imputed expectations to resolvethe constitutional claims. Indeed, some lower courts have voiced what amounts to a third “categorical” rule: that the

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297This is effectively the holding of the Rhode Island Supreme Court in Palazzolo v. State ex rel. Tavares, 746 A.2d707, 717 (R.I. 2000). See also Good v. United States, 189 F.3d 1355, 1363 (Fed. Cir. 1999); 767 Third AvenueAssoc. v. United States, 48 F.3d 1575, 1581 (Fed. Cir. 1995). The Court of Federal Claims in Good acknowledgedthat the Supreme Court had not “characterized” lack of investment-backed expectations as “a per se rule” fordenying takings liability, but nevertheless elevated it to that standard based on Monsanto. Good v. United States,39 Fed. Cl. 81, 95-96 (Fed. Cl. 1997). In Paradissiotis v. United States, the Court of Federal Claims considered acase in which government action had deprived a plaintiff of all use and value of certain stock options, but found“this factor is not enough to sustain plaintiff’s claim of a compensable taking.” No. 00-354C, 49 Fed. Cl. 16, 2001U.S. Claims LEXIS 45, at *16-17 (Mar. 27, 2001). Instead, the court found the investment-backed expectationsissue dispositive, ruling that general knowledge of governmental authority to adopt regulations, without more, “isenough to extinguish any reasonable expectation for takings purposes.” Id. at *19 (citation omitted).

298See Nollan v. California Coastal Comm’n, 483 U.S. 825, 833 n.2 (1987).

299See Lucas, 505 U.S. at 1028-29.

300See Loretto v. Manhattan Teleprompter CATV Corp., 458 U.S. 419, 435 (1982)

301

See supra notes 116-27 and accompanying text.

302Justice Blackmun penned a separate dissent but agreed it was dispositive that “[n]o investment-backedexpectations were diminished. It is significant that the Nollans had notice of the easement before they purchasedthe property.” Nollan, 483 U.S. at 866 (Blackmun, J., dissenting) (emphasis added).

takings inquiry ends, and the government is absolved of liability, once the court finds against a claimant on the issueof imputed expectations.297 Such a narrowing of the analytical *497 framework not only contravenes Penn Central butnullifies the subsequent refinements the Supreme Court has made to its takings jurisprudence.

Imputed expectations and constructive notice have been applied to deny compensation for both partial and totalregulatory takings, in disregard of contrary language in both Nollan298 and Lucas.299 Even more remarkable, imputedexpectations based on constructive notice have been invoked to uphold uncompensated physical occupations, thusshattering the original “categorical” takings rule.300 Unless there is a systematic reappraisal of the proper role ofexpectations in takings doctrine--a reappraisal that must emanate from the Supreme Court--there is good reason to fearthat this poorly specified but increasingly outcome-determinative concept will soon subsume the entire field of takingslaw.

A. Partial Takings: Rejecting Nollan

As we have seen,301 a key issue dividing the majority from the dissenters in Nollan was the relevance ofconstructive notice to partial takings claims involving real property. Justice Brennan, in a dissent joined by JusticeMarshall,302 disputed the Court’s finding of liability in terms that starkly foreshadowed what was to emerge as a majortheme in post-Lucas lower court decisions:

[The Nollans] were clearly on notice when requesting a new development permit that a condition ofapproval would be a provision ensuring public lateral access to the shore. Thus, they surely could havehad no expectation that they could obtain approval of their new development and exercise any right ofexclusion afterward. . . .The similarity of this case to Monsanto is obvious. Appellants were aware thatstringent regulation of development along the California coast had been in *498 place at least since 1976.The specific deed restriction to which the Commission sought to subject them had been imposed since1979 on all 43 shoreline development projects in the Faria Family Beach Tract. Such regulation toensure public access to the ocean had been directly authorized by California citizens in 1972. . . .The deedrestriction was “authorized by law at the time of [appellants’ permit] submissions.” . . . Appellants thus

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303Id. at 858-60 (citations omitted).

304See Paul, supra note 3, at 1519.

305Nollan, 483 U.S. at 833 n.2 (citations omitted).

306Peterson, supra note 3, at 1360.

307Id. at 1359-60.

308See, e.g., Store Safe Redlands Assocs. v. United States, 35 Fed. Cl. 726, 735 (Fed. Cl. 1996) (citing Nollan forthe proposition that “[p] roperty rights run with the land and do not evaporate as a result of regulatory actions”);Bowles v. United States, 31 Fed. Cl. 37, 51 (Fed. Cl. 1994) (noting that Nollan supports the argument that “prior‘notice’ has no relevance in cases involving land use regulation”); Vatalaro v. Dep’t of Envtl. Regulation, 601 So.2d 1223, 1229 (Fla. Dist. Ct. App. 1992) (holding that denial of a development permit constituted a regulatorytaking even though the denial was based on a regulation that existed before the owner acquired her land); Lopes v.City of Peabody, 629 N.E.2d 1312, 1315 (Mass. 1994) (“A rule that a purchaser of real estate takes subject to all

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were on notice that new developments would be approved only if provisions were made for lateral beachaccess. In requesting a new development permit from the Commission, they could have no reasonableexpectation of, and had no entitlement to, approval of their permit application without any deedrestriction ensuring public access to the ocean. As a result, analysis of appellants’ investment-backedexpectations reveals that “the force of this factor is so overwhelming . . . that it disposes of the takingquestion.”303

This assertion that the Nollans’ takings claim could be foreclosed by Monsanto-style constructive notice was“flatly rejected”304 by the majority of the Court:

Justice Brennan also suggests that the Commission’s public announcement of its intention to conditionthe rebuilding of houses on the transfer of easements of access caused the Nollans to have “no reasonableclaim to any expectation of being able to exclude members of the public” from walking across their beach.He cites our opinion in Ruckelshaus v. Monsanto Co. as support for the peculiar proposition that aunilateral claim of entitlement by the government can alter property rights. . . . [But] the announcementthat the application for (or granting of) the permit will entail the yielding of a property interest cannotbe regarded as establishing the voluntary “exchange” that we found to have occurred in Monsanto. Norare the Nollans’ rights altered because they acquired the land well after the Commission had begun toimplement its policy. So long as the Commission could not have deprived the prior owners of theeasement without compensating them, the prior owners must be understood to have transferred their fullproperty rights in conveying the lot.305

The Nollan Court could not have been more clear that constructive notice of unilateral land use restrictions bythe state cannot, without further analysis, defeat a claim that the application of *499 those restrictions constitutes aregulatory taking. This is apparent not just from the plain language cited above, but from the outcome of the case.As Professor Peterson has pointed out, “[i]n Nollan, the claimants knew when they purchased their land that thegovernment would require them to give up an easement if they built a new home on the land. Yet the Court found ataking.”306 The conclusion is therefore compelled that “it cannot be true that no taking occurs unless A relied to hereconomic detriment on a reasonable expectation that the government would not act as it did (that is, that thegovernment would not deprive A of her property).”307

Nevertheless, the number of post-Lucas cases that are consistent with Nollan on this point are conspicuous bytheir rarity.308 The general rule has been to adopt the reasoning of the Brennan dissent, and deny takings liability

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308(...continued)existing zoning provisions without any right to challenge any of them would threaten the free transferability of realestate.”).

whenever

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309In more extreme cases, courts have gone beyond Brennan’s position and foreclosed the constitutional right tocompensation even when the offending regulations were adopted after the property owner acquired title, if theowner was imputedly on notice that such regulations might be adopted and applied. See, e.g., District IntownProps. Ltd. P’ship v. District of Columbia, 198 F.3d 874, 883-84 (D.C. Cir. 1999); Good v. United States, 189 F.3d1355, 1363 (Fed. Cir. 1999).

310Incredibly, the Rhode Island Court recounts in a footnote that “during oral argument it was suggested that aparty to whom property passes through operation of law could assume the investment-backed expectations of theoriginal owner,” 746 A.2d 746, 717 n.9 (R.I. 2000), but dismisses the idea as unsupported by the Eleventh Circuitdecision in Reahard v. Lee County, 968 F.2d 1131 (11th Cir. 1992). It is as if the court was unaware of the UnitedStates Supreme Court precedent directly on point, and believed it was writing on a blank slate.

311Palazzolo, 746 A.2d at 716-17.

312679 N.E.2d 1035 (N.Y. 1997) (discussed supra notes 249-56 and accompanying text).

313U.S. Const. art. VI, cl. 2.

314See Stein, supra note 3, at 123-25.

315Id. at 125.

316A related argument from the same source, that the Lucas opinion effectively overruled Nollan on the issue ofconstructive notice, is equally baseless. See Id. at 125 n.104. Nollan is cited with approval three times in Lucas. If Justice Scalia (the author of both opinions) had any desire to reconsider what he wrote in Nollan at the time hepenned the majority opinion in Lucas, he surely would have done so expressly. In fact, however, the two opinionsare in complete accord. The statute and regulations at issue in Nollan were precisely the kind of “newly legislatedor decreed” restrictions that Lucas held could not in themselves defeat a takings claim. See Lucas v. South

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it can be established that the government had asserted the authority to impose restrictive land use regulations prior tothe current owner’s acquisition of the property.309

Some state courts have set out legal doctrines directly contradictory to Nollan’s footnote two withoutacknowledging that they are thereby repudiating Supreme Court precedent. Palazzolo is typical in this regard.Nowhere in the opinion does the Rhode Island Supreme Court so much as mention Nollan,310 yet *500 the decisionexpressly rejects Nollan’s holding that a purchaser of property acquires the Fifth Amendment rights of his or herpredecessor in interest. The court stated that “[r]egardless of whether the government physically takes property in theform of an easement or promulgates regulations restricting the property’s use, all subsequent owners take the landsubject to the pre-existing limitations and without the compensation owed to the original affected owner.”311

New York’s Gazza312 decision represents another direct, albeit unacknowledged, flouting of Nollan. Plainly,if the mere existence of a previously enacted regulatory scheme can completely insulate an agency from takings liabilityunder the Fifth Amendment, as was the holding in Gazza, then Nollan was wrongly decided. Or conversely (to reinvertthe Supremacy Clause),313 if Nollan’s footnote two has the precedential value normally accorded to decisions of theUnited States Supreme Court, then there is no basis in federal constitutional law for the Gazza opinion.

