Opinion ID: 691029
Heading Depth: 2
Heading Rank: 1

Heading: Alleged Regulatory Taking

Text: 21 Sage first argues that the court erred in granting summary judgment on the fact-intensive question concerning whether there was a regulatory taking, because numerous issues of fact exist as to whether Sage's expectations were reasonable given the regulatory environment. 3 Sage also argues that the proper date for measuring its expectations is 1981, when its leases originally became effective, not 1991, when they were extended. In support, Sage relies on New York case law, which provides that a tenant may invoke equitable principles to require a landlord to accept the renewal of a lease even after a tenant's failure to provide proper notice. See J.N.A. Realty Corp. v. Cross Bay Chelsea Inc., 42 N.Y.2d 392, 397 N.Y.S.2d 958, 366 N.E.2d 1313 (1977). Sage concludes that because it believed that it was required to renew the leases despite the lack of proper notice, the appropriate date for analysis of Sage's expectations is 1981, when the original leases were signed. According to Sage, it is inconceivable that Sage should have or could have reasonably foreseen in 1981 that the former Yugoslavia--which at that time was stable, pro-Western, and even preparing to host the 1984 Winter Olympics--more than ten years later would become embroiled in a civil war which would prompt the United States to respond by selectively closing a few SFRY offices and expelling their staffs. 4 22 Sage further argues that even if 1991 is the correct year to analyze Sage's investment-backed expectations, the court overlooked numerous questions of material fact in connection with Sage's expectations. In particular, Sage argues that the government did not refute the affidavit of Sage's Executive Vice President, which stated that neither he nor anyone else at Sage was a foreign policy expert who could have foreseen the May 1992 and July 1992 Executive Orders. Moreover, Sage asserts that its past experience leasing office space to other foreign entities whose countries were involved in domestic turmoil led it to believe that the United States government would not evict government officials of such countries. 23 The government counters that Sage's subjective arguments that it had a reasonable investment-backed expectation do not raise any issues of material fact sufficient to avoid summary judgment. In support, the government argues that it makes no difference when Sage's expectations are evaluated. Whether Sage's expectations are evaluated in 1981 or 1991, it could not have had any reasonable investment-backed expectation to be free from government interference, given the government's authority with respect to foreign government presence in the United States. Moreover, the government asserts that Sage's losses were not due to the government's actions; rather, Sage's losses were caused by the failure of the SFRY groups to pay rent and by Sage's own decision not to seek damages from the SFRY organizations pursuant to the terms of the leases. We agree with the government. There is no genuine issue of material fact in this case, the only issue being one of law, resolvable in favor of the government. 24 The Fifth Amendment provides, in pertinent part: nor shall private property be taken for public use, without just compensation. U.S. CONST. amend. V. The purpose of the Fifth Amendment is to prevent the [g]overnment from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole. Penn Central Transp. Co. v. New York City, 438 U.S. 104, 123, 98 S.Ct. 2646, 2659, 57 L.Ed.2d 631 (1978) (quoting Armstrong v. United States, 364 U.S. 40, 49, 80 S.Ct. 1563, 1569, 4 L.Ed.2d 1554 (1960)); see also Florida Rock Indus., Inc. v. United States, 18 F.3d 1560, 1571 (Fed.Cir.1994), cert. denied, --- U.S. ----, 115 S.Ct. 898, 130 L.Ed.2d 783 (1995). 25 A taking may occur as a result of a regulatory action that is neither a physical invasion nor a physical restraint. This proposition is based on the oft-cited maxim of Justice Holmes in Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 43 S.Ct. 158, 67 L.Ed. 322 (1922), that while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking. 260 U.S. at 415, 43 S.Ct. at 160. However, not all regulatory actions will constitute a regulatory taking. See id. at 413, 43 S.Ct. at 159 (Government hardly could go on if to some extent values incident to property could not be diminished without paying for every such change in the general law.). 26 To analyze whether a regulation goes so far as to constitute a taking, the Supreme Court has indicated that there is no set formula; the determination depends upon the particular circumstances of the case. Penn Central, 438 U.S. at 124, 98 S.Ct. at 2659. Ordinarily, the Court must engage in 'essentially ad hoc, factual inquiries.'  Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 426, 102 S.Ct. 3164, 3171, 73 L.Ed.2d 868 (1982) (quoting Penn Central, 438 U.S. at 124, 98 S.Ct. at 2659). To aid in this determination the Supreme Court has identified three factors of 'particular significance': (1) 'the economic impact of the regulation 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.'  Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 224-25, 106 S.Ct. 1018, 1025-26, 89 L.Ed.2d 166 (1986) (quoting Penn Central, 438 U.S. at 124, 98 S.Ct. at 2659). 