Petition for Writ of Certiorari — Kavanau v. Santa Monica Rent Control Board

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Supreme Court, 11S

(\) ri2i& € 0

97% 852 NOV 21 1997

OFFICE OF THE CLERK

No.

In the

Supreme Court of the United States

October Term, 1997

EARL W. KAVANAU,

Petitioner,

SANTA MONICA RENT CONTROL BOARD,

AN AGENCY OF THE CITY OF SANTA MONICA,

Respondent.

Petition for Writ of Certiorari to the

Supreme Court of the State of California

PETITION FOR WRIT OF CERTIORARI

sa.

“wT

JAMES S. BURLING

*R.S. RADFORD

*COUNSEL OF RECORD

Pacific Legal Foundation

2151 River Plaza Drive,

Suite 305

Sacramento, California 95833

Telephone: (916) 641-8888

Facsimile: (916) 920-3444

Attorneys for Petitioner

QUESTIONS PRESENTED FOR REVIEW

1. May a state foreclose a remedy of just compensation for

a regulatory taking on the grounds that an alternative remedy

may be available under the Due Process Clause?

2. Does a citizen whose property is taken by the

application of a regulatory scheme forfeit his right to just

compensation under the Takings Clause of the Fifth

Amendment merely because he acquired the property in

question after the enactment of the regulations?

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED FOR REVIEW ............ i

TABLE OF AUTHORITIES CITED ................. vi

CEI oo vb oe wk ae RoR eR ]

Re Ss ke es kn epee Os wen Ke ad l

CONSTITUTIONAL AND STATUTORY

Pe et Is oe oh ces biwe od eins l

SEA NOE SOE SUE RIN oo hc ee se ee th yes 2

A. The Rent Board Imposes an Arbitrary Limit on

Mr. Kavanau’s Ability to Recover His Investment

in Capital Improvements to His Property ......... 3

B. The Court of Appeal Sets Aside the Rent Board’s

Application of Its Regulations to Mr. Kavanau as

Unconstitutionally Confiscatory ................ 3

C. Following Procedures Required by California

Law, Mr. Kavanau Seeks--but Is Denied--Just

Compensation for the Rent Board’s Temporary

Regulatory Taking of His Property .............. 4

D. The California Supreme Court Rules That Just

Compensation for a Regulatory Taking Is Not

Available if a Due Process Remedy May Exist ..... 5

REASONS FOR GRANTING THE PETITION ........ 6

ili

Page

I. THIS COURT SHOULD GRANT THE PETITION

FOR WRIT OF CERTIORARI TO RESOLVE THE

CONFLICT BETWEEN THE CALIFORNIA

SUPREME COURT AND THE NINTH CIRCUIT

COURT OF APPEALS ON WHETHER THE

AVAILABILITY OF A DUE PROCESS REMEDY

FORECLOSES A FIFTH AMENDMENT TAKINGS

A. In Armendariz y. Penman, the Ninth Circuit

Established a Rule That the Availability of a

Regulatory Taking Claim Obviates a Due

ProcessCauseofAction........ 9

B. The Decision Below Creates an Irreconcilable

Conflict Between the California Courts and the

Ninth Circuit on a Question of Federal

Constitutional Law: On Identical Facts, State

Claimants Would Have No Takings Remedy,

While Federal Claimants Would Have No Due

ProcessCauseofAction........0 1]

I. IF THIS COURT DOES NOT ACT, THE

DECISION BELOW WILL ONCE AGAIN

FORCE CALIFORNIA TAKINGS PLAINTIFFS

TO TAKE THEIR CLAIMS DIRECTLY TO

Wipicsscpsen > ncn RR penne as ae 12

A. In Agins v. City of Tiburon, the California

Supreme Court Declared That Just

Compensation Is Not Available for

Temporary Regulatory Takings in California .. 13

Page

B. Under Agins, California Takings Plaintiffs

Took Their Fifth Amendment Claims Directly

to Federal Court, Since California Did Not

Offer the Adequate State Compensation

Remedy Specified in Williamson County

Regional Planning Commission v. Hamilton

EG ee ee re ea es 14

C. This Court Overruled Agins in First English

Evangelical Lutheran Church of Glendale v.

COM OE EOE BRE iw cS ic chase 15

D. In Response to First English, the California

Supreme Court Required Regulatory Takings

Claimants to First Seek a Due Process

Remedy of Invalidation of the Offending

Regulations via Mandamus or Declaratory

WINE Ee a ee ee ek ee ce a ok 15

E. By Ruling That a Due Process Remedy

Obviates a Claim for Just Compensation, the

Decision Below Reverts to Agins’ Rule That

No Compensation Remedy Is Available for

Temporary Regulatory Takings in California .. 17

II. THIS COURT SHOULD GRANT THE PETITION

TO RESOLVE THE CONFLICT AMONG THE

STATE AND FEDERAL COURTS AS TO

WHETHER AN OWNER WHO ACQUIRES

REGULATED PROPERTY FORFEITS HIS

FIFTH AMENDMENT RIGHTS IF THOSE

REGULATIONS ARE SUBSEQUENTLY

APPLIED TO CONFISCATE HIS PROPERTY .. 19

Page

A. The Decision Below Conflicts with the State

Courts of Florida, Massachusetts, and New

Jersey on the Important Federal Question of

Whether Fifth Amendment Rights Are

Extinguished Merely Because a Citizen

Acquires Real Property After Land Use

Regulations Have Been EE ee 20

B. The Decision Below Would Strip Citizens

of Their Right to Just Compensation

Whenever Regulated Property Changes

Hands, Contrary to This Court’s Doctrine

in Lucas and Nollan ..... 0.00000 e scene 22

ORE SIR ss eee eR eee ao ae

sa eto eoraale

TABLE OF AUTHORITIES CITED

Page

Cases

Agins v. City of Tiburon, 24 Cal. 3d 266

ESPs ko cba eer care ree ee 3,7,12-15,17-18

Albright v. Oliver, 510 U.S. 266 (1994) .............. 9

Anello v. Zoning Board of Appeals,

OF 00 Fe Pe i EL Eas 19-20

Armendariz v. Penman, 75 F.3d 1311

i gh ROPER ae alley Crt h ie Byer Om PERIIeY <7 9-12

Armstrong v. United States, 364 U.S. 40

ERE ish kee Ree e ra e DED R Lee hn eek 15

Basile v. Town of Southhampton,

Pe BN. eae ERO ici cbs ca eee as Sea ON 19

Del Monte Dunes at Monterey, Lid. v. City

of Monterey, 920 F.2d 1496 (9th Cir.

ROE «va evince HE POR Oe Uae eu eau eee ite es wales 15

First English Evangelical Lutheran Church

of Glendale v. County of Los Angeles,

QESALD. Be CIPD cn ov ene wk as 3,8,15,17-18

Gazza v. New York State Department of

Environmental Conservation, 89 N.Y .2d

PP SESUED ov ck ta cee eek bel eh es dues 19

Graham v. Connor, 490 U.S. 386 (1989) ........0...... 9

———————

vil

Page

Hensler v. City of Glendale, 8 Cal. 4th |

RNS 3 Se a eee ee eS 4,16

HFH, Ltd. v. Superior Court, 15 Cal. 3d

NN WN peek ok Saye te tebe cerns 13

Hoehne v. County of San Benito, 870 F.2d

I GE oc ke es esas deere erect ens 15

Kavanau v. Santa Monica Rent Control

Board, 19 Cal. App. 4th 730 (1993). ............ oy

Kensington University v. Council for

Private Postsecondary and Vocational

Education, 54 Cal. App. 4th 27 (1997) ............ 16

Kim vy. City of New York, 90 N.Y.2d 1

Li 2 2 IIA SRT Ig = MOREE SEG tng ea aeRO A 19

Leonard v. Town of Brimfield, 423 Mass.

152, 666 N.E.2d 1300 (1996) ...............0-- 21

Lopes v. City of Peabody, 32 Mass. App.

Ct. 1124, 595 N.E.2d 812, review

denied, 413 Mass. 1105, 600 N.E.2d

171 (1992), cert. granted and judgment

vacated, 507 U.S. 981 (1993), on

remand, 417 Mass. 299, 629 N.E.2d

PC i ear Pe COA AS Reve d anaes 20-21

Lucas v. South Carolina Coastal Council,

Se, Se IPR Sesh c tes cus cies asters 8,22

Macri v. King County, 110 F.3d 1496

EE BE eh he didn vas go oe Use nled | 10-11

Vill

Page

Monongahela Navigation Co. v. United

Beata: CHR UAE. BA Ce bk vv os ba ence eees 5

Moroney v. Mayor and Council of the Borough

of Old Tappan, 268 N.J. Super. 458, 633 A.2d

1045 (1993), cert. denied, 136 N.J. 295, 642 A.2d

WOORTINN eee a aa ee 21

Nollan v. California Coastal Commission, 483 U.S. 825

ROG Fee i Se 823

No ahs a ae ak gate ne 10-11

Pennsylvania Coal Co. v. Mahon, 260 U.S.

SOURED: 6 iin Ka el Be Pc RN Sea ee 22

Sinaloa Lake Owners Association v. City of

Simi Valley, 882 F.2d 1398 (9th Cir.

CR i 66 ok Oe RELA Ed Tun ee wes 15

State of California v. Superior Court

(Fae 12 Ce. Se ae eee cS PAS AG, 13

Vatalaro v. Department of Environmental

Regulation, 601 So. 2d 1223, 1229

(Sth Dist. Fla.), review denied, 613 So.

ee UN CORE. Pe eshte 5 css weeks 20-21

Williamson County Regional Planning

Commission v. Hamilton Bank of

Johnson City, 473 U.S. 172 (1985) ...... 7,14-15,17-18

Page

Statutes

Cal Code of Civ, Proc. 104.5 «wc cc ekeee. 7

EN Ce k ae pe oes Veins ee eens 16

Sas Oe RAD, ob eins RAR haan ts co. Shee l

United States Constitution

eee NS EEE OEE 1,3,5-7,12,14-15,19

Fourteenth Amendment... 0... eee eee ens 9

We leona one ces tey cays) ewes 2

Rules

United States Supreme Court Rule 13.1...........-..-. l

Miscellaneous

Sharon L. Browne, Administrative

Mandamus as a Prerequisite to Inverse

Condemnation: “Healing” California's

Confused Takings Law, 22 Pepperdine

Se AES ed cou cece nwa where kee ee es 16

Thomas E. Roberts, Zakings, Due Process,

; and Preemption, 29 Urb. Law. 399

; Ct De ERR ae eee meee ok eae _ 11-12

BUM R Yd lhe es

PETITION FOR WRIT OF CERTIORARI

Petitioner Earl W. Kavanau respectfully prays that a

writ of certiorari issue to review the judgment and opinion of

the Supreme Court of the State of California, entered in the

above-entitled proceeding on August 26, 1997.

OPINIONS BELOW

The decision of the Supreme Court of the State of

California is reported at 16 Cal. 4th 761, 941 P.2d 851, 66 Cal.

Rptr. 2d 672 (1997), and is reproduced as Appendix (App.) A.

The decision of the California Court of Appeal is unreported

and is rep sduced as Appendix B. The final order of the

Superior Court is unreported and is reproduced as Appendix C.

Page references herein are to the versions in the appendices.

JURISDICTION

The final decision of the Supreme Court of the State of

California was entered on August 26, 1997. The California

court considered and decided the question of whether the

confiscatory application of a rent control law requires just

compensation under the Takings Clause of the Fifth

Amendment to the United States Constitution. This petition for

writ of certiorari has been timely filed in accordance with

Rule 13.1 of the Rules of this Court. This Court has

jurisdiction over this matter pursuant to 28 U.S.C. § 1257(a).

CONSTITUTIONAL AND

STATUTORY PROVISIONS AT ISSUE

The Fifth Amendment to the United States Constitution

provides in pertinent part, “private property [shall not] be taken

for public use, without just compensation.”

Section | of the Fourteenth Amendment to the United

States Constitution provides in pertinent part: “No state shall

... deprive any person of life, liberty, or property, without due

process of law.”

—"

STATEMENT OF THE CASE

In a 1993 decision,’ the California Court of Appeal

determined that respondent Santa Monica Rent Control Board’s

(Rent Board’s) imposition of an arbitrary cap on annual rent

increases was confiscatory as applied to Earl Kavanau’s ten-

unit apartment building. This ruling allowed Mr. Kavanau to

adjust his rents to a level at which he could begin realizing a

fair return on his property. However, the Rent Board’s

unconstitutional actions had deprived Mr. Kavanau of $113,095

in lost rents over nearly four years before the offending

regulations were struck down.”

When Mr. Kavanau sued for just compensation for this

temporary taking, his complaint was dismissed. The California

Supreme Court affirmed, ruling that just compensation was not

available since Mr. Kavanau had access to a due process

remedy--invalidation of the unconstitutional application of the

regulations together with the possibility of future rent

adjustments by the Rent Board.

With this decision the California Supreme Court reverts

to its historic rule that just compensation is not available in

California for temporary regulatory takings. This doctrine,

' Kavanau v. Santa Monica Rent Control Board, 19 Cal. App. 4th 730

(1993) (Kavanau J). The text of this opinion is reproduced as Appendix E

to this petition.

? Kavanau v. Santa Monica Rent Control Board, No. BO087620 (1996)

(Kavanau IT), App. B-3.

era aaa eae ae

EEE IR BEL 258 FEE SME INES a

previously announced in Agins v. City of Tiburon,’ was

expressly overruled by this Court in First English Evangelical

Lutheran Church of Glendale v. County of Los Angeles.‘ In

addition to repudiating First English, the decision below

conflicts with the well-established principle that constitutional

claims should be litigated under explicit textual proscriptions

(such as the Fifth Amendment’s Takings Clause) if applicable,

rather than being swept under the more general provisions of

the Due Process Clause.

