California Eminent Domain Report : a blog following condemnation, inverse condemnation, and regulatory takings written by attorneys with Nossaman LLP.

We're looking back on 2011's wild ride and looking forward to the twists and turns still in front of us in 2012.  We've summarized all of this into the 2011 version of our annual Eminent Domain Year in Review piece.

For those who don't want to take the time to read the actual article, here are a few of the highlights:

• In January, Governor Brown proposed eliminating redevelopment agencies.  In June, he finally got legislation to accomplish that goal.  In August, the Supreme Court agreed to hear a legal challenge to the new law.  And on December 29, the Supreme Court upheld the law dissolving California's redevelopment agencies, while simultaneously striking down a companion law that would have provided agencies a "pay for play" mechanism to buy back into the system. 
• For the first time, a California court imposed liability for a regulatory taking under the three-part Penn Central test.  The Avenida San Juan Partnership v. City of San Clemente, 201 Cal.App.4th 1256 court held that the city's efforts to down zone a property to preclude its development triggered liability under Penn Central.
• In Galardi Group Franchise & Leasing, LLC v. City of El Cajon, 196 Cal.App.4th 280, the Court reaffirmed the rule that a claim for lost business goodwill must derive from the operation of a business on the property, precluding goodwill claims by a franchisor.  However, the court also held that the franchisee could assign its goodwill claim to the franchisor, allowing the franchisor to make a goodwill claim in the name of its franchisee.
• In Los Angeles County Metropolitan Transportation Authority v. Alameda Produce Market, 2011 Cal. LEXIS 12171, the California Supreme Court held that one party's withdrawal of a condemnation deposit does not result in the waiver of any other party's right-to-take challenge, despite the general rule that withdrawal of a condemnation deposit effects such a waiver pursuant to Code of Civil Procedure section 1255.260.

For 2012, we expect considerable focus on the fallout from the Matosantos decision as the unwinding of California's redevelopment infrastructure is dismantled (subject to the success of the legislative efforts to modify the new law).  We also expect continued development of the regulatory takings law, with a possible renewed focus on Penn Central. 

Finally, we expect an increasing split in the way the public views eminent domain, with Kelo torch bearers coming down swiftly on perceived "bad" uses of eminent domain (and, in particular, any version of redevelopment-based eminent domain that might arise from the ashes of 2011).  But for traditional uses of eminent domain for public infrastructure projects, we expect increasing support for such projects, as the public sees the public benefits - and job opportunities - massive infrastructure projects can generate. 

If you want more, go ahead, click the link and read the entire article (you know you want to). 

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We're gearing up for our webinar tomorrow on the Supreme Court's decision last week upholding ABX1 26, but striking down ABX1 27.  I will be moderating a panel that will include my colleagues Gale Connor, Brad Kuhn, Jeff Stava and Jennifer Capitolo.  

We'll also be joined for additional commentary by former California Senate Republican Leader Dick Ackerman and former Los Angeles County Counsel Bill Pellman. 

We're going to spend about an hour talking about the law and how it will be implemented.  We'll also take questions - and even do our best to answer them.  If you already have a question in mind, feel free to let us know now, and we'll see what we can do to make sure it gets addressed.  

And if you haven't registered yet, it's not too late.  We hope to "see" you tomorrow. 

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Yesterday, we reported briefly on the Supreme Court’s decision in California Redevelopment Assn. v. Matosantos.  As many of you undoubtedly know by now, the outcome was the nightmare redevelopment agencies feared most, but that many (including us) had forecast after listening to oral argument last month. 

The Court upheld ABX1 26, allowing the dissolution of California’s redevelopment agencies to proceed, but struck down ABX1 27, the “voluntary” buy back program that would have allowed redevelopment to continue.  In particular:

• The Court had little difficulty upholding ABX1 26, the law eliminating California’s redevelopment agencies. The Court reasoned that because redevelopment agencies were created by the Legislature, the Legislature could also eliminate them:  “A corollary of the legislative power to make new laws is the power to abrogate existing ones. What the Legislature has enacted, it may repeal.” 
• When it came to ABX1 27, the Court felt differently.  All but Chief Justice Cantil-Sakauye concluded that the “voluntary payment” portions of ABX1 27 run afoul of Proposition 22, adopted by voters in November 2010. The Court further concluded that the balance of ABX1 27 was not severable from the improper payment provisions, and the Court struck down ABX1 27 in its entirety. 

