Court Affirms Coastal Commission’s Consideration of Takings Issues

The California Coastal Act establishes another layer of regulation governing “development” in the Coastal Zone. Development under the Coastal Act is defined to encompass essentially everything and anything.  For example, under the Coastal Act development includes such things as a lot line adjustment, releasing fireworks on the 4th of July, or putting up a “No Trespassing” sign.  While there are certain limited exemptions, in most cases individuals undertaking any development in the Coastal Zone must obtain a Coastal Development Permit.  In certain instances, the local agency’s decision to approve or deny a Coastal Development Permit is reviewed by the California Coastal Commission.  On this review, the Coastal Commission may consider whether the decision to approve, deny, or impose mitigation measures would potentially run into takings issues.  This practice by the Coastal Commission was challenged by a Marin County resident, who filed a petition seeking to enjoin the Coastal Commission and any local jurisdiction implementing the Coastal Act from considering takings issues in permitting decisions.

The resident, Richard Kohn, asserted that by considering takings issues the Coastal Commission was violating the judicial powers and separation of powers clauses in the California Constitution, was violating the Coastal Act, and was instituting an unlawful underground regulation in violation of the Administrative Procedure Act. The Superior Court denied the petition, and Mr. Kohn appealed.  In an unpublished decision, the California Court of Appeal affirmed the Superior Court’s decision.

Rejecting a standing argument apparently raised by the Coastal Commission, the Court of Appeal first found that Mr. Kohn had both “public interest standing” and “taxpayer standing.” However, the Court of Appeal then found that because Mr. Kohn was challenging the practice in the abstract, as opposed to challenging a decision on a specific permit, the challenge was not ripe.  The Court of Appeal explained: “Because Kohn’s petition would require this court to resolve a hypothetical inquiry, and because no party will suffer any demonstrated hardship if we decline to decide it, we conclude the petition is unripe.  The question Kohn present must await decision on an adequate record in an appropriate case.”  (Internal quotation marks omitted.)

After stating why the controversy was not ripe and why the Court of Appeal would not address it, the Court of Appeal than addressed the controversy head on, finding that “[e]ven if this appeal presented a ripe dispute, we would find no error.” The Court of Appeal, citing Public Resources Code section 30010, concluded that the California Legislature clearly defined the Commission’s role in evaluating permits and included takings issues within that sphere.  Section 30010 states:

“The Legislature hereby finds and declares that this division is not intended, and shall not be construed as authorizing the commission . . . or local government acting pursuant to this division to exercise their powers to grant or deny a permit in a manner which will take or damage private property for public use, without the payment of just compensation therefor.”

The Court of Appeal also concluded that the consideration of takings issues did not run afoul of the judicial powers clause or separation of powers clause because it is both “reasonably necessary and incidental to one of the Commission’s primary and legitimate purposes,” and after the Commission’s made a final decision the Commission’s takings considerations could ultimately be reviewed by the courts.

Finally, the Court of Appeal found that the Commission’s taking-avoidance policy is not an improper underground regulation because its application depends upon a case-specific exercise of discretion and therefore was not a rule or standard of general applicability subject to the Administrative Procedure Act.

The Court of Appeal’s ultimate resolution of the abstract takings issue was not surprising given prior precedent and the general deference with which courts have historically viewed the Coastal Act and the Coastal Commission’s jurisdiction under the Act. However, as demonstrated by the Supreme Court’s 1987 decision in Nollan v. California Coastal Commission, 483 U.S. 825, that does not mean the Coastal Commission’s decisions are immune from takings challenges.  Permit applicants should therefore be mindful of the takings overlay during the Coastal Development Permit process, as it provides another potential argument for moving a project forward.

Join Nossaman at the Southern California Appraisal Institute’s Annual Litigation Seminar

On November 1, Nossaman Eminent Domain Partner Bernadette Duran-Brown will be Co-Chairing the Southern California Appraisal Institute’s 51st Annual Litigation Seminar.  Additionally, Ms. Duran-Brown will be joined by Brad Kuhn, Chair of Nossaman’s Eminent Domain & Valuation Practice Group, who will be participating in a panel discussion concerning Easement Valuation.

