Summary of a Recent
Judicial Development in
Agritourism

Voter Initiative to Eliminate Fee Shooting of Alternative Livestock
Is Not a Compensable Categorical or Regulatory Taking

L. Paul Goeringer
National AgLaw Center Research Associate

Summary of Decision

In Kafka v. Montana Department of Fish, Wildlife, and Parks, 2008 MT 460 (Mont. 2008), the Montana Supreme Court affirmed the decision of a district court, agreeing that alternative livestock game farm operators had no compensable property interests in licenses and intangible business assets. The court also agreed that the passage of a voter initiative was not a taking of the operators' real estate, fixtures, or alternative livestock.

Background

This case involved the state of Montana's regulation of alternative livestock game farms. Id. at 2. The three plaintiffs received their state alternative game farm licenses in the 1990s, and they invested in infrastructure necessary to run game farms, such as fencing and acquisition of livestock. Id. at 3-5. Two of the plaintiff game farms, owned by the Kafkas and the Bridgewaters, appeared to be profitable businesses based upon their tax returns. Id. at 3, 5. The final game farm, owned by the Boumas, was a breeder operation and never generated a taxable profit. Id. at 4.

On November 4, 2000, the regulatory system covering game farms was amended by the passage of Initiative I-143 by the state's voters. Id. at 6. Initiative I-143 did not take the game farms' alternative livestock or revoke their licenses, but prohibited fees from being charged by the game farms to shoot alternative livestock. Id. at 7. The prohibition of fee shooting took away the most profitable business of the game farms. Id. Both prior to and after the passage of I-143, game farms have been highly regulated by the state. Id. at 8.

In 2002, the Kafkas filed suit in district court to challenge the validity of I-143. Id. at 9. Of the original challenges, the district court dismissed all but the challenge of the taking of various property interests by the implementation of I-143 under the state constitution and the Fifth Amendment to the U.S. Constitution. Id. The other two plaintiffs, the Boumas and the Bridgewaters, were allowed to intervene. Id. at 10. After a bench trial, the district court found that "I-143 did not amount to a compensable taking of [plaintiffs'] private property under the Montana or U.S. Constitutions." Id. at 11. The district court made several findings: game farms were a highly regulated industry, a fact known by all the parties to this suit; the legislature had reserved the right to amend the regulations covering the game farm industry; and public sentiment was not in favor of the game farms. Id. at 12.

The district court examined the economic impacts of I-143 and made several findings. Id. at 13. Looking at the plaintiffs' real property, the district court found that the property had retained value, and in some cases even appreciated, after the passage of I-143. Id. at 13-15. The court also found that the alternative livestock owned by plaintiffs had lost substantial value after the passage of I-143, but the plaintiffs could mitigate the economic impact of these losses through the out-of-state markets that were still available after the passage of I-143. Id. at 16-17. The district court found that the plaintiffs had no compensable property interest in their game farm licenses, and that plaintiffs' intangible business assets were not compensable in a regulatory takings setting. Id. at 19.

The district court then turned to its categorical taking analysis and regulatory taking analysis. Under the Lucas v. S.C. Coastal Council test, the district court found that while the plaintiffs had compensable property interests, they had suffered no categorical taking because the property retained economic value. Id. at 20. Applying the Penn Central Transport Co. v. New York City test, the district court found that any reasonable investment-backed expectations that plaintiffs had were limited by the fact that they operated in a highly regulated industry that could be ended by the state. Id. at 21. "Accordingly, the State had no constitutional duty to compensate [plaintiffs] for the effects of I-143, no matter how greatly impaired the profitability of [plaintiffs'] businesses." Id. The plaintiffs filed this appeal.

Arguments

On appeal, plaintiffs argued that I-143 represented an unconstitutional taking and unfairly forced them to bear the economic burden of the elimination of alternative livestock fee hunting in Montana. Id. at 22-23. They argued that licenses, goodwill, and going-concern value were recognized property interests in Montana, and asserted that the district court's conclusion that no regulatory taking had occurred was in error. Id. at 36. Finally, the plaintiffs argued that the district court did not apply the relevant factors properly and should have found a regulatory taking. Id. at 76.

The state of Montana argued that the district court's findings were correct and urged the court to affirm the district court's decision. Id. at 24.

Analysis and Holdings

First, the court recognized the differences in language between state's constitutional takings provision and the Fifth Amendment of the U.S. Constitution. Id. at 30. As a general rule, the court noted that it looked to federal case law as guidance when considering claims brought under its state constitution. Id. Because the plaintiffs had relied on federal case law to challenge the district court's decision, the court followed its precedent of looking to federal law, and did not entertain assertions that the state constitution provided greater protection. Id. at 31.

