Petition for Writ of Certiorari — RCK Properties, Inc. v. United States, 120 S. Ct. 373 (1999) (No. 99-286)

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Supreme Court, U.S,

FILPD

99 286 Ave 17 197%

OFFICE OF THE CLERK

No.

In the

Supreme Court of the United States

FOREST PROPERTIES, INC.

(now known as RCK Properties, Inc.),

Petitioner,

UNITED STATES,

Respondent.

coe

On Petition for Writ of

Certiorari to the United States Court

of Appeals for the Federal Circuit

—-

PETITION FOR WRIT OF CERTIORARI

RONALD A. ZUMBRUN

Counsel of Record

The Zumbrun Law Firm

3800 Watt Avenue

Suite 101

Sacramento, California 95821

Telephone: (916) 486-5900

Attorneys for Petitioner

QUESTIONS PRESENTED

1. May government deny a Clean Water Act § 404

permit thereby taking a parcel of real Property and avoiding

the payment of just compensation by claiming that the parcel

is not the relevant parcel but rather part of a larger parcel

when in fact it was a separate parcel acquired at a different

time and by a different method, is under different Ownership,

is located in a different political jurisdiction and is subject to

an entirely different permit process?

2. May a property purchaser be denied just

compensation because of notice of a preexisting governmental

permit scheme, especially one that does not indicate the

property owner has any reason to believe its permit

application would not be granted or that, if not, just

compensation would not be paid?

PARTIES TO THE PROCEEDINGS

a a

The parties to the proceedings are Forest Properties,

Inc. (now known as RCK Properties, Inc.) (FPI) and the

United States acting through the United States Army Corps

of Engineers (Corps of Engineers).

FPI is the owner of the subject real property and was

the applicant in the underlying administrative proceedings.

RCK Properties, Inc. (RCK) was the parent corporation to its

wholly owned subsidiary FPI and was the successor by

merger with FPI. RCK is a wholly owned subsidiary of its

parent corporation, Henley Management Company. No

publicly held company owns 10% or more of the stock of

RCK.

The United States acting through the Corps of

Engineers is organized and operating under the laws of the

United States. Under the Clean Water Act, 33 U.S.C.

§ 1251, et seg., the Corps of Engineers has jurisdiction to

issue Section 404 permits, as defined by law.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED .................. i

PARTIES TO THE PROCEEDINGS ............ li

TABLE OF AUTHORITIES CITED ............ V

ee en kg 4k ek 0 e's l

I ry 6 5 5 oh eb eek tec ke ee + 8 l

CONSTITUTIONAL PROVISION ATISSUE ...... l

siAtomemns: OF THE CASE ...........0505. |

A. Procedural Background ............... l

REASONS FOR GRANTING THE PETITION ...... 6

I. THE DECISION BELOW CONFLICTS WITH

OPINIONS OF THE OREGON SUPREME COURT

AND THE UNITED STATES COURTS OF

APPEALS FOR THE NINTH AND FEDERAL

CIRCUITS IN THEIR TREATMENT OF THE

RELEVANT PARCEL ISSUE IN TAKINGS

CLAIMS BROUGHT UNDER THE FIFTH

ios sks G60 a > wo we ee e908 6

II.

III.

THIS CASE INVOLVES AN IMPORTANT

QUESTION OF FEDERAL CONSTITUTIONAL

LAW LEFT OPEN BY LUCAS V. SOUTH

CAROLINA COASTAL COUNCIL THAT

DESERVES RESOLUTION BY THIS COURT. . 16

HOLDING THAT "ONE WHO BUYS PROPERTY

WITH KNOWLEDGE OF A REGULATORY

RESTRAINT ASSUMES THE RISK OF

ECONOMIC LOSS" IS INCONSISTENT WITH

RULINGS OF THIS COURT, THE SUBJECT

COURT OF FEDERAL CLAIMS, AND THE

UNITED STATES COURT OF APPEALS BUT

CONSISTENT WITH THE RULINGS OF THE

NEW YORK, CALIFORNIA, AND VIRGINIA

a ee are ee ee 21

GEN 6a nie a eee ea eee ee 26

-iv-

TABLE OF AUTHORITIES CITED

Page

CASES

American Savings and Loan Association v.

County of Marin, 653 F.2d 364

ge a ee ere ee ae 9-11,13

Anello v. Zoning Board of Appeals

of the Village of Dobbs Ferry, 89 N.Y .2d 535,

656 N.Y.S.2d 184 (1997) ..... Serer eee ee 23

Basile v. Town of Southampton,

89 N.Y.2d 974, 655 N.Y.S.2d 877 (1997) ........ 23

Boise Cascade Corporation vy.

Board of Forestry, 325 Or. 185,

Se Pe RS oe oy ate ca vs ee ee ee 7

Brown vy. United States, 73 F.3d 1100

ae Ss a ae ee eee 12

City of Virginia Beach v. Bell, 255 Va. 395,

ee ee Es eke ee ee ee 24

Deltona Corporation v. United States,

Car Fae eee Cee Gee BNO 8 ek OE eR eK 14

Fifth Avenue Corp. v. Washington County,

eR ee A ee eee 11

Florida Rock Industries, Inc. v. United States,

ee Be) ee ae. ee eee 22

Page

Forest Properties, Inc. v. United States,

yee SG) fi. Mie AS Serre er |

Forest Properties, Inc. v. United States,

oe CN 8 kee oe eS ee © ie) l

Gazza v. New York State Department of

Environmental Conservation, 89 N.Y .2d 603,

Oe aes Pe ae EOD 6 k co ewe ea ee 23

K & K Construction, Inc. v. Department

of Natural Resources, 456 Mich. 570,

Sa en. Oe oe Ce a PNG ee he ore ee 11

K & K Construction, Inc. v. Department

of Natural Resources, 217 Mich. App. 56,

Se Fe ee CEO v6 8 de wee ee Oe 11

Kaiser Development Co. v. City and

County of Honolulu, 649 F. Supp. 926

(D. Haw. 1986), aff’d, 898 F.2d 112

Ce, SE 6. + 0+ 3 © 6 ee ete We Ce earn 10

Kavanau v. Santa Monica Rent Control Board,

Fe eR. : Freer ee 23-24

Kim vy. City of New York, 90 N.Y.2d 1,

3 & @ eR Fee tee ton 23

Loretto v. Teleprompter Manhattan

CATV Covp., 456 U.S. 419 (19GZ) ww ee ee es 26

Loveladies Harbor, Inc. vy. United States,

» ee Eby gi, Be A. : See 8-9,12

-vi-

TT ee ne

Page

Lucas v. South Carolina Coastal Council,

505 U.S. 1003 (1992) .......... 15-19,21,25-26

Machipongo Land and Coal Company, Inc. y.

Commonwealth of Pennsylvania, 719 A.2d 19

cee dE ee ere ee 1]

Nectow v. City of Cambridge, 277 U.S. 183 (1928) .. 10

Nollan v. California Coastal Commission,

mdienidhernd sj ML eee eT eee Tee 22

Preseault v. United States.

100 F.3d 1525 (Fed. Cir. 1996) ..._. lenin Sco eee

United States v. Riverside Bayview Homes, Inc..

Coe Soe See Ne ea eh ne 22

Volkema v. Department of Natural Resources,

214 Mich. App. 66, 542 N.W.2d 282 (1995) ...... 1]

CONSTITUTION

U.S. Const. amend. VV ..................... l

STATUTES

lin tectie bie a EE Te eee l

FE ek Car ae 2

-Vii-

32 UA. 9 OSS, BO occ cee

MISCELLANEOUS

Richard Epstein, Takings: Private

Property and the Power of Eminent

pO ee

Marc R. Lisker, Regulatory Takings

and the Denominator Problem,

27 Rutgers L.J. 663 (1996) .......

Roger Pilon, Property Rights, Takings,

and a Free Society, in Public Choice

and Constitutional Economics

(J. Gwartney & R. Wagner eds, 1988)

Page

“*

= = le a oe oe oe oe he ll

OPINIONS BELOW

The opinion of the United States Court of Appeals

for the Federal Circuit was reported as Forest Properties,

Inc. v. United States, 177 F.3d 1360 (Fed. Cir. 1999): the

entire opinion appears as Appendix A to this Petition. The

opinion of the United States Court of Federal Claims was

reported as Forest Properties, Inc. v. United States, 39 Fed.

Cl. 56 (1997); the entire opinion appears as Appendix B' to

this Petition. On August 6, 1997, its judgment and opinion

were issued.

JURISDICTION

The United States Court of Appeals for the Federal

Circuit entered judgment accompanied by its opinion on

May 19, 1999. The jurisdiction of this Court is invoked

under 28 U.S.C. § 1254.

CONSTITUTIONAL PROVISION AT ISSUE

The Fifth Amendment to the United States Constitution

provides in pertinent part: "nor shall private property

be taken for public use without just compensation."

U.S. Const. amend. V.

STATEMENT OF THE CASE

A. Procedural Background

The primary issue in this case is whether the

government’s denial of Forest Properties, Inc.’s (FP!)

' All further references to appendices hereto are shown

as App.

ilies

Pn ee

application for a Section 404° permit necessary to develop

certain lakebottom land in Big Bear Lake in the County of

San Bernardino, California, constituted a taking of private

property for public use requiring just compensation.

App. A2.

On December 16, 1992, FPI filed a complaint in the

United States Court of Federal Claims alleging inverse

condemnation. The Court of Federal Claims had jurisdiction

of the subject matter pursuant to the Tucker Act which

provides that court with original jurisdiction to render

judgment upon any claim against the United States founded

upon the Constitution, any Act of Congress, or any

reguiation of an executive department.’ After trial, the —

Court of Federal Claims indicated this would have been a

taking if the property taken was the relevant parcel. The

court, however, found that FPI had not established a taking

claim because the subject parcel was not the relevant parcel

bui rather part of a larger parcel. App. B35-36. Judgment

was entered against FPI on August 6, 1997.

The judgment was appealed and on May 19, 1999, the

United States Court of Appeals for the Federal Circuit

entered its opinion and judgment affirming the judgment of

the Court of Federal Claims. App. A.

In its opinion, the Court of Appeals for the Federal

Circuit held that the denial of a Clean Water Act § 404

permit by the respondent was not a taking requiring the

payment of just Compensation because the court found the

subject parcel was part of the larger relevant parcel. The

* Federal Water Pollution Control Act, Amendments of

1972, 33 U.S.C. § 1344 (Clean Water Act).

* 28 U.S.C. § 1491(a)(1).

‘

court so held despite the fact that the lakebottom parcel had

never been part of any other parcel, was acquired at a

different time and by a different method, was under different

ownership, and is located in a different jurisdiction with an

entirely different permit process. App. Al0. The permit

was denied even though comparable piuperties in the area

were allowed to develop. As the permit denial deprived FPI

of any beneficial use of the lakebottom property, it is

petitioner's position that this was a categorical taking

requiring just compensation. App. B35.

B. Factual Background

The following is a summary of the pertinent facts

underlying this action’:

This case grows out of the planned residential

development of two segments of property. The first segment

is a 53-acre tract of upland contiguous to Big Bear Lake in

Southern California. The second is 9.4 acres of lakebottom

contiguous to the aforementioned upland. The petitioner FP!

and Big Bear Properties, Inc. (BBP) are, respectively,

commonly owned real estate development and real estate

holding companies. App. A2

In 1969, BBP purchased 2,500 acres of land adjoining

Big Bear Lake for about $4 million. As part of the same

contract, it also received a 20-year irrevocable option from

a local water company to purchase up to 200 acres of

lakebottom land at $1,000 per acre. The option could be

exercised only by an entity (BBP or a successor) that owned

the land adjacent to the optioned lakebottom land. As the

* The Court of Federal Claims made extensive factual

determinations. App. B2-20. The Court of Appeals for the

Federal Circuit summarized those facts at App. A2-6.

a's

lake was quite shallow, any use of it would require filling

and/or dredging, and the water company had the right to

approve any plans for doing so. App. A2.

In the early 1980s, the number of acres subject to the

option was reduced. The water district approved BBP’s

tentative plan to fill and create housing sites onto 9.4 acres

of lakebottom off of Eagle Point, a particularly scenic spot.

It was provided that "(t]he deed of the District conveying the

Lake Bottom Land ... shall contain a reversionary clause

under which title to [the lake-bottom] shall revert to the

District if the proposed excavation and filling ... shall not be

completed within three years after the date of said deed."

App. A2-3.

In March 1988, BBP applied to the Corps of Engineers’

office for a Section 404 permit for a dredge and fill of

approximately nine acres at Big Bear Lake adjacent to a

residential subdivision. After filing the permit application,

BBP, in May 1988, sold 53 acres of the uplands to FPI for

$3.6 million. Five months later, in October 1988, BBP

assigned to FPI the option to the 9.4 acres of lakebottom,

without additional payment. FPI also took over the Section

404 permit application. App. A4.

FPI exercised the option by entering into a contract to

purchase the lakebottom land from the water district. It also

agreed with the water district to postpone the closing under

the contract, thereby delaying the execution of the deed and

avoiding the three year dredge-and-fill period established by

the settlement agreement. By entering into the contract, FPI

obtained equitable title to the lakebottom land under the

doctrine of equitable conversion. App. AS.

In February, 1992, the Corps of Engineers denied FPI’s

permit application. App. A5. FPI proceeded to develop the

upland property. FPI estimated that the additional lots on the

-4-

proposed filled-in lakebottom property would have provided

an additional profit of $2.36 million and claimed that its

equitable title to the lakebottom now is worthless.

App. AS-A6.

FPI filed the present lawsuit in the Court of Federal

Claims, seeking just compensation for the government's

alleged taking of its property. FPI argued that the denial of

the permit was a taking because it both deprived FPI of

productive use of the lakebottom land and would result in

title to the lakebottom land reverting to the water district.

There is nothing in the record that Suggests that FPI had

prior notice that the Section 404 permit would be denied or

that, if denied, compensation would not be paid. In fact, the

court indicated that if it had decided that the 9.4 acres was

the pertinent property, it most likely would have proceeded

to analyze the case as a categorical taking. App. B35. After

trial, the court held that there had been no taking and

dismissed the complaint. The court also held that because

the regulation deprived FPI of only a small portion of the

entire development and because the development as a whole

was still profitable, "the economic impact of the regulation

is not sufficiently severe to constitute a taking." App. A6.

The decision of the Court of Federal Claims was

subsequently upheld by the Court of Appeals for the Federal

Circuit. The Circuit Court also held that the investment-

based expectations criterion "limits recovery to owners who

can demonstrate that they bought their property in reliance

on the non-existence of the challenged regulation."

App. Al2.

FPI argued that its property has been categorically taken.

The effect of the government's denial of the Section 404

permit was to prevent FPI from filling the lakebottom land

and building houses on it. The permit denial also deprived

FPI of any beneficial use of the lakebottom property and was

thereby a categorical taking requiring compensation. App.

B35. Furthermore, FPI had the right to assume its permit

application would be granted or if not that just compensation

would be provided. App. B32.

PI also argued that the permit denial was a regulatory

taking because the lakebottom fill was not a nuisance, the

permit denial placed the economic burden of wetlands

protection solely and unfairly on FPI and the permit denial

vitiated FPI's distinct investment-backed expectations.

REASONS FOR GRANTING THE PETITION

THE DECISION BELOW CONFLICTS WITH

OPINIONS OF THE OREGON SUPREME COURT AND

THE UNITED STATES COURTS OF APPEALS FOR

THE NINTH AND FEDERAL CIRCUITS IN

THEIR TREATMENT OF THE RELEVANT PARCEL

ISSUE IN TAKINGS CLAIMS BROUGHT

___UNDER THE FIFTH AMENDMENT

The importance of the constitutional question raised by

this case is underscored by the existence of deep conflicts on

this issue between the states and among the United States

Courts of Appeals. Although FPI’s Fifth Amendment takings

claim was denied by the Court of Federal Claims and the

Court of Appeals for the Federal Circuit, it would have been

upheld by the Oregon Supreme Court under that state’s

interpretation of the federal Constitution. FPI also would

have prevailed in certain circuits of the United States Courts

of Appeals and before different panels of the Court of

Appeals for the Federal Circuit. Other states and circuits are

hopelessly divided on this issue. The rights guaranteed to

citizens under our Constitution should not depend on the

particular state or federal jurisdiction in which they are

r 3

asserted. This Court should grant the petition to establish

uniformity in the treatment of takings claims under the Fifth

Amendment.

The Oregon Supreme Court has found a taking when

environmental regulation required that a discrete segment of

a larger tract must be used for endangered species habitat.

In Boise Cascade Corporation v. Board of Forestry,’ the

state Board of Forestry denied an application to harvest

timber on a 64-acre tract to protect an endangered species

(the northern spotted owl) that had established its habitat on

the plaintiff's property. The Board of Forestry specified an

8-acre segment that could be harvested subject to certain

conditions, thereby carving out a 56-acre segment that was

deprived of all economically viable use and forced into

service as species habitat." The property owner sued,

alleging a Fifth Amendment taking of the 56-acre segment.

The Oregon Supreme Court found that the plaintiff had

stated a claim for a taking by alleging “‘depriv{ation] ... of

the only economically viable use of approximately 56 acres

of merchantable timber.’"’ The court emphasized that it

considered the regulated 56 acres to be the relevant parcel

for its takings analysis by denying a concurrent claim for a

temporary taking of the remainder of the 64-acre tract!*

> 325 Or. 185, 935 P.2d 411 (1997).

° Id. at 188.

Id. at 198 (citing complaint).

