Fourth Circuit Rejects Federal Jurisdiction Over Claim Against State for Loss of Private Property

A recent decision of the U.S. Court of Appeals for the Fourth Circuit concerned a nightmare scenario for any property owner. The plaintiffs sought to rebuild their beachfront house after it was destroyed. But the property was so close to the beach that local and state agencies would not allow the plaintiffs to rebuild, citing North Carolina’s coastal area management laws. Because the denial rendered the property essentially valueless, the plaintiffs sued the state, seeking compensation on the basis that the state had taken their property without just compensation.

But states, as a general rule, are immune from lawsuits. And though some exceptions exist, they are hard to navigate. Here, the Fourth Circuit allowed the possibility that the plaintiffs could challenge the state’s decision. But federal court was not the appropriate forum.

Background to the ‘Zito’ Case

The plaintiffs bought a beachfront house in 2008 in South Nags Head, in North Carolina’s outer banks. The house was located on one of the barrier islands, a narrow series of islands running along the coast. In 2016, a fire destroyed the house.

The plaintiffs wanted to rebuild their house. Under North Carolina’s Coastal Area Management Act (CAMA), they needed to apply for permission before building. CAMA is a statute seeking to ensure that coastal development "proceeds in a manner consistent with the capability of the land and water for development [or] use … based on ecological considerations."

The city refused permission, as did the North Carolina Coastal Resources Commission. The house would have been set back only 12 feet from the vegetation line, far short of CAMA’s 60-foot minimum that applied to the house (based on its size and the date the original house was built).

The plaintiffs sued the Coastal Resources Commission in federal court. They argued that CAMA resulted in an unconstitutional taking of their property. The Takings Clause, part of the Fifth Amendment to the U.S. Constitution, provides that "private property [shall not] be taken for public use, without just compensation." Under the plaintiffs’ theory, CAMA "takes" private property, draining beachfront property of its value and intended use, for the public use of protecting the land.

The district court dismissed the plaintiffs’ suit, concluding that the Coastal Resources Commission is a state entity that is immune from suit under the principle of sovereign immunity. The plaintiffs appealed.

Sovereign Immunity and the Fourth Circuit’s Opinion

Sovereign immunity—sometimes referred to as "Eleventh Amendment immunity"—generally protects states from being sued. There are some recognized exceptions:

1. A state can consent to being sued, in a particular lawsuit or in a certain category of suits;
2. When the suit is brought by another state or by the federal government;
3. When the U.S. Congress has taken certain actions under the Constitution to "abrogate" sovereign immunity;
4. When a private party sues a state official (rather than the state itself), and sues to prevent an ongoing violation of federal law (seeking an injunction rather than damages); or
5. When a private party sues a state official for acting "ultra vires," i.e., outside the limits of his or her authority.

The plaintiffs argued that an additional exception should apply: the state should not be immune from suit for any violation of the Takings Clause. The plaintiffs argued that the Takings Clause guarantees "just compensation" whenever the state takes private property for personal use. This guarantee alone, they argued, shows that states are not immune from suit for those takings.

The Fourth Circuit ruled that the Takings Clause does not provide a blanket exception to sovereign immunity. Still, the Fourth Circuit recognized some tension between sovereign immunity and the guarantee of just compensation in the Takings Clause. The Fourth Circuit relied on prior rulings resolving that tension. Federal courts will not hear Takings Clause cases against a state (absent one of the exceptions described above), provided the state’s own courts are open to these kinds of claims against the state. If the state’s courts will not hear them, federal courts will. This scheme upholds sovereign immunity but ensures litigants will still have a forum to pursue their claims.

So, the Fourth Circuit next looked to North Carolina law, and concluded that a North Carolina court would adjudicate the claim against the Coastal Resources Commission. North Carolina law allows a landowner to bring suit against the Commission in state superior court to determine whether the Commission’s action constitutes taking without just compensation. The case can be resolved by a jury. If the outcome is that the action constitutes a taking, and the state still plans to regulate the property, the state must initiate eminent-domain proceedings, which would give the landowner just compensation. State law would also allow the landowner to seek damages for the temporary taking: the time between the denial of permission to build and the compensation provided via eminent domain. Because North Carolina law allows landowners a forum to vindicate their federal rights under the Takings Clause, sovereign immunity barred the plaintiffs’ lawsuit here.

Takeaways from the ‘Zito’ Decision

Zito highlights the need to understand the limits of state sovereignty when bringing any kind of lawsuit against a state or state agency. Some actions against the state may be barred entirely. Others may be feasible, but are dependent on the nature of the relief sought. For example, a suit against a state official to obtain an injunction may often be possible where a suit against the state itself may not be. And, as the Zito decision shows, a suit against a state entity must sometimes be brought in a particular court. In the Takings Clause context, that means a state court when the state provides a forum for seeking just compensation.

This article was first published on LAW.COM on September 10, 2021, and is republished here with permission. ©2021 ALM Media Properties, LLC. All rights reserved.