Losing the Battle . . . New York Court of Appeals Overturns Development Rights Transfer Scheme

Losing the Battle … New York Court of Appeals Overturns Development Rights Transfer Scheme

So long as the Fifth Amendment to the United States Constitution exists, there will be litigation over the nature and extent of the takings question: when does governmental action abrogate private property rights through appropriation or arbitrariness? Equally certain is that there will be disagreement over the appropriate theoretical tests in takings litigation. What is uncertain, however, is the outcome of takings cases, dependent as they continue to be on the individual circumstances surrounding each case and upon judicial attitudes and perceptions of "due process" and "fairness." Several recent wetlands regulation cases in state courts exemplify these vagaries of takings law.¹

A recent decision by the New York Court of Appeals, Fred F. French Investing Co. v. City of New York,² attempts to smooth some of the conceptual turmoil in the takings area. The court may, however, have merely multiplied the confusion. In the process, land use controls advocates may have merely lost a battle in preparation for winning their war.

Fred French grew out of New York City's efforts to preserve historic landmarks and open space through the relatively new land use concept of transferable development rights (TDR). This device is, in general, aimed at reducing development pressure on valuable urban property by severing the rights to develop and shifting them to other geographically separate parcels that are better suited to more intensive development.³ Market forces presumably take over, and the owner of the parent parcel is paid for the TDR by the receiving parcel's owner. Alternatively, a municipality can set up a development rights bank under which the government compensates, as in eminent domain, owners of restricted [6 ELR 10277] parcels for their TDR's and holds the rights open for prospective purchasers. Of course, governmental financial problems make the first alternative much more palatable as a police power method of preserving landmarks or open space without the expense and administrative bother of eminent domain.

In Fred French, plaintiff had sold in 1970, subject to several mortgages, the Tudor City complex, which consists of residential buildings and two 15,000 square-foot private parks elevated over 42nd Street in mid-town Manhattan to another land company. Following a second sale of the complex, subject to mortgages still held by plaintiff, the new owner proposed to construct a 50-story tower on the parks, and then defaulted on the mortgages. Public hue and cry erupted over the development proposal, and the city included the parks in a newly-created Special Parks District, which permitted only passive recreational uses and required the parks to be open for public use.

The new zoning classification also allowed the owner of the parks to transfer the development rights to another area in mid-town Manhattan, subject to three tiers of administrative approval and continuing maintenance of the parks for public use at the owner's expense. The opening of the parks, notably, was not contingent upon the actual purchase of the TDR, thus leaving the owner with bare title, public park maintenance costs, and his TDR in limbo. Faced with this unenviable situation, the plaintiff-mortgagee sued to have the rezoning declared an unconstitutional taking of property and for an inverse condemnation award of compensation from the city.

Affirming the trial court's decision,⁴ the court of appeals held that the rezoning and attendant restrictions unconstitutionally deprived the plaintiff of property rights without due process of law, because they eliminated the owner's chance to obtain the "reasonable income productive" from the property. Chief Judge Breitel, writing for a unanimous bench, grasped the opportunity to conduct a "re-examination of much legal and judicial thinking in this area," an undertaking he had advocated in his dissent in the 1972 case of Golden v. Planning Board of Ramapo.⁵ He wasted no time in dismissing the theoretical bases of several important takings decisions,⁶ including the reversed U.S. Supreme Court benchmark opinion in Pennsylvania Coal Co. v. Mahon.⁷ These past cases were, he said, decided not on the ground that the government had confiscated property and thus owed compensation, since the courts in none of them had awarded a money judgment, but under the due process rubric that the government had engaged in an invalid exercise of the policy power.

Judge Breitel acknowledged that a police power regulation may become so "onerous" that it transforms into a taking, and that this quality is the beginning of conceptual confusion. Implicitly, then, he criticized Justice Holmes' sliding formulation in Pennsylvania Coal that "while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking"⁸ that has emboldened countless lower courts to review takings cases under a stricter balancing test rather than the reasonableness standard used in due process cases. The New York court thus adopted, without elaboration, Justice Brandeis' dissenting view in Pennsylvania Coal⁹ that police power cases are conceptually distinct from eminent domain cases, and that the standards for review are likewise distinct.

Given this underpinning, Judge Breitel analyzed the Tudor Park rezoning under the traditional¹⁰ due process reasonableness standard in police power cases: whether the ordinance serves a legitimate government purpose, whether it uses arbitrary means for such legitimate ends, and whether it destroys the parcel's economic value. The latter standard, he admitted, straddles police power and eminent domain concepts, but he nonetheless concentrated his subsequent analysis solely on the economic burden question.

Under this analysis, the court noted that the Tudor Park development rights are an essential, although abstract, attribute of the property.They were not nullified by the rezoning, but their non-vested, floating character, arising from the uncertainties of both the existance of a market and the administrative approvals necessary for their transfer, was a constitutionally repugnant "double abstraction" from the tangible piece of property. Thus, public use of the parks and precarious detachment of the development rights cumulatively destroyed the parks' economic value.