27 Even though a regulatory taking analysis is normally ad hoc and fact-intensive, the United States may still be entitled to judgment as a matter of law. See Chang v. United States, 859 F.2d 893, 898 (Fed.Cir.1988) (affirming dismissal of Fifth Amendment claim for failure to state a claim upon which relief could be granted). Such a case is the one before us. Here, Sage had no reasonable investment-backed expectation to be free from government interference with its leases to the SFRY organizations. 28 Prior to 1981, statutory and constitutional authority existed that permitted the government to take various actions against other countries, including the blocking of assets and closure of foreign government offices. See Dames & Moore v. Regan, 453 U.S. 654, 675, 101 S.Ct. 2972, 2984, 69 L.Ed.2d 918 (1981) (concluding that the IEEPA constitutes congressional authorization for the President to order the transfer of Iranian assets). In particular, the IEEPA authorized such actions to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States. 50 U.S.C. Sec. 1701(a). President Carter had used that authority to block Iranian government property and prohibit certain transactions with Iran in 1980 and 1981. Exec. Order No. 12,111, 45 Fed.Reg. 26,685 (1980) (prohibiting certain transactions with Iran); Exec. Order No. 12,170, 44 Fed.Reg. 65,729 (1979) (blocking Iranian government property). That authority has been used on several other occasions since 1981. E.g., Exec. Order No. 12,513, 50 Fed.Reg. 18,629 (1985) (prohibiting trade with Nicaragua); Exec. Order No. 12,543, 51 Fed.Reg. 875 (1986) (prohibiting certain transactions with Libya); Exec. Order No. 12,722, 55 Fed.Reg. 31,803 (1990) (blocking Iraqi government property and prohibiting transactions with Iraq); see also Chang, 859 F.2d at 896 (Executive Order No. 12,543 prevented plaintiffs from marketing services in Libya but did not result in compensable taking). 29 In light of this precedent, Sage could not have had a reasonable investment-backed expectation in either 1981 or 1991 that its leases to the SFRY organizations would proceed totally without interference by the government. A landlord leasing office space to organizations of the SFRY in 1981 did so against the backdrop of the government's foreign policy power. Such a power may rarely be used in the way it was here, but it is part of our legal framework and its existence must be considered in any reasonable expectations analysis. 30 Sage, as a member of the public, was on notice that the government, pursuant to its statutory and constitutional authority, could close a foreign government's offices and freeze its assets. The government never guaranteed Sage that it would not exercise its power to close the SFRY government offices. Nor did the government give assurance that the SFRY organizations would perform their obligations under the leases. The government is not an insurer that foreign governments will meet their obligations under lease agreements that are broken as a result of valid United States government actions. Moreover, if the government were to be liable to a lessor under a takings theory, it might logically follow that it would also be liable to the lessee, who was actually the party the government proceeded against. Such is not the law, for it would encumber the sovereign power of the government to expel foreign government agencies and to block assets when, in the exercise of its foreign policy powers, it decides it is necessary to do so. See Dames, 453 U.S. at 673, 101 S.Ct. at 2983 (attachments by American claimants against Iranian assets subordinate to President's power under the IEEPA). 31 As this court has stated, [w]hen dealing in foreign commerce, the possibility of changing world circumstances and a corresponding response by the United States government can never be completely discounted. Chang, 859 F.2d at 897. This statement is particularly apt with respect to Yugoslavia. In 1981, that country was under autocratic rule and experiencing national and ethnic rivalry among the six republics. 5 Even though the SFRY remained a nonaligned nation, the proximity of the Soviet Union was a factor with important foreign policy implications. The powerful dictator, Josip Broz Tito, had recently died in 1980, ending his 35-year regime as leader of the SFRY. The future of the Balkans, a region which had experienced turmoil for generations, was uncertain. Thus, we conclude that Sage could not have had a reasonable expectation of non-interference from the United States government. That being so clearly the case, the other factors need not be considered. See Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1005, 104 S.Ct. 2862, 2874, 81 L.Ed.2d 815 (1984) (no taking in case in which party had no reasonable investment-backed expectation that government would not disclose trade secret data submitted to the Environmental Protection Agency). The government was entitled to summary judgment that no regulatory taking occurred. 