A. The Rent Board Imposes an Arbitrary Limit on

Mr. Kavanau’s Ability to Recover His Investment

in Capital Improvements to His Property

In 1988, Earl Kavanau purchased a small apartment

building in Santa Monica, California, that was badly in need of

repair. Over the next year Mr. Kavanau incurred expenses in

excess of $140,000 for capital improvements and debt service,

while his annualized rental income from the property was only

$43,444.° Mr. Kavanau applied to the Rent Board for

permission to increase his rents by an amount sufficient to

recover his outlays on capital improvements and debt service

and to cover escalating operating costs. The Board determined

that Mr. Kavanau was entitled to increases totaling $35,000 per

year. However, the Board also imposed an arbitrary limit of

12% on the increases that could be implemented in any 12-

month period, even if this policy demonstrably deprived the

owner of a fair return on his property.°

B. The Court of Appeal Sets Aside the Rent Board’s

Application of Its Regulations to Mr. Kavanau as

Unconstitutionally Confiscatory

Mr. Kavanau petitioned for a writ of administrative

mandamus to set aside the Rent Board’s decision. The

> 24 Cal. 3d 266, 277 (1979).

* 482 U.S. 304, 310-11 (1987).

* Kavanau I, App. E-2-3.

* App. E-3.

California Court of Appeal found that the Board’s imposition

of an arbitrary 12% limit was “confiscatory” and therefore

unconstitutional as applied to Mr. Kavanau.’ The appellate

panel concluded that Mr. Kavanau was entitled to immediate

rent increases to secure a fair return on his full investment,

without regard to the Rent Board’s 12% cap."

This decision remedied the Rent Board’s confiscatory

actions prospectively, i.e., it allowed Mr. Kavanau to adjust his

rents to avoid any further losses stemming from the Rent

Board’s unconstitutional application of its annual cap.

However, Mr. Kavanau was left bearing the loss of $113,095

in revenues for the period in which the Board’s confiscatory

policy was enforced.

C. Following Procedures Required by California Law,

Mr. Kavanau Seeks--but Is Denied--Just

Compensation for the Rent Board’s Temporary

Regulatory Taking of His Property

Under procedures created by the California Supreme

Court, a claim for compensation for an as-applied regulatory

taking must be pursued by an inverse condemnation action

joined with or subsequent to a petition for administrative

mandamus.’ Having succeeded on his mandamus claim, in

1994 Mr. Kavanau filed suit in inverse condemnation, seeking

just compensation for the Rent Board’s temporary regulatory

taking of his property. This time a divided panel of the Court

of Appeal upheld a trial court’s dismissal of Mr. Kavanau’s

complaint, holding that no compensable taking can occur if the

owner retains any use of his property.’® In dissent, Justice

Croskey noted that the Court of Appeal’s prior decision in

Kavanau I already established, as a matter of law, that the Rent

Board’s application of its regulations to Mr. Kavanau violated

” App. E-4-5.

* App. E-6.

* Hensler v. City of Glendale, 8 Cal. 4th 1, 7, 26 (1994).

'° Kavanau II, App. B-9-10.

Sat Re ee ee Nee ye at es i Be

the Fifth Amendment’s Takings Clause. Therefore, the only

question properly before the court in Kavanau I] was the

amount of just compensation owed."

D. The California Supreme Court Rules That Just

Compensation for a Regulatory Taking Is Not

Available if a Due Process Remedy May Exist

The California Supreme Court affirmed on other

grounds. In the decision below, the state high court held that

Mr. Kavanau was not entitled to just compensation because

a remedy for [a] due process violation, if

available and adequate, obviates a finding of a

taking.'*

In this case, the supposedly “adequate” due process remedy

consists of Mr. Kavanau’s ability to return to the same Rent

Board that unconstitutionally deprived him of a fair return on

his property eight years ago. He must submit another petition

to the Board and either endure another eight years of litigation

or (if the rent adjustments should somehow be granted) attempt

to recoup from the tenants of his 10 apartments the $113,095

the Board took from him from 1989 through 1993.'° Clearly,

this remedy cannot be described as adequate in the same sense

as just compensation--“a full and perfect equivalent for the

property taken.”’* On the contrary, the remedy substituted for

just compensation by the court below is speculative at best, if

not illusory. Nevertheless, it was considered sufficient to

eliminate Mr. Kavanau’s Fifth Amendment right to just

compensation.

The court below underscored its holding by pronouncing

the availability of a due process remedy a “benefit” that in itself

fulfills the constitutional mandate of just compensation:

" App. B-10-11.

'2 App. A-20 (emphasis added).

3 App. A-21-25.

'* Monongahela Navigation Co. v. United States, 148 U.S. 312 (1893).

[T]he Supreme Court has recognized that the benefits

a property owner receives in conjunction with a

regulation may offset the burdens and thus satisfy the

takings clause .... Consistent with the reasoning of

these cases, . . . a remedy for the due process

violation, if available and adequate, is a valuable

benefit that satisfies the takings clause.

This holding by the court below deprives Earl Kavanau of

his Fifth Amendment right to just compensation for the Rent

Board’s confiscatory application of its arbitrary regulations.

More important, it deprives all California property owners of

their rights under the Takings Clause. By interpreting the

broader and more general protections of the Due Process

Clause as a “benefit” that obviates the specific textual

guarantee of just compensation, the California court has

reverted to its historic doctrine of foreclosing compensation for

temporary regulatory takings in California.

REASONS FOR GRANTING THE PETITION

The California Supreme Court has ruled that

Earl Kavanau has no compensation remedy under the Fifth

Amendment for the temporary regulatory taking of his property

if a due process remedy is available. This decision conflicts

with the recently enunciated doctrine of the Ninth Circuit Court

of Appeals, that a cause of action will not lie for a due process

violation if the same facts could give rise to a regulatory

takings claim. California citizens who suffer a temporary

regulatory taking of their property now face a deadly

contradiction: on the same set of facts, the federal courts will

not entertain a due process claim, while the state courts will not

recognize a just compensation remedy.

'S App. A-20 (emphasis added).

The effect of this decision is to return to the rule

previously applied in California under Agins v. City of Tiburon,

that no compensation remedy is available for temporary

takings. Under California law, as-applied inverse

condemnation claims must be preceded or accompanied by a

petition for administrative mandamus seeking to set aside the

offending regulatory action as invalid. Yet any application of

property regulations that could subsequently be invalidated via

a mandamus proceeding would ipso facto constitute a violation

of due process.'* By holding that no compensation remedy is

available where a due process remedy may be invoked, the

California Supreme Court has therefore held that no inverse

condemnation claim can be stated for a temporary regulatory

taking.

As was the case under Agins, this ruling will force

California plaintiffs to take their claims for just compensation

directly to federal court. Federal jurisdiction for these claims

must be recognized because California courts no longer offer

a “reasonable, certain and adequate provision” for obtaining

just compensation, as required by Williamson County Regional

Planning Commission v. Hamilton Bank of Johnson City."”

Finally, the court below refused to entertain a just

compensation remedy in part because Mr. Kavanau acquired

his property after rent control was adopted in Santa Monica.

According to the California Supreme Court, this gave

Mr. Kavanau “constructive knowledge” that the Rent Board

might, at any time in the future, apply its regulations in such a

way as to take his property without just compensation."* This

interpretation of the Fifth Amendment’s Takings Clause

directly conflicts with holdings of the state courts of Florida,

'© See Cal. Code of Civ. Proc. § 1094.5 (administrative mandamus will issue

if respondent proceeded without or in excess of jurisdiction; petitioner did

not receive a fair hearing; or there was prejudicial abuse of discretion).

'” 473 U.S. 172, 194 (1985).

'® App. A-18.

Massachusetts, and New Jersey, as well as with this Court’s

teaching in Lucas v. South Carolina Coastal Council’? and

Nollan v. California Coastal Commission.”

Because the doctrine enunciated by the California

Supreme Court in the opinion below conflicts with decisions of

the courts of three states and with the holdings of the Court of

Appeals for the Ninth Circuit, and because the opinion below

effectively repudiates this Court’s instruction in First English,

it is imperative that this Court grant the petition for certiorari

and reverse the decision below.

THIS COURT SHOULD GRANT THE

PETITION FOR WRIT OF CERTIORARI

TO RESOLVE THE CONFLICT RETWEEN THE

CALIFORNIA SUPREME COURT .\ND THE NINTH

CIRCUIT COURT OF APPEALS ON WHETHER THE

AVAILABILITY OF A DUE PROCESS REMEDY

FORECLOSES A FIFTH AMENDMENT TAKINGS CLAIM

The core doctrinal holding of the decision below is that

a remedy for the due process violation, if

available and adequate, obviates a finding of a

taking. ... [A] remedy for the due process

violation, if available and adequate, is a

valuable benefit that satisfies the takings

clause.”

This holding conflicts with this Court’s doctrine, expressed in

a variety of contexts, that

[w]here a particular amendment “provides an

explicit textual source of constitutional protec-

tion” against a particular sort of governmental

'? 505 U.S. 1003, 1029 (1994).

483 U.S. 825, 833 n.2 (1987).

" App. A-20-21.

ea a

SR RRR REE i NOLL LE ERNE EMTs MME

behavior, “that Amendment, not the more

generalized notions of ‘substantive due

process,’ must be the guide for analyzing [a

plaintiff s] claims.””

The decision below also conflicts with recent decisions of the

Ninth Circuit Court of Appeals which hold that the existence of

a regulatory takings claim obviates any cause of action for a

due process violation on the same facts.

A. In Armendariz v. Penman, the Ninth Circuit

Established a Rule That the Availability of a

Regulatory Taking Claim Obviates a Due

Process Cause of Action

In an en banc decision less than two years ago, the

United States Court of Appeals for the Ninth Circuit foreclosed

due process claims in federal court if a just compensation claim

can be stated on the same facts. In Armendariz v. Penman,” the

Court of Appeals held that the protection of the Fourteenth

Amendment’s Due Process Clause “does not extend to

circumstances already addressed by other constitutional

provisions.”

In Armendariz, the plaintiffs alleged a due process

violation based on city officials’ overzealous enforcement of

housing codes and other ordinances. The Court of Appeals

concluded that the plaintiffs’ due process claim was

“preempted” by the more explicit constitutional protections

available under the Takings Clause.”* Relying on this Court’s

opinions in Graham v. Connor” and Albright v. Oliver,”’ the

Ninth Circuit ruled that “[s}]ubstantive due process analysis has

22 Albright v. Oliver, 510 U.S. 266, 273-74 (1994) (Rehnquist, C.J., for

plurality) (quoting Graham v. Connor, 490 U.S. 386, 395 (1989)).

® 75 F.3d 1311 (9th Cir. 1994).

4 Id. at 1325.

> Id. at 1318.

” 510 US. 266.

no place in contexts already addressed by explicit textual

provisions of constitutional protection,” such as the Takings

Clause.”

The Armendariz rule, foreclosing due process claims if

a just compensation claim can be stated, has quickly become

the accepted doctrine of the Ninth Circuit. Late last year

Armendariz was applied in Patel v. Penman” to dismiss a due

process claim that had been filed concurrently with an action

for inverse condemnation. The Ninth Circuit reiterated its

Armendariz doctrine that a due process claim was “preempted”

by the availability of an action for just compensation based on

the same facts.*° Because the plaintiffs “challenge[{d] govern-

ment conduct that is explicitly limited by the Takings Clause of

the Fifth Amendment,” which “provides an explicit source of

constitutional protection” against the city’s actions, no

substantive due process claim could be brought in federal

court.*!

More recently the Ninth Circuit barred a due process

cause of action in Macri v. King County,” a case decided just

seven months ago. In Macri, plaintiffs alleged violations of the

Takings and Due Process Clauses in state court. The action

was removed to federal District Court, which stripped the

complaint of the due process cause of action under Armendariz

and remanded the inverse condemnation claim to state court.°®

8 75 F.3d at 1325-26.

? 103 F.3d 868 (9th Cir. 1996).

3! Jd. at 874-75.

2 110 F.3d 1496 (9th Cir. 1997).

3 Id. at 1498. This would be the end of the case if it arose in California

under Kavanau, because the plaintiff's only remedy is for the due process

action that was dismissed by the federal court. However, there is a strong

argument that a federal court in California would be required to retain

jurisdiction over the inverse condemnation cause of action. See Section II,

infra.

“aT, as ee ee

The Ninth Circuit affirmed on what was by then the settled law

of the circuit:

when an explicit textual provision of the

Constitution protects against the challenged

government action, the claim must be analyzed

under that specific provision alone and not

under the more general guarantee of substantive

due process.**

Armendariz, Patel, and Macri evidence a rule of law in the

Ninth Circuit wholly contrary to the decision of the California

Supreme Court below: when a given set of facts could support

either a due process claim or a suit for just compensation under

the Takings Clause, only the just compensation claim may be

maintained in federal court.*°

B. The Decision Below Creates an Irreconcilable

Conflict Between the California Courts and the Ninth

Circuit on a Question of Federal Constitutional Law:

On Identical Facts, State Claimants Would Have No

Takings Remedy, While Federal Claimants Would

Have No Due Process Cause of Action

In the decision below, the California Supreme Court has

determined that just compensation for a taking is not available

in the cou.ts of that state if an “adequate” due process remedy

exists.°° Thus, because Earl Kavanau could obtain the due

process remedy of invalidation accompanied by a remand to the

Rent Board, the California courts will not award compensation

for the Board’s temporary taking of his property.”

