Petition for Writ of Certiorari — Horwath Associates v. City of East Palo Alto

98 S72 0cT5 1%

uF THE CLERK

No.

In the

Supreme Court of the United States

October Term, 1998

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v-

HORWATH ASSOCIATES,

a California general partnership,

Petitioner,

Vv.

CITY OF EAST PALO ALTO and

EAST PALO ALTO RENT STABILIZATION BOARD,

Respondents.

s+.

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On Petition for Writ of Certiorari to the

California Court of Appeal, First Appellate District

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vv

PETITION FOR WRIT OF CERTIORARI

rs

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ERIC GRANT

Counsel of Record

DAVID A. SELF R.S. RADFORD

Attorney at Law Pacific Legal Foundation

18 Crow Canyon Court, 2151 River Plaza Drive,

Suite 280 Suite 305

San Ramon, California 94583 Sacramento, California 95833

Telephone: (510) 538-5105 Telephone: (916) 641-8888

Facsimile: (510) 538-3207 Facsimile: (916) 920-3444

Counsel for Petitioner

LOCATE ATTEN EER TIE EET TLE IE

i

QUESTIONS PRESENTED

1. Where a land-use regulation effects a temporary tak-

ing of private property, is compensation available for the time

required to obtain a judicial determination of the regulation’s

invalidity?

2. Where a land-use regulation effects a taking on the

ground that it fails to substantially advance a legitimate state

interest, is compensation available for a temporary taking even

if some economically viable use of the land remains?

TABLE OF CONTENTS

QUES TRONS PRESENTED. n.n.ganns:0:s vp00000 coeds

TABLE OF AUB St ee at ees

og Ft ee Perey ry er

FE ins ce becmeemienacaiae Wome

CONSTITUTIONAL PROVISIONS AND

REGULATE AT Bee Pe £5. EECA

STATEMENT GF THRECAGS 66 iiwccwasccvcccsecs

A. Facts and Administrative Proceedings .....

B. The Proceedings in the Trial Court ........

C. The Decision of the Court of Appeal .......

REASONS FOR GRANTING THE PETITION ......

I. HORWATH SUFFERED A COMPENSABLE

TAKING OF ITS RENTAL PROPERTY ......

A. Horwath Suffered a Compensable Taking

Because the Application of the City’s Rent-

Control Ordinance Imposed a “Long-Con-

tinued and Unreasonable Delay in Putting

an End to Confiscatory Rates” ............

B. Horwath Also Suffered a Compensable

Taking Because the Application of the

Rent-Control Ordinance Failed to Substan-

tially Advance a Legitimate State Interest . . .

ili

TABLE OF CONTENTS—Continued

Page

Il. IN RULING TO THE CONTRARY, THE

COURT BELOW DECIDED AN IMPOR-

TANT QUESTION OF TAKINGS LAW IN

A WAY THAT CONFLICTS WITH THIS

COURT'S DECISION IN FIRST ENGLISH ...... 10

A. Denial of Compensation for Time Spent

ET a a o'h'n MEME G GUEI bis Wee 0 60 11

B. Denial of Compensation Where Property

Retains Some Economically Viable Use ...... 15

Ill. THE INTERPRETATION OF FIRST ENGLISH

ADOPTED BY THE DECISION BELOW ALSO

CONFLICTS WITH DECISIONS OF OTHER

FEDERAL AND STATE COURTS ............. 18

A. Other Federal and State Courts Acknowledge

That Compensation Is Available for the Time

Required to Invalidate Confiscatory Land-Use

Regulations Through Litigation ............. 18

A ee eee 18

2. The Nebraska Supreme Court .......... 19

3. ThelIdaho Supreme Court ............. 21

B. The Nebraska Supreme Court Acknowledges

That Compensation Is Available for Tempo-

rary Takings Even Where Property Retains

Some Economically Viable Use ............ 23

CI i 5 Foc dos Bbc UT. ch dohs eGss Sveuwe 24

TABLE OF AUTHORITIES

Page

Cases

Agins v. City of Tiburon,

ee dian xy acon wing $ ok Sed 9, 16, 23

Armstrong v. United States,

is inn bs dh pa ence eaene o oes 14

Baker v. City of Santa Monica,

226 Cal. Rptr. 755 (Ct. App. 1986),

appeal dismissed, 479 U.S. 1073 (1987) ............. 8

Birkenfeld v. City of Berkeley,

Fe ID nino ope 0in 0.0:0 0:0 0660-00008 7,9

Carson Mobilehome Park Owners

Association v. City of Carson,

Ree a ec das eae ease cee 7-9

First English Evangelical Lutheran

Church v. Los Angeles County,

REE RO Ee or eee passim

Fisher v. City of Berkeley, 209 Cal. Rptr. 682

(1984), affirmed in part, appeal dismissed

M8 FE ee Ate RS oak deo bs ov basa sc ceee 8

Kavanau v. Santa Monica Rent Control

Board, 66 Cal. Rptr. 672 (1997),

cert. denied, 118 S. Ct. 856 (1998) ................ 16

Landgate v. California Coastal Commission,

953 P.2d 1188 (1998), petition for cert.

POU OEE Si cede h wegen cs ES 6, 23-24

Lucas v. South Carolina Coastal Council,

Se Rha SE ho Fa eas Ea 9, 15-16

Vv

TABLE OF AUTHORITIES—Continued

Page

McCuskey v. Canyon County, 851 P.2d 953

(Idaho 1993) (McCuskey I) ................... 21-22

McCuskey v. Canyon County Commissioners,

912 P.2d 100 (Idaho 1996) (McCuskey I])........ 21-22

Norfolk & Western Railway Co. v.

American Train Dispatchers

Association, 499 U.S. 117 (1991) ................. 1]

Oceanside Mobilehome Park Owners’

Association v. City of Oceanside,

204 Cal. Rr. 239 (Ct. App. 1984) ................. 8

Penn Central Transportation Co. v. City

of New York, 438 U.S. 104 (1978) ................. 16

Silverman v. Rent Leveling Board,

649 A.2d 1342 (N.J. Super. Ct.

PRG ee Beka ue hh oc sans csiednsineec 14, 16

Smith v. Illinois Bell Telephone Co.,

a 7-9, 15

Steinbergh v. City of Cambridge,

604 N.E.2d 1269 (Mass. 1992),

cert. denied, 508 U.S. 909 (1993) ................. 18

Whitehead Oil Company v. City of Lincoln,

515 N.W.2d 390 (Neb. 1994)

iy Sc ee a oa obs 19-20

Whitehead Oil Company v. City of Lincoln,

515 N.W.2d 401 (Neb. 1994)

a en. ss ca ae 20-21, 23-24

Williamson County Regional Planning

Commission v. Hamilton Bank,

ae rE PE sos Gs Co wiv ae kn cca ds 11,14

vi

TABLE OF AUTHORITIES—Continued

Yuba Goldfields, Inc. v. United States,

723 F.2d 884 (Fed. Cir. 1983) ................. 18-19

Yuba Natural Resources, Inc. v.

United States, 904 F.2d 1577

Ce EI a a 18-19

Constitutional Provisions,

Statute, and Rules

US. Comst, Gene. V oo cc ct eee SVE eee ONS passim

OG SEPTE Ee 28 6 datiew an 02 cite a eentens 2

Be Waar eo Ce 45.4 0 6 aX as cheesesteak l

Supreme Court Rule 1076) .. 0... ccc ccc ccc cccccccces 23

RE BOE ce ccvccvicd eves ee. Hae 17

l

PETITION FOR WRIT OF CERTIORARI

Horwath Associates (Horwath) respectfully petitions for a

writ of certiorari to review the judgment of the California Court

of Appeal, First Appellate District, entered in the above-entitled

proceeding on April 30, 1996.

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OPINIONS BELOW

The orders of the California Supreme Court granting and

then dismissing Horwath’s petition for discretionary review are

unreported; they appear at Appendices C and E to the petition,

respectively. The opinion of the California Court of Appeal is

unreported; it appears at Appendix A to the petition. The deci-

sion of the trial court is unreported; it appears at Appendix B to

the petition.

+

JURISDICTION

The judgment of the California Court of Appeal was en-

tered on April 30, 1996. Petition Appendix (Pet. App.) at A-1.

Horwath’s timely petition for discretionary review to the Cali-

fornia Supreme Court was originally granted on July 17, 1996.

Pet. App. at C-1. Subsequently, in an order dated July 8, 1998,

the California Supreme Court dismissed Horwath’s petition for

review. Pet. App. at E-1. The jurisdiction of this Court is in-

voked under 28 U.S.C. § 1257(a).

a

CONSTITUTIONAL PROVISIONS AND

REGULATIONS AT ISSUE

The Fifth Amendment to the United States Constitution

provides in pertinent part: “nor shall private property be taken

for public use without just compensation.”

2

Section 1 of the Fourteenth Amendment to the United

States Constitution provides in pertinent part: “nor shall any

State deprive any person of life, liberty, or property, without

due process of law.”

Regulation 1241 of the East Palo Alto Rent Stabilization

Board provides:

If the board fails to render a final decision on a land-

lord’s petition for a rent adjustment within 110 days

from the date of filing, the petition shal! be deemed

granted in the amounts requested on the petition on

the 111th day following the date of the filing of the

petition.

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_

STATEMENT OF THE CASE

A. Facts and Administrative Proceedings

Petitioner Horwath Associates (Horwath) is a family part-

nership that used to own apartment buildings in the City of East

Palo Alto, California (City), a working-class community in the

San Francisco Bay Area. See Pet. App. at A-2. Before it lost

these apartments to foreclosure during an earlier stage of the

present litigation, Horwath was subject to respondent City’s

rent-control erdinance, which is administered by respondent

East Palo Alto Rent Stabilization Board (Board). See Pet. App.

at A-1 n.1. That ordinance was enacted in 1983, after Horwath

purchased the apartment buildings. See Pet. App. at A-2. As

noted by the court below, “[d]uring the course of Horwath’s

ownership, the rents which it received were insufficient to meet

the expense of owning the buildings.” Jd. In a word, the rents

allowed under the City’s ordinance were confiscatory. Accord-

ingly, as was its right under the United States Constitution as

well as under the ordinance, Horwath in 1989 filed petitions

with the Board seeking permission to increase the rents it could

legally charge for its apartment units. See id.

3

Consistent with the requirements of the Constitution as

interpreted by this Court and by the California courts, the ordi-

nance and its implementing regulations required the Board to

act on Horwath’s petition within a fixed period of time. If the

Board did not act on the petition within 110 days, the Board’s

own regulations required it to certify new rents at the requested

levels. See Rent Board Regulation 1241, quoted at p. 2 supra.

Faved with this mandate designed to ensure that landlords

would not be forced tc long endure confiscatory rental rates, the

Board did not comply. Rather, as the court below described it,

“the Board did not make any decision, and it did not respond to

Horwath’s request to issue rent certificates authorizing [the re-

quested] rent increases as required by Regulation 1241.” Pet.

App. at A-2 to -3. Because Horwath could not legally raise its

rents without the certificates, it was forced to sue the City and

the Board to obtain the certificates to which it was indisputably

entitled. Respondents “replied to the [complaint] by admitting

that the Board did not render its final decision within 110 days

of filing as required by Regulation 1241.” Pet. App. at B-3.

Respondents defended the (in)action of the Board solely on the

ground that the regulation was “constitutionally invalid,” while

admitting that they had not repealed the supposedly unconsti-

tutional provision nor did they have “any plans to do so.” Id.

The state trial court granted judgment to Horwath; the Board

“was ordered to ‘promptly issue new rent certificates’ at the

level requested in Horwath’s petitions.” Pet. App. at A-3.

Despite the mandate to act “promptly,” the Board took an

additional five weeks to actually to issue the certificates. See

Pet. App. at B-3, B-8 (judgment issued by court on June 27,

1990; certificates issued by Board on August 1, 1990). After

giving the 30-day notice of a rent increase as required by law,

“Horwath raised the rents on some of the units but eventually

lost the properties to the primary lender because of recurring

defaults.” Pet. App. at A-3. All told, respondents’ legally un-

justifiable inaction resulted in “a delay of approximately six

4

months” in Horwath’s ability to increase rents. Pet. App. B-8.