It has been argued that Gazza should be distinguished from Nollan on the grounds that the latter case involvedthe issuance of a development permit subject to an unconstitutional condition, whereas Gazza suffered an outrightprohibition of any development.314 The California Coastal Commission’s mistake, according to this rationale, was innot flatly denying the Nollans’ application to improve their home, since “the Nollans could have foretold that a permitdenial or even the exaction of a view easement were possible and allowable, and they could not have recovered in eitherof those events.”315 This argument, however, is grounded on a misreading of Nollan. 316 In fact, the condition the *501

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316(...continued)Carolina Coastal Council, 505 U.S. 1003, 1028 (1992).

317See Nollan v. California Coastal Comm’n, 483 U.S. 825, 828, 829 (1987).

318Stein, supra note 3, at 125.

319See Nollan, 483 U.S. at 835 (“We assume, without deciding....”) (emphasis added).

320Id. at 835-36.

321Id. at 833 n.2.

322Id

323

District Intown Props. Ltd. P’ship v. District of Columbia, 198 F.3d 874, 882 (D.C. Cir. 1999). This is not, ofcourse, the requirement of Lucas. “Economically viable use,” as that term was coined by the Court in PennCentral, refers to the capacity to earn a fair return on investment--to employ resources in a manner sufficientlyprofitable as to remain in business as a going concern. 438 U.S. 104, 138 n.36 (1978). See also KeystoneBituminous Coal Assoc. v. DeBenedictis, 480 U.S. 470, 495-96 (1987) (applying a “loss of economically viableuse” standard by inquiring into whether the regulation in question “makes it commercially impracticable for[plaintiffs] to continue mining their bituminous coal interests in western Pennsylvania”) (emphasis added).

Coastal Commission attached to the Nollans’ permit is precisely what it was authorized to do under California PublicResources Code sections 30106, 30212, and 30600.317 Far from “acting erratically or unpredictably,”318 the Commissionapplied to the Nollans the very imposition of which it had supposedly given constructive notice. Thus, the finding ofa taking was not related to any divergence between the notice given and the type of restriction imposed. In addition,the Nollan Court expressly refrained from deciding whether an outright permit denial would have survived scrutinyunder Agins’ substantial advancement test.319

Moreover, even if this standard were met, the Court immediately added, such a denial would nonetheless requirecompensation if it “would interfere so drastically with the Nollans’ use of their property as to constitute a taking.”320

In other words, a denial of the Nollans’ application would at most have shifted the Court’s analysis to Agins’ secondprong to determine whether compensation was due. There is no basis to conclude that takings liability would have beenavoided. Finally, the purported Gazza/Nollan distinction simply finesses Nollan’s footnote two. In the final analysisit makes no difference whether the Coastal Commission claimed the authority to deny the Nollans’ permit outright orto condition it upon the granting of an easement. Regardless of the specific content of the Commission’s “publicannouncement”321 of regulatory intent, the Court’s rejection of such notice as a bar to takings liability isstraightforward: such a “unilateral claim of entitlement by the government” cannot by itself defeat a takings claim.322

This holding was disregarded by the New York Court in Gazza, as it has been disregarded by a *502 growing numberof state and lower federal courts in the years since Lucas.

B. Total Takings: Rejecting Lucas

Some courts in the post-Lucas era have engaged in Herculean efforts to prevent takings claims from fallingwithin the ambit of Justice Scalia’s “categorical” rule. Thus the D.C. Circuit in District Intown opined that a parcelwhich was restricted to use as a lawn was not deprived of all economically viable use, since the plaintiff “propoundedno evidence that the lawn’s economic value was totally destroyed as is required by Lucas.”323 The Supreme Court ofRhode Island found Lucas inapplicable to the facts of Palazzolo because the regulated property, although deprived of

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324Palazzolo v. State ex rel. Tavares, 746 A.2d 707, 715 (R.I. 2000).

325772 So. 2d 540 (Fla. Dist. Ct. App. 2000).

326Id. at 542.

327Id. at 543. Although a 500-foot dock could assertedly be built without a permit from the State Department ofEnvironmental Protection, the opinion is silent as to whether such a project would be permitted by the Corps ofEngineers or other regulatory bodies with jurisdiction over the property.

328

Id.

329Id. See also New Port Largo Inc., v. Monroe County, 95 F.3d 1084, 1089 n.5 (11th Cir. 1996) (holding that landpurchased for development but rezoned to private airport use did not come under Lucas’ categorical rule despiteprior factual finding by state trial court that “[t]his rezoning of this property... would deprive the owner of anyreasonable use”); Good v. United States, 39 Fed. Cl. 81, 107 (Fed. Cl. 1997) (noting that possible speculative valueof transferable development rights, for which land was not eligible under current zoning, are sufficient to avoid theLucas rule even if the property was deprived of all beneficial use); Adams Outdoor Adver. v. City of East Lansing,614 N.W.2d 634, 639 n.4 (Mich. 2000) (holding that total elimination of the value of lessee’s estate did not comeunder Lucas’ categorical rule because lessors (who were not parties to the suit) held additional property interests).

330The term is intended to echo Steven R. Levine, Environmental Interest Groups and Land Regulation: Avoidingthe Clutches of Lucas v. South Carolina Coastal Council, 48 U. Miami L. Rev. 1179 (1994).

331See Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1027 (1992).

332See, e.g., Hendler v. United States, 175 F.3d 1374, 1385 (Fed. Cir. 1999) (“If a regulation categorically prohibitsall economically beneficial use of land, there is, without more, a compensable taking.”); Dodd v. Hood RiverCounty, 136 F.3d 1219, 1228 (9th Cir. 1998) (noting that Lucas held that no balancing of investment-backedexpectations is necessary where a regulation destroys all economically viable use of property); Good v. UnitedStates, 39 Fed. Cl. 81, 95 (Fed. Cl. 1997) (noting that Lucas established “that a regulation depriving real propertyof all economic value would give rise to a taking without considering the other Penn Central factors”); Brunelle v.Town of South Kingstown, 700 A.2d 1075, 1082 (R.I. 1997) (distinguishing between Lucas’ categorical rule andapplication of investment-backed expectations standard in partial takings cases); Mayhew v. Town of Sunnyvale,964 S.W.2d 922, 937 (Tex. 1998) (stating that “the reasonable investment-backed expectation of the claimant is

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any conceivable beneficial use, “would have value in the amount of $157,500 as an open-space gift.”324 In FloridaDepartment of Environmental Protection v. Burgess,325 the court found that Lucas was not implicated by a permit denialthat required land to be maintained as undeveloped acreage, since the owner was free to exploit it for his “personalrecreational use,” 326 possibly to the extent of building a boat dock.327 According to the Burgess court, deprivation ofall economically viable use requires more than simply foreclosing all potentially profitable or income-productive usesof land.328 Rather, Lucas’ categorical rule will not be triggered so long as the challenged regulations allow the owner“to make some use of property that economically *503 can be executed.”329 As troubling as these tortured efforts toevade the “clutches”330 of Lucas may seem, they at least maintain the appearance of applying the takings analysis thathas been handed down by the Supreme Court; that is, they go through the motions of complying with the Court’sprecedents. This cannot be said of another category of cases that reject Lucas’ categorical rule outright or make itsubservient to a judicial inquiry into investment-backed expectations.

The Lucas Court made it clear that newly minted land use regulations may only restrict the productive use ofproperty, not eliminate it altogether without compensation.331 This understanding has been frequently repeated by thelower courts, usually in dicta332 but occasionally as grounds for finding takings liability.333 Yet a surprising number of

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332(...continued)critical to this analysis because it distinguishes this concept from those situations in which the landowner’sproperty has been totally destroyed”).

333See Florida Rock Indus., Inc. v. United States, 18 F.3d 1560, 1564-65 (Fed. Cir. 1994) (noting that Lucasteaches that a regulation that denies all economically viable use “is, without more, a compensable taking”).

334See Palazzolo v. State ex rel. Tavares, 746 A.2d 707, 715-18 (R.I. 2000); Anello v. Zoning Bd. of Appeals, 678N.E.2d 870, 871 (N.Y. 1997); Hunziker v. State, 519 N.W.2d 367, 371 (Iowa 1994).

335See, e.g., Reahard v. Lee County, 968 F.2d 1131, 1136 (11th Cir. 1992) (noting that the economically viable usetest involves consideration of “(1) the economic impact of the regulation on the claimant; and (2) the extent towhich the regulation has interfered with investment-backed expectation”); Berrios v. City of Lancaster, 798 F.Supp. 1153, 1157 (E.D. Pa. 1992) (looking to investment-backed expectations after finding that low-incomerenters had suffered a complete loss of their leasehold interests); Atlas Enters. Ltd. P’ship. v. United States, 32Fed. Cl. 704, 707 (Fed. Cl. 1995); Golf Club of Plantation, Inc. v. City of Plantation, 717 So. 2d 166, 170 (Fla.Dist. Ct. App. 1998); Karam v. State, 705 A.2d 1221, 1229 (N.J. Super. Ct. App. Div. 1998); East Cape MayAssocs. v. New Jersey Dep’t of Envtl. Prot., 693 A.2d 114, 120 (N.J. Super. Ct. App. Div. 1997).

336Loveladies Harbor, Inc. v. United States, 28 F.3d 1171 (Fed. Cir. 1994).

337Id. at 1179.

338Id. at 1178.

