In our North Carolina Land Use Litigator Blog, we suggested that the common denominator between the recent North Carolina Supreme Court case of Beroth Oil v. NCDOT and Michael Lewis’ new book Flashboys is a concern about manipulation of market prices by using advance knowledge of a future purchase. The blog highlighted the economic and policy considerations that arise when such advance knowledge exists.

In this client alert, we explore the case’s implications for property owners and governments.

Background

In the 21st century, no governmental infrastructure project is a secret. Property owners whose property is identified for possible acquisition can discover this information years in advance. Governments possess the same information. Accordingly, the following could occur:

  • A private buyer buys a home within the future right-of-way or adjacent to it without knowing about the new highway
  • A private property owner seeks land development entitlements to “beat” NCDOT and cause a relocation of the project or to increase damages
  • Local governments are in a quandary: issue approvals knowing that the property would likely be a future highway or deny the approvals because NCDOT had prepared maps showing a future highway
  • NCDOT conducts activities fingering property for future acquisition without remedies for property owners whose land was identified

In 1987, the General Assembly adopted the Map Act. See, N.C.G.S. § 136.44.50 et. seq. The 1987 session bill adopting the Map Act was entitled, in part, “An Act to control the cost of acquiring rights-of-way for the State’s Highway System.” The Map Act authorized NCDOT recording a map in a land registry showing the location of a future highway and the properties affected by it.

No building permits for new structures or subdivisions located in the future rights-of-way shown on a map could be issued for three years after recordation, but property owners could pursue variances and early hardship acquisitions.

Once recorded, a map remained in a property owner’s chain of title forever or until NCDOT filed a condemnation action. Everybody has record knowledge of the future highway, the rules of governmental entitlements are established and some remedies for property owners are created.

The Case

The Fundamental Question

The specific issue in Beroth Oil v. NCDOT, (2014 WL 1477931) is: Did the trial court err when it denied the property owners request to certify a class of all owners of property affected (in the property owners’ words “taken”) by recordation of a corridor map? To reach a holding on this issue, the North Carolina Supreme Court, through majority and minority opinions, examines a fundamental question that arises in every inverse condemnation case: What legal standard applies to the substantive merits of an inverse condemnation claim?

Court Holdings

The Trial Court and North Carolina Court of Appeals

The trial court denied class certification of a class of 800 property owners. It reasoned that the “ends-means” test applied because the alleged takings were caused by restrictions on a map recorded pursuant to the Map Act. The ends-means test has two steps: (1) determining that the ends sought by exercising police powers are within the legitimate scope of these powers and the means chosen is reasonable and (2) determining whether the interference with a property owner’s rights amount to a taking.

The trial court concluded that an individualized determination of each property would be required and denied class certification. The North Carolina Court of Appeals affirmed and agreed that the “ends-means” test was the correct legal standard.

The North Carolina Supreme Court majority and minority opinions

Unanimously, the North Carolina Supreme Court concludes that the trial court and Court of Appeals erred by applying the “ends-means” test to determine class certification. The majority holds that analyzing the substantive merits of the property owners’ inverse condemnation claim at the class certification stage was premature. Nevertheless, the majority affirmed denying class certification “because of the unique nature of property, coupled with the large number of diverse tracts...individual issues would predominate over common issues of law and fact in a trial on the merits.”

The minority concludes that the trial court should have analyzed the substantive merits of claims at the class certification stage but the substantial inference standard applies to the property owners’ claims. Based upon the distinction between statutes adopted by using police powers to protect the public verses statutes adopted using eminent domain powers to confer a public benefit, the minority concludes that the Map Act is an eminent domain statute and the substantial interference standard applies to the property owners’ claims.

Four Implications

Before Beroth Oil, many lawyers and courts, including the trial court and the Court of Appeals, understood that the substantial interference formula applied only to physical invasions and the “ends-means” test applied to invasions caused by laws or policies. This understanding was mistaken.

A set formula for physical invasions of property remains.

The substantive interference test applies to every physical invasion of private property by the government. What does this mean? Any reduction of market value is a taking and damages are awarded.

No set formula for non-physical invasions of property rights exists.

For the majority, “[s]hort of a permanent physical invasion, however, no set formula exists to determine in all cases, whether compensation is constitutionally due for a governmental restriction of property.” Why is this so? Non-physical invasions occur in a “nearly infinite variety of ways in which governmental actions or regulations can affect property interests.” In such cases, “the takings issue is inextricably tied to the amount of damages; the extent of damages is not merely a collateral issue, but is determinative of the takings issue itself.”

For the minority, the substantive interference test applies to a law adopted using eminent domain powers and the ends-means test applies to a law adopted using police powers.

Non-physical invasions caused only by adopting or enforcing a land use law are subject to the ends-means formula.

Both opinions agree that the ends-means formula applies to an alleged taking simply caused by adoption or enforcement of a zoning ordinance.

Most cases, including Beroth Oil, involve allegations of takings caused by laws and governmental actions. As for actions by the government, concepts of tort law may be relevant. Courts “have interwoven the law of inverse condemnation with property and tort law concepts and with artificial interpretations of the eminent domain provisions.”

For alleged non-physical invasions facts make the difference.

For so long as the majority’s opinion continues to be the law, no set formula for non-physical invasions being takings exists in North Carolina. Therefore, development of facts is essential.

At first blush, two facts in Beroth Oil are disturbing: (1) NCDOT has delayed filing condemnation actions for more than 16 years and (2) the map has not been withdrawn. But, other facts exist too: (1) the project has been challenged by three federal lawsuits filed by some property owners and (2) the plaintiffs have not sought building permits or subdivisions or variances.

Should the minority opinion become law, a set formula exists. Interference with property rights caused by an eminent domain law is a functional equivalent to a physical invasion of property. Developing facts supporting categorizing a statute as a police power or eminent domain statute will be critical.

If you have any questions about the issues raised in this client alert, please contact John Cooke.

Womble Carlyle client alerts are intended to provide general information about significant legal developments and should not be construed as legal advice regarding any specific facts and circumstances, nor should they be construed as advertisements for legal services.

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