An extraordinarily complicated takings case stemming from the City of Capitola’s mobile home rent control ordinance has received new life, even though the city has won numerous rounds in federal and state court. In the most recent decision, the Sixth District Court of Appeal ruled that the mobile home park owner who is fighting the city should have the opportunity to amend a lawsuit because the trial court judge applied an incorrect test for determining if an unconstitutional taking had occurred.

The problem, the Sixth District ruled, “is the reliance by the parties and the [trial] court on the concept that the ordinance either did or did not ‘substantially advance a legitimate government interest.’ The United States Supreme Court has held that the ‘substantially advances’ formula is not a valid method of identifying regulatory takings for which the Fifth Amendment requires compensation.”

The Sixth District cited the Supreme Court decision in Lingle v. Chevron USA, Inc., 544 U.S. 528 (2005), which reversed a 25-year-old precedent from Agins v. City of Tiburon, 447 U.S. 225 (1980). The Agins court held that a government regulation that does not substantially advance legitimate state interests could amount to a regulatory taking. But in Lingle, the court ruled that such a regulation posed a due process question, not a takings question (see CP&DR, July 2005).

The Lingle decision was widely seen as a victory for cities with rent control, because property owners had started successfully using the “substantially advances” test to challenge rent control ordinances. But in the Capitola case, the Lingle decision — which was issued after the trial court had ruled — appears to have worked against the city.

“The error of applying a due process test in determining a takings claim requires reversal,” Justice Eugene Premo wrote for the Sixth District. “Furthermore, since the error permeates the case from pleadings to final determination, and because park owner was not allowed to amend its as-applied takings, equal protection and due process claims when they were ripe, park owner should be allowed to amend its complaint.”

The case involves a long-simmering conflict and a great deal of ill feeling. In 1987, Los Altos El Granada Investors purchased Castle Mobile Estates, a 108-space mobile home park in Capitola a short distance from the Santa Cruz beach. The park is governed by the city’s rent control ordinance first adopted in 1979.

Almost immediately, the new park owner began pressuring tenants to sign long-term leases that remove the tenants’ spaces from rent control protections. At least as early as 1994, the park owner began both demanding large rent increases and offering to sell the park to residents for millions more than the $1.7 million the owners paid in 1987. The park owner apparently got few leases and no interest in a park sale to tenants, so the owner began trying to close the park once space at a time. Litigation eventually halted that scheme, but residents claim the intimidation has continued.

In March 2000, the park owner filed with the city a request for a $300 a month rent increase — equal to a rise of about 150%. Several months later, the owner renewed an offer to sell the park to the tenants for somewhere between $6 million and $10 million. After extensive bickering over methodologies and experts’ abilities, the city in April 2001 approved a rent increase of $5.68 on top of a small inflationary increase, plus $9.69 per month for the city’s expert witness costs.

The property owner eventually filed four lawsuits in federal court alleging that the city had taken property without just compensation. The city successfully defended three suits, but one case (Los Altos El Granada Investors v. City of Capitola, U.S. District Court No. C-03-3859-JF) remains pending after the district court determined that the park owner’s takings claims were ripe for adjudication. However, the case is on hold pending the outcome of the state court litigation.

The park owner’s state court lawsuit, filed in 2002, did not get far at the trial court level. The court found that the property owner’s claims were facial challenges to the ordinance itself, and, because the ordinance has been around for years, the claims were barred by the statute of limitations. The court also determined that prior federal court rulings on the same claims prohibited the state court from considering the claims. Finally, the court determined that the city’s approval of the April 2001 rent increase was supported by substantial evidence.

On appeal, the park owner continued to press its takings claims. The Sixth District upheld portions of Santa Cruz County Superior Court Judge Robert Atack’s decision, including his ruling regarding the base year from which the city should calculate rent increases — a victory for the city. The Sixth District also upheld Judge Atack’s refusal to grant the park owner an “England reservation,” in which the park owner attempted to notify the court that it would pursue only its state law claims in state court while reserving federal claims for federal court. (Federal courts have declined to consider takings claims adjudicated by state courts.) The Sixth District found that an Englandreservation was not applicable here.

Still, the heart of the Sixth District decision was the reversal based on the lower court’s incorrect application of the “substantially advances” test. The litigation now heads back to Superior Court for further proceedings.

The Case:
Los Altos El Granada Investors v. City of Capitola, No. H027860, 06 C.D.O.S. 4062, 2006 DJDAR 5902. Filed May 17, 2006. Modified June 16, 2006, at 2006 DJDAR 7614.
The Lawyers:
For Los Altos El Granada Investors: Robert Coldren, Hart, King & Coldren, (714) 432-8700.
For the city: John Barisone Jr., Atchison, Barisone, Condotti & Kovacevich, (831) 423-8383.