This delay contributed to Horwath’s inability to meet its loan

obligations on the apartment buildings and, ultimately, to the

loss of the apartments through foreclosure. This loss occurred

despite Horwath’s partners having contributed some $500,000

to the venture during this period. See Pet. App. at B-9, B-10

(noting additional capitalization of $100,000 and contributions

of $200,000 each from two partners).

B. The Proceedings in the Trial Court

Thereafter Horwath brought the present inverse condem-

nation action against respondents in California Superior Court,

seeking damages for a taking of its property in violation of the

Takings Clause of the United States Constitution and its state

analogue. See Pet. App. at A-1. After a trial, the superior court

issued a decision finding that “the failure of the City/Board to

comply with their own ordinance and regulations . . . caused a

temporary ‘taking’ of property and even a temporary ‘taking’

requires just compensation.” Pet. App. at B-14 (citing First

English Evangelical Lutheran Church v. Los Angeles County,

482 U.S. 304 (1987)). Accordingly, the trial court awarded

Horwath $28,032, or $4,672 for each of the six months that re-

spondents failed to issue the rent certificates to which Horwath

was entitled. Pet. App. at B-15.'

C. The Decision of the Court of Appeal

On appeal, the California Court of Appeal, First Appellate

District, reversed. That court acknowledged that “the Board

' The trial court did not award Horwath any damages for a permanent

taking, ruling that Horwath’s complete loss of its rental property was

due to a number of factors in addition to respondents’ unlawful con-

duct. See Pet. App. at B-13 to -14. None of these factors, however,

mitigates respondents’ liability for the temporary taking resulting

from respondents’ failure to comply with their own regulations. In

any case, the court of appeal noted the existence of these factors but

did not rest its decision on that ground. See Pet. App. at A-4.

5

failed to act on Horwath’s request for a rent increase within the

time limit imposed by [the Board’s] regulation.” Pet. App. at

A-6. It further acknowledged that this time limit constituted a

“protection{] built into the regulation to protect the applicant

from unreasonable delay on the part of the Board.” Pet. App.

at A-8. Finally, the court observed that the delay imposed on

Horwath by respondents’ failure to act on the request was both

“unwarranted” and “unnecessary.” Pet. App. at A-7, A-9.

Notwithstanding these points, the court of appeal criti-

cized the trial court’s “simplistic” belief that “a compensable

temporary taking of property occurred [during the time] until

the Board’s inaction was successfully challenged in court and

the higher rents were put in place.” Pet. App. at A-6. In

particular, the court of appeal rejected the trial court’s reliance

on First English. First, the court of appeal characterized the

present case as “involv[ing] a delay attributable to the normal

workings of governmental and legal processes, a situation First

[English] expressly declined to address.” Pet. App. at A-11;

accord Pet. App. at A-9 (opining that “the delay to which Hor-

wath was subjected is the same kind of delay that commonly

occurs while government-imposed processes run their course,

which have not traditionally been viewed as constituting a com-

pensable taking”). In addition to finding that First English did

not apply because the delay was “normal,” the court of appeal

found that decision inapplicable because “the challenged delay

did not deny Horwath all economically beneficial or productive

use of its property.” Pet. App. at A-9.

In reaching these conclusions and vacating the compen-

sation award to Horwath, the court of appeal expressed concern

that awarding temporary takings damages in cases like this one

would result in a state of affairs in which “the financial burden

on local governments will become overwhelming and scarce

public resources will be dissipated at an alarming rate.” Pet.

App. at A-10. According to the court, “[t]hese funds are better

put to public use.”

6

Horwath sought review of the appellate court’s decision

in the California Supreme Court. That court originally granted

review on July 17, 1996. See Pet. App. at C-1. On November

24, 1997, the court entered an order deferring further action in

the case pending disposition of Landgate v. California Coastal

Commission, subsequently decided and reported at 953 P.2d

1188 (1998), petition for cert. pending, No. 98-183.’ See Pet.

App. at D-1. Finally, on July 8, 1998, after Landgate had been

decided, the California Supreme Court dismissed review of the

present case. See Pet. App. at E-1.

,%

vy

REASONS FOR GRANTING THE PETITION

Horwath suffered a compensable taking of its rental prop-

erty when respondents failed to grant Horwath’s petition for

an adjustment of its rents. Because respondents deliberately

decided not to respond to Horwath’s petition and because that

non-response was completely lacking in legal justification, re-

spondents’ actions imposed a long-continued and unreasonable

delay in putting an end to confiscatory rates and failed to sub-

stantially advance a legitimate state interest, either of which is

sufficient to establish a compensable temporary taking.

The court below ruled to the contrary on the grounds that

compensation for a temporary taking is not available for time

spent in litigation to establish the invalidity of official action

and that such compensation is not available if some economic-

ally viable use of the property remains. In so ruling, the court

below decided an important question of takings law in a way

that conflicts with the relevant decisions of this Court and with

the decisions of other federal and state courts.

* Landgate ‘aises closely related issues concerning the proper appli-

cation of this Court’s temporary takings jurisprudence. Joining with

amici Pacific Legal Foundation and Lechuza Villas West, Horwath

filed a brief amici curiae in support of the Landgate petition.

7

HORWATH SUFFERED A COMPENSABLE

TAKING OF ITS RENTAL PROPERTY

Under either of two applicable tests, Horwath suffered a

compensable temporary taking of its apartment buildings as

a result of respondents’ application of the City’s rent-control

ordinance.

A. Horwath Suffered a Compensable Taking

Because the Application of the City’s Rent-

Control Ordinance Imposed a “Long-Con-

tinued and Unreasonable Delay in Putting

an End to Confiscatory Rates”

As established by this Court in Smith v. Illinois Bell Tele-

phone Co., 270 U.S. 587, 591 (1926), an ordinance effects a

compensable taking of private property for public use when it

imposes on the property owner a “long-continued and unrea-

sonable delay in putting an end to confiscatory rates.” Though

it originated in a now-suspect judicial era, the Smith standard—

and particularly its application to rent-control ordinances—is

hardly controversial, having been acknowledged and applied

by the California courts for the past two decades.’

3 Thus, in Birkenfeld v. City of Berkeley, 130 Cal. Rptr. 465, 493

(1976), the California Supreme Court relied on Smith to strike down

a rent-control ordinance on the ground (among others) that the ordi-

nance was not “capable of providing adjustments in maximum rents

without a substantially greater incidence and degree of delay than is

practically necessary.” Accord Carson Mobilehome Park Owners

Association v. City of Carson, 197 Cal. Rptr. 284, 288 (1983) (re-

affirming reliance on Smith and ruling that a rent-control ordinance

effects a taking when the ordinance’s rent-adjustment mechanism

produces a delay that is “longer than practically necessary to achieve

the legitimate purposes of the legislation”).

The California courts continue to apply these principles, being

careful to sustain rent-contro! ordinances against takings challenges

(continued...)

8

Horwath suffered a taking under the Smith standard when

respondents failed to “put[] an end” to the confiscatory rates

from which Horwath sought administrative relief in late 1989.

Smith, 270 U.S. at 591. The delay resulting from respondents’

failure in this regard was “long-continued and unreasonable”

virtually by definition. /d. The delay was long-continued be-

cause it continued far longer than any delay previously upheld

by the California courts in cases applying the Smith standard.

See supra n.3. Indeed, in the absence of judicial intervention,

the respondents’ delay would have continued forever. More-

over, the delay was unreasonable because it had absolutely no

reason behind it. As the trial court found: “The City and its

Board further acknowledge that neither at the time [Horwath’s

rent-adjustment petition was filed] nor in this trial has any good

cause been shown . . . for any delay beyond the mandatory time

limits” of the ordinance. Pet. App. at B-5 (emphasis added).

* (...continued)

only when the ordinances establish a fixed and relatively short per-

iod to act upon the requested adjustment. See id. at 288-89 (uphold-

ing an ordinance because a request for a rent adjustrnent would be

granted if the rent board did not act upon the recuest within 105

days); Fisher v. City of Berkeley, 209 Cal. Rptr. 682, 716 (1984) (re-

affirming the Smith standard and upholding a rent-control ordinance

because it “impose[d] a time limit of 120 days on all decisions on

landiord petitions” for rent increases), aff'd on grounds not relevant

here, 475 U.S 260 (1986); Oceanside Mobilehome Park Owners’

Association v. City of Oceanside, 204 Cal. Rptr. 239, 248 (Ct. App.

1984) (upholding rent-control ordinance because there were no more

than “approximately 110 days between the date of the submission of

the application and the effective date of any rent increase”); Baker v.

City of Santa Monica, 226 Cal. Rptr. 755, 764 (Ct. App. 1986) (up-

holding rent-control procedures because the rent board “is not only

required to make a final decision within 120 days, but does so as a

matter of practice” (footnote omitted)), appeal dismissed, 479 U.S.

1073 (1987). Cf Rent Board Regulation 1241 (providing that a rent

adjustment request shall be deemed granted if the Board does not act

upon the request within 110 days), quoted at supra p. 2.

9

Furthermore, the court of appeal conceded that the delay

wrought by the Board’s inaction was “unnecessary.” Pet. App.

at A-9. An unnecessary delay is per se unreasonable because

it is inherently longer or greater than “practically necessary.”

See Carson, 197 Cal. Rptr. at 288 (holding that a delay effects

a taking under Smith if such delay is “longer than practically

necessary”); Birkenfeld, 130 Cal. Rptr. at 494 (holding that a

delay effects a taking under Smith if it is greater in “incidence

and degree . . . than is practically necessary”). For these rea-

sons, Horwath suffered a compensable taking of its property

under the Smith standard when respondents failed to act upon

Horwath’s petition for a rent adjustment.

B. Horwath Also Suffered a Compensable Taking

Because the Application of the Rent-Control

Ordinance Failed to Substantially Advance a

Legitimate State Interest

Although the Smith standard should suffice to establish

that Horwath’s property was taken, any doubt is removed by

considering the more modern standard laid down by this Court

in Agins v. City of Tiburon, 447 U.S. 255 (1960), and re-

affirmed in Lucas v. South Carolina Coastal Council, 505 U.S.

1003 (1992): “As we have said on numerous occasions, the

Fifth Amendment is violated when land-use regulation ‘does

not substantially advance legitimate state interests... .’” Jd. at

1016 (quoting Agins, 447 U.S. at 260). Although a government

agency may have a legitimate interest in taking a reasonable

amount of time to review and analyze the data submitted with

a rent-adjustment petition before acting on that petition, it can-

not have a legitimate interest in taking an unlimited amount of

time to act on a petition.

In the present case, as set forth above, respondents did not

articulate any justification for their actions, let alone a justifica-

tion that would satisfy the first prong of the Agins test. Again,

the court below found respondents’ actions to be “unnecessary”

as well as “unwarranted,” Pet. App. at A-9, the exact opposite

10

of government actions that substantially advance a legitimate

state interest.‘ Because the actions of respondents both failed

to substantially advance a legitimate government interest and

resulted in a long-continued and unreasonable delay in putting

an end to confiscatory rental rates, Horwatn suffered a com-

pensable taking of its rental property.

Il

IN RULING TO THE CONTRARY, THE COURT

BELOW DECIDED AN IMPORTANT QUESTION OF

TAKINGS LAW IN A WAY THAT CONFLICTS WITH

THIS COURT’S DECISION IN FIRST ENGLISH

In the face of these unremarkable conclusions, the Cali-

fornia Court of Appeal’s holding that Horwath did not suffer a

compensable taking is astonishing. The court gave essentially

two reasons for that holding, both of which conflict with this

Court’s decision in First English, which held that where gov-

ernment conduct has already effected a taking, “no subsequent

action by the government can relieve it of the duty to provide

compensation for the period during which the taking was ef-

fective.” 482 U.S. at 321.

* We do not mean to suggest by this point that a taking occurs any

and every time a government agency’s conduct fails to conform to

state law. As the court of appeals pointed out, however, the regula-

tion flouted by the Board was a regulation intended “to protect the

[rent-adjustment] applicant from unreasonable delay on the part of

the Board.” Pet. App. at A-8 (citing the decisions discussed in the

previous section). Or, as the trial court put the point, that regulation

“provide[s] reasonable time limits within which the City/Board must

dispose of a rent increase application pursuant to the rules laid down

in Birkenfeld [and its progeny].” Pet. App. at B-5. In this situation

at least, where the state-law obligation violated by the agency is con-

sciously intended to be a means of enforcing federal constitutional

norms (particularly Fifth Amendment norms), the agency can hardly

claim with any justification that it has a “legitimate” interest in vio-

lating that obligation.

