California to Finally Tackle Inverse Condemnation Reform for Wildfires?

In Governor Gavin Newsom’s first State of the State address, he called for the creation of a strike force charged with developing a comprehensive strategy to address the destabilizing effect of catastrophic wildfires on the State.  On April 12, 2019, Governor Newsom announced the results of that dedicated effort, in the form of a report titled “Wildfires and Climate Change: California’s Energy Future” (“Strike Force Report”).  Governor Newsom also summarized the findings of the Strike Force Report in a press conference that can be viewed here.

The Strike Force Report first sets out steps the State must take to reduce the incidence and severity of wildfires, including the significant wildfire mitigation and resiliency efforts the Governor has previously proposed. Recognizing that climate change is a core driver of heightened wildfire risk, the Strike Force Report also outlines the Governor’s vision for clean energy policies to reduce the impacts of climate change on wildfire risk. The Strike Force Report concludes that wildfires are an issue that must be tackled by numerous stakeholders, including the State, local agencies, and private property owners, to address a variety of contributors to wildfires, including improving vegetation management and fire suppression, incentivizing private owners to mitigate risks, building safer communities and stricter land use controls, and improving emergency response.

With respect to a potential change in the law, the Strike Force Report suggests that shareholders (not customers) should continue to be responsible where a utility fails to operate safely, but otherwise, “[a]ny real plan must allocate costs resulting from wildfires in a manner that shares the burden broadly among stakeholders including utilities (ratepayers and investors), insurance companies, local governments, and attorneys.” The Strike Force Report also provides a brief overview of California’s unique doctrine of inverse condemnation and notes that the combination of strict liability and statutory attorney’s fees exposes California utilities to significant potential liability which needs to be more broadly apportioned.

The Strike Force Report identifies three concepts to address catastrophic wildfire risk, which are proposed for further consideration and development:

  1. Liquidity-Only Fund. This concept would (i) create a fund to provide liquidity for utilities to pay wildfire damage claims pending a California Public Utilities Commission (“CPUC”) determination of whether or not those claims are appropriate for cost recovery, and (ii) potentially broaden utilities’ ability to recover wildfire-related costs from ratepayers. The liquidity-only fund could be capitalized by utility investors and ratepayers and would then be available to provide funds for utilities to pay claims after a determination of cause and before a determination of cost recovery by the CPUC. The idea here is to provide financing to bridge the potentially lengthy gap between the time utilities must pay wildfire liability claims and when the CPUC makes a decision on cost recovery.
  2. Changing Strict Liability to a Fault-Based Standard. This concept would involve modification of California’s strict liability standard under inverse condemnation to one based on fault to balance the need for public improvements with private harm to individuals. The Strike Force Report argues that moving to a fault-based standard for inverse condemnation claims would shift the risk of property loss to insurance companies and uninsured or underinsured property owners in cases where the utility was not a bad actor. However, where the utility acted negligently, recklessly, or with intentional misconduct, it would still be responsible for paying damages, including possible punitive damages. Notably, the Strike Force Report does not outline what such a law would look like or how such a change would be accomplished, although Governor Newsom hinted at addressing wildfire liability under the “common enemy doctrine,” which has typically been limited to inverse condemnation flooding claims against flood control districts. Governor Brown’s original proposed legislation that ultimately became Senate Bill 901 (Dodd, 2018) (“SB 901”) last year had a somewhat similar concept to move away from the strict liability standard for wildfire-related inverse condemnation claims, but there was significant push-back and the concept was ultimately abandoned. There are also questions about whether such legislation would be constitutional without going through the process of a constitutional amendment.
  3. Wildfire Fund. This concept would create a wildfire fund coupled with a revised cost recovery standard to spread the cost of catastrophic wildfires more broadly among stakeholders. The Strike Force Report explains that the wildfire fund would create a buffer to absorb a significant portion of the wildfire liability costs that might otherwise be passed on to ratepayers under existing law while providing time for mitigation efforts to be advanced. The wildfire fund would also provide the utilities a source of immediate funding for the claims asserted against them for catastrophic wildfire damages, and would ensure prompt payment of those claims in exchange for a cap on recovery by impacted property owners or their insurers. As proposed in the Strike Force Report, the wildfire fund would include pooled capital from investor-owned electrical utilities, and municipally-owned utilities may participate at their option.