“ Id. at 1498-99 (citing Armendariz, 75 F.3d at 1325-26).

> Accord, Thomas E. Roberts, Takings, Due Process, and Preemption,

29 Urb. Law. 399, 406-09 (1997) (noting that under this line of decisions

“the Takings Clause subsumes substantive due process” in the Ninth

Circuit).

*° App. A-20.

*” App. A-20-25.

If Mr. Kavanau had filed his complaint in federal

District Court, the holding under Armendariz would have been

precisely the opposite: because the Fifth Amendment

guarantees just compensation for a regulatory taking of his

property, Mr. Kavanau would not be able to maintain a claim

for a due process violation.

The decision below, in conjunction with Armendariz,

creates a situation in California where federal plaintiffs are

deprived of a cause of action for a due process violation, while

state plaintiffs are deprived of a remedy for a taking. Virtually

any fact situation that would result in a finding of a regulatory

taking could also be recharacterized as a due process

violation.* Thus, for any given injury, the “correct”

constitutional cause of action and available relief are dictated

entirely by the plaintiff's choice of forum.

This Court should grant certiorari_to. reconcile the

conflict between the California Supreme Court and the Ninth

Circuit and restore uniformity in the treatment of federal

constitutional claims.

IF THIS COURT DOES NOT ACT, THE DECISION

BELOW WILL ONCE AGAIN FORCE CALIFORNIA

TAKINGS PLAINTIFFS TO TAKE THEIR CLAIMS

DIRECTLY TO FEDERAL COURT

The holding of the court below, denying a compensation

remedy for temporary regulatory takings, is not new. The same

court came to the same conclusion 18 years ago in Agins v. City

of Tiburon.” Because compensation for a temporary regulatory

taking was not available in California courts under Agins,

plaintiffs asserting their rights under the Takings Clause had no

** See, e.g., Thomas E. Roberts, Takings, Due Process, and Preemption,

29 Urb. Law. at 407-08 (category of due process claims is broader than

regulatory takings claims, but former subsumes latter).

*® 24 Cal. 3d 266.

option but to take their claims directly to federal court. This

Court overruled Agins in 1987, but the same misutilization of

federal judicial resources will arise anew under the decision

below, which effectively reinstates the Agins rule.

A. In Agins v. City of Tiburon, the California

Supreme Court Declared That Just Compensation

Is Not Available for Temporary Regulatory

Takings in California

In 1979, the California Supreme Court proclaimed in

Agins v. City of Tiburon that no compensation remedy was

available in that state for temporary regulatory takings.”

Owners whose property was confiscated by excessive

regulation were limited to a due process remedy of invalidation

unless the government chose to persist in its unconstitutional

actions after a taking had been established in court.*!

Agins was by no means an isolated aberration. Rather,

it was the logical culmination of the California Supreme

Court’s long-standing policy of protecting governmental

entities from financial liability for their restrictive land-use

policies, regardless of the impact on private citizens.” Just

compensation, in the view of the California court, was an

“inappropriate and undesirable remedy” because “[c]om-

munity planners must be permitted the flexibility which their

work requires.” Being forced to comply with the United

States Constitution would supposedly have a “chilling effect”

“© 7d. at 277 (“mandamus or declaratory relief rather than inverse condem-

nation is the appropriate relief” for a temporary regulatory taking).

"Id.

® See, e.g., State of California v. Superior Court (Veta), 12 Cal. 3d 237

(1974) (declaratory relief or mandamus held to be sole remedy for

unconstitutional land-use regulations), HFH, Ltd. v. Superior Court, 15 Cal.

3d 508 (1975) (no inverse condemnation remedy for zoning ordinance that

does not eliminate substantially all use of land)

® Agins, 24 Cal. 3d at 275.

7 ae

that would “intimidate legislative bodies and [] discourage the

implementation of strict or innovative planning measures.”’**

Finally, the California Supreme Court found it necessary to

shield local governments from the Takings Clause because “[iJn

enacting a zoning ordinance, the legislative body assesses the

desirability of a program on the assumption that compensation

will not be required.”**

In other words, the expectation of California govern-

ments that they would be free of liability under the Takings

Clause outweighed the expectation of property owners that the

authority of the United States Constitution extended to

California.

B. Under Agins, California Takings Plaintiffs Took

Their Fifth Amendment Claims Directly to

Federal Court, Since California Did Not Offer

the Adequate State Compensation Remedy

Specified in Williamson County Regional

Planning Commission v. Hamilton Bank

In Williamson County Regional Planning Commission v.

Hamilton Bank of Johnson City," this Court established that

regulatory takings claims are not ripe for adjudication in federal

court until the plaintiff “seek[s] compensation through the

procedures the State has provided for doing so." This

requirement, however, was predicated on the availability of a

“*reasonable, certain and adequate provision for obtaining

compensation’” in state court.*”

Because no adequate compensation remedy existed in

California under Agins, property owners seeking their Fifth

“ Id. at 276.

* 473 US. 172.

*® Id. at 194.

” Id. (citations omitted).

Amendment rights were permitted to take their claims directly

to federal court, notwithstanding Williamson County. The

Ninth Circuit was forced to carve out an exception from this

Court’s ripeness doctrine in recognition of the fact that

“California’s compensation procedures were inadequate” under

Agins.*

C. This Court Overruled Agins in First

English Evangelical Lutheran Church of

Glendale v. County of Los Angeles

This Court directly confronted and overruled Agins in

First English Evangelical Lutheran Church of Glendale v.

County of Los Angeles.*' Squarely rejecting the California rule

that takings claimants could be limited to a due process remedy,

this Court decreed, “government action that works a taking of

property rights necessarily implicates the ‘constitutional

obligation to pay just compensation.” Accordingly, the Agins

doctrine was overruled as “inconsistent[] with the requirements

of the Fifth Amendment.”*

D. In Response to First English, the California

Supreme Court Required Regulatory Takings

Claimants to First Seek a Due Process Remedy

of Invalidation of the Offending Regulations via

Mandamus or Declaratory Relief

In response to First English, the California Supreme

Court created a stringent new procedural rule limiting claims

$0 Del Monte Dunes at Monterey, Lid. v. City of Monterey, 920 F.2d 1496,

1507 (9th Cir. 1990). Accord, e.g., Hoehne v. County of San Benito,

870 F.2d 529, 533 (9th Cir. 1989) (federal court had jurisdiction because

under Agins, “California law prohibited actions seeking just compensation

as a remedy for regulatory takings”); Sinaloa Lake Owners Association v.

City of Simi Valley, 882 F.2d 1398, 1402 (9th Cir. 1989) (federal court had

jurisdiction because under Agins, “no action for inverse condemnation based

on a regulatory taking could be brought under California law”).

5! 482 US. at 310-11.

8 Jd at 315 (quoting Armstrong v. United States, 364 U.S. 40, 49 (1960)).

3 Jd. at 311.

for regulatory takings. Under the California rule of Hensler v.

City of Glendale, as-applied regulatory takings claims must

proceed by way of administrative mandamus, subject to a

statute of limitations of 90 days or less.** Only if a takings

claimant succeeds in having the offending regulation

invalidated via mandamus may he seek compensation via

inverse condemnation. | What makes this procedural

requirement unique is not so much its doctrinal unsoundness”’

as that it effectively requires plaintiffs to pursue a due process

claim as a prerequisite to seeking just compensation under the

Takings Clause.

Under California law, a petition for administrative

mandamus seeks to invalidate the application of a regulation or

ordinance as an abuse of discretion™--the same inquiry that is

applied in due process challenges. Moreover, the remedy of

invalidation or recision of the offending measure as applied to

the plaintiff in question is universally recognized as a due

* $8 Cal. 4th 1.

*S Jd. at 21-28.

*” It has never been the law that only invalid statutes or government actions

trigger hability under the Takings Clause.

The Hensler opinion was [unclear] on why injured

property owners should be forced to seek an invalidation

remedy--the only relief provided under the cited code

sections--when the /egitimacy of the regulation may be

conceded by the owner from the outset... . Until now, it

had not been suggested that a wnt of administrative

mandamus is required to remedy permissible

governmental actions.

Sharon L. Browne, Administrative Mandamus as a Prerequisite to Inverse

Condemnation: “Healing” California's Confused Takings Law,

22 Pepperdine L. Rev. 99, 125 (1994).

*® Cal. Code of Civ. Proc. § 1094.5(b).

® See, e.g., Kensington University v. Council for Private Postsecondary and

Vocational Education, 54 Cal. App. 4th 27, 30 (1997).

process remedy.” Thus, in effect, the initial response of the

California Supreme Court to First English was to establish that

regulatory takings plaintiffs must pursue a due process action

before compensation under the Takings Clause will be

considered. Compensation via inverse condemnation was no

longer foreclosed, as under Agins, but was held out as a

follow-on possibility for plaintiffs who succeeded in their claim

for a due process remedy of invalidation.

E. By Ruling That a Due Process Remedy Obviates a Claim

for Just Compensation, the Decision Below Reverts to

Agins’ Rule That No Compensation Remedy Is Available

for Temporary Regulatory Takings in California

In the case at bar, Earl Kavanau complied to the letter

with California’s rigorous procedural demands. His admini-

strative mandamus petition was filed within 90 days of the Rent

Board’s confiscatory actions and--most remarkable of all--

Mr. Kavanau obtained a judgment from a California appeals

court in his favor, finding the Rent Board’s regulations to be

unconstitutionally “confiscatory” as applied to him. But at

that point the door was slammed.

Faced with the prospect of actually subjecting an entity

of California government to the discipline of the Takings

Clause, the court below determined that a due process remedy

was not only a prerequisite (o, but a substitute for just

compensation.* Because Mr. Kavanau could return to the very

Rent Board that had willfully deprived him of a fair return on

his property and go through the petitioning process anew, the

court below ruled that the availability of these procedures

“obviates” a claim for just compensation.”

regulation that goes too far, under the due process theory, is not ‘just

compensation,” but invalidation of the regulation . . . ”) (emphasis added).

61 Kavanau I, App. E-4-6.

® App. A-20-21.

By upholding the dismissal of Mr. Kavanau’s inverse

condemnation complaint, the California Supreme Court

effectively repudiated this Court’s instruction in First English

that

a landowner is entitled to bring an action in

inverse condemnation as a result of “the self-

executing character of the constitutional

provision with respect to compensation.”™

Because every takings claimant is required, under California’s

procedural scheme, to obtain a due process remedy as a

prerequisite to pursuing inverse condemnation, the decision

below forecloses just compensation in nearly every case. The

only exceptions will be where the government persists in the

application of its regulations after a court pronounced them to

be invalid.

But this was precisely the doctrine of the California

Supreme Court under Agins v. City of Tiburon! Ten years after

this Court corrected the court below in First English, the Agins

rule has been resurrected: just compensation is (in theory)

available in California for a permanent regulatory taking, but

never for a temporary one.

Unless this Court acts, the conflict identified in the

preceding section will be “resolved” by forcing all California

takings plaintiffs into federal court. As was the case under

Agins, federal jurisdiction will be invoked by regulatory takings

claimants because, under Kavanau, California courts no longer

afford a “reasonable, certain and adequate”® provision for

obtaining just compensation. This undesirable outcome can be

avoided only by granting the petition for certiorari and

reversing the court below.

“ First English, 482 U.S. at 315 (citations omitted).

* Williamson County, 473 U.S. at 194.

iil

THIS COURT SHOULD GRANT

THE PETITION TO RESOLVE THE

CONFLICT AMONG THE STATE AND FEDERAL

COURTS AS TO WHETHER AN OWNER WHO

ACQUIRES REGULATED PROPERTY FORFEITS

HIS FIFTH AMENDMENT RIGHTS IF THOSE

REGULATIONS ARE SUBSEQUENTLY APPLIED

TO CONFISCATE HIS PROPERTY

Even though Kavanau I established, as law of the case, that

the Rent Board’s application of its regulations was

unconstitutionally confiscatory as applied to Mr. Kavanau, the

court below found that just compensation was not available

under the Fifth Amendment. This ruling was based in part on

the fact that Santa Monica's rent control law had been enacted

prior to Mr. Kavanau’s purchase of his property. When the

Rent Board subsequently applied this law unconstitutionally,

Mr. Kavanau was stripped of his rights under the Fifth

Amendment because he supposedly “had constructive

knowledge” that the Rent Board might violate the United States

Constitution at some future time.

California thus joins New York State in extinguishing the

Fifth Amendment rights of citizens who purchase regulated

property. The New York Court of Appeals has recently held

that the enactment of property regulations comprises an

immediate encumbrance on the title of subsequent purchasers.°”

The confiscatory application of such regulations therefore

“does not constitute a governmental taking of any property

interest owned” by citizens who acquire title after the

App. A-18.

See Anello v. Zoning Board of Appeals, 89 N.Y.2d 535 (1997), Gazza v.

New York State Department of Environmental Conservation, 89 N. Y.2d 603

(1997); Kim v. City of New York, 90 N.Y.2d 1(1997); Basile v. Town of

Southhampton, 89 N.Y.2d 974 (1997).

regulatory scheme is in place.“ This reasoning was mirrored

by the court below, which found that the Rent Board’s

unconstitutional confiscation of Mr. Kavanau’s property

comprised only a “minor” interference with his expectations,

since the statute supposedly authorizing the Board’s unconsti-

tutional actions predated Mr. Kavanau’s acquisition of the

property.”