339189 F.3d 1355 (Fed. Cir. 1999). See also Bayou Des Familles Dev. Corp. v. United States, 130 F.3d 1034, 1038(Fed. Cir. 1997).

courts have found their *504 way around this doctrine by grafting an analysis of investment-backed expectations ontothe total takings rule. This rewriting of Lucas has been accomplished by two different routes. First, some decisionssimply adopt the language of Lucas’ inquiry into “background principles of state law” and apply it as a proxy for PennCentral’s investment-backed expectations standard, usually reinterpreted as a constructive notice rule.334 Second, anumber of cases explicitly misconstrue Lucas to stand for the proposition that a denial of all economic use is a takingonly so long as such a denial also extinguishes the owner’s reasonable expectations.335

The rule that takings litigants must establish interference with reasonable expectations, even when they havebeen denied all economically viable use of their land, can be traced to the Federal Circuit’s 1994 Loveladies Harbordecision.336 There, the Court of Appeals characterized the law of regulatory takings after Lucas as follows:

With regard to the interest alleged to be taken, there has been a regulatory taking if (1) there was a denialof economically viable use of the property as a result of the regulatory imposition; (2) the property ownerhad distinct investment-backed expectations; and (3) it was an interest vested in the owner, as a matterof state property law, and not within the power of the state to regulate under common law nuisancedoctrine.337

The Loveladies court implied that the Supreme Court in Lucas downplayed the investment-backed expectationsinquiry in the context of a denial of all beneficial use only because “[t]here was *505 no question that Lucas haddistinct investment-backed expectations for his property.”338

The Federal Circuit affirmed Loveladies’ interpretation of Lucas in Good v. United States.339 As it had inLoveladies, the Federal Circuit in Good opined there was no question that the takings claimant in Lucas had suffered

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340Good, 189 F.3d 1355.

341Id. at 1361.

342Id.

343Id.

344See Palm Beach Isles Assocs. v. United States, 208 F.3d 1374, 1379 (Fed. Cir. 2000). There, the Federal Circuitacknowledged that Loveladies overlaid investment-backed expectations onto Lucas’ categorical rule. Id. However,the court relied on Florida Rock Industries, Inc. v. United States, 18 F.3d 1560, 1564-65 (Fed. Cir. 1994), for theproposition that where there is a denial of all beneficial use, “the only remaining issue” is whether the relevantproperty interest inhered in the owner’s title. Id. Pointedly referring to Good, the Palm Beach Isles court notedthat “[a]ny thing inconsistent with this analysis, cannot, of course, change the law.” 208 F.3d at 1379 n.3. Seealso Ultimate Sportsbar, Inc. v. United States, 48 Fed. Cl. 540, 2001 U.S. Claims LEXIS 11, at *23 (Jan. 31, 2001)(“the reasonable expectations concept is not ‘a part of every regulatory takings case,” ‘ quoting Palm Beach IslesAssocs. v. United States, 231 F.3d 1354, 1359 (Fed. Cir. 2000)).

345

See District Intown Props. Ltd. P’ship v. District of Columbia, 198 F.3d 874 (D.C. Cir. 1999); Atlas Enters. Ltd.P’ship v. United States, 32 Fed. Cl. 704, 707 (Fed. Cl. 1995); Florida Dep’t of Envtl. Protection v. Burgess, 772So. 2d 540, 544 (Fla. Dist. Ct. App. 2000); East Cape May Assocs. v. New Jersey Dep’t of Envtl. Prot., 693 A.2d120 (N.J. Super. Ct. App. Div. 1997); Palazzolo v. State ex rel. Tavares, 746 A.2d 707 (R.I. 2000); McQueen v.South Carolina Coastal Council, 530 S.E.2d 628, 631 (S.C. 2000).

346See East Cape May, 693 A.2d 120.

347See Burgess, 772 So. 2d at 544; Palazzolo, 746 A.2d at 717; McQueen, 530 S.E.2d at 635.

348See Good v. United States, 189 F.3d 1355, 1357 (Fed. Cir. 1999).

a frustration of his reasonable expectations.340 Further, the appellate panel found that Lucas’ categorical takings rulewas “categorical only in the sense that courts do not balance the importance of the public interest against theregulation’s imposition on private property rights.”341

As to the continued applicability of Penn Central’s takings analysis to cases involving deprivation of alleconomically viable use, the Federal Circuit insisted that “[t]he Lucas Court did not hold that the denial of alleconomically beneficial or productive use of land eliminates the requirement that the landowner have reasonable,investment-backed expectations.”342 Accordingly, the court found that “[r]easonable, investment-backed expectationsare an element of every regulatory takings case.”343

Although the Loveladies/Good reinterpretation of Lucas was rejected by a different panel of the Federal Circuitin the original Palm Beach Isles opinion,344 other federal and state courts have relied on those cases for the propositionthat investment-backed expectations must be consulted even when there has been a regulatory denial of alleconomically viable use of *506 land.345 With one exception,346 these cases have rejected claims for compensation underLucas on the ground that the claimant lacked reasonable expectations of being allowed to make use of his property.347

The Good case provides a sobering illustration of how the evolving judicial interpretation of reasonableexpectations has combined with a misinterpretation of Lucas to leave landowners without a remedy when governmentrequires them to undergo burdensome and drawn-out administrative procedures and ultimately commands them toleave their land idle. In 1973, Lloyd Good and his mother bought forty acres of land in the Florida Keys.348 Seven years

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349Id.

350Id.

later, Good set out to obtain the permits necessary to develop a residential subdivision on his land.349 He initiallyreceived permits from the Corps of Engineers and state environmental authorities, and by 1984 he had gotten thecounty’s approval as well.350 However, a new state agency created after Good had purchased his land balked andordered the county to reconsider the application under new and tighter regulations that had been enacted while Good’spermits were being

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351Id. at 1358.

352Id.

353Id.

354Id.

355Id.

356Id. at 1358-59. The new plan contemplated only sixteen houses, a canal and a tennis court, Id. at 1359,compared to Good’s original proposal, approved by the Corps of Engineers, to develop a fifty-four-lot subdivisionand a forty-eight-slip marina. Id. at 1357.

357Id. at 1359.

358Id.

359Id.

360Good v. United States, 39 Fed. Cl. 81, 109 (Fed. Cl. 1997).

361Id.

362See Good, 189 F.3d at 1360-61.

reviewed.351 Good went to court and obtained a consent decree which eventually elicited a second approval from thecounty,352 but by then time was running out on the Corps of Engineers permits.

Accordingly, in 1988, Good applied for and received a new federal permit under the Clean Water Act, againauthorizing his planned development. 353 Soon after, the second round of county approvals were received, but this timeconditioned upon approval by yet another state agency, the South Florida Water *507 Management District.354 Thisbody refused to sanction Good’s development on the grounds that it had the potential to interfere with the habitat ofcertain species listed by the state as endangered.355 Good accordingly scaled back his project to meet these concerns,and in 1990 again sought approval from the Corps of Engineers for a much smaller development.356 This time theCorps consulted with the Fish and Wildlife Service, which determined that Good’s proposal would threaten the LowerKeys marsh rabbit and the silver rice rat, species which had recently been listed as endangered under the federalEndangered Species Act.357 Based on this information the Corps of Engineers denied Good’s revised application in1994, the same year the permit it had issued in 1988 expired.358 Good filed suit under Lucas, arguing that the permitdenials had deprived him of the right to make any economically viable use of his property.359

The Court of Federal Claims found that no taking had occurred, citing Penn Central as “limit[ing] recovery toproperty owners who can demonstrate that their investment was made in reliance upon the non-existence of thechallenged regulatory regime.”360 Although many of the regulatory initiatives and agencies that denied Good the rightto build did not exist at the time he purchased his property, the “regulatory climate” of the time was found to haveplaced him on constructive notice that he might one day be prevented from realizing his development plans.361

The Federal Circuit affirmed, emphasizing that the reasonableness of the owner’s expectations were central tothe analysis, regardless of whether Good had been denied all economically viable use of his land.362 The court rejectedthe contention that Lucas eliminated the consideration of reasonable investment-*508 backed expectations in total

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363See Id. at 1361.

364Id. (quoting Creppel v. United States, 41 F.3d 627, 632 (Fed. Cir. 1994)).

365See Good, 189 F.3d at 1361.

366Id. at 1361-62.

367Id. at 1362.

368Id.

369Id. at 1362, 1363.

370Id. at 1362.

371Id. at 1363.

372Id. (stating that “[a]ppellant’s lack of reasonable, investment-backed expectations defeats his takings claim as amatter of law”).

373530 S.E.2d 628 (S.C. 2000).

374Id. at 629.

375Id. at 630.

376Id.

takings cases.363 Instead, the court found that “it is common sense that ‘one who buys with knowledge of a restraintassumes the risk of economic loss.” ‘364 In this context, Good argued that his expectations were not undermined byconstructive notice of regulatory risk because the Endangered Species Act was not in effect at the time he purchasedhis land.365 Although the court conceded that this position was not “entirely unreasonable,” it rejected it “[i]n view ofthe regulatory climate that existed when [Good] purchased the property.”366 Specifically, the court concluded that Goodwas put on constructive notice by: (1) “environmental criteria” that were part of the federal Clean Water Act permitprocess as it existed in 1973, the year Good bought his land;367 (2) state and county approval necessary for landdevelopment when Good purchased;368 (3) “rising environmental awareness,” “concern” and “sensitivity” between thetime Good purchased and the time he initially sought to develop;369 and (4) “ever-tightening” regulations, includingthe adoption of the Endangered Species Act, that resulted from these increased environmental concerns.370 In light ofthese factors, the court determined that Good “must have been aware that standards could change to his detriment, andthat regulatory approval could become harder to get,” and thus, that he had no reasonable expectations ofdevelopment.371 The court rejected the takings claim on that basis alone.372

A similar story played out in McQueen v. South Carolina Coastal Council, 373 a case involving the samedefendant and same regulatory enactment as in Lucas. Like Lloyd Good (or for that matter, David Lucas), SamMcQueen purchased property before land use restrictions were enacted that would cause him to lose all economic useof his land. McQueen purchased two residential *509 lots in South Carolina in the early 1960s.374 Like other lots inthe immediate area, McQueen’s lots sat on manmade, saltwater canals and were created by fill.375 For almost thirtyyears, McQueen left the lots unimproved.376 During that time, other landowners constructed bulkheads and houses on

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377Id.

