Adding Some Bite to the Bark
"All bark and no bite." Typically, that is a fair description of regulatory takings litigation: the litigation generates a lot of noise and gnashing of teeth but, at the end of the day, rarely are government agencies bitten with an order that they pay compensation. But a new opinion from the federal 9th Circuit Court of Appeals, Guggenheim v. City of Goleta (Sept. 28, 2009, Case No. 06-56306), demonstrates that regulatory takings litigation can have teeth. In Guggenheim, the 9th Circuit holds that the city of Goleta's rent control ordinance on mobile home parks went too far and that the city will have to pay the park's owners just compensation. This case, particularly coupled with two other recent regulatory takings cases, Monks v. City of Rancho Palos Verdes and Casitas Municipal Water District v. United States, suggests that agencies may now need to pay close attention to their regulations if they hope to avoid a regulatory takings bite.
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 there is a regulatory taking, just compensation must be paid. The hard part is deciding when government regulation has gone too far, resulting in a taking. In fact, this part is so hard that lawsuits over regulatory takings usually resemble Alice's trip through Wonderland, with the parties falling in and out of state and then federal court (instead of a rabbit hole) based on procedural and substantive rules that often seem as logical as the Mad Hatter's recitals at the Tea Party. For example, under the "ripeness" doctrine, plaintiff landowners or developers are usually barred from federal court until they have exhausted their remedies in state court. But if they go to state court first, they find themselves later barred from federal court because they have already litigated the issues in state court.
The twisted path of regulatory takings litigation, however, has not usually been a bad thing for the government agency defendants: usually the procedural and substantive rules lead to a win for the agencies; they almost never are ordered to pay just compensation. In other words, while a "regulatory taking" may have sounded a loud bark, it usually lacked a real bite. With its opinion in Guggenheim, the 9th Circuit may have added the bite of just compensation.
In an opinion that fills two volumes and nearly 80 pages, the 9th Circuit ruled that the city of Goleta owes compensation to mobile home park owners for the economic losses that resulted from the city's enactment of a mobile home rent control ordinance. The Court of Appeal described these economic losses as amounting to a "naked transfer" of about 90 percent of the park's value from the park owners to the park tenants.
To get to that ruling, the 9th Circuit had to carefully work its way down a path littered with procedural hurdles that normally prove fatal to the claims of property owners and developers who pursue regulatory takings claims. Among these procedural hurdles is "standing." This hurdle required a particularly lengthy analysis because the owners of this mobile home park bought the property long after the original rent control ordinance was enacted. (In fact, a strong dissent argues this should have been a fatal defect.)
Getting past a second hurdle, the 9th Circuit found adequate "ripeness" to allow the matter to proceed. In doing so, it pointed to the extensive litigation history in both the state and federal courts, finding ripeness even though there had not been a final adjudication in the state court, which typically has proven fatal to a regulatory takings claim.
In the end, the 9th Circuit concluded that the city of Goleta's rent control ordinance, with its effect of transferring as much as 90 percent of the value in the property from the owners of the park to the tenants (who could then sell their units at a dramatic "premium" because of the guaranteed low rent) constituted a regulatory taking. It then sent the matter back down to the trial court to determine how much compensation the owners of the park would be paid by the city of Goleta.
The implication for cities and counties that have rent control ordinances, particularly on mobile home parks, is obvious: they need to pull out those ordinances and compare them to what the city of Goleta enacted and make sure that they have not crossed the line of transferring the value of the property from the mobile home park owners to the tenants.
More generally, the implication for government agencies is that they may now find themselves at a greater risk of ultimately having to pay just compensation when their regulations go too far. They may no longer be able to safely assume that if they do find themselves in regulatory takings litigation that they will be able to get the suit knocked out on procedural grounds.
And in California, if agencies are found liable for a regulatory taking, they can find themselves on the hook not only for just compensation but also for all of the attorneys' fees that the property owner or developer incurred in litigating the issues. (See Code of Civil Procedure Section 1036 [a prevailing plaintiff in an inverse condemnation action is entitled to litigation expenses, including attorneys' fees].)
Bradford Kuhn is a member of Nossaman's Eminent Domain and Valuation Practice Group and specializes in business and commercial litigation with an emphasis on eminent domain, inverse condemnation, and other real estate disputes. He can be reached at email@example.com.