COMMENTS

THOMAS W. KELTY, Chief Counsel,
Illinois Municipal League

INVERSE CONDEMNATION: ANOTHER ASSAULT UPON MUNICIPAL REGULATION

Any person listening to a discussion by public officials of municipal problems over the past few months would hear the subjects of "tort liability" and the "insurance crisis" discussed at length and in strong terms. While most certainly these subjects are of critical importance to municipalities, another type of liability is quietly becoming a greater threat to government at the state and local level and could become as significant a problem in the future as the insurance crisis has been in 1986. The doctrine, the doctrine of "inverse condemnation", has experienced substantial expansion in its application in other states and may, in 1986, gain its first interpretation by the United States Supreme Court.

The doctrine of inverse condemnation finds its legal basis as an action for damage to real property under Article I, Section 15 of the Illinois Constitution which provides,

"Private property shall not be taken or damaged for public use without just compensation as provided by law. Such compensation shall be determined by a jury as provided by law." (Emphasis added)

Thus, a property owner whose real property is damaged or rendered unusable by a public project could be compensated for that loss by the public because the public benefits from the operation of the public project.

The classic example of circumstances giving rise to damages for inverse condemnation occurs in highway construction. Many times in the construction of limited access highways, direct access to roadways that were high traffic count business thoroughfares is rerouted or restricted by the construction of a limited access highway. Generally, the authority constructing the highway will provide a "frontage" road to continue access to business properties along the newly constructed highway. However, the direct access to the businesses remains diminished. In this type of circumstance, an abutting property owner may be able to maintain an action in inverse condemnation for damages. The property has been taken or damaged not by a "taking" but, rather, by an action which inversely affects it.

Illinois courts have generally adopted a strict interpretation of the Constitutional provision for damages and have held that the harm suffered by a landowner must be different in kind and not merely greater in degree from that suffered by the general public.

Until recently, the rule of law regarding inverse condemnation in the State of California was similar to that of Illinois. However, two cases in the California courts have expanded inverse condemnation liability in an alarming way. These cases have clouded the line between an inverse condemnation action and tort liability for damages in a fashion that could open municipalities to large liability in inverse condemnation actions.

In the case of Yee v. City of Sausalito, the Plaintiff was allowed by a California Appellate Court to sue the City of Sausalito in inverse condemnation to recover for damage to property incurred as a result of a rupture in the City's storm drain system. The Trial Court ruled for the City on the ground that the Plaintiff had stated a general tort cause of action for negligent maintenance of a public improvement and not a claim for inverse liability. In fact, the Plaintiff had admitted in discovery that the gutter was not functioning as planned or constructed; that the defect which existed in the gutter resulted in the seepage of water damaging the Plaintiff's property; and that the rupture resulted from the City's negligent failure to properly maintain the gutter.

Despite this clear admission on the part of the Plaintiff that the accident and resulting damage was caused by the City's negligent maintenance, the Court of Ap-

August 1986 / Illinois Municipal Review / Page 9

peals reversed the Trial Court and allowed the Plaintiff's inverse condemnation cause of action contrary to a substantial body of California case law that precludes an inverse cause of action for failure to properly maintain public property. Had the Appellate Court not allowed Yee to pursue an inverse condemnation action but rather proceed under a tort theory, the City would have had several defenses, similar to defenses available to Illinois municipalities, that it had a reasonable maintenance program, and that reasonable inspection did not or could not have undiscovered the condition. With these defenses, the City would only be found liable if negligent. If fault had been found on the part of the City, insurance coverage would have been available to provide payment for damages awarded against the City. However, under inverse condemnation, there is essentially strict liability; the Plaintiffs need merely prove that the cause of damages was the city and liability is established.

The interpretation of the Appellate Court in Yee allows a Plaintiff to circumvent the necessity to prove a negligent failure by the municipality to properly maintain its property before obtaining a finding on damages. Allowing an action of this nature to be maintained in inverse condemnation strips municipalities of defenses available under acts similar to the Illinois Tort Immunity Act and moves directly to the question of damages sustained by the Plaintiff. The most alarming prospect of this theory is the lack of insurance coverage for damages awarded in this fashion. Not only does this type of action bypass proof of negligence, it also (generally) bypasses the insurance coverage of the municipality and causes the municipal treasury to bear the full weight of any judgment.

The second California case with a similar result is the case of McMahans v. City of Santa Monica. In this case, a city-owned water main ruptured in an alley adjacent to McMahans Furniture Store, causing it considerable damage. The case was prosecuted by McMahans insurance carrier. Again, no tort cause of action was pursued. As in Yee, the McMahans Court held the City liable in inverse condemnation. Yet, when the water main ruptured, it was neither operating as intended nor causing a public benefit. The appropriate standard of review of the City's behavior should have been that set forth in the California Tort Claims Act because the rupture was not an intentional act. The California standard in the Tort Claims Act is whether or not the City's program of maintenance was reasonable. A virtually identical standard for damages is contained in the Illinois Tort Immunity Act.