378Id.

379Id.

380Id.

381Id.

382Id.

383Id.

384Id. at 630-31.

385Id. at 633.

386Id.

387Id. at 634-35.

388Id. at 635.

the lots that surrounded his property.377 In 1991, McQueen applied to the South Carolina Coastal Council for a permitto build bulkheads to prevent erosion of his and his neighbors’ property.378 The Council granted a permit for bulkheadconstruction on one lot, but due to bureaucratic confusion on the part of the Army Corps of Engineers, failed to act onthe application for the other lot.379 The Council subsequently asked McQueen to resubmit both applications, so that itcould correct the discrepancy.380 However, when McQueen did as asked, the Council denied both permits, claiming thatthe proposed construction of bulkheads would result in the illegal filling of a wetlands, namely, the manmade canal.381

McQueen appealed to the agency, then to a higher administrative board, then to a circuit court, which determined thatthe state precluded all economic use of his land by denying the permits and was therefore required to compensate himfor the value of the lots.382 The state appealed to an intermediate appeals court, which affirmed that McQueen’sproperty was taken.383

On appeal, the South Carolina Supreme Court cited Loveladies Harbor for the proposition thatinvestment-backed expectations are relevant to a takings claim involving a denial of all economically viable use.384 Ina familiar refrain, the court erroneously stated that the concept of investment-backed expectations “was not discussedin Lucas as there was no question David Lucas had distinct investment-backed expectations.”385 It noted that “[w]ithoutthe requirement of investment-backed expectations, *510 a property owner could obtain a windfall by claiming a takingin the face of new regulations, without any real intent to develop.” 386 After acknowledging that McQueen was leftwithout any economic use of land, the court stressed that he had “purchased beachfront property that has been thesubject of at least some developmental restrictions for over a century.”387 In light of the constructive notice embodiedin this history, and considering McQueen’s “neglect of the property and failure to seek developmental permits in theface of ever more stringent regulations,” the court held that he had no reasonable expectation of improving his landand therefore had not suffered a taking.388

In light of Good and McQueen, it is difficult to imagine circumstances under which any landowner couldestablish a regulatory taking for the loss of all economic use of his land, short of a violation of statutorily vested

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389The loose constructive notice rule effectively collapses all regulatory takings law into the doctrine of vestedrights. See, e.g., Gulliford, supra note 3, at 216-17 (expressly, albeit perhaps unwittingly, describing theinvestment-backed expectations doctrine in the terminology of vesting). See also Lynn Ackerman, Comment,Searching for a Standard for Regulatory Takings Based on Investment-Backed Expectations: A Survey of StateCourt Decisions in the Vested Rights and Zoning Estoppel Areas, 36 Emory L.J. 1219, 1274-75 (1987) (urging theSupreme Court to adopt a standard of investment-backed expectations based on state vested rights doctrines). There is a grim irony in the fact that a judicial doctrine originally intended to protect the dynamic,forward-looking, entrepreneurial notion of expectations has come to limit owner’s rights to the bare status quoembodied in past governmental actions: “the landowner’s [protected] expectation is created by some affirmativegovernment action.” Gulliford, supra note 3, at 216 n.90.

Ominously, however, the Court of Federal Claims in dicta has indicated that even completely vesteddevelopment rights may be abrogated without compensation under an investment-backed expectations analysis:“[E]ven if plaintiff were able to demonstrate the existence of... a vested right under state law, a federal restrictionon that state right would not demonstrate the federal restriction to be a taking.” Good v. United States, 39 Fed. Cl.81, 98 (Fed. Cl. 1997) (emphasis added).

390This implication of Good and McQueen was recently made explicit in Walcek v. United States, 2001 U.S.Claims LEXIS 59, at *71 (Apr. 5, 2001) (finding no taking in part because, although plaintiffs had acquired theirtitle prior to passage of the Clean Water Act in 1972, their ownership was subsequent to the Rivers and HarborsAct of 1899).

391See Siegan, supra note 30, at 146 (“Given the environmental pressures of the times, one might conclude thatLucas could have anticipated South Carolina’s confiscatory action. If the protection of expectations depends onsuch considerations, the concept will have minimal significance.”).

392458 U.S. 419 (1982).

393See Id. at 426, 435.

394Id. at 435.

395See, e.g., Pumpelly v. Green Bay & Mississippi Canal Co., 80 U.S. 166, 181 (1981) (“[W]here real estate isactually invaded by superinduced additions of water, earth, sand, or other material, or by having any artificialstructure placed on it, so as to effectually destroy or impair its usefulness, it is a taking, within the meaning of theConstitution.”).

396See Lucas, 505 U.S. 1003, 1015 (1992) (holding that a permanent physical occupation of private property can(continued...)

development rights.389 Where the use of privately owned wetlands is at issue, it seems the land must have been acquiredbefore 1899, the year the precursor to the current Clean Water Act was passed, and then immediately developed.390 Thisabsurd result is precisely what the majority *511 opinion in Lucas sought to avoId. As a practical matter, there canbe little doubt that if David Lucas’s case arose today and was adjudicated under the reasonable expectations standardof Good or McQueen, the result would be a finding of no taking.391

C. Physical Takings: Rejecting Loretto

In Loretto v. Manhattan Teleprompter CATV Corp.,392 the Supreme Court ruled that a permanent physicaloccupation of private property amounts to a taking regardless of the public interests served by the occupation or thedegree to which it impacts the economic value of the property.393 The Court noted that it had uniformly found suchinvasions to constitute a taking “whether the action achieves an important public benefit or has only minimal economicimpact on the owner.”394 This doctrine is anchored in a long history of decisions395 and was reiterated in Lucas.396 Thus,

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396(...continued)never be permitted, “no matter how minute the intrusion, and no matter how weighty the public purpose behind it,”without payment of just compensation)

in Loretto the Court held that a property owner had suffered a taking when a New York statute required her toacquiesce

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397See Loretto, 458 U.S. at 438.

398See, e.g., Meltz, supra note 3, at 121 (“[T]he government can require submission to regulation, but where theregulation results in a permanent physical occupation, the government must pay.”); Frank Michelman, Takings,1987, 88 Colum. L. Rev. 1600, 1608 (1988) (noting that permanent physical occupations such as the one in Lorettohave “talismanic force” in takings adjudication) [hereinafter Michelman, Takings, 1987]; Nicholas V. Morosoff,Note, “’Take’ My Beach, Please!”: Nollan v. California Coastal Commission and a Rational-Nexus ConstitutionalAnalysis of Development Exactions, 69 B.U. L. Rev. 823, 842 n.136 (1989) (noting that Loretto provides “onesituation in which to be reasonably certain that a taking will be found”). Even commentators who are generallyhostile to the doctrine of regulatory takings agree that compensating owners for physical invasions of their propertyby government is the quintessential purpose of the Takings Clause. See, e.g., William Michael Treanor, Note, TheOrigins and Original Significance of the Just Compensation Clause of the Fifth Amendment, 94 Yale L.J. 694(1985).

399For a rare counterexample, see Pettro v. United States, 47 Fed. Cl. 136, 146-47 (Fed. Cl. 2000) (determiningliability for physical taking without consulting investment-backed expectations or other Penn Central factors).

400Loretto, 458 U.S. at 422.

401Mrs. Loretto allegedly did not know of the existence of the cable equipment at the time she purchased thebuilding. See Id. at 445 (Blackmun, J., dissenting).

402Id. at 421.

403Loretto v. Manhattan Telemprompter CATV Corp., 423 N.E.2d 320, 336 (N.Y. 1981).

404Loretto, 458 U.S. at 426. On the contrary, the Loretto decision rested in part on the Court’s concern forprotecting “an owner’s expectation that he will be relatively undisturbed at least in the possession of his property.” Id. at 436 (emphasis added).

405Id. at 442 (Blackmun, J., dissenting).

in the installation of cable television hardware on the roof of her apartment building, even though such installationarguably increased the value of her property.397

While Loretto’s “physical taking” rule seems the most firmly rooted of the Court’s modern takingsjurisprudence,398 it is *512 doubtful that the outcome would be the same if today’s investment-backed expectationsdoctrine had been applied to the 1982 case.399 After all, the cable equipment at issue in Loretto was originally placedon the building four years before Mrs. Loretto took title,400 thus providing at least constructive--if not actual--noticethat such an invasion would have to be tolerated.401 Moreover, the cable company’s occupation of Mrs. Loretto’s rooftopwas specifically authorized by statute402 fact which today would compel many courts to apply Lucas for the propositionthat “background principles of state law” had stripped Mrs. Loretto’s title of any right to be free of the governmentallyauthorized occupation.

Such speculation is not frivolous, for in fact the New York Court of Appeals in 1981 had denied Mrs. Loretto’stakings claim in part because of “the absence of any reasonable expectation on the part of the landlord that the spacethus utilized (or invaded) would ever be income productive.”403 The United States Supreme Court rejected this analysis,holding instead that a governmentally authorized physical occupation of property constitutes a per se takingnotwithstanding the fact that it “does not interfere with any reasonable investment-backed expectations.”404 However,this ruling was denounced as “anachronistic” *513 by Justice Blackmun in a dissent joined by Justices Brennan andWhite.405 The dissenters would have denied Mrs. Loretto’s takings claim because she was a participant in a highly

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406Id. at 448.

407Id.

408681 N.E.2d 312 (N.Y. 1997). For extended treatment of Kim, see Eagle, supra note 248, at 392-96.

409See Kim, 681 N.E.2d at 314.

410Id.