* Id. at 197-98.

The opinion below also conflicts with the Federal

Circuit’s decision in Loveladies Harbor, Inc. v. United

States.’ In Loveladies, landowners brought a claim for the

regulatory taking of a 12.5-acre segment of a 51-acre parcel.

Originally, the 51 acres had been part of a 250-acre tract,

most of which had already been developed and sold."°

When the Corps of Engineers denied Loveladies a federal

permit needed to develop the 12.5 acres, instead requiring

the land to be used for wetlands preservation, Loveladies

brought suit against the federal government for just

compensation under the Takings Clause.

The Federal Circuit Court was directly confronted with

the relevant parcel issue. The government contended that the

relevant property for a takings analysis was either

Loveladies’ original 250-acre tract or the 5l-acre parcel

which it still owned when the permit was denied."

Loveladies argued that the relevant parcel of the takings was

the 12.5 acres for which it had sought a permit.’”

The Federal Circuit Court agreed with Loveladies,

declining to include the impact of the permit denial on the

remaining 38.5 acres. The court concluded that "the relevant

property for the takings analysis is the 12.5 acres, for

which the trial court found the remaining value to be

de minimis."'? Consequently, the Court of Appeals for the

Federal Circuit held Loveladies had been deprived of all

° 28 F.3d 1171 (Fed. Cir. 1994),

10 Id. at 1180.

= &

'2 Id. at 1181.

economically beneficial use of the "relevant parcel." Thus

the permit denial was “effectively a total taking of the

property owners’ interest in these [12.5] acres."'*

The decision below also conflicts with the Ninth Circuit

Court’s decision in American Savings and Loan

Association v. County of Marin.’ Marin County applied

two different zoning classifications to two contiguous

segments of a landowner’s property. One 48-acre section

called Strawberry Spit (Spit) was zoned as urban open space

with a 5-acre minimum lot size. An adjacent 20-acre section

known as Strawberry Point (Point) was zoned to allow

4 multi-residential units per acre.'° Point was worth some

$2 million under this zoning arrangement.'’ Nevertheless

the owner sued, alleging a regulatory taking of Spit because

of the severe zoning restrictions on the 48-acre section. The

trial court held that, since Spit and Point were contiguous

sections of land under common ownership, the entire 68

acres comprised the relevant parcel for purposes of

determining takings liability ."*

On appeal, the Ninth Circuit Court recognized that the

issue before it was "whether the challenged ordinance creates

two separate parcels for taking purposes by adopting different

zoning designations for each parcel."'? The court rejected,

'* Id. at 1182 (emphasis added).

'S 653 F.2d 364 (9th Cir. 1981).

'© Id. at 367.

'7 Id. at 368.

" o

'9 Id. at 370.

as inapplicable, cases wherein property was treated as a

single unit for takings purposes because in those cases "the

entire subject property was covered by a_ uniform

restriction."*° Instead, the Ninth Circuit noted that this

Court in Nectow v. City of Cambridge! applied separate

constitutional analyses to two contiguous segments of

property under common ownership that had been subjected

to different zoning.”

Most significantly, the American Savings court

concluded by holding that if the appellant can show that "the

Spit and Point have been, or would be, treated separately

when its development plans are submitted ... [then] the Spit

must be analyzed as a_ separate parcel for takings

w)3

purposes.

0 Id. at 369.

*! 277 U.S. 183 (1928).

“- American Savings and Loan, 653 F.2d at 370.

Id. at 372. Accord, Kaiser Development Co. v. City and

County of Honolulu, 649 F. Supp. 926 (D. Haw. 1986),

aff’d, 898 F.2d 112 (9th Cir. 1990). In deciding to treat

different segments of a single legal property as separate

parcels for purposes of its takings analysis, the court cited as

the "most important" consideration the fact that "the City has

treated Queen’s Beach separately for zoning and planning

purposes. ... In summary, under the facts of this case,

Queen's Beach is to be considered a separate parcel for the

purposes of determining whether there has been a taking."

649 F. Supp. at 947-48.

-10-

Be et ot Oe | ee a

The Ninth Circuit Court of Appeals also agreed with the

Oregon Supreme Court's analysis in Fifth Avenue Corp. v.

Washington County’ wherein that court "divided the

property analytically into two separate parcels" depending on

whether they were zoned as developable or not.”

On the other hand, the Federal Circuit Court’s decision

in the subject case is fully consistent with the decisions of the

Michigan courts in Volkema v. Department of Natural

Resources *° and K & K Construction, Inc. v. Department

of Natural Resources.*’ In Volkema, the court found that

wetlands preservation of a 6-acre parcel denying the owner

of all beneficial use did not require just compensation. The

rationale was based on the 6-acre segment being included in

a larger 24.6-acre tract. That decision, however, is

inconsistent with decisions in the State of Pennsylvania’®

and earlier decisions of the Michigan Court of Appeals.”°

** 581 P.2d 50 (Or. 1978).

* American Savings and Loan, 653 F.2d at 370.

°° 214 Mich. App. 66, 542 N.W.2d 282 (1995).

7 456 Mich. 570, 585-86, 575 N.W.2d 531 (1998).

Machipongo Land and Coal Company, Inc. y.

Commonwealth of Pennsylvania, 719 A.2d 19, 28 (1998).

* K & K Construction, Inc. v. Department of Natural

Resources, 217 Mich. App. 56, 551 N.W.2d 413 (1996).

-11-

The Court of Federal Claims in the subject case made

this critical holding:

"If the Court were to have decided that the pertinent

property was solely the 9.4 acres of lakebottom

property for which FPI sought, and was

subsequently denied, a section 404 permit, then this

Court would most likely have proceeded to analyze

this case as a Lucas-type categorical taking. The

justification would be that the value of the

lakebottom land was essentially eviscerated due to

the inability of FPI to dredge and fill the area and

place residential homes on the acreage." App. B35.

In the case of a categorical taking, liability is a foregone

conclusion.” However, the subject Circuit Court of

Appeals held that FPI’s claim for the total taking of the

lakebottom parcel failed because the court should consider

the value remaining in the contiguous 53-acre upland parcel

owned by FPI. App. A6._ This is the position the

government took in Loveladies but was unsuccessful.

FPI presents a stronger case than that of the plaintiff in

Loveladies. There, the 12.5 acres were part of the original

250-acre parcel. Here, FPI’s lakebottom parcel has never

been part of the larger upland parcel. FPI acquired its

interests in the two parcels at different times and by different

methods. FPI acquired the upland parcel by grant deed on

May 3, 1988, and holds that parcel in fee simple. App. BS;

Joint Exhibit 7 at Court of Appeals for the Federal Circuit,

1996).

~12-

Vive ata

Joint Appendix 1041-42*'; Foulkes testimony, JA 315:22-

316:1. FPI does not hold, and has never held, fee title to the

lakebottom parcel. FPI acquired an equitable interest in the

lakebottom parcel by the exercise of the option on

November 29, 1988, and the water district still holds the

legal title in fee. App. B8-9, 26-30; Foulkes testimony,

JA 316:2-17. The two parcels are in different jurisdictions:

the upland parcel is in the City of Big Bear Lake and the

lakebottom parcel is in the unincorporated area of

San Bernardino County. Foulkes testimony, JA 316:25-

317:5.

In the present case, the lakebottom land has been

treated separately for development purposes. Not only the

Section 404 permit but numerous other state and local

permits (including dredge and fill and shorezone alteration

permits) were required to develop the lakebottom land.

App. B11-13; Foulkes testimony, JA 302:12-303:12. These

permits were not required for the upland parcel. Under the

American Savings test, the lakebottom land is a separate

parcel.

The separate nature of the lakebottom and upland parcels

is emphasized by the facts of this case. Local government

levies taxes based on parcels. FPI pays property taxes on the

upland parcels that-t-owns at Eagle Point but does not pay

property taxes on the lakebottom parcel because FPI does not

own the lakebottom parcel. Foulkes testimony, JA 317:6-20.

When FPI created its Eagle Point project, it did not

consider the upland and lakebottom parcels as part of a single

parce!. This was because the lakebottom parcel was never

fully defined in that it was changing shape and location

*! All further references to the Joint Appendix are shown

as JA.

-13.

during the life of the project. Foulkes testimony, JA 318:11-

20. However, the upland parcel could be developed and, in

fact, is being developed without the development of the

lakebottom — parcel. App. BI8, Foulkes testimony,

JA 318:22-319:1,

If the fill had been completed on the lakebottom project,

it would have been possible to develop the lakebottom

without developing the adjacent uplands. The lakebottom

land was a separate parcel that could have been zoned and

developed within the county or within the city. All that

would have been needed would be to put road access

containing the various utilities to the site from the adjacent

road, Dodson testimony, JA 449:19-450:9; Foulkes

testimony, JA 354:16-355:2.

The upland parcel and the lakebottom parcel are

sometimes described as one project in some documents

because the City of Big Bear Lake, in April, 1988, indicated

that it would not issue a grading permit on the lakebottom

unless a tentative tract map was filed on both the upland and

the lakebottom parcel. At that point the project grew to

include both parcels. Foulkes testimony, JA 319:2-12.

However, there is a difference between a parcel and a

project. A development project may consist of more than

one parcel. Different owners of different parcels can

cooperate and use their separate parcels as part of a

development project but that does not make each parcel part

of a whole single parcel. Foulkes testimony, JA 317:21

318:10.

The Court of Federal Claims, App. B43, B54, relied on

cases such as Deltona Corporation v. United States,”

which holds that under certain circumstances where claimants

° 657 F.2d 1184 (Ct. Cl. 1981).

.14-

iii pak iat than Fen ans

divide the original property they may not later assert takings

claims solely for those divided portions. Here, by contrast,

TRA acquired the ‘two puree’ss ‘tty sepAT Me RUAN Uh

separate times EPI acquired the upland parcel by

Corporation Grant Deed on May 3, 1988, App. BS, and

acquired the option rights to the lakebottom parcel on

October 17, 1988, App. B6, and acquired equitable title to

the lakebottom parcel by exercise of the option on

November 29, 1988. App. B&8. The parcels have never been

divided because they have never at any time been part of the

same parcel

With the resulting loss to EPI of the lakebottom land

caused by the denial of the Section 404 permit and the

required reversion of that parcel to the water district, FP

retains none of the incidents of ownership of that parcel. It

does not have the right to use the lakebottom land in its

current condition, to restrict or permit access to it by others,

to sell, lease or give it away, in whole or in part. In fact,

after the reversionary clause’s resulting divestment of the

lakebottom land, FPI will not retain a single stick in the

bundle of property rights adhering to that land.”

But even more telling is the unique legal status of the

lakebottom parcel. Section 7.d. of the 1983 Agreement

requires that the lakebottom parcel must be filled within three

years of the date of the deed of conveyance of that parcel o1

else the title to the parcel shall revert to the water district

App. B4-5; Joint Exhibit 4, JA 1024. Thus if FPL cannot get

its fill permit, it loses the lakebottom parcel altogether. This

factor alone shows that, legally, the two parcels are separate

and distinct. In summary, the distinct physical and legal

See Lucas v. South Carolina Coastal Council, 505 U.S

1003, 1027 (1992)

15-

characteristics of the lakebottom parcel show that said parcel

has never been part of the upland parcel and is therefore the

only relevant parcel for the takings analysis.

THIS CASE INVOLVES AN IMPORTANT

QUESTION OF FEDERAL CONSTITUTIONAL

LAW LEFT OPEN BY LUCAS V. SOUTH

CAROLINA COASTAL COUNCIL THAT

DESERV LUTION BY THIS COURT

In Lucas, this Court declared that land use restrictions

that deprive owners of all economically beneficial use of

their property trigger the requirement for just compensation

under the Takings Clause of the Fifth Amendment. The

Lucas opinion candidly admitted, however, that

"the rhetorical force of our ‘deprivation of all

economically feasible use’ rule is greater than its

precision, since the rule does not make clear the

‘property interest’ against which the loss of value is

to be measured. When, for example, a regulation

requires a developer to leave 90% of a rural tract in

its natural state, it is unclear whether we would

analyze the situation as one in which the owner has

been deprived of all economically beneficial use of

the burdened portion of the tract, or as one in which

the owner has suffered a mere diminution in value

of the tract as a whole."*

* 505 U.S. at 1019.

*$ 505 U.S. at 1016 n.7.

-16-

The uncertainty surrounding this issue has imposed

severe Costs On property owners, as illustrated by the case

at bar. Petitioner respectfully submits that the time has come

for this Court to revisit the partial categorical takings issue

left open in Lucas.

Lucas states that there are at least two discrete categories

of regulatory action that are compensable without case-

specific inquiry into the public interest advanced in support

of the action. The first includes regulation that compels the

property owner to suffer a physical "invasion" of his

property. The second category includes regulation that

denies all economically beneficial or productive use of the

land.*° These two types of regulatory action have come to

be known as "categorical takings." App. A7.

The lower courts misunderstood the nature of categorical

takings. As stated by the Court of Federal Claims: "Critical

to this Court’s determination that the regulatory taking

analysis is the appropriate method to use to analyze FPI’s

taking claim is its determination of the relevant parcel that

has been allegedly taken." App. B22. The court apparently

believed that if “only a small portion of the plaintiff's

property has allegedly been taken" a categorical taking has

not occurred. Jd. The court reaffirmed this position in the

following holding:

"Clearly, the Corps’ denial of FPI’s permit did not

deprive FPI of all economic viability for the

relevant parcel. On the contrary, the facts

undeniably confirm that substantial and viable

economic use remains in the integrated development

of uplands and lakebottom at the Eagle Point Estates

project. Thus, a categorical taking, or a per se

taking, simply did not occur." App. B41 (footnote

omitted; emphasis by court).

The Federal Circuit Court similarly described this in ruling

that “because the regulation deprived Forest of only a small

portion of the entire development and because the

development as a whole was still profitable, ‘the economic

impact of the regulation is not sufficiently severe to constitute

a taking.”" App. A6.

These statements are factually and legally incorrect.

Factually, the Corps of Engineers’ denial of the Section 404

permit prevents any "integrated development of uplands and

lakebottom." Indeed, the denial means there can be no

development whatever of the lakebottom and ownership of

the lakebottom will revert to the water district. Legally, the

true test of a categorical taking is, as the trial and appellate

courts acknowledged, whether a physical occupation occurred

or all beneficial or productive use of the property has been

prohibited. App. B22; App. A7.

Had the government formally condemned the 9.4 acres

of lakebottom land and conveyed it to the water district for

use as a wildlife preserve there would be no argument that

such action constituted a taking of FPI’s property. The fact

that the same result was obtained through denial of the

Section 404 permit does not make the government’s actions

any less of a taking of FPI’s property.

The second situation in which categorical treatment

of takings is appropriate is where regulation denies all

economically beneficial or productive use of land.*’ Lucas

indicates that the justification for this rule may be that total

” Lucas, 505 U.S. at 1015.

-18-

pas a eas Sia Se ane. See akan

(ASIC Da SS

deprivation of beneficial use is, from the landowner’s point

of view, the equivalent of a physical appropriation.’ The

Court notes its "frequently expressed belief that when the

owner of real property has been called upon to sacrifice all

economically beneficial uses in the name of the common

good, that is, to leave his property economically idle, he has

suffered a taking." The government's denial of the

Section 404 permit deprives FPI of any economically

beneficial use of the lakebottom parcel. App. B35. In the

terms of Lucas, the denial of FPI’s permit application

requires that FPI leave its property economically idle and

constitutes a taking. App. B35.

In Lucas, this Court found the deprivation of all

economically viable use of David Lucas’ two beachfront lots

gave rise to a categorical taking (barring a showing that the

owner's proposed property use was foreclosed by state

common law principles).“”. Compensation was required

because the enactment of South Carolina’s Beachfront

Management Act had displaced the entirety of Mr. Lucas’

rights of dominion and control over the use of his property.

But the state would have taken no less if Mr. Lucas had

happened to own a third lot, on which he could build. If

Mr. Lucas had all along owned a third parcel on the Isle of

Palms, located inland of the "no-build" line established by

the Beachfront Management Act, would this have altered the

outcome of his case? There is no reason to believe that fact

would have been relevant to the takings analysis.

8 Id. at 1017.

Id. at 1019 (emphasis in original).

Id. at 1029-31.

-19-

As Professor Epstein notes:

"Prima facie, compensation must be paid for the

land taken no matter how much land the owner

retains. ... In the case [where the state takes two

acres of land from a four-acre parcel], what is

decisive is that which is taken, not that which is

retained. It matters not if the claimant owns only

the two acres taken or the full four acres; the

obligation to compensate is constant in either

case. "*!

The task of determining the relevant parcel for Fifth

Amendment takings claims, is "[o]ne of the most troubling

areas in current takings jurisprudence."** The doctrinal

importance of this issue has been well summarized by

Professor Epstein:

"The protection afforded by the eminent domain

clause to each part of an endowment of private

property is equal to the protection it affords the

whole--no more and no less. No matter how the

basic entitlements contained within the bundle of

ownership rights are divided and no matter how

many times the division takes place, all of the pieces

together, and each of them individually, fall within

the scope of the eminent domain clause. "**

*' Richard Epstein, Takings: Private Property and the

Power of Eminent Domain 57-58 (1985).

“Marc R. Lisker, Regulatory Takings and _ the

Denominator Problem, 27 Rutgers L.J. 663, 725 (1996).

“* Epstein, Takings at 57.

-20-

There are doctrinally important reasons for this Court to

clarify that Lucas’ categorical rule applies to the taking of

discrete, independently viable parcels of real property, even

when these parcels comprise less than the totality of an

owner's property holdings.