The court discussed whether the licenses and the goodwill and going-concern value of the plaintiffs' businesses where compensable property interests under the state constitution and the U.S. Constitution. Id. at 32. The court found that the state and federal constitutional taking provisions did not create compensable property interests. Id. at 33. The court stated, "they are created and their dimensions are defined by existing rules or understandings that stem from an independent source such as state law." Id. (citation and quotations omitted). The court found the general rule to be that a property interest is created where "the citizen had the rights to exclude, use, transfer, or dispose of the property." Id. The court then turned to each interest to determine whether a compensable property interest had been created.

With respect to the game farm licenses, the court determined that some license holders might have a property interest protected by the Due Process Clause of the Constitution. Id. at 39. But the court noted, "[c]are . . . must be exercised not to analogize what is 'property' for purposes of the Takings Clause and what might be viewed as a 'property interest' under the Due Process Clause, as the two concepts are dissimilar." Id. at 40. The court also recognized the reluctance of courts to find compensable property interests in government-issued licenses. Id. at 41.

To find a compensable property interest, the court repeated the rule that "the Licenses must be transferable, exclusive, and free of any express statutory language precluding the formation of a property right." Id. at 46. In comparing the game farm licenses with those from prior precedent, the court found that the licenses were transferrable and that the state had limited discretion to deny the transfer of a license. Id. at 47.

Turning to the issue of whether the licenses were "free of any expressed statutory language that would prohibit the formation of a compensable property interest in the License itself," the court found no disclaimer language in the licenses or the statute like that found in prior federal precedent. Id. at 48. But the court noted that nothing in the statutory language or the licenses limited the ability of the state to alter the licenses through duly enacted amendments or changes. Id. at 49-50. The court left this issue unresolved because the licenses did not contain a right to exclude. Id. at 51.

Considering the right to exclude, the court found that "[n]othing in the language of the Licenses . . . gives the License holders the right to exclude others from the Game Farm industry." Id. at 52. The court found no limit on the number of licenses that the state could issue; none assured the license holders of a freedom from competition or provided a license holder with a set segment of the game farm market. Id. The only right to exclude held by the plaintiffs was the right to exclude others from fee-shooting on their own property, and this right had nothing to do with the licenses. Id. at 53. For these reasons, the court affirmed the decision of the district court that licenses where not compensable property interests under the state or federal constitutions. Id. at 54.

Looking to the intangible business interests, prior federal case law required "an actual physical occupation of the land by the government"; "thus, if the going-concern value is based upon a right or ability to exclusive use of the property which the government is occupying, it makes sense to provide compensation for the value lost." Id. at 57. The court found that the instant case involved a regulatory taking claim rather than an actual physical occupation; therefore, the plaintiffs' reliance on the prior case law involving physical occupation was not on point. Id.

Initiative I-143 did not require the government to physically take or occupy the plaintiffs' property, but it eliminated the most profitable part of their businesses. Id. at 62. The court found, "as is clear from the foregoing authorities, these interests are not compensable in this case under the Fifth Amendment or Article II, § 29 of the Montana Constitution because there has been no physical condemnation or occupation of appellants' property by the State." Id. at 63. The court upheld the district court's decision that the goodwill and going-concern value of the plaintiffs' businesses was a not a compensable property interest under the state and federal constitutions. Id. at 64.

The court turned to the final argument that I-143 was a taking of the plaintiffs' real property, fixtures, and alternative livestock. Id. at 65. The court examined each of these property interests under the Penn Central Transport Co. v. New York City test, which involves the following factors: "(1) the character of the governmental action; (2) the extent to which the regulation has interfered with distinct investment-backed expectations; and (3) the economic impact of the regulation on the claimant." Id. at 69.

Turning to the real estate and fixtures, the court agreed with the district court's finding that I-143 did not amount to a taking of the plaintiffs' real estate and fixtures. Id. at 80. The court agreed with the state's experts, who testified that the plaintiffs' real property and fixtures had retained or appreciated in value since the passage of I-143. Id. at 81. The court noted that the plaintiffs had offered no expert testimony to counter the state's experts. Id. Because of the lack of evidence offered by the plaintiffs, the court found that the plaintiffs "provide[d] no basis to assert a taking of their real estate interests, regardless of the weight of the remaining two factors." Id. at 83. The court affirmed the decision of the district court that the plaintiffs had not suffered a regulatory taking of their real estate and fixtures because of the passage of I-143. Id.

Regarding the alternative livestock, the court agreed with the plaintiffs that the district court underestimated the economic impact of I-143. Id. at 84. The court found that the existing alternative market returns were less than the expense of maintaining the livestock. Id. at 85. This factor weighed heavily in the plaintiffs' favor. Id.

Looking at the character of the governmental action, the court did agree that the plaintiffs were being asked to bear the burden of the amendment; however, the court found the intrusion on the plaintiffs' alternative livestock businesses to be minimal. Id. at 86-87. According to prior precedent, it is "well-established that regulations which impair or significantly decrease the profitable use of property do not amount to a taking." Id. Because an "owner possesses a full 'bundle' of property rights, the destruction of one 'strand' of the bundle is not a taking, because the aggregated must be viewed in its entirely." Id. (citation omitted). The court recognized that if I-143 had impacted other available markets, "then this factor might lean more in their favor because [plaintiffs], and not the general public, are shouldering this burden." Id. at 88. The court concluded that in the instant case, this factor weighed against finding a compensable taking. Id.