411Id. The court supported the conclusion that inquiry into an owner’s title is necessary in physical takings caseswith the Lucas Court’s statement that it “assuredly would permit the government to assert a permanent easementthat was a pre-existing limitation upon the landowner’s title.” Id. (quoting Lucas v. South Carolina CoastalCouncil, 505 U.S. 1003, 1028-29 (1992)).

412Kim, 681 N.E.2d at 317.

413See Id. at 313, 317.

414See Id. at 318.

415Id. at 313.

416Id. at 318.

regulated industry-- rental housing.406 As such, she should reasonably have expected such governmental impositionsas “one of the many statutory responsibilities that a New Yorker accepts when she enters the rental business.”407

The reasoning of the Court of Appeals and the Loretto dissenters lives on in recent applications of theexpectations doctrine. This can be seen with special clarity in another of the 1997 New York “takings quartet”decisions, Kim v. City of New York.408 In Kim, New York City buried 2,390 square feet of a commercial property underdirt to provide lateral support for a newly elevated city street.409 The affected property owners brought suit under theTakings Clause, arguing that the rationale of Loretto entitled them to compensation for the City’s invasion withoutregard to other considerations.410 The New York Court of Appeals disagreed. Instead, it cited to Lucas for theproposition that a “threshold inquiry into an owner’s title is generally necessary to the proper analysis of a takings case,whether of a regulatory or physical nature.”411 Noting that the New York City Charter in effect at the time Mrs. Kimpurchased her land required her to “maintain lateral support to the [adjacent] roadway,”412 the court found that Mrs.Kim was on constructive notice that her property was below legal grade based on a designation on a map that had beenfiled away in an administrative office more than a decade earlier.413

According to the court, the filed map showing proposed future grade changes inhered in Mrs. Kim’s title,stripping her of *514 any constitutional right to be free of a physical occupation of her property at whatever future timethe city chose to implement the new grades.414 Consequently, the title Mrs. Kim and her co-owners acquired “neverencompassed the property interest they claim has been taken”415 and they could not maintain a takings claim when thecity buried their property to provide support for its new roadway.416 To further justify its holding, the court continued:

[W]hen plaintiffs purchased the property, an inquiry would have revealed the disparity between theexisting grade and the previously established legal grade. Plaintiffs’ potential lateral-support obligation,then, presumably would have been factored into the purchase price of the property. Consequently, ifplaintiffs were to succeed on their takings claim, they could receive the windfall of initially receiving areduction in

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417Id. at 319.

418The centrality of the constructive notice rule is evidenced by the court’s suggestion that a different takingsquestion would be presented “[i]f plaintiffs had purchased the property at the legal grade, and the City thereafterraised the legal grade of the roadway.” Id. at 318 n.7.

419See Loretto v. Manhattan Teleprompter CATV Corp., 485 U.S. 419, 426 (1982). This omission can only bedescribed as inexplicable, given that the Supreme Court in Loretto reversed the New York Court of Appeals on thisvery point. See supra notes 401-402 and accompanying text

420Kim, 681 N.E.2d at 316 n.3.

421The Commission’s demands for exactions in exchange for permits were made pursuant to the terms of theCalifornia Coastal Act of 1976 (codified at Cal. Pub. Res. Code §§ 30000-30988.4 (West 1996 & Supp. 2000). SeeNollan v. California Coastal Comm’n, 483 U.S. 825, 829 (1987).

422Nollan, 483 U.S. at 858 (Brennan, J., dissenting).

423Kim, 681 N.E.2d at 313.

424As Professor Eagle points out:Why the plaintiffs (or their title insurers) should have had, or how they could have had, any notice of this

map was not discussed. There is no indication that the map was filed in the Registrar’s office or in the CountyClerk’s office. Further, there was no indication whether the map was indexed against the property in the Borough

(continued...)

the purchase price on account of this obligation and subsequently receiving compensation when theobligation is enforced.417

Thus, while the Kim court framed its decision in terms of the property owners’ lack of a compensable propertyinterest, the conclusion that the placement of fill was not a taking clearly rested on the ground that the landowners hadconstructive notice that the city might sacrifice their property to support a higher grade for the adjacent street.418

The Kim court neither cited nor acknowledged the Supreme Court’s language in Loretto, which expressly foundlandowner expectations to be irrelevant in the physical takings context.419 The New York court did, however, attemptto reconcile its holding with Nollan’s footnote two. According to the Court of Appeals:

[T]he property interest allegedly taken in Nollan was not subject to any preexisting restriction; rather,the case centered on *515 a State agency’s policy of conditioning the grant of building permits on theproperty owner’s surrender of a public easement over the beachfront property. Because plaintiffs’predecessors in interest had neither applied for nor been granted the conditioned permit, thegovernment’s interest in the easement was, at the time of plaintiffs’ acquisition of the property, a mere“unilateral claim of entitlement,” not an enforceable property interest.420

But the Coastal Commission’s assertion of authority to exact an easement in exchange for a building permit wasenshrined in state law that could be consulted at any library or lawyers’ office in California.421 As Justice Brennancorrectly noted, the Nollans “were clearly on notice when requesting a new development permit that a condition ofapproval would be a provision ensuring public lateral access to the shore.”422

In contrast, New York City claimed the authority to invade and bury 2,390 square feet of Mrs. Kim’s propertyon the authority of a document created by a long-defunct city agency, which had never been recorded or enacted intolaw but had merely been filed in the “office of the Queens Borough President,”423 whatever and wherever that may be.424

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424(...continued)President’s office. The question must be posed: to what extent must title companies hereafter be required to searchsuch places as the Queens Borough President’s office? Eagle, supra note 248, at 369.

425Michelman, Takings, 1987, supra note 398, at 1608.

426The Court of Appeals’ rule in Kim in a sense places all landowners in the same position as those banks andsavings institutions whose assets were seized and liquidated by the federal Resolution Trust Corporation. See, e.g.,California Hous. Sec., Inc. v. United States, 959 F.2d 955 (Fed. Cir. 1992):

Loretto simply does not fit cases such as this where the historically rooted expectations of ownership thatunderlie Loretto do not exist....The Loretto per se approach should not facilely be extended in cases where thehistorically rooted expectations that underlie the Loretto decision do not remotely apply. The instant case involvesa regulatory action in a highly regulated industry in which the government took actions that reasonably shouldhave been expected by plaintiffs. Id. at 959-60 (quoting Am. Cont’l Corp. v. United States, 22 Cl. Ct. 692, 701 (Cl. Ct. 1991)).

427Laurence H. Tribe, American Constitutional Law 608 (2d ed. 1988) (emphasis added).

It is simply impossible to maintain both that the Nollan statute did not inhere in the landowners’ title, stripping themof a remedy under the Fifth Amendment, and that the Kim map dId.

Like the other New York takings quartet cases, Kim breaks with existing Supreme Court precedent to fashiona new “talismanic force”425 in takings analysis, consisting of imputed expectations *516 and constructive notice rules.426

As we have seen, the Court of Appeals is far from alone in its eagerness to embrace this approach.

IV

REASSESSING THE PLACE OF INVESTMENT-BACKED EXPECTATIONS IN THE TAKINGS CALCULUS

The fundamental problem with the Palazzolo opinion and post-Lucas expectations doctrine in general wasexpressed by Professor Tribe some years ago:

To the degree that private property is to be respected in the face of republican and positivist visions, itbecomes necessary to resist even an explicit government proclamation that all property acquired in thejurisdiction is held subject to government’s limitless power to do with it what government wishes.Indeed, government must be denied the power to give binding force to so sweeping an announcement,whether explicit or implicit, if we are to give content to the just compensation clause as a real constrainton federal power and, through the fourteenth amendment, on state and local power. But this shows thatthe expectations protected by the clause must have their source outside positive law. Grounded in customor necessity, these expectations achieve protected status not because the state has deigned to accord themprotection, but because constitutional norms entitle them to protection.427

Despite the fact that the investment-backed expectations inquiry has never been clearly defined or understood,many courts have embraced this doctrine-- commingled with Monsanto’s notice rule and Lucas’ references tobackground principles and limitations *517 that inhere in title--as a vehicle to subordinate constitutional rights tostatutory controls. A reassessment of the meaning and place of this doctrine is required both because the current stateof the law is incoherent, and because expectations analysis is being applied in a way that unfairly deprives citizens of

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428Cf. Steven J. Eagle, Can a Purchaser of a Previously Regulated Parcel Bring a Takings Claim When theRegulation Is Applied?, A.L.I.-A.B.A. Course of Study Materials, Inverse Condemnation & Related Gov’t Liab.SE18 27, 28 (Sep.-Oct. 1999) (citing a clear need to subject the post-Lucas notice rule to analytical scrutiny, “sincethe rule might violate elemental fairness as well as the categorical rules that U.S. Supreme Court has developed toascertain if a taking had occurred that requires just compensation”).

429Creppel v. United States, 41 F.3d 627, 632 (Fed. Cir. 1994) (emphasis added). This characterization of the roleof expectations has also crept into the legal literature. See, e.g., Carol M. Rose, Property and Expropriation:Themes and Variations in American Law, 2000 Utah L. Rev. 1, 20- 21 (2000) (“an owner cannot succeed in atakings claim unless she can show that a regulatory change disrupts her ‘investment-backed expectations,” ‘ citingPenn Cent. Transp. Co. v. New York City, 438 U.S. 104, 124 (1978)).

430617 N.W.2d 519 (Wis. Ct. App. 2000).

431Id. at 520.

432Id.

433Id.

rights purportedly guaranteed under the Constitution.428

A. The Current Use of Expectations Analysis Is Doctrinally Dysfunctional

The great function of the Bill of Rights is to provide a shield against governmental conduct that violatesindividual rights and liberties. In interpreting specific constitutional protections, courts develop bodies of doctrine thatsimplify their task by making the application of the text more understandable and predictable. Sometimes, however,interpretive doctrines take a wrong turn and become dysfunctional in the sense of impeding, rather than facilitating,the protection of rights. This has been the fate of the doctrine of investment-backed expectations.