Though as a technical matter the CRA obtained a split decision (successfully attacking one of the two laws), the outcome represents a self-described “worst case scenario” that is obviously not what redevelopment proponents had in mind when they filed the lawsuit.  That said, the result is not too surprising to those who followed the oral argument, which focused largely on three issues:

1. The fact that redevelopment agencies were created initially by the Legislature, which would, absent some constitutional prohibition, mean that the Legislature could also abolish them.
2. The fact that the “voluntary” payments under ABX1 27 were not particularly voluntary, since failure to make them meant the redevelopment agency would be eliminated.  And, if not voluntary, the payments seemed to run afoul of Proposition 22.
3. The question of whether the two laws were so intertwined that striking down one (presumably, ABX1 27) would necessitate striking down both. 

Much as it telegraphed during oral argument, the Supreme Court started by concluding that ABX1 26 – the dissolution bill – passed constitutional muster.  Rejecting the argument that Proposition 22 created a constitutional right for redevelopment agencies to exist, the Court found no discussion of redevelopment agencies taking on constitutional stature, and without some explicit mention of such a profound shift in the law, the Court would not imply any such intent.  As the Court summarized, the drafters of legislation do “not, one might say, hide elephants in mouseholes.” 

The Court moved on to ABX1 27, focusing its attention on the “voluntary” payment program.  The Court concluded that ABX1 27 was substantively indistinguishable from earlier efforts by the State to shift property tax increment from redevelopment agencies to the State’s educational revenue augmentation funds (“ERAFs”) – the very circumstance Proposition 22 sought to prevent. 

The Court then put the nail in the ABX1 27 coffin: “A condition that must be satisfied in order for any redevelopment agency to operate is not an option but a requirement.  Such absolute requirements Proposition 22 forbids.” 

Finally, the Court turned to the severability question, needing to decide whether ABX1 26 could stand alone, or whether it must fall given ABX1 27’s fate. The Court responded to claims that a number of legislators had reportedly opined that the Legislature would not have wanted such an outcome by looking at the statute’s specific severability clause stating the opposite, concluding that

whatever individual legislators may have said at one point or another, what the Legislature actually did establishes it would have passed [ABX1 26] irrespective of the passage of [ABX1 27], and that [ABX1 26] is volitionally separable. Consequently, it is severable.

Thus, the Court’s final conclusion: ABX1 26 stands, while ABX1 27 falls. 

What Happens Next: the Mechanics? The Court examined some of the mechanics of ABX1 26’s implementation in light of the partial stay and the passage of time that has rendered some of the law’s time frames impossible. The Court concluded that it had the power to reform the law, and it chose a superficially simple solution: all initial dates in ABX1 26 are shifted four months, representing the time period during which the Supreme Court’s partial stay was in place. 

But there is a twist. For any obligations that span multiple fiscal years, the Court did not reform the deadlines. Instead, only those trigger dates which fall before May 1, 2012, get shifted. This means, for example, that for the distributions required to be made on January 16 and June 1 every year, the January 16, 2012, distribution is now due May 16, 2012, but the June 1, 2012, distribution (and all future distributions) remain due as set forth in ABX1 26. 

What Happens Next: Implementation? Moving beyond the technical issues, the real question is what happens to redevelopment obligations and assets. This will be the subject of considerable discussion in upcoming weeks, but there are a few, bright-line rules people should know:

1.  For obligations incurred prior to January 1, 2011, the obligations remain valid and binding. 
2. For deals under negotiation when the Supreme Court stay was issued, the redevelopment agencies have no power to consummate the deals. 
3. Remaining redevelopment assets will be sold. 
4. If the agency transferred any assets to its city/county or another public agency after January 1, 2011, the transfer is potentially subject to ABX1 26’s “claw back” provisions. 

