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Rent-Controlled Landlords Break Through In Ninth Circuit

In the first decision of its kind, a divided Ninth U.S. Circuit Court of Appeals panel has declared that the City of Goleta's mobile home rent control ordinance constitutes a regulatory taking.
 
The ruling is remarkable on several fronts. First, the court weighed the merits of property owners' claims even though a state court did not issue a decision on the claims. Second, the court accepted a "facial" challenge to the city's ordinance, meaning there are no circumstances in which the rent control law would be permissible. Nearly all successful takings cases in the past have been "as applied" challenges that contest how a government agency applies the law to a property owner's situation. Finally, the court sided with the property owners even though the rent control scheme predated the owners' purchase of the mobile home park by 18 years.
 
"The decision breaks new ground, both in the conclusion that there is a facial Penn Central taking and in concluding the federal courts could reach the merits of the taking claim," Robert Coldren, attorney for the property owners, wrote in the Los Angeles Daily Journal. "The decision is likely to be controversial on both counts."
 
Goleta has already asked for a rehearing before a full panel of the Ninth Circuit. While such "en banc" rehearings are rare, this case appears to be a good candidate for one because the opinion departs from the circuit's jurisprudence and because the panel split 2-1 on the ruling.
 
The facts are not unusual for a mobile home rent control case. Santa Barbara County adopted the ordinance for mobile home parks in 1979 and amended it in 1987. When Goleta incorporated in 2002, the county's ordinances automatically went into effect in the new city. In April 2002, the Goleta City Council formally readopted the entire county code, including the rent control ordinance (RCO). That ordinance limits annual rent hikes to 75% of the increase in the local consumer price index and includes provisions for park owners to recapture increased operating costs and capital expenses.
 
Daniel and Susan Guggenheim and Maureen Pierce bought Ranch Mobile Estates in 1997. After Goleta incorporated, they filed lawsuits in state and federal court contending that the ordinance was a taking on its face and that they were entitled to compensation. The two sides settled the state court lawsuit. An important stipulation in the settlement was that the City of Goleta lacked a rent control ordinance between the time incorporation took effect and the time the City Council first met, which amounted to a few hours. In the Ninth Circuit's eyes, this lapse restarted the statute of limitations for the park owners to challenge the RCO.
 
A District Court judge ruled for the park owners in 2004. But the decision was vacated while on appeal after the U.S. Supreme Court ruled on an unrelated takings case (Lingle v. Chevron U.S.A, Inc., 544 U.S. 528; see CP&DR Legal Digest, July 2005). The Guggenheim case retuned to District Court, which then ruled for the city.
 
On appeal, the Ninth Circuit first had to decide if the case was "ripe" for a decision. Many federal lawsuits fail the ripeness test because of the Supreme Court's Williamson County precedent, which permits a federal court to weigh a Fifth Amendment taking claim only if the plaintiff has unsuccessfully sought compensation in state court. The seeming Catch-22 from Williamson County is that if a property owner has litigated to completion in state court, a federal court will not consider the case because it has already been decided in the state court.
 
The Ninth Circuit ruled the case was ripe in large part because Goleta had never raised the issue during previous proceedings in state or appellate court. "It would certainly seem counterintuitive to us now to think that a case that had at that point already been litigated through three rounds – two in federal court and one in state court – could suddenly become ‘unripe,'" Judge Jay Bybee of the Ninth Circuit wrote.
 
The panel then turned to the question of whether the ordinance amounted to a taking based on the three factors in the Supreme Court's Penn Central test: the economic impact of the regulation on the property owner; the extent to which the regulation interfered with investment-backed expectations; and the character of the government action.
 
To determine the RCO's economic impact, the court relied on the testimony of the park owners' expert, John Quigley, an economics professor at the University of California, Berkeley. He said that housing costs in Goleta had increased 205% from 1997 to 2003, but park rents had risen only 21.1%. Most importantly, Quigley said the below-market rents amounted to a transfer of value from the park owners to their tenants, who could sell their units at a premium. The economist said a mobile home worth $12,000 would sell for about $100,000 because of rent control.
 
The court called this a "naked transfer" of wealth. "The undisputed evidence shows that the mere enactment of the RCO has caused a significant economic loss for the park owners," Bybee wrote. The court did not consider the significant devaluation of real estate during more recent times.
 
To determine whether the ordinance affected the park owners' investment-backed expectation, the court turned to Palazzolo v. Rhode Island, 533 U.S. 606 (2001). In Palazzolo, the court ruled that a property owner could contest a land use restriction imposed years before acquiring his property (see CP&DR Legal Digest, August 2001).
 
"[T]he mere fact that the park owners bought the park in its regulated state does not mean that the city has not taken property by regulation or that the park owners cannot bring such a claim," Bybee wrote. He also pointed to the city's re-adoption of the RCO. "At the very least, the parks owners have the right to bring a takings action based on the city's 2002 adoption of the RCO."
 
As to the character of the government action, the third factor in Penn Central, Bybee's cited Cf. Cienega Gardens v. United States, 331 F.3d 1319 (Federal Circuit 2003): "We do not doubt that the city's objective in passing the RCO was to increase the availability of low-cost housing. Singling out mobile home park owners, however, and forcing them to rent their property at a discount of 80% below its market value, ‘is the kind of expense-shifting to a few persons that amounts to a taking.' Moreover, the city has numerous alternatives for supporting affordable housing – such as tax incentives, low-cost loans, rent supports, or vouchers – without directing the burden at such a limited group."
 
The court concluded that the RCO "‘goes too far and' and constitutes a regulatory taking under the Fifth and Fourteenth Amendments." The court sent the case back to District Court to determine how much the city must pay the park owners.
 
In dissent, Judge Andrew Kleinfeld agreed the case was ripe for adjudication and that a transfer of wealth had occurred. But, he added, "I cannot agree that there was a taking of anything for which the Guggenheims would be entitled to compensation, because they purchased the park after the regulatory takings that mattered." He added, "There is nothing in the record to support the notion that the Guggenheims' interest in the trailer park was worth more before than after the city reenacted the county ordinance."
 
Under the court's decision, wealth transfers from people who bought a mobile home based on rent control to the park owners. Mobile home purchasers "have no legal protection against repeal," Kleinfeld noted.
 
If the decision stands, it has implications for the approximately 100 cities and counties with mobile home rent control ordinances, according to an analysis by Nossaman inverse condemnation attorneys Rick Friess and Brad Kuhn. Those cities and counties, they wrote, need to ensure their ordinances "have not crossed the line of transferring the value of the property from the mobile home park owners to the tenants."
 
The Case:
Guggenheim v. City of Goleta, No. 06-56306, 2009 DJDAR 14205. Filed September 28, 2009.
The Lawyers:
For Guggenheim: Robert S. Coldren, Hart, King & Coldren, (714) 432-8700.
For the city: Amy E. Morgan, Burke Williams & Sorensen, (951) 788-0100.
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