A. The Decision Below Conflicts with the State

Courts of Florida, Massachusetts, and New Jersey

on the Important Federal Question of Whether

Fifth Amendment Rights Are Extinguished Merely

Because a Citizen Acquires Real Property After

Land Use Regulations Have Been Adopted

The Florida District Court of Appeal rejected the

doctrine of the decision below in Vatalaro v. Department of

Environmental Regulation.” There, the Florida court held that

the denial of a permit constituted a regulatory taking of prop-

erty even though the denial was based on a regulation that

existed before the owner acquired her land. This ruling, that a

violation of the Takings Clause requires just compensation even

if the taking is “authorized” by preexisting legislation, directly

conflicts with the California court’s ruling that Mr. Kavanau

was not entitled to compensation because he had “constructive

knowledge” that the Rent Board might violate his constitutional

rights.

Similarly, in Lopes v. City of Peabody,” the Supreme

Judicial Court of Massachusetts held that a property owner has

a right to compensation for a taking arising from the application

* Anello v. Zoning Board of Appeals, 89 N.Y.2d at 540.

®° App. A-18.

” 601 So. 2d 1223, 1229 (Sth Dist. Fla.), review denied, 613 So. 2d 3 (Fla.

1992).

”* 32 Mass. App. Ct. 1124, 595 N.E.2d 812, review denied, 413 Mass. 1105,

600 N.E.2d 171 (1992), cert. granted and judgment vacated, 507 U.S. 981

(1993), on remand, 417 Mass. 299, 629 N.E.2d 1312 (1994).

of a land-use restriction predating the owner’s acquisition of his

land.

The Lopes plaintiff acquired a lot that was subject to a

wetlands ordinance enacted six years earlier.’2 When the City

denied a permit to build a residence on the regulated land, the

Massachusetts Supreme Judicial Court ruled that Mr. Lopes had

a right to pursue an inverse condemnation remedy even though

his property was “subject to the restriction at the time of his

purchase.”

Finally, the decision below conflicts with the state

courts of New Jersey. In Moroney v. Mayor and Council of

the Borough of Old Tappan," the New Jersey appellate court

upheld a finding that a landowner was entitled to pursue 4

takings remedy for the denial of a building permit based

on preexisting zoning regulations. Noting that someone who

owned the property prior to the adoption of restrictive

zoning could have pursued a takings claim, the New Jersey

court ruled that property owners “stand in the shoes of their

predecessors in title” to challenge the application of such

measures.”

In the case at bar, Earl Kavanau was deprived of his

right to just compensation under the Takings Clause in part

because he acquired title to his property after rent control was

imposed in Santa Monica. This ruling directly conflicts with

Vatalaro, Lopes, and Moroney, and deepens the conflict among

the states on this essential issue of federal constitutional law.

This Court should grant certiorari to restore uniformity among

2 417 Mass. at 303, 629 NE. 2d at 1314-15.

73 Id. But see Leonard v. Town of Brimfield, 423 Mass. 152, 155, 666

N_E.2d 1300, 1303 (1996) (limiting the extent to which a landowner can

claim takings damages for a preexisting regulation).

™ 968 N.J. Super. 458, 633 A.2d 1045 (1993), cert. denied, 136 N.J. 295,

642 A.2d 1004 (1994).

> 633 A.2d at 1047.

the state courts of California, New York, Florida,

Massachusetts, and New Jersey.

B. The Decision Below Would Strip Citizens

of Their Right to Just Compensation

Whenever Regulated Property Changes

Hands, Contrary to This Court’s Doctrine

in Lucas and Nollan

In Lucas v. South Carolina Coastal Council, this Court

held that limitations on the use of property that would otherwise

violate the Takings Clause may remain uncompensated only if

the limitations “inhere in the title itself, in the restrictions that

background principles of the State’s law of property and

nuisance already place upon land ownership.” If these

“background principles” are expanded to include any and all

restrictive legislation enacted prior to a given owner’s purchase

of his property, the protections of the Takings Clause would

quickly evaporate.

As Justice Holmes observed long ago, when the

“seemingly absolute” requirement of just compensation

is found to be qualified by the police power, the

natural tendency of human nature is to extend

the qualification more and more until at last

private property disappears. ”’

The decision below provides a clear illustration of Justice

Holmes’ foresight. If the mere enactment of rent control

insulates the City of Santa Monica from any claims for

compensation based on the unconstitutional application of that

law to subsequent buyers of rental property, an ever-growing

segment of the population will be deprived of their federal

constitutional rights.

7 505 US. at 1029.

” Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 415 (1922).

This Court expressly held in Nollan v. California

Coastal Commission that private ownership rights are not

altered merely because property is acquired after a restrictive

land-use policy is implemented.” The full “bundle” of owner-

ship rights runs with the land: “Prior owners must be

understood to have transferred their full property rights” when

they convey title.” In contrast, under the reasoning employed

by the court below, the prior owner’s right to pursue a compen-

sation remedy for a taking is extinguished when land changes

ownership following the enactment of potentially restrictive

regulations.

CONCLUSION

For the reasons stated above the petition for writ of

certiorari should be GRANTED.

DATED: November, 1997.

Respectfully submitted,

JAMES S. BURLING

*R.S. RADFORD

*COUNSEL OF RECORD

Pacific Legal Foundation

2151 River Plaza Drive,

Suite 305

Sacramento, California 95833

Telephone: (916) 641-8888

Facsimile: (916) 920-3444

Attorneys for Petitioners

8 483 US. at 833 n.2.

APPENDIX

ade? thd

Get PRIS BR See ® Ee aaa

A-1

Filed 8/26/97

IN THE SUPREME COURT OF CALIFORNIA

Earl W. KAVANAU,

Plaintiff and Appellant,

No. $051847

Ct. App. 2/3 B087620

SANTA MONICA RENT Los Angeles County

CONTROL BOARD, Super. Ct. No. BC 103933

Defendant and Respondent.

*675 Earl W. Kavanau, in pro. per., Plaintiff and Appellant.

James S. Burling, R.S. Radford, Sacramento, Paul C. Mileck,

Berkeley, Sherman L. Stacey, Santa Monica, Kimball & Weiner and

George Kimball, Los Angeles, Amici Curiae on behalf of Plaintiff

and Appellant.

Anthony A. Trendacosta, Ralph H. Goldsen, Doris Ganga, Karl M.

Manheim, Hedges & Caldwell, David Pettit and Joan Mack, Los

Angeles, for Defendant and Respondent.

Louise H. Renne, City Attorney, San Francisco, Andrew W.

Schwartz, Deputy City Attorney, Richards, Watson & Gershon and

Rochelle Browne, Los Angeles, Amici Curiae on behalf of Defendant

and Respondent.

CHIN, Justice.

In this case, we consider the inverse condemnation claim of

Earl W. Kavanau, a property owner who prevailed in a prior action

against the Santa Monica Rent Control Board (Rent Board) on the

ground that the rent control regulations of the City of Santa Monica

(the City) violated his right to due process of law. The Court of

Appeal affirmed the trial court’s dismissal order, rejecting Kavanau’s

inverse condemnation claim because he had not lost “all use of his

property.” We disagree that a property owner must lose all use of his

property in order to have a viable inverse condemnation claim.

Nevertheless, we conclude Kavanau is not entitled to maintain an

A-2

inverse condemnation action, because he may obtain a full and

adequate remedy for any interim loss flowing from the due process

violation through an adjustment of future rents under the rent

regulation process. Accordingly, we affirm the judgment of the

Court of Appeal.

FACTUAL ALLEGATIONS AND

PROCEDURAL BACKGROUND

Kavanau’s complaint alleges as follows. In 1988, he purchased a

10-unit apartment building in the City. At that time, the building was

already subject to the City’s rent control law, which limited rent

increases to 12 percent per year regardless of increases in landlord

expenses. Between November 1, 1988, and October 31, 1989,

Kavanau collected rents totaling $43,444 and spent $33,565 operating

and maintaining the property, $82,934 improving the property, and

$44,000 servicing debt on the property. On November 30, 1989,

Kavanau applied to defendant Rent Board for rent increases on nine

of the ten units in his building. The Rent Board’s hearing examiner

determined Kavanau was entitled to rent increases totaling

approximately $35,000 per year, but required Kavanau to impose

these increases over the course of eight years so as not to exceed the

12 percent limit in any one year. The hearing examiner approved rent

increases for the first year totaling $5,184.

Kavanau appealed the hearing examiner’s decision to the Rent

Board, which upheld the decision. Kavanau then petitioned the

superior court for a writ of administrative mandate, which the court

denied. Kavanau appealed, and the Court of Appeal reversed. *676

(Kavanau v. Santa Monica Rent Control Bd. (1993) 19 Cal.App.4th

730, 736, 23 Cal. Rptr.2d 724 (Kavanau | ).)

In Kavanau I, the Court of Appeal concluded that the 12 percent

limit on rent increases deprived Kavanau of “a just and reasonable

return” and therefore was unconstitutional. (Kavanau I, supra,

19 Cal.App.4th at p. 736 & fn. 7, 23 Cal.Rptr.2d 724.) The Court of

Appeal directed the superior court to issue a writ of mandate

prohibiting application of the 12 percent limit to his rent increase

petition. (Id. at pp. 736- 737, 23 Cal.Rptr.2d 724.) We denied the

Rent Board’s petition for review. The Rent Board complied with the

superior court’s mandate.

A-3

Kavanau then filed the complaint in this case, seeking damages for

temporary application of the 12 percent limit. In his first cause of

action, he alleges he “has suffered a ‘taking’ and ‘damaging’ of his

property rights” within the meaning of article I, section 19 of the

California Constitution and the Fifth Amendment of the United States

Constitution. He seeks “just compensation” in the form of lost rental

income and interest. In his second cause of action, Kavanau alleges

a violation of his right to due process of law and seeks damages,

including emotional distress damages, under 42 United States Code

section 1983 (section 1983).

The Rent Board demurred to Kavanau’s complaint, and the

superior court sustained the demurrer without leave to amend.

Kavanau appealed, and the Court of Appeal affirmed. The Court of

Appeal noted that Kavanau had abandoned his cause of action under

section 1983. As for the cause of action alleging a taking of his

property requiring just compensation under the state and federal

Constitutions, the Court of Appeal rejected Kavanau’s claim because

he never lost “all use of his property.” For example, he continued to

receive rents and enjoy tax benefits, and he could borrow against the

property, hold it for investment, convert it to condominiums, or sell

it. One justice dissented, stressing that Kavanau I had already

decided the Rent Board had applied its regulations in an

unconstitutional manner. Because Kavanau lost substantial rental

income as a result of this constitutional breach, the dissenting justice

argued Kavanau had suffered a taking of his property and should

receive just compensation. We granted review in order to consider

whether a taking occurred and what, if any, right to just compensation

Kavanau might have.

THE CITY’S RENT CONTROL LAW

{1]{2]{3] Rent control laws must be “reasonably calculated to ...

provide landlords with a just and reasonable return on their property.”

(Birkenfeld v. City of Berkeley (1976) 17 Cal.3d 129, 165,

130 Cal.Rptr. 465, 550 P.2d 1001 (Birkenfeld ).) In order to satisfy

this standard, rent control laws incorporate any of a variety of

formulas for calculating rent ceilings. (See Baar, Guidelines for

Drafting Rent Control Laws: Lessons of a Decade (1983) 35 Rutgers

L. Rev. 723, 781-817 (Guidelines) [discussing various rent control

formulas].) “Rent control agencies are not obliged by either the state

A-4

or federal Constitution to fix rents by application of any particular

method or formula.” (Carson Mobilehome Park Owners Assn. v.

City of Carson (1983) 35 Cal.3d 184, 191, 197 Cal. Rptr. 284,

672 P.2d 1297 (Carson ).) Rather, “selection of an administrative

standard by which to set rent ceilings is a task for local governments

... and not the courts.” (Fisher v. City of Berkeley (1984) 37 Cal. 3d

644, 681, 209 Cal. Rptr. 682, 693 P.2d 261 (Fisher ); cf. Power

Comm'n v. Natural Gas Pipeline Co. of America (1942) 315 US.

575, 586, 62 S.Ct. 736, 743, 86 L.Ed. 1037 (Pipeline Co.) [“The

Constitution does not bind rate-making bodies to the service of any

single formula or combination of formulas.”].)

The City uses a “maintenance of net operating income” formula

for calculating rent ceilings. A typical maintenance of net operating

income formula presumes the landlord’s net operating income at the

time rent control began provided a just and reasonable return. In

order to maintain this net operating income at a constant level, the

law permits rent increases that will enable the landlord to recoup

increases in ongoing operating expenses. (See Guidelines, supra,

35 Rutgers L. Rev. at pp. 809-817.) The landlord may also amortize

the costs of capital improvements over the useful life of those

improvements *677 and pass those costs through to tenants. (See id.

at pp. 817-826.) Of course, if the law holds net operating income

constant, inflation will erode the real value of thai income. Thus,

many maintenance of net operating income formulas permit a

periodic inflation adjustment. (See Fisher, supra, 37 Cal.3d at p. 683,

209 Cal.Rptr. 682, 693 P.2d 261; cf. Cotati Alliance for Better

Housing v. City of Cotati (1983) 148 Cal App.3d 280, 289,

195 Cal. Rptr. 825 (Cotati ).)

The City’s rent control law conforms generally to this model. An

April 10, 1979, amendment to the City Charter (Charter) created the

Rent Board and empowered it “to regulate rentals ... so that rents will

not be increased unreasonably and so that landlords will receive no

more than a fair return.” (Charter, § 1800.) Pursuant to this charter

amendment (Charter, § 1803(g)), the Rent Board adopted compre-

hensive regulations (Rent Board Regulations).

