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.

 

Should Property Owners Pursue Takings Claims in State or Federal Court?

When state and local governments impose unreasonable conditions or exactions on private property, owners pursuing a regulatory takings claim often face a maze of procedural obstacles just to have their case heard. I once described these procedural obstacles as resembling 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. The reason for this maze stems from (i) a U.S. Supreme Court decision, Williamson County Regional Planning Commission v. Hamilton Bank, 473 U.S. 172, 194-96 (1985), which held that landowners must first unsuccessfully seek compensation in state court before bringing a Fifth Amendment takings claim in federal court, and (ii) subsequent court decisions holding that if property owners go to state court first, they find themselves later barred from federal court because they have already litigated the issues in state court.  This “Catch-22” may finally be resolved, as the U.S. Supreme Court has agreed to hear the case of Knick v. Township of Scott (Case No. 17-647) to revisit its holding in Williamson County and potentially allow owners to bring a takings claim under the U.S. Constitution directly in federal court.

Background

In Williamson County, a property owner successfully pursued a regulatory takings claim in federal court when its residential development was stopped, but the U.S. Supreme Court reversed, stating that the developer had to first pursue its claims in state court.  Later, in San Remo Hotel v. San Francisco, 545 U.S. 323 (2005), the Court held that a property owner who first pursued a takings claim in state court could not thereafter pursue the claim in federal court since the issue had already been litigated.  These decisions placed property owners in a “Catch-22,” with a seemingly impossible procedural hurdle to pursue takings claims in federal court.

In Knick, a local Pennsylvania government agency enacted an ordinance requiring all cemeteries to be open and accessible to the public, and later attempted to enforce the ordinance to allow the public to access a privately-owned 90-acre parcel of land that “may” contain an ancient burial ground.  Not wanting widespread public access to its private property, the owner sued in state court, but the court refused to rule since the government withdrew its enforcement efforts on the owner’s property.  The owner then sued in federal court, but the court held the claims were not ripe under Williamson County until the owner filed a new takings claim in state court.

Upcoming U.S. Supreme Court Decision

The owner appealed the decision all the way to the U.S. Supreme Court, which has agreed to hear the case to address the Williamson County procedural issue.  Specifically, the Court will answer the following question:  “Whether the Court should reconsider the portion of Williamson County [], requiring property owners to exhaust state court remedies to ripen federal takings claims, as suggested by Justices of this Court? [].”

We likely won’t obtain a decision until early 2019, but it will be interesting to see if the Court finally overrules its prior decision and allows property owners to pursue their takings claims directly in federal court. Given the widespread criticism of the procedural maze, including by the Court’s own justices, I would not be surprised to see the Williamson County rule abolished or at least significantly minimized.

Another Inverse Condemnation Temporary Damages Claim Fails to Get Off the Ground

As we’ve seen all too many times in California, when local municipalities delay development approvals — even improperly — courts are reluctant to find liability under an inverse condemnation cause of action and award temporary damages. While there have been some successful cases (see Lockaway Storage v. County of Alameda (2013) 216 Cal.App.4th 161), those results are the exception, not the rule.  A recent court of appeal opinion, Mahon v. County of San Mateo 2018 Cal. App. Unpub. LEXIS 1483, provides an example of the uphill battle a property owner faces in successfully recovering for a temporary taking.

In Mahon, a property owner sought to develop two homes on his property.  The owner originally sought approvals in 1999, and after numerous hearings and changes to his plans to address public comments, the proposed development was denied by the County Board in 2005.  The property owner filed a petition for writ of mandate, along with an inverse condemnation action.  The owner was successful on the writ, with the trial court finding the owner had not been given a fair and proper hearing and that one of the Board members had become personally involved in the underlying permit application process.

The property owner finally obtained a new Board hearing in 2009 (10 years later), and the application for development was once again denied, with the Board concluding that under a recent case interpreting the Subdivision Map Act, the owner could not develop two residences since the property had not been lawfully subdivided. When brought back to the court, the trial court again held that the County should issue the development permits, and the County did so, conditioned upon the owner’s demonstrating his property had been lawfully subdivided.  Even then, because there was no evidence that a lawful subdivision had occurred, the owner still could not develop the two residences.

In 2016 (17 years after the owner had originally applied for permits), the trial court finally reached a decision on the owner’s inverse condemnation cause of action. The court concluded that there was no taking, despite conceding that the owner had been treated unfairly, had been denied due process, and had been required to satisfy years of inconsistent and ever-shifting demands by the County.  The Court of Appeal confirmed the decision, explaining that even though the County had committed a procession of delays and errors, the owner had viable development options.  The Court explained that despite the known political pressure, the owner chose to try and obtain approvals through continuous design changes without doing the one thing that the County clearly wanted:  significant revisions to the size of the planned residences.  Under the Penn Central line of regulatory takings cases, the Court held that while the owner was initially denied a proper hearing, the delays in securing that hearing through the court did not amount to a taking.