Additionally, the Strike Force Report argues that the current structure of the CPUC does not allow it to effectively address wildfire safety and be nimble in today’s changing

energy market. Therefore, the Strike Force Report proposes the following recommendations aimed at strengthening utility regulation at the CPUC:

  • Expand safety expertise by improving the CPUC’s ability to review wildfire mitigation plans, conduct inspections and audits, and enforce safety standards at investor-owned utilities.
  • Clarify cost recovery standards by setting clear guidelines for when utilities can pass on the costs of claims from wildfire damage to ratepayers.
  • Improve decision-making by overhauling procedures, delegating more decisions to technical staff so that judges and commissioners focus on core questions of rate-setting, and improving enforcement.
  • Review high-risk industry regulatory models and explore options for incorporating the latest climate impact research, in concert with the Governor’s Office of Planning & Research, as well as academic and industry experts in risk reduction.

In parallel with the Governor’s strike force, the Commission on Catastrophic Wildfire Cost and Recovery, has also been analyzing issues relating to catastrophic wildfires and is expected to build upon the Strike Force Report and issue its own set of recommendations to the Governor and the Legislature by July 1, 2019. The Commission on Catastrophic Wildfire Cost and Recovery was established last year in SB 901 and recently put out a Request for Comment on various wildfire-related topics in advance of its upcoming April 29, 2019 meeting.

The Strike Force Report announces several immediate next steps across a broad range of state agencies, reflecting the far-reaching consequences of catastrophic wildfires. The Commission on Catastrophic Wildfire Cost and Recovery, the Legislature, and the Governor’s strike force will continue working over the next few months to develop a solution for consideration by the Governor and the Legislature that most effectively addresses wildfire liability.

Faced with Funding Deadlines, Santa Cruz Approves Use of Eminent Domain

(Dan Coyro — Santa Cruz Sentinel)

As we have seen far too many times in California, eminent domain becomes a key tool for public agencies in order to keep public works construction on schedule and avoid jeopardizing state or federal funding.  According to an article in the Santa Cruz Sentinel, Santa Cruz council approves eminent domain for road widening, situation is playing out in Santa Cruz, where the City Council recently approved the adoption of a resolution of necessity to acquire two properties by eminent domain in order to satisfy a July deadline for a $2.8 million construction grant.

The properties in question are needed for the City’s planned intersection widening project at Highways 9 and 1, which would add four new lanes, plus modern traffic signal equipment, bike lanes, access ramps and crosswalks.  The properties are currently utilized as a rental complex and the 45-year location of Central Home Supply’s flagship store.  The property owner provided alternative means to improve traffic, which he claims have been “virtually ignored” by the City and Caltrans.  The proposed acquisitions will cut right through the business’ showroom, offices and parking, plus the house next door.

The owner claims that the unacquired portions of the properties may be left as uneconomic remnants and the City may be better off acquiring both sites in full.  Specifically, the owner indicated:

The costs are going to be horrendous, to try and get all that done, just cost-wise for us to try and stay on that site.  To bring it home, it’s the same as someone needing just a ‘minimal’ portion of your house for the public good.  Imagine they take your kitchen, bathroom and a wall off your bedroom.  Are you going to live there now?  That’s kind of what we’re left with.  We’ve tried everything, thinking inside and outside the box, but we can’t realign and reconfigure our operations successfully after the take, and with the road constraints impose by this project.

The owner did suggest that finding a suitable relocation site may assist in resolving the dispute.

Caltrans Must Sell Back Condemned Homes at Original Purchase Price

More than 50 years ago, Caltrans purchased roughly 500 homes under threat of eminent domain within the planned right-of-way for the anticipated construction of the I-710 freeway (linking Monterey Park to Pasadena).  As we reported a number of years ago, Caltrans finally decided to sell those homes once it became clear the alignment would not be utilized.  We haven’t heard much on how that sales process was going, but the Pasadena Star reported recently that it has been the subject of litigation, which has now reached an outcome.

