Property owners who contend that the government has taken their property without just compensation must press their monetary claims in state court and might never get to argue in federal court.

A unanimous U.S. Supreme Court ruled on June 20 that property owners who lose their takings claims in state court are not entitled to retry their claims in federal court, even if the federal court forced the property owners into the state court. California courts have been extremely reluctant to award damages in takings cases. In the process of making its decision, however, four members of the high court indicated that they would like to revisit one of the most important takings cases from the 1980.

The decision in San Remo Hotel v. San Francisco, No. 04-340, was actually the second unanimous high court victory for regulators in one month. In Lingle v. Chevron USA, Inc., No. 04-163, the court threw out a standard for pressing a taking claim that favors property owners - a standard that has been used to fight mobile home rent control in California.

The San Remo decision concluded more than a decade of litigation, said attorney Paul Utrecht, who represented the hotel owners.

"The Supreme Court wisely put to rest the attempt by the national developers' lobby to get something no other claimant receives: two bites at the litigation apple," said Timothy Dowling, chief counsel of Community Rights Counsel in Washington D.C. "The ruling will help level the playing field and allow local officials and planners to protect our communities through reasonable land use controls."

Property rights advocates, meanwhile, shook their heads in frustration.

"They took the wrong case," said Michael Berger of Manatt, Phelps & Phillips in Los Angeles, who filed an amicus brief for the hotel owners. The problem, he said, lies with the court's 1985 decision in Williamson County Regional Planning Comm'n v. Hamilton Bank of Johnson City, 473 U.S. 172. Williamson County forces landowners to pursue takings cases in state court first. But after the state court rules, federal courts have generally refused to consider a case, saying that everything was decided in state court - meaning that landowners never get their day in federal court.

"The language of the Williamson County opinion clearly leads people to believe that trying a case in state court will ripen it for federal court, and 'ripen' has to mean more than just getting thrown out," Berger said.

In a concurring opinion, Supreme Court Chief Justice William Rehnquist and Justices Sandra Day O'Connor, Anthony Kennedy and Clarence Thomas said they want to reconsider Williamson County. However, Berger noted, owners of the San Remo Hotel did not directly attack Williamson County. The court decided the case based on the full faith and credit statute (28 U.S.C. § 1738), which requires courts in different jurisdictions to respect the decisions of other courts.

"We have repeatedly held … that issues actually decided in valid state court judgments may well deprive plaintiffs of the 'right' to have their federal claims relitigated in federal court," Justice John Paul Stevens wrote for the court. "The relevant question in such cases is not whether the plaintiff has been afforded access to a federal forum; rather, the question is whether the state court actually decided an issue of fact or law that was necessary to its judgment."

The owners of the San Remo Hotel have been feuding with the city for decades. In 1971, brothers Tom and Robert Fields purchased the three-story hotel in North Beach. Eight years later, the city instituted a moratorium on the conversion of residential hotels to tourist use, and in 1981 the city adopted the hotel conversion ordinance (HCO). The law, which the city strengthened in 1990, is intended to preserve affordable housing by requiring owners of converted rooms to provide replacement units or pay an in-lieu fee.

During the 1980s, the city and the Fields disagreed over how many rooms in the San Remo were dedicated to residential use. In the end, all 62 rooms were classified residential. In 1990, the Fields applied for a conditional use permit to convert all rooms to tourist use. The city approved the use permit in 1993, and required the property owners to pay a $9,000 per-unit ($567,000 total) in-lieu fee.

The Fields then filed takings lawsuits in both state and federal court. They pursued the federal court route first. The District Court ruled that the Fields' attack on the facial validity of the hotel conversion ordinance was filed too late. The court also ruled that their claim that the city's application of the ordinance was a taking was unripe because they had not pursued a remedy in state court. The case then moved to the Ninth U.S. Circuit Court of Appeals, which upheld the lower court's determination that the "as-applied" takings claim was unripe (San Remo Hotel v. City and County of San Francisco, 145 F3d 1095; see CP&DR Legal Digest, July 1998). But the Ninth Circuit granted the property owners a "Pullman abstention" on the facial claim, a move that permitted the Fields to get a definitive ruling in state court before pressing their claim in federal court.

The Fields then revived their dormant state court lawsuit. They got nowhere in San Francisco Superior Court but received some satisfaction from the First District Court of Appeal. The appellate panel ruled that the hotel conversion ordinance should be subject to the "heightened scrutiny" standard, which requires a close relationship between an exaction and a project's impact. The First District directed the Superior Court to try the case based on this standard. Instead, the city appealed to the state Supreme Court, which voted 4-3 to overturn the First District. The state's high court ruled that heightened scrutiny did not apply to a generally applicable ordinance such as the HCO. The court also rejected the property owner's as-applied and facial takings claims (San Remo Hotel LP v. City and County of San Francisco, 27 Cal.4th 643; see CP&DR Legal Digest, April 2002).