The seminar will be held on Thursday, November 1st, at the Omni Hotel, 251 South Olive Street, Los Angeles.  The event will kick off with registration and breakfast at 7:30 a.m., and will also include luncheon Keynote Speaker Christopher Jackson, Sr., Senior Economic & Community Development Manager City of Inglewood, with an update on development in the city. Click HERE for more information and to register.

If you’re unfamiliar with the Appraisal Institute’s Annual Litigation Seminar, it provides litigation professionals with insight into the complex and ever-changing litigation valuation arena including the trends and issues shaping the appraisal and legal fields. Sessions will be presented by leaders in the real estate, legal, and appraisal fields, and cover many timely topics including:  Severance Damages: Fact or Fantasy; Tax Law Changes: Impacts on Attorneys/Appraisers; Luxury Residential Litigation: Keys to Success; Valuing Municipal Utilities, and Appraisal Arbitration & Mediation.  Credit will be available for the seminar, including 8 hours of BREA, MCLE, and CE (pending). The Appraisal Institute is a global professional association of real estate appraisers, with more than 18,000 professionals in nearly 50 countries throughout the world. Its mission is to advance professionalism and ethics, global standards, methodologies, and practices through the professional development of property economics worldwide.

We hope to see you there!

Governor Brown Signs SB 901, Addressing Wildfire Cost Recovery, But Ignoring Inverse Condemnation Liability

On August 31, 2018, the California Legislature passed Senate Bill (“SB”) 901, which addresses a number of wildfire-related items relating to public utilities.  Governor Brown signed the Bill into law on September 21, 2018.

While the bill introduces a series of new changes, it is particularly noteworthy for what it does not include from Governor Brown’s initial June 2018 proposal for wildfire liability reform.  At least for the time being, lawmakers abandoned the most controversial aspect of Governor Brown’s proposal for the bill: modifying California’s strict liability standard applied to utility companies for wildfires.  SB 901 as passed by the Legislature does not make any changes to the state’s legal doctrine of inverse condemnation.  However, SB 901 does makes several changes relevant to public and investor-owned utilities that are within jurisdiction of the California Public Utilities Commission (“CPUC”).

Addresses cost recovery before the CPUC

  • New Reasonableness Standard for Recovery of Wildfire Costs – Authorizes the CPUC to use a more detailed reasonableness standard in determining whether an electrical utility will be allowed to recover through rates charged to consumers expenses related to damages stemming from a wildfire caused by the utility’s equipment.  Specifically, SB 901 authorizes the CPUC to permit utilities to recover costs associated with wildfires occurring after December 31, 2018 and to consider 12 specified factors to determine whether the expenses are allowed or disallowed.  The new reasonableness standard refines and puts a wildfire-specific nuance into the existing generalized CPUC-wide “prudent manager” standard, but only in the context of wildfire costs by electric corporations.
  • Rules for 2017 Wildfires – Specifies that for applications by an electrical corporation to recover costs and expenses arising from catastrophic wildfires ignited in 2017, the CPUC is required to continue to determine just and reasonableness without specifying the 12 enumerated factors identified for the fires in 2019 and beyond.  In the case of the 2017 wildfires, the bill requires the CPUC to consider the electric utility’s financial status and determine the maximum amount the corporation can pay without harming ratepayers, also known as a “financial stress test,” and requires the CPUC to limit the disallowance from the 2017 wildfires to the threshold determined by the stress test.
  • Financing Via Rate Recovery Bonds – Allows (but does not require) the CPUC to authorize, under specified circumstances, the use of financing to reduce the bill shock associated with damages paid by utilities for wildfires for the amounts borne by ratepayers of the 2017 wildfires or of future fires.  Upon a finding that certain wildfire damage costs are just and reasonable, the CPUC may authorize an electrical corporation to issue rate recovery bonds in order to finance such costs over a specified period of time.  This financing provision is applicable only to electric corporations and does not cover the cost of fines and penalties.
  • Increased Penalties – Increases the amount of a penalty that the CPUC can assess for violations of CPUC orders, laws, and decisions from up to $50,000 to up to $100,000 per violation per day.  Unlike the above provisions applicable only to electrical corporations, the increased penalties would be applicable to all types of utilities before the CPUC.