11

A. Denial of Compensation for Time

Spent in Litigation

In the first place, the court below held that “the delay to

which Horwath was subjected is the same kind of delay that

commonly occurs while government-imposed processes run

their course,” that is, “a delay attributable to the normal work-

ings of governmental and legal processes.” Pet. App. at A-9,

A-11. This kind of delay, reasoned the court, comes within

the category of “normal delays in obtaining building permits,

changes in zoning ordinances, variances, and the like,” which

First English arguably excluded from its compensation man-

date. 482 U.S. at 321. Whether or not First English actually

intended to exempt “normal delays” from the requirement that

compensation be paid for temporary takings is debatable. But

it should not be open to question that the category of normal

delays does not include the time required to obtain a judicial

determination of the validity of a land-use regulation. Several

considerations establish this point.

First, the text of the relevant passage from First English

spoke not of “normal delays” in the abstract, but rather normal

delays in “obtaining building permits, changes in zoning ordin-

ances, variances, and the like.” Jd. It is common sense that the

unnamed items included in the catchall phrase “and the like”

necessarily share the character of the named items. Or, to use

the language of statutory construction: “Under the principle of

ejusdem generis, when a general term follows a specific one,

the general term should be understood as a reference to subjects

akin to the one with specific enumeration.” Norfolk & Western

Railway Co. v. American Train Dispatchers Association, 499

U.S. 117, 129 (1991). The character, or subject, of building

permits, zoning, and variances is administrative —they concern

the process leading up to the “final [agency] decision” that is

necessary to ripen a federal takings claim. Williamson County

Regional Planning Commission v. Hamilton Bank, 473 U.S.

172, 186 (1985). By definition, post-final decision litigation

12

does not partake of an administrative character. Accordingly,

the delays resulting from such litigation are not “normal” as

that term is used in First English.

Second, any doubts about this conclusion are wiped away

when one broadens one’s consideration to include the First

English dissent. There, Justice Stevens criticized the Court for

“erect[ing] an artificial distinction between ‘normal delays’ and

the delays involved in obtaining a court declaration that the

regulation constitutes a taking.” 482 U.S. at 334 (Stevens, J.,

dissenting). Whether one agrees or disagrees with this criti-

cism, the crucial point is that Justice Stevens recognized that

the Court had erected a clear “distinction” between normal de-

lays on the one hand and delays emanating from litigation on

the other. Justice Stevens further argued that “[p]recisely the

same” injuries to property owners would ensue from lengthy

proceedings before a zoning board” (exemplary of “normal

delays”) and “litigation which ends with a judicial determina-

tion that the existing zoning restraint” constitutes a taking. /d.

Again, whether or not one credits this argument, the argument

plainly acknowledges that the Court did not see fit to include

litigation within the contemplation of normal delays.

In general, argued Justice Stevens, “[l]itigation challeng-

ing the validity of a land-use restriction gives rise to a delay

that is just as ‘normal’ as an administrative procedure seeking

a variance or an approval of a controversial plan.” /d. at 334-

35. The court below held that Horwath’s litigation challenging

the validity of respondents’ actions gave rise to “a delay attrib-

utable to the normal workings of governmental and legal pro-

cesses.” Pet. App. at A-11 (emphasis added). In adopting the

precise reasoning of the dissent in First English, the court of

appeal necessarily decided this case in a manner that conflicts

with the Court’s decision in First English.

Third, if the lower court’s notion that takings plaintiffs

cannot obtain compensation for time spent in litigation is incon-

sistent with the text of First English, it is also fundamentally at

~

13

odds with the entire concept of temporary takings endorsed by

this Court. Under the decision below, a government agency in

California may with impunity deprive property of all economic-

ally viable use or may harm property in a manner that does not

substantially advance a legitimate state interest—with abso-

lutely nothing to fear from the Just Compensation Clause. Like

respondents, the agency that acts in a manner contrary to the

Fifth Amendment can simply sit back and wait to be sued by

the affected property owner, thereby forcing the owner to spend

thousands of dollars and potentially many years invalidating

those actions in court. Yet even after prevailing against the

agency, the property owner would, under the decision below,

receive no compensation for all the time during which the tak-

ing was in effect! Once the court rules in the owner’s favor, the

agency can simply rescind its original decision—without suf-

fering any financial consequences for all the years it forced the

property to remain economically idle or suffer under confisca-

tory rates. Compare Pet. App. at A-3 (litigation instituted on

March 29, 1990), with Pet. App. at E-1 (litigation concluded in

state courts on July, 8, 1998, more than eight years later).

If this “go and sin no more” approach adopted by the court

below sounds suspiciously like the pre-First English approach

that prevailed in California, it is. The California state court

whose judgment was reversed in First English had held that “a

landowner who claims that his property has been ‘taken’ by a

land-use regulation may not recover damages for the time be-

fore it is finally determined that the regulation constitutes a

‘taking’ of his property.” 482 U.S. at 306-07. In like fashion,

the court below ruled that Horwath could not recover damages

for the time before it obtained a determination that respondents’

actions constituted “unwarranted administrative delay” (and

therefore constituted, as discussed in Part I above, a taking).

Pet. App. at A-9. In First English, however, this Court explic-

itly “disagree[d]” with the lower court’s holding, concluding

that the Takings Clause “would require compensation for that

period.” 482 U.S. at 307. This Court emphasized that mere

14

invalidation of the government’s action “without payment of

fair value for the use of the property during this period of time

would be a constitutionally insufficient remedy.” /d at 322.

Yet mere invalidation is precisely what the decision under re-

view “awards” to Horwath.

Finally, the ruling below stands in conflict with the ven-

erable principle of takings law, reaffirmed in First English, that

“the Fifth Amendment’s just compensation provision is ‘de-

signed to bar Government from forcing some people alone to

bear public burdens which, in all fairness and justice, should be

borne by the public as a whole.’” 482 U.S. at 318-19 (quoting

Armstrong v. United States, 364 U.S. 40, 49 (1960)). The court

of appeal conceded that the delay resulting from the Board’s

refusal to act on Horwath’s petition for a rent adjustment was

“unnecessary” and “unwarranted.” Pet. App. at A-9. Despite

these concessions, the court placed the burden of the delay en-

tirely on Horwath, explicitly wishing to spare local government

from having to incur “financial burden.” Pet. App. at A-10.

This allocation of burdens is fundamentally in conflict

with the bedrock principle of takings law stated in Armstrong.

It may well be that, under Williamson County, property owners

must bear the burdens of obtaining a final administrative deci-

sion. In all fairness and justice, however, it is the public who

should bear the burden of regulatory misconduct that must be

corrected through /itigation. After all, it is the public who pre-

sumably benefits from the “delay that commonly occurs while

government-imposed processes run their course.” Pet. App. at

A-9. It is no excuse that regulatory mistakes are somehow “in-

evitable” given “[t]he complexity of . . . rent regulation and real

estate finance.” Pet. App. at A-10 (quoting Silverman v. Rent

Leveling Board, 649 A.2d 1342, 1348 (NJ. Super. Ct. App.

Div. 1994)). Again, it is the public—not victimized property

owners—who presumably benefits from these complex, delay-

producing schemes; therefore, it is the public who ought to bear

the burden when resulting delays injure private property. In our

15

system of constitutional government, agencies are supposed to

be ultimately accountable to the public. If, by evading liability

for just compensation, agencies are allowed to conceal the costs

to property owners of agency violations of legal rights, the pub-

lic is misinformed concerning the full costs and benefits of an

agency’s services.

For all these reasons, the lower court’s ruling that a prop-

erty owner may not recover temporary takings damages for the

time required to invalidate a land-use regulation in court cannot

be reconciled with this Court’s decision in First English. If that

ruling is allowed to stand, temporary takings doctrine, already

a practical nullity in California, will be on its way to becoming

a doctrinal nullity as well.

B. Denial of Compensation Where Property

Retains Some Economically Viable Use

The court below also held that Horwath could not receive

compensation for the unreasonable delay to which it was sub-

jected because “the challenged delay did not deny Horwath all

economically beneficial or productive use of its property.” Pet.

App. at A-11.° Thus, the court endorsed the conclusion of a

* The basis for the court’s conclusion that Horwath was not denied

economically viable use of its property was as follows: “Horwath

collected rents while it pursued its [legal] challenge, and it was free

to sell, develop, or encumber its properties.” /d_ It is difficult to con-

ceive how the ability to collect confiscatory rents—rents that “not

only do not yield a fair return, but are insufficient to pay the operat-

ing cost of” providing rental housing, Smith, 270 U.S. at 590—is an

economically viable use of rental property. Nor is the ability to sell

or encumber property sufficient to establish an economically viable

use. No doubt David Lucas was free to sell or encumber his beach-

front lots, just as he could “picnic, swim, camp in a tent, or live on

the property in a movable trailer.” Lucas, 505 U.S. at 1044 (Black-

mun, J., dissenting). Even so, the Court agreed that Lucas had been

deprived of all economically viable use of the lots. See id. at 1009.

Finally, the court below offered no factual basis for the assertion that

Horwath could “develop” its rental property into something else.

16

New Jersey appellate court that “in order to recover damages

on an inverse condemnation claim, the municipal agency’s de-

cision and the administrative lag in according a remedy must

have substantially destroyed the landlord’s beneficial use of his

property.” Silverman, 649 A.2d at 1348, quoted in Pet. App. at

A-10. For several reasons, the lower court’s refusal to award

compensation to temporary takings that do not result from a

denial of all economically viable use of property cannot be

reconciled with this Court’s takings jurisprudence.

It is almost embarrassing to have to point out that while

denial of all economically viable use of property is a sufficient

condition for finding a compensable taking, it is not a necessary

one. As Lucas reaffirmed, “the Fifth Amendment is [also] vio-

lated when land-use regulation ‘does not substantially advance

legitimate state interests.” 505 U.S. at 1016 (quoting Agins,

447 U.S. at 260). Moreover, a land-use regulation can effect a

taking even if fails neither the economically viable use prong

nor the substantial advancement prong of the Agins test. As

Lucas observed, even property owners who are not “able to

claim the benefit of our categorical formulation” may still pre-

vail under the multifactored analysis in Penn Central Trans-

portation Co. v. City of New York, 438 U.S. 104, 124 (1978).

See Lucas, 505 U.S. at 1019 n.8. Even the California Supreme

Court, a court not known for its fidelity to the Takings Clause,

has recently acknowledged (at least with respect to permanent

takings) that a land-use regulation “may effect a taking though

... it does not involve a physical invasion and leaves the prop-

erty owner some economically beneficial use of his property.”

Kavanau v. Santa Monica Rent Control Board, 66 Cal. Rptr.

672, 680 (1997), cert. denied, 118 S. Ct. 856 (1998).

Even if it acknowledged these precepts with respect to

permanent takings, the court below appears to have fashioned

a different rule with respect to temporary takings: compensa-

tion for such takings is available only if they result from denials

of “all economically beneficial or productive use” of property.

17

Pet. App. at A-11. But that proposition manifestly conflicts

with First English. Nothing in the First English opinion itself

would justify limiting the just compensation mandate to only

certain kinds of takings but not others. To start out with, the

Court framed the question as “whether the Just Compensation

Clause requires the government to pay for ‘temporary’ regula-

tory takings”—not just certain kinds of temporary regulatory

takings. 482 U.S. at 313.°

Moreover, the rationale behind compensation for tempo-

rary takings is that mere “invalidation” of government action

“without payment of fair value for the use of the property” is a

“constitutionally insufficient remedy.” Jd. at 322. There is no

logical reason why the remedy of invalidation ought to be in-

sufficient for one kind of regulatory taking (the denial of all

economically viable use) but sufficient for other kinds (such as

the failure to substantially advance a legitimate state interest).

