9th Circuit Reverses Course on Rent Control

Daily Journal

More than a year ago, a three-judge panel of the 9th U.S. Circuit Court of Appeals issued its controversial regulatory takings opinion in Guggenheim v. City of Goleta, holding that the city of Goleta's rent control ordinance constituted a taking.  On Dec. 22, 2010, an 11-member, en banc court concluded otherwise, holding that the Guggenheims have no takings claim against the city.

The Guggenheims, the owners of a mobile home park, claimed that the city of Goleta's rent control ordinance had the effect of transferring the vast majority (as much as 90 percent) of the property's value to the tenants, constituting a regulatory taking.  The 9th Circuit issued the initial Guggenheim opinion in September 2009, siding with the owners.  The court remanded the case for a trial on the amount of compensation the owners should be awarded.  At the time, property rights advocates hailed the opinion as a rare victory in federal takings jurisprudence.
Nearly six months after publishing its opinion, however, the 9th Circuit granted a request from the city, ordering an en banc hearing.  In June, the en banc court held arguments on the case, and practitioners have been waiting for a decision ever since.  Just as 2010 was winding to a close, the 9th Circuit issued its new Guggenheim opinion, reversing its earlier decision, and holding that Goleta's ordinance does not constitute a taking. 

A "regulatory taking" occurs when government regulation goes too far, "taking" property away from its owner.  Similar to the government's physical taking of property, when the government takes property through a regulation, it must pay just compensation.  That part is easy; the law is clear:  if a regulatory taking occurs, just compensation must be paid.  The hard part is deciding when government regulation has gone too far, resulting in a taking. 

At one end of the spectrum, takings claims are easy to understand.  As the U.S. Supreme Court explained in Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1019 (1992), where a government regulation eliminates all economically viable use of property, it constitutes a taking.  But government regulation rarely eliminates all economic uses of property. 

In cases where a regulation leaves some potential economic value in the property, the test is more complicated.  In Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978), the Supreme Court articulated the seminal test for determining whether a taking has occurred.  In Penn Central, the court held that takings claims should be analyzed by looking at three factors:  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.

But before courts ever address the three-factor Penn Central test, regulatory takings claims must overcome huge procedural hurdles.  Under Williamson County Regional Planning Commission v. Hamilton Bank of Johnson City, 473 U.S. 172 (1985), a federal takings claim is not ripe unless the owner first exhausts all state court remedies.  In complying with Williamson, owners typically wind up with a final state-court decision on the merits which federal courts then conclude has a res judicata – or conclusive – effect on the subsequent federal lawsuit.  In other words, a property owner faces the ultimate "Catch 22":  if the owner litigates to a final decision on the merits in state court, the federal claim is barred, and if the owner fails to litigate to a final decision on the merits in state court, the federal claim is not ripe. 

Thus, not surprisingly, federal regulatory takings claims only rarely proceed to a hearing on the merits.  In fact, prior to Guggenheim, the 9th Circuit had never reached the merits of a Penn Central claim.

When the 9th Circuit navigated its way through all of the procedural obstacles, reached the merits, and found that a taking had occurred, the original Guggenheim opinion understandably generated some buzz.  Of particular importance, the court held that failure to proceed to a final decision on the merits in state court is not always fatal to a takings claim, explaining that the Williamson test raises prudential, rather than jurisdictional, concerns.  Thus, the court proceeded to the merits of the Guggenheims' claim. 

The court then held that the city's rent control ordinance flunked the Penn Central test.  The court analyzed all three prongs of the Penn Central test and held "On balance, the City'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 before the compensation hearing could occur, the court ordered the new, en banc hearing.

Following the en banc hearing, the 9th Circuit reached a different conclusion.  In an opinion written by Justice Andrew Kleinfeld – the author of the dissent in the original decision – the court still reached the merits of the claim (itself, a notable occurrence).  However, the court this time concluded that the Guggenheims failed to establish the "investment-backed expectations" required to state a takings claim under Penn Central because the rent control ordinance pre-existed the Guggenheims' purchase of the property.  As the court explained: "Whatever unfairness to the mobile home park owner might have been imposed by rent control, it was imposed long ago, on someone earlier in the Guggenheims' chain of title. The Guggenheims doubtless paid a lot less for the stream of income mostly blocked by the rent control law than they would have for an unblocked stream."

The court also rejected the Guggenheims' related substantive due process and equal protection claims. 

Justice Carlos Bea issued a lengthy dissent, in which he strongly criticizes the decision as converting "a three-factor balancing test into a ‘one-strike you're-out' checklist."  Justice Bea also attacks the majority as rewriting other key Supreme Court precedent, concluding that the Guggenheims should be allowed to proceed on their takings claim, as well as their substantive due process and equal protection claims. 

Justice Bea's criticism notwithstanding, the majority opinion tends to fall in line with the countless cases that demonstrate that federal regulatory takings claims can be nearly impossible to prove.  That said, the fact that the 9th Circuit waded through the procedural landmines and reached the merits remains hugely significant.  Merely by reaching the merits of the takings claim, the 9th Circuit broke new ground, meaning the decision still qualifies as a "victory," at least of sorts, for property owners. 

Despite the 9th Circuit's finding that the city's rent control ordinance did not constitute a taking, government agencies still must be aware of the risks of exposure to regulatory takings claims.  The simple fact that the court reached the merits is hugely significant, and it may signal a turning of the tide for federal takings claims. 

With respect to the ordinance at issue in Guggenheim, the 9th Circuit may well have reached a different conclusion had the ordinance been enacted while the Guggenheims owned the property.  Thus, cities and counties contemplating similar rent control ordinances should weigh carefully the degree to which the ordinance will effect a transfer of value from the property's owner to the tenants. 

Where that transfer is substantial, agencies should anticipate legal challenges, with owners who can establish the necessary "investment-backed expectations" trumpeting the Guggenheim decision as proof that a taking occurred.  Time will tell whether the lower courts actually read such an implied holding into the Guggenheim decision. 

Rick E. Rayl is a partner at Nossaman in the firm's Eminent Domain and Valuation and Real Estate Practice Groups and an experienced trial attorney dealing with eminent domain, inverse condemnation and other real estate and business disputes.  He is editor of the blog, "California Eminent Domain Report." He can be reached at rrayl@nossaman.com or (949) 833-7800.

Bradford B. Kuhn is an associate of Nossaman's Eminent Domain and Valuation Practice Group. He frequently blogs about eminent domain news and developments at http://www.CaliforniaEminentDomainReport.com/.

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