As we have noted on previous occasions, the City of New York has been acquiring wetlands in Staten Island as part of its Bluebelt Projects. The Staten Island Bluebelt system is a natural drainage corridor which includes streams, ponds and other wetland areas. The current Bluebelt system drains 15 watersheds clustered at the southern end of Staten Island, plus the Richmond Creek watershed. The combined area of these 16 watersheds total approximately 10,000 acres.

Much of the wetlands was in private ownership. How this property is valued is a complicated question. Had no condemnation occurred, an owner can challenge the designation as confiscatory if the New York State DEC refuses to issue a permit allowing use of the land. There is a two-step process involved in the judicial review. The Court of Appeals explained the process in St. Aubin v. Flacke, 68 N.Y.2d 66, 70 (1986):

If the court finds that the permit denial is supported by substantial evidence, then a second determination is made in the same proceeding to determine whether the restriction constitutes an unconstitutional taking requiring compensation. The taking determination is made on the basis of a full evidentiary hearing and if the landowner prevails the Commissioner [of Environmental Conservation] is directed at his [or her] option, to either grant the requested permit or institute condemnation proceedings.

If the land is condemned, the wetlands are valued as restricted by statute but with an increment if the Wetlands Act is shown to be confiscatory. The increment is the value of a successful challenge the owner could have brought. In Berwick v. State of New York, 107 A.D.2d 79, 84 (2d Dept. 1985), the court explained:

The law follows the realities of the marketplace, which are that a knowledgeable buyer would adjust his [or her] purchase price to offset the cost in time and money of applying for a permit and challenging its denial in court as confiscatory. Certainly, a knowledgeable buyer would not pay claimants the full unrestricted residential values of their properties on the day of taking, when the wetlands restrictions were still legally in effect. He [or she] would pay on the value of the property as so restricted, plus some increment representing its enhanced value at such future time when he [or she] is successful in nullifying the wetlands restrictions in court.

Recently, the Second Department confirmed the application of the “reasonable probability—incremental increase rule” in Matter of New Creek Bluebelt, Phase 3, (Baycrest Manor), 156 A.D.3d 163 (2d Dept. 2017). We represented the owner. Importantly, the Second Department applied the U.S. Supreme Court's decision of Palazzolo v. Rhode Island, 533 U.S. 617 to hold that Baycrest Manor could challenge a regulation even if it purchased the land after the regulation was adopted, as the Supreme Court stated, “[a] law does not become a background principle for subsequent owners by enactment itself.” Palazzolo v. Rhode Island, 533 U.S. at 630.

The Baycrest court applied the standards set forth in Penn Central Transp. Co. v. New York City, 438 U.S. 104. These standards required claimant to establish that there was reasonable probability that the impositions of the wetlands regulations on the property would be found to constitute a regulatory taking. The court further held that the increment represents the premium a reasonable buyer would pay for the probability of a successful judicial determination that the regulations were confiscatory. But the court did not agree with the increment applied by claimant's appraiser even though it was completely consistent with its precedent in Berwick v State of New York, 107 A.D.2d 79. The court found the appraiser's adoption of an increment based only on legal instruction an insufficient basis. It would seem that if a practitioner seeks to have the higher increment utilized, it should be supported by testimony as to the time, money and effort to make a challenge.

In a subsequent case, Matter of City of New York (New Creek Bluebelt Phase 4 – Galarza), 58 Misc.3d 1210(A) (Sup. Ct. Kings 2018), Justice Wayne P. Saitta, who also decided the Baycrest case, distinguished the Second Department's decision in Monroe Equities v. State of New York, 145 A.D.3d 680 (2d Dept 2016). The condemnor City of New York had argued that the Monroe Equities court held that watershed regulations constitute background principles of New York. Justice Saitta disagreed, and stated:

However, Monroe Equities is distinguishable, because watershed regulations are different from wetlands regulations.

In Monroe Equities, the owner of a property located in the Lake Mombasha watershed was denied a permit to build three residences on the property because the watershed regulations prohibited the placement of a subsurface sewage disposal system within 300 feet of Lake Mombasha. The owner challenged the watershed regulations as a per se Lucas taking. The Second Department affirmed the denial of the owner's regulatory takings claim finding that “the right to install a septic system was never part of the 'bundle of rights' the claimant acquired with title to the property.” Monroe Equities at 683.

Although the Appellate Division decision does not describe the objective of the watershed regulations, the decision of the lower trial court indicates that the property was located on the shores of Lake Mombasha, which was the sole source of water supply for the Village of Monroe, and that the regulations established a 300-foot sanitary buffer around the perimeter of the lake, within which no subsurface sanitary waste disposal system could be placed. Monroe Equities LLC v State of New York, 47 Misc3d 747, 4 NYS3d 816 (Ct of Cl, 2014).

The purpose of the watershed regulations was to prevent human waste from seeping into and polluting the Village's water supply. Unlike the State's wetlands regulations, the watershed regulations at issue in Monroe Equities prohibited a nuisance which the Village could have traditionally enjoined at common law.

New Creek Blue Belt Phase 3 (Baycrest), rather than Monroe Equities, is the relevant precedent, and establishes that wetland regulations are not part of the background principles of New York property law. Therefore, a challenge to the wetlands regulations is not barred merely by the fact that claimant purchased the property after the regulations were enacted.

Justice Saitta probably has decided more wetlands condemnation cases than any other jurist in New York state. His decisions indicate a scholarly interest in the subject. The Galarza decision is notable for its presentation of the history of treatment of the wetlands issue. The court detailed how wetlands were treated in the City of New York. It was this study that led the court to decide that New York state wetlands regulations did not simply make explicit a prohibition on activity that “was always unlawful,” and therefore the wetlands regulations are not background principles of New York property law.

Michael Rikon is a partner of Goldstein, Rikon, Rikon & Houghton.