Indeed, such a dichotomy would clash with the Court’s unequi-

vocal statement that, “in the event of a taking, the compensa-

tion remedy is required by the Constitution.” /d. at 316. Thus,

if a failure to substantially advance a legitimate state interest is

a taking—and, of course, it is—then a compensation remedy is

“required,” regardless of whether the affected property was or

was not deprived of all economically viable use.

In ruling to the contrary, and in ruling that compensation

is not required for the time a property owner has spent in suc-

cessful litigation, the lower court decided an important question

of takings law in a way that conflicts with First English and

other relevant decisions of this Court. Review of that decision

is therefore warranted under this Court’s Rule 10(c).

® The First English opinion does on occasion employ the term “all

use,” as in regulations that “deny a landowner all use of his land” or

as in a “taking of all use of property.” /d. at 318,321. But the reason

for that narrow language was, as the Court explained, simply that

“the allegation of the complaint . . . was that the ordinance in ques-

tion denied [the owner] all use of its property.” /d. at 321.

18

iil

THE INTERPRETATION OF FIRST ENGLISH

ADOPTED BY THE DECISION BELOW ALSO

CONFLICTS WITH DECISIONS OF OTHER

FEDERAL AND STATE COURTS

Although the California Court of Appeal’s interpretation

of First English is consistent with the decisions of some state

courts of last resort, see, e.g., Steinbergh v. City of Cambridge,

604 N.E.2d 1269, 1275 (Mass. 1992), cert. denied, 508 U.S.

909 (1993), cited in Pet. App. at A-9, that interpretation is in

conflict with the decisions of at least one United States court

of appeals and two other state courts of last resort.

A. Other Federal and State Courts Acknowledge

That Compensation Is Available for the Time

Required to Invalidate Confiseatory Land-Use

Regulations Through Litigation

1. The Federal Circuit

Yuba Natural Resources, Inc. v. United States, 904 F.2d

1577 (Fed. Cir. 1990), stemmed from a dispute between a min-

ing company and the federal government over rights to mine a

certain tract of land in California. Although the company had

acquired the mineral rights in 1905 and had in fact mined the

property for many years, the government asserted in a letter

dated April 9, 1976, that the tract was “owned outright in fee by

the United States ... with no reservations in the title. Dredging

activity or removal of any material, including precious metals

is prohibited.” /d. at 1579. The effect of this letter was “to pre-

vent Yuba from mining materials for about six years.” Yuba

Goldfields, Inc. v. United States, 723 F.2d 884, 890 (Fed. Cir.

1983) (earlier incarnation of same case). The approximately

six-year period ended on January 29, 1982, the date the govern-

ment withdrew the 1976 letter. Cruciaiiy, the letter was with-

drawn because the Yuba successfully confirmed its title to the

minerals in quiet title /itigation against the government. See id.

at 886.

19

On these facts, the Federal Circuit concluded that “the

mineral rights in the [property] had been temporarily taken by

the government from the time of the [government’s] April 9,

1976 letter to Yuba until the government withdrew the letter on

January 29, 1982.” Yuba Natural Resources, 904 F.2d at 1580.

This nearly six-year period included more than 18 months of

time during which Yuba was establishing, through litigation,

the invalidity of the government’s claim to the mineral rights.

See Yuba Goldfields, 723 F.2d at 886 (recounting the filing of

Yuba’s suit on January 12, 1980, and the government’s aban-

donment on January 4, 1982, of its appeal from an adverse trial

court decision in that suit). The Federal Circuit held that the

measure of just compensation due to Yuba was “the fair rental

value of the property for the period of the taking,” Yuba Nat-

ural Resources, 904 F.2d at 1581, which necessarily included

the period encompassed by the litigation. The Federal Circuit

therefore affirmed the Claims Court’s award of compensation

to Yuba for a temporary taking. See id. at 1583.

Contrast the Federal Circuit’s decision to the decision

below. The California Court of Appeal would no doubt have

lectured Yuba as to why the six-year delay in its being able to

exploit mineral resources “is the same kind of delay that com-

monly occurs while government-imposed processes run their

course.” Pet. App. at A-9. While the Federal Circuit affirmed

an award that included compensation for the period of time

spent challenging the validity of government action, the court

below vacated a similar award, dismissing that time period as

“a [noncompensable] delay attributable to the normal workings

of governmental and legal processes.” Pet. App. at A-11. In so

doing, the court below entered a decision in conflict with the

Federal Circuit’s decision in Yuba Natural Resources.

2. The Nebraska Supreme Court

In Whitehead Oil Company v. City of Lincoln, 515 N.W.2d

390 (Neb. 1994) (Whitehead Oil II), the company applied for

a permit to build and operate a service station and convenience

eT

20

store on its property consistent with the existing zoning. The

city modified the zoning designation of the property and denied

the application as inconsistent with that designation. See id. at

678. That was in June of 1987. Nearly seven years later, after

two trips through the Nebraska court system, the company

succeeded in having the zoning change declared invalid under

state law: the Nebraska Supreme Court concluded that “the

city acted arbitrarily and capriciously in changing the zoning

designation of the [company’s] parcel”; the court “direct[ed] |

the district court to remand the matter to the city, ordering it to

issue Whitehead Oil the permit it seeks.” Jd. at 678, 680.

oc ETE eeseoees eee OTe

Having ruled for the oil company on this state-law zoning

issue, the Nebraska Supreme Court then considered the com-

pany’s additional claims for “damages in inverse condemnation

under both the U.S. and Nebraska Constitutions.” Whitehead

Oil Company v. City of Lincoln, 515 N.W.2d 401, 405 (Neb.

1994) (Whitehead Oil III) (companion case decided the same

day as Whitehead Oil II). Those takings claims sought com-

pensation in an amount equal to “the fair rental value of its

property as a site for a convenience store . . . from the date its

use permit should been have issued”—not the date on which

the city’s actions were voided. Jd. (emphasis added).

How would the court below have treated these claims?

The answer is not difficult. The California Court of Appeal

would have held that “the delay to which [the company] was

subjected [in obtaining its permit] is the same kind of delay that |

commonly occurs while government-imposed processes run |

their course.” Pet. App. at A-9. Under the decision below, the

seven years the company spent litigating the permit denial was

a noncompensable “delay attributable to the normal workings

of governmental and legal processes.” Pet. App. at A-11.

But how instead did the Nebraska Supreme Court actually

treat the company’s takings claims? As opposed to a reading

of First English that focused on what that decision supposedly

“declined to address,” Pet. App. at A-11, the Nebraska Supreme

21

Court took First English at face value: “a landowner may sue

for damages when property is ‘taken’ by government regula-

tion, even if the taking is only temporary and the regulation

later invalidated.” Whitehead Oil III, 515 N.W.2d at 407 (em-

phasis added). Having concluded that the city’s actions failed

to substantially advance a legitimate state interest, the court

awarded damages to the company for a temporary taking. See

id. at 408. The critical point for present purposes is that these

damages accrued from “the date of the city’s refusal to permit

[the requested] use of the land” to “the date the city issues the

permit Whitehead Oil seeks,” most of which time the company

was embroiled in litigation against the city. Jd. at 412. In the

Nebraska courts, therefore, a landowner can “recover damages

for the time before it is finally determined that [the land-use]

regulation constitutes a ‘taking’ of his property.” First English,

482 US. at 306-07. In so holding, Whitehead Oil cannot be

reconciled with the decision below.

3. The Idaho Supreme Court

Also in conflict with the decision below is the decision of

the Idaho Supreme Court in McCuskey v. Canyon County Com-

missioners, 912 P.2d 100 (Idaho 1996) (McCuskey II). In that

case, a property owner sought to construct a convenience store,

a use authorized by the zoning in existence when he purchased

the property. In 1986, the county initially granted a building

permit but quickly revoked it on the ground that the conveni-

ence store was inconsistent with a 1979 zoning ordinance that

purported to downzone the property from “heavy industrial” to

“rural residential.” See id. at 101-02. The property owner chal-

lenged the county’s action in a declaratory judgment action;

more than six years later, the Idaho Supreme Court declared the

1979 ordinance void under state law. McCuskey v. Canyon

County, 851 P.2d 953, 959 (Idaho 1993) (McCuskey I). The

owner then sought “compensation for the County’s interference

with his use of the property, which he contends constituted a

taking, during the period following [revocation of the building

22

permit] and until the date the opinion in McCuskey I was filed.”

McCuskey II, 912 P.2d at 103. In other words, the property

owner sought damages for a temporary taking pursuant to First

English. The trial court denied relief on the ground that the

takings claim was barred by the statute of limitations. See id.

On appeal, the critical question was when did the takings claim

first accrue.

Under the decision below, this would be an easy question.

Because the time spent obtaining the judicial decision that in-

validated the 1979 zoning ordinance constituted the “kind of

delay that commonly occurs while government-imposed pro-

cesses run their course,” no taking could have occurred while

the validity of the county’s actions was being litigated. Pet.

App. at A-9. Under such an analysis, the takings claim could

have accrued no earlier than the date of the McCuskey I deci-

sion in 1993. The Idaho Supreme Court, however, provided

an irreconcilably different answer:

The time of taking occurs . . . as of the time that the

full extent of the plaintiff's loss of use and enjoy-

ment of the property becomes apparent. In this case,

[the property owner] was fully aware of the extent

to which Canyon County interfered with his full

use and en/oyment of the property in question on

November 13, 1986, the date that [he] was notified

... that he could not build the convenience store.

McCuskey II, 912 P.2d at 104 (citations omitted and emphasis

added).

In the present case, the “full extent of the plaintiff's loss

of use and enjoyment of the property” became apparent no later

than February 22, 1990, the date that the Board began refusing

to grant the necessary rent adjustment certificates despite the

fact that Horwath was entitled to those certificates as a matter

of law under Regulation 1241. See Pet. App. at A-2. Yet, in

contrast to the Idaho Supreme Court in McCuskey II, the court

23

below ruled that a taking did not occur—and could not have

occurred—at that time. This conflict, in conjunction with the

above-discussed conflicts between the decision below and the

decisions of the Federal Circuit and of the Nebraska Supreme

Court, demonstrates that the present case warrants review pur-

suant to this Court’s Rule 10(b).’

B._ The Nebraska Supreme Court Acknowledges

That Compensation Is Available for Tempo-

rary Takings Even Where Property Retains

Some Economically Viable Use

In addition to the conflicts set out above, the decision be-

low also creates a conflict with respect to the availability of

compensation for temporary takings that do not result from de-

nials of all economically viable use of property. The conflict

is not subtle: While the decision below held that respondents’

actions could not give rise to a temporary taking because they

“did not deny Horwath all economically beneficial or product-

ive use of its property,” Pet. App. A-11;the Nebraska Supreme

Court held precisely the opposite in Whitehead Oil, specifically

rejecting the government’s argument that “under the U.S. Con-

stitution, compensation for a temporary taking can only be had

when all economically viable uses have been foreclosed,” 515

N.W.2d at 407.

In resolving the company’s claim for a temporary taking,

the court in Whitehead Oil asked the straightforward question

whether the city’s denial of a use permit satisfied this Court’s

familiar two-pronged test for a categorical taking: “[L]and-use

regulation does not effect a taking if it ‘substantially advance[s]

legitimate state interests’ and does not ‘den[y] an owner eco-

nomically viable use of his land.’” /d. at 408 (alterations in

original). Emphasizing an obvious point that seems to escape

” Although the decision below did not strictly emanate from “a state

court of last resort,” Rule 10(b), it mirrors the recent decision of the

California Supreme Court in Landgate v. California Coastal Com-

mission, as explained at supra note 2 and accompanying text.

24

the California courts—that the foregoing is “a disjunctive test

under which a taking results if either element is not met”—the

Nebraska Supreme Court concluded that the city’s action failed

the first prong of the test (the prong implicated in the present

case), in that “the city acted not in furtherance of a legitimate

state interest.” Jd. Observing that this Court “has long recog-

nized that a land-use regulation or zoning ordinance which is

an invalid exercise of police power may result in a taking,

although not all economically viable use of the land is denied,”

the state court awarded damages to the company for a temp-

orary taking. Jd. (emphasis added). Thus, in contrast to the

court below, the Nebraska court did not treat the denial of

economically viable use as prerequisite to compensation under

First English. See id. In this respect, Whitehead Oil stands in

irreconcilable conflict with the decision below.

