Today, we're featuring a post written by our Tennessee colleague, economist William Wade. He writes about the Massachusetts Court of Appeals' recent decision in Smyth v. Conservation Comm'n of Falmouth, and the more recent cert petition in that case. Bill writes and comments frequently on takings cases. See, e.g., William W. Wade, “Theory and Abuse of Just Compensation for Income Producing Property in Federal Courts: A View from above the Forest,” 46 Tex. Envt'l L. Rev. 140 (2016).
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Smyth and Massachusetts' "New" Penn Central Factor
William W. Wade, Ph.D.
The Massachusetts case, Janice Smyth v. Conservation Commission of Falmouth,[1] is current again. Pacific Legal Foundation lawyer J. David Breemer, filed a petition for writ of certiorari to the U.S. Supreme Court. Mr. Breemer’s petition is encyclopedic in its survey of regulatory takings cases, which demonstrates that Penn Central’s ad hoc test has led to an ad hoc assortment of decisions that generally disfavor the plaintiff based on a myriad of convoluted, inconsistent legal arguments. I would add that little or confounded understanding of first-year financial economics exacerbates many of the issues he raised. For certain, faulty economics governs the Smyth decision travesty.
After so many years since the seminal 1978 decision,[2] and millions of words in trial briefs, journal articles and court decisions, wouldn’t you think that a systematic understanding of Penn Central’s three famous prongs would be agreed upon by now?[3] Smyth and other recent appellate decisions across the country reveal that consistency and understanding of how to measure economic impacts and determine their interference with distinct investment backed expectations hopelessly elude jurists and opposing counsel.[4]
To refresh your memory, Janice Smyth owns an unimproved lot in a mostly built-out subdivision on Cape Cod. She inherited the lot from her parents, who purchased it for $49,000 in 1975. She sought a permit from a local Conservation Commission’s in 2012 to build a home on the Cape Cod location. Permit denied to protect wetlands. Takings case filed.
At trial, plaintiff’s appraiser valued the property in 2014 dollars at $700,000, if buildable, and $60,000, if unbuildable. A jury found that the wetlands protection law effected a regulatory taking of the plaintiff's property and awarded damages in the amount of $640,000. The Massachusetts appellate court threw out the jury decision on legal issues apart from this discussion, and re-evaluated the Penn Central test results.
Wouldn’t you imagine that these facts perfectly reflect what the Fifth Amendment had in mind as the basis for just compensation: a planned single family home with no complicating income issues disallowed in order to protect the wetland for the good of the community?
Not so in Massachusetts. Ignoring the 91.4% diminution in the value (%DIV) of the property from $700,000 (if buildable) to $60,000 (if unbuildable), the appellate court reversed the jury verdict. Clearly this 91.4% DIV is consistent with diminution in value criteria for compensation in precedential case decisions where real property was taken.
Instead, the Massachusetts court created a “new” Penn Central test prong and determined “that . . . as unbuildable the property's value [$60,000] is still greater than the amount [$49,000] the plaintiff's parents paid for the property, . . . even a substantial reduction in the value of property can occur without effecting a regulatory taking.”[5] This new Penn Central prong–comparing the unbuildable current appraised value to the original purchase price–was decided on an economic blunder that has appeared in prior takings decisions.[6]
The first standard financial valuation step in any analysis is to establish the benchmark date for the evaluation. Existing values in the record are adjusted to that date for comparison to estimated values at the same benchmark date. As pointed out by the cert petition, the purchased price “in today’s dollars” is $216,000.[7] That value actually could have been useful to deal with the legitimate concern with the “shifting and subjective interpretations of [Penn Central’s interference with distinct investment-backed expectations.][8]
The $216,000 can be viewed as Ms. Smyth’s inheritance equity value “in today’s dollars” at the time of taking. Regulatory takings decisions require proof of severity economic impact.[9] The economic impact prong only measures the difference between the plaintiff’s planned, expected outcome less the resultant regulatory result. The % DIV measured by the economic impact prong is not dispositive of severity of economic impact.[10] Interference with distinct investment backed expectations, Penn Central’s second economic prong, must be proven. After denial of Ms. Smyth’s permit, the market value, reported as $60,000, clearly would not recoup her $216,000 equity value. This was the proof of severity adopted by Florida Rock V.[11]
The court went even further down Alice’s rabbit hole in its justification for reversal, emphasizing that the unbuildable property value, being worth more than its purchase price, ". . . any compensation would constitute a 'windfall' for [the plaintiff]."[12] Seemingly the court adopted Professor Michelman’s inference in his famous 1967 article that land speculators are some sort of moral plague on society with no need of protection against changing regulations.[13] Ms. Smyth cannot be castigated as a speculator and her plans for a nice house on Cape Cod cannot be considered some sort of unconscionable windfall.
The takings bar has enough problems sorting out measurement and evaluation of the 42 year old Penn Central test without having to figure out new ad hoc prongs such as created by the Massachusetts court.
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[1] Case No. 17-P-1189 (Mass. App. Ct.), Feb. 19, 2019, Petition For Writ Of Certiorari, August 16, 2019.
[2] Penn Central v. City of New York, 438 U.S. 104 (1978) (42 years by my count).
[3] Id. at 124. (“In engaging in these essentially ad hoc, factual inquiries, the Court's decisions have identified several factors that have particular significance. The economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations . . . [and] the character of the governmental action.”)
[4] See, for example, Love Terminal Partners, L.P. v. United States, 16-2276 (Fed. Cir. 2018). (The Federal Circuit ruled that plaintiff’s suffered no economic impact because the planned terminal operation was not yet earning any positive net cash flow. Hence, “the plaintiffs [did not show] a decrease in the value of their property as a result of government regulation.” Slip. op at 23.) Economic nonsense.
[5] Smyth, Mass. App. Ct. at 14, including n.15, (internal cites omitted).
[6] See for example Walcek v. United States, 49 Fed. Cl. 248 (2001).
[7] Cert. Petition at 6. (The actual date of “today’s dollars” is reported in Pet. App. B-2.)
[8] Id. at 21.
[9] Cienega Gardens v. United States (“Cienega X”), 503 F.3d 1266, 1282 (Fed. Cir. 2007). Cienega X appears to adopt the phrase “severity of economic deprivation” from Tahoe Sierra as the panel’s threshold to determine that compensation is due for a taking. See Tahoe Sierra Preservation Council, Inc. v. Tahoe Reg’l Planning Agency, 535 U.S. 302, 322, n.17 (2002).
[10] Florida Rock Industries v. United States, 45 Fed. Cl. 21, 37 (1999) (“Fl Rock V”) (Diminution in value alone does not suffice to determine a compensable taking). Florida Rock V, following the Federal Circuit’s remand direction, ruled that diminution alone is not dispositive of the degree of interference with DIBE. Florida Rock II, 791 F.2d 893, 905 (Fed. Cir.1986 )
[11] Id.
[12] Smyth at 15.
[13] Frank L. Michelman, Property,Utility and Fairness: Comments on the Ethical Foundations of Just Compensation Law, 80 Harv. L. Rev. 1165 (1967). His intent of excluding protections for “speculators” led to his requirement that plaintiffs demonstrate “some distinctly perceived, sharply crystallized, investment-backed expectation,” which Justice Brennan simplified to the received DIBE language. See Daniel R. Mandelker, Investment-Backed Expectations: Is there a Taking?, 31 Wash. U.J. Urb. & Contemp. L. 3 (1987) for more insight into the opaque Michelman article.