Regulatory takings claims have received considerable publicity the past few years, as practitioners and legal scholars attempt to divine whether a meaningful trend towards greater government liability exists. Last fall, the 9th U.S. Circuit Court of Appeals issued a significant opinion that many viewed as indicative of such a trend, Guggenheim v. City of Goleta (Sept. 28, 2009, Case No. 06-56306). There, the court held that the city of Goleta must pay just compensation to the owner of a mobile home park as a result of a rent control ordinance that the court concluded effected a taking of the owner's property. On March 12, the Guggenheim case took a new turn. Nearly six months after publishing its opinion, the 9th Circuit issued an order granting an October 2009 request from the city for a new hearing before a larger panel of judges. This order invalidates the original opinion, meaning it is no longer citable as legal precedent.
In Guggenheim, the owner of a mobile home park challenged the city of Goleta's rent control ordinance on the grounds that the ordinance constituted a taking of its property. While rent control ordinances are common in California, the city of Goleta's ordinance was particularly onerous. By restricting the amount of rent the owner could charge to the mobile home park's tenants, the ordinance had the effect of transferring as much as 90 percent of the property's value from the owner to the tenants (who could then sell the units at a dramatic "premium" because of the guaranteed low rent). The 9th Circuit held that this crossed a line and qualified as a compensable taking.
The holding was noteworthy not only because the court found that the ordinance qualified as a compensable taking, but also because the court actually reached the merits of the issue. Regulatory takings cases are often decided on procedural grounds, with courts holding that the owner does not have standing to raise the takings claim or, even more commonly, that the claim is not timely.
In some cases, courts rule that the claim is not "ripe." Regulatory takings claims often turn on whether the government's regulations eliminate the owner's ability to make an economically viable use of the property. As the Supreme Court explained the concept in Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1019 (1992): "When the owner of real property has been called upon to sacrifice all economically beneficial uses in the name of the common good...he has suffered a taking." When analyzing the issue, courts often conclude that the claim fails because the owner has not sufficiently exhausted all reasonable avenues for generating an economically viable use of the property before filing the lawsuit.
In other cases, the opposite problem is true: courts rule that the claim is "stale." In these cases, the owner may work tirelessly to ensure all reasonable options are exhausted before suing, thwarting a ripeness challenge. In so doing, the owner allows the statute of limitations lapse, rendering the claim untimely.
To add insult to injury, a court may find that the case fails both because it contains claims that are not ripe, and because it contains claims that are stale. This is what happened earlier this month when the California Court of Appeal for the 4th District decided MHC Financing Limited Partnership Two v. City of Santee (March 15, 2010, Case No. D053345). The court never reached the merits of plaintiff's claim that the city of Santee's rent control ordinance went too far, finding the "as applied" challenge unripe and the "facial" challenge stale.
Even if a plaintiff clears these timeliness hurdles, other procedural barriers exist, especially in federal court, where the plaintiff must demonstrate exhaustion of state-court remedies. Thus, when the 9th Circuit navigated its way through the procedural obstacles in an 80-page opinion, reached the merits, and found that a taking had occurred, the Guggenheim opinion understandably generated some buzz.
Of particular importance, the court held that the rent control ordinance constituted a regulatory taking pursuant to the landmark Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978) decision. That decision established a key, three-part test for analyzing regulatory takings claims: the economic impact of the regulation on the claimant; the extent to which the regulation has interfered with investment-backed expectations; and the character of the governmental action. The court analyzed all three prongs of the Penn Central test and held: "On balance, the [c]ity's [rent control ordinance] 'goes too far' and constitutes a regulatory taking under the Fifth and [14th] Amendments for which just compensation must be paid." The case was remanded to the trial court to determine how much compensation the mobile home park owner would be paid by the city of Goleta.
But instead of going back to the trial court for a damages proceeding, the 9th Circuit has decided it wants to take another look at the takings issue. The March 12 order triggers an "en banc" hearing of the case. So, what happens now?
The term "en banc" is a French term that means, literally, "on the bench." It typically refers to a hearing before the entire panel of judges, as opposed to a smaller, three-judge panel. And, in most of the Federal Circuits, this is precisely what would happen. But the 9th Circuit is different. Because it is so large, with 28 active seats (a few are currently vacant), the 9th Circuit has gone away from true, en banc, hearings. Instead, 9th Circuit "en banc" proceedings involve a random selection of 10 judges, plus the Chief Judge.
Of course, with less than half the judges participating and with only six votes required for a majority opinion some risk exists that the "en banc" opinion will still not reflect the majority view of the court. This risk is more than theoretical, as the 9th Circuit is infamous for its division between liberal and conservative judges. Thus, the 9th Circuit rules provide for a second, true "en banc" hearing under certain circumstances, though such a hearing would be extremely rare.
These idiosyncrasies (along with a more general view that the court is too "politically liberal" and out of touch with the Supreme Court) have generated considerable criticism of the 9th Circuit and its composition. There have been at least seven attempts to split the court into two or even three courts, typically through creation of a new Twelfth (and potentially Thirteenth) Circuit. To date, none of those efforts have succeeded, meaning the court persists with its current procedure, which requires agreement among only six of the court's 28 judges to obtain an "en banc" majority.
For Guggenheim, the en banc court is scheduled to hear the case the week of June 21, 2010, in Pasadena. The court will likely issue a new opinion before the end of the year. For those looking to "read the tea leaves," the names drawn for the 11-judge panel may provide a clue as to the ultimate outcome. The court is almost evenly divided between judges appointed by Republican Presidents and judges appointed by Democratic Presidents. Conventional wisdom would suggest that judges appointed by Republican Presidents are more likely to side with the owners seeking to attack a rent control ordinance, as compared to their Democratic-appointed counterparts.
Of course, judges do not always line up nicely behind political party lines, and one need not look any further than the original Guggenheim opinion for proof of that. The initial three-judge panel was split, 2-1, but Republican Presidents appointed all three judges (the opinion was authored by Judge Jay Bybee, a George W. Bush appointee, while the dissent was authored by Judge Andrew Kleinfeld, a George H.W. Bush appointee).
Regardless of the outcome, government agencies should take heed from the initial opinion, and should be wary whenever they seek to implement rent control ordinances (or any regulation for that matter) to ensure that they do not become the next target of a major regulatory takings case. Cities and counties that have rent control ordinances should weigh carefully the degree to which the ordinances effect a transfer of value from the property's owner to the tenants. And, where that transfer is substantial, they should anticipate possible legal challenges even if Guggenheim itself ultimately tilts the other way.
Rick Rayl is the Chair of Nossaman's Eminent Domain and Valuation Practice Group. He frequently blogs about eminent domain news and developments at www.CaliforniaEminentDomainReport.com. Bradford Kuhn is an associate of Nossaman's Eminent Domain and Valuation Practice Group. He blogs about eminent domain news and developments at www.CaliforniaEminentDomainReport.com.