There are compelling reasons for this Court to apply

Lucas’ categorical takings rule to the regulatory deprivation

of all beneficial use of a discrete. independently viable

segment of real property. Deprivations such as those

imposed by the Corps of Engineers in the case at bar entail

the assertion of complete dominion and control over real

property, for which compensation has traditionally been

required. The segment of property that has been rendered

unusable had independent economic viability prior to

application of the regulations at issue. FPI had formed

concrete, reasonable, investment-backed expectations

regarding its use of the property, which were completely

extinguished by the Corps of Engineers’ actions.

HOLDING THAT "ONE WHO BUYS

PROPERTY WITH KNOWLEDGE OF A

REGULATORY RESTRAINT ASSUMES THE RISK

OF ECONOMIC LOSS" IS INCONSISTENT

WITH RULINGS OF THIS COURT, THE

SUBJECT COURT OF FEDERAL CLAIMS, AND

THE UNITED STATES COURT OF

APPEALS BUT CONSISTENT WITH

THE RULINGS OF THE NEW YORK.

CALIFORNIA, AND VIRGINIA SUPREME COURTS

The Court of Appeals for the Federal Circuit States that

"[t]he investment-based expectation criterion ‘limits recovery

to owners who can demonstrate that they bought their

property in reliance on the non-existence of the Challenged

-21-

regulation. One who buys with knowledge of a restraint

assumes the risk of economic loss.’" App. Al2-13.

However, this Court held in Nollan v. California Coastal

Commission™:

"Nor are the Nollans’ rights altered because they

acquired the land well after the Commission had

begun to implement its policy. So long as the

Commission could not have deprived the prior

owners of the easement without compensating them,

the prior owners must be understood to have

transferred their full property rights in conveying

the lot."

The Court of Appeals for the Federal Circuit's language

also is too broadly stated. More appropriately it would be

phrased to include property owners who bought their

property in reasonable reliance on their ability to comply

with the regulation at issue. "[AJ]fter all, the very existence

of a permit system implies that permission may be granted,

leaving the landowner free to use the property as desired."

Florida Rock Industries, Inc. vy. United States*> (citing

United States v. Riverside Bayview Homes, Inc.*°).

The Federal Circuit Court’s decision in this respect is

even in direct contravention with the Court of Federal Claims

decision in the subject case which states "[t]his Court

believes, however, that a permit-based regulatory system

presents a situation in which it is fallacious to argue that the

* 483 U.S. 825, 833 n.2 (1987).

* 18 F.3d 1560, 1580 (Fed. Cir. 1994).

* 474 U.S. 121, 127 (1985).

Pe siainle

existence of the regulatory regime can deny a property owner

the requisite compensable property interest. "App. B32.

See discussion, App. B30-32.

The Federal Circuit Court’s ruling also is inconsistent

with the same Circuit Court's decision in Preseault v. United

States.’ There it was stated "the statute does not say that

such actions are without consequences to the property

owners, nor does it say that the property owners will not, or

must not, be compensated for such actions. "**

However, the Circuit Court’s ruling is fully consistent

with the decisions of the New York Supreme Court in Kim vy.

City of New York,” Anello v. Zoning Board of Appeals of

the Village of Dobbs Ferry,” Basile v. Town of

Southampton,*' and Gazza v. New York State Department

of Environmental Conservation.”

It also is consistent with the California Supreme Court's

rent control decision in Kavanau v. Santa Monica Rent

Control Board ® where that court stated: "“[s]imilarly, the

‘interfere[nce] with [Kavanau’s] distinct investment-backed

100 F.3d 1525 (Fed. Cir. 1996).

Id. at 1551.

90 N.Y.2d 1, 659 N.Y.S.2d 145 (1997).

S| 89 N.Y.2d 974, 655 N.Y.S.2d 877 (1997).

2 89 N.Y.2d 603, 657 N.Y.S.2d 555 (1997).

33. 16 Cal. 4th 761, 780 (1997) (brackets in original).

93.

expectations’ was minor, considering he had constructive

knowledge of the 12 percent limit when he chose to improve

his property."

Similarly, the Virginia Supreme Court in City of

Virginia Beach v. Bell ™ ruled:

"In Lucas, the plaintiff property owners purchased

the land prior to the enactment of the regulation

restricting the use of their property. Thus, the

subsequent regulation directly affected the property

owners’ ‘bundle of rights’ which, at the time of

their purchase, included the right to develop their

property freely.

"In contrast to Lucas, however, the Ordinance at

issue here predated Bell’s and the Trustee’s

acquisition of the property. Therefore, the ‘bundle

of rights’ which either Bell or the Trustee acquired

upon obtaining title to the property did not include

the right to develop the lots without restrictions."*

Further, it is not enough to argue that FPI was aware of

the Clean Water Act. Even if the "notice defense" were

valid, the government would have to show that FPI was on

notice that the Clean Water Act prohibited development of

the lakebottom parcel. The Act itself does not prohibit

dredging and filling per se. Indeed, the Corps of Engineers’

former District Engineer, Col. Charles S$. Thomas, testified

that the purpose of Section 404 of the Clean Water Act is to

consider the permissibility of fill in waters of the United

States. Permits are sometimes granted to fill waters of the

* 255 Va. 395, 498 S.E.2d 414 (1998).

Id. at 401.

-24-

simaaataiaaiaiiiiiiiaiiaaiiiidiiaiiaias

United States and sometimes permits are granted for fill

which is to be used for residential sites in waters of the

United States. Thomas testimony, JA 571:25-572:12. It is

legal to place fill in a special aquatic site such as Big Bear

Lake so long as one has a Section 404 permit. Thomas

testimony, JA 575:25-576:5.

FPI had obtained all state and local approvals necessary

to dredge the lakebottom parcel, including a waste discharge

permit from the Santa Ana Regional Water Quality Control

Board, a 1603 permit from the California Department of Fish

and Game, a Shorezone Alteration permit from the water

district, and a grading permit from the City of Big Bear

Lake. App. B12-13. As the Court of Federal Claims found,

"the only remaining regulatory hurdles were within the

jurisdiction of the Federal Government." App. B13.

The fact that numerous dredge and fill projects had taken

place in Big Bear Lake at the time of the permit application

gave petitioner every reason to believe its project would be

approved. Foulkes testimony, JA 232:22-235:2; Dodson

testimony, JA 433:15-434:12. Lucas © declares:

"The fact that a particular use has long been

engaged in by similarly situated owners ordinarily

imports a lack of any common-law prohibition

(though changed circumstances or new knowledge

may make what was previously permissible no

longer so ....) So also does the fact that other

landowners, similarly situated, are permitted to

continue the use denied to the claimant."

It is evident, as set forth above, that this important issue

deserves the attention of this Court.

-25-

CONCLUSION

Our takings jurisprudence largely rests on the recognition

that private property rights are inextricably linked with

individual liberty and autonomy.*’ As this Court has

recognized, property owners can suffer a unique injury--

regardless of the scale of the government's intrusion.”

In the subject instance, FPI owns two distinct and

severable parcels. Therefore, the parcel acquired by inverse

condemnation constitutes the relevant parcel. Even if they

were deemed to be part of a simple nondistinct ownership, a

takings still would occur if the regulation precludes use of an

identifiable, discrete piece of property even though the parcel

acquired forms only a portion of the larger parcel.

This Court should grant this petition and address the

issue left open in Lucas of categorical takings and the issue

of the relevant parcel. The facts of this case offer this Court

the opportunity to provide the much-needed guidance to the

lower federal and state courts and to establish a uniform base

of constitutional protection under the Fifth Amendment.

See, e.g., Roger Pilon, Property Rights, Takings, and a

Free Society, in Public Choice and Constitutional

Economics 151, 176 (J. Gwartney & R. Wagner eds, 1988)

("property rights are at the very heart of a free society,

serving to define the normative relationships among its

members and to enable those individuals to pursue their

various ends free from the interference of others").

Loretto v. Teleprompter Manhattan CATV Corp.,

458 U.S. 419, 436 (1982).

-26-

Similarly, this Court should grant this petition to

establish once and for all that illegal regulatory practices are

not legalized by the mere transfer of property ownership

When one transfers a property interest, it is accompanied by

all related existing and future rights against government's

illegal practices.

For the reasons set forth above, petitioner respectfully

requests that this Court grant the Petition for Writ of

Certiorari

DATED: August 13, 1999.

Respectfully submitted,

RONALD A. ZUMBRUN

COUNSEL OF RECORD

The Zumbrun Law Firm

3800 Watt Avenue

Suite 101

Sacramento, CA 95821

Telephone: (916) 486-5900

Facsimile: (916) 486-5959

Attorneys for Petitioner

APPENDIX A

Copr. (C) West 1999 No Claim to Orig. U.S. Govt. Works

177 F.3d 1360

(Cite as: 177 F.3d 1360)

FOREST PROPERTIES, INC.(now known as RCK

Properties, Inc.), Plaintiff-Appellant,

UNITED STATES, Defendant-Appellee,

and

Big Bear Municipal Water District, Defendant-Appellee.

No. 97-5145.

United States Court of Appeals,

Federal Circuit.

May 19, 1999,

John H. Findley, of Sacramento, California, argued

for plaintiff-appellant. With him on the brief were Ronald

A. Zumbrun and Meriem L. Hubbard.

Andrew C. Mergen, Attorney, Environmental and

Natural Resources Division, U.S. Department of Justice,

of Washington, DC, argued for defendant-appellee,

United States. With him on the brief were James F. Simon,

Acting Assistant Attorney General, Edward J. Passarelli,

Alan Brenner, and John A. Bryson, Attorneys.

W. Keich Lemieux, Lemieux & O’Neill, of Westlake

Village, California, for defendant-appellee, Big Bear

Municipal Water District.

Before LOURIE, Circuit Judge, FRIEDMAN, Senior

Circuit Judge, and RADER, Circuit Judge.

FRIEDMAN, Senior Circuit Judge.

This appeal challenges the Court of Federal Claims’

decision that the United States did not take the appel-

lant’s real property when it denied the appellant a permit

to dredge and fill certain underwater lake-bottom prop-

erty. We agree that there was no taking and therefore

affirm the judgment dismissing this suit for just compen-

sation.

This case grows out of the planned residential devel-

opment of two segments of property. The first segment is

a 53 acre tract of upland contiguous to Big Bear Lake (the

Lake) in Southern California. The second is 9.4 acres of

lake-bottom contiguous to the aforementioned upland.

The appellant Forest Properties, Inc. (Forest) and Big Bear

Properties, Inc. (Big Bear) are, respectively, commonly-

owned real estate development and real estate holding

companies.

In 1969, Big Bear purchased 2500 acres of land adjoin-

ing the Lake for about $4 million. As part of the same

contract, it also received a 20-year irrevocable option

from a local water company to purchase up to 200 acres

of lake-bottom land at $1,000 per acre. The option could

be exercised only by an entity (Big Bear or a successor)

that owned the land adjacent to the optioned lake-bottom

land. As the lake was quite shallow, any use of it would

require filling and/or dredging, and the water company

had the right to approve any plans for doing so.

In the early 1980's, the number of acres subject to the

option was reduced in the settlement of a dispute

between Big Bear and the successor water district (the

rs i

he Ne ot ak sO an Ae

ee ee ee ee

appellee Big Bear Municipal Water District) over the val-

idity of the option. As part of the settlement, the water

district approved Big Bear’s tentative plan to fill and

create housing sites on 9.4 acres of lake-bottom off of

Eagle Point, a particularly scenic spot. The settlement

also provided that “[t]he deed of the District conveying

the Lake Bottom Land .. . shall contain a reversionary

clause under which title to [the lake-bottom] shall revert

to the District if the proposed excavation and fill-

ing ... shall not be completed within three years after the

date of said deed.”

The 9.4 acres of lake-bottom were wetlands. The Fed-

eral Water Pollution Control Act Amendments of 1972

prohibited dredging and/or filling “navigable waters”

without a permit obtained under Section 404 of those

amendments. See Pub.L. No. 92-500, § 404, 86 Stat. 816

(1972) (codified at 33 U.S.C. § 1344). In the mid-1970’s,

the Army Corps of Engineers promulgated regulations

defining “navigable waters” to include wetlands. See

United States v. Riverside Bayview Homes, Inc., 474 U.S. 121,

139, 106 S.Ct. 455, 88 L.Ed.2d 419 (1985) (validating the

Corps’ interpretation).

The Corps administers the Section 404 permit pro-

gram, see 33 U.S.C. §§ 1344(a), (d) (1988), in accordance

with guidelines developed in conjunction with the Envi-

ronmental Protection Agency, see id. § 1344(b) — the Corps

must make a “public interest review” of all permit appli-

cations, see 33 C.F.R. § 320.4(a)(1) (1988). In relevant part,

these guidelines provide that “no discharge of dredged or

fill material shall be permitted if there is a practicable

alternative to the proposed discharge which would have

less adverse impact on the aquatic ecosystem.” 40 C.F.R.

§ 230.10(a) (1988). A housing development is considered a

non-water dependent project — one that “does not require

access Or proximity to or siting within the special aquatic

site in question to fulfill its basic purpose.” Id.

§ 230.10(a)(3). For such projects, the guidelines create two = -

presumptions: (1) that “practicable alternatives that do

not involve [wetlands] are presumed to be available,

unless clearly demonstrated otherwise,” and (2) that “all

practicable alternatives . . . which do not involve a dis-

charge into [protected wetlands] are presumed to have

less adverse impact on the aquatic ecosystem, unless

clearly demonstrated otherwise.” Id. As a practical mat-

ter, this means that few, if any, dredge or fill permits will

be granted for the construction of housing.

In March 1988, Big Bear applied to the local Corps

office for a Section 404 permit for “a dredge and fill of

approximately nine acres . . . at Big Bear Lake in conjunc-

tion with a residential subdivision that will contain

waterfront lots and a small marina. * * * A total of 62

acres (9 acres of filled area) will be developed with

approximately 100 lots.” The proposed fill would have

created three peninsulas jutting out into the lake, and

would have added numerous prime, lakefront lots to the

development.

After filing the permit application, Big Bear, in May

1988, sold 53 acres of the uplands to Forest for $3.6

million. Five months later, in October 1988, Big Bear

assigned to Forest the option to the 9.4 acres of lake-

bottom, without additional payment. The owner of Forest

and Big Bear stated that the $3.6 million was consider-

ation for both the uplands and the option. Forest also

took over the Section 404 permit application.

RL LN eT Th St DE AR OE OOD BEE ADM fe TE ine

ible SLIP WS hg ian at AI SP SK nk

Forest exercised the option by entering into a con-

tract to purchase from the water district the lake-bottom

land. It also agreed with the water district to postpone

the closing under the contract, thereby delaying the exe-

cution of the deed and avoiding the three year dredge-

and-fill period established by the settlement agreement.

By entering into the contract, Forest obtained equitable

title to the lake-bottom land under the doctrine of equita-

ble conversion. See County of Santa Clara v. Curtner, 245

Cal.App.2d 730, 54 Cal.Rptr. 257, 261 (Cal.Ct.App.1966).

In February 1989, however, the Corps told Forest that

“li]f we were asked for a final decision at this time with

the information we currently possess, our recommenda-

tion to the District Engineer would be that the projects do

not meet [the] criteria for permit issuance.” Forest then

modified its development to provide a “[rJevised

[project [that] involve[d] the creation of 123 lots on 57.6

acres of land including the planned 4.4 acres of net fill.”

These 4.4 acres had only one peninsula instead of three

and the change apparently lessened the adverse effect of

the development on the wetlands environment.

By 1991, this new, smaller development had secured

the necessary state permits for the lake-bottom land. In

February 1992, however, the Corps denied the permit.

The Corps concluded that Forest’s project could satisfy

neither the Section 404 guidelines - mainly because For-

est had not rebutted the presumption that there were

available, less adverse “practicable alternatives to the

proposed discharge” - nor the Corps’ public interest

review. As an alternative, the Corps suggested “a revised

development proposal that would allow other possible

A6é

uses of the Eagle Point property, such as higher-density

lots on the available upland portions of the property.”

Forest did not seek administrative or judicial review

of the Corps’ denial of the permit. It revised its develop-

ment plan, however, to eliminate the filled peninsula and

proceeded to develop the upland. Forest created 106 lots

with a market price of about $12 million, at a cost of $7.1

million (the $3.6 million purchase price plus development

costs). Forest has sold a number, but not all of the lots.

Forest estimates that the additional lots on the proposed

peninsula would have provided an additional profit of

$2.36 million and claims that its equitable title to the lake-

bottom now is worthless.

Forest filed the present suit in the Court of Federal

Claims, seeking just compensation for the government's

alleged taking of its property. It argued that the denial of

the permit was a taking because it both deprived Forest

of productive use of the lake-bottom land and would

result in title to the lake-bottom land reverting to the

water district. After a trial, the court held that there had

been no taking and dismissed the complaint. In a 55-page

opinion that discussed the issues in detail, the court held

that because the regulation deprived Forest of only a

small portion of the entire development and because the

development as a whole was still profitable, “the eco-

nomic impact of the regulation is not sufficiently severe

to constitute a taking.” Forest Properties, Inc. v. United

States, 39 Fed. Cl. 56, 80 (1997).