,%

4

CONCLUSION

The petition for a writ of certiorari should be granted. If

the petition is granted in No. 98-183, Landgate v. California

Coastal Commission, the present petition should be held pend-

ing the disposition of that case.

DATED: October, 1998.

Respectfully submitted,

ERIC GRANT

Counsel of Record

DAVID A. SELF R.S. RADFORD

Attorney at Law Pacific Legal Foundation

18 Crow Canyon Court; 2151 River Plaza Drive,

Suite 280 Suite 305

San Ramon, California 94583 Sacramento, California 95833

Telephone: (510) 538-5105 Telephone: (916) 641-8888

Facsimile: (510) 538-3207 Facsimile: (916) 920-3444

Counsel for Petitioner

APPENDIX

TABLE OF CONTENTS

Opinion of the California Court of Appeal, First

Appellate District (filed Apr. 30, 1996)

Decision of the State of California Superior Court,

San Mateo County (filed June 13, 1994)

Order of the California Supreme Court granting

the petition for review (filed July 17, 1996)

Order of the California Supreme Court deferring

briefing and further action (filed Nov. 24, 1997)

Order of the California Supreme Court dismissing

the petition for review (filed July 8, 1998)

Appendix A-1

Filed 4/30/96

IN THE COURT OF APPEAL OF

THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FIVE

HORWATH ASSOCIATES,

Plaintiff and Appellant,

v. A067695

THE CITY OF EAST PALO (San Mateo County

ALTO et al, Super. Ct. No. 3766167

Defendants and Respondents.

Horwath Associates (Horwath), property owners in the

City of East Palo Alto, brought this action against the City and

its Rent Stabilization Board.' Horwath sought an award of

damages for inverse condemnation on the theory that the City’s

delay in granting a rent increase on its 124 rent-controlled units

constituted an uncompensated taking of property in violation of

the California and United States Constitutions. (U.S. Const.,

Amend. V: Cal. Const., art I, § 19.) The trial court held that a

temporary taking had occurred and awarded Horwath $28,032

' The City of East Palo Alto (the City) was incorporated in 1983 and

is a municipal corporation organized and existing pursuant to the

laws of the State of California (Gov. Code, § 34302 et seq.). The

East Palo Alto Rent Stabilization Board (the Board) is an agency of

the City and is charged with the duty and responsibility of

administering the City’s Rent Stabilization Ordinance. Where

appropriate, we will refer to the City and its Board collectively as

“the City.”

Appendix A-2

in damages and its attorney fees. Both parties appeal. Horwath

appeals contending the court erred in determining the amount

of compensation owed. The City cross-appeals contending,

among other things, that the court erred in finding an uncon-

stitutional taking of Horwath’s property. We conclude the

City’s actions did not result in a taking of property for which

Horwath is entitled to compensation under the state or federal

constitutions. Consequently, we reverse.

Facts

Horwath, the plaintiff in this case, is a family general

partnership which purchased several apartment complexes with

a total of 124 rental units in an unincorporated area of San

Mateo County in 1982 and 1983. After the City was incor-

porated in 1983, a “Rent Stabilization and Eviction for Good

Cause Ordinance” was adopted and the Board was formed.

During the course of Horwath’s ownership, the rents which

“~——1t received were insufficient to meet the expense of owning the

buildings, and Horwath began defaulting on its loan -obliga-

tions. In 1989, Horwath filed petitions with the Board seeking

permission to increase the rents at its apartment complexes.

After hearings were held over a two-day period, the hearing

examiner issued a decision denying Horwath’s petitions for a

rent increase.

Horwath immediately appealed the hearing examiner’s

decision to the full Board. However, the Board failed to take

any action on Horwath’s appeal within the timeframe provided

by Rent Board Regulation 1241 (Reg. 1241). Regulation 1241

states: “If the board fails to render a final decision on a

landlord’s petition for a rent adjustment within 110 days from

the date of filing, the petition shall be deemed granted in

the amounts requested on the petition on the 111th day

following the date of the filing of the petition.” (Emphasis

added.) Despite this language, the Board did not make any

decision, and it did not respond to Horwath’s request to issue

Appendix A-3

rent certificates authorizing rent increases as required by

Regulation 1241.

On March 29, 1990, Horwath filed a petition for writ of

administrative mandamus in the San Mateo County Superior

Court seeking an order that rents be set for its 124 units as

requested in its petitions. The Board filed an answer to the

petition admitting that it did not render its final decision within

the mandatory time limits set forth in Regulation 1241, but

denying that is was required to do so because Regulation 1241

was constitutionally invalid, void, and unenforceable.

After considering the record, Judge Clarence Knight issued

a writ of mandate finding that the requirements of Regula-

tion 1241 were mandatory, and that the City and its Board had

failed to comply with its terms. The court rejected the Board’s

constitutional challenge, finding that Regulation 1241 was

reasonable, valid and “consistent with the interests of landlords,

tenants, and the general public in having petitions for rent

increases expeditiously decided.” The Board was ordered to

“promptly issue new rent certificates” at the level requested in

Horwath’s petitions. The clerk issued the writ of mandate on

June 27, 1990.

Pursuant to the writ, Horwath was allowed to increase its

rents by a total of $27,828 per month. The new rent certificates

for each of the 124 apartments were mailed to Horwath on

July 31, 1990. After giving 30-days’ notice on any rent

increase as required by law (Civ. Code, § 827), Horwath raised

rents on some of the units but eventually lost the properties to

the primary lender because of recurring defaults.

Horwath then sued the City in inverse condemnation.

Horwath argued that “because the defendants failed to properly

administer the rent control ordinance and delayed awarding

plaintiff rent increases to which it was entitled, defendants are

liable to plaintiffs in inverse condemnation.” Horwath further

alleged that “had it received the increased rents when it applied

Appendix A-4

for them in August, 1989 and thereafter, it could have met its

debt service and maintained its ownership of the properties.”

It is important to emphasize that Horwath’s lawsuit did not

challenge the constitutionality of the City’s rent control

scheme. Rather, the lawsuit focused on the Board’s failure to

timely grant the requested rent increases, and its failure to abide

by the time requirements imposed by Regulation 1241.

Horwath sought damages to recoup its $600,000 down pay-

ment, its loss of equity between $1 million and $3.5 million and

the loss of sums contributed by Horwath’s individual partners

to keep the properties afloat (approximately $800,000).

A two-week trial of the matter took place before the court

and included testimony by Horwath’s general managing part-

ners, expert witnesses for each side, and numerous other

witnesses. We need not recount at length the trial court’s

extensive findings. One of the key findings was that Horwath

could not prevail on its permanent taking claim. The court

found that irrespective of the City’s delay in authorizing

Horwath to increase its rents, “[t]he ultimate loss of the

property seems to have been inevitable as a result of a large

number of factors,” including “the incorporation of the City of

East Palo Alto, the adoption of the rent control ordinance by the

City, certain increases and then rollbacks in allowed rentals, the

recession in the economy, the political turmoil in East Palo

Alto, the breakdown of public safety in East Palo Alto, the

inability of Plaintiff to consistently obtain close to 100%

occupancy, the crime, violence and degradation of property

values in the area, the savings and loan problems of the times,

and numerous other socio-economic problems of the era and of

the area.” Accordingly, the court ruled that “[n]o permanent

damages can be awarded. To do so would be to engage in pure

speculation.”

However, the court went on to find that the failure of the

Board to comply with its own Regulation 1241 caused a tem-

porary taking of Horwath’s property and that even a temporary

Appendix A-5

taking required just compensation. The court found this

temporary taking spanned the course of approximately six

months—from April 1, 1990, the date Horwath would have

been able to actually start charging increased rents if the Board

had timely acted on Horwath’s petitions for a rent increase by

February 22, 1990, up to and including October 1, 1990, the

date Horwath actually was able to raise its rents after the Board

mailed the new rent certificates on July 31, 1990.2 The court

found this “six month delay in obtaining the maximum rental

allowances” caused a monthly loss of $4,672, totaling $28,032,

together with interest, for which Horwath was entitled to be

compensated. The court also awarded Horwath $22,008 in

attorney fees. (Code Civ. Proc., § 1036 [prevailing plaintiff in

inverse condemnation action may recover attorney fees].)

Discussion

The California and United States Constitutions forbid the

taking of private property without just compensation. (U.S.

Const., Amend. V; Cal. Const., art. I, § 19.)’ Inverse condem-

nation is “a shorthand description of the manner in which a

landowner recovers just compensation for a taking of his

property when condemnation proceedings have not been

instituted.” (United States v. Clarke (1980) 445 U.S. 253, 257.)

The determination of whether an inverse taking has occurred is

2 It is obvious the court computed the 30-days notice requirement

contained in Civil Code section 827 in calculating the delay for

which the City was responsible.

> The Fifth Amendment applies to the states through the Fourteenth

Amendment. (First Lutheran Church v. Los Angeles County (1987)

482 U.S. 304, 310, n. 4.) Neither party argues that this court should

apply two different principles or standards under the “takings”

clauses of the two Constitutions, and our Supreme Court has

recognized that in analyzing “an inverse condemnation action arising

out of a regulatory taking” the standards imposed by the state and

federal constitutions are virtually identical. (Hensler v. City of

Glendale (1994) 8 Cal.4th 1, 9, fn. 4.)

Appendix A-6

a question for the court, even when there are factual questions

involved. (Redevelopment Agency v. Tobriner (1984) 153 Cal.

App.3d 367, 376; Orpheum Bldg. Co. v. San Francisco Bay

Area Rapid Transit Dist. (1978) 80 Cal.App.3d 863, 868.)

The trial court seemed to believe that simply because the

Board failed to act on Horwath’s request for a rent increase

within the time limit imposed by a municipal regulation, that a

compensable temporary taking of property occurred until the

Board’s inaction was successfully challenged in court and the

higher rents were put into place. The situation presented by

this case is not that simplistic. Our Supreme Court has recently

reminded us that California’s “just compensation” provision

“never was intended, and never has been interpreted, to impose

a constitutional obligation upon the government to pay ‘just

compensation’ whenever a governmental employee commits an

act that causes loss of private property.” (Customer Co. v. City

of Sacramento (1995) 10 Cal.4th 368, 378.)

The taking alleged herein does not fall into either category

of governmental action which generally requires compensation

—a governmental activity that authorizes or directs a physical

intrusion into the plaintiffs’ property or which deprive the

landowner of all economically feasible use of the property.

(Lucas v. South Carolina Coastal Council (1992) 505 US.

1003, 1015; see also Hensler v. City of Glendale, supra, 8 Cal.

4th at p.10; but see Customer Co. v. City of Sacramento, supra,

10 Cal.4th at p. 371 [property destruction caused by police in

pursuit of suspect did not constitute a taking].) Where, as here,

the claim is that governmental conduct not amounting to a

permanent physical occupation or confiscation of property

involves a regulatory taking, the analysis is peculiarly fact

dependent, involving “essentially ad hoc, factual inquiries.”

(Penn Central Transp. Co. v. New York City (1978) 438 U.S.

104, 124; Lucas v. South Carolina Coastal Council, supra,

505 U.S. at p. 1015; Connolly v. Pension Benefit Guaranty

Corp. (1986) 475 U.S. 211, 224.)

—

Appendix A-7

“[W]here the government merely regulates the use of

property, compensation is required only if considerations such

as the purpose of the regulation or the extent to which it

deprives the owner of the economic use of the property suggest

that the regulation has unfairly singled out the property owner

to bear a burden that should be borne by the public as a whole.

[Citation.] An individualized assessment of the impact of the

regulation on a particular parcel of property and its relation to

a legitimate state interest is necessary in determining whether

a regulatory restriction on property use constitutes a compen-

sable taking. [Citation.]” (Hensler v. City of Glendale, supra,

8 Cal.4th at p. 10, internal quotation marks omitted.) We read

the Supreme Court as requiring us to balance the legitimacy of

the state’s interest against the impact on the owner’s use of his

land. (See, e.g., Agins v. Tiburon (1980) 447 U.S. 255, 260-

261.)

