9th Circuit Casts Doubt On Mobile Home Rent Control

 

A ruling by the Ninth U.S. Circuit Court of Appeals appears to have thrown into doubt many of the approximately 100 mobile home rent control ordinances in effect in California cities and counties.

A divided three-judge panel ruled that the City of Cotati’s mobile home rent control ordinance was unconstitutional because, under the ordinance, the possibility existed that tenants might receive what amounts to a transfer of equity from landowners when tenants sell their mobile homes.

“Unlike ordinary rent control ordinances, an ordinance that permits incumbent tenants to capture a premium based on the present value of the reduced rent fails to substantially advance a state’s interest in creating or maintaining affordable housing,” Judge Robert Beezer wrote for the court.

The court also appeared to shift the burden of proof from the mobile home park owners — who argued that the city’s ordinance was a regulatory taking — to the city. The park owners’ claim should be upheld “unless the city presents sufficient evidence of external factors that will prevent the existence of a premium altogether,” Beezer wrote.

Attorney Henry Heater, who represented the city, said, “It looks like this panel has created a presumption of unconstitutionality that would be nearly impossible to rebut.”

The city has requested a new hearing before a full panel of Ninth Circuit judges, a request that has the support of the state attorney general’s office, the League of California Cities, and two mobile home owners groups. One of those groups, California Mobilehome Resource and Action Association (CMRAA), put out a “red alert” after the Ninth Circuit issued its ruling.

“The decision strikes at the very heart of affordable housing, and threatens the extinction of all mobile home rent control ordinances throughout California,” CMRAA Corporate Counsel Bruce Stanton warned.

Pacific Legal Foundation attorney Meriem Hubbard, who represented the park owners, said the Ninth Circuit correctly applied takings law to the facts of the case. “If a city wants to have rent control, the cost must be borne by everyone, not by two or three property owners,” she said.

“I don’t think the burden of proof has shifted,” Hubbard added. “The property owner has got to come in and show, on the face of the ordinance, that there is no way to enforce it without creating a premium.” Only after the property owner passes that test does the burden of proof move to the city, she said.

In many mobile home parks, the resident owns the mobile home itself but rents a pad of land from the park owner. Mobile home rent control regulates the pad rent. Park owners often argue that residents obtain a higher price when selling their mobile home because rent control keeps the pad rents low. Residents argue that rent control is necessary because, with mobile homes not being very mobile, park owners could otherwise gouge mobile home owners.

In 1979, Cotati adopted a mobile home rent control ordinance. When voters decided to repeal that ordinance in 1998, the City Council immediately adopted a replacement law. It permitted park owners to increase mobile home pad rentals by the lesser of 6% or the percentage change in the Consumer Price Index. Park owners may apply to the city for larger rent increases. Also, for the first time, the 1998 ordinance contained a “vacancy control” provision that prohibited park owners from charging a new base rent or increasing existing rent for a mobile home space when a mobile home is sold.

Park owners Gene Cashman and Athena Sutsos sued the city, claiming that the ordinance violated the Fifth and Fourteenth Amendments. Finding that the ordinance was an illegal taking, District Court Judge Saundra Armstrong granted summary judgment for Cashman and Sutsos. After more proceedings, Armstrong vacated that judgment and eventually conducted a five-day bench trial. At the conclusion of the trial, she ruled for the city. The park owners appealed, and the Ninth Circuit, in a 2-1 decision, ordered the original judgment reinstated.

The appellate panel based its decision largely on three earlier Ninth Circuit cases: Richardson v. City and County of Honolulu, (1997) 124 F.3d 1150; Chevron USA, Inc. v. Cayetano, (2000) 224 F3d 1030 (Chevron I), and Chevron USA, Inc. v. Lingle, (2003) 363 F3d 846 (Chevron II). Richardson concerned a Hawaii law that limited ground rents charged to the owners of condominiums. The Ninth Circuit struck down the law, ruling that the law’s lack of a provision to prevent condominium owners from selling their units for a premium failed to “substantially further” the law’s goal of creating affordable owner-occupied housing.

Chevron I had to do with limits on rent that oil companies could charge gas station operators. In Chevron I, the court ruled that the oil company had to show, by a preponderance of evidence, that the rent control was not reasonably related to the stated purpose of lowering fuel prices. In Chevron II, the court struck down the law because it did not satisfy the “substantially advances” test.

District Court Judge Armstrong, after conducting the trial, used Chevron I as a basis to rule against the property owners. She found that the park owners failed to prove that the Cotati law would create a premium for mobile home owners, or that any such premium would interfere with the purpose of the ordinance. But the Ninth Circuit said that Armstrong misconstrued Chevron I. That case holds that “conflicting expert evidence creates genuine issues of material fact” that must be resolved at trial, the appellate court explained.

In this case there was no conflicting testimony, the court held. “Like Richardson, there is no dispute that [the Cotati ordinance] does not on its face prevent mobile home tenants from capturing a premium,” Beezer wrote. Therefore, the burden of proof was on the city, and the only evidence the city submitted was an expert’s 1990 report on Sonoma County mobile homes, which the court deemed “insufficient” because it did not pertain to the “dominant impact of the ordinance.”

Precisely how much evidence the city did present is in dispute. In his dissenting opinion, Judge William Fletcher said that the majority “mischaracterizes the evidence before the district court.” Fletcher pointed to the 1990 study, titled “Economic Impact of Rent Controls on Mobile Home Resale Prices in Sonoma County and Cotati,” as well as a second study about the effect of vacancy controls in mobile home parks in California. The author of the second study also testified at trial. Both studies concluded that mobile homes in rent-controlled parks do not sell for more than equivalent units in parks that are not rent-controlled.

“But under today’s holding, what was the trigger for the ‘substantially advances’ test has itself become the test,” protested Fletcher, who contended the court was breaking new ground. “After today’s decision, the possibility of capture of any part of a premium by a tenant renders a rent control ordinance unconstitutional. Even if two qualified experts present evidence that there is, in actual fact, no premium, a plaintiff is entitled to summary judgment that the ordinance is unconstitutional. With all due respect to my colleagues, this simply cannot be the law.”

Heater, the city’s lawyer, said the ruling could affect all land use laws because they all transfer wealth in some fashion.

Hubbard, the landowners’ attorney, said she could not say what impact the ruling might have on other rent control laws. If a law does not create a premium that benefits tenants, it might pass muster, she said.

Two years ago, the state Supreme Court ruled that Cotati’s validation lawsuit against mobile home park owners regarding the same rent control law was not a SLAPP (strategic lawsuit against public participation). (City of Cotati v. Cashman, 29 Cal.4th 69; see CP&DR Legal Digest, October 2002.) The city filed the suit in state court after the park owners filed their federal court lawsuit.

The Case:
Cashman v. City of Cotati, No. 0315066, 04 C.D.O.S. 6293, 2004 DJDAR 8588. Filed July 15, 2004.

The Lawyers:
For Cashman: Meriem Hubbard, Pacific Legal Foundation, (916) 419-7111.
For the city: Henry Heater, Endeman, Lincoln, Turek & Heater, (619) 544-0123.