The Charter amendment rolled back most residential rents in the

City to their level on April 10, 1978. (Charter, § 1804(b); Rent Bd.

Regs., regs. Nos. 7000-7001.) This rollback established the base rent

——————eOOO

A-5

for individual rental units in the City. (Charter, § 1804(b).) To

accommodate subsequent cl.anges in landlord expenses, the Rent

Board has since authorized various general rent adjustments and

surcharges. (Charter, § 1805(a), (b); Rent Bd. Regs., regs.

Nos. 3000- 3106.) In addition, a landlord can petition for an

individual rent adjustment in lieu of applicable general adjustments

(Charter, § 1805(c); Rent Bd. Regs., regs. Nos. 4100-4114), in which

case a hearing examiner receives evidence and prepares a decision,

including findings of fact and law (Charter, § 1805(d); Rent Bd.

Regs., regs. Nos. 4007-4020). Either party may appeal the hearing

examiner's decision to the Rent Board. (Charter, § 1805(d)(10);

Rent Bd. Regs., reg. No. 4021.)

The Rent Board Regulations define net operating income as gross

income less operating expenses. (Rent Bd. Regs., regs.

Nos. 4101(a), 4104.) The Rent Board Regulations also establish a

presumption that the net operating income during the 1978 calendar

year provided a landlord with a fair return. (Rent Bd. Regs., reg.

No. 4102.) A landlord can rebut this presumption by showing that

operating expenses during 1978 were unusually high (Rent Bd. Regs.,

reg. No. 4103A) or that base rent was unusually low (Rent Bd. Regs.,

reg. No. 4103B). A landlord is entitled not only to maintain 1978

net operating income (Rent Bd. Regs., reg. No. 4102), but also to

petition for rent increases that will increase net operating income at

a rate equal to 40 percent of any increase in the consumer price index

(Rent Bd. Regs., reg. No. 4106).

To establish an erosion of net operating income, and therefore

entitlement to a rent increase, a landlord may present evidence of an

increase in operating expenses. Under the Rent Board Regulations,

operating expenses include capital improvement costs (Rent Bd.

Regs., reg. No. 4101(c)(1) (viii)), but the landlord must amortize

these costs over their useful life in accordance with an amortization

schedule (Rent Bd. Regs., reg. No. 4041(a)-(c)).

At the time Kavanau improved his property, a landlord who had

no financing costs could include an imputed interest cost as part of

his capital improvement costs. (Former Rent Bd. Regs., reg.

No. 4041(d).) Also at that time, a capital improvement rent increase

lapsed once the amortization period ended (i.e., once the landlord had

recouped all the costs associated with the improvement). (Former

A-6 —

Rent Bd. Regs., reg. No. 4041(e).) Under current Rent Board

Regulations, a capital improvement rent increase is permanent,

allowing the landlord eventually to recoup more than his total cost.

(Rent Bd. Regs., reg. No. 4041(c).)

The Rent Board Regulations protect tenants from sudden, large

rent increases by delaying rent increases that would otherwise be

permissible. At the time the Court of Appeal decided Kavanau I, a

landlord could not increase rent more than 12 percent in any

12-month period, except in “extraordinary circumstances” such as an

earthquake. (Former Rent Bd. Regs., reg. No. 4107(a), (f).) This

12 percent limit is central to the dispute in this case. Current Rent

Board Regulations impose this limit only in the case *678 of tenant

hardship. (Rent Bd. Regs., reg. No. 4107(a).)

DISCUSSION

Two independent constitutional protections are at issue in this

case. The due process clauses of the state and federal Constitutions

guarantee property owners “due process of law’ when the state

“deprive[s] [them] of ... property.” (Cal. Const., art. I, §§ 7, 15;

U.S. Const., 14th Amend., § 1.) On the other hand, the takings

clauses of the state and federal Constitutions guarantee property

owners “just compensation” when their property is “taken for public

use.” (Cal. Const., art. I, § 19; U.S. Const., Sth Amend.) These

distinct constitutional protections limit the legislative power of

government in different but related ways. The due process protection

focuses on the government’s means and purpose: whether the

government’s method rationally furthers legitimate ends. The takings

protection focuses on the impact of the government’s action: whether

the government has in effect appropriated private property for its own

use, rather than merely regulating a private use of the property. This

conceptual distinction, however, blurs somewhat in cases applying

the due process and takings clauses to price regulations, including

rent control. In that context, courts sometimes employ overlapping

terminology and standards, treating the two clauses as a single

constitutional protection of private property nghts.

Deprivation of Property Without Due Process of Law

[4][5] The state and federal Constitutions prohibit government

from depriving a person of property without due process of law.

A-7

(Cal. Const., art. 1, §§ 7, 15; U.S. Const., 14th Amend., § 1.) These

provisions guarantee appropriate procedural protections (see, ¢.g.,

Goldberg v. Kelly (1970) 397 U.S. 254, 90 S.Ct. 1011, 25 L.Ed.2d

287) and also place some substantive limitations on legislative

measures (see, e.g., Washington v. Glucksberg (1997) --- U.S. ----,

117 S.Ct. 2258, 138 L.Ed.2d 772; US. v. Carolene Products Co.

(1938) 304 U.S. 144, 58 S.Ct. 778, 82 L. Ed. 1234; Nebbia v. New

York (1934) 291 U.S. 502, 54 S.Ct. 505, 78 L.Ed. 940 (Nebbia )).

The latter guaranty--sometimes described as substantive due

process--prevents government from enacting legislation that is

“arbitrary” or “discriminatory” or lacks “a reasonable relation to a

proper legislative purpose.” (Nebbia, supra, 291 U.S. at p. 537,

54 S.Ct. at p. 516.)

{6}{7}{8}[9][10}[11] In the context of price control, which includes

rent control, courts generally find that a regulation bears “a

reasonable relation to a proper legislative purpose” so long as the law

does not deprive investors a “fair return” and thereby become

“confiscatory.” (Pipeline Co., supra, 315 U.S. at pp. 584, 585,

62 S.Ct. at pp. 742-743; see also Power Comm’n v. Hope Natural

Gas Co. (1944) 320 U.S. 591, 602-603, 64 S.Ct. 281, 287-288,

88 L.Ed. 333 (Hope Gas ); 20th Century Ins. Co. v. Garamendi

(1994) 8 Cal.4th 216, 292-296, 32 Cal. Rptr.2d 807, 878 P.2d 566

(20th Century ); Calfarm Ins. Co. v. Deukmejian (1989) 48 Cal.3d

805, 816, 258 Cal.Rptr. 161, 771 P.2d 1247 (Calfarm ); Guidelines,

supra, 35 Rutgers L.Rev. at pp. 781- 817.) Determining prices that

will provide a fair return “involves a balancing of the investor and the

consumer interests.” (Hope Gas, supra, 320 U.S. at p. 603, 64 S.Ct.

at p. 288.) “It is the product of expert judgment which carries a

presumption of validity.” (Id. at p. 602, 64 S.Ct. at pp. 287-288.) A

reviewing court focuses on whether the regulatory agency took

relevant investor interests into account. (Permian Basin Area Rate

Cases (1968) 390 U.S. 747, 770, 88 S.Ct. 1344, 1361-1362, 20 L.

Ed.2d 312 (Permian Basin ); Pipeline Co., supra, 315 U.S. at p. 586,

62 S.Ct. at p. 743.) One of these investor interests is a “return ...

commensurate with returns on investments in other enterprises

having corresponding risks. That return, moreover, should be

sufficient to ... attract capital.” (Hope Gas, supra, 320 U.S. at p. 603,

64 S.Ct. at p. 288.) Though due process protections generally focus

on method, not result, in the context of price regulation “it is the

A-8

result reached not the method employed which is controlling.

[Citations.] It is not theory but the impact of the [price regulation]

which counts.” (Id. at p. 602, 64 S.Ct. at pp. 287- 288.) In sum,

when considering *679 whether a price regulation violates due

process, a “court must determine whether the [regulation] may

reasonably be expected to maintain financial integrity, attract

necessary capital, and fairly compensate investors for the risks they

have assumed, and yet provide appropriate protection for the relevant

public interests, both existing and foreseeable.” (Permian Basin,

supra, 390 U.S. at p. 792, 88 S.Ct. at p. 1373.)

We applied these due process standards to rent control laws in

Fisher, supra, 37 Cal.3d 644, 209 Cal. Rptr. 682, 693 P.2d 261,

Carson, supra, 35 Cal.3d 184, 197 Cal Rptr. 284, 672 P.2d 1297, and

Birkenfeld, supra, 17 Cal.3d 129, 130 Cal. Rptr. 465, 550 P.2d 1001.

Though the state and federal Constitutions do not mandate a

particular administrative formula for measuring fair return (Fisher,

supra, 37 Cal.3d at p. 681, 209 Cal Rptr. 682, 693 P.2d 261), we did

note certain characteristics that would weigh in favor of a finding of

constitutionality. For example, due to the effects of inflation, the law

“may not indefinitely freeze the dollar amount of ... profits without

eventually causing confiscatory results.” (id. at p. 683, 209 Cal. Rptr.

682, 693 P.2d 261, original italics.) In addition, when a rent control

law establishes a “base rent” by reference to rents on a specified date,

the law should permit adjustments of that base rent for those rental

units that had artificially low rents at that time. (Birkenfeld, supra,

17 Cal.3d at p. 168, 130 Cal. Rptr. 465, 550 P.2d 1001.) Similarly,

the law should permit individualized rent adjustments in appropriate

cases even if base rent was not artificially low (Fisher, supra, 37 Cal.

3d at pp. 689-690, 209 Cal. Rptr. 682, 693 P.2d 261), and the

procedural mechanism by which landlords may obtain any of these

adjustments must not be prohibitively burdensome (Birkenfeld, supra,

17 Cal.3d at pp. 169-171, 130 Cal. Rptr. 465, 550 P.2d 1001; see also

Fisher, supra, 37 Cal.3d at p. 690, 209 Cal. Rptr. 682, 693 P.2d 261).

Among other things, this process may not entail “a substantially

greater incidence and degree of delay than is practically necessary.”

(Birkenfeld, supra, 17 Cal.3d at p. 169, 130 Cal.Rptr. 465, 550 P.2d

1001; see also Fisher, supra, 37 Cal.3d at p. 687, 209 Cal Rptr. 682,

693 P.2d 261.) In this regard, we recommended that the law permit

“general rental adjustments for all or any class of rental units based

A-9

on generally applicable factors.” (Birkenfeld, supra, 17 Cal.3d

at p. 171, 130 Cal.Rptr. 465, 550 P.2d 1001; see also Fisher, supra,

37 Cal.3d at p. 687, 209 Cal.Rptr. 682, 693 P.2d 261; but see

Carson, supra, 35 Cal.3d at p. 194, 197 Cal. Rptr. 284, 672 P.2d

1297.) We also indicated rent control laws should (1) allow landlords

to petition for rent adjustments without having to prove building code

compliance, (2) allow the governing agency to consolidate petitions

for rental units in the same building, and (3) allow the governing

agency to delegate hearings on petitions to hearing officers.

(Birkenfeld, supra, 17 Cal.3d at pp. 170-171, 130 Cal. Rptr. 465,

550 P.2d 1001; see also Fisher, supra, 37 Cal.3d at pp. 690-691,

209 Cal.Rptr. 682, 693 P.2d 261.) All these characteristics would

serve to reduce delay and make the petition process less burdensome

to landlords, but we did not hold the state or federal Constitution

required any of them per se.

[12] Of course, the fair return principle is not limited to the

property as it was when the landlord purchased it. A landlord is also

entitled to a fair return on necessary capital improvements. (Sierra

Lake Reserve v. City of Rocklin (9th Cir.1991) 938 F.2d 951, 958,

vacated in part (1993) 987 F.2d 662; see also Guaranty Nat. Ins.

Co. v. Gates (9th Cir.1990) 916 F.2d 508, 515.) For example, if a

landlord retrofits an older building in order to comply with new

building code requirements, the capital improvements may be the

larger part of the building’s value. In that case, if fair return did not

take those capital improvements into consideration, it would be an

empty promise. As the high court noted in Duquesne Light Co. v.

Barasch (1989) 488 U.S. 299, 310, 109 S.Ct. 609, 617, 102 L.Ed.2d

646 (Duquesne ), “fair rate of return” depends on “the amount of

capital upon which the investors are entitled to earn that return.” (See

also Hope Gas, supra, 320 U.S. at p. 603, 64 S.Ct. at p. 288 [“return

... Should be sufficient ... to attract capital’”’].) Thus, a rent control law

that merely allows a landlord to recoup the bare cost of a necessary

capital improvement runs the risk of *680 being confiscatory and

thereby violating the landlord’s right to due process of law.

Taking of Property Without Just Compensation

[13] The state and federal Constitutions prohibit government from

taking private property for public use without just compensation.

(Cal. Const., art. I, § 19; U.S. Const., Sth Amend.; Chicago,

A-10

Burlington & Q.R. Co. v. Chicago (1897) 166 U.S. 226, 239, 17 S.Ct.

581, 585-586, 41 L.Ed. 979 [applying the federal takings clause to

the states].) In Pa. Coal Co. v. Mahon (1922) 260 U.S. 393, 415,

43 S.Ct. 158, 160, 67 L.Ed. 322 (Pa. Coal ), the United States

Supreme Court recognized that a regulation of property that “goes too

far” may effect a taking of that property, though its title remains in

private hands. In such a case, the property owner may bring an

inverse condemnation action, and if it prevails, the regulatory agency

must either withdraw the regulation or pay just compensation. (First

Lutheran Church v. Los Angeles County (1987) 482 U.S. 304, 317,

321, 107 S.Ct. 2378, 2387, 2389, 96 L.Ed.2d 250.) Even if the

agency withdraws the regulation, the property owner may have a

right to just compensation for the temporary taking while the

regulation was in effect. (Id. at p. 321, 107 S.Ct. at p. 2389 [finding

this right “where the government’s activities have ... worked a taking

of all use of property”].)