1. Expectations Doctrine Has Become Circular

The descent of investment-backed expectations doctrine, from its initial promise in Michelman’s article andPenn Central to its nadir in decisions like Palazzolo, has entailed more than one doctrinal error. The most fundamentalchange in the role of expectations in the takings calculus over time has been its shift from an evidentiary descriptionof the property interest alleged to have been taken, to an affirmative defense by which the government asserts immunityfrom the Fifth Amendment. The latter standard was sharply illustrated by a recent statement by the United States Courtof Appeals for the Federal Circuit: “The third [Penn Central] criterion--the extent to which the regulation interfereswith the property owner’s expectations --limits recovery *518 to owners who can demonstrate that they bought theirproperty in reliance on the nonexistence of the challenged regulation.”429

Rather than providing one ground (among several) for recovery under the Takings Clause, as initiallyconceptualized, the notion of investment-backed expectations has been turned into a pleading requirement, the functionof which is to bar aggrieved property owners from bringing their claims to court. A good example of this shift inemphasis is R.W. Docks & Slips v. State.430 In that case, a marina developer designed and began construction of thePort Superior Marina, a project designed to consist of 272 boat slips, a marina, and appurtenant structures.431 After 201boat slips had been completed pursuant to initial approvals, a state environmental agency refused to issue permitsneeded to finish the project.432 The developer sued, alleging a regulatory taking of the property on which the finalseventy-one boat slips were to have been constructed.433 The argument that the denial had frustrated the owner’s distinctinvestment-backed expectations of completing the project as designed would seem to be compelling. The Wisconsincourt, however, looked only to the reasonableness of the expectation that the state would not interfere with the owner’s

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434Id. at 522.

435See Presbytery of Seattle v. King County, 787 P.2d 907, 915 (Wash. 1990).

436See Peterson, supra note 3, at 1320 (noting that the Court usually considered “whether the claimant reasonablyrelied... on an expectation that the government would not act as it did when applying the reasonableinvestment-backed expectations factor”).

437See supra notes 189-207 and accompanying text.

438Store Safe Redlands Assocs. v. United States, 35 Fed. Cl. 726, 734 (Fed. Cl. 1996).

439Steven J. Eagle, Regulating Wetlands That “Could Affect” Interstate Commerce: Commerce Clause, RegulatoryTakings, and Fairness Issues, A.L.I.- A.B.A. Course of Study Materials, Wetlands L. & Regulation SE88 238, 253(May-June 2000). See also Paul Turner & Sam Kalen, Takings and Beyond: Implications for Regulation, 19Energy L.J. 25, 62-66 (1998) (distinguishing between limitations that inhere in title and reasonableinvestment-backed expectations).

440679 N.E.2d 1035 (N.Y. 1997).

441678 N.E.2d 870 (N.Y. 1997).

442681 N.E.2d 312 (N.Y. 1997).

443746 A.2d 707 (R.I. 2000).

planned use of the property, and concluded in the negative that “Docks should not have presumed that all necessarypermits would be granted. It assumed the risk of loss in the event of the DNR’s denial of the permits sought.”434 Thisdoctrinal shift-- from viewing expectations as concrete manifestations of an owners’ intentions435 to a proxy for thelikelihood that the government would frustrate those plans436 the *519 first step toward depriving the expectationsinquiry of analytical coherence.

The second major source of error stems from the previously noted tendency to conflate Penn Central’sinvestment-backed expectations test with Lucas’ references to background legal principles and limitations that inherein the title to land.437 Only a few courts have shown the discernment to recognize the importance of keeping theseconcepts distinct:

The initial inquiry by the court--whether plaintiff has a property interest--is not determined by examiningwhether plaintiff has “reasonable investment-backed expectations.” Such an inquiry is only relevant whenassessing whether government regulation has effected a taking by regulation of an acknowledged andexisting property interest. At this point it is not relevant to the antecedent inquiry which the court mustaddress: does plaintiff possess a property interest and, if so, what is the proper scope of that interest?438

As Professor Eagle has observed, the background legal principles referenced by Justice Scalia are not logicallyimplicated in such questions as whether permitting requirements have been implemented in a particular jurisdiction,or when. Rather, they refer to “fundamental principles of common law that are beyond the immediate modificationby a government where the alternative would be to pay just compensation.”439

Not only have most post-Lucas courts been careless or indifferent about maintaining this distinction, they haveoften made both concepts subservient to constructive notice rules. Thus, the New York Court of Appeals’ opinions inGazza,440 Anello,441 and Kim,442 like the Rhode Island Supreme Court in Palazzolo,443 all purport to find that theadoption of restrictive land *520 use regulations both extinguish an owner’s investment-backed expectations and inhere

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in the titles to their land. This not only reduces Lucas’ background principles inquiry to a tautology (if restrictions onproperty use

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444Anello, 678 N.E.2d at 872 (Wesley, J., dissenting) (quoting Lucas v. South Carolina Coastal Council, 505 U.S.1003, 1031 (1992), quoting Webb’s Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 164 (1980)).

445Michelman, supra note 21, at 1233.

446See Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 124, 125 (1978).

447See Lucas, 505 U.S. at 1016 n.7, 1019 n.8.

448See, e.g., Maritrans Inc. v. United States, 40 Fed. Cl. 790, 792 (Fed. Cl. 1998) (“Defendant contends thatplaintiffs do not have a property interest for purposes of the Fifth Amendment. Because the maritime industry ispervasively regulated, and because plaintiffs could have anticipated the requirement of double hulls, plaintiffs haveno reasonable investment-backed expectations.”).

449See Richard A. Epstein, Takings: Private Property and the Power of Eminent Domain 156 (1985). See alsoEagle, supra note 248, at 383 (“The takings quartet cases, particularly Kim, squarely present the issue of when thevery existence of private property rights is vitiated by legislation.”).

450Lucas, 505 U.S. at 1034 (Kennedy, J., concurring) (“[I]f the owner’s reasonable expectations are shaped by whatcourts allow as a proper exercise of governmental authority, property tends to become what courts say it is.”).

exist, they ipso facto constitute background legal principles); it eliminates any possible showing that the subsequentapplication of restrictive regulations contravenes an owner’s investment-backed expectations.

The most doctrinally indefensible result of intermingling the concepts of expectations, background principles,and constructive notice is that the resulting doctrine actually extinguishes property interests that would otherwiserequire compensation. As Judge Wesley of the New York Court of Appeals observed in his dissenting opinion inAnello, “for any parcel of property that is completely deprived of its value by the ordinance, the Village has, ‘by ipsedixit, . . . transform[ed] private property into public property without compensation’ once the parcel is transferred toanother.”444

This development derives from the pervasive uncertainty that has always surrounded the proper role ofexpectations in the takings calculus. An individual’s “distinctly perceived, sharply crystallized, investment-backedexpectation”445 of using a particular property in a specific way is a consideration different in kind from the generalized,society-wide understandings that inform our basic notions of what property is. Yet Justice Brennan in Penn Centralused the same term--expectations--to denote both the latter and the former;446 and this ambiguity was repeated in Lucas.447 This imprecision in the use of terms has invited the government to argue--as it has--that the mere adoption ofregulations not only trumps any investment-backed expectations concerning the use to which property may be devoted,but actually extinguishes property interests which prior to that event were not only recognized, but were protected bythe Fifth Amendment.448 *521 The very survival of a rights-based system of property as a means of social organizationis called into question by a rule that allows parties to acquire property interests simply by declaring their intention toconfiscate them without paying; yet the government has effectively been granted this power under decisions likePalazzolo.449

By conflating expectations and notice rules with Lucas’ references to background principles of law andlimitations that inhere in title, courts have rendered the doctrine of investment-backed expectations ineluctablycircular-- the very problem Justice Kennedy anticipated in his Lucas concurrence.450 The doctrine as it now standsgrants the state unilateral authority to define what property interests are compensable--and indeed what propertyinterests exist--by the regulations it enacts, or considers enacting. The premise underlying decisions like Good andDistrict Intown, that the enactment of one restrictive measure puts property owners on notice that even more draconianregulations are likely to follow, has been properly noted to lead to a reductio ad absurdum: the enactment of the firstregulation in a field, no matter how mild and unobjectionable, will extinguish takings claims against far more

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451See Oswald, supra note 3, at 114 (“By merely enacting one regulation (even a relatively non-intrusive one that isclearly a legitimate exercise of the police power), the government opens the path for eventual, incremental takingof the entire property interest without payment of just compensation.”).

452Richard E. Levy, Escaping Lochner’s Shadow: Toward a Coherent Jurisprudence of Economic Rights, 73 N.C.L. Rev. 329, 411 (1995). The implications of this process are especially ominous in the context of a system ofnationwide permit requirements. See, e.g., Laura Pfefferle, Comment, A New Green Government Weapon:Shooting Down Regulatory Takings with Estoppel, 13 Tul. Envtl. L.J. 471, 476 (2000) (arguing that “the federalprohibition against dredging and filling wetlands under section 404 of the Clean Water Act (CWA) puts all U.S.property owners on constructive notice that development of wetlands may not be permitted and that they mustadjust their reasonable investment-backed expectations accordingly”).

453For an example of the “abruptness” necessary for the modern takings claimant to establish reasonableexpectations, see Maritrans v. United States, 43 Fed. Cl. 86 (Fed. Cl. 1999). There, the court rejected thecontention that a shipping company had constructive notice that the government would require double hulls for itssingle-hulled tankers. Id. at 88. The court reached this conclusion because the company “had no reliableindication from Congress, industry publications, competitors, or any public materials that such a requirementwould be seriously considered,” and because “[a]lmost without exception, officials within the Coast Guard, theMaritime Administration, the academic community and the entire maritime industry did not foresee the advent ofdouble hulls.” Id. at 88, 89. See also Am. Pelagic Fishing Co., L.P. v. United States, 49 Fed. Cl. 36, 2001 U.S.Claims LEXIS 54, at *45 (Apr. 4, 2001) (“The targeted revocation of existing permits...and the targeted denial offuture permits by Congress were not events any citizen in a constitutional republic could have reasonablyexpected.”).