The determination whether the government's denial

of a permit constituted a taking of Forest’s real property,

for which the Fifth Amendment mandates the payment of

just compensation, involves three inquiries: (A) whether

the taking alleged was physical or regulatory; (B) if the

alleged taking was regulatory, what was the relevant

parcel for determining the economic impact of the regula-

tion, see Loveladies Harbor, Inc. v. United States, 28 F.3d

1171, 1180 (Fed.Cir.1994); and (C) did the regulatory

action actually constitute a taking, see id. at 1181-82.

A. A physical taking of land occurs when the gov-

ernment itself occupies the property or “requires the

landowner to submit to physical occupation of its land,”

Yee v. City of Escondido, 503 U.S. 519, 527, 112 S.Ct. 1522,

118 L.Ed.2d 153 (1992), whether by the government or a

third party, see Preseault v. United States, 100 F.3d 1525,

1551 (Fed.Cir.1996) (en banc). In a cegulatory taking the

government prevents the landowner from making a par-

ticular use of the property that otherwise would be per-

missible. See Lucas v. South Carolina Coastal Council, 505

U.S. 1003, 1014, 112 S.Ct. 2886, 120 L.Ed.2d 798 (1992).

Such a taking may “den[y] all economically beneficial or

productive use of land” (a “categorical” taking), id. at

1015, or have “crossed the line from a noncompensable

‘mere diminution’ to a compensable ‘partial taking,’ ”

Florida Rock Indus. v. United States, 18 F.3d 1560, 1570

(Fed .Cir.1994).

Here, as the Court of Federal Claims pointed out,

“[t]here was neither a physical taking nor invasion of this

property.” The Corps’ denial of the permit merely pre-

vented Forest from making a particular use of the lake-

bottom, namely, dredging and filling it and then develop-

ing building lots on the new dry land. That is a classic

example of a regulatory taking claim.

This court without discussion twice has treated the

same government action — denial of a permit under Sec-

tion 404 of the Clean Water Act — as involving a claim for

a regulatory taking. See Loveladies Harbor, 28 F.3d at 1173;

Florida Rock, 18 F.3d at 1562.

Forest, however, contends that this case involves a

physical taking because the effect of the denial of the

permit will be the reversion to the water district of For-

est’s interest in the lake-bottom property, since the lake-

bottom would not be excavated and filled within three

years after execution of the deed to the property. This,

however, would be attributable not to the government's

action, but to the prior contractual arrangement between

Forest and the water district for such a reversion. The

government itself has not required Forest to give up or to

submit to the physical occupation of the submerged land.

See Yee, 503 U.S. at 527-28.

Indeed, Forest’s argument is abstract and conjectural.

The reversionary period is triggered by the execution of

the deed. As far as it appears from the record, the deed

has not been executed and Forest continues to retain its

equitable title to the submerged land. Unless and until

Forest obtains the deed, the three-year period for dredg-

ing and filling the lake-bottom will not begin to run, and

- it cannot be said whether or when that will ever occur.

B. We also agree with the Court of Federal Claims

that the relevant parcel for takings analysis is the entire

62 acre project. This relevant parcel inquiry is critical

because “our test for regulatory taking requires us to

compare the value that has been taken from the property

with the value that remains in the property.” Keystone

Bituminous Coal Ass'n v. DeBenedictis, 480 U.S. 470, 497,

107 S.Ct. 1232, 94 L.Ed.2d 472 (1987). See also Penn Central

Transp. Co. v. New York City, 438 U.S. 104, 130-31, 98 S.Ct.

2646, 57 L.Ed.2d 631 (1978) (“In deciding whether a par-

ticular governmental action has effected a taking, this

Court focuses ... on the nature and extent of the interfer-

ence with rights in the parcel as a whole.”).

With regard to the relevant parcel, “[o]ur precedent

displays a flexible approach, designed to account for

factual nuances.” Loveladies Harbor, 28 F.3d at 1181. It

requires courts to focus on the economic expectations of

the claimant with regard to the property. See Keystone, 480

U.S. at 500-01. Where the developer treats legally sepa-

rate parcels as a single economic unit, together they may

constitute the relevant parcel. See id.; Naegele Outdoor

Adver. v. City of Durham, 844 F.2d 172, 176 (4th Cir.1988); K

& K Constr., Inc. v. Department of Natural Resources, 456

Mich. 570, 575 N.W.2d 531, 535-37 (Mich.), cert. denied,

___ U.S. __, 119 S.Ct. 60, 142 L.Ed.2d 47 (1998).

The Court of Federal Claims found that the relevant

parcel was the entire 62-acre project. In so finding, the

court properly “ocus[ed] [sic] on how the economic

expectations of the claimant, with respect to the parcel at

issue, have shaped the owner’s actual and projected use

of the property.”

Al0

The record shows that from the outset, the develop-

ment was treated as a single integrated project (called

Eagle Point Estates) comprising the two tracts. At the

time Forest acquired its interest in the properties, it was

understood that the two portions would be developed as

a single project. As the trial court found, “from the time

° of the purchase of the upland property, [Forest’s] eco-

nomic intentions were to utilize the lakebottom acreage

and the upland parcel in conjunction with each other as

one income-producing unit.” In fact, only the owner of

the adjacent upland property could exercise the option on

the lake-bottom land. The 1988 application for the Section

404 permit described a single project of “[a] total of 62

acres (9 acres of filled area) * * * developed with approxi-

mately 100 lots.” After that application was filed, Forest

purchased the 53 upland acres for $3.6 million and

obtained the option on the submerged land without addi-

tional payment; the record indicates that the $3.6 million

was the consideration for both parcels.

Forest points to other evidence in the record which, it

contends, supports the use of the 9.4 acres of submerged

land as the relevant parcel for the taking analysis. It notes

that it had different kinds of title to the lake-bottom

(equitable ownership) and the dry land (fee), that it

acquired its interest in the two entities in different trans-

actions at different times, that different local government

authorities had regulatory jurisdiction over the two loca-

tions, and that the two segments were capable of separate

development. In holding that the entire 62 acre project

was the relevant parcel, however, the Court of Federal

Claims properly looked to the economic reality of the

arrangements, which transcended these legalistic bright

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lines, and it did not commit clear error in so doing. Cf.

Loveladies Harbor, 28 F.3d at 1181 (reviewing the relevant

parcel determination for clear error).

C. The ultimate issue in this case is whether the

Corps’ denial of a permit to dredge and fill the 9.4 acres

of lake bottom was a regulatory taking of the entire 62

acre parcel. “Several factors” . . . have particular signifi-

cance” in the “essentially ad hoc, factual inquiries” that

determine whether a government regulation constitutes a

regulatory taking: (1) “The economic impact of the regu-

lation on the claimant”; (2) “the extent to which the

regulation has interfered with distinct investment-backed

expectations”; and (3) “the character of the governmental

action.” Penn Central, 438 U.S. at 124. See also Florida Rock,

18 F.3d at 1564. In 1992, however, the Court in Lucas

“dramatically change[d] the third criterion, from one in

which courts, including federal courts, were called upon

to make ad hoc balancing decisions, balancing private

property rights against state regulatory policy, to one in

which state property law, incorporating common law nui-

sance doctrine, controls.” Loveladies Harbor, 28 F.3d at

1179. See also Creppel v. United States, 41 F.3d 627, 631

(Fed.Cir.1994).

Applying these factors, the Court of Federal Claims

concluded: Under the regulatory/partial taking analysis,

the plaintiff is unable to demonstrate that there was any

deficiency in the character of the Government's action,

nor is the plaintiff able to demonstrate that it had reason-

able, investment-backed expectations in the development

of the lakebottom property in the manner in which it had

proposed. Finally, there is substantial economic value

remaining in the parcel as a whole, which supports the

Al2

conclusion that the Government’s denial of the plaintiff’s

permit only caused a noncompensable, mere diminution

in the value of its property, which is not substantial

enough to protect as a taking.

We discuss these factors in reverse order.

1. The character of the government action does not

have an impact on this case. The Court of Federal Claims

correctly found that the dredging and filling of the sub-

merged area to permit its use for building would not

constitute a nuisance under California law.

2. The trial court correctly held that the denial of

the permit has not significantly “interfered with distinct

investment-backed expectations.” We have recognized

that such expectations must be reasonable. See 767 Third

Ave. Associates v. United States, 48 F.3d 1575, 1581

(Fed.Cir.1995).

In 1988, when Forest purchased the 53 acres of

upland and the option to acquire the 9.4 acres of lake-

bottom from Big Bear, the Corps’ guidelines governing

the issuance of Section 404 permits under the Clean Water

Act had been in effect for a number of years. As

explained above, those guidelines made it clear that fill-

ing wetlands to construct housing on the reclaimed land

was disfavored and that it was most unlikely that such a

project would be approved. Indeed, three years before the

Corps denied the permit, it told Forest that on the basis of

the information it then had, it would recommend denial.

The investment-based expectation criterion “limits recov-

ery to owners who can demonstrate that they bought

their property in reliance on the non-existence of the

challenged regulation. One who buys with knowledge of

eR othe

eee. a

_— >

Al3

a restraint assumes the risk of economic loss.” Creppel, 41

F.3d at 632. Although Forest unquestionably hoped to

obtain the permit and realize its development goals, that

hope is not enough to show a reasonable investment-

backed expectation that might be protected by the Tak-

ings Clause.

3. The “economic impact of the regulation upon the

claimant” is “measured by the change, if any, in the fair

market value caused by the regulatory imposition.” Flor-

ida Rock, 18 F.3d at 1567. Forest, however, failed to intro-

duce convincing evidence to show the amount, if any, by

which the value of the relevant property — the 62 acres -

was reduced by the denial of the permit.

Forest's evidence showed the listed selling prices for

the developed upland lots, and the company’s ultimate

owner, Mr. Colburn, indicated that those prices were the

fair market value of the land. There was also evidence

showing the anticipated selling price of the lots that

would be created by the draining and filling of the 9.4

underwater acres, and the profit on their sale that Forest

allegedly lost through the denial of the permit.

Those prices, however, reflect the development of the

lots following the denial of the permit, and do not neces-

sarily reflect their value immediately after the permit was

denied. This was not evidence of the amount by which

the fair market value of the 62 acres was reduced by the

denial of the permit. See, e.g., Loveladies Harbor, 28 F.3d at

1178. The profit that Forest allegedly lost does not neces-

sarily reflect the reduction in market value the denial of

the permit caused.

Al4

This case stands in sharp contrast to Loveladies Har-

bor, where the evidence led the Court of Federal Claims

to find that the fair market value of the relevant parcel

(there the submerged land) was $2,658,000 before the

denial of the fill permit and only $12,500 after the denial

— a diminution in value of 99%. See id. We held that “The

trial court’s conclusion that the permit denial was effec-

tively a total taking of the property owner’s interest in

these acres is fully supported in the record: there is no

clear error in that conclusion.” Id. at 1182 (footnote omit-

ted).

There are no comparable findings regarding the

amount of the reduction in the fair market value of the

relevant parcel here that resulted from the denial of the

permit, and insufficient evidence in the record upon

which such finding could be made. Forest had the burden

of proof to establish a regulatory taking, and it failed to

carry that burden. Indeed, the record shows that, despite

the denial of the permit, the value of the 62 acres

increased from the $3.6 million Forest paid in 1988 in

what it asserts was an arms length transaction with Big

Bear, to more than $12 million today. That result itself

undermines Forest’s contention that its property was

taken.

In sum, we have no reason to disagree with the Court

of Federal Claims’ conclusion, grounded on the record,

that the denial of the permit “did not prevent all or

substantially all of the economically viable use of the

property, and, thus, the economic impact of the regula-

tion is not sufficiently severe to constitute a taking.”

La ee

Al5

CONCLUSION

The judgment of the Court of Federal Claims is

AFFIRMED.

APPENDIX B

FOREST PROPERTIES, INC.,

The UNITED STATES,

and

Big Bear Municipal Water

District, third party.

No. 92-851L.

United States Court of Federal Claims.

Aug. 6, 1997.

John H. Findley, Sacramento, CA, for plaintiff.

Ronald A. Zumbrun and Meriem L. Hubbard, of counsel.

Edward J. Passarelli and Alan Brenner, Washington,

DC, with whom was Assistant Attorney General Lois J.

Schiffer, for defendant. John Gleason, U.S. Army Corps of

Engineers, and Daniel W. Kilduff of counsel.

Wayne K. Lemieux, Westlake Village, CA, for third

party.

OPINION

YOCK, Judge.

This is a regulatory taking action brought by the

plaintiff after the Federal Government acting through the

United States Army Corps of Engineers denied a dredge

and fill permit for the development of land owned by the

plaintiff at Big Bear Lake in San Bernardino County, in

southern California. Trial was held on September 9-12,

1996, at the United States Courthouse, Pasadena, Califor-

nia.

For the reasons that follow, the Court finds that the

plaintiff’s property was not taken in violation of the Fifth

Amendment to the United States Constitution.

Statement of Facts

The plaintiff, Forest Properties, Inc. (“FPI”), along

with Big Bear Properties, Inc. (“BBP”), are members of a

group of companies, all of which are owned by RCK

Properties, Inc., which, in turn, is ultimately owned by

Mr. Richard W. Colburn and his family. BBP is in the

business of real estate holdings, and it generates business

revenues by selling real estate property to real estate

developers, one of which was FPI. FPI is in the business

of real estate development, which, in this case, involved

acquiring a parcel of real estate, obtaining the necessary

governmental permits to subdivide it, putting in roads

and other necessary improvements, and finally selling the

improved lots to the general public for the construction of

single family housing.

In January 1969, BBP acquired approximately 2500

acres of upland property contiguous to Big Bear Lake in

San Bernardino County, California, from the Big Bear

Development Company for approximately $4 million. As

part of this sale, the Bear Valley Mutal Water Company

also entered into a binding contract with BBP for an

irrevocable, 20-year option on lakebottom land. If exer-

cised within 20 years, BBP, as optionee, would be able to

purchase, at the price of $1,000 per acre, up to 200 acres

of lakebottom property within Big Bear Lake. Impor-

tantly, a number of conditions were attached to the option

for the acquisition of the lakebottom land. For example,

by the terms of the option agreement, the optionee could

only exercise the option to the lakebottom land if the

optionee also owned the adjacent upland property above

the high water line. Moreover, in order to retain owner-

ship of the lakebottom land property, any planned fill of

the lakebottom property had to be completed within

three years after acquiring legal title to the property.

Finally, the optionor had to be afforded the right to

review and to conceptually approve the design of any

planned fill of the lakebottom property.

Twelve years later, in 1981, this option became the

subject of a lawsuit filed in the Superior Court of the

State of California for the County of San Bernardino, by

BBP against the Big Bear Lake Municipal Water District

(“Municipal Water District”).! By this time, the Municipal

Water District had succeeded the Bear Valley Mutual

Water Company as the party in interest to the option. BBP

decided to exercise its option rights to a portion of the

lakebottom land, but the Municipal Water District argued

that, even though it was the successor-in-interest to the

Bear Valley Mutual Water Company, it was not bound to

the option agreement. On September 22, 1982, the Supe-

rior Court of the State of California for the County of San

1 On June 2, 1993, this Court granted the plaintiff’s motion

to name the Big Bear Municipal Water District as a third party,

pursuant to RCFC 14. As a third party, the Municipal Water

District was not actively involved in the litigation of this case,

although it did monitor the proceedings throughout the trial of

this case.

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Bernardino found that the option was binding on the

Municipal Water District, and, thus, BBP owned the right

to purchase and fill up to 200 acres of lakebottom prop-

erty in Big Bear Lake. Big Bear Properties, Inc. v. Big Bear

Mun. Water Dist., No. VCV-2782 (Cal.Super.Ct. Sept. 22,

1982).

To avoid further appeals and litigation, BBP and the

Municipal Water District entered into a settlement agree-

ment on February 18, 1983, (“1983 agreement”) that

restricted the total amount of lakebottom property that

could be acquired by BBP to some 28.7 acres. Addi-

tionally, both parties agreed that the lakebottom property

could only be used for residential housing purposes and

that the total amount of acreage that BBP could purchase

would be limited to 9.4 acres, located adjacent to or

abutting an approximately 67-acre parcel on the south

shore of Big Bear Lake known as Eagle Point.?

The 1983 agreement also included tentative develop-

ment plans for the lakebottom parcel adjacent to the

Eagle Point area of Big Bear Lake. The development plan

showed three peninsulas, plus wildlife habitat islands

located offshore of the three peninsulas. Under the 1983

agreement, the Municipal Water District agreed not to

“raise any objection * * * based upon issues of develop-

ment design, density and related esthetic [sic] and envi-

ronmental considerations” to the plans attached to the

agreement. The 1983 agreement provided that, as a result

of any exercise of the option by BBP, the deed conveying

2 The Eagle Point area of Big Bear Lake was aptly named.

The area is a natural gathering, feeding, and foraging area for

the American bald eagle.

the lakebottom land would contain a reversionary clause.

This reversionary clause stated that title to the land con-

veyed would revert to the Municipal Water District if the

proposed dredging and filling was not completed within

three years after the date of the deed.

On March 29, 1984, the Municipal Water District, for

valuable consideration, conveyed a 10-year conservation

easement of lakebottom property near Eagle Point (“1984

easement”) to the United States Forest Service for the

purposes of preserving and improving an eagle habitat.

By its terms, the 1984 easement expired in 1994. This 1984

easement was not intended to interfere with any rights of

BBP. However, the metes and bounds description of the

1984 easement, drawn up by the engineer working for the

Municipal Water District, inadvertently overlapped the

lakebottom property on which BBP held an option.