The court concluded by praising other forms of open space preservation, such as development banks or the "Chicago Plan,"¹¹ that add certainty to property restrictions, and sometimes involve compensation through partial eminent domain. This relatively positive attitude elated one commentator who has assiduously advocated the TDR concept.¹²

Two other factors should add to TDR advocates' satisfaction. First, the court implicitly accepted the facial validity of the TDR concept by assuming the legitimate governmental purpose and means-end relationship of the city's action in its due process analysis. These areas presented the court with an opportunity to strike down TDR's, if it wished to do so. Secondly, the court ignored an appellate division case, Penn Central [6 ELR 10278] Transportation Co. v. City of New York,¹³ decided five months before, that upheld the validity of the TDR scheme in New York City's Landmark Preservation Law.¹⁴ Had the court of appeals been disenchanted with the TDR idea, it could have easily criticized Penn Central. The court may thus be waiting for a less egregious instance of administrative overreaching to declare its support for TDR's.

Advocates of stronger land use regulation also should be pleased with the decision in Fred French, although not for reasons of theoretical advancement of takings law. The court's due process formulation becomes transparent upon close scrutiny. Judge Breitel was forced to employ the routine diminution of value test to reach his result. Also, his bifurcation between police power and eminent domain boils down to a view that a taking occurs only through physical invasion by the government, a test that has been roundly criticized as too simplistic in a complex regulatory era.¹⁵ Indeed, the regulation in this instance would have satisfied his eminent domain formulation, since the city forced public use onto private ownership. This adds up to a substantive due process standard, a course that involves the judiciary in perhaps as much effort to obtain a result as it would expend in any other takings case using the Holmes' balancing test of private harm versus public benefit.

There is some merit to Judge Breitel's approach because it simplifies the pleadings aspects of takings law. Now, in New York, plaintiffs seeking relief from allegedly onerous police power regulation may ask only for declaratory relief invalidating the challenged regulation. They may seek inverse condemnation only when the government appropriates the property through intrusion and cannot employ this remedy to escape mere diminution of value. New York thus follows the recent California decision in HFH, Inc. v. Superior Court,¹⁶ which allowed landowners to attack improper zoning only through a mandamus action.

This apparent trend toward simplifying the procedural aspects of takings law will bear substantive fruit only if courts also rigorously apply the normal due process standard of reasonableness to police power challenges. Judicial abstinence from searching into, for instance, the percentage of diminution and the corresponding sum of public benefits from land regulation should loosen legislative and administrative inhibitions against innovative land use regulation.

Balanced against this optimism, however, is the fact that freedom to exercise greater land use controls carries with it the responsibility of policy-makers not to lose sight of fundamental notions of fairness.¹⁷ It may be that the threat, however remote, of an inverse condemnation action for burdensome regulation instills a certain amount of sensible caution in regulators. Fred French's relaxation of that barrier should not be viewed as a call for outright war on destructive land uses, but rather, as Judge Breitel hoped, as an impetus toward ingenious resolution of modern landmark and zoning problems.

1. See Comment, Recent State Wetlands Cases: The Continuing Battle Over the Proper Scope of Regulation, 6 ELR 10125 (June 1976).

2. 39 N.Y.2d 587, 350 N.E.2d 381, 6 ELR 20810 (May 4, 1976).

3. See Costonis, Space Adrift: Landmark Preservation and the Marketplace (1974); Costonis, Development Rights Transfer: An Exploratory Essay, 83 Yale L.J. 75 (1973); Marcus, Mandatory Development Rights Transfer and the Taking Clause: The Case of Manhattan's Tudor City Parks, 24 Buffalo L. Rev. 77 (1974); Schnidman, Transferable Development Rights: An Idea in Search of Implementation, 11 Land & Water L. Rev. 339 (1976) But see Note, The Unconstitutionality of Transferrable Development Rights, 84 Yale L.J. 1101 (1975).

4. Fred F. French Investing Co. v. City of New York, 77 Misc. 2d 199, 352 N.Y.S.2d 762 (Sup. Ct. 1973), aff'd mem., 47 App. Div.2d 715, 366 N.Y.S.2d 346 (1975).

5. 30 N.Y.2d 359, 390, 285 N.E.2d 291, 309, 2 ELR 20296, 20303 (1972).

6. Lutheran Church in America v. City of New York, 35 N.Y.2d 121, 316 N.E.2d 305, 359 N.Y.S.2d 7 (1974); Arverne Bay Constr. Co. v. Thatcher, 278 N.Y. 222, 15 N.E.2d 587 (1938).

7. 260 U.S. 393 (1922).

8. Id. at 415.

9. Id. at 416.

10. 1 Williams, American Land Planning Law § 7.02, at 177 (1974).

11. Costonis, The Chicago Plan: Incentive Zoning and the Preservation of Urban Landmarks, 85 Harv. L. Rev. 574 (1972).

12. Costonis, Fred F. French Investing Co. v. City of New York: Losing a Battle but Winning a War, 28 Land Use L. & Zoning Digest No. 7, at 6 (1976). The "war" in this context is the more limited campaign to validate the TDR concept.

13. 50 App. Div.2d 265, 377 N.Y.S.2d 20, 6 ELR 20251 (Dec. 16, 1975).

14. N.Y. City Charter & Admin. Code ch. 8-A.

15. Michelman, Property, Utility, and Fairness: Comments on the Ethical Foundations of "Just Compensation" Law, 80 Harv. L. Rev. 1165, 1226-29 (1967); Sax, Takings and the Police Power, 74 Yale L.J. 36, 46-48 (1964). See also Costonis, "Fair" Compensation and the Accommodation Power: Antidotes for the Taking Impasse in Land Use Controversies, 75 Colum. L. Rev. 1021 (1975).

16. ELR 20062 (Nov. 12, 1975).

17. See generally, Michelman, supra note 15.