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COVID-19: Governmental Closures & Seizures Without Compensation? Condemnation or Reverse Condemnation? What Can You Do?
April 10, 2020
In the face of governmental orders shutting down businesses, redirecting business efforts and assets, and even seizing business property to redistribute to others, we are seeing more and more questions about the limits of governmental authority and the remedies for affected people and businesses. Covid-19 based Lawsuits already are being filed, and the courts undoubtedly will have to provide the answers.  

Covid-19, Condemnation, and Just Compensation

Many people are familiar with the concept of eminent domain and condemnation in the context of a government seizing private property for public use and providing "just" compensation to the former property owner. This is most often seen in the context of real property and, most frequently, in situations where the government is taking property to build roads or other infrastructure. The government typically brings suit to gain a right of entry onto the real estate and to determine "just compensation." But while usually seen in regard to real property, there is no question that the government can use a condemnation action to claim both physical possession and legal title to real property and personal property. This governmental action is referred to a "taking." The Fifth Amendment to the United States Constitution states private property shall not be taken for public use without just compensation.
For takings involving businesses, some of the most important questions involve what is included in a business's personal property and whether the Fifth Amendment’s protections apply to things like inventory. The United States Supreme Court held the government’s duty to pay just compensation applies to personal property as well as real property. As Chief Justice Roberts wrote, “The government has a categorical duty to pay just compensation when it takes your car, just as when it takes your home.” Horne v. Department of Agriculture, 576 U.S. 350, --- (2015).
A business, like a person or a family, has personal property. The types of property a business owns are slightly different from that of an individual, and the tax issues involved with a business's property are also different. But in either case, personal property is property that is movable and not affixed to or associated with the land. That means, in most cases, personal property is everything except real property (land and buildings). And for a business, personal property could include everything from pens and paper to a company-owned car or large piece of manufacturing machinery.

Common Types of Business Personal Property:

  • Furniture
  • Fixtures (window shades, building antennas, etc.)
  • Machinery (manufacturing equipment, cars, etc.)
  • Tools and equipment
  • Computers, copiers, scanners and printers
  • Cell phones and other communication devices
  • Perishable goods
  • Supplies needed by the business (including PPE)
Because a business’s personal property can include inventory, the next thing to consider in the takings context is whether there actually has been a taking—and, if so, whether it is temporary or permanent. A temporary taking is most often seen in the context of a regulatory taking, such as when a regulation issues a moratorium or prohibition on the use of one's property—a common example being a moratorium on land use or building permits. Working through these questions involves asking questions about the regulation’s economic impact and even the extent to which the regulation has interfered with "distinct investment backed expectations.” Although many factors must be considered, and individual circumstances are always important, the key is the regulation’s impact on the property’s value. The length of the moratorium is also a critical factor. For instance, while a one-year moratorium has been constituted a taking in certain circumstances, the shorter the period, the more scrutiny a takings claim will receive from the courts.
Also important is understanding how regulatory takings are defined and whether an executive order temporarily shutting a business down will qualify. The Supreme Court of the United States has ruled that whether a regulatory act constitutes a taking requiring compensation depends on the extent of diminution in the property’s value, any distinct investment-backed expectations, and the character of the regulatory act. The courts already are being asked to decide if an executive order shutting down or restricting businesses will be considered to be a regulatory act and, then, whether the impact on the property’s value and whether the impact is temporary or permanent. Temporary takings are harder to prove, and their value is harder to calculate.

When a Business' Personal Property or Inventory is Appropriated 

Another question that has come up in the context of governments’ responses to COVID-19 is whether just compensation has been offered, or is required, for the business impacts. For instance, is it a taking if a government has directed movement of supplies from one private business to another, or even directly seized property, such as ventilators or PPE, for "public use"? This question raises yet others.
  • Is the seizure permanent?
  • If there was a taking, was just compensation offered or paid?
  • Did the government issue a proclamation or seek judicial approval first?
  • Is a commandeering a taking? Is it a seizure? Is it an appropriation? Does it matter?
  • Is it a police action taken under police powers of the government?
At bottom, though, businesses are asking what can be done about physical appropriations by the government. If property of any kind has been seized, appropriated, or "taken," what can a business do to seek just compensation under the Fifth Amendment if none is offered?

Reverse or Inverse Condemnation

In inverse condemnation cases, private property owners bring suit against the government when they believe some action has interfered with the use and enjoyment of their property. We already have seen two inverse condemnation suits filed as a result of Governors’ orders shutting down businesses and restricting movement. Usually the government doing the taking has a duty to start proceedings to "ascertain damages" or the value of just compensation. But if there has been a taking without a preliminary condemnation proceeding or offer of compensation, the affected property owner still has options. Business owners can seek compensation by filing what is known as an inverse (or reverse) condemnation proceeding. In this type of proceeding, a property owner brings a lawsuit to establish a taking and the amount of money the government must pay as just compensation. The property owner may even be able to recover the costs of litigation if he/she prevails.
We already have seen two such cases relating to a government's response to COVID-19.
The first case is a class action complaint raising Fifth and Fourteenth Amendment takings claims as well as due process and civil rights claims. It seeks just compensation, a declaratory judgment, and an injunction prohibiting enforcement of the shutdown orders -- "Unless, and until, a mechanism is established to provide (a) just compensation for affected businesses and (b) appellate review of Governor Wolf's classifications determining whether individual businesses are 'life sustaining.'"
Plaintiffs are individuals and businesses from across the Commonwealth of Pennsylvania and are members of two distinct classes adversely affected by the Governor’s actions: (i) businesses ordered to shut down by the COVID-19 Closure Orders (“Business Class Members”) and (ii) individual workers displaced from their gainful employment as a result of the same COVID-19 Closure Orders (“Employee Class Members”). The plaintiffs argue none of the governmental defendants “offered compensation to [plaintiffs] in exchange for the total regulatory seizure of [plaintiffs’] property."
What was the seizure? The lead Business Class Member, Schulmerich, is a manufacturer and refurbisher of orchestral instruments and of hand bells. Spring and summer are critical times for the refurbishment aspect of Schulmerich’s business and, if Schulmerich misses a cycle, its customers will not engage its services later in the year—the opportunity will be missed. The Business Class Members claim their property is useless during the period of shutdown. The Employee Class Members similarly claim their wages will be lost as a result of the shutdown.  

The second case claiming an uncompensated taking comes out of Colorado. In Lawrence v. State of Colorado, the pro se plaintiff seeks "an immediate, emergency hearing and preliminary injunction followed by a more comprehensive hearing" for a permanent injunction seeking to enjoin governments from enforcing their orders closing businesses and limiting gatherings. The plaintiff is claiming a series of constitutional violations, including certain takings.
The plaintiff alleges the shutdown orders have impaired his free exercise of religion because his local church has ceased conducting weekly masses, ceased offering the Eucharist, and ceased hearing confessions. Similarly, the plaintiff claims an infringement of his right to peaceably assemble with his friends in further violation of the First Amendment.
The plaintiff also claims two uncompensated takings. He claims his employer's business was taken without compensation resulting in his loss of income. And, he claims Colorado has taken his vehicle by prohibiting nearly all activities relating to its use, and he seeks compensation for the automobile incurred during the moratorium.  
We will continue to look at pending COVID-19. If you have any questions or need assistance, please contact our COVID-19 Task Force.
Litigation Niall A. Paul