Importantly, the Municipal Water District was under a

California court order that had upheld BBP’s option and,

thus, the Municipal Water District presumably lacked the

intent to interfere with BBP’s rights to the lakebottom

option. Consequently, the Municipal Water District’s

unfortunate titling mistake created a cloud on the title to

the lakebottom property adjacent to Eagle Point.

On May 3, 1988, BBP transferred approximately 53

acres of its upland property at Eagle Point to FPI by a

corporation grant deed for $3.6 million. This deed did not

specifically include the adjacent lakebottom option rights

in the transfer of ownership from BBP to FPI. Apparently,

FPI recognized that a number of issues were complicating

the lakebottom property transfer.* Although FPI had

always planned to develop Eagle Point as one develop-

ment (“Eagle Point Estates”), it decided to separate the

acquisition of the two parcels of land in order to avoid a

premature reversion of the lakebottom parcel to the

Municipal Water District. Thereafter, on October 17, 1988,

some five months later, BBP assigned the option rights to

the 9.4 acre lakebottom property adjacent to Eagle Point

to FPI. The document effecting this assignment did not

indicate the amount of compensation for this option but

merely indicated that the property was transferred for

“valuable consideration.” Evidence in the record confirms

that no additional consideration beyond the $3.6 million

paid for the upland 53 acres was paid by FPI to BBP for

the 9.4-acre option.

In order to exercise the option, but to avoid a future

reversion of the lakebottom property, Mr. Stephen

Foulkes, Vice President of FPI, and Mr. James Good, FPI’s

attorney, negotiated an informal agreement with Mr. Jere

Mitchell, General Manager of the Municipal Water Dis-

trict, and Mr. Wayne Lemieux, Sr., the Municipal Water

District’s attorney, regarding the procedures for exercis-

ing the option and purchasing the lakebottom property.

Apparently, all of the parties to the option agreement

were eager to devise a flexible arrangement that would

legally exercise the option immediately but permanently

convey legal title at a later date. In order to achieve this

3 It is important to note that FPI and its sister company,

BBP, shared many of the same officers. Therefore, FPI would

have been aware of all of the terms of the option, including the

reversionary clause in the 1983 agreement.

mutual goal, their subsequent arrangement had to

address a number of vexing problems.

First, the 20-year option was due to expire at the end

of that year, i.e., 1988. Although it is not clear from the

record or from the testimony of the witnesses, FPI and the

Municipal Water District apparently believed that extend-

ing the option was not the preferred course of action. The

second problem concerned the time constraints imposed

upon BBP (and subsequently FPI) by the reversionary

clause in the option and the 1983 agreement. Because the

reversionary clause stated that title to the land conveyed

would revert to the Municipal Water District if the dredg-

ing and filling was not completed within three years, FPI

believed that the title to the lakebottom property might

eventually revert to the Municipal Water District because

the estimated time required to obtain the regulatory

approvals could exceed three years. Third, in the course

of developing the lakebottom property, FPI would have

to obtain the approval of several federal and state agen-

cies. FPI surmised that a number of minor changes to the

Eagle Point Estates project might be required in order to

receive the various regulatory approvals. However, the

option and the 1983 agreement contemplated that the

Municipal Water District “review, and to approve or dis-

approve any specific plan for excavation and fill-

ing * * * of Lake Bottom Land” to be purchased by the

optionor. Specifically, the Municipal Water District had

previously informed FPI that, if any changes occurred to

the project, the District would reevaluate the shore zone

alteration permit previously issued to FPI. Finally, the

1984 easement prevented the Municipal Water District

from conveying clear and legal title to the lakebottom

property. Therefore, since the three-year reversionary

clause period would commence after the date of the deed,

FPI (and, to a lesser extent, the Municipal Water District)

felt that it was more prudent to postpone the transfer of

legal title of the lakebottom property until these problems

were solved to the parties’ mutual satisfaction.

Thus, in order to exercise the option before it expired

and to delay the commencement of the reversionary

clause, the two parties agreed to let FPI exercise the

option, thereby obtaining equitable title to the lakebottom

land, and to delay the transfer of legal title until all of the

regulatory hurdles had been cleared. In pursuance

thereof, by letter of October 19, 1988, Mr. Good, on behalf

of FPI, forwarded two draft letters to Mr. Lemieux for his

review. One draft letter purported to exercise FPI’s option

with respect to the lakebottom property adjacent to Eagle

Point, while the second draft letter suggested deferral of

the close* of escrow “until the exact acreages [sic] are

known following all the regulatory approvals, and partic-

ularly in view of the title problem with respect to Eagle

Point.”

By letter dated November 29, 1988, to Mr. Mitchell,

Mr. Foulkes, on behalf of FPI, claimed to have exercised

the option, stating that FPI “hereby gives the District

notice of its exercise of the option to purchase, as mod-

ified by the [1983] Agreement, with respect to the acres

* Apparently, the initial suggestion by Mr. Good to delay

the closing of the escrow account, as opposed to the opening of

the account, was a mistake. In the subsequent letter describing

the purchase of the lakebottom property, the parties mutually

agreed to defer the opening of the escrow account.

abutting the real property described in paragraph 2.b. of

the [1983] Agreement, referred to as ‘Eagle Point’.” In a

letter dated November 30, 1988, sent to Mr. Lemieux, Mr.

Good memorialized the agreed procedure to complete the

purchase and transfer of the legal title to the lakebottom

property by postponing the opening of the escrow

account.° Mr. Lemieux, on behalf of the Municipal Water

District, signed this letter as approved on December 5,

1988, 27 days before the expiration of the 20-year option.®

At this point, FPI believed it was the equitable owner of

approximately 9.4 acres of lakebottom property adjacent

to Eagle Point and the 53-acre upland parcel also owned

in fee by FPI.

During the course of the FPI development at Eagle

Point, BBP (and subsequently FPI) had sought to obtain a

number of federal, state, and local permits. Prior to the

sale of the Eagle Point property to FPI, BBP had com-

menced the process of obtaining the necessary permits.

The first stage in the process required BBP to assist the

lead state agency in the creation of an Environmental

Impact Report (“EIR”) pursuant to the California Envi-

ronmental Quality Act (“CEQA”). In this first EIR, the

Municipal Water District was identified as the lead

agency for the State of California. Thus, BBP submitted

various plans for the Eagle Point Estates project and a

draft EIR to the Municipal Water District.

5 See note 4.

6 During a meeting of the Municipal Water District’s Board

of Directors on July 18, 1996, the Board approved an oral

resolution finding that the option granted in the 1983 agreement

had been validly exercised by FPI in 1988.

ee eee

Cla ith tela A a il RR OE BRON WEES

B10

On June 2, 1987, the Municipal Water District issued

a Notice of Preparation of Draft EIR for the Eagle Point

Estates project. The notice described the project as envi-

sioning “approximately nine (9) acres of new land

extending beyond the current highwater line of the lake.

Combined with the approximate 53 acres of land above

the highwater line at the site * * * .” The plans for the

project at this point contained three peninsulas, offshore

habitat islands for eagles, and a residential island to the

east of the most eastern of the three peninsulas.

In June 1987, BBP hired an environmental consultant,

Mr. Tom Dodson, to assist BBP in the preparation of

various environmental reports that were to be incorpo-

rated into the EIR. In October 1987, Mr. Dodson com-

pleted a study of the Eagle Point Estates property, which

was entitled “A Biological Assessment of the Eagle Point

Residential Subdivision,” and this study was a part of

Eagle Point Estates’ overall EIR. The study found that the

upland property of some 53 acres at Eagle Point con-

tained 15 rare plant species, including two species that

were listed as “endangered species” in rare montane wet

meadow habitat. The study noted that Eagle Point had

the “highest degree of floral endemism in California and

possibly the continental United States for such a small

area.” Moreover, Eagle Point was identified as a “ ‘key

perching and foraging habitat’ for wintering bald eagles,”

which, at that time, were designated as an endangered

species by the United States Government.

On July 5, 1988, the Municipal Water District issued

the “Conditions of Approval of Eagle Point Property”

and a final EIR was prepared in August 1988 that

approved the Eagle Point Estates project. Claiming that

B11

the EIR was inadequate under CEQA, however, on

August 10, 1988, the State of California challenged the

validity of the EIR in the Superior Court of the State of

California for the County of San Bernardino. On April 25,

1989, the Superior Court ruled that the EIR was inade-

quate under CEQA and ordered the preparation of a new

EIR. State v. Big Bear Mun. Water Dist., No. BCV-4778

(Cal.Super.Ct. Apr. 25, 1989). The practical effect of this

judgment was to void all previous permits approved

pursuant to the August 1988 EIR and to force FPI to begin

the regulatory process all over again.

In response to this setback, FPI aggressively

attempted to correct the EIR. The Eagle Point Estates’

design plan was modified by reducing the project into

one described as “53.36 acres existing plus 5.4 acres lake

bottom.”” A second EIR was prepared that incorporated

improvements to the first EIR by refining its mitigation

measures. For example, FPI retained Dr. Charles Gold-

man, professor of ecology and limnology at the Univer-

sity of California, Davis, and Dr. John Reuter in order to

design a dredge and fill procedure for the project’s lake-

bottom property. Eventually, the final design of the Eagle

Point Estates project included about 25 different mea-

sures designed to protect the environment.

Throughout the development process of the Eagle

Point Estates project, FPI interacted with a number of

federal and state agencies in order to enlist support and

approval for its project. Among the federal agencies with

? As described in FPI’s application for approval of the

tentative tract map by the City of Big Bear Lake.

B12

jurisdiction over the property was the United States

Department of the Interior, Fish and Wildlife Service

(“FWS"). Although the FWS would ultimately not sup-

port the project, it offered a variety of suggestions to

increase mitigation measures and to decrease any poten-

tially harmful effects on the environment. FPI went to

great lengths to develop additional mitigation measures

and to integrate the FWS’s suggestions into the second

EIR. For example, FPI eliminated two of the project's

proposed three peninsulas, shifted the fill to the far east-

ern edge of the project, placed eagle perch trees on open

space lots, protected every part of the endangered species

plant habitat, provided one-for-one mitigation for wet-

land habitat, and dedicated nearly 16 acres of upland

property (over 25 percent of the project’s total area) to

open space on the Eagle Point Estates project site with an

endowment for maintaining and managing it.

With regard to the State of California, all indications

were that the Eagle Point Estates would obtain all regula-

tory approvals. The City of Big Bear Lake, the new lead

agency under CEQA for the second EIR, issued its Notice

of Public Hearing on the Final Environmental Impact

Report for the project on July 17, 1991. On July 25, 1991,

the Community Development Department of the City of

Big Bear Lake issued its Notice of Determination, stating

that the EIR was prepared for the Eagle Point Estates

project, and found that the project would not have an

adverse effect on the environment. On July 30, 1991, the

City of Big Bear Lake issued its approval of FPI’s Eagle

Point Estates subdivision in its Mitigation Measures and

Conditions of Approval for Eagle Point Estates. Finally,

B13

the Municipal Water District issued its Notice of Deter-

mination, approving FPI’s shorezone alteration permit for

Eagle Point Estates, conditioned on the observance of

mitigation factors. As far as the State of California was

concerned, the project could proceed. There were no

legal challenges to this revised EIR and, thus, the only

remaining regulatory hurdles were within the jurisdiction

of the Federal Government.

Previously, by application dated March 16, 1988, BBP

had submitted Application No. 88-160, Department of the

Army, Corps of Engineers (“Corps”), for a section 404

permit under the Federal Water Pollution Control Act of

1972, 33 U.S.C. § 1251 et seq. (1994) (“Clean Water Act”),

to dredge and fill 9.4 acres of lakebottom property,

included in the Eagle Point Estates project, in order to

build residential lots. The permit application described

the project as “[a] total of 62 acres (9 acres of filled

area) * * * developed with approximately 100 lots.” At the

time of the application, the proposed project had been

somewhat modified by the deletion of the habitat islands

and the residential island but still included the three

peninsulas. By a letter dated April 4, 1988, the Corps

notified BBP that it was reviewing the section 404 permit

application and estimated that the processing time would

be 60 to 90 days.

8 State and local approvals that were necessary in order to

dredge the lakebottom parcel had been obtained, including a

waste discharge permit from Santa Ana Regional Water Quality

Control Board, a 1603 permit from the California Department of

Fish and Game, a grading permit from the City of Big Bear Lake,

and the aforementioned shorezone alteration permit from the

Municipal Water District.

B14

Upon the completion of the sale of the upland prop-

erty at Eagle Point on May 3, 1988, but before the exercise

of the option by FPI on December 5, 1988, Mr. Dodson

informed the Corps, by a letter dated October 11, 1988,

that FPI would assume the section 404 permit application,

previously submitted by BBP, and would continue the

procedure to gain approval of the section 404 permit

application. Throughout its consideration of FPI’s permit

application, the Corps (and other federal agencies)

expressed a willingness to work with FPI in developing

additional information needed to demonstrate compli-

ance with federal environmental regulations. In the

period between March of 1988 and the end of 1991, FPI

had numerous communications with various federal

agencies, regarding its section 404 permit, culminating

with a “Revised Project” presented to the Corps. The

“Revised Project” proposed a development with 57.6

acres of land and 4.4 acres of lakebottom property with

one peninsula requiring dredge and fill to accommodate

residences, a marina, and other recreational amenities. As

early as February 17, 1989, in a letter to FPI, however, the

Corps was signaling that it might deny the 404 permit

application.

In order for permits to be issued for the pro-

posed projects, they must be found to comply

with the 404(b)(1) guidelines and be found not

contrary to the public interest. If we were asked

for a final decision at this time with the informa-

tion we currently possess, our recommendation

to the District Engineer would be that the pro-

jects do not meet either criteria for permit issu-

ance and should be denied.

B15

Eventually, as the Corps’ review process dragged on,

FPI requested a meeting with the Corps in order to clarify

its present views on the issues of bald eagles, wetland

habitat, aquatic habitat, endangered species, practicable

alternatives, and the economics of the project. On January

22, 1992, after FPI had presented its views on these issues,

Colonel Thomas, the district engineer responsible for the

Corps’ decision, addressed the FPI representatives.

Although the parties had different interpretations of Col-

onel Thomas’ conversation with FPI, neither party dis-

puted that the greatest impediment to a section 404

approval was the on-site alternatives and the cost evalua-

tions prepared with respect to the practicable alternatives

to FPI’s development plan. The permit requested was for

the dredging and filling of the lakebottom property to

create a peninsula on which approximately 14 expensive,

single-family houses were to be built. Housing is gener-

ally considered to be a nonwater-dependent activity.

Housing specifically, and nonwater-dependent activities

in general, in special aquatic sites in waters of the United

States, is almost always denied permits because the pre-

sumption exists that there are water-dependent practical

alternatives in aquatic sites that are not as environmen-

tally damaging as nonwater-dependent activities. Thus,

FPI’s dredge and fill permit request presented a difficult

hurdle in its attempt to demonstrate a least damaging

practicable alternative to the Corps.

One month later, on February 24, 1992, the Corps

formally denied FPI’s section 404 permit application for

the lakebottom fill portion of the Eagle Point Estates

project. In the letter detailing its decision, Colonel

Thomas explained that the Corps denied the permit for

B16

numerous reasons, such as concerns regarding water

quality, the negative impact on endangered plant and

animal species, and the belief on the part of the Corps

| that there were practicable alternatives to filling the Eagle

Point Estates lakebottom property that would have less

adverse effects on the environment. The decision letter

| stated in pertinent part:

a. 404 (b)(1) guidelines:

(1) There are practicable alternatives to the

. proposed discharge that would have less

adverse effect on the aquatic ecosystem and

those alternatives do not have other significant

adverse environmental consequences.

(2) The proposed discharge will result in

significant degradation of the aquatic ecosystem

under 40 CFR 230.10(b) and (c).

(3) The discharge does not include all

appropriate and practicable measures to mini-

mize potential harm to the aquatic ecosystem.

b. Public interest factors:

(1) Effects on special aquatic sites - the

project would destroy approximately 7 acres of

vegetated shallows below the ordinary high

water line, and have at least 1.6 acres of impact

on wetlands above the high water line.

(2) Water quality - the project has the

potential to reduce the water quality of Big Bear

Lake and Summit Creek by increasing pollution

from the developed areas, and increasing turbi-

dity and polluted runoff during and after con-

struction.

(3) Mitigation - the mitigation proposed

for this project is inadequate. Further, certain

B17

uncompensated impacts such as the removal of

shallow-water, near-shore habitat and the reduc-

tion in the value of bald eagle perch trees will

occur. As such, the mitigation proposed would

cause a substantial temporal loss in resource

availability to wildlife.

(4) General environmental concerns -

approximately 7 acres of special aquatic sites

would be permanently destroyed by the project

as proposed. One federally-designated endan-

gered animal species, two federally endangered

plant species, fifteen sensitive plant species, and

their habitat would be negatively impacted.

(5) Shore erosion and accretion — a stable

shore zone would be replaced by a shore zone

which would require reinforcement to prevent

erosion and accretion around the peninsula.

(6) The public and agency responses to the

Public Notice and subsequent responses have

been opposed to the project.

* * + *

In consideration of the public interest

review factors mentioned above, I find that issu-

ance of a Department of the Army permit for the

project as proposed, as prescribed by regula-

tions published in 33 CFR Parts 320 to 330, and

40 CFR Part 230, is contrary to the public inter-

est and your permit request is hereby denied.

Finally, Colonel Thomas stated that the Corps would

continue to consider any subsequent application for a

section 404 permit that FPI might wish to submit.