In Steve Scauzillo’s April San Gabriel Valley Tribune article, Renters of Caltrans-owned homes in South Pasadena get to buy them $970,000 below market, several current tenants will be able to purchase their properties back from Caltrans for the same price Caltrans paid in 1963 — which range from the mid-$20,000’s to mid-$30,000’s.  Caltrans had attempted to sell the homes back at the same price, but adjusted for inflation, which brought the prices up to several hundred thousand dollars (which was still dramatically below their fair market value of over $1 million).  The court disagreed with Caltrans’ inflation adjustment, concluding that the homes should be offered back at the original acquisition price – no more, no less:

The Caltrans policy of adjusting the original acquisition price adjusted for inflation to determine the affordable sales price for the petitioners’ homes is an underground regulation and is therefore nullified.

Beckloff ruled that Caltrans came up with the idea of upping the sales price — sometimes six or seven times the acquisition price — on its own. In other words, officials made it up. “Caltrans cannot use its pricing methodology,” Beckloff wrote, saying the bureaucracy was acting in a “type of ‘quasi-legislating’ power …”

Caltrans tried to argue that selling any state-owned properties for less than fair market value would be cheating the taxpayers.  In its court briefs, Caltrans said it was “obligated and authorized,” and in fact “mandated by law” to “adjust the original acquisition prices for inflation.”  The court explained that Caltrans has no authority to vary from what is known as the “Roberti Law,” a complex set of regulations that requires Caltrans to offer the homes to tenants living there for a certain period of time and at an affordable price who are low- and moderate-income. Of the 460 surplus properties, about tenants at 120 of them qualified for the affordable price program.

Caltrans didn’t walk away empty-handed.  The court kept in tact covenants that will remain as liens on the property during a transfer of ownership.  The tenant does not realize the full equity, only the appreciation from the sales price from the purchase to the next sale. In other words, upon a later sale, about $900,000 in equity would go to a state agency charged with building affordable housing, called the California Housing Finance Agency.

The 710 freeway example — with Caltrans’ ownership dating now over 50 years — is quite the story.  After the backlash from the famous eminent domain Kelo decision and the enactment of Proposition 90 in California, the results today would likely have played out differently.  Under California Code of Civil Procedure section 1245.245, if a public entity does not put condemned property to public use within 10 years of the adoption of the resolution of necessity (and does not adopt a new resolution), the public entity is required to offer the property back to the original owner at the present market value, unless it is a single family residence, in which case it is to be offered back at the price paid by the agency, adjusted for inflation, if the original owner meets low or moderate income requirements.  If the original owner cannot be found, the agency is required to sell the property as surplus.

Batter Up for Spring Training with Nossaman & IRWA!

Jump start your Spring learning goals with the International Right of Way Association’s upcoming events throughout California.  Join Nossaman’s Eminent Domain & Valuation Chair, Brad Kuhn, for a presentation entitled “Managing Publicly Owned Property: Best Practices for Leases, Licenses, and Encroachments.”

On Friday, April 5th, Brad will be presenting at the IRWA Chapter 42 Spring Training Conference at the Valley Transportation Authority Auditorium in San Jose, CA.  For more information on the Spring Training Conference, please visit Chapter 42’s website here.

For those of you in SoCal, you can also catch Brad’s informative session on this same topic at the IRWA Chapter 11 April Luncheon on Wednesday, April 17th, at the Handlery Hotel in San Diego, CA.  Further information on the Chapter 11 event can be found here.  We hope to see you out in the field at one of these great events!

Eminent Domain From Start to Finish: Streamlining the Basics & Navigating the Complexities from Precondemnation to Litigation

Nossaman LLP invites you to join us for our 2019 seminar “Eminent Domain From Start to Finish:  Streamlining the Basics & Navigating the Complexities from Precondemnation to Litigation.”  Whether you are new to the Eminent Domain arena or a seasoned pro, this complimentary afternoon seminar with panels of Nossaman attorneys and leading industry professionals will provide extensive insight and guidance into the process of eminent domain.  We will be presenting the seminar at both the Luxe City Center Hotel in Los Angeles, on Tuesday, March 19th, and the City Club of San Francisco, on Tuesday March 26th.  Additionally, our San Francisco seminar will be co-hosted by Associated Right of Way Services, Inc. (AR/WS).

At both events, attendees will have the chance to participate in Q&A sessions with each panel, as well as network with colleagues during an evening cocktail reception.  An application for California MCLE accreditation of this program is pending. This program has been approved for 4 continuing education hours by the Bureau of Real Estate Appraisers and may also qualify for recertification credits with the International Right of Way Association.