In Carson Mobilehome Park Owners’ Assn. v. City of

Carson (1983) 35 Cal.3d 184, our Supreme Court set the stage

for Horwath’s action when it recognized that a public agency’s

unreasonable delay in granting a rent increase could give rise

to a takings claim. After pointing out that “property may be as

effectively taken by long-continued and unreasonable delay in

putting an end to confiscatory rates as by an express affirmance

of them,” the court noted that “[s]ome delay is, of course, inher-

ent in all rent control procedures. However, only those delays

which are longer than practically necessary to achieve the

legitimate purposes of the legislation are constitutionally

proscribed.” (/d. at pp. 191-192, internal quotation marks omit-

ted, quoting in part Birkenfeld v. City of Berkeley (1976)

17 Cal.3d 129, 169, see also Fisher v. City of Berkeley (1984)

37 Cal.3d 644, 687.) However, in order to rise to the level

necessary to state a claim for inverse condemnation, the delays

must be long, continued, unreasonable and substantially greater

than what is practically necessary. (Smith v. Ill. Bell Tel. Co.

(1926) 270 U.S. 587, 591; Carson Mobilehome Park Owners’

Assn. v. City of Carson, supra, 35 Cal.3d at p. 193; Oceanside

Appendix A-8

Mobilehome Park Owners’ Assn. v. City of Oceanside (1984)

157 Cal.App.3d 887, 901.)

Our case involves a local rent control regulation that sets

forth a specific procedure by which a person may seek to

modify or ameliorate the rent control ordinance’s effect on him

by seeking a rent increase. Its provisions require that com-

plaints of aggrieved property owners be addressed, and that

action—favorable or unfavorable—be completed within 110

days. Thus, there are protections built into the regulation to

protect the applicant from unreasonable delay on the part of the

Board. (See Fisher v. City of Berkeley, supra, 37 Cal.3d

at p. 691 [120-day limit on landlord petitions not excessive],

Carson Mobilehome Park Owners’ Assn. v. City of Carson,

supra, 35 Cal.3d at p. 193 [105-day period for rent board to act

not excessive]; Oceanside Mobilehome Park Owners’ Assn. v.

City of Oceanside, supra, 157 Cal.App.3d at p. 901 [110-day

period for action on rent increase not excessive]; Baker v. City

of Santa Monica (1986) 181 Cal.App.3d 972, 986 [120-day

period not excessive].)

If the Board fails to act within the prescribed time, the writ

of administrative mandate provides an adversely affected citi-

zen with an effective means of forcing a recalcitrant Board to

act on an overdue submission. Horwath, of course, ultimately

received the requested rent increase as a result of utilizing this

writ procedure. What Horwath alleges, and the trial court

found, was a temporary taking of its property occurred during

a six-month period in which four things happened: 1) the

superior court decided the constitutionality of the regulation in

question and issued the writ of mandate, 2) the Board issued

124 certificates authorizing the requested rent increases;

3) Horwath gave the affected tenants 30-days notice as legally

required, and 4) the rent increases actually went into effect.

Given the complexities of rent control, of which we are inti-

mately familiar (see City of Berkeley v. City of Berkeley Rent

aa wa alas ~~ ‘ is

Appendix A-9

Stabilization Bd. (1994) 27 Cal.App.4th 951), this period is not

unreasonably long.

Of course, while Horwath was presenting a judicial chal-

lenge to the Board’s inaction, it was not able to make

immediate optimum use of its property by charging higher

rents. However, this fact alone does not constitute a taking.

Instead “[mlJere fluctuations in value during the process of

government decisionmaking, absent extraordinary delay, are

‘incidents of ownership’ . . . [which] cannot be considered a

‘taking’ in the constitutional sense.” (Agins v. Tiburon, supra,

447 USS. at p. 263, fn. 9, citing Danforth v. United States

(1939) 308 U.S. 271, 285.)

In considerable measure, the delay to which Horwath was

subjected is the same kind of delay that commonly occurs while

government-imposed processes run their course, which have

not traditionally been viewed as constituting a compensable

taking. (See e.g. Guinnane v. City and County of San

Francisco (1987) 197 Cal.App.3d 862, 870 [delay which occur-

red while city studied the possible acquisition of plaintiff's

property as open space did not constitute temporary taking];

Steinbergh v. City of Cambridge (Mass. 1992) 604 N.E.2d

1269, 1275 [delay occasioned by litigation process in invali-

dating rent control restriction did not constitute temporary

taking]; see generally Mira Development Corp. v. City of San

Diego (1988) 205 Cal. App.3d 1201, 1220 [government may

engage in good faith decisionmaking concerning public use of

site without being subject to inverse condemnation action].)

While no California case has addressed the precise

question here—whether a taking is wrought by unnecessary

administrative delay in authorizing a rent increase—this very

question was addressed in a case discovered by out independent

research, Silverman v. Rent Leveling Bd. (N.J.Super.A.D. 1994)

649 A.2d 1342. As in our case, a property owner sought com-

pensation for unwarranted administrative delay in approving his

application for hardship rent increase, which was ultimately

Appendix A-10

achieved through judicial intervention, claiming the delay

constituted an unconstitutional temporary taking of rental

premises without just compensation.

The court observed, [w]hile we do not endorse the

desultory pace at which plaintiffs’ application was reviewed by

the municipal agencies, we reject the claim that there was a

taking without just compensation.” (/d. at p. 1348.) The court

went on to explain, “[T]he complexity of the subject [rent

regulation and real estate finance] indicates that mistakes are

inevitable and that public entities, and ultimately their tax-

payers, cannot always be called to account when errors are

made. Considering these circumstances, we conclude that in

order to recover damages on an inverse condemnation claim,

the municipal agency’s decision and the administrative lag in

according a remedy must have substantially destroyed the

landlord’s beneficial use of his property.” (/bid.)

We are persuaded that the approach taken in Silverman is

the proper one, as it appears to provide for the most equitable

accommodation of the competing public and private interests

at stake in a “takings” challenge such as this one. If persons are

permitted to be monetarily compensated with the “unusually

generous” remedies available in inverse condemnation actions

every time a local governmental agency delays in making a

particular decision, the financial burden on local governments

will become overwhelming and scarce public resources will be

dissipated at an alarming rate. (Customer Co. v. City of

Sacramento, supra, 10 Cal.4th at p. 390; see Air Quality

Products, Inc. v. State of California (1979) 96 Cal.App.3d 340

352.) These funds are better put to public use, especially

where, as here, the harm experienced by the property owner is

temporary and the essential attributes of property ownership

remain intact while relief is being sought.

In finding a temporary taking had occurred, the trial court

cited First Lutheran Church v. Los Angeles County, supra,

482 U.S. 304. In-that case, the county passed an ordinance

Appendix A-11

which prohibited the church from building on its property

which was ultimately invalidated after a successful legal chal-

lenge. The Supreme Court held that the church was entitled to

bring an action in inverse condemnation for the time it was

subject to the invalid ordinance because “‘temporary’ takings

which . . . deny a landowner all use of his property, are not dif-

ferent in kind from permanent takings, for which the

Constitution clearly requires compensation.” (/d. at p. 318.)

In First Lutheran, the Supreme Court was addressing an

ordinance which denied the landowner all use of its property,

and it expressly did not “deal with the quite different questions

that would arise in the case of normal delays in obtaining

building permits, changes in zoning ordinances, variances, and

the like... .” (/d. at p. 321.) Our case involves a delay attribu-

table to the normal workings of governmental and legal pro-

cesses, a situation First Lutheran expressly declined to address.

Furthermore, in our case the challenged delay did not deny

Horwath all economically beneficial or productive use of its

property. Horwath collected rents while it pursued its chal-

lenge, and it was free to sell, develop, or encumber its

properties. We agree with the observation in Guinnane v. City

and County of San Francisco, supra, 197 Cal.App.3d at

page 869, that “there is nothing in First [Lutheran] which alters

the established principle that the interim burden imposed on a

landowner during the government’s decisionmaking process,

absent unreasonable delay, does not constitute a taking.”*

* We also have considered a case decided by the Second District after

this matter was fully briefed, Santa Monica Beach, Ltd. v. Superior

Court (1996) 42 Cal.App.4th 1228. In that case, the lower court

granted a demurrer to a landlord’s inverse condemnation claim

against a local rent control board for a regulatory taking. The

landlord’s regulatory taking claim questioned how effectively the rent

control’s stated purpose—mitigating a housing shortage for the poor

—was furthered by the rent control scheme. Since the legitimate

state interest of maintaining an affordable housing stock was

(continued...)

Appendix A-12

Having concluded that Horwath did not establish that the

City’s delay in authorizing the rent increase effected a taking of

his property in violation of the state and federal constitution, we

find it unnecessary to discuss whether the court’s remedy pro-

vided it adequate compensation. 7

The judgment is reversed. Each party is to bear its own

costs.

King, J.

We concur:

Peterson, PJ.

Haning, J.

* (...continued)

allegedly not being advanced by the rent control scheme, the landlord

claimed he was being deprived of the economically viable use of his

land without advancing the law’s stated purpose. The appellate court

overturned the grant of demurrer, concluding this type of takings

claim could not properly be evaluated without a factual record. In

view of the obvious differences between the takings claim in Santa

Monica Beach, Ltd. and the takings claim we review in the instant

case, we do not believe Santa Monica Beach, Ltd. provides any

illumination on the issues at hand.

Appendix B-1

Filed 6/13/94

SUPERIOR COURT STATE OF CALIFORNIA

COUNTY OF SAN MATEO

JOSEPH HORWATH, and No. 376167

ANTHONY HORWATH,

dba HORWATH ASSOCIATES

Plaintiffs, DECISION

vs.

THE CITY OF EAST PALO ALTO;

THE EAST PALO ALTO RENT

STABILIZATION BOARD,

Defendants.

/

This is an action for inverse condemnation which

proceeded to trial pursuant to a First Amended Complaint filed

June 28, 1993. The gravamen of the single cause of action is

that contrary to the requirements of the Defendants’ Rent

Control Ordinance and Regulations promulgated pursuant

thereto, the City and its Rent Control Board failed to grant

apartment rent increases to Plaintiffs by February 22, 1990, a

mandatory date pursuant to petitions for increases filed by

Plaintiffs in August and September of 1989; that Plaintiffs were

required to petition for a writ mandate to have the Certificates

of Maximum Legal Rents issued; that the writ was granted

June 27, 1990, but no certificates were in fact issued until the

Fall of 1990; that as a result of the 6 to 8 month delay

occasioned in Plaintiffs receiving the certificates, Plaintiffs 124

units of apartments were lost through foreclosure, Plaintiffs

being unable to service the Notes and Deeds of Trust

encumbering same without the requested increased rents.

Plaintiffs prayed for compensatory damages for the alleged

—_-

Appendix B-2

unconstitutional taking of its property, interest, attorney’s fees,

appraisal fees, other-costs and expenses and for costs of suit.

Defendants filed a general denial to the unverified

complaint, raised 8 affirmative defenses thereto and at the

commencement of trial abandoned the second (Statute of

Limitation), third (Governmental Immunity), fourth (Laches),

and seventh (Non-Exhaustion of Administrative Remedies).

This left viable for trial the first (Failure to State a Cause

of Action) fifth (Valid Exercise of Police Powers), sixth

(Estoppei), and eighth (Failure to Mitigate Damages) affirm-

ative defenses. Defendants in their Answer prayed that Judge-

ment be entered in Defendants’ favor, for reasonable attorney’s

fees and costs of suit. At trial, the question of Failure to

Mitigate Damages was in great measure transmuted into an

affirmative defense that any losses suffered by Plaintiffs either

were solely caused by the activities of the Plaintiffs or were

caused by economic and social factors beyond the control of

either the Plaintiffs or the Defendants.

The Court was thus presented with issues of liability,

causation and damages at trial.

ISSUE: LIABILITY

Prior to ‘the commencement of the instant action,

Plaintiffs had filed a Petition for Writ of Mandate in San Mateo

County Superior Court Action No. 349812 on March 29, 1990,

seeking a Writ to Compel the City and its Rental Control Board

to certify Plaintiffs’ rents at the levels requested in their

Petitions as mandated by the Cities’ own ordinance and regula-

tions, for an award of attorney’s fees pursuant to Government

Code §800 and CCP §1021.5, plus Petitioners’ costs of Court.

