Of all the issues associated with the regulation by government of private property and the use of private property, the issue of when that regulation so hampers use of the property as to amount to a "taking" of the property by the government may currently be the most prominent. Under the United States and Michigan Constitutions, governmental entities are not permitted to take private property without due process of law and providing just compensation for the taking. The questions of whether a taking has occurred and whether the government owes the owner of the property just compensation (and what that just compensation should be) have come up frequently in recent years in the context of the regulation of wetlands.
Most recently, and in Michigan, the Michigan Supreme Court decided a case that had captured national attention in connection with the takings issue. This case, known generally as K & K Construction, Inc. v. Department of Natural Resources or K & K Construction, was argued before the Court November 5, 1997. The court's decision was filed March 24, 1998.
The property at issue in the K & K Construction case had been acquired by Joseph and Elaine Kosik in 1976 and transferred to J.F.K. Company (a limited partnership consisting of the five children of Joseph and Elaine) in 1986 so J.F.K. could develop the land. J.F.K. and an entity known as Resorts and Company owned 82 acres of property near M-59 in Waterford Township. K & K Construction itself did not have an ownership interest in the property but had contracted with the owners to build a restaurant and sports complex on the property.
The 82 acre property consisted of four contiguous parcels. Parcel one, the largest, consisted of approximately 55 acres, 27 acres of which were wetlands. Parcels two and four were immediately south of parcel one with parcel two lying to the west of parcel four. Parcel three was south of parcel two. Parcel two contained a small portion of wetlands but parcels three and four had no wetlands. Parcel one was zoned for commercial use while parcels two, three and four were zoned for multiple family residential housing. Parcel three had been developed prior to the events giving rise to this case as had two portions of parcel one. Parcels two and four had not been developed.
When plaintiffs sought a permit from the then Michigan Department of Natural Resources (MNDR) under the provisions of the Wetland Protection Act (now, Part 303 of the Natural Resources and Environmental Protection Act), MDNR denied their request. Plaintiffs had sought the permit to construct the restaurant and sports complex on parcel one as well as some multi-family residential structures and related facilities on parcels two and four. Plaintiffs did not file an administrative appeal. Instead, they filed a takings case in December 1988, arguing that the effect of the DNR denial of their request was to "take" their property. While this takings case was pending at the trial court level, plaintiffs submitted a second wetland permit application to MDNR in May, 1990, seeking permission to fill a much smaller area of wetlands and develop the primarily upland ring around the wetland. This request was also denied by MDNR and no administrative appeal was taken.
When the takings case was tried in December, 1991, the trial court determined that the MDNR denial of the first permit request had rendered the property essentially worthless and required the DNR to compensate plaintiffs for the full value of the property. When the MDNR realized that the trial court was in favor of plaintiffs' position, the MDNR attempted to allow the more limited development requested under the second requested permit application to occur in an effort to establish a defense. However, the trial court determined that, even so, the MDNR owed plaintiffs compensation for the temporary taking (by reason of the delay in permitting the second development proposal) of the property that could be developed under the second plan and for the full value of the wetlands that were not usable even under that plan. The trial court then determined that the amount due plaintiffs was approximately $3.5 million for the wetlands and approximately $500,000 for the temporary taking plus, in both cases, interest. This decision was affirmed by the Michigan Court of Appeals in 1996. Both the trial court and the Court of Appeals considered only the effect of the restrictions on use on parcel one and determined that the restrictions eliminated all economically viable use of parcel one in allowing plaintiffs to recover.
The Michigan Supreme Court, however, on appeal by MDNR, relied on a "non-segmentation" principle in its decision. This principle, in essence, asserts that one considering the effect of regulation on a parcel of property for purposes of a takings analysis must look at the effect of the imposition under the regulation or restriction with respect to the parcel as a whole and not simply the affected portion. The supreme court then found that, for the purpose of the takings analysis, the property consisted of at least parcels one, two and four (those undeveloped or only partially developed), despite previous decisions by the supreme court that suggested that zoning was a consideration in determining whether various contiguous pieces of property were subject to the non-segmentation principle. The court states in a footnote and obviously relied heavily on the fact that the "plaintiffs intended to use all three of them in a single development plan (which) negates the fact that they were zoned differently" and also noted that J.F.K. was the sole owner of all of the property at the time the alleged taking occurred. In fact, in remanding the case back to the trial court, the supreme court ordered the trial court to determine whether all four of the parcels should be considered in the taking analysis.
Finally, the court considered the issue of whether the proposed regulation of the plaintiffs' land in fact constituted a regulatory taking. In doing, so they considered both a "categorical taking" analysis and a "balancing analysis". For a categorical taking to exist, the property owner must be deprived of all economically beneficial use of his property. In the "balancing analysis", even though a categorical taking may not take place, the effect of the imposition of regulations may be so burdensome as to amount to a taking. In the balancing analysis three factors are considered:
- character of the governmental action;
- the economic effect of the regulation on the claimant; and
- the extent to which the regulation deprived or interfered with the investment backed expectations of the owner.
Relying on previous case law, the court suggested, generally, that a comparison of the value removed as a result of the regulation should be compared with the value that remains in conducting the balancing test.
The court then concluded that there was no categorical taking of the property and that, although the trial court had considered various issues related to the economic effect of the proposed regulation of parcel one, it had not taken into account the value of the totality of the property including parcels two and four. Thus, the supreme court remanded this matter back to the trial court for further consideration and ordered the trial court to use the comparison of the value removed with the value remaining in evaluating the case under the balancing test.
The K & K Construction decision by no means ends the debate over whether regulation under the provisions of Part 303 may amount to a taking. It does, at the least, suggest that the regulation of wetlands on a portion of or all of a particular property comprising only one property in a larger group of properties over which there is common ownership or control will be considered a taking. Furthermore, it may influence the strategy to be followed for development in connection with areas containing wetlands.
K & K Construction, Inc., et al., v. Department of Natural Resources, No. 106712 (Mich., March 24, 1998).
*article courtesy of William A. Wichers II.