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US Supreme Court decides critical question for eminent-domain cases

Ryan Sugden

Ryan Sugden

The property is idyllic. It consists of two parcels in a cove on the St. Croix River along the Wisconsin-Minnesota border where the river widens and flattens to form Lake St. Croix.

Wooded and bisected by a steep bluff, the parcels have beautiful natural features but less buildable land. William Murr and his wife originally purchased the first parcel over five decades ago to build a family vacation home. A few years later, the Murrs acquired the neighboring parcel, thinking it would make a good investment. But it was never developed.

By 1995, the Murrs had transferred the parcels to their children. Years later, the Murr siblings sought to realize their parents’ investment and sell the second parcel to raise money for renovations to the vacation home. Local officials objected.

The reason given? A new ordinance prevented parcels with less than an acre of buildable land from being developed or sold. The Murr siblings cried foul. They claimed that the ordinance, when applied to the second parcel, constituted a taking of that parcel because it eliminated all of its economically viable uses.

Local officials responded by arguing the ordinance was valid because the Murrs’ two parcels, considered together, had value.

The Murrs filed suit for inverse condemnation. The case turned on a seemingly simple question—what property do the Murrs own?—which was ultimately decided by the United States Supreme Court. The Supreme Court’s decision in Murr v. Wisconsin will affect how courts measure property in inverse-condemnation cases and will have implications for property owners, developers, and industrial companies with large land holdings who file claims against the government for onerous land-use regulations.

Wisconsin courts deny Murrs’ claim for inverse condemnation

An inverse-condemnation claim is different from eminent-domain cases, which typically involve a governmental entity taking property through its power of eminent domain. In inverse condemnation, a government entity has adopted a regulation that restricts how property can be used, and the landowner is seeking compensation from the government because the regulation has significantly reduced the property’s value.

A landowner is typically only entitled to compensation if the challenged regulation eliminates virtually all valuable ways the property can be used. Property owners are more likely to prevail when their property is narrowly defined because it is often easier to show that a small parcel has no valuable uses. On the other hand, a broader definition of “property” makes inverse-condemnation claims more difficult, as the government is more often able to show that the parcel can be used in some valuable way when it is larger.

After the Murrs bought their two parcels, local authorities adopted a regulation prohibiting the sale or development of parcels with less than one acre of buildable land. The Murrs’ undeveloped parcel is undersized, and when they tried to sell it, local officials told them they could not. If the Murrs were going to sell, they had to sell the two parcels together. The Murrs filed suit for inverse condemnation, seeking compensation for the value of the second parcel, claiming it could not be used in any valuable way since it could not be separately sold or developed. The Murrs claimed the government had effectively “taken” the undeveloped parcel by passing the ordinance.

Wisconsin courts denied their claim. The courts found that the two parcels, although separated by a legal boundary line and assessed and taxed separately, had to be considered together for the purposes of an inverse-condemnation claim. Under Wisconsin state law, which is similar to state laws across the country, substandard parcels (that is to say, parcels that are undersized) that are contiguous and under common ownership, are deemed “merged.” The courts found that the Murrs’ two parcels, when considered together, had value because a home could be built on the parcels together. The Murrs appealed the state court’s decision to the U.S. Supreme Court.

U.S. Supreme Court decides “critical” question in eminent-domain law

In inverse-condemnation cases, the U.S. Supreme Court has long required that courts consider the “parcel as a whole” when determining the effects of a challenged government regulation. For instance, the Supreme Court has rejected attempts in inverse-condemnation cases to separate a parcel’s air rights from existing land uses. But the court has left open what exactly “parcel as a whole” means. Is a parcel defined by its legal boundary lines as the Murrs claimed? Or can a “parcel” be composed of many separate lots as long as they are under common ownership, as Wisconsin officials asserted?

In Murr v. Wisconsin, the U.S. Supreme Court agreed with the Wisconsin courts’ decision to deny the Murrs’ inverse-condemnation claim. The Supreme Court confirmed that the Murrs’ two parcels should be considered as one when looking at the effects of the challenged land-use regulations, even though the parcels are treated separately for purposes such as taxation. In reaching this decision, the Murr Court eschewed using a bright line definition of “parcel.” Instead, it adopted a three-factor test that may raise more questions than it answers.

Under Murr, when considering inverse-condemnation cases, courts must consider: (1) how the property in question is legally defined; (2) the physical characteristic of the property, including any adjoining parcels owned by the same plaintiff; and (3) the value of the property under the challenged regulation and whether the regulation increases the value of other parcels owned by the same plaintiff. Once a court has considered these factors and determined what property is subject to the challenged regulation, only then should it consider the regulation’s effects on the property and whether a taking has occurred. This means that a property owner, like the Murrs, may long believe that it owns two (or more) separate parcels of property, and may pay taxes and use them separately for years, but a court may consider them as one if the landowner challenges regulations that restrict how the parcels can be used.

Minority claims the new test will have unfortunate consequences

Chief Justice John Roberts, along with the Supreme Court’s other conservative-leaning members, Justices Alito and Thomas, dissented from the Murr Court’s majority decision (the Court’s newest member, Justice Gorsuch, did not participat). They accused the majority of stacking the deck in the government’s favor. Chief Justice Roberts noted that although property is commonly defined by legal boundary lines, the Murr decision adopts a litigation-specific definition of “property” that will sow uncertainty in cases that already are notoriously complex, expensive, and time-consuming. In addition, Chief Justice Roberts and his fellow dissenters claimed that the government is more likely to be victorious under the majority’s “malleable” definition of property because the “widespread benefits” of land use and environmental regulations often appear “weightier than the isolated losses” of the individual landowners suffering under them. Chief Justice Roberts feared this imbalance will “undermine[] the effectiveness of the [U.S. Constitution’s] Takings Clause as a check on the government’s power” to regulate land use.

Chief Justice Roberts’ concerns may prove well-founded, and the Murr Court’s definition of property may have significant consequences for real-estate developers, owners of commercial property, and large land holders. Disputes over the definition of “property” are likely to arise in circumstances involving large pieces of property that have been subdivided. For instance, a developer of residential real estate who has platted formerly agricultural land will most likely be unable to receive compensation if an environmental regulation eliminates all uses for some of the newly created lots. That is because the individual lots, considered together, have value even if some lots, when singled out, have none. Moreover, inverse-condemnation proceedings will become more time-consuming and complex if the definition of the very property in question is disputed.

Landowners should take steps to avoid seeing the government aggregate disparate land holdings for the purpose of refuting an inverse-condemnation claim. First, parcels should be used separately. For instance, the Murrs used the undeveloped parcel for activities, like volleyball, that the Murr Court suggested reflected a “special” relationship between the two. In a commercial context, if a building is being put up on one parcel, and construction equipment is staged on another that is owned by the same party, a court may find a “special” relationship exists between the two parcels.

Landowners should also separate ownership of their land holdings. Property under common ownership is more likely to be aggregated by a court in an inverse-condemnation case. And before filing an inverse condemnation claim, landowners should engage appropriate professionals and consultants. A land-use planner can provide advice on the ways parcels can be used, separately and together, in anticipation of how a government entity is likely to respond to an inverse-condemnation claim. An appraiser can opine on the economic impact of any particular land-use ordinance that might be in question. And experienced counsel is necessary to provide advice on legal strategy and the risks and benefits of pursuing an inverse-condemnation claim.

Ryan Sugden is a real estate litigation attorney at Stinson Leonard Street LLP.

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