By letter of March 5, 1992, addressed to the Corps,

FPI responded to the permit rejection. This letter reflected

ee et tal ht atte naan > need Sei

}

B18

FPI’s belief that the Corps was amenable to a new appli-

cation addressing the concerns expressed by Colonel

Thomas, in the denial of FPI’s initial application, but

retaining the plans to dredge and fill the lakebottom

property as in the original permit application. However,

FPI had misunderstood the extent of its permit problems,

and a subsequent letter by Colonel Thomas, dated April

7, 1992, specifically stated:

My letter of February 24, 1992, listed the

justifications for permit denial. * * *

My reference to a revised development pro-

posal did not mention fill in the lake for the

purpose of housing nor did I mean to imply that

such fill had become acceptable to the Corps.

Rather, I referred to a revised development pro-

posal that would allow other possible uses of

the Eagle Point property, such as higher-density

lots on the available upland portions of the

property.

Apparently anticipating the futility of obtaining a

section 404 permit to dredge and fill the lakebottom

property, FPI had modified the Eagle Point Estates project

and submitted such a section 404 permit application on

March 4, 1992. Consequently, FPI notified the Corps by

letter dated August 14, 1992, that it intended to proceed

with the development of the upland portion of Eagle

Point Estates. Additionally, the letter stated FPI’s inten-

tions to dredge, but not fill, a small portion of the lake-

bottom land in order to provide recreational access to Big

B19

Bear Lake for Eagle Point Estates residents.? The Corps

did not assert jurisdiction over this planned dredging.

Additionally, FPI successfully obtained two nationwide

permits from the Corps to construct a bridge and utilities

over a stream within the upland portion of the Eagle

Point Estates.

Eventually, the modified Eagle Point Estates project

was completed pursuant to amended plans that were

developed as a result of the Corps’ denial of FPI’s section

404 permit application. Presently, Eagle Point Estates con-

sists of 106 single-family lots located in the upland por-

tion of Eagle Point.!° A limited, recreational access to Big

Bear Lake is provided to the residents via a pier on a

small area of lakebottom property that was dredged by

FPI. Nearly 16 acres of upland property have been dedi-

cated to open site as environmental mitigation measures.

The total current listed sales price for the lots at

Eagle Point Estates is $12,048,400. Mr. Richard W. Col-

burn indicated in his deposition that the fair market

value of Eagle Point Estates is approximately the listed

sales price for the lots, i.e., $12 million. In a letter to the

Bank of America dated June 9, 1992, Mr. Colburn also

stated that the total development costs of Eagle Point

° Although the fill portion of the project was never

completed, some dredging was conducted that resulted in

deeper water (and presumably a better dissolved oxygen

content) in the dredged location. At the time, no Corps permit

was required for such an operation limited to dredging.

10 Plaintiff retains an area of undeveloped land at Eagle

Point Estates that could be developed into an additional two or

three saleable lots.

B20

Estates (including land costs) would be about $7,100,000.

As of August 30, 1994, the plaintiff had sold a total of 25

out of 106 lots in Eagle Point Estates for $3,547,900. All

but one of the lots sold at or above the listed sales price,

with the remaining lot sold to Mr. Foulkes at approxi-

mately cost value. In a letter to Mr. Colburn, fax dated

July 3, 1991, Mr. Foulkes presented a financial evaluation

of the Eagle Point Estates project in terms of its profit

potential. He estimated that, if the 404 fill permit was not

granted, the profit generated would range between $2

million and $4 million and, if the fill permit was granted,

the profit would run between $3.6 million and $6.3 mil-

lion. As of April 30, 1996, closed sales of 28 lots generated

proceeds in the amount of $4,208,000, and Mr. Foulkes

testified that as of September 1996, at least 33 lots had

been sold, with others still in escrow. Mr. Colburn attrib-

uted the number of remaining unsold lots to the down-

turn in the real estate market in southern California. The

loss of the 14 lots on the proposed peninsula amounted to

a decrease in developable land of some 15 percent of the

project, although the market value of the lakeshore lots

would have been among the highest of all of the lots in

the development.

On December 16, 1992, FPI filed a Complaint in this

Court alleging an inverse condemnation. FPI believes

that, by denying the section 404 permit, the Government

effectuated a taking, which requires just compensation

pursuant to the Fifth Amendment.

B21

Discussion

The Fifth Amendment to the United States Constitu-

tion provides, in relevant part, that “private property

[shall not] be taken for public use without just compensa-

tion.” It is well established that a taking can be accom-

plished by governmental regulation. As the United States

Supreme Court found in Pennsylvania Coal Co. v. Mahon,

260 U.S. 393, 415, 43 S.Ct. 158, 160, 67 L.Ed. 322 (1922),

“while property may be regulated to a certain extent, if

regulation goes too far it will be recognized as a taking.”

In Agins v. City of Tiburon, 447 U.S. 255, 260, 100 S.Ct.

2138, 2141, 65 L.Ed.2d 106 (1980), the Supreme Court

stated that “application of a general zoning law to partic-

ular property effects a taking if the ordinance * * * denies

an owner economically viable use of his land, see Penn

Central Transp. Co. v. New York City, 438 U.S. 104, 138 n. 36

[98 S.Ct. 2646, 2666 n. 36, 57 L.Ed.2d 631] (1978).”

Further, as the Supreme Court has held in Pennsylva-

nia Coal, the question of whether or not the taking reaches

“a certain magnitude” is one that is particularly fact

dependent. See Pennsylvania Coal, 260 U.S. at 413, 43 S.Ct.

at 159. The Supreme Court has “eschewed the develop-

ment of any set formula for identifying a ‘taking’ forbid-

den by the Fifth Amendment, and [has] relied instead on

ad hoc, factual inquiries into the circumstances of each

particular case.” Connolly v. Pension Benefit Guar. Corp.,

475 U.S. 211, 224, 106 S.Ct. 1018, 1026, 89 L.Ed.2d 166

(1986).

In this regulatory taking case, the first matter this

Court must decide is whether or not the plaintiff had a

sufficient ownership or compensable interest in the land

B22

allegedly taken so as to invoke the protection of the Fifth

Amendment. Since this Court finds herein that FPI had a

compensable property interest in the lakebottom land, the

next step is to determine which taking analysis is appro-

priate in this case, i.e., a categorical taking analysis (in

which a physical occupation occurred or all beneficial or

productive use of the property has been prohibited) or a

regulatory or partial taking analysis (in which a regula-

tion may have gone “too far” but stops short of a cate-

gorical taking). Critical to this Court’s determination that

the regulatory taking analysis is the appropriate method

to use to analyze FPI’s taking claim is its determination of

the relevant parcel that has been allegedly taken. In this

case, the Court finds that the parcel as a whole is the 62-

acre Eagle Point Estates, which includes the 9.4 acres of

lakebottom property and the inextricably linked 53 acres

of upland property. Thus, only a small portion of the

plaintiff's property has allegedly been taken, and,

because a categorical taking did not occur, a regulatory or

partial taking analysis is appropriate in this case.

Finally, the Court will analyze FPI’s taking allegation

utilizing the three factors identified in Penn Cent. Transp.

Co., 438 U.S. at 124, 98 S.Ct. at 2659. This Court will

determine whether or not the denial of FPI’s application

for a 404 permit to dredge and fill constituted a taking by

analyzing the character of the governmental action, the

extent to which the regulation interfered with FPI’s

investment-backed expectations, and the regulation’s eco-

nomic impact on FPI. Under this three-tiered analysis,

this Court concludes that FPI cannot establish a taking

under the Fifth Amendment.

B23

I. FPI’s Property Interest in the Lakebottom Land.

In order for the plaintiff to maintain a taking action

for just compensation under the Fifth Amendment, it

must establish that it had an ownership interest in the land

allegedly taken. Here, the plaintiff maintains that it has

validly exercised an option that has given it equitable

title to the 9.4 acres of wetlands contiguous to the 53-acre

upland portion of the Eagle Point Estates development. It

also owns the fee title to the 53 upland acres which are

not at issue in this case. The Government, however, has a

rather broad-gauge argument that basically rejects the

idea that the plaintiff had legally exercised the option to

acquire title to the 9.4 acres of lakebottom property.'! The

Government’s primary argument on this issue is that

FPI’s proposal to defer opening the escrow account

improperly attempted to extend the length of the 20-year

option.'? Since the option was improperly exercised, the

'! Importantly, there is no evidence to suggest that the

parties to the option agreement ever believed that FPI had not

properly exercised its option. Certainly, the Municipal Water

District never objected to FPI’s tender of the exercise of the

option. Indeed, the Municipal Water District was the lead state

agency on the initial EIR addressing the proposed lakebottom

fill project.

'2 The Government also raises two minor arguments that

can be disposed of summarily. First, the Government contends

that, even if FPI had validly exercised the option, conditions

subsequent to the exercising of the option and conditions

precedent to the performance of the purchase of the lakebottom

property existed—that is, the Municipal Water District’s

approval of any plans for the excavation and fill of the

lakebottom property prior to purchase. The Government,

however, is simply speculating when it states that FPI would not

B24

defendant argues, the option right expired after the 20-

year time period had run; therefore, the plaintiff did not

own the equitable title to the 9.4 acres of lakebottom land.

However, this argument is premised on an incorrect

application of the law. Interpretation of land contracts

and option rights are a matter of state law. As such, this

Court must look to California law to determine what

constitutes the proper exercise of an option right.

An option is a unilateral contract by which the

optionee receives the right from the optionor to create a

bilateral contract of purchase during the life of the

option. Erich v. Granoff, 109 Cal.App.3d 920, 167 Cal.Rptr.

have been able to secure the remaining outstanding permits and

the Municipal Water District’s approval in order to convert its

equitable interest in the lakebottom property into a legal title to

the property as the result of a completed purchase. As stated

above, FPI had secured the permission of many state and local

regulatory authorities. Not only was the Municipal Water

District the lead state agency for the first EIR, but FPI had also

obtained a shorezone alteration permit from the Municipal

Water District on August 1, 1991.

Second, the Government maintains that, even if FPI had

been able to purchase the property, it would not have been able

to retain ownership because the option and the 1983 agreement

had a reversionary clause. This reversionary clause stipulated

that the lakebottom property would revert to the Municipal

Water District if the plans for the excavation and fill of the

property were not completed within three years of the date of the

deed. However, this argument is unavailing because, as a result

of its exercising the option, FPI held equitable title to the 9.4

acres of lakebottom property but would not obtain legal title,

and a dated deed, until after all of the necessary permits had been

obtained. Thus, the three-year period stated in the reversionary

clause would not commence until FPI received legal title

through a properly executed and filed deed.

B25

538, 542 (1980). Moreover, an option must be exercised in

the time and manner described by the option instrument.

See Riverside Fence Co. v. Novak, 273 Cal.App.2d 656, 78

Cal.Rptr. 536, 539 (1969). However, if the option agree-

ment does not specify any particular manner by which

the option must be exercised, any method is permissible.

Id. (citing Lawrence v. Settle, 182 Cal.App.2d 386, 6

Cal.Rptr. 49, 51 (1960)). Most importantly, unless speci-

fied in the option agreement, tender of the purchase price

is not required to properly exercise one’s option rights.

Erich, 167 Cal.Rptr. at 542-43; Riverside Fence Co., 78

Cal.Rptr. at 539. “Indeed, it is generally recognized that

payment of the purchase price in an option contract is,

unless otherwise stated in the contract, an obligation to

be performed by the optionee in his performance of the

conditions of the bilateral contract of purchase and sale

which is formed upon the exercise of the option.” Erich,

167 Cal.Rptr. at 542-43; see also Murfee v. Porter, 96

Cal.App.2d 9, 214 P.2d 543, 548-49 (1950) (noting that

nothing in the option clause required payment of the

price of the land to be made or tendered when the option

right was exercised in order to constitute an acceptance).

In order to constitute a binding contract for the sale and

purchase of the property, the optionee need only give

notice of acceptance of the right. Id.

FPI, as the optionee, attempted to exercise its option

rights by notifying the Municipal Water District, in writ-

ing, that it was exercising its option to the 9.4 acres of

lakebottom property located at Eagle Point. Critically,

there is no provision in the option that required the sale to

B26

be completed within the 20-year period. Thus, the perfor-

mance of the contract was deferred by the mutual agree-

ment of the parties. The delay in opening the escrow

account was designed to be effective until the Municipal

Water District cleared its title problems with the 1984

easement and Eagle Point Estates received all of its regu-

latory approvals. This mutually agreed deferral, while

each party attended to details hindering immediate per-

formance, constituted consideration on the part of each of

the deferring parties. See Frankel v. Board of Dental

Exam'rs, 46 Cal.App.4th 534, 54 Cal.Rptr.2d 128, 136

(1996).

As stated earlier, supra at note 6, the Municipal

Water District unanimously passed an oral resolution

stating that FPI had properly exercised the option. There-

fore, even if the acts of Municipal Water District agents

Mr. Mitchell and Mr. Lemieux, Sr., had been unauthorized

in 1988, the Municipal Water District’s Board of Directors

found that the option was validly exercised by FPI. Sub-

sequent ratification renders an agent's action binding on

a board of directors as of the time the unauthorized act

was performed. 2 WITKIN, SUMMARY OF CALIFORNIA

LAW, Agency and Employment § 87 (9th ed.1987). A munic-

ipality is subject to the same rule. 45 CAL. JUR. 3D

Municipalities § 321 (1978); see also Baker v. City of Palo

Alto, 190 Cal.App.2d 744, 12 Cal.Rptr. 425, 432 (1961)

(“The city could, like any other party, retroactively adopt

prior acts or fix retroactive dates of execution of the

contract.”).

Finally, nothing in the option required the Municipal

Water District’s approval of the proposed fill before the

option could be exercised, only that it be afforded the

B27

opportunity in the future to approve or disapprove any

proposal. While the Municipal Water District retained a

right to review and approve or disapprove any specific

plan for excavation and filling, this right to review FPI's

plan was a completely separate step that could only occur

after the option was exercised. The exercise of the option

was done by the November 29, 1988 letter from Mr.

Foulkes to the Municipal Water District. No third party

action was referenced in that exercise of the option. It was

only after the exercise of the option, when the contract

had already been formed, that Mr. Good’s November 30,

1988 letter to Mr. Lemieux discussed how the contract

was to be performed. Since third-party approval was not

a condition precedent required by the option, it merely

pertained to the performance of the contract, not to its

formation. See Murfee, 214 P.2d at 548-49.

Accordingly, it is clear from the evidence that FPI

properly exercised its option to purchase the lakebottom

property. FPI’s option contract did not specify that the

tender of payment for the lakebottom property was

required in order to properly exercise the option. In fact,

there is no indication that the option specified any partic-

ular manner by which the optionee had to exercise its

option rights. Considering this lack of particularity, and

especially in light of the option agreement not requiring

that the optionee tender payment as part of an effective

exercise, the Court does not find that FPI improperly

exercised its option rights with respect to the lakebottom

land. FPI has validly exercised its option on the lakebot-

tom land, and the property was under contract of sale to

FPI.

B28

Under California law, contract rights, including

option contracts, are considered property interests.

County of San Diego v. Miller, 13 Cal.3d 684, 119 Cal.Rptr.

491, 496, 532 P.2d 139, 144 (1975). The United States

Supreme Court also has confirmed that contract rights are

a form of property within the purview of the Fifth

Amendment. See, e.g., United States Trust Co. of New York v.

New Jersey, 431 U.S. 1, 19 n. 16, 97 S.Ct. 1505, 1516 n. 16,

52 L.Ed.2d 92 (1977) (government bonds); Armstrong v.

United States, 364 U.S. 40, 46, 80 S.Ct. 1563, 1567-68, 4

L.Ed.2d 1554 (1960) (mechanic’s lien); Louisville Joint Stock

Land Bank v. Radford, 295 U.S. 555, 601-02, 55 S.Ct. 854,

868-69, 79 L.Ed. 1593 (1935) (mortgage that constituted a

lien under state law); Lynch v. United States, 292 U.S. 571,

579, 54 S.Ct. 840, 843-44, 78 L.Ed. 1434 (1934) (insurance

contract). When an option has been exercised under Cali-

fornia law, the optionee is the equitable owner of the

property and is entitled to just compensation. County of

Santa Clara v. Curtner, 245 Cal.App.2d 730, 54 Cal.Rptr.

257, 261 (1966); see also County of San Diego, 119 Cal.Rptr.

at 496, 532 P.2d at 144 (holding that even the owner of an

unexercised option to purchase land, which was taken by

the Government, has a compensable interest). Thus,

although the Municipal Water District still owned the

legal title in fee, FPI’s equitable ownership in the 9.4-acre

lakebottom land parcel constitutes a property interest,

which is protected and compensable under the Fifth

Amendment.

Also, and notwithstanding defendant's arguments to

the contrary, this case does not present a “nuisance excep-

tion” problem, nor is the Government's “notice defense”

argument applicable here. The concept of a nuisance

B29

exception from the Takings Clause is a holdover from the

cases that did not recognize a taking where a legitimate

use of police power had occurred. See Mugler v. Kansas,

123 U.S. 623, 8 S.Ct. 273, 31 L.Ed. 205 (1887) (failed

attempt to employ the Takings Clause to challenge the

prohibition on the operation of a brewery). After the

development of the concept of a regulatory taking, the

Government continued to be protected from a taking

claim when it had acted to prevent a use that was inju-

rious to the community, i.e., a nuisance. Keystone Bit-

uminous Coal Ass'n v. DeBenedictis, 480 U.S. 470, 107 S.Ct.

1232, 94 L.Ed.2d 472 (1987).

In Lucas v. South Carolina Coastal Council, 505 U.S.