What Happens Next: a Legislative Compromise? Finally, entering into the realm of pure speculation, there is already some murmuring about a possible legislative compromise designed to reinstate some form of redevelopment. Whether any such compromise sees the light of day remains to be seen. And even if it does, considerable obstacles may exist. 

In particular, any legislative effort to reinstate some form of redevelopment must overcome the very problem that led to the demise of ABX1 27: how to fund “Redevelopment 2.0” without running afoul of Proposition 22. Moreover, a legislative compromise only works if the Governor approves it, and Governor Brown’s early comments do not suggest he is dissatisfied with the Court’s holding. 

For more information on the opinion and its aftermath, please join us for a webinar, Supreme Court Upholds Elimination of Redevelopment in California - Now What? It will take place on January 4, 2012, at 2:00 p.m. 

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Today, the California Supreme Court issued its much-anticipated opinion in California Redevelopment Assn. v. Matosantos, the case challenging ABX1 26 and ABX1 27.  In a decision foreshadowed by the tone of last month's oral argument, the Court upheld ABX1 26, but struck down ABX1 27 as a violation of California's Proposition 22:

• "Assembly Bill 1X 26, the dissolution measure, is a proper exercise of the legislative power vested in the Legislature by the state Constitution."
• "A different conclusion is required with respect to Assembly Bill 1X 27, the measure conditioning further redevelopment agency operations on additional payments by an agency‘s community sponsors to state funds benefiting schools and special districts. Proposition 22 ... expressly forbids the Legislature from requiring such payments."

This means that the law eliminating California's redevelopment agencies stands, while the law that would have provided a mechanism to reinstate redevelopment agencies upon making certain "voluntary" payments was struck down.  The bottom line:  the decision ends redevelopment in California.

We will have more on the opinion in the very near future.  In addition, we will be hosting a free webinar on Wednesday, January 4, 2012, at 2:00 p.m. to discuss the opinion, its implications, and what happens from here.  We hope you'll join us, you can register here. 

UPDATE, 2:05 p.m.  While we digest the opinion and attempt to write something meaningful about it, Robert Thomas has already managed two substantive blog posts on the case today, including a short summary of the opinion and a good collection of early reports on the decision. 

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It's Christmas Eve Eve here in Southern California.  Our chances for a white Christmas seem small; as I look out my window, I see bright sunshine and know the temperature is in the 70s.  Still, it's easy to see that the holiday season is in full swing. 

If you are in need of some last minute shopping ideas and don't know what to get the eminent domain practitioner on your gift list, there are some great choices to be found. 

Perhaps the most all-inclusive option comes to us through the Institute for Justice.  Its "Rally in a Box" comes complete with stickers, posters, signs, and six eminent-domain-themed T-Shirts. 

But there's more.  Just in time for the Supreme Court's pending decision in the redevelopment lawsuit, you can choose to celebrate by supporting redevelopment with a timeless classic, the I heart Redevelopment shirt.. 

If you're more included to support the Governor and his battle over budget dollars, you may want to opt for one of the "I am Sutter Brown--CA First Dog" items available, with proceeds going to California's general fund. 

I had hoped to end this post with a fabulous holiday-themed eminent domain cartoon, but I discovered that (1) as we get more removed from the Kelo decision, there is less of that circulating on the Internet, and (2) that which is circulating comes with strict copyright restrictions.  So instead of a clever cartoon, I will end merely by wishing everyone a happy and safe holiday season. 

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Yesterday, we wrote about the Avenida San Juan Partnership v. City of San Clemente decision.  For more information on the decision, see the following:

• Our E-Alert, Court of Appeal Upholds Regulatory Takings Decision Under Penn Central Test;
• Man Bites Dog! California Property Owner Wins Regulatory Taking Case in the California Court of Appeal, a blog post by Gideon Kanner on Gideon's Trumpet;
• Either Reverse Your Unconstitutional Spot Zoning, Or Pay. Your Choice, by Robert Thomas on his inversecondemnation.com blog; and
• Eminent Domain: Winning Owner In Inverse Condemnation Battle Cannot Recoup Fees By Attorney Owner Or Reap A Fee Multiplier Request, a piece in California Attorney's Fees focused, not surpisingly, on the attorneys' fees portion of the opinion.

