By Joe Forward, Legal Writer, State Bar of Wisconsin

July 12, 2010 – In the context of groundwater extraction, which caused damage to adjacent property, the Wisconsin Supreme Court recently held that mere consequential damage resulting from governmental action is not a taking that requires payment of just compensation.

In E-L Enterprises, Inc. v. Milwaukee Metropolitan Sewerage District, 2010 WI 58, the supreme court reversed a verdict that awarded E-L Enterprises $309,388 for property damage that resulted when the Sewerage District extracted groundwater for sewer construction in the 1980s.

A trench, constructed through an easement adjacent to E-L’s building, caused water levels on its property to fall significantly. The water level took two years to recover. E-L’s foundation was supported by “wood piles,” which must be water-saturated to prevent rotting.

In 2001, E-L’s owner discovered that wood piles had rotted and were no longer able to support the building. The repairs cost $309,388. E-L filed suit against the Sewerage District on claims of constitutional taking, inverse condemnation, negligence and nuisance.

The negligence and nuisance claims were dismissed based on governmental immunity. The constitutional takings and inverse condemnations claims survived.

Under takings law, the supreme court explained, the government is barred from taking property for public use without paying just compensation.

Instructed that “groundwater is considered property of the person who owns the land under which it flows,” the jury found that removal of E-L’s groundwater caused the damage and awarded just compensation. The appeals court affirmed.

Constitutional taking

Under the U.S. and Wisconsin Constitutions, the court explained, a taking occurs when the government physically occupies (takes) private property or regulatory restrictions deprive an owner of all beneficial use of the property to benefit the public.

E-L argued that the Sewerage District “physically took E-L’s groundwater” and the taking “deprived E-L of the use of that groundwater, resulting in diminished value of E-L’s property.” This taking, E-L argued, was done to benefit the public.

In an opinion by Justice Annette K. Ziegler, the court held that the Sewerage District “did not physically occupy the property for which E-L seeks compensation, and no government imposed restriction deprived E-L of all, or substantially all, of the beneficial use of its property.”

Noting a distinction in Wisconsin law from other states, the court explained that under takings law, property must be “taken” for public use, not merely “damaged.” That is, the “Sewerage District did not physically occupy E-L’s building or wood piles,” it only damaged them.

In other words, the Sewerage District took E-L’s groundwater, not its wood piles, and E-L introduced no proof as to the value of the extracted groundwater.

The court concluded that E-L’s damages were consequential damages “not compensable under Art. I, Section 13 of the Wisconsin Constitution or the Takings Clause of the Fifth Amendment.”

Exception does not apply

The court noted an exception to the general rule that “consequential damage to property resulting from governmental action is not a taking thereof.”

That exception would allow just compensation if diverting groundwater “deprived E-L of all, or substantially all, of the beneficial use of its building.” But the court noted that E-L never stopped leasing the building. Thus, value was not substantially destroyed.

No inverse condemnation

Where the government exercises its eminent domain power without paying just compensation, Wis. Stat. section 32.10 provides a remedy, the court noted. However, the court concluded that such remedy “is simply inapplicable” here.

Absent actual occupation, to prevail on a claim of inverse condemnation, the facts alleged must show that a government-imposed restriction deprived the owner of all, or substantially all, of the beneficial use of his property,” the court explained.

Sewerage District did not physically occupy the E-L property, and the government did not impose a restriction on E-L that deprived it of all, or substantially all, its property, the court held.

Dissent

Justice David T. Prosser filed a dissenting opinion, opposing the reversal of a “reasonable jury verdict.” Wisconsin cases, Justice Prosser wrote, “support the conclusion that damages are available in the circumstances here.”

He cited Damkoehler v. City of Milwaukee, 124 Wis. 144, 101 N.W. 706 (1904), and Dahlman v. City of Milwaukee, 131 Wis. 427, 111 N.W. 675 (1907).

Attorneys

G. Michael Halfenger and William Katt Jr. of Foley & Lardner LLP, Milwaukee, and Michael McCabe, James Petersen, and Lauri Rollings of the Milwaukee Metropolitan Sewerage District represented the Milwaukee Metropolitan Sewerage District.

Jerome Kerkman, Susan Cerbins, and Joseph Cincotta of Kerkman & Dunn, Milwaukee, represented E-L Enterprises, Inc.