Petitioners in that action essentially alleged that the East Palo

Alto “Rent Stabilization and Eviction for Good Cause Ordi-

nance”, particularly Section 12.A.12 thereof and Regulations

31241 and 1243 adopted pursuant thereto, were constitutionally

valid and enforceable; that the ordinance and the regulations

Appendix B-3

mandated that the City render a final decision on a landlord’s

petition within 110 to 120 days following the date of filing; that

a failure to do so required the City to certify the Petitioners’

rents in the amounts requested in their petition (Regulation

1241); that 197 days had elapsed since the date of filing the

petitions and the City had failed to render a final decision on

the applications; that the City should accordingly be ordered to

forthwith comply with its own ordinance and regulations and

issue the certificates of rent increases as requested.

Interestingly, the City and its Board replied to the

petition by admitting that the Board did not render its final

decision within 110 days of filing as required by Regulation

1241; but then denied that it was required to do so because that

regulation was itself constitutionally invalid, void and unen-

forceable, but the City had not yet repealed same (nor did it

apparently have any plans to do so)!!

The Writ of Mandate proceeded to hearing on May 4,

1990 before the Hon. Clarence B. Knight, Judge, Department 2

of this Court. The Minute Order (of the hearing before Judge

Knight reflects that he specifically found Regulation 1241 to be

reasonable, valid and constitutional. He granted the Petition for

Writ of Mandate with costs to Petitioners, denying Petitioners

request for attorney’s fees.

On May 7, 1990, Judge Knight further entered a tentative

written Decision setting out the same ruling and on June 27,

1990 a written Judgment granting peremptory Writ of Mandate

was filed ordering the City and its Board (“to . . . promptly

issue new rent certificates certifying Petitioners’ rents at the

equalized levels requested in their petitions and set forth in the

requested rent schedule (3 pages), a copy of which is attached

to this Judgment; . . .”) and allowing Petitioners their costs and

disbursements (it was silent as to the issue of attorney’s fees).

Judge Knight found that the requirements of Regulation

1241 were mandatory, that the City and its Board had failed to

Appendix B-4

comply with the terms of their own regulation, and thus liability

was estabiished at least insofar as Regulation 1241 is concerned

(failure to render a final decision within 110 days from the date

of filing mandates that the Petition “shall be deemed granted in

the amounts requested in the Petition on the 111th day follow-

ing the date of filing the Petition.”).

The Judgment of and writ issued pursuant thereto left

open for further determination at the trial of this matter the

questions of constitutional validity and enforceability of Sec-

tion 12-A-12 of the Rent Control Ordinance and Regulation

1243 and any liability of the City and its Board for any

admitted failure of the Defendants to comply with the ordi-

nance and regulation.

Section 12.A.12 of the Ordinance provides that:

“The rules and regulations adopted by the Board

shall provide for final Board action on any

individual petition within one hundred twenty

(120) days following the date of filing of the

individual rent ceiling adjustment petition, unless

the conduct of the Petitioner or other good cause

is responsible for the delay.” (Emphasis added.)

Regulation 1243 provides:

“TIME FOR DECISION.

The Board shall take final action on any indi-

vidual adjustment petition within one hundred

twenty days following the date of proper filing,

unless the conduct of the Petitioner or other good

cause is responsible for the delay. Good cause

may include, but is not limited to, continuances

granted, the submission of additional information

by the Petitioner, the filing of a Motion for

Reconsideration, or a request by Petitioner to

Appendix B-5

disqualify the hearing examiner or Board

member(s).” (Emphases added.)

This court now specifically finds Section 12.A.12 of the

Ordinance and Regulation 1243 to provide for reasonable time

limits within- which the City/Board must dispose of a rent

increase application pursuant to the rules laid down in

Birkenfeld v. City of Berkeley (1976) 17 CAA 129, 169, Carson

Mobile Park, etc., v. City of Carson (1983) 35 CA3 187, and

Oceanside Mobile Park, etc., v. City of Oceanside (1984) 157

CA3 887. Both Section 12.A.12 and Regulation 1243 are

constitutional and valid. Defendants admit non-compliance

with both thereof as well as Regulation 1241. The City and its

Board further acknowledge that neither at the time nor in this

trial has any good cause been shown pursuant to either the

Ordinance or the Regulation for any delay beyond the mand-

atory time limits, nor that any delay was caused by any conduct

of Plaintiffs/Petitioners.

Liability of the Defendants has therefore been clearly

established.

I BE. CA TION

An interesting aspect of this case is that the Plaintiffs’

alleged loss is economic rather than physical. Most cases

pertaining to inverse condemnation deal with such things as

landslides, collapsing sewers, activity on easements, and other

physical situations. Here, the “taking” is alleged to be economic

only in the sense of the contended loss of Plaintiffs, equity in

124 units of apartments because of the failure of the City/Board

to act on rent increase applications within the 110/120 days

maximums permitted by the Rent Control Ordinance and

Regulations of the City of East Palo Alto.

Whether the “taking” be physical or economic, some

authorized activity by the City/Board dealing with the public

good has to have caused the loss or losses complained of by the

Plaintiff if the Plaintiff is to prevail herein.

Appendix B-6

Amendment V to the United States Constitution provides

that “no person shall be . . . deprived of . . . property, without

due process of law; nor shall private property be taken for

public use without just compensation.” Article I, Section 19 of

the California Constitution sets out that “private property may

be taken or damaged for public use only when just compen-

sation . . . has first been paid to . . . the owner.”

While the “taking” for which a public entity may be held

liable is generally a physical invasion or interference with prop-

erty rights, it can occur when the body politic deprives the

owner of the economically viable use of his property. (Keystone

Bituminous Association v. The Lebenedictis (19137) 480 U.S.

470; Agins v. Tiburon (1980) 447 U.S. 255. The adoption and

enforcement of valid ordinances and regulations which substan-

tially advance a legitimate governmental interest and which

result in the loss of all economically viable use of property, can

constitute a “taking”. (First English Evangelical Lutheran

Church v. Los Angeles (1987) 482 U.S. 304; Gregory v. San

Juan Capistrano (1983) 142 Cal.App.3d 72; Fisher v. City of

Berkeley (1984) 37 CA3d 644).

Section 3 of the East Palo Alto Rent Stabilization

Ordinance states that the purpose of the ordinance is:

“To protect residential tenants in the City from

unreasonable rent increases by discouraging

speculation in rental property and stabilizing rent

increases; to protect the tenants from arbitrary,

discriminatory or retaliatory evictions; and at the

same time to assure landlords both a fair return

and rental income sufficient to cover costs of

maintenance and operating expenses as well as

the costs of capital improvements to their rental

properties.”

The adoption of the ordinance and regulations

promulgated pursuant thereto clearly establishes a public

oO

Appendix B-7

use/purpose; and, if the effectuation thereof results in the lack

of economic viability of the property such as to cause its loss

through foreclosure, a compensable “taking” may well result.

The key word in the foregoing is “cause”. While inverse

condemnation is not necessarily a negligence type action, the

Plaintiff must demonstrate a causal relationship between the

governmental activity and the property loss complained of in

order to establish an actionable “taking”. (Souza v. Over-

development Co. (1985) 164 CA3d 165).

“Typically, this element is referred to as ‘proxi-

mate cause’. Unlike the corresponding element in

negligence cases, however, foreseeability is not a

consideration for inverse condemnation. Instead,

a governmental entity may be held strictly liable,

irrespective of fault, where a public improvement

constitutes a substantial cause of the Plaintiff's

damages even it only one of several concurrent

causes. (Belair v. Riverside County Flood Dist.

(1988) 47 CA3d 550, 558-559 [253 Cal.Rptr. 693,

764 p.2nd 1070].)”

Marshall v. Department of Water and Power

(1990) 219 CA3d 1124, 1139.

Prior to 1991 BAJI 3.75 defined proximate cause as that

which produced the loss and without which the loss would not

have occurred. BAJI 3.76 on the other hand defined legal cause

as a cause which is a substantial factor in bringing about the

loss. The case of Mitchell v. Gonzales (1991) 54 CA3d 1041

abolished the proximate cause test and established only the

substantial factor test as being appropriate to the determination

of cause of loss. The ruling of Marshall, supra, 1139, seems to

be in accord with BAJI 3.76 when it states that a governmental

entity may be held strictly liable if the “taking” constitutes a

substantial cause even if only one of several concurrent causes

of the Plaintiff loss.

Appendix B-8

“While there is no judicially approved definition of what

is a subsiantial factor for causation purposes, it seems to be

something which is more than a slight, trivial, negligible, or

theoretical factor in producing a particular result.” (BAJI,

January 1994 Pocket Part for 7th Edition, Vol. I, pg. 41,

comment). The California supreme Court referencing the term

“substantial factor” in a criminal case stated:

“No cause will receive judicial recognition if the

part it played was so infinitesimal or so theoretical

that it cannot be regarded as a substantial factor in

bring[ing] about the particular result.” (People v.

Caldwell (1984) 36 CA3d 210, 220).

The gist of the First Amended Complaint paragraphs 18, 19 and

20, and all of the testimony and evidence adduced at trial on

behalf of the Plaintiff is that the rent increases_should have been

granted as of February 22, 1990 but were not received until

forced out of the Board by the successful mandate petition on

or about August 1, 1990, a delay of approximately 6 months;

that as a direct and proximate result of the delay and the failure

of the Defendant to certify Petitioner’s rent increases, Plaintiff

lost its properties through foreclosure.

Was, then, the failure of the Board to grant the increased

rents in the amounts requested by Plaintiffs as of February 22,

1990 coupled with an approximately six months delay there-

after before granting the increases as ordered by Judge Knight,

a “substantial factor” or a “substantial cause” of Plaintiffs loss

of its property by foreclosure in 1991.

The evidence discloses that in 1986, 1987 and 1989

Plaintiff had several times defaulted on its loan obligations such

as to have caused its lender, Home Savings, to execute several

Notices of Default. Plaintiff had been able to at least limitedly

satisfy each of these notices prior to August of 1989. By the

time Plaintiff filed its applications for rent increases with the

Board in August and September of 1989, all 124 units were

Appendix B-9

again in default to the tune of some $259,000. This sad state of

affairs was in fact what precipitated Plaintiffs application for

Annual General Adjustments (AGA) and Individual Rent

Adjustments (IPA). The loan payments at the time were

approximately $43,000 a month. Plaintiffs sought rent increases

of approximately $27,000 a month. Mathematically the grant-

ing of such increases would still have left Plaintiffs short same

$16,000 a month.

In their efforts to stay alive Plaintiffs during the fall of

1989 renegotiated their loans with Home Savings such that the

above arrearage was added to, incorporated in and became part

of the principle of the loans; Plaintiffs were required to pay

some $64,000 by February of 1990 on account of the arrear-

ages; and commencing in October of 1989 the monthly pay-

ments would be interest only of approximately $30,000 a month

plus a $6,000 monthly deposit in a tax impound account, a total

of $36,000 per month. Once again Plaintiffs cash flow would

still have been insufficient even with the increased rents to

service the renegotiated monthly mortgage requirements.

However, Plaintiffs had available to them other resources

and did further capitalize the partnership to the tune of approxi-

mately $100,000 and had available approximately an additional

$225,900 to apply towards curing the defaults. For whatever

reasons, however, Plaintiffs chose not to apply this $225,000 to

keeping these 124 apartment units afloat.

The rents which were being paid, on the other hand, did

provide some cash flow which was allocated against the

monthly accruals. The amount thereof was still insufficient to

fully amortize the $36,000 needed each month as by the

summer of 1990 the renegotiated payments were again in de-

fault and by the end of 1990 a judicial foreclosure proceeding

had been instituted against the Plaintiff's by Home Savings.

In 1982 and 1983 Plaintiff purchased the 124 units for a

total of $3,500,000. Most of the purchase price was by way of

—

Appendix B-10

promissory notes and deeds of trust. In October 1985 Plaintiff

refinanced all of the units and in so doing borrowed a total of

$5,025,000. This resulted in cash of approximately $900,000

being made available to Plaintiff. Three hundred thousand

dollars of this was set aside in an operating reserve for the units

and $600,000 was distributed $200,000 to each of the 3 part-

ners in Plaintiff. The amounts so distributed were understood

to be kept available by the partners for capital reinfusion if it

became necessary.