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Last April, we reported on a bizarre case arising out of the City of San Clemente's attempt to down zone a piece of property.  The trial court had concluded that the down zoning constituted a taking and ordered the City to rescind a decision supported by that down zoning.  The City had denied an application to develop the property because the application did not conform to the current general plan and zoning ordinance (the City seems to have sidestepped the fact that the development applications included applications to amend the general plan and zoning). 

In addition to a writ of mandate ordering the City to rescind its decision, the Court also awarded damages of $1.3 million, representing the overall value of the property ($2.8 million), less the anticipated cost to build a driveway needed to support its development ($1.5 million).  Following a post-trial motion, the Court amended the judgment to make clear that the City had the choice of either (1) rescinding the denial based on the down zoning or (2) paying the damages award.

Yesterday, the Court of Appeal issued its decision in Avenida San Juan Partnership v. City of San Clemente.  It upheld the writ and the determination that the owner was entitled to a damages award, but it remanded the case for recalculation of the amount of the award.  It's a long, complicated opinion, and we'll just hit some of the high points for now.

Spot Zoning.  The Court held that the City had specifically targeted this property for down zoning, leaving it as an "island" of "minimum lot size zoning in a residential ocean of substantially less restrictive zoning."  It didn't help that the enabling legislation that created the new RVL (residential, very low) zoning had described the zone as intended for preserving "open space in canyons" by rezoning "significant acreage."  The subject property was less than three acres - and not located in a canyon.  This was enough to qualify as "irrational discrimination" under cases such as Hamer v.
Town of Ross (1963) 59 Cal.2d 776 and Arcadia Development Co. v. City of Morgan Hill (2011) 197 Cal.App.4th 1526, 1536.   

Penn Central and "Economically Viable" Uses.  The City argued that its action fell short of a regulatory taking, as a matter of law, because the RVL zoning did not leave the owner with no economically viable use of he property, a fatal flaw under Lucas v. South Carolina Coastal Council (1992) 505 U.S. 1003.  The Court held that this view "is too limited," and that a taking occurs where a regulation goes "too far," even if some economically viable use remains.  (See Palazzolo v. Rhode Island (2001) 533 U.S. 606.)   Where this occurs, courts look to the "Penn Central" test, which the California Supreme Court has held contains three "core" factors:

1. The economic effect on the landowner;
2. The extent of the regulation's interference with investment-backed expectations; and
3. The character of the governmental action.

The Court quickly concluded that all three factors "readily appl[ied]" in this case. 

Timeliness.  As we have reported in the past, regulatory takings claims often fail on procedural grounds, either because they are too late, missing the applicable statute of limitations, or because they are premature, failing on ripeness grounds.  (We've even seen cases, such as MHC Financing Limited Partnership Two v. City of Santee, where claims failed because they were both too late - and too early.) 

Here, the City argued that the owner waited too long to challenge the RVL zoning.  The Court disagreed, concluding that the statute began to run on the challenge only when the City denied the owners' development applications in 2007.   The Court went through a painstaking analysis of the difference between "facial" and "as applied" challenges, holding that the owners' challenge clearly fell on the "as applied" side of the ledger, making it timely. 

The City also argued that the owners' claim was not ripe because the owners failed to apply for entitlements to build what the RVL would have allowed them:  a single dwelling.  The Court rejected this argument as well, holding that under Palazzolo, the City's denial of the application qualified as final. 

Damages.  The Court examined closely the damages award, ultimately concluding that the trial court's methodology was flawed.  The trial court had performed a simple analysis, taking opinions of the value of the property absent the RVL zoning, and subtracting out the cost the owners would have incurred to build the (expensive) driveway necessary to support the property's development. 

The Court correctly noted that this methodology ignores the fact that the takings conclusion was premised on on the Penn Central test, not a "no economically viable use" theory.  Because of this, damages had to take into account the fact that the property still has some value, even with the RVL zoning in place:  "A very large taking is not a total taking."