Looking at the final factor, the plaintiffs' "reasonable investment-backed expectations," the court examined whether the expectation to "always be able to charge a fee to shoot alternative livestock in Montana" free of state interference was reasonable. Id. at 89. The court found that this was an unreasonable expectation. Id. The court distinguished the cases relied on by the plaintiffs because in those cases, the individuals could not have anticipated the changes created by the government. Id. at 90-91. In the instant case, the court found that "the State never assured [plaintiffs] they would always be permitted to charge a fee to shoot alternative livestock in Montana." Id. at 92. As a result, the plaintiffs could not maintain a reasonable expectation that they would always be able to conduct fee shooting of alternative livestock. Id. at 93. The court found this factor to weigh against finding a compensable taking of the plaintiffs' alternative livestock. Id.

The court affirmed the findings of the district court that the plaintiffs had not suffered a compensable taking of their licenses, the goodwill and other intangible assets of the plaintiffs' businesses, the plaintiffs' real estate and fixtures, or the plaintiffs' alternative livestock. Id. at 95.

Dissent

Justice Nelson viewed the majority's and the state's reliance on Mugler v. Kansas, 123 U.S. 623 (1887), as misplaced. Id. at 126. Mugler was decided on substantive due process grounds, and not on the Fifth Amendment's Takings Clause. Id. Mugler allows the government to use the police power to prevent noxious uses of property, such as those that constitute public nuisances, without paying just compensation. Id. at 129. Justice Nelson saw nothing about game farms that would be a public nuisance; in fact, the state had promoted game farm development for 83 years. Id. at 130-131. Finally, Justice Nelson noted, "it has long been established that the mere declaration by the government that a certain property or use thereof constitutes a nuisance does not make it so." Id. at 132. Justice Nelson would not allow the state to escape providing just compensation by declaring "that which formerly was not a public nuisance to have been a public nuisance all along." Id. at 134.

Justice Nelson also viewed the majority's reliance on due process arguments as misplaced. Id. at 136-139. Although due process arguments had been valid under prior U.S. Supreme Court precedent, after a recent U.S. Supreme Court decision, "[t]he critical focus in a regulatory takings case is on the severity of the burden a particular regulation imposes on private property rights and how that regulatory burden is distributed among property owners." Id. at 152-154. Justice Nelson would not have precluded the plaintiffs from recovering just compensation simply because the state claimed to be exercising its police power. Id. at 156.

Justice Nelson would have found that the plaintiffs had a property interest in the game farm licenses. Id. at 178-196. Justice Nelson explained that the plaintiffs had a right to exclude others from their property and never claimed a right to exclude others from the game farm industry. Id. at 195. Under Penn Central, Justice Nelson would have found that the plaintiffs had suffered a compensable taking of their licenses. Id. at 196.

Justice Nelson also would have found that I-143 was a taking of the goodwill and going-concern value of the plaintiffs' businesses. Id. at 202. The dissent noted that the majority had no legal standard for determining whether an industry is "highly regulated." Id. at 203. The dissent also noted that the plaintiffs had an expectation that their game farms would continue as long as the plaintiffs followed the permit requirements. Id. at 206. Looking at prior precedent, Justice Nelson found the rule to be that "recovery will be allowed where the business derives its success from a location not easily duplicated or where relocation is foreclosed for the reasons relating to the entire condemnation project." Id. at 210 (citation and quotations omitted). Justice Nelson would have found a taking of the goodwill and going-concern value of the plaintiffs' businesses by the passage of I-143. Id. at 214.

Regarding the alternative livestock, Justice Nelson believed that the economic impact factor of the Penn Central test weighed heavily in favor of the plaintiffs' takings claims. Id. at 221. Looking at the governmental action factor, the dissent noted that the initiative could have seized all alternative livestock and prohibited their ownership to achieve its alleged result. Id. at 227. Initiative I-143 chose a different route and deprived the plaintiffs of all economic benefit of their livestock. With this in mind, Justice Nelson would have found this factor to weigh heavily in favor of the conclusion that I-143 was a taking of the plaintiffs' alternative livestock. Id. at 229. Finally, as to the investment-backed expectations factor, Justice Nelson disagreed with the majority's conclusion that the plaintiffs' investment-backed expectations were unreasonable. Id. at 231. Looking at the history of the industry and its promotion by the state, the dissent found that nothing made the investment-backed expectations of the plaintiffs unreasonable. Id. at 232-236. Justice Nelson would have held "that the [plaintiffs were] entitled to just compensation for the 'substantial devaluation' of their alternative livestock." Id. at 239.

The case was decided on December 31, 2008.