Friedrich Hayek, the renowned Austrian economist, opined in his epic Road to Serfdom that  “[t]he more the state ‘plans’ the more difficult planning becomes for the individual.”1  Giving light to Hayek’s observation regarding government planning and its effect on free-market behavior, the Minnesota Supreme Court in Johnson v. City of Minneapolis2 recognized that egregious drawn-out government planning creating a “cloud of condemnation”3 over private property constituted a compensable taking under the Minnesota Constitution.

On December 16, 1983 the City of Minneapolis (“City”) adopted a redevelopment plan for an area of south downtown Minneapolis, including south Nicollet Mall, one of the downtown’s major retail centers.  The City’s primary objectives were to promote and assist development of a new convention center located in the area and to preserve downtown Minneapolis as a major retail center.  Through the redevelopment plan, the City also sought to increase the downtown tax base.  During 1983 and 1984, however, the City was unable to persuade local property developers to submit a redevelopment plan.  In 1985, the City approached a French developer, La Societe Generale Immobiliere (LSGI), to submit a redevelopment plan.  LSGI submitted a redevelopment plan, which proposed the construction of a dome over part of Nicollet Mall and a tunnel under the street to accommodate traffic.  In August 1985, the City granted LSGI exclusive negotiating rights to redevelop the area.

One year later, the City approved the proposed redevelopment contract with LSGI and approved a $73 million bond sale to finance property acquisition for the LSGI redevelopment plan.  The City’s actions, however, were resisted by the Mayor of Minneapolis, who consistently vetoed steps taken to close the redevelopment contract between LSGI and the City.  The City ultimately overrode the mayor’s vetoes and the City and LSGI subsequently executed the redevelopment contract on November 3, 1986.  The redevelopment contract provided that the City would acquire the properties in the redevelopment area and lease the properties to LSGI for the construction of a shopping mall and office tower.  The parties expected the redevelopment plan to comprise 900,000 square feet of retail shopping space and 400,000 square feet of office space, at an estimated cost of $300 million.

On October 27, 1987, LSGI informed the City that it had fulfilled its obligation under the redevelopment contract by securing anchor tenants for the redevelopment project by obtaining a letter of intent to lease retail space from Nordstrom, a local retailer, and by obtaining a letter of interest from Nieman Marcus expressing its interest in leasing space for one of its stores.  The redevelopment contract, however, contained a confidentiality provision that prohibited LSGI and the City from informing local property owners about the status of the project, including notifying them that their properties would likely be condemned to make room for new tenants such as Nordstrom and Nieman Marcus.

On the date the redevelopment contract was supposed to close, however, the City adopted a resolution directing the Minneapolis Community Development Agency to adopt new design guidelines that rejected LSGI’s original plan for a dome over Nicollet Mall and an underground traffic tunnel.  The new guidelines would maintain Nicollet Mall “as an open urban street with no enclosure and at-grade transportation.”  The resolution effectively directed LSGI to create a new redevelopment plan radically different from the one it previously proposed in the redevelopment contract.  On November 8, 1987, the City and LSGI closed on the redevelopment contract and the City executed a 99-year-lease with LSGI for all of the properties involved in the litigation.

Later that month, the City sent form letters to the Johnson plaintiffs informing them that the City was going forward with the LSGI project and that their properties would be appraised as an initial step toward condemnation. The letter cautioned, however, that by “appraising the property the City [was] not making a definite commitment to acquire the same.”  At trial, the author of the letter on behalf of the City testified that this formulaic language was included in every form letter from the City.  Indeed, the plaintiffs took this letter as an affirmative statement that the LSGI redevelopment project was going forward and that their proprieties would ultimately be condemned.

Based on their belief that the redevelopment project was moving forward and that their properties were going to be appraised and condemned by the City, the plaintiffs prepared for their properties to be appraised—which occurred in December 1987. Eventually, however, and despite numerous negotiations between the City and LSGI, the City’s redevelopment contract with LSGI fell through.  On June 1, 1989, the City advised LSGI that it was in default and terminated the redevelopment contract.  During this time—December 1987 through June 1989— the City never informed the plaintiffs that it was no longer pursuing acquisition of their properties despite numerous telephone calls and letters sent by plaintiffs to the City’s elected officials requesting a report on the status of the redevelopment project and the acquisition of their properties.

In June 1989, LSGI sued the City in federal court requesting specific performance of the redevelopment contract.  An order for specific performance would have required the City to acquire plaintiffs’ properties and perform its remaining obligations under the redevelopment contract.  Also in 1989, adding insult to injury, and despite that it had taken no further action to acquire plaintiffs’ properties, the City assessed plaintiffs significant special assessments as part of the redevelopment project.  The LSGI lawsuit lasted four years.  In July 1993, a jury awarded LSGI approximately $31 million in damages against the City.  The Eighth Circuit Court of Appeals ultimately reversed the jury award against the City based on its interpretation of the redevelopment contract.

The financial impact of the failed redevelopment plan and litigation between LSGI and the City was disastrous for the plaintiffs who had patiently waited for the City to acquire their properties. Before the LSGI redevelopment plan, vacancies in plaintiffs’ building were low and plaintiffs’ properties were profitable. During the LSGI redevelopment project, however, numerous tenants inquired—both of the City and plaintiffs—regarding the status of the project. Because the plaintiffs could not obtain any status reports due to the City’s failure to communicate with them, plaintiffs were unable to reassure their tenants that they would be able to honor their leases through the end of their terms. Fearing that they would soon be displaced through condemnation, plaintiffs’ tenants vacated the properties in droves and plaintiffs had difficulty attracting replacement tenants. As a result, plaintiffs’ rental income decreased dramatically. Plaintiffs’ buildings also deteriorated because the City did not urge plaintiffs to make necessary improvements to the properties.