The United States Supreme Court has struggled to articulate a

standard for when a regulation “goes too far” and effects a taking.

The court has stated broadly that the takings clause is “designed 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.” (Armstrong v. United States (1960) 364 U.S. 40,

49, 80 S.Ct. 1563, 1569, 4 L.Ed.2d 1554.) Nevertheless, the court

has concluded that the inquiry in any particular case is “essentially

ad hoc” (Penn Central Transp. Co. v. City of New York (1978)

438 U.S. 104, 124, 98 S.Ct. 2646, 2659, 57 L.Ed.2d 631 (Penn

Central )) and “‘a question of degree [that] ... cannot be disposed of by

general propositions” (Pa. Coal, supra, 260 U.S. at p. 416, 43 S.Ct.

at p. 160). The court has, however, identified “two discrete

categories of regulatory action” that constitute a taking. (Lucas v.

South Carolina Coastal Council (1992) 505 U.S. 1003, 1015, 112 S.

Ct. 2886, 2893, 120 L.Ed.2d 798 (Lucas).) Thus, the court has held

that a permanent physical invasion of property, no matter how slight,

effects a taking requiring compensation. (Loretto v. Teleprompter

Manhattan CATV Corp. (1982) 458 U.S. 419, 421, 102 S.Ct. 3164,

3168, 73 L.Ed.2d 868.) Similarly, the court has held that a regulation

that deprives a property owner of “all economically beneficial or

productive use of land” effects a taking requiring just compensation.

(Lucas, supra, 505 US. at p. 1015, 112 S.Ct. at p. 2893; Agins v.

A-1]

Tiburon (1980) 447 U.S. 255, 260, 100 S.Ct. 2138, 2141, 65 L.Ed.2d

106.)

[14] A regulation, however, may effect a taking though, as is true

here, it does not involve a physical invasion and leaves the property

owner some economically beneficial use of his property. In Lucas,

the high court expressly rejected the “assumption that the landowner

whose deprivation is one step short of complete is not entitled to

compensation.” (Lucas, supra, 505 U.S. at p. 1019, fn. 8, 112 S.Ct.

at p. 2895, fn. 8.) “Such an owner” merely lost “the benefit of [the

court’s] categorical formulation.” (Ibid; see also Nollan v.

California Coastal Comm’n (1987) 483 U.S. 825, 831, 107 S.Ct.

3141, 3145-3146, 97 L.Ed.2d 677 (Nollan ).) Of course, we held in

Agins v. City of Tiburon (1979) 24 Cal.3d 266, 277, 157 Cal.Rptr.

372, 598 P.2d 25, “that a zoning ordinance may be unconstitutional

... only when its effect is to deprive the landowner of substantially all

reasonable use of his property.” (See also Fisher, supra, 37 Cal.3d

at p. 686, 209 Cal Rptr. 682, 693 P.2d 261 [paraphrasing and citing

Agins v. City of Tiburon].) But the regulation at issue in Agins v.

City of Tiburon left the plaintiffs a substantial use of their five-acre

property, including building as many as five single-family homes on

it. In order to uphold the regulation, we did not need to limit the

protections of the takings clause to total deprivations of “substantially

all reasonable use” of property, because the case before us did not

even approach a total deprivation. Thus, our holding was dictum.

Moreover, Lucas makes clear we misinterpreted *681 the federal

Constitution, and nothing in our opinion in Agins v. City of Tiburon

suggests we were interpreting the state takings clause more narrowly

than the federal clause. Finally, even if we did intend to interpret the

State right more narrowly than the federal right, the federal

Constitution would nevertheless apply here to protect Kavanau.

[15] When a regulation does not result in a physical invasion and

does not deprive the property owner of all economic use of the

property, a reviewing court must evaluate the regulation in light of

the “factors” the high court discussed in Penn Central and subsequent

cases. Penn Central emphasized three factors in particular: (1) “{tJhe

economic impact of the regulation on the claimant”; (2) “the extent

to which the regulation has interfered with distinct investment-backed

expectations”, and (3) “the character of the governmental action.”

(Penn Central, supra, 438 U.S. at p. 124, 98 S.Ct. at p. 2659;

A-12

MacDonald, Sommer & Frates v. Yolo County (1986) 477 U.S. 340,

349, 106 S.Ct. 2561, 2566, 91 L.Ed.2d 285; Kaiser Aetna v. United

States (1979) 444 US. 164, 175, 100 S.Ct. 383, 390, 62 L.Ed.2d

332.) Subsequent cases, as well as a close reading of Penn Central,

indicate other relevant factors: (1) whether the regulation

“interfere[s] with interests that [are] sufficiently bound up with the

reasonable expectations of the claimant to constitute ‘property’ for

Fifth Amendment purposes” (Penn Central, supra, 438 U.S. at p. 125,

98 S.Ct. at pp. 2659-2660); (2) whether the regulation affects the

existing or traditional use of the property and thus interferes with the

property owner’s “primary expectation” (id. at pp. 125, 136, 98 S.Ct.

at pp. 2659-2660, 2665); (3) “the nature of the State’s interest in the

regulation” (Keystone Bituminous Coal Assn. v. DeBenedictis (1987)

480 U.S. 470, 488, 107 S.Ct. 1232, 1243, 94 L.Ed.2d 472 (Keystone);

see also Mugler v. Kansas (1887) 123 U.S. 623, 668-669, 8 S.Ct. 273,

300-301, 31 L.Ed. 205) and, particularly, whether the regulation is

“reasonably necessary to the effectuation of a substantial public

purpose” (Penn Central, supra, 438 U.S. at p. 127, 98 S.Ct.

at p. 2660); (4) whether the property owner’s holding is limited to

the specific interest the regulation abrogates or is broader (id.

at pp. 127-128, 98 S.Ct. at pp. 2660-2661); (5) whether the

government is acquiring “resources to permit or facilitate uniquely

public functions” such as government’s “entrepreneurial operations”

(id. at pp. 128, 135, 98 S.Ct. at pp. 2661, 2664-2665); (6) whether

the regulation “permit[s the property owner] ... to profit [and] ... to

obtain a ‘reasonable return’ on ... investment” (id. at p. 136, 98 S.Ct.

at p. 2665); (7) whether the regulation provides the property owner

benefits or rights that “mitigate whatever financial burdens the law

has imposed” (id. at p. 137, 98 S.Ct. at p. 2666; Keystone, supra,

480 US. at p. 491, 107 S.Ct. at p. 1245; Agins v. Tiburon, supra,

447 US. at p. 262, 100 S.Ct. at p. 2142); (8) whether the regulation

“prevent[s] the best use of [the] land” (Ibid.); (9) whether the regula-

tion “extinguish[es} a fundamental attribute of ownership” (ibid.);

and (10) whether the government is demanding the property as a

condition for the granting of a permit (Dolan v. City of Tigard (1994)

512 U.S. 374, 385, 114 S.Ct. 2309, 2316-2317, 129 L.Ed.2d 304

(Dolan ); Nollan, supra, 483 U.S. at pp. 831, 841, 107 S.Ct.

at pp. 3145-3146, 3150- 3151).

A-13

This list is not a comprehensive enumeration of all the factors that

might be relevant to a takings claim, and we do not propose a single

analytical method for these claims. Rather, we simply note factors

the high court has found relevant in particular cases. Thus, instead

of applying these factors mechanically, checking them off as it

proceeds, a court should apply them as appropriate to the facts of the

case it is considering. Recent Supreme Court decisions suggest a

two-part analysis that considers the economic effects of the regulation

and the government’s purpose. (Yee v. Escondido (1992) 503 U.S.

519, 523, 112 S. Ct. 1522, 1526, 118 L.Ed.2d 153; Keystone, supra,

480 US. at pp. 484-485, 107 S.Ct. at pp. 1241-1242.) With respect

to the latter consideration, the high court has declared that a

regulation of property “effects a taking if [it] does not substantially

advance legitimate state interests.” (Agins vy. Tiburon, supra,

447 US. at p. 260, 100 S.Ct. at p. *682 2141: see also Dolan, supra,

512 US. at p. 385, 114 S. Ct. at pp. 2316-2317; Lucas, supra,

505 U.S. at p. 1016, 112 S.Ct. at pp. 2893-2894: Nollan, supra,

483 US. at p. 834, 107 S.Ct. at p. 3147; Keystone, supra, 480 US.

at p. 485, 107 S.Ct. at pp. 1241- 1242; United States v. Riverside

Bayview Homes, Inc. (1985) 474 U.S. 121, 126, 106 S.Ct. 455,

458-459, 88 L. Ed.2d 419.) But, outside the context of permit

condition cases such as Nollan and Dolan, the court has not clarified

how it would apply this standard, and, in particular, the extent to

which it would apply the standard in the same way as the similarly

worded due process standard. (Cf. Nollan, supra, 483 US. at p. 834,

fn. 3, 107 S.Ct. at p. 3147, fn. 3 [stating that the standards are “quite

different”); Dolan, supra, 512 U.S. at p. 391, 114 S.Ct. at pp. 2319-

2320 [articulating a “ ‘rough proportionality’ ” standard for permit

condition cases].)

Penn Central, supra, 438 U.S. 104, 98 S.Ct. 2646, 57 L.Ed.2d 631,

of course did not involve a price regulation. In the context of price

regulation, the high court has sometimes employed an analysis under

the takings clause similar to that which it employs under the due

process clause, focusing on the regulation’s impact and investors’

ability to earn a fair return. In Duquesne, for example, an electric

utility argued that electricity rates constituted a taking because the

rate-setting agency did not include certain costs in the rate base.

(Duquesne, supra, 488 U.S. at p. 305, 109 S.Ct. at p. 614.) Though

the court was addressing a takings issue, it did not cite Penn Central.

A-14

Instead, it cited due process cases, including Permian Basin, supra,

390 U.S. 747, 88 S.Ct. 1344, 20 L.Ed.2d 312, Hope Gas, supra,

320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333, and Pipeline Co., supra,

315 U.S. 575, 62 S.Ct. 736, 86 L.Ed. 1037, and applied a “fair return”

analysis similar to the analysis it had traditionally applied in due

process cases. (Duquesne, supra, 488 U.S. at pp. 307-310, 109 S.Ct.

at pp. 615-617; see also FCC v. Florida Power Corp. (1987) 480 US.

245, 250-254, 107 S.Ct. 1107, 1111-1113, 94 L.Ed.2d 282 (Florida

Power) [also applying what appears to be a due process analysis

when reviewing a price regulation under the takings clause]; 20th

Century, supra, 8 Cal.4th at pp. 292-296, 32 Cal.Rptr.2d 807,

878 P.2d 566 [same]; Cotati, supra, 148 Cal.App.3d at p. 293,

195 Cal.Rptr. 825 [a breach of the due process clause in the context

of rent control “might well violate” the takings clause]; 2 Rotunda

& Nowak, Treatise on Constitutional Law (2d ed.1992) § 15.12,

p. 505, fn. 59 [“Early Supreme Court opinions concerning utility rate

regulation were written in terms of “due process of law’, but those

opinions are now understood as establishing principles identical to

those inherent in the takings clause....”]; Brauneis, “The Foundation

of Our ‘Regulatory Takings’ Jurisprudence’: The Myth and Meaning

of Justice Holmes’s Opinion in Pennsylvania Coal Co. v. Mahon

(1996) 106 Yale L.J. 613, 672, fn. 270 [“More recently, the Court has

once again seemed to graft what was originally a due process test of

governmental authority onto the Takings Clause ....’"]; but see Yee v.

Escondido, supra, 503 U.S. at p. 529, 112 S.Ct. at p. 1529 [suggesting

that traditional takings clause jurisprudence applies to rent

regulations]; Pennell v. San Jose (1988) 485 U.S. 1, 8-14, 108 S.Ct.

849, 855-859, 99 L. Ed.2d 1 [treating the takings clause and the due

process clause separately when deciding a constitutional challenge to

a rent control law].)

Court of Appeal Decision in Kavanau I

In Kavanau I, the Court of Appeal determined that the Rent

Board’s application of its 12 percent limit to Kavanau’s petition for

rent increases was unconstitutional. Though the court did not state

whether it found a violation of Kavanau’s due process rights or a

taking without just compensation, the court applied a due process

analysis and relied on our decisions in Calfarm, supra, 48 Cal.3d 805,

258 Cal.Rptr. 161, 771 P.2d 1247, Fisher, supra, 37 Cal.3d 644,

209 Cal.Rptr. 682, 693 P.2d 261, and Birkenfeld, supra, 17 Cal.3d

A-15

129, 130 Cal.Rptr. 465, 550 P.2d 1001, which were all due process

cases. (Kavanau I, supra, 19 Cal. App.4th at pp. 734- 735, 23 Cal.

Rptr.2d 724.) Thus, we conclude the court did not find a taking.