454See District Intown Props. Ltd. P’ship v. District of Columbia, 198 F.3d 874, 887 (D.C. Cir. 1999) (Williams, J.,concurring).

455Oswald, supra note 3, at 109.

draconian measures arising years in the future.451 This renders the fundamental concept of private property rightsindeterminate, if not meaningless:

‘Expectations’ are determined by reference to the background law that confers an ‘entitlement’ so as tomake the expectations ‘legitimate.’ But if the creation of an entitlement is a function of the government’sdecision to accord a particular interest such status by virtue of positive law, the government could freelydecide not to create any entitlements. Moreover, the government could condition every apparententitlement by reserving the power to terminate it, effectively defining away *522 all property, contract,and affirmative rights. Thus, an expectations model ultimately collapses into a baselineless world unlessthere is some external referent that limits the government’s ability to structure the background law so asto define away rights.452

As the concurring judge in District Intown noted, “such a notion of ‘reasonable investment-backed expectations’strips it of any constraining sense: except for a regulation of almost unimaginable abruptness,453 all regulation will buildon prior regulation and hence be said to defeat any expectations.”454

This doctrinal aberration has established a legal framework in which regulatory takings claims are essentiallydecided against property owners the moment the government decides to regulate. Under the dominant strand ofpost-Lucas expectations decisions, a landowner’s expectation of putting property to beneficial use “is legitimate if statelaw regards it as such, but is not legitimate if state law regards it otherwise--a profoundly unhelpful statement whenthe goal is to define permissible limits of governmental regulation.”455 Surely, this cannot be what Justice *523 Brennan

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456See supra notes 33-45 and accompanying text.

457See, e.g., Epstein, supra note 449, at 155 (“If notice is sufficient to defeat the obligation to compensate, then theeminent domain provision has no force or effect.”). See also Levy, supra note 452, at 412 (“[T]he Takings Clausecollapses under a purely expectations-based model, because the state would be able to define property as inherentlysubject to appropriation without compensation.”).

458See Store Safe Redlands Assocs. v. United States, 35 Fed. Cl. 726, 735 (Fed. Cl. 1996) (“Under such logic,Congress could pass a law that stated that no one could build on their property. After all property had passed handsonce, the right to build on one’s property would be lost to everyone. Such an argument is not based on the propertylaw of any American state or upon the Constitution of the United States.”); Preseault v. United States, 100 F.3d1525 (Fed. Cir. 1996), holding that:

[The government argues] that an owner’s subjective expectations of keeping or losing her property undervarious possible scenarios define for that owner the extent of her title. Just the reverse is true. It is the law-createdright to own private property, recognized and enforced by the Constitution, legislation, and common law, that givesthe owner an historically rooted expectation of compensation. The expectations of the individual, however well- orill-founded, do not define for the law what are that individual’s compensable property rights. Id. at 1540.

459964 S.W.2d 922 (Tex. 1998).

460Id. at 925.

461Id. at 926.

462Id.

463Id.

464Id. at 927.

465Id. at 928.

intended when he included investment-backed expectation as a factor in takings analysis.456 Ultimately, as has beenrecognized by a growing number of scholars457 and at least a few courts,458 a doctrine that rejects takings claims basedsolely on the state’s exercise of power effectively renders the Takings Clause a nullity.

2. Post-Lucas Expectations Doctrine Leads to Injustice and Absurdity

Post-Lucas takings decisions that elevate land use regulations to “background principles of law” immediatelyupon their adoption are vulnerable to another type of doctrinal error that has not generally been noted. This problemis best illustrated by the 1998 decision of the Texas Supreme Court in Mayhew v. Town of Sunnyvale.459 The Mayhewfamily had owned land in Sunnyvale, Texas since 1941.460 In 1986 the Mayhews submitted an application for a3,600-unit planned development on a 1,196-acre tract. 461 This proposal was rejected on the ground that it wasinconsistent with a minimum lot size requirement of one acre per unit the town had adopted long after the Mayhewsfirst took *524 title to their property, but prior to their development application.462 The Mayhews responded by filingsuit, alleging inter alia that the permit denial effected a regulatory taking.463 A state trial court ultimately agreed,finding that the town’s one-acre zoning restriction “does not bear any factual relationship to valid planning principlesor objectives,”464 and awarding the Mayhews $8.5 million in compensation, including interest and attorneys’ fees.465

The Texas Supreme Court disagreed. In a unanimous opinion, the state high court found that the Mayhews

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466Id. at 936-38.

467Id. at 936.

468See Id. at 937.

469See Sugameli, supra note 212, at 979.

470Id. at 977.

471109 F. Supp. 2d. 526 (N.D. Tex. 2000).

472Id. at 572.

473Id. at 533 (quoting testimony recounting a conversation between a party to the Mayhew development plan and amember of the town council).

474Hammer-Smith Construction Co., a plaintiff-intervenor in Dews, sought to develop a portion of the same tractthat was involved in the Mayhew litigation. Id. at 557-63.

could not have suffered a taking because their investment-backed expectations had been extinguished by the town’sadoption of the one-acre minimum zoning law.466 Citing to both Penn Central and Lucas, the Mayhew court ruled thatan owner’s reasonable expectations were limited to “existing and permitted uses of the property” at the time anapplication is filed.467 The fact that the Mayhews owned most of the land in question before the restrictive zoning wasadopted was deemed irrelevant, implicitly on the theory that they should have anticipated the one-acre limitation anddeveloped their property before it was enacted.468

This decision has been cited with enthusiasm by regulatory advocates for the proposition that owners can haveno reasonable expectation to use their property in ways disapproved by local political authorities, regardless of whetherthe regulations authorizing such a denial are adopted before or after the property is acquired.469 Mayhew was greetedas a ringing confirmation of the view that “’newly legislated or decreed’ restrictions on land use can also constitute‘background principles’ of state law”470 for takings analysis. However, the decision also illustrates a fatal doctrinal flawin that view--what happens when the newly minted regulations, now firmly enshrined as background legal principles,turn out to be illegal?

*525 Two years after the Town of Sunnyvale’s zoning regulations were found to be “background principles ofstate law,” thereby stripping the Mayhews of their property interests, those same regulations were invalidated by afederal district court in Dews v. Town of Sunnyvale.471 The federal court found that the town’s one-acre minimumzoning ordinance was in reality a blatantly racist mechanism for excluding minorities from the town. Local officials’rationalizations in support of the restrictions were employed “as a facade in an unsuccessful attempt to shield [the town]from liability for excluding both African-Americans and affordable housing from Sunnyvale.”472 The propertyrestrictions so warmly endorsed by the Texas Supreme Court and its supporters were found to represent nothing moreexalted than an official effort to “[keep] ‘niggers’ out of Sunnyvale.”473

Doctrinally, this development poses more than merely an embarrassment to the supporters of the Mayhewdecision. Rather, it exemplifies a major theoretical problem: how is it possible that a restrictive land use regulationcould comprise a “background principle of state law” in 1998, but not in 2000? Conversely, how could Sunnyvale’sracist zoning ordinance constitute a restriction that “inhered in the title” to the Mayhews’ land, stripping them ofconstitutional protections under the Fifth Amendment, yet be swept aside as an illegal impediment to the developmentof the same land474 by a different owner two years later? Do the “background legal principles” that define our settledunderstanding of what constitutes property flicker and fluctuate with every court decision? Even to raise thesequestions demonstrates the absurdity of a doctrine that elevates day-to-day regulatory enactments to the same status

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as long-standing, established principles of common law. Yet while the Dews court rightly swept aside Sunnyvale’sracist zoning restrictions, opening

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475Disturbingly, even now that the Jim Crow nature of Sunnyvale’s restrictive zoning has been revealed and theregulations invalidated, the Texas Supreme Court’s Mayhew decision continues to be cited favorably asestablishing that the adoption of such measures obliterates the Fifth Amendment rights of property owners. SeeMartin County v. Section 28 P’ship Ltd., No. 4D98-2813, 2000 Fla. App. LEXIS 16226, at *10 (Fla. Dist. Ct.App. Dec. 13, 2000).

47628 F.3d 1171 (Fed. Cir. 1994).

477Id. at 1177 (emphasis added). This language was quoted by the Michigan Supreme Court in denying takingsliability in Adams Outdoor Advertising v. City of East Lansing, 614 N.W.2d 634, 644 n.9 (Mich. 2000).

478702 N.E.2d 1026 (Ind. 1998).

479Id. at 1031 (emphasis added).

480Palm Beach Isles Assocs. v. United States, 231 F.3d 1354, 1370 (Fed. Cir. 2000) (Gajarsa, J., dissenting from(continued...)

the door to the construction of integrated, affordable planned *526 housing in the Texas town, the injustice done tothe Mayhews cannot be remedied.475

Juxtaposition of the two Town of Sunnyvale opinions highlights, in a particularly jarring way, the deficiencyof a doctrine that permits local officials to eradicate private property interests by the mere adoption of restrictiveland-use regulations. Barring a legitimate connection to the prevention of nuisance-like uses which could have beenprohibited at common law, such restrictions may reflect no more than the ascendancy of parochial political interests.There is no valid doctrinal rationale for granting such interests an exemption from the requirements of the FifthAmendment.