In order to circumvent this traditionally understood distinction, the court in McMahans concludes that the City's failure to maintain or replace the subject water main (which had outlived its normal life) was a deliberate act and that, consequently, when the main ruptured it was operating in accordance with the City's intent not to replace or maintain it. In this circuitous way, the Court concludes that the break in the main was an intentional act, and that the City bears liability under inverse condemnation. The Court found that the public is benefited by the rupture by virtue of the savings which have accrued to the public from the City's deliberate decision not to maintain or replace the water main.

It is apparent that the McMahans Court has broken entirely new ground in its opinion. The City of Santa Monica had a maintenance program to replace or maintain water lines. Whether this program was adequate previously would have been judged exclusively under the tort principles of the Tort Claims Act, which would require judging the City on the reasonableness of its actions. There was no basis in the record for concluding that the City either deliberately denied funding for its maintenance program or deliberately concluded it would be less expensive to allow old mains to break rather than to operate a replacement program. However, this is precisely the conclusion reached by the Court.

The expansion of inverse condemnation, as in the cited California cases, has been inadvertently aided by the United States Supreme Court. In four of the last six years, the Supreme Court has refused to decide the question of whether the Takings Clause of the United States Constitution requires the payment of money damages to a landowner when the city deprives the owner of economic use of his property. The most recent opportunity of the Supreme Court to address this issue came in another California case, McDonald, Sommer and Frates v. County of Yolo and City of Davis. This action arose as a result of the imposition of restrictions by two local governments in California on the use of a parcel of property purchased by the Plaintiff for development purposes. The developer had sought permission to construct residential units on a parcel of land which the County determined could only be used for open-space agricultural use. The use of the land had been restricted by the County and the City for several

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reasons, including the lack of access to public streets, sewers and the water supply.

The developer challenged the County's action as a taking of property without "just compensation" in violation of the Fifth Amendment to the U.S. Constitution and sought damages for the reduction in the property's value.

A five-member majority of the Supreme Court found that the regulation of the property did not constitute a taking of the property because the developer's claim was not yet "ripe."

Previous opinions of the Supreme Court have held that a regulation can be considered a taking if it "goes too far."However, according to Justice John Paul Stevens, it cannot be determined whether the local regulation has gone too far because the County has not been given an opportunity to pass on proposals for less intense development than that originally proposed by the developer. Until the County has rejected other proposals, the possibility is still open that "some development" will be permitted.

The key issue left open by the Supreme Court is at what point the regulation becomes sufficiently burdensome to be considered a "taking of property." An additional issue left unresolved is whether land owners are entitled to damages for the period in which the burdensome regulations were in effect.

In this 5-4 decision, the minority members in a dissenting opinion by Justice Byron White took the position that the Court had sufficient facts to resolve the question of whether the regulation by the municipalities constituted a taking of property. The dissenting opinion took the position that the landowner should be compensated for loss of value even if the loss is only temporary!

The Supreme Court will have another opportunity in the upcoming term to decide another case which will again present the inverse condemnation issue.

Practically speaking, the decisions in both the Yee and McMahans case present every city in California with a serious budgetary quandry. Each legislative decision concerning the appropriate expenditure of public funds becomes a deliberate decision not to spend funds in some other area and leave the City open to attack if a court determines the City should have spent funds in a different manner. What was in actuality an attempt by the City of Santa Monica to spend its scarce resources in the best way possible has been interpreted by the Court as the assumption of absolute liability in every case where maintenance or capital replacement programs prove to be inadequate.

Further, damage awards under inverse condemnation threaten all cities financial security, as at this time it is very difficult for a city to obtain insurance covering inverse condemnation. Thus, the beneficiaries of this redistribution of risk towards the public sector are the insurance companies.

Should a similar rule of law be adopted by Illinois Courts, the affects on Illinois municipalities could be devastating. The imposition of strict liability in inverse condemnation cases would circumvent the protection of the Tort Immunity Act in the same way that the California Tort Claims Act has been circumvented. The probable immediate effects of the adoption of this position by Illinois Courts could be an explosion in the number of inverse condemnation suits and the inability of municipalities to obtain insurance for inverse condemnation awards at any price.

Further, from a policy point of view, cities are neither suited, nor should be required to play the role of strict liability insurers as regards all property damage resulting from public facilities, regardless of cost. After all, private owners of water lines, gas lines, oil lines and similar facilities bear no such strict liability resulting from failures of these facilities. There seems to be no policy reason why local governments should be subjected to a different standard under similar circumstances. •

August 1986 / Illinois Municipal Review / Page 11