Expands the requirements of the existing wildfire mitigation efforts of electric utilities

  • Wildfire Mitigation Plans – Requires wildfire mitigation plans of electric utilities to be approved within three months of its submission, unless the CPUC makes a written determination justifying the need to extend the deadline.
  • Collaboration with CalFire – Requires the CPUC to enter into a memorandum of understanding with CalFire to address several wildfire-related issues, such as: the development of consistent approaches and data sharing related to fire prevention, safety, vegetation management, and energy distribution systems.
  • Independent Evaluators – Requires the development of a list of approved independent evaluators with experience in assessing the safe operation of electrical infrastructure.

SB 901 also makes comprehensive changes to forestry management and fuel reduction under the Forest Practice Act in order to mitigate the risk of wildfires across the state. These widespread changes were negotiated in weeks of conversation by Assembly and Senate staff, CalFire, the Governor’s Office, the Board, and many stakeholders.  Lastly, SB 901 allocates $200 million per year for five years from the state’s Greenhouse Gas Reduction Fund in order to provide funding to CalFire for forest health and fire prevention and prescribed burns and other fuel reduction activities.

Improper CEQA Determination Does Not Trigger Regulatory Taking

When a governmental agency improperly denies a permit application for a new development, and the proposed development is thereby delayed, does this result in a regulatory taking?  As we’ve seen in some prior cases, such improper governmental actions can trigger liability, but it is uncommon.  A recent Court of Appeal decision, Bottini v. City of San Diego (Sept. 18, 2018), highlights just how difficult it is for a property owner to pursue a regulatory taking due to a delay caused by a city’s improper denial of a development application.

Background

Bottini concerns the Windemere Cottage, a late Victorian-era beach bungalow in La Jolla.  The owners submitted a preliminary review application to verify whether the Windemere was eligible for historical designation to “determine the constraints on future development” of the property.  The Historical Resources Board concluded the Windemere was not a historical structure, but the State Office of Historic Preservation California later indicated the property was eligible for the Register of Historical Resources.

The owners thereafter obtained a determination that the Windemere’s unsafe condition rendered it a nuisance, which required demolition.  After demolishing the Windemere, the owners then sought a Coastal Development Permit to construct a new single-family home, and sought a CEQA exemption for the construction of a single-family home.  The local planning association objected, claiming the owners improperly “split” their project for purposes of CEQA, and the demolition should have been considered as part of the project.  The City Council agreed, and concluded that the demolition of the Windemere would have a significant effect on the environment under CEQA because it would result in the adverse change of a historical resource.

Litigation

The owners filed a lawsuit, seeking to overturn the City Council’s decision regarding the requirement to undertake a full environmental analysis under CEQA.  The owners also sought to recover for inverse condemnation, claiming that the City’s improper decision, and the resulting delay, resulted in a regulatory taking.  The Court of Appeal agreed with the owners that the proposed development was exempt from CEQA, as the demolition of the potentially historic resource was pursuant to a separate nuisance abatement action, and the only “project” was the new construction.  However, the Court rejected the owners’ takings claim.

The Court walked through a lengthy history of takings law, and debated whether the proper analysis involved (1) a Penn Central balancing test or (2) a Landgate “substantially advances” legitimate government interests test.  The Court explained:

To date, no published authority of which we are aware has expressly analyzed whether . . . the “substantially advances” formula remains a valid test by which to determine whether a regulatory taking has occurred under the takings clause of the California Constitution . . . .  We now answer that question in the negative and conclude that the Penn Central test . . . and not the “substantially advances” formula—applies to ad hoc regulatory takings claims that arise under the California Constitution.