1003, 112 S.Ct. 2886, 120 L.Ed.2d 798 (1992), however, the

Supreme Court narrowed the concept of uses that may be

considered injurious to the community to a much more

limited concept of uses that would be prohibited by back-

ground principles of the state’s law of property and nui-

sance. The Government must establish that “the nature of

the owner’s estate shows that the proscribed use interests

were not part of his title to begin with.” Id., at 1027, 112

S.Ct. at 2899. For this defense to apply in the Govern-

ment’s favor, the limitation on the owner’s interest “can-

not be newly legislated or decreed (without compensa-

tion), but must inhere in the title itself, in the restrictions

that background principles of the State’s law of property

and nuisance already place upon land ownership.” Id., at

1029, 112 S.Ct. at 2900. Thus, when a plaintiff’s use can be

enjoined under background principle’s of a state’s law of

property and nuisance, that use is not a part of the

property ownership interest to begin with; hence, no

taking can result because no property interest was lost. In

B30

other words, in order to fall within the nuisance excep-

tion, the regulation at issue must do no more than allow

the Government to accomplish by decree what an adja-

cent landowner or the state could have achieved through

the state laws of nuisance or property. Id.

The Government argues that a court must consider

federal laws which were in place prior to FPI’s acquisi-

tion, in determining whether or not there was a pre-

existing limitation on FPI’s title. Citing to a decision by

the United States Court of Appeals for the Federal Circuit

(“Federal Circuit”) in M & J Coal Co. v. United States, 47

F.3d 1148 (Fed.Cir.1995), cert. denied, 516 U.S. 808, 116

S.Ct. 53, 133 L.Ed.2d 18 (1995), the Government contends

that the relevant background principles that form the

basis of the compensable expectancy analysis must

include all of the federal laws.'3

However, contrary to the Government's expansive

interpretation of the Lucas nuisance exception, the Fed-

eral Circuit’s plurality opinion in Preseault v. United

States, 100 F.3d 1525, 1538 (Fed.Cir.1996) explicitly stated

that “Lucas provides no such support” for the proposition

that “background principles” can include federal law.

“The background principles referred to by the Court in

Lucas were state-defined nuisance rules.” Id. FPI’s option

13 Even assuming that the Government is correct, however,

the fact that it took the Corps four years to deny the permit

application indicates that the Corps had to go through an

extensive process in order to determine that the project did not

comport with the Corps’ regulations. Obviously, if the defect

had inhered in the title or in the project ab initio, the Corps

presumably would have reached that conclusion much earlier.

B31

and equitable interest in the lakebottom property were

defined in reference to California law, and California law

contains the appropriate background principles that form

the basis of the compensable expectancy analysis. The

Eagle Point Estates project neither constituted a nuisance

nor was prohibited by California property law. The pro-

ject’s final EIR had been certified under CEQA, and there

is no evidence that any portion of the project would have

endangered public health and safety.'4 Therefore, the nui-

sance exception problem does not exist in this case.

The Government also argues that because the section

404 regulatory structure was in place prior to FPI’s acqui-

sition of the lakebottom property, the Corps’ denial of the

-ermit demonstrates that the Eagle Point Estates project

was constrained by a preexisting and valid law. This

amo.'nts to the so-called “notice defense.” Courts have

examis.ed the import of an existing regulatory structure

at the tite of purchase in terms of both the nature of the

plaintiff’: ~roperty interest and the plaintiff’s invest-

ment-backec. »xpectations. Compare M & J Coal Co. v.

United States, 3b Fed.Cl. 360, 367 (1994) (“A compensable

right does not exis. ** * if at the time of sale an existing

law or regulation pre.luded a certain use * * * .”) with

Creppel v. United States, 41 F.3d 627, 632 (Fed.Cir.1994)

(stating that inquiring into the plaintiff’s investment-

'4 Conflicting evidence exists as to whether or not there

would have been an adverse impact on the aquatic ecosystem, a

positive impact on the aquatic ecosystem, or offsetting effects.

However, there is simply no evidence ‘in the record that a

nuisance would have been created or that a violation of

California state property law would have occurred as a result of

any portion of the project.

B32

backed expectations “limits recovery to owners who can

demonstrate that they bought their property in reliance

on the nonexistence of the challenged regulation.”). In

fact, some courts have found that an existing regulatory

structure may negate the existence of a compensable

property interest. This Court believes, however, that a

permit-based regulatory system presents a situation in

which it is fallacious to argue that the existence of the

regulatory regime can deny a property owner the requi-

site compensable property interest.

The Government’s contention runs counter to the

nature of a permit system, “after all, the very existence of

a permit system implies that permission may be granted,

leaving the landowner free to use the property as

desired.” United States v. Riverside Bayview Homes, Inc.,

474 U.S. 121, 127, 106 S.Ct. 455, 459, 88 L.Ed.2d 419 (1985).

It may be the case that in those instances where a regula-

tion provides an outright ban on a particular use of a

plaintiff’s property, the owner did not have a compens-

able property interest. However, since in a permit-based

system, up to the time of the permit denial (which would

also be the time that the alleged taking occurred), it was

possible that the property owner could have received the

permit, it is incongruous to argue that the owner never

had a compensable property interest to begin with.

Rather, this Court believes that, where there is a regula-

tory permit procedure in effect, the plaintiff’s compens-

able interest is best examined on the merits in terms of

the owner’s reasonable investment-backed expectations

and not as a threshold matter in terms of whether or not

the landowner owned a compensable property interest.

B33

In summary, FPI legally exercised its option to 9.4

acres of lakebottom property adjacent to its upland prop-

erty at Eagle Point. As a result, FPI was (and still is) the

equitable owner of the lakebottom property with a com-

pensable interest in this property. FPI and the Municipal

Water District agreed to a variety of conditions that had

to be satisfied prior to the purchase of the lakebottom

property, but both parties had made substantial progress

in satisfying these conditions. With regard to a pre-exis-

ting limitation on FPI’s proposed use of the 9.4 acres, the

proposed dredge and fill of the lakebottom property did

not violate state nuisance or property law such that the

use was not a part of the plaintiff’s ownership interest.

Finally, section 404’s regulatory structure did not serve to

divest the plaintiff of its compensable property interest

merely because it was in place prior to FPI’s acquisition

of the lakebottom property.

II. Taking Analysis and the Relevant Parcel.

After concluding that FPI had an ownership/com-

pensable property interest, the Court can now proceed to

examine whether or not a constitutionally-recognized

taking has occurred, i.e., whether or not there was a total

or near-total loss of viable economic use. Taking jurispru-

dence has acknowledged that a regulatory process, such

as that developed under the Clean Water Act, can effect a

taking. Loveladies Harbor, Inc. v. United States, 28 F.3d 1171

(Fed.Cir.1994); Ciampitti v. United States, 22 Cl.Ct. 310

(1991). In cases involving allegations that a taking was

caused by a regulation, there are two possible types of

takings. The first is termed a categorical taking, and such

B34

a taking results “where [the] regulation denies all eco-

nomically beneficial or productive use of [the] land” or is

a physical occupation of the land. Lucas, 505 U.S. at 1015,

112 S.Ct. at 2893 (citing Agins, 447 U.S. at 260, 100 S.Ct. at

2141; Nollan v. California Coastal Comm'n, 483 US. 825,

834, 107 S.Ct. 3141, 3147, 97 L.Ed.2d 677 (1987); Keystone,

480 U.S. at 495, 107 S.Ct. at 1247; Hodel v, Virginia Surface

Mining & Reclamation Ass’n, Inc., 452 U.S. 264, 295-96, 101

S.Ct. 2352, 2370-71, 69 L.Ed.2d 1 (1981)). In those

instances where a regulation denies an owner of all eco-

nomically beneficial use of his land, a per se or categorical

taking results, and the Court need not proceed with any

further inquiry. A taking has occurred.

By comparison, a regulatory or partial taking pur-

suant to a regulation may occur when the imposition on

the owner’s land is “one step short of complete.” Lucas,

505 U.S. at 1019 n. 8, 112 S.Ct. at 2895 n. 8. There is no

bright-line rule, in these instances, to determine whether

or not a taking has occurred. Rather, courts have engaged

in essentially “ad hoc, factual inquiries” into the circum-

stances of each particular case. Kaiser Aetna v. United

States, 444 U.S. 164, 175, 100 S.Ct. 383, 390-91, 62 L.Ed.2d

332 (1979). To assist in this examination, the courts have

advocated the application of a tripartite test to determine

whether or not a compensable taking has occurred. Lucas,

505 U.S. at 1019-20 n. 8, 112 S.Ct. at 2895-96 n. 8 (Stating

that where a property owner “might not be able to claim

the benefit of our categorical formulation” and quoting

from Penn Cent. Transp. Co., 438 U.S. at 124, 98 S.Ct. at

2659, that the test to be applied examines ” ‘[t]he eco-

nomic impact of the regulation on the claimant

and . . . the extent to which the regulation has interfered

B35

with distinct investment-backed expectations’ * * * .”);

Accord Golden Pac. Bancorp v. United States, 15 F.3d 1066,

1072 (Fed.Cir.1994) (applying three-part test to partial

taking cases): Bowles v. United States, 31 Fed.Cl. 37, 49

(1994). In summary, the three factors of the three-tiered

test to be considered are: (1) the character of the govern-

mental action, (2) its interference with reasonable invest-

ment-backed expectations, and (3) the economic impact

of the Government’s action on the landowner. Penn Cent.

Transp. Co., 438 U.S. at 124, 98 S.Ct. at 2659; Ruckelshaus v.

Monsanto Co., 467 U.S. 986, 1005, 104 S.Ct. 2862, 2874, 81

L.Ed.2d 815 (1984); Golden Pac. Bancorp, 15 F.3d at 1072.

The dichotomy developed between a categorical tak-

ing and a regulatory taking compels this Court first to

define the parameters of the relevant parcel. If the Court

were to have decided that the pertinent property was

solely the 9.4 acres of lakebottom property for which FPI

sought, and was subsequently denied, a section 404 Per-

mit, then this Court would most likely have proceeded to

analyze this case as a Lucas-type categorical taking. The

justification would be that the value of the lakebottom

land was essentially eviscerated due to the inability of

FPI to dredge and fill the area and place residential

homes on the acreage.!° However, because the Court

finds that the pertinent parcel in this case is the entire 62-

acre Eagle Point Estates project (i.e., the 53 acres of

1S An argument could be made that even if the Court would

decide to consider the relevant parcel to be the 9.4 acres of

lakebottom alone, that considerable value remains in the land

for use by the owner even if it cannot use the property to

dredge, fill and put residential houses on it.

B36

upland property in conjunction with the 9.4 acres of

lakebottom land), then the Court must approach this case

using a regulatory or a partial taking analysis since there

is clearly substantial value remaining in the total parcel at

issue.

The United States Court of Appeals for the Federal

Circuit, in determining the relevant parcel for taking

cases, advocates “a flexible approach, designed to

account for factual nuances.” Loveladies Harbor, 28 F.3d at

1181. This Court in Ciampitti, 22 Cl.Ct. at 318, detailed an

extensive list of factors which a court should consider

when attempting to determine what constitutes the rele-

vant parcel:

Factors such as the degree of contiguity, the

dates of acquisition, the extent to which the

parcel has been treated as a single unit, the

extent to which the protected lands enhance the

value of remaining lands, and no doubt many

others would enter the calculus.

FPI, in asserting that only the 9.4-acre lakebottom prop-

erty is the relevant parcel, focuses on the “separateness”

of the transactions. Specifically, FPI relies on the different

dates upon which the upland property was acquired and

the option rights were transferred, the separate consider-

ation that was paid for the upland property, and the

option rights.!¢

'e The evidence presented in this case supports a finding by

FPI that there was no separate consideration paid for the option,

outside of the $3.6 million paid by FPI to BBP, for the 53 upland

acres.

B37

This Court must be wary of focusing solely on the

particulars of a transaction. Such a myopic approach

would allow sophisticated real estate investors to design

a transaction so as to segregate those parts of a parcel

which could run afoul of regulations, such as the Clean

Water Act, and maximize the possibility of a successful

taking claim. As noted in Ciampitti, “a taking can appear

to emerge if the property is viewed too narrowly.” Id. at

319.

Rather, in addition to the factors described in Ciam-

pitti, a court should focus on how the economic expecta-

tions of the claimant, with respect to the parcel at issue,

have shaped the owner’s actual and projected use of the

property. Keystone, 480 U.S. at 499, 107 S.Ct. at 1249

(property “is viewed in the context of any reasonable unit

of petitioners’ coal mining operations and financial-

backed expectations * * * .”); Ciampitti, 22 Cl.Ct. at 318

(stating that one factor to consider in determining the

relevant parcel is “the extent to which the whole parcel

could be developed.”); see also American Sav. & Loan Ass’n

v. County of Marin, 653 F.2d 364, 371 (9th Cir.1981) (noting

that how a parcel would be treated at the development

stage is dispositive in defining the parcel). A property

owner, who treats a series of parcels as one property for

the purposes of development, financing, planning, and

utilization, cannot then segregate the properties for the

purpose of establishing a taking claim. Aside from the

analytical flaws inherent in ignoring these considerations,

the approach advocated by this Court comports with the

underpinnings of taking jurisprudence. In a regulatory or

a partial taking claim, the Court must examine the extent

to which the value of an owner’s property has been

B38

diminished by the Government's action. However, if a

property owner treats a series of properties as one

income-producing unit, the value lost to the claimant is

not simply the loss of the segregated parcel affected by

the Government action, but the decrease in the owner’s

ability to utilize the unified parcels as one income-gener-

ating unit. Any other approach would elevate the style of

the transaction over the substance of a property owner’s

treatment of a parcel. .

Considering the above-described analysis, it is clear

that the relevant parcel in this instance is the entire 62-

acre Eagle Point Estates project (i.e., the 53 acres of

upland property in conjunction with the 9.4 acres of

lakebottom land). This is trué for several reasons. First,

the upland property and the lakebottom land are contig-

uous parcels. In fact, the option to the lakebottom prop-

erty could only be exercised if the optionee owned the

adjacent upland property. To this Court, this is strong

evidence that these two properties should be deemed one

parcel for this taking analysis. In addition, while FP!

makes much of the different dates upon which the upland

property and the option rights were acquired, this Court

believes that, to the contrary, a mere five-month separa-

tion in time is more indicative of the unity of the two

parcels than the separation of the parcels. This, to the

Court, evidences a clear and consistent intent by the

plaintiff to treat and to develop the properties as one

unit. Finally, and perhaps most importantly, from the

time of the purchase of the upland property, FPI’s eco-

nomic intentions were to utilize the lakebottom acreage

and the upland parcel in conjunction with each other as

one income-producing unit. For instance, the revised

B39

draft of the Eagle Point Estates EIR, dated March 1991,

and prepared for the City of Big Bear Lake, described the

importance of the lakebottom land to the marketing and

to the value of the Eagle Point Estates project. The EIR

indicated that Eagle Point was selected because “it would

best achieve the overall project objective.” The EIR

explained that the following factors were used in making

this judgment:

The physical characteristics of the site will

allow boating access to the lake;

3. The existence of “Dredge and Fill” rights

associated with the property to create

access|.]

The EIR continued that the “combination of a strong

demand for lake access lots, coupled with very little

competition to supply such lots, provides a major market-

ing advantage for the applicant’s property.” Thus, FPI

viewed the lakebottom property and the upland property

as two complimentary units of one income-generating

parcel, with the lakebottom property providing the

owners of the lots on the upland areas with access to the

lake for recreational purposes, and owners of the water

front lots on the filled portions of the lake with an aes-

thetically unique setting.

Other documentation in the record indicates the

unity, for the purposes of development and the economic

expectations of FPI, of the upland and lakebottom par-

cels. On May 5, 1988, FPI applied to the Community

Development Department of the City of Big Bear Lake for

approval of the Eagle Point Estates tract. FPI included in

B40

this application drawings of the development showing a

residential subdivision with three peninsulas created by

fill from the lakebottom. The application further

described the project as “53.36 acres existing plus 5.4

acres lake bottom.” This description of the Eagle Point

Estates as one unified development utilizing both the

upland and the lakebottom property pervades the

numerous permit applications which FPI submitted,

including the plaintiff's section 404 permit.'” Accord-

ingly, this Court finds that the relevant parcel for this

taking analysis is the combined upland and lakebottom

parcels, which constituted the Eagle Point Estates devel-

opment. This conclusion is a product of the contiguity of

the properties, the temporal proximity of the purchase of

the upland property and the option rights, and the unity

of use proposed by FPI for the upland and lakebottom

properties, throughout the entire planning and develop-

ment process.

Once the relevant parcel has been determined to be

the entire 62 acres, it is indisputable that the parcel as a

whole has substantial remaining economic viability. After

the denial of its permit, FPI continued to carry on its

intended business, i.e., selling lots at Eagle Point

Estates.'* Indeed, most of FPI’s own market projections

'7 While all of the various permit applications include

descriptions of the project encompassing the upland and

lakebottom properties, there are slight variances in the number

of acres which FPI planned to dredge and fill.

'® For example, as of August 30, 1994, the plaintiff had sold

a total of 25 out of its 106 lots in Eagle Point Estates for

$3,547,900. All but one of the lots sold at or above the listed sales

price, with the remaining lot sold to Mr. Foulkes at

B41

demonstrated that FPI expected to a [sic] make a consider-

able profit on the Eagle Point Estates project even without

the filled lakebottom lots.'? Clearly, the Corps’ denial of FPI’s

permit did not deprive FPI of all economic viability for the

relevant parcel. On the contrary, the facts undeniably con-

firm that substantial and viable economic use remains in the

integrated development of uplands and lakebottom at the

Eagle Point Estates project. Thus, a categorical taking, or a

per se taking, simply did not occur.?°

approximately cost value. As of April 30, 1996, closed sales of 28

lots generated proceeds in the amount of $4,208,000.

