Ninth Circuit Departs from Established Jurisprudence for Regulatory Takings Claims

In its split decision in Guggenheim v. City of Goleta , 2009 WL 3068152 (C.A.9 (Cal.)), the Ninth Circuit departed from established takings jurisprudence to find that the vacancy control provision of a rent control ordinance for mobile home parks caused a taking for which just compensation must be paid, despite the fact that the ordinance did not interfere with the property owner’s reasonable investment-backed expectations for the property.

Plaintiffs Daniel and Susan Guggenheim and Maureen Pierce purchased a mobile home park in an unincorporated area of Santa BarbaraCounty in 1997, many years after the County’s adoption of an ordinance that controlled rents at mobile home parks. Several years later, the area where the park is located was incorporated into the City of Goleta. Upon incorporation, the City adopted by reference the County’s code in its entirety, including the rent control ordinance. Several months later, the City readopted by reference most provisions of the County’s code, including the rent control ordinance, as permanent City ordinances. A month after the City incorporated, the owners of the park brought suit against the City in federal court alleging violations of the Takings Clause, the Due Process Clause and the Equal Protection Clause, along with various state law claims. The case was stayed in federal court and proceeded in state court, then went two rounds in federal district court, finally resulting in a decision in favor of the City on all federal Constitutional claims. The plaintiffs appealed.

The first issues the Ninth Circuit addressed were standing and ripeness. While federal courts normally employ these jurisdictional prerequisites to eliminate cases from their dockets, Judge Bybee went to great lengths to overcome these hurdles in order to address the Constitutional claims on the merits. First, although the rent control ordinance had clearly been in effect for many years prior to the plaintiffs’ purchase of the property, the Court found that there was a short period of time during the incorporation process when the ordinance was not in effect and, and the Court found that this “opening” gave the plaintiffs standing to challenge the City’s ordinance. Second, the Court found the ripeness requirements set forth in Williamson County Regional Planning Commission v. Hamilton Bank of Johnson City, 473 U.S. 172 (1985) to be prudential rather than jurisdictional and then determined the City had waived its ability to argue that the case was not ripe under this doctrine by not raising it in the district court.

Turning to the merits of the Constitutional claims, the Court first considered whether the vacancy control provision of the rent control ordinance, which limited rent increases that could be charged by the park owners, amounted to a taking because it transferred wealth from the park owners to the mobile home owners. Writing for the majority in a split decision, Judge Bybee held the rent control ordinance to be a regulatory taking under Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978), despite the fact that the ordinance had been in effect when the plaintiffs purchased the property. The Court examined the impact of the ordinance under the three factors of the regulatory takings test set forth in Penn Central – the economic impact on the claimant, the extent to which the regulation interfered with distinct investment-backed expectations and the character of the government action. In so doing, the Court found that the first and third factors were clearly met because the mere enactment of the ordinance caused a significant economic loss for the park owners and government action singled out mobile home park owners to bear the burden of affordable housing for the City. As for the second factor, Judge Bybee reasoned that despite the fact that “the Park Owners got exactly what they bargained for when they purchased the mobile-home park subject to a detailed rent control ordinance,” this does not mean that the park owners cannot bring a claim for a taking. (Id. at 24, 29.) In reaching this conclusion, Judge Bybee relied on language in Palazzolo v. Rhode Island, 533 U.S. 606 (2001) stating that postenactment transfers of title should not relieve a state of its obligation to defend an action restricting land use. (Id. at 627-628.) No other circuit court has interpreted the holding of Palazzolo so broadly.

In his dissent, Judge Kleinfeld strongly disagreed with Judge Bybee’s characterization and application of the Palazzolo holding and explained how the Palazzolo holding could be harmonized with established takings jurisprudence. Considering the merits of the case, Judge Kleinfeld found that the plaintiffs did not have a regulatory takings claim because none of the Penn Central factors were satisfied. As to the first factor, he found the park owners suffered no economic loss because the park was subject to rent control, and already devalued, when they purchased it. As to the second factor, he agreed with the majority that the ordinance did not interfere with the owners’ investment-backed expectations, but explained that this fact precluded a viable regulatory takings claim. Judge Kleinfeld found the third factor also weighed in favor of the City because the government action was simply a continuation of the old ordinance that existed when the plaintiffs purchased the park. As such, the readoption of the ordinance did not reapportion public burdens; that event occurred many years prior when the ordinance was first adopted and then amended (1979 and 1987), and the statute of limitations had long since expired on takings claims arising from these ordinances.

The Court returned to more traditional analyses in affirming the district court’s rejection of plaintiffs’ Due Process and Equal Protection claims. It is interesting to note that the Court, in rejecting the plaintiffs’ due process claims, relied in part on the fact that the plaintiffs’ return on their investment was reasonable under the ordinance. (Id. at 31.)

This decision is most troubling for municipalities and public agencies because it departs from established Supreme Court standards for establishing a taking from a government regulation, particularly rent control ordinance with vacancy control provisions. Interested cities may want to file amicus briefs encouraging either a rehearing or a petition for certiorari with the Supreme Court. For more information, please contact Julia Bond.