The Court then discussed the Penn Central standard, which requires an examination of three factors to determine whether a regulatory taking has occurred:  (1) the economic impact of the regulation on the claimant; (2) the extent to which the regulation has interfered with the claimant’s reasonable, distinct investment-backed expectations; and (3) the character of the government action.

  1. With respect to the first factor, the Court concluded that the City’s decision had an adverse economic impact on the owners, as they could not use the property and had to pay a mortgage for their existing home and an empty lot due to the delay associated with the City’s erroneous decision.
  2. With respect to the second factor, the Court concluded that the City’s decision did not interfere with reasonable, investment-backed expectations, as the owners should not have expected to be able to demolish the structure and build a new residence without undertaking any environmental review, and no representations were made to the contrary.  In fact, at the time of purchase, the owners knew the Windemere was up for designation as a historical resource.
  3. With respect to the third factor, the Court explained there was no physical invasion, but was instead simply an improper application of a public program.

Primarily because of the lack of a distinct investment-backed expectation, the Court concluded it was proper to deny the owners’ inverse condemnation claim.

Conclusion

Bottini helps clarify regulatory takings law in California and the applicability of the Penn Central test as opposed to the Landgate test.  It also serves as an important reminder as to the uphill battle property owners face when seeking to recover for damages due to delay associated with development permitting applications.  Absent a truly unreasonable action or false representations by the local government, property owners should expect to experience some reasonable delays with permitting, and it is therefore difficult to demonstrate Penn Central factors of interference with distinct, investment-backed expectations and improper governmental action.

Another Regulatory Takings Case Gets Lost in the Procedural Maze

For those of you who have followed Nossaman’s eminent domain blog since the very early days, you’ll recall our coverage of a significant regulatory takings case, Monks v. City of Rancho Palos Verdes.  The 2008 California decision received much press coverage in that it was one of the very few instances where property owners overcame the myriad substantive and procedural obstacles and succeeded under a regulatory takings theory.  Now, ten years later, another group of property owners in Rancho Palos Verdes attempted to pursue a similar regulatory takings claim on the back of Monks, but got lost in the procedural maze along the way.  In Black v. Rancho Palos Verdes (Sept. 6, 2018 Cal. Ct. Appeal 2nd Dist.), the California Court of Appeal issued a published decision denying eight property owners’ takings claim on the ground that the owners failed to exhaust their administrative remedies before pursuing litigation.

The litigation has an extremely long history.  The short story is that the City issued a landslide moratorium which generally prohibited new development in a landslide area, which was later modified to allow development subject to a property owner’s completion of a geotechnical survey — at a cost of between $500,000 and $1 million — which satisfied certain safety factors.  The Monks Court concluded the exception was insufficient to avoid a taking and it was improper to require an owner to spend such a significant sum just to be told no use could be made of the property.  The City then repealed the moratorium and allowed the plaintiffs to develop their property.

In Black, the plaintiff property owners filed a takings claim, but never pursued an application for development, instead believing no such process was required based upon the prior findings in Monks.  The Court of appeal disagreed, concluding that the owners were still required to exhaust their administrative remedies.  The “futility” exception noted in Monks is extremely narrow and requires a property owner to pursue at least some development proposal.  Absent such an attempt, there is no way to know whether a governmental agency will allow a development.

The Court held that in Black, there was no evidence that the City would have denied the property owners’ application, and relying on statements from the City after the filing of litigation was improper:  the record establishing futility should be established before filing suit.  With respect to the administrative expense, the owners did not face the same Monks experience of incurring extraordinary costs for the geotechnical survey; instead, they faced the expense of hiring architects and engineers, which the Court indicated were not unusual expenses in seeking to develop a property.

Black serves as a reminder of the importance of property owners pursuing development applications and exhausting administrative remedies before rushing off to court to pursue a takings claim.  It also highlights the limited applicability of the “futility exception” in avoiding administrative exhaustion.  Without pursuing such development efforts, a property owner is likely to get its regulatory takings claim stuck in the procedural maze.