We question some of the Court of Appeal’s reasoning in

Kavanau I. For example, that court implied that the state and federal

Constitutions require application of the “fair return *683 on

investment” formula for setting rent ceilings. (Kavanau I, supra,

19 Cal. App.4th at pp. 733, 735, 23 Cal.Rptr.2d 724: for a discussion

of the fair return on investment formula, see Guidelines, supra,

35 Rutgers L.Rev. at pp. 790- 796.) Though we have used the phrase

“Just and reasonable return” (Birkenfeld, supra, 17 Cal.3d at p. 165,

130 Cal.Rptr. 465, 550 P.2d 1001), we have never held that either the

state or federal Constitution requires application of the fair return on

investment formula or any other specific formula. (Fisher, supra,

37 Cal.3d at p. 681, 209 Cal. Rptr. 682, 693 P.2d 261 [rejecting

argument that Constitution requires application of the circular “fair

return on market value” formula]; Carson, supra, 35 Cal.3d at p. 191,

197 Cal. Rptr. 284, 672 P.2d 1297.)

In addition, rather than amortizing the costs of Kavanau’s capital

improvements over their useful life, the Court of Appeal apparently

treated those costs in the same way as ongoing operating or

maintenance costs. (Kavanau I, supra, 19 Cal.App.4th at p. 736, fn. 7,

23 Cal.Rptr.2d 724.) The court also apparently included as capital

improvement costs certain expenditures the Rent Board had found

unnecessary. (Ibid.) As a result, the court determined that Kavanau

incurred a large deficit.

[16][17] Moreover, the Court of Appeal assumed the City’s

maintenance of net operating income formula without the 12 percent

limit established the minimum “fair return” under the state and

federal Constitutions. (Kavanau I, supra, 19 Cal. App. 4th at p. 733,

23 Cal.Rptr.2d 724.) Based on this assumption, the Court of Appeal

concluded the 12 percent limit put Kavanau’s return below the

constitutional minimum. But the court did not explain why the

12 percent limit could not be one aspect of a comprehensive scheme

that as a whole provided landlords a fair return. (Cf. Pennell v. San

Jose, supra, 485 U.S. at pp. 13-14, 108 S.Ct. at pp. 858-859.) “The

economic judgments required in rate proceedings are often hopelessly

complex... The Constitution is not designed to arbitrate these

A-16

economic niceties.”” (Duquesne, supra, 488 U.S. at p. 314, 109 S.Ct.

at p. 619.) Thus, courts do not “examine[ | piecemeal” the

“subsidiary aspects of [a state agency’s] ratemaking methodology”

(id. at p. 313, 109 S.Ct. at pp. 618-619), and flexibility in one part of

a regulatory scheme may offset restrictiveness in another (id.

at p. 314, 109 S.Ct. at p. 619). We see no reason why a reasonable

annual limit on rent increases cannot be consistent with a fair return.

Furthermore, the City could have prohibited certain capital

improvements altogether, perhaps as a way of keeping a stock of

housing available for low income residents. Thus, the City could at

its option permit those capital improvements, but encourage landlords

to limit their magnitude by prohibiting rent increases in excess of

12 percent per year regardless of the improvements’ cost. (Cf.

Nollan, supra, 483 U.S. at pp. 836-837, 107 S.Ct. at pp. 3148-3149.)

[18] Finally, the essential inquiry in due process cases involving

price controls is whether the regulatory scheme’s result is just and

reasonable. (Hope Gas, supra, 320 U.S. at p.602, 64 S.Ct. at pp. 287-

288.) The Court of Appeal did not expressly find that the 12 percent

limit prevented Kavanau from “ ‘operating successfully.” ” (20th

Century, supra, 8 Cal.4th at p. 295, 32 Cal.Rptr.2d 807, 878 P.2d

566.) Rather, the 12 percent limit merely delayed Kavanau’s rent

increase. Regulated prices must fall within a “broad zone of

reasonableness” to be constitutional (Permian Basin, supra, 390 U.S.

at p. 770, 88 S.Ct. at pp. 1361-1362; see also Pipeline Co., supra,

315 US. at p. 585, 62 S.Ct. at pp. 742-43), and due process requires

fundamentally a balancing of interests (Hope Gas, supra, 320 U.S.

at p. 603, 64 S.Ct. at p. 288). The 12 percent limit achieved this

balance. It balanced landlords’ interests in recouping their increased

costs against tenants’ interests in avoiding sudden, large rent

increases. Of course, in certain circumstances-- such as during times

of very high inflation--a 12 percent limit on rent increases might be

confiscatory, but the Court of Appeal did not adequately explain why

application of the 12 percent limit to Kavanau’s petition for rent

increases violated his constitutional rights.

[19] Thus we have serious doubts about the Court of Appeal’s

reasoning in Kavanau *684 I. Nevertheless, the Court of Appeal’s

judgment in that case is final and precludes relitigation of certain

issues in this proceeding. (See, e.g., Perez v. City of San Bruno

2 rn

A-17

(1980) 27 Cal. 3d 875, 883, 168 Cal.Rptr. 114, 616 P.2d 1287.) For

example, we must accept as true for purposes of this proceeding that

application of the Rent Board’s 12 percent limit on rent increases

violated Kavanau’s right to due process of law. Of course, Kavanau

obtained a remedy in the form of a writ of mandate, but he also seeks

damages.

Kavanau’s Present Claim for Damages

In Hensler v. City of Glendale (1994) 8 Cal.4th 1, 14, 32 Cal.

Rptr.2d 244, 876 P.2d 1043, we held that, if a property owner brings

a timely action to set aside or void a regulation, he may but need not

join a claim for damages. Instead, he may bring a damages claim

separately after successfully challenging the regulation. (Id. at pp. 7,

26, 32 Cal.Rptr.2d 244, 876 P.2d 1043.) Thus, in Hensler we

identified an exception to the general rule against splitting claims.

(See also Healing v. California Coastal Com. (1994) 22 Cal. App.4th

1158, 1170, 27 Cal. Rptr.2d 758: Mata v. City of Los Angeles (1993)

20 Cal. App.4th 141, 149, 24 Cal. Rptr.2d 314; Patrick Media

Group, Inc. v. California Coastal Com. (1992) 9 Cal.App.4th 592,

607, 11 Cal.Rptr.2d 824; Gallagher v. Frye (9th Cir.1980) 631 F.2d

127, 130.) In accordance with Hensler, Kavanau brought his present

claim for damages, alleging two causes of action.

In his second cause of action, Kavanau sought damages based on

the violation of his right to due process. The state and federal due

process clauses, unlike the takings clauses, make no express reference

to damages, but Kavanau alleged a “deprivation of ... rights,

privileges, or immunities secured by the Constitution,” entitling him

to damages under section 1983. We need not determine whether

section 1983 would allow Kavanau to recoup damages under the facts

of this case, because he abandoned his section 1983 cause of action,

choosing instead “[t]o focus attention on what [he] believes to be the

important constitutional questions involved .. [in] his first cause of

action for inverse condemnation....” The Court of Appeal expressly

noted that Kavanau had abandoned the section 1983 cause of action,

and he did not petition for rehearing. Accordingly, the only cause of

action before us is Kavanau’s first cause of action alleging a taking

and seeking just compensation. (See Cal. Rules of Court, rule 29(b).)

[20}][21] Kavanau’s allegations, if true, are not sufficient to

establish a taking, and therefore the trial court was correct to sustain

A-18

the Rent Board’s demurrer. This case does not fall within either of

the “two discrete categories of regulatory action” that constitute a

taking. (Lucas, supra, 505 U.S. at p. 1015, 112 S.Ct. at p. 2893;

Agins v. Tiburon, supra, 447 U.S. at p. 260, 100 S.Ct. at p. 2141.)

Rent control does not generally constitute a physical invasion of

property (Yee v. Escondido, supra, 503 U.S. 519, 112 S.Ct. 1522,

118 L.Ed.2d 153), and we agree with the Court of Appeal that

Kavanau has not lost “all economically beneficial or productive use

of” his property (Lucas, supra, 505 U.S. at p. 1015, 112 S.Ct.

at p. 2893).

[22] Nor do the factors the high court articulated in Penn Central

and subsequent cases indicate a taking in this case. The “economic

impact” (Penn Central, supra, 438 U S. at p. 124, 98 S.Ct. at p. 2659)

on Kavanau of the 12 percent limit, which in effect merely delayed

his rent increase, was not significant when compared to the benefits

he continued to receive from his property, including significant rental

income (id. at p. 130, 98 S.Ct. at p. 2662 [rejecting assertion that a

reviewing court should consider the property interest that a regulation

affects in isolation from unaffected property interests] ). Similarly,

the “interfere[nce] with [Kavanau’s] distinct investment-backed

expectations” (id. at p. 124, 98 S. Ct. at p. 2659) was minor,

considering he had constructive knowledge of the 12 percent limit

when he chose to improve his property. Finally, the “character of the

governmental action” (ibid.) does not compel us to find a taking.

This case does not involve a regulation that “prohibited a

beneficial use to which [Kavanau’s building] had previously been

devoted” (Penn Central, supra, 438 U.S. at p. 125, 98 S.Ct.

at pp. 2659-2660), thus interfering with *685 Kavanau’s “primary

expectation” (id. at p. 136, 98 S.Ct. at p. 2665). Rather, the

12 percent limit affected Kavanau largely because he changed the use

of his building by making costly capital improvements. Nor did the

12 percent limit abrogate Kavanau’s entire property holding, as might

occur when someone owns only mineral rights and a land-use

regulation prohibits mining those minerals. (Pa. Coal, supra,

260 U.S. at pp. 412-416, 43 S.Ct. at pp. 159-160; Penn Central,

supra, 438 US. at pp. 127-128, 98 S. Ct. at pp. 2660-2661.) Further-

more, by _imposing the 12 percent limit, the Rent Board was not

acquiring “resources to permit or facilitate uniquely public functions”

such as government’s “entrepreneurial operations.” (Penn Central,

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supra, 438 US. at pp. 128, 135, 98 S.Ct. at pp. 2661, 2664-2665.)

Nor did the 12 percent limit “prevent the best use” of Kavanau’s

building or “extinguish a fundamental attribute of ownership.”

(Agins v. Tiburon, supra, 447 U.S. at p. 262, 100 S.Ct. at p. 2142.)

In addition, the Rent Board did not impose the 12 percent limit as a

condition for granting a permit. (Dolan, supra, 512 U'S. at p. 385,

114S.Ct. at pp. 2316- 2317; Nollan, supra, 483 U'S. at pp. 831, 841,

107 S.Ct. at pp. 3145-3146, 3150-3151.) Finally, the Rent Board has

a “legitimate ... interest[ }” in easing the burden on tenants of sudden,

large rent imcreases, and the 12 percent limit “substantially

advance[d]” that interest. (Agins v. Tiburon, supra, 447 US.

at p. 260, 100 S.Ct. at p. 2141; see also Penn Central, supra, 438 U.S.

at p. 127, 98 S.Ct. at pp. 2660- 2661; Keystone, supra, 480 U'S.

at p. 488, 107 S.Ct. at pp. 1243- 1244.) Thus, the factors that have

proved relevant in other takings cases do not indicate a taking in this

case.

[23] But Kavanau emphasizes the Court of Appeal’s finding in

Kavanau | that application of the 12 percent limit deprived him of a

fair return and thus violated his right to due process. We must, of

course, accept that finding as true for purposes of this proceeding.

Put simply, Kavanau argues that, because he lost rental income as a

direct result of the Rent Board’s unconstitutional application of its

12 percent limit, he has suffered a taking requiring just compensation.

Thus, Kavanau asks us to consider whether a rent regulation that

violates a particular property owner’s right to due process by

depriving him of a fair return also necessarily constitutes a taking.

As noted, the United States Supreme Court has declared that a

regulation of property “effects a taking if [it] does not substantially

advance legitimate state interests.” (Agins v. Tiburon, supra,

447 US. at p. 260, 100 S.Ct. at p. 2141.) The similarity of this

takings standard to the due process requirement that a regulation

“have a reasonable relation to a proper legislative purpose” (Nebbia,

supra, 291 U.S. at p. 537, 54 S.Ct. at p. 516) supports Kavanau’s

argument that a due process violation in this context constitutes a

taking. In fact, when the high court first articulated this takings

standard, it cited Nectow v. Cambridge (1928) 277 US. 183, 188,

48 S.Ct. 447, 448, 72 L.Ed. 842, a due process case. (Agins v.

Tiburon, supra, 447 U.S. at p. 260, 100 S.Ct. at p. 2141.) Kavanau’s

argument might also find some support in cases such as Duquesne,

A-20

supra, 488 U.S. 299, 109 S.Ct. 609, 102 L.Ed.2d 646, Florida Power,

supra, 480 U.S. 245, 107 S.Ct. 1107, 94 L.Ed.2d 282 (1987), and

20th Century, supra, 8 Cal.4th 216, 32 Cal.Rptr.2d 807, 878 P.2d

566, which apply standards under the takings clause similar to those -

that apply under the due process clause.

On the other hand, the Rent Board stresses the distinct functions

of the due process clause and the takings clause. The Rent Board

argues that the due process protection focuses on method. It requires

that a regulation not be arbitrary or capricious and that the regulatory

agency give due consideration to conflicting interests. The takings

protection focuses on result. According to the Rent Board, a taking

occurs only in cases of “ ‘deep financial hardship’ ” (20th Century,

supra, 8 Cal.4th at p. 258, 32 Cal.Rptr.2d 807, 878 P.2d 566) or when

a regulation deprives a property owner of nearly all use of the

property (Lucas, supra, 505 U.S. at p. 1015, 112 S.Ct. at p. 2893).

The Rent Board asserts we should no more treat a due process

violation affecting property as a taking than we would treat an equal

protection or free speech violation affecting property as a taking.