Back to federal court went the Fields. This time, the District Court ruled that not only was the facial takings claim too late, it was also barred by the rule of "issue preclusion" because the state Supreme Court had decided it. The Ninth Circuit agreed, saying, "[T]he California Supreme Court decision was a final judgment on the merits" (see CP&DR Legal Digest, May 2004). The U.S. Supreme Court then agreed to review the "issue preclusion" determination.

The high court apparently took the case because of a Circuit Court split. In Santini v. Connecticut Hazardous Waste Management Service, 342 F.3d 118 (2003), the Second Circuit ruled that parties who litigated involuntarily in state court pursuant to Williamson County cannot be precluded from having the same claims decided in federal court.

In upholding the Ninth Circuit, the Supreme Court downplayed the importance of Williamson County. The property owners did not have to ripen their facial challenge in state court, Justice Stevens wrote. However, they chose to make both facial and as-applied arguments in state court, and under the full faith and credit statute, the Ninth Circuit properly declined to reconsider the state court's decision.

In addition, wrote Stevens, "it was settled well before Williamson County" that as-applied takings claims must ripen in state court.

"[T]here is scant precedent for the litigation in federal court of claims that a state agency has taken property in violation of the Fifth Amendment's takings clause," Stevens wrote.

He continued, "State courts are fully competent to adjudicate constitutional challenges to local land use decisions. Indeed, state courts undoubtedly have more experience than federal courts do in resolving the complex factual, technical and legal questions related to zoning and land use regulations."

In his concurring opinion, Rehnquist questioned this final point. "[T]he court has not explained why we should hand authority over federal takings claims to state courts, based simply on their relative familiarity with local land use decisions and proceedings, while allowing plaintiffs to proceed directly to federal court in cases involving, for example, challenges to municipal land use regulations based on the First Amendment."

Rehnquist conceded that he joined the court's opinion in Williamson County 20 years ago. But, he wrote, that decision is having a "dramatic" impact on takings plaintiffs and should be reconsidered.

Berger said the court inched toward overturning Williamson County. "I feel like we educated them. But I'd sure like to do more than that," he said. San Remo attorney Utrecht said repeal of Williamson County would give takings plaintiffs direct access to federal court for all their claims. Federal court is where Utrecht wanted his case all along.

Attorneys on the other side, however, are not ready to give up on Williamson County. "I think the court is willing to look at it," said Timothy Coates, of Geines, Martin, Stein & Richland, who has represented government agencies on takings claims. "I'm not sure the court is willing to overturn it. Williamson County is based on a reading of the takings clause."

In the Lingle case, the court ruled that the "substantially advances" test does not apply when a court is determining whether a regulation effects a taking. That test originated with Agins v. City of Tiburon, 447 U.S. 255 (1980), in which the court ruled that a government regulation amounts to a taking if it "does not substantially advance legitimate state interests."

"Today we correct course," Justice O'Connor wrote in reference to Agins. "We hold that the 'substantially advances' formula is not a valid takings test, and indeed conclude that it has no proper place in our takings jurisprudence." Instead, a property owner must prove a takings under a different theory: a physical taking, a regulatory taking that denies all use, a Penn Central taking that interferes with investment-backed expectations, or an exaction that does not directly relate to, or is not roughly proportionate with, a project's impact.

When Lingle was at the appellate level, the Ninth Circuit used the substantially advances test to rule that Hawaii's service station rent control scheme amounted to a taking. After that ruling, the Ninth Circuit used the same test to invalidate the City of Cotati's mobile home rent control law (Cashman v. City of Cotati, 374 F. 3d 887, see CP&DR Insight, October 2004; CP&DR Legal Digest, September 2004).

Although some property rights activists, including the National Association of Homebuilders, tried to spin the high court's Lingle decision in their favor, the ruling was a clear setback.

In both San Remo and Lingle, said the Community Rights Counsel's Dowling, "the U.S. Supreme Court has unanimously rejected arguments from the so-called property rights movement calling for greater federal intrusion into the land use planning process."

The Cases: San Remo Hotel, L.P. v. City and County of San Francisco, No. 04-340, 05 C.D.O.S. 5313, 2005 DJDAR 7265. Filed June 20, 2005.

The Lawyers:

For San Remo: Paul Utrecht, (415) 956-8100.

For San Francisco: Andrew Schwartz, Shute, Mihaly & Weinberger, (415) 552-7272.

Lingle v. Chevron USA, Inc., No. 04-163, 2005 DJDAR 5868. Filed May 23, 2005.

The Lawyers:

For Lingle:

Seth Waxman, Wilmer, Cutler, Pickering, Hale & Dorr, (202) 663-6000.

For Chevron USA: Craig Stewart, Jones Day, (415) 626-3939.