Mahon highlights the difficulty for property owners to successfully recover for a temporary taking due to improper delays in the entitlement process.  Even if the municipality acts improperly, courts will typically give the agency broad leeway before finding liability.  It is imperative that owners demonstrate they are left with virtually no options to develop their property, or that the agency’s actions go well beyond mere errors or typical delays.

Important New Decision Impacting Legal Issues Motions in California Inverse Condemnation Cases

As any experienced California eminent domain lawyer knows, there is a unique statutory mechanism that allows parties to bring a legal issues motion to secure a court’s ruling on a litany of issues that impact compensation. This statutory right is set forth in Code of Civil Procedure section 1260.040 and reads as follows:

“(a)          If there is a dispute between plaintiff and defendant over an evidentiary or other legal issue affecting the determination of compensation, either party may move the court for a ruling on the issue.  The motion shall be made not later than 60 days before commencement of trial on the issue of compensation.  The motion shall be heard by the judge assigned for trial of the case.

(b)          Notwithstanding any other statute or rule of court governing the date of final offers and demands of the parties and the date of trial of an eminent domain proceeding, the court may postpone those dates for a period sufficient to enable the parties to engage in further proceedings before trial in response to its ruling on the motion.

(c)           This section supplements, and does not replace any other pretrial or trial procedure otherwise available to resolve an evidentiary or other legal issue affecting the determination of compensation.”

Section 1260.040 was enacted in 2001. The Law Revision Commission’s Comments state that Section 1260.404 “is intended to provide a mechanism by which a party may obtain early resolution of an in limine motion or other dispute affecting valuation.”

Since section 1260.040 was adopted in 2001, I’ve found it to be very useful to bring issues before the trial court that have a direct impact on compensation. For example, if there is a question about whether a larger parcel exists, it’s a good idea to file a motion under section 1260.040 to get a decision from the court before your appraiser proceeds to appraise or not appraise severance damages.  Similarly, if there is a question about whether certain evidence must be ignored under the Project Influence Rule codified by Code of Civil Procedure section 1263.330, it’s best to secure a court’s ruling on the issue before appraisals are exchanged.  Securing these types of legal rulings impacting compensation has a number of practical advantages.  First, it reduces the risk that your expert’s opinion may be impeached or excluded.  Second, it may promote settlement.  Finally, it may save both sides in legal expenses to have these issues determined earlier in the case as opposed to just prior to trial via a motion in limine.

While section 1260.040’s applicability to direct condemnation cases is not controversial, there has been disagreement about whether it should apply to inverse condemnation cases. Yesterday, the California Court of Appeal issued a decision in Weiss v. The People ex rel. Department of Transportation, et al., in which the Court held that section 1260.040 is inapplicable to inverse condemnation cases.  In Weiss, the plaintiffs sued Caltrans and the Orange County Transportation Authority (OCTA) for alleged damages resulting from the construction of a sound wall along the 5-Freeway.  The plaintiffs claimed that the sound wall had the opposite effect and increased noise and related impacts on their homes thereby diminishing their property values.

Caltrans and OCTA filed a motion under section 1260.040 to argue that the plaintiffs could not establish liability. Essentially, the agencies used section 1260.040 as a motion for summary judgment.  The court granted the motion after finding that plaintiffs could not establish liability.  The plaintiffs appealed and argued that section 1260.040 does not apply to inverse condemnation cases, and should only apply to issues impacting compensation (and not liability) in eminent domain actions.  While a prior appellate court had previously decided that section 1260.040 does apply to inverse condemnation cases (Dina v. People ex rel. Dept. of Transportation (2007) 151 Cal.App.4th 1029), the court in Weiss disagreed.  Without getting too much into the details here, I’ll just say that the court in Weiss relied on rules of statutory construction and the legislative history to reach its decision.  The court effectively concluded that because section 1260.040 is found in the “eminent domain” law, it does not apply to inverse condemnation cases.  The court also concluded that issues of liability are different from issues involving compensation, and that deciding liability does little to nothing to further section 1260.040’s goal of promoting settlement.

While it is true that section 1260.040 is found within the eminent domain law, there are other statutes within the eminent domain law that expressly state that they don’t apply to inverse condemnation. For example, section 1263.530 states that the goodwill statutes are not intended to deal with compensation for inverse condemnation claims for temporary interference with or interruption of business.  There is no similar express carve out for section 1260.040.

At present, there is a clear split between two appellate courts on this issue, so it’s possible the Weiss decision will be appealed to the California Supreme Court.  We’ll have to wait and see.  Until then, practitioners in inverse condemnation cases may be wise to stay away from section 1260.040 and instead rely on one or more other procedural mechanisms to tee up liability issues (e.g., motion for judgment on the pleadings, motion for summary judgment, or motion for nonsuit.)  These are hardly equal substitutes for the lenient notice provisions that apply to section 1260.040.  And section 1260.040 also enables a court to weigh evidence while pleading motions don’t.  But the current uncertainty surrounding section 1260.040 indicates that practitioners should stay clear from it in inverse cases unless and until the appellate courts resolve the disagreement between the Weiss and Dina courts.

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