'’ Mr. Richard Colburn testified that the fair market value

of Eagle Point Estates is approximately the share price for the

lots, i.¢., approximately $12 million. In a letter to the Bank of

America on June 9, 1992, Mr. Colburn also stated that the total

developed costs of Eagle Point Estates (including land costs)

would be about $7,100,000, therefore generating a profit of

roughly $5 million. In a letter to Mr. Colburn, fax dated July 3,

1991, Mr. Foulkes presented a financial evaluation of the Eagle

Point project in terms of its profit potential. He estimated that if

the section 404 fill permit was not granted, the profit generated

would range between $2 and $4 million, and that if the fill

permit was granted, the profit would run between $3.6 million

and $6.3 million.

20 FPI also contends that the denial of its permit constituted

a physical occupancy of the lakebottom property and, thus, a

categorical taking by way of an environmental easement. FPI’s

logic is flawed. FPI was under a statutory prohibition against

unpermitted discharges into the waters of the United States.

FPI’s permit for a non-water-dependent activity in a special

aquatic site was denied because less damaging alternatives

existed. The Federal Circuit has emphasized that Clean Water

Act restrictions on the filling of wetlands cannot be equated

with physical occupations, stating that a taking claim arising

out of a section 404 permit denial “raises a regulatory takings

claim and only a regulatory takings claim.” Loveladies, 28 F.3d at

B42

Ill. Regulatory/Partial Takings Analysis.

Having determined that the relevant parcel for anal-

ysis in this case is the entire 62-acre Eagle Point Estate

Project, this Court will now proceed to analyze the pres-

ent case pursuant to the regulatory /partial takings para-

digm. As explained, supra, in these instances, a court

must determine when a regulation causing “a partial loss

of economic use of the property has crossed the line from

a noncompensable ‘mere diminution’ to a compensable

‘partial taking.’ ” Florida Rock Indus., Inc. v. United States,

18 F.3d 1560, 1570 (Fed.Cir.1994). In order to determine

whether or not that reduction in value rises to the level of

a compensable partial taking under the Fifth Amend-

ment, the Supreme Court has resolved the issue by using

the three-tiered analysis initially espoused in Penn Cent.

Transp. Co., 438 U.S. at 124, 98 S.Ct. at 2659, and recently

reaffirmed as the appropriate analytical framework in

Lucas. The three-tiered analysis used in Penn Cent. Transp.

Co., 438 U.S. at 124, 98 S.Ct. at 2659 examines: (1) the

character of the governmental action, (2) the extent to

which the regulation interferes with the claimant’s invest-

ment-backed expectations, and (3) the economic impact

of the regulation on the landowner.

1175; see also Yee v. City of Escondido, 503 U.S. 519, 527, 112 S.Ct.

1522, 1528, 118 L.Ed.2d 153 (1992) (“The government effects a

physical taking only where it requires the landowner to submit

to the physical occupation of his land.”) FPI’s lakebottom

property was wetland property prior to the application for a

section 404 permit. The Corps’ denial merely maintained the

status quo and did not physically occupy FPI’s property.

B43

The Lucas court omitted discussing factor number

one (the character of the governmental action) as a factor

in a partial takings analysis. Lucas, 505 U.S. at 1019 n. 8,

112 S.Ct. at 2895 n. 8. The probable reason was that this

factor generally prompts inquiries as to whether or not

the Government's action is analogous to a physical inva-

sion of its property, with compensation being more likely

in such instances. Keystone, 480 U.S. at 488-89 n. 18, 107

S.Ct. at 1243-44 n. 18. However, the Corps’ regulations,

contrary to FPI’s claim, do not involve the Government

effecting a physical invasion of its property. Rather, the

regulations at issue act to proscribe the owner’s use of its

property.

Furthermore, FPI did not challenge the Government's

action as being arbitrary or capricious by the Corps’

implementation of section 404 of the Ciean Water Act.

Because wetlands serve important environmental func-

tions, see, e.g., Riverside Bayview Homes, 474 U.S. at 131-35,

106 S.Ct. at 461-64, there is no room for doubt that the

governmental action in this case served an important

purpose via the process for obtaining a section 404 per-

mit. See Florida Rock Indus., Inc. v. United States, 791 F.2d

893, 904 (Fed.Cir.1986) (stating that “the preservation of

wetlands bears a substantial relationship to the public

welfare as perceived by the best lights of our time”);

Deltona Corp. v. United States, 228 Ct.Cl. 476, 657 F.2d

1184, 1192-94 (1981). Thus, this Court will not examine

any further the character of this legitimate Government

action. This nation clearly has a legitimate public welfare

duty to preserve the nation’s wetlands, and it is a worthy

national goal.

B44

The second factor to be examined is the interference

with FPI’s investment-backed expectations. FPI’s section

404 permit application was for the dredge and fill of

approximately 9.4 acres of lakebottom property in order

to augment the building of the residential development,

known as Eagle Point Estates. The Corps’ denial of FPI’s

application was based on a variety of review factors,

including detrimental effects on special aquatic sites,

water quality, threatened and endangered plant and ani-

mal species, shore erosion, and shore accretion. All of the

major regulatory agencies, including the United States

Environmental Protection Agency (“EPA”), the United

States Department of the Interior’s Fish and Wildlife Ser-

vice, the United States Department of Agriculture’s For-

est Service, and the California Department of Fish and

Game had recommended the denial of FPI’s 404 permit

application.

In the face of this regulatory consensus, FPI main-

tains that its investment-backed expectations are compen-

sable with respect to the development of the Eagle Point

Estate project. As support of its position, FPI notes that it

spent four years developing mitigation measures with the

Corps and that there never was any indication from the

Corps that FPI could not overcome any obstacles to

receiving a section 404 permit. In addition, FPI notes that

the placement of fill in other areas of Big Bear Lake had

been approved in the years preceding the FPI application

for a section 404 permit.

The Court notes, however, that an investment-backed

expectation “must be more than a ‘unilateral expectation

or an abstract need,’ ” it must be reasonable. Ruckelshaus,

467 U.S. at 1005-06, 104 S.Ct. at 2874 (quoting Webb’s

B45

Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 161, 101

S.Ct. 446, 451, 66 L.Ed.2d 358 (1980)). In those instances

where a regulation limits an owner’s use of his land, by

inquiring into the claimant’s investment-backed expecta-

tions, a court “limits recovery to owners who can demon-

strate that they bought their property in reliance on the

nonexistence of the challenged regulation.” Creppel, 41

F.3d at 632. See also Concrete Pipe & Prods. of California, Inc.

v. Construction Laborers Pension Trust for S. Cal., 508 U.S.

602, 645-46, 113 S.Ct. 2264, 2291-92, 124 L.Ed.2d 539

(1993); Ruckelshaus, 467 U.S. at 1005-06, 104 S.Ct. at

2874-75 (no reasonable expectation that EPA would keep

information confidential cons.dering regulatory scheme).

A regulatory scheme affecting the property at issue at the

time of purchase can significantly discount an owner’s

investment-backed expectations with respect to the prop-

erty. In fact, numerous courts have found that a regula-

tory structure can thoroughly abrogate a property

owner’s investment-backed expectations. See, e.g., Golden

Pac. Bancorp, 15 F.3d at 1074 (“Given the highly regulated

nature of the banking industry, * * * the Comptroller’s

actions could not possibly have interfered with a reason-

able investment-backed expectation *** .”); Ciampitti, 22

Cl.Ct. at 320-22 (no reasonable investment-backed expec-

tations that an owner could develop wetlands in light of

Clean Water Act’s section 404 permit system). The ratio-

nale underlying these decisions is two-fold. First, to hold

otherwise would turn the Government into an involun-

tary guarantor of the property owner’s gamble that he

could develop the land as he wished despite the existing

regulatory structure. Ciampitti, 22 Cl.Ct. at 321. Second, it

B46

is assumed that when a property owner purchases prop-

erty that is subject to regulations which may proscribe, or

limit certain uses of the property, “the owner presumably

paid a discounted price for the property. Compensating

him for a ‘taking’ would confer a windfail.” Creppel, 41

F.3d at 632. Thus, this Court must be wary of the specula-

tor syndrome and analyze the plaintiff’s expectations in

light of the regulation, the agencies’ actions, and the

reasonableness of the plaintiff's economic expectations.

The Clean Water Act was enacted in 1972 and pro-

hibits the discharge of pollutants into waters of the

United States except in compliance with, inter alia, section

404 of the Act. 33 U.S.C. §§ 1251(a), 1311(a) (1994). Para-

graph (a) of section 1344 authorizes the Secretary of the

Army to issue permits for the “discharge of dredged or

fill material into the navigable waters * * * .” 33 U.S.C.

§ 1344(a) (1994). In order to assist in administering the

Clean Water Act, the Corps is provided with certain

criteria that it must weigh in determining whether or not

to issue a section 404 permit. Some of the factors include

whether or not the dredge and fill will contribute signifi-

cantly to the “degradation of the waters of the United

States,” 40 C.F.R. § 230.10(c) (1991) and whether or not

there are practicable alternatives which would have less

impact on the water’s aquatic ecosystem, 40 C.F.R.

§ 230.10(a). If a project associated with a proposed dis-

charge into a “special aquatic site”! is not “water depen-

dent,”22 “practicable alternatives that do not involve

21 Special aquatic sites include wetlands of the type at issue

in this case.

22 A project is not water dependent if it “does not require

access or proximity to or siting within the special aquatic site in

B47

special aquatic sites are presumed to be available, unless

clearly demonstrated otherwise * * * [and] all practicable

alternatives * * * which do not involve a discharge into a

special aquatic site are presumed to have less adverse

impact on the aquatic ecosystem, unless clearly demon-

strated otherwise.” 40 C.F.R. § 230.10(a)(3).

Further, the section 404 guidelines make specific ref-

erence to consideration of adverse impacts on threatened

or endangered plant and animal species. Part 230.10(b)

and (b)(3) of title 40 provides that “[n]o discharge of

dredged or fill material shall be permitted if it: ‘ * * *

Jeopardizes the continued existence of species listed as

endangered or threatened under the Endangered Species

Act of 1973, as amended * ** .’ ” Subparts D and E of part

230 further discuss the potential impacts on threatened

and endangered species and special aquatic sites, includ-

ing the destruction of habitat, contamination and reduc-

tion of food sources, and elimination of breeding and

nesting areas. See 40 C.F.R. §§ 230.30-.40.

This well-developed regulatory scheme was firmly in

place and being enforced at the time FPI purchased the

upland property and the option rights in 1988. Well prior

to this time period, the public was clearly on notice that

the development of wetland areas was subject to compli-

ance with section 404 of the Clean Water Act. As a sophis-

ticated real estate developer, FPI would be charged with

knowledge of this regulatory scheme. Indeed, FPI also

question to fulfill its basic purposes * * * .” 40 C.F.R.

§ 231.10(a)(3). For example, a housing project is not considered

to be water dependent, while a marina is or would be

considered to be water dependent to fulfill its basic purpose.

B48

had actual knowledge that the lakebottom property was

subject to the section 404 permit application process.

When it purchased the option rights to the lakebottom

property, FPI assumed, as the party in interest, the section

404 application already in process, which had been com-

menced by its sister company, BBP. Thus, FPI knew, at the

time of purchase, that it would have to qualify for a

section 404 permit in order to develop the lakebottom

Property in accordance with its plans.

Moreover, prior to the purchase of the option rights,

FPI knew that unique, and possibly insurmountable,

problems were implicated by its application for a section

404 permit. For instance, Mr. Tom Dodson (plaintiff's

environmental consultant), in his “Biological Assessment

of the Eagle Point Residential Subdivision,” noted that

the area contained 15 rare plant species, with two of these

species being endangered, and that the area was a key

perching habitat for wintering bald eagles, which were

also an endangered species at the time. In a letter dated

March 14, 1987, Mr. Dodson stated that FPI’s application

to fill the lakebottom property “is likely to require much

more consultation with respective agencies than is nor-

mally the case with similar projects.” On June 2, 1988, the

EPA sent a letter to the Corps, with a copy to the appli-

cant, stating that the EPA objected to the project as a

nonwater-dependent project in a special aquatic site. In a

July 18, 1988 letter to Mr. Dodson, the EPA reiterated the

applicable permit requirements and again explained the

effect of a nonwater-dependent project. Mr. Dodson’s

August 5, 1988 letter to the Corps reflects that he was

engaged in a dialogue with the Corps concerning the

water-dependency issue and regulatory restrictions. On

B49

October 11, 1988, Mr. Dodson forwarded a practicable

alternatives report to the Corps and the EPA and, in the

same letter, requested that the applicant’s name be

changed to FPI in order to reflect FPI’s purchase of BBP’s

option to the lakebottom property. In response to these

facts, FPI decided to exercise its option to the lakebottom

property in a way that would enable it to have more than

three years in which to clear all of the necessary regula-

tory hurdles. Thus, prior to its purchase of the property

at issue, FPI was aware not only that the lakebottom land

was subject to the section 404 permit application process

but that the application could be denied due to signifi-

cant federal and state environmental concerns.

In many ways, FPI’s attempt to dredge and fill the

lakebottom property in order to build a residential project

was a quixotic quest from the outset. Mr. John Winn,

formerly Acting Regulatory Branch Chief of the Corps of

Engineers, testified that, based on his experience since he

began with the program at its inception in 1974, housing

has never been considered a water-dependent activity.

Thus, if an applicant proposes a nonwater-dependent use

(i.e., a housing project), it is presumed that there are less

damaging alternatives. Therefore, in his view, the nonwa-

ter-dependent status of a housing project makes the like-

lihood of securing a section 404 permit extremely

unlikely. In his entire career, Mr. Winn testified that he

was not aware of any section 404 permit applications that

had been issued for housing on fill in the waters of the

United States that constituted aquatic sites (FPI’s situa-

tion here). In addition to detailing the fragile environ-

mental conditions at the Eagle Point Estates project and

B50

the lack of adequate mitigation measures in FPI’s pro-

posed plans, Mr. Joseph Johns, President of Envicom

Corporation, emphasized that FPI should have known

that a residential development was not a water-depen-

dent activity, especially in a special aquatic site, and

permission to construct housing on the filled in wetlands

would be denied as a matter of course. Ultimately, of

course, the permit was denied primarily based on the

water-dependency issue.

FPI’s stated belief that it could overcome the regula-

tory hurdles involved in developing the lakebottom land

is not satisfactorily reasonable for a variety of reasons not

the least of which was that it was at least equally plaus-

ible that the Corps would disagree with FPI and deny its

application for a section 404 permit. FPI’s subjective “uni-

lateral expectation” that it could obtain the section 404

permit through mitigation efforts simply does not give

rise to a reasonable investment-backed expectation. See

Ruckelshaus, 467 U.S. at 1006, 104 S.Ct. at 2874-75. In

Stating that previous fill projects had been approved

before 1983, FPI fails to mention that these projects were

approved by the Municipal Water District and were not

approved by the Corps.* Thus, these prior approvals are

not pertinent to a discussion of whether or not FPI could

reasonably expect the Corps to approve its dredge and fill

project. Moreover, even if the Corps had approved pre-

vious projects, this would not make FPI’s expectation to

develop the lakebottom property any more reasonable.

See Golden Pac. Bancorp, 15 F.3d at 1075 (prior permissive

*3 The Corps started asserting jurisdiction over wetlands

on Big Bear Lake in 1985.

BS1

conduct by Government in administering regulations

does not affect investment-backed expectations because

Government could enforce regulations in more stringent

fashion if it so chose). Finally, a growing stubbornness

appears to have permeated FPI and its agent as the plain-

tiff was repeatedly appraised of the nonwater-dependent

nature of the property and the fact that its alternatives

analysis was inadequate. For example, in reaction to the

EPA’s letter of February 3, 1989, to FPL, which stated that

the project was not water dependent and would be

opposed on that basis, Mr. Dodson suggested in a letter

to Mr. Foulkes, dated February 17, 1989, that FPI not

address the remaining issues because they involved

“other alternatives which I do not believe we should

concede exist until the issue of the fill rights has been

fully resolved in court.”

In summary, FPI acquired the Eagle Point Estates

property and exercised its option to the lakebottom prop-

erty after the imposition of, and with the full knowledge

of, the regulatory framework. Most importantly, FPI sim-

ply had no reasonable basis in fact or in law for expecting

that it would receive a section 404 permit to fully develop

the lakebottom property part of Eagle Point Estates. The

plaintiff and its agent were repeatedly told by numerous

agencies of the state and the Federal Government of the

deficiencies in their application for a project of this type,

that, according to several witnesses, had never been

approved in the history of the regulation. FPI took a

business risk that it would be able to obtain a section 404

permit in order to exploit its property interest in the

lakebottom property and Eagle Point. Simply because FPI

was thwarted from doing so by reasonable regulations

B52

designed to protect the environment and the wetlands

does not establish a sufficient reason for the Court to

intervene and protect FPI against the downside of that

business risk. Consequently, this Court must hold that

FPI did not have a reasonable investment-backed expec-

tation that it could dredge and fill the lakebottom land

attached to the development of Eagle Point Estates at Big

Bear Lake.

Having decided

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