Confiscation Claims — How To Conduct A Trial Of A “Forgotten” Cause of Action

November 25, 1998

In the 1926 decision in which it first upheld the power of a local government to adopt a comprehensive zoning plan,/1 the U.S. Supreme Court recognized that a zoning ordinance can be constitutional on its face but unconstitutional as applied to an individual property owner./2 Indeed, two years later, the Court found an ordinance’s application to a particular parcel of land to be an unconstitutional confiscation of property rights./3
The New York Court of Appeals came to the same conclusion in a leading decision it rendered in 1938, striking down a New York City ordinance’s application to a plot of vacant land in Brooklyn./4 In the following years, courts throughout New York often were asked to decide whether zoning ordinances were unconstitutional as applied./5

The most frequently asserted claim was that the ordinance involved was confiscatory of an owner’s property in that it left the owner with no reasonable use for the property solely because of the existence of the ordinance. Cases of this type resulted in invalidation of the ordinances as applied to the plaintiff’s property. They did not result in compensation — money damages or attorney fees.

It seems, however, that fewer confiscation claims have been brought than might otherwise have been the case since the U.S. Supreme Court’s 1978 opinion/6 concluding that local governments (and local officials sued in their official capacities) can be held liable for money damages under Section 1983/7 for violating the Constitution. Yet in appropriate circumstances, confiscation claims still can be an effective weapon in property owners’ attacks on abusive government regulations.

The “Bedford” Case

The quintessential explanation of the elements of and the way to try a confiscation case was set forth by Judge Bernard Meyer in the decision he wrote for the New York Court of Appeals in Northern Westchester Professional Park Associates v. Town of Bedford./8 Judge Meyer was particularly well-suited to delineate the nuts and bolts of the trial of such a case inasmuch as, before ascending to the Court of Appeals, he was one of the most respected judges on the Nassau County trial bench and presided over many of these cases at the trial level.

The Bedford case arose after the Town of Bedford denied a rezoning request by Northern Westchester Professional Park Associates, which owned an irregularly shaped 12.6-acre parcel of land that bridged that town and the Town and Village of Mount Kisco. Northern Westchester then filed suit against the Town of Bedford, alleging that because of the development of abutting lands its property could not be used for any purpose permitted by the applicable zoning.

The trial court declared that the zoning was unconstitutional as applied to Northern Westchester’s property and it invalidated the ordinance as it applied to that property. The Appellate Division reversed and the case reached the Court of Appeals.

In its decision, the Court first set forth the standard that a property owner must meet to prove a confiscation claim. It stated that an owner must show that “no reasonable return may be obtained from the property under the existing zoning.” The fact that the property would have a much greater value if zoned for less restrictive use, or even that the established zoning has caused significant diminution in the value of the property owner’s investment, “is not enough.”

The Court next explained how to determine whether a zoning classification permits a “reasonable return.”/9 This requires proof of: o The rate of return earned by like property in the community; o The owner’s investment in the property in “dollars and cents form”; and o The rate of return that the property as a whole (at least where it is uniformly zoned) would produce from the various uses permissible under the existing classification, including conditional or pre-existing nonconforming uses but excluding all permitted public or quasi-public uses.

The Court noted that the “owner’s investment” is the amount paid by the owner to purchase the property, the cost of improvements, and the amount of taxes, expenses, and other carrying charges in excess of income generated by the property. It added, significantly, that the owner also must show that it did not pay a premium over fair market value when it purchased the property in the expectation that the property would be downzoned.

Judge Meyer then stated that a court could determine whether the challenged zoning is confiscatory by multiplying the rate of return earned by like property in the community by the owner’s investment, and comparing that number with the rate of return that the property as a whole would produce from each of its permissible uses. If the rate of return is not reasonable solely as a result of the zoning, then the zoning is invalidated as confiscatory. Obviously, expert testimony is indispensable for this process.

Two Deficiencies

When it applied that standard to Northern Westchester’s proof, the Court found it to be deficient in at least two respects. First, it held that there were deficiencies in Northern Westchester’s proof relating to special permit uses. It noted that much of the evidence on special permit uses related to public and quasi-public uses, which the Court said was irrelevant.

The Court also said that, although there was testimony “touching” on use of the property for a tennis club, sanitarium, and landscape nursery, there was no testimony on its use as a nursing home. Moreover, it said, the testimony indicated that club use was unsuitable because it did not represent the highest and best use; the Court emphasized, though, that “there is no constitutional requirement that the highest and best use or the greatest income obtainable be allowed.”

The Court also found deficiencies in the evidence concerning the price paid by Northern Westchester for the property. Northern Westchester had contended that there was no evidence to indicate that its original purchase of the property was anything but an arm’s-length transaction, but the Court said that that was inadequate. It stated that Northern Westchester bore the burden of establishing the investment base against which confiscation had to be measured, “including the part played in the purchase negotiations of the potential rezoning of the property.” The Court added that the fact that the transaction was arm’s length “does not exclude the possibility that a premium over fair market value was paid.”

Accordingly, the Court affirmed the Appellate Division’s decision that Bedford’s zoning ordinance was not unconstitutional as applied to Northern Westchester’s property.

Conclusion

Zoning ordinances are entitled to a presumption of constitutionality./10 As a result, the burden of challenging such an ordinance — and of establishing beyond a “reasonable doubt” that there is no way to obtain a reasonable return on a particular real estate — is on the property owner.

Proving such a claim at trial typically requires the use of expert witnesses such as a community planner and real estate appraiser. Although it is difficult to sustain the burden of proof in an attack of this type, property owners nevertheless should consider the value of asserting a confiscation claim when determining how to resolve problems raised by a zoning ordinance.

NOTES: 1. Euclid v. Ambler Realty Co., 272 U.S. 365 (1926). 2. In that opinion the Supreme Court stated: “It is true that when, if ever, the provisions set forth in the ordinance in tedious and minute detail, come to be concretely applied to particular premises . . . or to particular conditions, or to be considered in connection with specific complaints, some of them, or even many of them, may be found to be clearly arbitrary and unreasonable.” 3. Nectow v. Cambridge, 277 U.S. 183 (1928). 4. Arverne Bay Const. Co. v. Thatcher, 278 N.Y. 222 (1938). 5. See, e.g., Vernon Park Realty, Inc. v. Mt. Vernon, 307 N.Y. 493 (1954); Heram Holding Corp. v. Albany, 307 N.Y.S.2d 680 (3d Dep’t 1970); McConnell v. Tuckahoe, 266 N.Y.S.2d 821 (2d Dep’t 1966). 6. Monell v. Department of Social Services, 436 U.S. 658 (1978). 7. 42 U.S.C. 1983. 8. 60 N.Y.2d 492 (1983). 9. Interestingly the Court did not question that the property must earn a profit, i.e., must deliver a reasonable return to the owner. 10. See, e.g., Huntington v. Park Shore Country Day Camp, Inc., 47 N.Y.2d 61 (1979).

John M. Armentano, a partner with the Long Island law firm of Farrell Fritz, P.C., represents local governments and developers in zoning, land use, and environmental matters, including litigation.

This article is reprinted with permission from the November 25, 1998 edition of the New York Law Journal.

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