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Court to decide when loss of property value should result in government compensation

Murphy Desmond attorney Matthew Fleming stands in a vacant lot adjacent to McKee Park in Fitchburg. Fleming is representing the property owner in McKee Family I LLC v. City of Fitchburg and has been arguing that his client should prevail under standards established by the U.S. Supreme Court. (Staff photo by Kevin Harnack)

Murphy Desmond attorney Matthew Fleming stands in a vacant lot adjacent to McKee Park in Fitchburg. Fleming is representing the property owner in McKee Family I LLC v. City of Fitchburg and has been arguing that his client should prevail under standards established by the U.S. Supreme Court. (Staff photo by Kevin Harnack)

Wisconsin residents who see their property lose value following government action may soon have better chances of getting compensation.

Wisconsin common law now prevents private citizens from obtaining compensation unless they can show that a particular regulation has deprived their property of all its economically reasonable uses or value. Federal law, though, is looser in this regard.

Federal courts’ basic test for getting compensation is similar to Wisconsin’s. But, in the landmark case of Penn Central Transportation Co v. City of New York, the U.S. Supreme Court adopted a second, slightly lower standard that instead calls on courts to weigh various factors and try to strike a balance.

A zoning case now before the Wisconsin Supreme Court could eventually take the state in the same direction. The dispute is between McKee Family I LLC, a property owner, and the city of Fitchburg and concerns the permissible use of two lots lying near Fitchburg’s Wilshire Drive and Chappel Valley Road.

The former owners of the land had the site rezoned in 1994 to pave the way for a large development district. Among the projects planned for the district were four buildings containing 128 luxury apartments on the lots, as well as a clubhouse, swimming pool and underground parking.

McKee later acquired the lots under the assumption that it could pursue the same plans. Fitchburg officials helped fan the new owners’ hopes by giving the plans an initial approval and taking steps, in February 2009, toward issuing a building permit.

The project was not popular with neighbors, though, and the Fitchburg Common Council responded three months later by rezoning the property. Among other things, the change allowed only 28 apartments to be built on the two lots. Crucially, a building permit had not been issued for the original project.

McKee sued in 2010, alleging the rezoning amounted to an unconstitutional taking of its vested rights.

Dane County Circuit Court Judge John Albert disagreed. In a ruling handed down in April 2014, Albert noted McKee’s lack of a building permit. Without that official document, he concluded, there could be no vested right in the former zoning classification.

McKee did not fare well on appeal, either. Wisconsin’s District 4 Court of Appeals eventually agreed with Albert’s conclusion that McKee’s lack of a building permit meant the company had no vested property right in the previous zoning.

McKee appealed again, this time to the state Supreme Court, which agreed in April to accept the case.

Lisa Lawless, a lawyer for the city of Fitchburg, declined to comment for this article.

Matthew Fleming, the lawyer representing McKee, has been arguing that his client should prevail under the standards established by the U.S. Supreme Court in the Penn Central case.

Such contentions have strong support within the real estate industry. Wisconsin tends to mirror federal laws governing takings, so judges often look to federal case law for guidance in these sorts of cases, said Tom Larson, vice president of legal and public affairs at the Wisconsin Realtors Association. Larson and his colleagues have been backing Fleming and McKee through the company’s appeals.

Wisconsin’s standards concerning what the government should pay after taking actions that significantly affect a property’s use or value largely stem from the case of Zealy v. City of Waukesha. Handed down in 1996, the ruling in Zealy stipulated that claimants could not get compensation unless they could show they had lost all reasonable economic use of their land. The decision fell into line with a precedent the U.S. Supreme Court set in 1992 in the case of Lucas v. South Carolina Coastal Council.

The Wisconsin Supreme Court now has an opportunity to decide if the criteria are in need of revision.

“(The court) may say, ‘Yes that’s the only standard,’” Larson said. “Or, ‘No there’s not and here’s another standard.’”

Lucas established that owners must be compensated if a government regulation results in their properties losing 100 percent of their value. The trouble arises when courts are asked to decide what should happen when government action has caused such a loss merely for a part of a property rather than the whole thing.

Federal courts, for their part, have established that the effects of government regulation need not affect an entire property’s value to give rise to the need to provide compensation. Now the question is over whether Wisconsin should do the same.

“Our argument is that the U.S. Supreme Court has recognized a taking can occur short of that,” Larson said.

Among the factors now being considered by federal courts are whether the government regulations in question interfered with reasonable, investment-backed expectations and whether a property owner suffered direct economic harm.

The adoption of such standards in Wisconsin, Larson said, would give property owners an easier time of fighting unreasonable regulations.

What’s more, such a change in the state’s vested-rights doctrine would bring the state’s common law into line with a 2014 law preventing local governments from changing the rules that apply to a particular project after the developers have already applied for permission for the work to proceed. That law does not apply in McKee’s case because it was passed after McKee filed suit in 2010.

Fleming noted that Lucas, Zealy and other previous zoning cases had come along during a time when most governments had simpler planning and development regulations.

“Where you’ve gone through not only a very specific planning process but also have given land tied to the number of dwelling units you’re being able to develop, that really kicks this over the edge,” he said.


About Erika Strebel, erika.strebel@wislawjournal.com

Erika Strebel is the law beat reporter for the Wisconsin Law Journal and a law school student at UW-Madison. She can be reached at 414-225-1825.

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