B. The Judicial Inquiry into a Landowner’s Investment-Backed Expectations Is Necessarily Fact-Driven and Properly Concerned with Determining the Appropriate Level of Compensation, Not with Establishing Takings Liability

In addition to its inherent circularity and indeterminacy, post-Lucas expectations doctrine is incoherent on yetanother level. Typically, courts apply the doctrine to deny liability for a taking as a matter of law, yet base theirreasoning on speculation concerning valuation issues that are inherently fact-bound and case-specific. For example,in Loveladies Harbor,476 the Court of Appeals found:

[T]he owner who bought with knowledge of the restraint could be said to have no reliance interest, or tohave assumed the risk of any economic loss. In economic terms, it could be said that the market hadalready discounted for the restraint, so that a purchaser could not show a loss in his investmentattributable to it.477

Similarly, the Indiana Supreme Court in Board of Zoning Appeals v. Leisz 478 opined that “whether they wereaware of it or *527 not, the price at which they bought the properties may have been, and in a perfect world was, areflection of this risk.”479 Judge Gajarsa, in his Palm Beach Isles dissent, employed the same peculiar combination ofspeculative and categorical language without benefit of evidence:

If investment-backed expectations were not an essential element in categorical takings claims, speculatorswho purchased property for a nominal sum, that reflected the impact of anticipated or existingrestrictions, could receive windfalls from takings claims. When property is purchased with theexpectation that it is or may be subject to regulation, the market has already discounted the possibleexistence of regulation into the value of the property.480

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480(...continued)the court’s denial of rehearing en banc) (citing Creppel v. United States, 41 F.3d 627, 632 (Fed. Cir. 1994))(emphasis added).

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48141 F.3d at 632 (emphasis added).

482See, e.g., United States v. Shewfelt Inv. Co., 570 F.2d 290 (9th Cir. 1977).

483See, e.g., Washburn, supra note 3, at 86 (“[T]here cannot be a set formula for determining when an owner’sexpectations are reasonable. Each case must be decided on its own facts.”) (emphasis added); Mandelker,Investment-Backed Expectations, supra note 3, at 216 n.6 (“Courts need to consider investment-backedexpectations only in as-applied taking cases where factual analysis is necessary.”)

484The appropriateness of allowing juries to determine, as a factual matter, the existence and extent of a plaintiff’sinvestment-backed expectations was also endorsed by the Sixth Circuit Court of Appeals in Hamilton Bank v.Williamson County Regional Planning Commission, 729 F.2d 402 (6th Cir. 1984), vacated, 473 U.S. 172 (1985)(vacating on ripeness grounds). The Sixth Circuit Court of Appeals found that “even if respondent had no vestedright under state law, the jury was entitled to find that respondent had a reasonable investment-backed expectationthat the development could be completed and that petitioner’s action in disapproving the plat interfered with thatexpectation.” Hamilton Bank, 729 F.2d at 407.

485William W. Wade, Penn Central’s Economic Failings Confounded Takings Jurisprudence, 31 Urb. Law. 277,279 (1999). See also William S. Walter, Appraisal Methods and Regulatory Takings: New Directions forAppraisers, Judges, and Economists, 63 Appraisal J. 331, 342-45 (1995) (discussing expert methodologies forestablishing and measuring investment-backed expectations).

486Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1024 (1984) (O’Connor, J., concurring in part and dissenting inpart).

Again, the Federal Circuit absolved the government of takings liability in Creppel v. United States because “[i]nsuch a case, the owner presumably paid a discounted price for the property. Compensating him for a ‘taking’ wouldconfer a windfall.”481

It seems extraordinary that what is plainly on its face a disputed question of fact--whether or not the marketdiscounted, in a specific instance, the probability that the government would prohibit development--should be resolvedby a reviewing court, with no evidence before it as a matter of law. It is a well-recognized principle in valuing propertyat either eminent domain or inverse condemnation, that speculative values must be disregarded.482 Yet in this branchof regulatory takings law, courts freely speculate about conditions “in a perfect world” en route to arriving atconclusions concerning the relationship between hypothetical values and the imputed economic expectations ofplaintiffs.

Commentators have long understood that the existence of investment-backed expectations, and theirreasonableness, are factual issues that cannot be resolved by reference to general principles of law.483 On the contrary,these are questions that *528 must be determined by a fact-finder weighing evidence at trial;484 they “are measurablewith established benchmarks . . . their meaning is no mystery to financial and economic theorists and practitioners.”485

This legal commonplace was reflected in Justice O’Connor’s separate opinion in Monsanto:

[T]he extent of Monsanto’s pre-1972 expectations, whether reasonable and investment-backed orotherwise, is a heavily factual question. . . . [I]f the factual findings of the District Court on this precisequestion were not as explicit as they might have been, the appropriate disposition is to remand to theDistrict Court for further factfinding.486

Especially in constructive notice cases, in which courts impute expectations based on regulations, policies, or“regulatory climates” that may not have been known to the landowner, it cannot reasonably be assumed that a takingsclaimant purchased land at a price that fully reflected the risk that it could not be put to beneficial use. In some cases,a sophisticated buyer may have acquired property at a price that accurately reflected the risks of future regulatory

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487Cf. Armstrong v. United States, 364 U.S. 40, 49 (1960) (“The Fifth Amendment’s guarantee that privateproperty shall not be taken for a public use without just compensation was designed to bar Government fromforcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public asa whole.”).

488See, e.g., Good v. United States, 189 F.3d 1355, 1361 (Fed. Cir. 1999); Creppel v. United States, 41 F.3d 627,632 (Fed. Cir. 1994); Kim v. City of New York, 681 N.E.2d 312, 319 (N.Y. 1997); Gazza v. New York Dep’t ofEnvtl. Conservation, 217 A.D.2d 202, 213 (N.Y. App. Div. 1995); McQueen v. South Carolina Coastal Council,530 S.E.2d 628, 633 (S.C. 2000). This concern was voiced in Palazzolo by the Rhode Island court’s reference tothe need to prevent “pernicious ‘takings claims’ based on speculative purchases in which an individualintentionally purchases land, the use of which is severely limited by environmental restrictions, and then seekscompensation from the state for that ‘taking.’” Palazzolo v. State ex rel. Tavares, 746 A.2d 707, 716 (R.I. 2000).

489Epstein, supra note 449, at 155.

490These are the two prongs of the test for a regulatory taking the Supreme Court has invoked most frequently overthe past two decades.

491One commentator argues:In one sense, this government response might be viewed as relevant to the amount of compensation

required, and not to whether compensation is required at all. Thus, if a landowner purchases land at a discountbecause there is a high probability that subsequent zoning will restrict its use, perhaps the government should payless--but not nothing--when it actually zones the land. See Paul, supra note 3, at 1506. This analysis does not consider the closely related problem of determining justcompensation for the seller of land that is acquired at a discount because of the adoption of restrictive regulations. See generally Stein, supra note 3; Epstein, supra note 449, at 155.

492Palm Beach Isles Assocs. v. United States, 231 F.3d 1354, 1363- 64 (Fed. Cir. 2000).

interference; however, in other instances an owner reasonably may have paid an amount that reflected only the specificregulatory hurdles that were known to exist at the time of acquisition. In the latter cases, foreclosing compensationas a matter of law unfairly shifts the full cost of general public *529 burdens to individual property owners,487 ratherthan preventing windfalls.

Finally, the preoccupation with preventing windfalls to plaintiffs that characterizes so many recent expectationsdecisions488 seems doctrinally misplaced for still another reason: such concerns appear to be more relevant todetermining the appropriate amount of compensation, rather than establishing whether a taking has occurred. AsProfessor Epstein has observed, “[w]e do not use prices to determine rights; we use rights to determine prices.”489 Inother words, the amount an owner paid for a property seems uniquely irrelevant to the legal issue of whether achallenged regulation fails to substantially advance legitimate state interests or deprives the owner of beneficial useof the land.490 On the other hand, the purchase price might be relevant to determining the amount of compensation thatwould be deemed “just” under the Takings Clause.491 This insight--that an owner’s reasonable expectations may bemore relevant to the *530 issue of compensation than to takings liability per se--was recognized by the Federal Circuitin Palm Beach Isles:

Once a taking has been found, the use restrictions on the property are one of the factors that are takeninto account in determining damages due the owner. . . . [I]n the initial analysis of whether a taking hasoccurred, when it is determined that the effect of the regulatory imposition is to eliminate all economicviability of the property alleged to have been taken, the owner’s expectations regarding future use of theproperty are not a factor in deciding whether the imposition requires a remedy.492

In any case, the question of whether the realistic probability of a regulatory wipeout was discounted into the

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493See Dews v. Town of Sunnyvale, 109 F. Supp.2d. 526 (N.D. Texas 2000).

494See generally Bernard H. Siegan, Economic Liberties and the Constitution 248-64 (1980) (discussing the“dichotomy” in the Court’s treatment of economic and civil rights).

495Dolan v. City of Tigard, 512 U.S. 374, 392 (1994).

purchase price of a given parcel is properly one to be presented to a jury at trial. Courts that impute landowners’expectations based on their own speculations concerning this factual issue, and then use their preordained conclusionsto justify foreclosing takings liability as a matter of law, have not distinguished themselves as guardians of individualrights secured by the Fifth Amendment.

CONCLUSION

The Supreme Court in Palazzolo must address what has become one of the most pernicious developments in thehistory of constitutional law. The doctrine of investment-backed expectations, originally a benign and potentiallyuseful tool for identifying compensable property interests, has become a hopelessly circular and indeterminate paradigmthat extinguishes constitutionally protected rights in deference to newly enacted regulations that may be pretextual oreven illegal.493

An unacknowledged, albeit perhaps obvious, subtext of this deference is the familiar distinction between“economic” and “fundamental” constitutional rights.494 Allowing the government to define away its citizens’ rightsto freedom of speech or religion would be universally decried as intolerable. Yet this has become the role of post-Lucasexpectations doctrine with respect to the Fifth Amendment rights of property owners, as exemplified in *531 decisionslike Palazzolo. If the Supreme Court is serious in maintaining that “[w]e see no reason why the Takings Clause of theFifth Amendment, as much a part of the Bill of Rights as the First Amendment or Fourth Amendment, should berelegated to the status of a poor relation,”495 then the role of expectations in the takings calculus must undergo athorough reassessment.