The capital reinfusion did become necessary and clearly

Joseph Horwath contributed his portion thereof. It is not abso-

lutely clear but seems reasonable to infer that Anthony Horwath

did likewise. It is less clear that Anton Horwath contributed his

$200,000 when called upon at a later date.

Throughout the 1989-90 period Plaintiff endeavored in

many ways to stall the constantly recurring threats of fore-

closure. Plaintiff attempted to negotiate a sale of at least one of

the properties to Vinod Bansal; Plaintiff attempted to refinance

through Fidelity Savings and Loan; Plaintiff successfully

negotiated a “stand still” agreement with Home Savings;

Plaintiff sought rent increase authority from the Board to an

amount which would adequately provide (as required by

statute) for the property to generate an appropriate Net Operat-

ing Income (NOI); Plaintiff joined with other apartment house

owners in the area to engage a private security service in an

effort to reduce crime and violence on the street; Plaintiff

actively participated in governmental efforts to increase the

economic viability of the City of East Palo Alto and to partici-

pate in various public service affairs in order to increase the

attractiveness of rental units on the street.

The Writ of Mandate issued by Judge Knight in a sense

was a default against the Defendants in that their Regulation

1241 provides that in the event of failure to act within the time

specified rent increases in the amount applied far shall be

granted. It does not matter whether these amounts are realistic

ee

Appendix B-11

or unrealistic. The writ simply ordered the Board and the City

to allow rents up to the maximum requested. The writ in no

way made any determination that such rents would be obtain-

able in the real world of applicable market forces.

Two experts testified—one for the Plaintiff and one for

the Defendant—that the rents allowed pursuant to the writ were

not obtainable under the then current market situation for apart-

ments of these types and in this location. Assuming 100%

occupancy, the best rental increase which could have then been

anticipated was only approximately $23,000 a month rather

than the $27,000 authorized by the writ. Both experts testified

that there was a bad combination of economic and social

circumstances affecting the area in 1989 and 1990. The United

States had entered upon its general recession by that time which

was particularly being felt in California. The Tax Reform Act

of 1986 had impacted the ability of multiple family unit owners

to obtain capital gains treatment in the event of a sale and/or

various loss carry forward benefits. The savings and loan crisis

was upon us making it difficult to obtain financing. The supply

of apartments on the San Francisco peninsula exceeded the

demand therefor. The City of East Palo Alto was in terrible

political turmoil, one budgetary crisis followed another, and

police enforcement was in dire straits.

The Plaintiffs’ Anthony and Joseph Horwath themselves

testified and evidence was adduced against them by the

Defendants that crime, violence and property degradation on

O’Keefe Street were rampant and increasing. It was difficult to

find responsible tenants willing to pay a reasonable rental.

About the only new tenants who could be acquired were wel-

fare and AFDC recipients.

The consequence was that even after finally getting the

new rental certificates approximately August 1, 1990, Plain-

tiff's were able to increase the monthly rents only by some

$2,400 rather than the $27,000 authorized by the writ and the

$23,000 monthly increase which the two experts felt might

Appendix B-12

have possibly been attained. The end result was bankruptcy

(Chapter 11) of the Plaintiff in January of 1991. This ultimately

led to a deed in lieu of foreclosure being executed by the

Plaintiff transferring title of the subject properties to the lender,

Home Savings, approximately a year later.

The loss of the property through the foreclosure

proceedings was therefore caused by a multitude of factors.

One of those factors was the inability of the Plaintiffs to obtain

a reasonable return on their investment and a reasonable NOI.

Irrespective of the failure of the Board to allow any IRA’s by

February 22, 1990, the ordinance and regulations did mandate

a blanket AGA of approximately 4.9% or $4,672.00 per month.

The effective date of such because of CC §827 would have

been April 1, 1990. Assuming that the certificates were in fact

not issued pursuant to the writ until sometime during the month

of July 1990, and mailed to Plaintiff July 31, 1990, the earliest

effective date of the AGA’s would then have become

October 1, 1990—a delay of six months.

No evidence was adduced that the rents could not have

been raised at least the minimum _of these AGA adjustments.

The ratio therefore of the AGA increases to the maximum

possible rental increases pursuant to the testimony of the

experts of $23,000 (including AGA and IRA increases adjusted

by what the market would bear) is 20.3%. The total amount of

AGA monthly increase of $4,672.00, would obviously not have

cured Plaintiff's entire operating deficits. It would have helped

however.

The ultimate test of what rent the Plaintiffs could

reasonably obtain for the units after the belated receipt of the

certificates, however, is in fact what the Plaintiffs thereafter did

to increase the rents. In some instances Plaintiff increased the

rent slightly more than the allowed AGA levels, in some

instances less than it, in some instances not at all, and in no

instances an amount equal to that which the experts testified

might be possible under market conditions then existing.

Appendix B-13

Particularly, Plaintiff did not raise any of the rents to the level

authorized by the writ and asked for by Plaintiff in its original

' increase applications of August and September 1989. As

acknowledged by Anthony Horwath in his letter to Home

Savings of July 8, 1991 (Exhibit M) the area had deteriorated

so badly it was simply impossible to obtain even minimal

reasonable rents.

By the end of 1990 the prospective mitigating sale to

Bansal had fallen through. Although not entirely clear, it

appears that this was because of the refusal of Home Savings to

allow Bansal to assume the note and deed of trust on the

property he was attempting to purchase. There was no evidence

presented that such refusal was in any way related to the failure

of the City/Board to issue rent certificates on February 22,

1990. A more reasonable inference is that Bansal simply did

not qualify pursuant to the loan standards/criteria of Home

Savings.

Likewise, there was no evidence that the failure of the

Fidelity refinance in December 1990 was the result of the non-

issuance of the certificates in February 1990. On the contrary,

by December 1990 the maximum authorized rent increase

certificates had been issued and the appeal by the City/Board

from the Writ of Mandate had been abandoned and the certifi-

cates were thereupon final and non-appealable (a requirement

of Fidelity).

The ultimate loss of the property seems to have been

inevitable as a result of a large number of factors starting with

the refinancing of the properties in 1985, the incorporation of

the City of East Palo Alto, the adoption of the rent control

ordinance by the City, certain increases and then rollbacks in

allowed rentals, the recession in the economy, the political

turmoil in East Palo Alto, the breakdown of public safety in

East Palo Alto, the inability of Plaintiff to consistently obtain

close to 100% occupancy, the crime, violence and degradation

of property values in tne area, the savings and loan problems of

Appendix B-14

the times, and numerous other socio-economic problems of the

era and of the area. The most that can be said for Plaintiff's

case therefore is that the failure of the City/Board to comply

with their own ordinance and regulations by February 22, 1990

caused a temporary “taking” of property and even a temporary

“taking” requires just compensation (First English Evangelical

Lutheran Church v. Los Angeles (1987) 482 US 384).

Plaintiff ‘s needed $36,000 a month additional rent as a

minimum to stay afloat under the renegotiated agreement with

Home Savings. Even the minimum AGA increases authorized

pursuant to the writ (and which seem to have been reasonably

obtainable) would have provided increased rents of only

$4,672.00 per month maximum. This increase would not have

permanently cured Plaintiffs problems and the property most

likely ultimately would have been lost via foreclosure. A rea-

sonable inference, however, is that the receipt thereof perhaps

would have forestalled foreclosure and given the Plaintiff's an

opportunity to consummate the Bansal sale, the Fidelity refi-

nancing, or some other proposition to salvage their project. The

inability to receive $4,672.00 against a need of $36,000 per

month (almost 13%) is not insignificant nor trivial and

constitutes a substantial factor in causing at least a temporary

loss to Plaintiff.

ISSUE: DAMAGES

No permanent damages can be awarded. To do so would

be to engage in pure speculation. Market forces, environmental

forces, habitability problems, societal problems, financing

problems, and the clearly demonstrated inability to obtain the

maximum IRA plus AGA eventually allowed versus the

amount of money needed to cure defaults and to maintain a

current status make it impossible to determine that the six

month delay in obtaining the maximum rental allowances was

a substantial factor in causing the foreclosure (or deed in lieu

of foreclosure) loss of the property.

Appendix B-15

Conversely, there was a temporary taking by virtue of the

failure of the Board to grant at least the AGAs by February 22,

1990 which caused a monthly loss of $4,672.00 to Plaintiffs, all

to their damage in the sum of $28,032.00 for which they are

entitled to be compensated.

AFFIRMATIVE DEFENSES

From the foregoing recitals it is clear that the affirmative

defense of failure to state a cause of action is inapplicable.

The fifth affirmative defense of a valid exercise of police

powers is likewise inapplicable. While the creation of the rent

ordinance and its regulations was a permissible governmental

activity, the failure of the Defendants to abide by their own

ordinance/regulations negates entirely the declination to act

being a proper exercise of police powers.

No evidence of any nature whatsoever was presented to

support the sixth affirmative defense of estoppel.

The eighth affirmative defense of a failure to mitigate

damages is completely unsupported by any evidence. To the

contrary, the evidence is clear that the Plaintiff made every

reasonable effort to mitigate its damages.

ATT Y FE

Both sides requested an award of attorneys fees herein.

CCP §1235.140(b) makes provision for an award of

attorneys fees to the property owner in eminent domain

proceedings. Inverse condemnation is a type of eminent domain

action.

Plaintiffs are accordingly entitled to their reasonable

attorneys fees as a portion of their litigation costs upon their

making a proper motion therefor.

Appendix B-16

CONCLUSION

Judgment shall be entered herein in favor of the Plaintiff

in the sum of $28,032.00 for the uncompensated temporary

taking of their property by the Defendants, together with inter-

est thereon at the rate of 7% per annum from February 22, 1990

to the date of judgment, and Plaintiffs litigation costs, including

therein reasonable attorneys fees.

Unless either party requests a further statement of deci-

sion as provided by the Code of Civil Procedure and the

California Rules of Court, the foregoing shall constitute the

Court’s Statement of Decision. In the event a further written

statement is requested, same shall be prepared by counsel for

Plaintiff.

DATED: [Ilegible]

_/s/ Harian K. Veal _

JUDGE OF THE SUPERIOR COURT

Appendix C-1

Filed 7/17/96

First Appellate District, Division Five, No. A067695

$054159

IN THE SUPREME COURT OF CALIFORNIA

HORWATH ASSOCIATES, Appellant

Vv.

THE CITY OF EAST PALO ALTO et al., Respondents

Appellant’s petition for review GRANTED.

Submission of additional briefing, otherwise required by

rule 29.3, California Rules of Court, is deferred pending further

order of the court.

George

Chief Justice

Baxter

Associate Justice

Werdegar

Associate Justice

Chin

Associate Justice

Brown

Associate Justice

se Associate Justice

Associate Justice

Appendix D-1

Filed 11/24/97

First Appellate District, Division Five No. A067695

$054159

IN THE SUPREME COURT OF CALIFORNIA

HORWATH ASSOCIATES, Appellant

V.

THE CITY OF EAST PALO ALTO et al., Respondents

Review was granted in this matter on July 17, 1996, and

briefing ordered deferred pending disposition of the appeal in

Kavanau v. Santa Monica Rent Control Board, which was filed

on August 26, 1997, and became final on September 26, 1997.

(16 Cal. 4th 761.)

The court has now determined that briefing and further

action in the above-entitled case shall be deferred pending

disposition of the appeal in Landgate, Inc. v. California Coastal

Commission (S059847).

/s/_ George

Chief Justice

Appendix E-1

Filed 7/8/98

First Appellate District, Division Five, No. A067695

$054159

IN THE SUPREME COURT OF CALIFORNIA

HORWATH ASSOCIATES, Appellant

v.

THE CITY OF EAST PALO ALTO et al., Respondents

Pursuant to rule 29.4(c), California Rules of Court, the

above-entitled review is DISMISSED and cause is remanded to

the Court of Appeal, First Appellate Distict, Division Five.

George

Chief Justice

Mosk

Associate Justice

Kennard

Associate Justice

Werdegar

Associate Justice

Associate Justice

Associate Justice

Associate Justice