New Resources for Eminent Domain & Valuation Practitioners

We wanted to provide some timely articles for those of you in the eminent domain and valuation arena.

First, Brad Kuhn, the Chair of Nossaman’s Eminent Domain and Valuation Practice Group, was recently featured on the cover of the July/August 2018 issue of Right Of Way magazine—a publication of the International Right of Way Association.  Brad participated in an Industry Roundtable in the issue on “leveraging the right of way professional in today’s fast-paced design-build world.”  The  Roundtable examined the critical right of way component in infrastructure projects and how consulting with experienced professionals “in the initial planning phase of a project prove[s] just how much attention should be given to the right of way team.”  To read the full article, click here.

Next, Brad is also a featured author in the Q2 2018 issue of Valuation magazine—a publication of the Appraisal Institute.  His article is titled “How the Project Influence Rule Can Affect Your Appraisals.”  When property is acquired for a public project, most jurisdictions require appraisers to follow the “project influence rule” and ignore any change in property value as a result of the project. In its simplest terms, the rule says the determination of compensation must be considered as if the public project hadn’t happened.  The project influence rule has been applied throughout the country and is intended to operate as both a sword and a shield for property owners and public agencies, preventing a party from being under- or overcompensated.  The article addresses how the project influence rule applies in various scenarios.  To read the full article, click here.

We hope these publications provide some insight into current issues regarding eminent domain and valuation, and we welcome you to contact Brad with any questions here.

New Eminent Domain Opinion Discusses Admissibility Rules for Valuation Witnesses

One of the unique things about eminent domain cases is that a set of specific procedural rules govern the admissibility of valuation evidence at trial.  A new unpublished opinion from the Court of Appeal, San Bernardino County Transportation Authority v. Byun, explores some of the many things that can go wrong when a party ignores those procedural rules.

At the outset, I must admit to a personal stake in this one; this was a case I handled, and which I argued at the Court of Appeal on May 17 (that the decision came out so quickly after argument gives some sense of how the Court felt about the case).  Without getting too deep into the multi-year factual morass, suffice it to say that the opposing party violated about every rule regarding valuation opinions that exists, many of them repeatedly. The end result was the trial court’s exclusion of two entire teams of designated experts, the owner and his plant manager, and myriad contractors and other witnesses (I think the total was about 20 by the end of it).

The opinion covers a lot of the procedural history, and though fascinating, there really is not much worth rehashing here.  I did, however, want to focus on one particular issue, since it is a mistake often made in eminent domain cases when inexperienced condemnation attorneys represent the property or business owner.

In condemnation cases, Evidence Code section 813 provides that the property’s owner has a right to testify to an opinion of value.  This is unusual, since typically a valuation opinion would be the exclusive realm of a qualified expert witness (typically, an appraiser).

While property owners and their attorneys always seem to stumble onto this rule, it comes with a crucial corollary:  the owner, just like any witness who intends to offer an opinion of value at trial, must be designated during the expert exchange.  Perhaps more importantly, the owner must exchange a “statement of valuation data” describing the intended opinion.  Failure to follow these procedural steps correctly can have a devastating impact, because it results in the waiver of the owner’s “right” to testify.  As the Court of Appeal explained in affirming the trial court’s exclusion of the owner:

[Owner]’s right to testify did not excuse his failure to sign and exchange a supporting statement of valuation data.

The moral of the story is actually pretty simple:  if you find yourself in an eminent domain case, make sure you are hiring an attorney who actually practices in this area of law, because the consequences of a misstep by an attorney who does not understand the differences between eminent domain procedures and ordinary civil litigation procedures can be severe.

FERC to Consider Adjustments to Use of Eminent Domain for Gas Pipelines

The Federal Energy Regulatory Commission (FERC) recently issued a Notice of Inquiry seeking input on whether to adjust its policies and procedures for reviewing and issuing authorizations for natural gas transportation facilities.  FERC is specifically considering whether it should modify (i) its methodology for determining whether there is a need for a proposed project, (ii) its consideration of the use of eminent domain and landowner interests, and (iii) its evaluation of environmental impacts.  FERC is also considering whether there are ways to improve the efficiency and effectiveness of its approval process.