There were a number of other issues addressed in the Court's opinion, including an interesting attorneys' fees discussion, but I think they go beyond the scope of a blog post.   As we digest the opinion a bit further, we'll probably have more to say.

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The debate over the extensions of some of the Bush-era tax cuts have been making national news for some time.  It's splattered all over the newspaper and has its own running commentary on the political talk shows. 

But today, there's a different twist for those of us who deal with eminent domain.  Congress is debating the extension of the payroll taxes yet again, but this time, a major eminent domain issue is wrapped up in the fray.

Specifically, Republicans in Congress had said they planned to couple the extension of the tax cuts with a requirement to fast-track approval of a controversial pipeline project that President Obama previously planned to delay until at least 2013. 

The Keystone XL pipeline is intended to link oil fields in Canada with refineries in Oklahoma more than 1,500 miles away.  It has been the subject of considerable controversy, largely from environmentalists, but also from property-rights advocates objecting to the massive eminent domain that the project would entail.  

A November 7 article by Jonathan Mariano, Keystone XL Pipeline Relies on Eminent Domain for Success, explains:

The fight against the Keystone XL pipeline has been mostly an environmental fight, but quite frankly, not everyone is an environmentalist and may not resonate with this message. However, eminent domain may just provide enough common ground for the environmentalist and non-environmentalist alike.

So what happened?  This afternoon, Republicans in the House passed the payroll tax cut package, 234-193.  Included in the package is a requirement to accelerate approval of the Keystone XL project.  But the Republicans' "victory" may be illusory, as explained by Lisa Mascaro in a December 13 Los Angeles Times article, House approves payroll tax cut extension, with strings attached:

But the Republican win is expected to be short lived, as the bill has limited chances in the Senate, where Democrats oppose the GOP priorities . . . added to the bill to win Republican votes, including one to accelerate the controversial Keystone XL pipeline.

(As an amusing aside for those of us who have heard the name Susette Kelo more times than we can possibly imagine, one of the most vocal opponents of the Keystone project and its use of eminent domain is named, ironically enough, Sue Kelso.  An October 17 article in the New York Times, Eminent Domain Fight Has a Canadian Twist, talks about Ms. Kelso's part of the story.)

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One of the peculiarities with California's eminent domain law lies with the way it addresses situations in which an agency makes a deposit of probable compensation in a case in which one or more of the defendants raise a right-to-take challenge. 

The issue came to a head yet again, with the California Supreme Court holding that a lender's withdrawal of a condemnation deposit does not result in a waiver of the property owner's right to take challenge.  The decision, Los Angeles County Metropolitan Transpiration Authority v. Alameda Produce Market (November 14, 2011), chronicles the long and twisted history of this area of the law, but in the end, the Court struggles with the real problem:  the law, as written, fails to address properly the two key policy concerns at play. 

The deposit of probable compensation plays a key role in eminent domain cases.  It establishes the date of value in most cases, but we sometime forget why the deposit is used to set the date of value.  The deposit represents an approximation of the property's value.  By the agency's making a deposit which quickly becomes available to the property owner, the owner gains the chance to keep those funds in the real estate market. 

This is crucial, because it allows - at least theoretically - the owner to maintain its position in the real estate market.  The idea is simple:  the owner can withdraw the deposit of probable compensation, invest that money in another property, and still enjoy the benefits of market appreciation.  Thus, by providing the owner with the capital to reinvest as of the deposit date, it is "fair" to use that date as the date of value. 

Of course, it doesn't always work this way, and agency's are often accused of making woefully inadequate deposits that prevent the owner from investing in comparable property.  And, of course, there is always a delay between the date of deposit and the date on which the owner has the funds available and can secure replacement property.  But conceptually at least, the idea makes sense. 

Where a right-to-take challenge combines with a deposit, however, another key policy concern comes into play.  Condemning agencies have a legitimate interest in not having deposits withdrawn only to later lose a right-to-take challenge, leaving them trying to pursue the party that withdrew the deposit.   This risk is unfair to the agency.