Plaintiffs eventually brought an inverse condemnation lawsuit in Minnesota state district court and the Court, after a three-week trial with an advisory jury, found that the City had misled plaintiffs about the planned acquisition of their properties. The “cloud of condemnation” over plaintiffs’ properties between November 1987 and February 1995, according to the Court, impacted their business opportunities making them commercially impracticable and substantially deprived plaintiffs of most of the economically viable and feasible uses for the property. Lending support to Hayek’s observation regarding government planning and the free market, the court concluded:

Where government action specifically targeting Plaintiffs’ properties so substantially and directly affects their use, business opportunity, freedom of choice of use of their property [the City] violated Plaintiffs’ constitutional right to be free from unjust taking and/or damage to their private property under both the United States Constitution and Minnesota Constitution...

The Court awarded plaintiffs collectively $4,348,000 plus interest as damages.

The City appealed and the Minnesota Court of Appeals reversed the district court holding that because the City never “significantly controlled” plaintiffs’ properties the City’s actions did not amount to a constitutional taking. Plaintiffs appealed and the Minnesota Supreme Court reversed holding that the City’s actions constituted a regulatory taking compensable under the Minnesota Constitution.

The Minnesota Supreme Court began its analysis by noting that, because the City never took physical control over plaintiffs’ properties, the United States Supreme Court’s decision in Penn Central Transportation Co. v. City of New York, 438 U.S. 104 (1978) governed plaintiffs’ claim under the United States Constitution. Under Penn Central, where there is less than a complete taking of the property in question, a three-factor balancing test is used to determine whether there has been a compensable taking. The three factors to consider are: (1) the economic impact on the claimant; (2) the extent the regulation interfered with the claimant’s investment-backed expectations; and (3) the character of the regulation.

According to the Minnesota Supreme Court, the Court of Appeals had erred by placing all weight on whether the City had “significant control” over the properties instead of evaluating that factor within the Penn Central three-factor framework. Having stated the proper framework for evaluating plaintiffs’ claim under the U.S. Constitution, however, the Court declined to decide whether plaintiffs were entitled to relief under the U.S. Constitution because, in the unanimous opinion of the Court, plaintiffs were “entitled to compensation under the Minnesota Constitution.”

Analyzing plaintiffs’ claim under the Minnesota Constitution, the Court first observed that the Minnesota Constitution’s takings clause is broader than that clause found in the U.S. Constitution. The Minnesota Constitution provides: “Private property shall not be taken, destroyed or damaged for public use without just compensation.” The Court acknowledged that, contrary to the opinion of the Court of Appeals, “no physical invasion of [plaintiffs’] property” is required for a compensable taking to occur. The Court then distinguished its earlier decision in Orfield v. Housing and Development Authority of St. Paul, in which it did not conclude that a compensable taking had occurred, noting that in the instant case the City never informed plaintiffs that the City was not obligated to proceed with LSGI’s redevelopment plan, plaintiffs were not apprised of the status of the redevelopment plan, and, finally, plaintiffs were not informed when the City decided to abandon the LSGI redevelopment plan. These considerations, in addition to the fact that the City “specifically targeted” plaintiffs’ properties for the redevelopment project, acted in bad faith by failing to use its best efforts, and failed to cooperate with LSGI in meeting redevelopment deadlines, considered together, constituted a compensable taking under the Minnesota Constitution. 

The Minnesota Supreme Court concluded: 

We conclude that the cumulative effect of the City’s actions with respect to the LSGI development, which the district court concluded substantially interfered with appellants’ property rights, constituted an abuse of the City’s condemnation authority and that appellants are therefore entitled to compensation under Orfield... While each action taken by the City, analyzed separately, could be viewed as normal condemnation activity, the cumulative effect of the actions rendered appellants’ properties unmarketable for years while the development was being negotiated and, later, in litigation. Because of the unique circumstances of this case, we find no basis for reversing the district court’s findings and conclusions of law that the City specifically targeted appellants’ properties and acted in bad faith and conclude that this case presents a narrow and rare instance in which precondemnation activity constituted a taking under the Minnesota Constitution.

---By our decision today, we do not adopt a sweeping rule that property owners are entitled to compensation for any diminishment in value or loss of income caused by the prospect that their property will be condemned at some future date. Rather, our decision is limited to the particular facts presented.

Whether the Minnesota Supreme Court’s decision in Johnson is a first-step in expanding private-property rights under the Minnesota Constitution remains to be seen; indeed, the Minnesota Supreme Court was quick to caution that the decision was “limited to the particular facts presented.”

What is clear, however, is that the Johnson decision is a judicial directive to state and local government that they should engage in deliberate and measured decisionmaking when proceeding with redevelopment plans which possibly could place a “cloud of condemnation” over affected private property. At least one elected official already has taken notice; the current Mayor of Minneapolis has acknowledged that the Johnson decision is another reason why he is “streamlining how the city handles development projects.”

* The author, Matthew R. Salzwedel, is an attorney at Lockridge Grindal Nauen P.L.L.P in Minneapolis.

 

Endnotes

1 F.A. HAYEK, ROAD TO SERFDOM 76 (1944).

2 Johnson v. City of Minneapolis, 667 N.W.2d 109 (Minn. 2003).

3 Siegel v. City of Minneapolis, Nos. 94-17966, 94-17968, slip. op. at 26 (Minn. Distr. Ct. Mar. 14, 2001).

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