The Notice of Inquiry was likely issued in response to President Trump’s issuance of Executive Order 13807, which seeks to ensure that the Federal environmental review and permitting process for infrastructure projects is coordinated, predictable, and transparent.  The consideration is timely given that FERC’s policies describing the criteria and steps used to balance a proposed natural gas pipeline’s public benefits against its potential adverse consequences have not been substantially revised in nearly 20 years.  FERC’s proceeding could lead to significant changes to the approval process for new projects, and numerous environmental groups have already submitted a joint letter requesting the adoption of expansive revisions.

As it pertains to the use of eminent domain, under consideration is whether a different standard of review should apply to projects that do not intend to use condemnation to acquire right-of-way.  Additionally, FERC is asking whether project applicants should take additional steps to minimize the use of eminent domain, and if so, what should those steps entail and how would it affect proposed route alignments and overall project costs?  Moreover, how should project applicants proceed when they cannot access portions of the right-of-way to conduct environmental analysis?  Finally, are there additional ways in which FERC should take into consideration landowner interests to encourage property owner participation in the review process?

This is an important comment period for all those involved in the gas transmission industry or property owners who may be impacted by such projects.  We’ll follow this closely to see what changes FERC decides to pursue in its review process for natural gas pipeline projects.

Is Meaningful Eminent Domain Reform Finally On The Horizon?

Many states have enacted eminent domain reform since the U.S. Supreme Court’s 2005 decision in Kelo v. City of New London, which broadly defined “public use” to include the government’s acquiring property for another private owner to realize an economic benefit (such as increasing tax revenues).  However, as reported by the Institute for Justice in its 50 States Report Card, many of those reform efforts have been insignificant.  And, despite repeated efforts over the last 13 years, Congress has yet to pass legislation limiting the use of eminent domain for truly public uses.  However, the proposed effort to pursue eminent domain reform has not gone away, as an article by FreedomWorks is reporting that this week the House Judiciary Committee will markup the Private Property Rights Protection Act, H.R. 1689.

If passed, the Private Property Rights Protection Act would prohibit any state or federal government agency that received federal economic development funds from using eminent domain for purposes of economic development.  The bill would also provide private property owners with more rights should their property be taken for economic development purposes.  The question is whether the bill will gain enough momentum this time around, as it previously passed by overwhelming margins in the House in 2005, 2012 by voice vote, and 2014, yet it has never been considered by the Senate.

Perhaps this time it will be different, especially with the recent release of the movie Little Pink House, which covers the City of New London’s efforts to condemn Susette Kelo’s house to enhance the City’s tax base.  If you’re interested in this topic, it sounds like a must-see (or if you’re more of a reader, check out Jeff Benedict’s book, which I recently received as a gracious gift by the former IRWA President).  Columnist George Will wrote that the movie “will win the Oscar for best picture if Hollywood’s political preening contains even a scintilla of sincerity about speaking truth to power.”

So stay tuned for eminent domain reform, and perhaps Oscar nominations.

College of the Desert to Pay $22 Million to Settle Eminent Domain Case

For years, the College of the Desert has been seeking to acquire the former Palm Springs mall in order to expand its campus to the west valley.  It has been quite a lengthy battle, as the property owner had repeatedly objected to the College’s use of eminent domain for the site.  However, last week, the parties finally reached a settlement of the condemnation action, with the College agreeing to pay $22 million for the property — dramatically more than the $9.6 million the College originally offered to pay.

According to an article in the Desert Sun, the 29-acre property will allow the College to leverage its partnership with DIGICOM Learning, where the College will establish a Center for Digital Media Education in the new West Valley Campus, where both K-12 and college students can learn skills in video storytelling.  The goal is to train students in digital media and to connect them with Coachella Valley businesses that need employees trained in video.

Apparently, the owner paid in the $9-10 million-range for the property in 2012.  Even with the improving real estate economy, and despite the mall becoming vacant, the owner did quite well.

 

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