Thus, the basic rule:  for a party to withdraw a condemnation deposit, they must waive their right-to-take challenge.  (See Code of Civil Procedure section 1255.260.)   But this rule misses both key policies.  On the one hand, it prevents someone with a legitimate right-to-take challenge from withdrawing the deposit and using that money to invest in replacement property.  Yet this does not prevent the deposit from establishing the date of value, meaning the owner can "miss" a rising market.

On the other hand, as the Court held in the Alameda Produce case, where the party withdrawing the deposit is not the same as the party making the right-to-take challenge, no waiver occurs.  Thus, the agency faces the real risk that Party A will walk away with the money, never to be seen again, while Party B pursues its right-to-take challenge which, if successful, places the agency at huge financial risk. 

There's a very simple solution to all of this, and the Supreme Court mentioned it.  Instead of speaking in terms of waiver, all the law needs to do is ensure that if a condemnation deposit is withdrawn while a right-to-take challenge is pending, the withdrawal must be bonded.  This

1. Secures the agency's money,
2. Allows the withdrawing party to utilize the funds to reinvest, and
3. Allows legitimate right to take challenges to proceed, all while 
4. Allowing us to preserve the idea that the deposit date is properly used as the date of value. 

Current law creates no such mandatory bonding, leaving both key policy interests unprotected.  In the end, I think the Legislature should step up and modify these rules so that they in fact protect the two key policy interests in play.  Alternatively, our trial courts should be prepared to deny all requests for withdrawals of condemnation deposits until (1) all right to take challenges are resolved or (2) the money withdrawn is properly bonded.  

Absent that, we are in for yet more cases where either the owner is put to the unfair choice of missing the opportunity to use the condemnation deposit or abandoning a right to take challenge, or the agency is placed at risk of losing its condemnation deposit where one party withdraws the money as another challenges right to take. 

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I wanted to provide a quick update on what is going on in the lawsuits involving ABX1 26 and ABX1 27.  For those trying to keep score on who stands where, the following is a list of the amicus briefs that have been filed. 

In support of the CRA / League of Cities' position, seeking to overturn the laws:

• Association of California Cities - Orange
• City of Irvine
• Long Beach
• Public Interest Law Western Center
• San Bernardino County
• Southern California Coalition
• Southern California Non Profit Housing
• Riverside County

In support of the State's position, seeking to uphold the laws:

• Affordable Housing Advocates
• California Professional Firefighters
• Center for Constitutional Jurisprudence
• California Teachers Association 
• Los Angeles Unified School District
• MORR - Chris Norby
• Santa Clara Unified School District

Next, we have a new lawsuit entering the fray.   Last week, a group of 10 Southern California cities filed a lawsuit seeking to strike down ABX1 26 and ABX1 27.  This lawsuit, filed in Superior Court, would seem at first glace to be a bit late to the party.  After all, the Supreme Court has already accepted jurisdiction over the original lawsuit, promising a decision by January.

So what is the point of a new filing in Superior Court?  Perhaps there is none.  The State responded almost immediately, filing a notice of related cases and noting for the Court that the case encompasses issues pending before the California Supreme Court and may become moot before any action is taken. 

But there may be a bit more to it.  The new lawsuit indeed raises the very same arguments as those being made in the Supreme Court.  But the new lawsuit also raises some additional grounds for striking down the laws - 14 claims of invalidity in total - including claims that the bills:

1. Did not qualify for passage on a majority-vote basis.
2. Exceeded the scope of the "special session" in which they were passed.
3. Did not meet the requirements necessary to take effect immediately.
4. Endanger existing contracts.  

And one final update.  Yesterday, Governor Brown vetoed SB 450, a bill proposed by Senator Alan Lowenthal of Long Beach that would have made changes in Low and Moderate Income Housing funds managed by redevelopment agencies.  But before anyone thinks Governor Brown may be changing his mind, his veto message for SB 450 makes clear that the veto is tied to the pending Supreme Court case, which makes the bill "a little ahead of its time."

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