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In Re 106 North Walnut, LLC

2009 WL 1738499 (U.S. Dist. Ct. D. N.J. 2009) (Unpublished)

REDEVELOPMENT; CONDEMNATION; INVERSE CONDEMNATION —Inverse condemnation may take place without formal proceedings or compliance with statutory safeguards such as when a municipality planning to redevelop an area bars a property owner to refrain from making any further property improvements and where a municipality actually demolishes a building, thus reducing the property to vacant land, but never actually declares a taking.

A fire destroyed a thirty-six unit apartment building. The municipality issued a Notice of Unsafe Structure and Notice of Imminent Hazard although the building was later found by the municipality to be structurally sound. The property was then sold. The purchaser knew about the fire damage and planned to renovate the building. After the sale, the municipality designated the property as part of a Redevelopment Area in need of redevelopment. When this happened, the new owner was in the process of renovating the building. It ceased its construction when the municipality informed it that it planned to demolish the building for the area’s redevelopment. The building subsequently was torn down by the municipality and the owner filed a petition for bankruptcy.

The Bankruptcy Court rejected the owner’s claim that the municipality was liable under the doctrine of inverse condemnation, but concluded that the municipality’s actions were negligent and contrary to protections afforded property owners under New Jersey Law. According to the Bankruptcy Court, the record did not support a finding that the municipality demolished the building as a means to effectuate a taking or as part of a strategy to reduce the compensation to be paid. It believed it to be important that the municipality never issued a declaration of intent to condemn the property. Thus, the municipality was negligent in the demolition because it: (a) failed to conduct a diligent search to find the owner of the property; (b) failed to inspect the interior of the premises; and (c) ordered the demolition without a prior asbestos inspection or notification to the utility company.
The owner appealed, contending that the municipality’s wrongful demolition of its property and the restrictions imposed under the Redevelopment Plan deprived it of all economic and beneficial use of the property and resulted in an “inverse condemnation.” The Federal District Court reversed, noting that an inverse condemnation is predicated on the proposition that a taking may occur without formal proceedings or compliance with statutory safeguards established by the Legislature. An owner is barred from any claim to a right to inverse condemnation unless it is deprived of all or substantially all of the beneficial use of the totality of its property of the result of excessive police power regulation, but where the threat of condemnation has such a substantial effect so as to destroy the beneficial use that a landowner makes of its property, there is a taking of property within the meaning of the Constitution. Here, the Court ruled that to sustain such a claim, the property owner had to show a substantial destruction of the value of its property and that the municipality’s activities were a substantial factor in bringing that about.

The Court made an objective inquiry as to whether the Redevelopment Plan substantially affected and destroyed the beneficial use of the property and whether the municipality deprived the owner of all or substantially all of the beneficial use. It believed that the subjective intent of the municipality was irrelevant, and concluded that given the “totality of the circumstances” and the “other related activities” at play in this situation, the matter was ripe for adjudication and rose to the level of an inverse condemnation. The Court noted that the “other activities” included: (a) the municipality’s plan to redevelop the area was imminent; (b) that municipal officials had told the property owner to refrain from making any further improvements to the property because it was planning to demolish the building; (c) that the municipality informed the property owner it would select a redeveloper; and (d) that the municipality actually demolished the building reducing the property to vacant land.

As a result of its findings, the Court held that this was not just a case where a municipality had declared a designation of blight. Here, the municipality had given the property owner the impression that the Rehabilitation Plan for the area of land that encompassed the subject property was going to be executed. Further, the Court held that fault or lack of reasonable care has no place in the concept of inverse condemnation and, in that regard, it is similar to a products liability manufacturing defect case in that the plaintiff is not required to prove fault. Finally, the Court held that as a result of the municipality’s actions the property owner was left without a satisfactory means to regain any economic value for its property and was forced to file bankruptcy because it could not get financing to rebuild or sell the property due to its location in the redevelopment zone. Accordingly, the Court ruled that, as a matter of law, inverse condemnation had taken place. In furtherance of its ruling, the Court remanded the matter to the Bankruptcy Court for additional proceedings to determine just compensation due the property owner.

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