Two decisions by the Ninth U.S. Circuit Court of Appeal appear to bolster local rent control ordinances, although the decisions at least hint at the court’s doubt as to whether the state’s system for weighing landowners’ takings claims is adequate.

In separate cases, the Ninth Circuit rejected allegations that the application of mobile home rent control ordinances in Carson and Morgan Hill were unconstitutional takings of private property. In both cases, the Ninth Circuit said the claims were unripe — meaning not ready for a decision — because the mobile home park owners had not sought relief in state court.

Both mobile home park owners said they did not take their claims to state court because doing so would be futile. Both Ninth Circuit panels appeared at least mildly receptive to this argument, but the court in both cases concluded that the argument was only theoretical because the property owners could point to no state court ruling that supported their argument.

The bottom line, said Rochelle Brown, an attorney who defended Carson’s rent control ordinance, is that landowners cannot make a federal case out of alleged rent control takings unless the landowners first lose in state court. "The importance [of the decisions] to local government that has rent control is that landlords who are unhappy with local government decisions have to challenge them in state court, rather in federal court," she said. Brown doubted the rulings have implications for takings law outside the area of rent control.

The next phase in the legal dance between property owners and regulators likely will be a challenge of California’s approach to takings claims. The state system requires a property owner who alleges that the application of rent control regulations is a taking to seek a state court order. If the court agrees that a taking has occurred, the court then orders the local government to consider a "Kavanau adjustment." Under Kavanau v. Santa Monica Rent Control Board, 941 P.2d 851, the property owner may seek future rent increases as compensation for rents that the government kept too low. The mobile home park owners argued that Kavanau adjustments were inadequate remedies.

In the Morgan Hill case, owners of Hacienda Valley Mobile Estates sought a rent increase of $200 per month per space. The city’s Rent Control Commission approved an increase of $4.03 a month. The owners then filed a federal lawsuit alleging that the application of the city’s rent control law was a taking and a violation of the federal Civil Rights Act (42 U.S.C. § 1983).

District Court Judge Ronald Whyte determined that Hacienda Valley had not met the ripeness requirements set forth in Williamson County Regional Planning Commission v. Hamilton Bank, 473 U.S. 172 (1985). Under Williamson County, before a property owner can seek relief in federal court, the property owner must obtain a final administrative decision from the regulatory agency, and must seek compensation through state remedies unless doing so would be futile.

Hacienda Valley appealed, and a unanimous three-judge panel of the Ninth Circuit upheld Judge Whyte. The property owners had clearly satisfied the first prong of theWilliamson County test by obtaining a final decision from the city. But the property owners had not sought compensation under the state system — the second prong

The property owners first argued that their application to the Rent Control Commission satisfied the second prong of Williamson County. The owners argued that the Commission’s refusal to grant the requested rent increase was both a completion of the taking, and a deprivation of compensation for the taking.

But the Ninth Circuit rejected that argument. "[A] taking and the pursuit of a remedy for the taking were not simultaneous in this case" Justice Proctor Hug Jr. wrote for the court.

Hacienda Valley further argued for the futility exception, saying a Kavanau adjustment was unconstitutional and that state courts are unconstitutionally deferential to the government. The property owners argued that simply going back to the same entity that denied the original rent increase would be pointless. The court rejected that argument because the property owners could not "direct us to, nor did our own research reveal, anything regarding how the Kavanau adjustment process works," Hug wrote.

As for deferential treatment, the property owners contended that state courts have been willing to find that a taking had occurred only when there was an "arbitrary regulation of property rights." The property owners argued that the correct standard was whether or not the regulation "substantially advanced" a legitimate state interest. Again, the court rejected the argument because the property owners could not point to a precedent that supported the contention.

Hacienda Valley attorney Robert Coldren said the Ninth Circuit did not adequately address the question of the whether Morgan Hill’s application of its ordinance substantially advanced an appropriate public purpose. Moreover, the court also did not address the issue of who should pay compensation. The constitution requires the government to pay just compensation for a taking, while Kavanau places the burden of compensation solely on future residents of a rent controlled property.

"All of the just compensation in the world won’t cure the constitutional infirmity," Coldren said. "Thus, we shouldn’t have to go through the state courts."

The same issue arose in the case from Carson, in which a concurring opinion appeared to bolster Coldren’s argument. Judge Diarmuid O’Scannlain wrote that "California’s procedures may not provide ‘just compensation’ because the burden of compensation falls not on the government as the representative of the benefiting general public, but on a select group of future tenants."

"The Fifth Amendment," O’Scannlain wrote, "is violated when government attempts to lay the general public’s burden of just compensation on third parties."

Still, O’Scannlain conceded this argument was speculative and he joined a unanimous three-judge panel that upheld Carson’s rent regulation. The case was filed after the Carson Mobilehome Park Rental Review Board granted owners of Carson Harbor Village a rent increase of $14.29 per space — less than 10% of the amount sought. The Carson Harbor Village owners sued and lost in district court.

On appeal, the Carson Harbor Village owners contended Kavanau and a follow up case, Galland v. City of Clovis, 16 P3d 130 (see CP&DR Legal Digest, March 2001) — in which the state Supreme Court said a property owner could receive § 1983 damages in state court only by showing that a rent ceiling had been confiscatory and a Kavanauadjustment was inadequate — made it impossible to pursue takings or § 1983 lawsuits. Carson Harbor also questioned having the same body that rejected a proposed rent increase decide on a Kavanau adjustment.

"We acknowledge that Carson Harbor raises serious concerns about the adequacy of the new compensation procedures established in Kavanau and Galland," Judge Raymond Fisher wrote for the court. "Nevertheless, the alleged inadequacy of the procedures remains highly speculative. Carson Harbor has not sought a writ of mandate and Kavanau adjustment, nor has Carson Harbor identified any landowner who has sought and failed to receive adequate compensation through these procedures."

The rulings are good for property owners, Coldren contended, because the Ninth Circuit treated the lawsuits as challenges to the cities’ application of the ordinances, rather than as challenges to the ordinances themselves. That distinction gives property owners far more time to sue, Coldren said.

But Browne said the cities won by having the Ninth Circuit rule that such lawsuits belong in state court, which has well-defined processes for such claims, rather than federal court, where § 1983 claims can get messy.

The Cases:
Hacienda Valley Mobile Estates v. City of Morgan Hill, No. 02-15986, 03 C.D.O.S. 10855, 2003 DJDAR 13716. Filed December 17, 2003.
Carson Harbor Village Ltd. v. City of Carson, No. 02-56213, 04 C.D.O.S. 58, 2004 DJDAR 91. Filed January 2 2004.

The Lawyers:
For Hacienda Valley: Robert Coldren, Hart, King & Coldren, (714) 432-8700.
For Morgan Hill: Donald Lincoln, Endeman, Lincoln, Turek & Heater, (619) 544-0123.
For Carson Harbor Village: David Spangenberg, Spangenberg & Ritson, (707) 473-4340.
For City of Carson: Rochelle Browne, Richards, Watson & Gershon, (213) 626-8484.