NJ Supreme Court Rules on Applicable Time Frame for Commencing Inverse Condemnation Actions

July 2010Newsletters In the Zone

The New Jersey Supreme Court recently ruled in favor of husband and wife property owners in an inverse condemnation case nearly a half of a century in the making. In Klumpp v. Borough of Avalon (decided June 22, 2010), the Supreme Court decided that equity considerations demanded that Edward and Nancy Klumpp be permitted to amend their lawsuit against the Borough of Avalon to include a claim for inverse condemnation, which would allow them to seek compensation from the borough for the value of their land taken.

The facts and procedural history of the lawsuit are explored in detail in the Supreme Court's opinion. In short, the lawsuit revolved around the construction of a protective dune that the Borough of Avalon had caused to be constructed in the wake of a 1962 nor'easter storm (The "Great Atlantic Storm") that devastated much of the New Jersey shoreline. The plaintiffs had purchased beachfront property in 1962 upon which they constructed a summer home. Their home, like many others along the beach, was leveled by the storm. Acting upon authority granted to municipalities to address the emergencies caused by the storm's serious erosion and destructive consequences, the Borough of Avalon adopted a resolution authorizing the borough to take control and possession of any affected property without first paying compensation to the property owners.

However, the resolution contained an express statement that the borough could not deny just compensation to any property owner if the borough's occupation amounted to a taking.

The borough constructed a dune on the plaintiffs' property that was completed by 1965, but it did not pay the plaintiffs any compensation. As part of the dune construction, the borough placed fences to limit public access and constructed an alternate access point to the beach that traversed another portion of the plaintiffs' property. At the present time, the borough has been unable to prove the plaintiffs were ever notified before the taking occurred. The plaintiffs never sought to rebuild their home.

However, over the years the borough continued to send the plaintiffs property tax bills as owners of private property, and the property was listed as private on the official town maps. Further, the borough's position changed over the years as to the legal theory by which it exercised control over the plaintiffs' property. Several decades later, the plaintiffs filed their lawsuit, claiming that the borough's construction of the dune was a trespass, and later, they claimed that there was a compensable taking.

Generally, under federal and state law, a taking occurs when a governmental actor takes private property for public use without just compensation. A "taking" is analogous to a "condemnation," and the government's power to effectuate a taking is referred to as "eminent domain." Under New Jersey law, the government must bring a condemnation proceeding in the proper exercise of its eminent domain powers. Where it does not, then the property owner may claim an "inverse condemnation" and seek compensation from the government actor for the fair market value of the property as of the date of the taking.

This case is noteworthy because the Supreme Court addressed an issue of first impression to New Jersey's highest court: What is the applicable time frame for commencing an inverse condemnation action? Relying on earlier decisions of the New Jersey appellate court, the Supreme Court established a rule of law that a six-year statute of limitations will apply to a property owner's inverse condemnation claim. Here, the plaintiffs filed their claim decades later, and both the trial court and appellate court denied the plaintiffs' inverse condemnation claim on the basis that it was filed well beyond the six-year statute of limitations that some New Jersey courts have applied. In establishing the time period, the New Jersey Supreme Court noted that the six-year period begins to accrue "the date that the landowner becomes aware, or through the exercise of reasonable diligence, should have become aware, that he or she had been deprived of all reasonably beneficial use."

The circumstances in this case are somewhat unique. The court determined it was not until 2005 that the plaintiffs became aware their property clearly was part of the dune construction project. Up to that point, the plaintiffs' legal theory centered around the alleged trespass and subsequent denial of access by the borough. Among the borough's initial arguments was that the borough had acquired title through adverse possession. Once the Borough of Avalon asserted in 2005 that it entered the plaintiffs' property with the intention of effectuating a taking, the plaintiffs sought to amend their complaint to allege an inverse condemnation. The trial and appellate courts denied the plaintiffs' attempts to amend their complaint. The Supreme Court's decision now permits the plaintiffs to amend their complaint to include a claim for inverse condemnation and seek proper compensation.

Unfortunately, the plaintiffs' victory may be more moral than financial. Because the Supreme Court's decision was limited to whether the plaintiffs could raise an inverse condemnation claim (which they now can), the court remanded the case back to the trial court for further proceedings to determine the amount of just compensation the borough must pay to the plaintiffs. The dune was constructed in or around 1965, so any amount of compensation would include 45 years of accrued interest. However, the law requires the trial court to determine the fair market value of the property as it was decades ago, and not based upon the fair market value of the property as it exists today (even with the distressed real estate market of late, the subject property would be quite valuable in today's dollars).

Going forward, the case will present unique challenges to the parties to determine the fair market value of the property that was taken. As the Supreme Court noted, among the reasons for the limited timeframe for commencing an inverse condemnation action to ensure that "the closer in time the landowner commences the action, the more precise the valuation, particularly when improvements by the government may be forthcoming and would alter the condition of the property at the time of the taking." (Emphasis added.) This case is certainly the exception to that rule. It may well boil down to a battle of the valuation experts to pin down a valuation from more than four decades ago.

For more information, please contact Alexander M. Wixted at 609.895.6730 or [email protected].