For additional details and to register for the Los Angeles seminar, please click here.

For additional details and to register for the San Francisco seminar, please click here.   

We hope to see you at our 2019 Eminent Domain seminar!

 

Property Owner’s Spot Zoning Challenge Unsuccessful, But Regulatory Taking Still Possible

When a local government agency impermissibly “spot zones” a property, thereby depriving it of all economically beneficial uses, can the property owner seek to invalidate that zoning decision, or is the owner left with a claim for damages under the theory of a regulatory taking? In a recent published California district court decision, Continue Reading

Regulatory Taking May Result From Improper CEQA Determination? Stay Tuned

A few months ago, we reported on a Court of Appeal decision, Bottini v. City of San Diego, where the Court held that delays resulting from a governmental agency’s improper denial of a permit application for a new development did not result in a regulatory taking.  The case involved a local agency’s improper application of CEQA to a proposed residential development, and the property owner successfully securing a decision by the court to overturn the City’s requirement to comply with CEQA where there was a clear exemption.  The owner also sought damages due to a lengthy delay in development, but the Court held there had been no regulatory taking.  The owner petitioned for review by the California Supreme Court, which is rarely successful.  However, interestingly, the Court decided to take up the case, so we will now await a decision on the issue.

The Court will be faced with determining whether a developer who succeeds in overturning a city’s improper application of CEQA (or development regulations generally) is entitled to secure just compensation from the public agency resulting from the development delay — i.e., a temporary “taking” of the property.  (For us regulatory takings geeks, the Court will likely focus on whether to apply the Penn Central “investment-backed expectations” test or the Landgate “substantially advances” test.)  Usually these decisions revolve around whether (i) the government’s improper action can be categorized as “normal delay” during the permit approval process, and (ii) the government’s actions were completely out of the realm of reasonableness.  Rarely is there a bright-line that can be drawn in these types of cases, so it will be interesting to see how the Supreme Court renders a decision.  We’ll continue to follow the case as it unfolds.

IRWA Chapter One 27th Annual Valuation Seminar

Join Brad Kuhn, Chair of Nossaman’s Eminent Domain & Valuation Practice Group, at the International Right of Way Association’s Chapter One Annual Valuation Seminar.  The event will be held on Tuesday, February 12, 2019, at the Quiet Cannon Conference Center in Monterey Park, CA.  Brad will be addressing “What To Do When the Cookie Isn’t From A Cutter:  Unusual Valuation Scenarios From Eminent Domain.”  For current information on the seminar, please consult the IRWA Chapter One website.

Covering Los Angeles, Chapter One is the founding Chapter of the International Right of Way Association.  The members of Chapter One come from all walks of life such as transportation authorities and departments, water and school districts, public works and redevelopment agencies, utilities companies, railroads, and private consultants such as appraisers, title specialists, acquisition agents, attorneys, relocation assistance agents, and right-of-way and civil engineers.  The Chapter regularly offers a wide range of education and professional development opportunities reflecting the diverse needs of stakeholders in the right of way profession.

We hope to see you there!

Resolve to Learn More About Eminent Domain in 2019!

Please join Nossaman Eminent Domain & Valuation Partner Rick Rayl at CLE International’s 21st Anniversary Southern California Eminent Domain Conference.  The event will be held from Thursday, January 31st through Friday, February 1st at the DoubleTree Downtown in Los Angeles.  Rick will participate in the presentation, “Case Law Update:  The Latest Developments,” on January 31st at 10:45 a.m.  Additional topics covered during the conference will include: Government Regulation of Short-Term Vacation Rentals, Insights into Severance Damages, and California’s Wildfires and Potential Inverse Condemnation Liability. Continue Reading

California Coastal Commission to Recommend Eminent Domain to Combat Sea-Level Rise?

With the recent widespread reports of sea-level rise triggered by global warming, the California Coastal Commission — a state agency which regulates coastal development — plans to release a proposal in early-2019 which provides guidelines to local jurisdictions on how to combat the potential impacts.  The stakes are enormous, as the Commission believes many homes along California’s 1,100 miles of coastline will inevitably be wiped out by a rising ocean.  According to an article by Anne Mulkern in E&E News, Calif. prepares policy for coastal ‘retreat’, the suggested approach in a draft version of the Coastal Commission’s proposal involves “managed retreat” — i.e., buying or condemning threatened homes and relocating them or tearing them down, which would thereafter free the coastline and preserve the beaches.  The Commission argues against relying on sea walls for fear that they would make sandy beaches disappear under rising ocean water.  Needless to say, the proposal is extremely controversial.