32 An additional reason for affirming the trial court's decision is that the Supreme Court has held that no taking occurs when, as occurred in this case, expectations under a contract are merely frustrated by lawful government action not directed against the takings claimant. Omnia Commercial Co. v. United States, 261 U.S. 502, 43 S.Ct. 437, 67 L.Ed. 773 (1923). In Omnia, the Court recognized that a contract right is property within the meaning of the Fifth Amendment. However, it denied the takings claim of a steel manufacturer's customer whose contract was rendered impossible of performance because the government requisitioned the entire production of steel from the manufacturer during World War I. The Court found that there was no acquisition of the obligation or [the customer's] right to enforce it. Id. at 510-11, 43 S.Ct. at 438. It further found that the customer's contract with the steel mill was merely frustrated and that there was no taking. The Supreme Court stated: 33 [T]he contract consists in the agreement and obligation to perform. If one makes a contract for the personal services of another or for the sale and delivery of property, the Government, by drafting one of the parties into the army, or by requisitioning the subject-matter, does not thereby take the contract. 34 Omnia, 261 U.S. at 511, 43 S.Ct. at 438. 35 In NL Industries, Inc. v. United States, 839 F.2d 1578 (Fed.Cir.), cert. denied, 488 U.S. 820, 109 S.Ct. 63, 102 L.Ed.2d 41 (1988), we followed the holding of the Supreme Court in Omnia and held that frustration of a business by loss of a customer was not a taking. 839 F.2d at 1579. NL Industries (NL) had contracted with Allied General Nuclear Services (AGNS) to transport nuclear waste to AGNS's proposed reprocessing facility. NL Indus., Inc. v. United States, 12 Cl.Ct. 391, 393-94 (1987), aff'd, 839 F.2d 1578 (Fed.Cir.), cert. denied, 488 U.S. 820, 109 S.Ct. 63, 102 L.Ed.2d 41 (1988). Thereafter, the government placed a moratorium on AGNS's pending application for a license to operate the reprocessing facility. Id. at 395. Although the government's actions were targeted at AGNS, not NL Industries, NL's contract with AGNS was thereby frustrated. Relying on Omnia, this court affirmed the trial court's denial of NL's takings claim. Such precedent is applicable to this case because the government here did not take action against Sage. It may have frustrated the achievement of Sage's contractual rights with the SFRY, but that did not amount to a taking. 36 Sage argues that the decisions in Omnia and NL Industries are contrary to more recent case authority. In particular, Sage points to Penn Central and United Nuclear Corp. v. United States, 912 F.2d 1432 (Fed.Cir.1990), for the proposition that any government regulation may constitute a taking if the action is contrary to the owner's reasonable expectations and deprives the owner of viable use of all or a portion of its property. Sage therefore concludes that this court must perform the ad hoc regulatory takings analysis outlined in Penn Central for any claim that government regulation is contrary to a property owner's reasonable expectations. We disagree, although we have, as noted above, performed a Penn Central takings analysis and concluded that Sage had no reasonable expectation to be free of government interference. 37 The cases relied on by Sage all involve government actions which regulated both the plaintiff and the plaintiff's property interest. Penn Central, 438 U.S. at 107, 98 S.Ct. at 2650-51 ([W]e must decide whether the application of [the regulation] to the [plaintiff's property interest] has 'taken' its owners' property in violation of the Fifth and Fourteenth Amendments.); United Nuclear, 912 F.2d at 1437 ([T]he property interest that is the subject of the taking claim is United's leasehold interest in the minerals, which the government took by preventing United from mining under the leases....). These cases are not inconsistent with the principle that no interest is taken when a contract expectation is merely frustrated by a regulation directed toward a different party or property interest. E.g., Galloway Farms, Inc. v. United States, 834 F.2d 998 (Fed.Cir.1987) (losses due to grain embargo against the Soviet Union not compensable to farmer under the Fifth Amendment); PVM Redwood Co. v. United States, 686 F.2d 1327 (9th Cir.1982) (denial of supply of lumber to sawmill operator due to passage of Redwood Park Expansion Act merely a frustration of contract expectancy), cert. denied, 459 U.S. 1106, 103 S.Ct. 731, 74 L.Ed.2d 955 (1983); Kearney & Trecker Corp. v. United States, 688 F.2d 780, 783, 231 Ct.Cl. 571 (1982) (no taking when government did not appropriate any of the rights the plaintiff had under the contract but only made it impossible for the plaintiff to perform it.), cert. denied, 460 U.S. 1051, 103 S.Ct. 1498, 75 L.Ed.2d 929 (1983). 38 The government, by closing the consulate and blocking the SFRY's assets, did not take any property interest of Sage. Sage merely had an expectation of future income from rent payments by the SFRY organizations. The SFRY organizations still had a legal obligation to pay rent, which they disavowed when the government blocked the SFRY's assets and closed the SFRY government offices. The government neither acquired from Sage the SFRY organizations' obligations to pay rent nor deprived Sage of any right to enforce its agreements. Sage's remedy, if any, lay against the SFRY organizations, which defaulted on their lease obligations. Article 18 of the leases specifically provided damage remedies that Sage could have attempted to enforce in its district court suit. The government's actions in this case thus did not take Sage's interests in the leases.