What are the Potential Impacts of Sea-Level Rise?

According to various studies prepared, sea-level rise impacts will be astronomical over the next 80 years.  While a rise in sea-level of 2.5-6.5 feet may not seem dramatic, in addition to impacts to many residences and businesses, dozens of wastewater treatment plants and power plants, 250 miles of highway, 1,500 miles of roads, and 110 miles of railways could be at risk.  A recent article by my colleague, John Erskine, appears in the latest issue of California Special Districts magazine, and addresses the potential widespread impacts to California’s coastline.

How Would “Retreat” Be Accomplished, and What are the Alternatives?

While the Coastal Commission itself would not be buying or condemning the homes (it tasks the local cities and counties with that directive), the proposal itself is hugely detrimental, as the Commission has oversight over municipalities as they write land-use rules and can in many cases control permitting related to construction or development in coastal zones.   The Commission is proposing to condition development permits in the coastal zone on ensuring modification or removal of structures where necessary to maintain minimum beach width, and including such language in recorded deeds so all future purchasers are on notice.   It is further suggesting that jurisdictions fund “retreat” by buying the homes and then renting them out until they’re damaged.  Nossaman has assisted many property owners and local agencies recently with Coastal Commission approvals of new developments or modifications, and based on that experience, it is clear that the Commission is attempting to condition coastal development permits on waiving shoreline protection devices (such as seawalls), and is otherwise attempting to require setback conditions that reduce the size of development.

Some cities have opposed the “retreat” approach, and have instead pursued a sea-wall approach or beach replenishment programs.  For now, push-back by beach homeowners has at least delayed hearings on the Commission’s proposal, but many complex questions remain, including impacts to property values, how to manage and fund “retreat”, the loss of substantial property taxes, and the use of eminent domain for such a controversial issue.

Other states have addressed somewhat similar problems, including the acquisition of flood-prone homes in New Jersey and Houston, but California appears to be the first state in the country to be considering retreat so broadly.  And while it may seem like sea-level rise impacts are many years away, we are already seeing the ramifications.  In Sonoma, 11 homes have been torn down or collapsed into the sea as oceanfront cliffs have fallen away, and similar erosion conditions in Pacifica have resulted in multiple homes or apartments being acquired by eminent domain and then demolished.  Even Caltrans is shifting Pacific Coast Highway in certain locations.

Is “Retreat” Legal, and What are the Potential Takings and Valuation Issues?

Property rights advocates argue the Coastal Commission does not have authority to condition development permits on retreat management, while the Commission contends it does under the Coastal Act, which mandates preservation of beach access.   The Commission further purports that its proposal is simply “guidance.”  But its real-world effect is much more significant, particularly as we have recently seen the Commission place significant restrictions on development involving the waiver of shoreline protection.  Impacted property owners are encouraged to consult with coastal law experts before agreeing to any special permit condition approvals.

Moreover, the guidance itself will potentially massively impact property values and could potentially effect a regulatory taking of various properties.  Traditionally, a regulatory taking involves the examination of three factors:  (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.  If the Commission’s proposal moves forward, it is likely beachfront owners will at least attempt to challenge the proposal under this regulatory takings framework (i.e., a “facial challenge”), and we are certainly likely to see owners challenge strict standards or permit conditions placed on new development applications as unconstitutional (i.e., an “as-applied challenge”).

If local jurisdictions ultimately move forward with acquiring beachfront properties, either voluntarily or under threat of eminent domain, there will surely be large valuation disputes and legal issues on how, if at all, the Commission’s guidance and its impact on property values should be considered in determining just compensation.  Impacted owners may seek to recover precondemnation damages (i.e., diminution in value due to the unreasonable actions or delays of the government), and will claim that any decrease in value due to the Commission’s guidance or the jurisdiction’s proposed acquisition or retreat program must be ignored.  (See Code Civ. Proc., sec. 1263.330.)

We will continue to track the Coastal Commission’s proposal and report on any updates.

LexBlog