*686 [24][25] In this case, we need not decide whether a rent

regulation that violates a particular property owner’s right to due

process also constitutes a taking, because, assuming it otherwise

might, we hold that a remedy for the due process violation, if

available and adequate, obviates a finding of a taking. In a variety of

contexts, the Supreme Court has recognized that the benefits a

property owner receives in conjunction with a regulation may offset

the burdens and thus satisfy the takings clause. (Penn Central, supra,

438 US. at p. 137, 98 S.Ct. at pp. 2665- 2666; see generally Kendall

& Ryan, “Paying” for the Change: Using Eminent Domain to Secure

Exactions and Sidestep Nollan and Dolan (1995) 81 Va. L.Rev. 1801,

1837-1842; Costonis, “Fair” Compensation and the Accommodation

Power: Antidotes for the Taking Impasse in Land Use Controversies

(1975) 75 Colum. L.Rev. 1021, 1039-1042.) Thus, in Pa. Coal,

Justice Holmes noted the “average reciprocity of advantage” that

often characterizes regulations and justifies them for purposes of the

takings clause. (Pa. Coal, supra, 260 U.S. at p. 415, 43 S. Ct.

at p. 160.) More explicitly, the court has long held that the special

benefits conferred on a property owner’s remaining property as a

direct result of a taking may constitute just compensation.

(Bauman v. Ross (1897) 167 U.S. 548, 17 S.Ct. 966, 42 L.Ed. 270.)

A-21

Bauman involved the taking of private property to build a highway

in the District of Columbia. The court stated: “The Constitution of

the United States contains no express prohibition against considering

benefits in estimating the just compensation to be paid for private

property taken for the public use; and ... no such prohibition can be

implied...” (Id. at p. 584, 17 S. Ct. at p. 980.) Similarly, a

government agency may “mitigate ... [the] financial burdens” of a

land-use regulation, and thus avoid a takings clause violation, by

transferring development rights to the property owner’s other parcels.

(Penn Central, supra, 438 U.S. at p. 137, 98 SCt. at pp. 2665-2666;

see also MacDonald, Sommer & Frates v. Yolo County, supra,

477 US. at p. 350, 106 S.Ct. at pp. 2566- 2567: cf. Suitum v. Tahoe

Regional Planning Agency (1997) --- U.S. ----, 117 S.Ct. 1659,

137 L.Ed.2d 980 [not deciding whether the sale value of transferable

development rights is relevant to the existence of a taking or only to

the adequacy of the compensation].) Consistent with the reasoning

of these cases, when a due process violation is the sole basis of an

asserted taking, a remedy for the due process violation, if available

and adequate, is a valuable benefit that satisfies the takings clause.

(Cf. Williamson Planning Comm’n v. Hamilton Bank (1985)

473 US. 172, 194-197, 105 S.Ct. 3108, 3120-3122, 87 L.Ed.2d 126

[state law inverse condemnation remedy may be adequate

compensation for purposes of takings clause]; Ruckelshaus v.

Monsanto Co. (1984) 467 U.S. 986, 1019, 104 S.Ct. 2862, 2881,

81 L.Ed.2d 815 [Tucker Act remedy may be adequate compensation

for purposes of takings clause]; Regional Rail Reorganization Act

Cases (1974) 419 US. 102, 136, 150, 155-156, 95 S.Ct. 335,

354-355, 362, 364-365, 42 L. Ed.2d 320 [same].)

Under the due process clause, future rent ceilings must enable

Kavanau to earn a fair return that will “maintain financial integrity,

attract necessary capital, and fairly compensate [him] for the risks [he

has] assumed.” (Permian Basin, supra, 390 U.S. at p. 792, 88 S.Ct.

at p. 1373.) Among other things, this standard requires the Rent

Board to consider, when setting rent ceilings, Kavanau’s costs, which

include certain costs associated with rent control. (Civ.Code,

§ 1947.15 [stating circumstances in which rent control agencies must

consider the cost to a landlord of professional services associated

with rent control].) We think one of the costs associated with rent

control that the Rent Board must consider is the cost to Kavanau of

A-22

any confiscatory rent ceilings the Rent Board previously imposed on

the apartments in question. (Cf. Communications Satellite Corp. v.

F.C.C. (D.C.Cir.1977) 611 F.2d 883, 894 & fn. 19 [past deficiency

“may not be capitalized into the rate base for future years” unless

“rates ... have for sometime been under strictures set by an

administrative agency” and the defituency is the result of agency

“miscalculation”].) Thus, irrespective ofavhether section 1983 would

have afforded Kavanau a remedy for the due process violation, his

continuing right to an adjustment of future rents can provide an

adequate remedy.

*687 An adjustment of future rents that takes into consideration

past confiscatory rents is the converse of the refund that producers in

price- regulated industries may have to pay if, during litigation over

price levels, they charge prices that a court later determines to be

excessive. (See, e.g., Trans Alaska Pipeline Rate Cases (1978)

436 US. 631, 655, 98 S. Ct. 2053, 2066-2067, 56 L. Ed.2d 591.)

Moreover, this remedy, as opposed to an award of damages against

the Rent Board, places the cost of compensating Kavanau roughly on

those tenants who benefited from unconstitutionally low rents. (Cf.

State of California v. Levi Strauss & Co. (1986) 41 Cal.3d 460, 472-

473, 224 Cal.Rptr. 605, 715 P.2d 564 [antitrust class action applying

“fluid recovery” whereby fund roughly benefits those who suffered

damages]; Blue Chip Stamps v. Superior Court (1976) 18 Cal.3d

381, 388, fn. 1, 134 Cal. Rptr. 393, 556 P.2d 755 (conc. opn. of

Tobriner, J.) [price reduction as remedy for overcharges].) We note

in this regard that if any of Kavanau’s tenants have vacated an

apartment, then state law may have authorized Kavanau to set the rent

for his new tenants at a level that enabled him, or will enable him, to

recoup past losses. (Civ.Code, §§ 1954.50-1954.53.) In that case, he

would not be entitled to an additional rent adjustment. Thus, in

practice, future rent adjustments are likely to affect only those tenants

who have not moved and who benefited from unconstitutionally low

rents.

[26] Finally, the remedy of future rent adjustments avoids putting

a reviewing court in the position of declaring the appropriate

regulated rent ceiling for a particular apartment in order to measure

damages. (Cf. United States v. Western Pac. R. Co. (1956) 352 US.

59, 63-64, 77 S.Ct. 161, 164-165, 1 L.Ed. 2d 126 [deferring to the

“primary jurisdiction” of an administrative agency “whenever

A-23

enforcement of the claim requires the resolution of issues which ...

have been placed within the special competence of an administrative

body”].) Setting rent ceilings is essentially a legislative task, and

agencies, not courts, choose which administrative formula to apply.

(Fisher, supra, 37 Cal.3d at p. 681, 209 Cal.Rptr. 682, 693 P.2d 261.)

The state and federal Constitutions require only a fair process that

reasonably takes into consideration the landlord’s interests, and a

landlord’s return need only fall within a “broad zone of

reasonableness.” (Permian Basin, supra, 390 U.S. at p. 770, 88 S.Ct.

at pp. 1361- 1362). Accordingly, courts are in no position to

determine the appropriate rent ceiling for an apartment as a means of

assessing damages. We strongly resist any rule that would impose on

a reviewing court the impossible task of finding somewhere in the

penumbra of the Constitution a stipulation that a particular apartment

in a particular building should rent for $746 per month rather than

$745.

[27] Here, the City’s rent contro! scheme is sufficiently flexible to

permit the Rent Board to consider past confiscatory rent ceilings

when evaluating a landlord’s petition for a rent increase. (Charter,

§ 1805(e).) Kavanau, of course, is not necessarily entitled to rent

increases equal to the exact amount by which his past rents fell below

some imagined constitutional minimum. Rather, he is merely entitled

to future rent ceilings that will “maintain financial integrity, attract

necessary capital, and fairly compensate [him] for the risks [he has]

assumed, and yet provide appropriate protection to the relevant public

interests, both existing and foreseeable.” (Permian Basin, supra,

390 US. at p. 792, 88 S.Ct. at p. 1373.) But, in measuring the future

rent ceiling for a particular apartment, the Rent Board must take into

consideration the effect on Kavanau, if any, of the temporary

enforcement of its confiscatory regulation with respect to that

apartment. In this regard, we note Kavanau’s actual loss in this case

may be small or nonexistent. For example, the Rent Board arguably

could have satisfied the Kavanau I mandate by waiving the

12 percent limit, but imposing a higher limit, under some other

regulatory provision, that adequately accommodated Kavanau’s

interest in a fair return. If, in response to Kavanau I, the Rent Board

allowed Kavanau to increase rent in accordance with its maintenance

of net operating income formula, but without any annual limit, it may

already have enabled Kavanau to recoup his losses. In addition, the

A-24

12 percent limit was not confiscatory to the extent *688 market

conditions would have prevented Kavanau from increasing rent more

than 12 percent even if the Rent Board had not enforced the limit.

Kavanau asserts he would have to double his rents in order to

recoup his losses within a reasonable period of time. He points out

that he operates in a competitive environment, and he argues that

future rent adjustments are an inadequate remedy because they will

price his apartments above market levels and leave him with an

empty building. If Kavanau’s assertion is true, then those same

market forces might well have prevented Kavanau from increasing

his rents regardless of the 12 percent limit. The Constitution does not

protect investors from the risks inherent in the marketplace. In

addition, Kavanau does not persuade us that his losses, if any, are so

great as to prevent him from recouping them through future rent

adjustments. In fact, Kavanau conceded at oral argument that his

rents remained well below free market levels even with the full

increase he sought. Moreover, if a landlord acts promptly to

challenge a confiscatory regulation, and seeks a stay of that

regulation during litigation, his losses, and thus any future rent

adjustments, are likely to be relatively small. A landlord who

unnecessarily permits large losses to accumulate cannot complain if

the market prevents him from recouping those losses. Finally, we do

not here decide what alternative remedy might be appropriate if a

landlord can establish that the remedy of future rent adjustments is

for some reason unavailable. But before Kavanau can allege the

unavailability of future rent adjustments, he must petition for those

adjustments, the Rent Board must determine, subject to judicial

review, their appropriate amount, and he must attempt to impose

them.

[28] Just as a reviewing court averages the effects of subsidiary

aspects of a price-setting scheme by looking at “net effect”

(Duquesne, supra, 488 US. at p. 314, 109 S.Ct. at p. 619), a

reviewing court can also average the effects of a price-setting scheme

over time. Thus, a fair return over the course of several years will

offset a confiscatory return during a particular year. Recognizing that

Kavanau has a continuing right under the due process clause to future

rent adjustments that will enable him to earn a fair return, we believe

he has not suffered a taking. Put another way, the ongoing process

of setting rent ceilings dispels the due process violation, which in this

fy AS.

A-25

case is the sole basis for a potential takings clause violation. (Cf.

Mountain Water v. Mont. Dept. of Public Serv. Reg. (9th Cir. 1990)

919 F.2d 593, 601 [no violation of Constitution because water utility

“may seek just compensation for its property taken through [future]

rate setting”].) Accordingly, we agree with the trial court and the

Court of Appeal that Kavanau has not stated a viable inverse

condemnation claim.

CONCLUSION

Kavanau I determined that application of the Rent Board’s

12 percent limit on rent increases violated Kavanau’s right to due

process. The remedy of future rent adjustments available to Kavanau

under the due process clause precludes a finding of a taking in this

case. Accordingly, we affirm the judgment of the Court of Appeal.

GEORGE, C.J., and MOSK, KENNARD and WERDEGAR, JJ.,

concur.

MOSK, Justice, concurring.

I concur in the majority opinion. I write separately to attempt

further clarification of the relationship between due process and

takings jurisprudence in the context of rent control and rate regulation

generally.

The term “due process” has at least two distinct meanings or

applications in the field of rate regulation: (1) substantive due

process, i.¢., whether the scheme of regulation in question is

* “ “arbitrary, discriminatory, or demonstrably irrelevant to the policy

the Legislature is free to adopt...” ” (Pennell v. San Jose (1988)

485 U.S. 1, 11, 108 S.Ct. 849, 857, 99 L.Ed2d 1 (Pennell )):

(2) what can be termed “confiscatory” due process, i.e. whether a

given scheme of rate regulation, although not per se or facially

invalid, is confiscatory in its result and has prevented an opportunity

to obtain a just and reasonable rate of return on investment. *689

(See Duquesne Light Co. v. Barasch (1989) 488 U.S. 299, 307-308,

109 S.Ct. 609, 615-616, 102 L.Ed.2d 646 (Duquesne Light Co.)). As

explained below, it is this latter confiscatory due process analysis that

significantly overlaps the takings clause.

Substantive due process analysis of price and rate regulation is

fairly straightforward. Price regulation is presumed to be

A-26

constitutional, and “ “The burden of proving’ otherwise ‘rests on the

party asserting the violation...’ [Citation.] It ‘is not easily met. For

the last half-century, courts have upheld challenged governmental

acts unless no reasonably conceivable set of facts could establish a

rational relationship between the regulation and the government’s

legitimate ends.’ [Citation.] ‘It is enough that there is an evil at hand

for correction, and that it might be thought that the particular ...

measure was a rational way to correct it.” (20th Century Ins. Co. v.

Garamendi (1994) 8 Cal. 4th 216, 292, 32 Cal.Rptr.2d 807, 878 P.2d

566, italics added (20th Century Ins. Co.).)

Rent control is simply a form of price control. “For constitutional

purposes rent control is indistinguishable from other types of

governmental price regulation. Despite the permanence and

concreteness of real property, and the special place accorded it by the

common law and expounded by the early commentators, its

commercial use is no less subject to regulation under the police

power than other, more ephemeral, goods and services... To

ascertain the limitations imposed by the ... federal constitution[ |

upon municipal efforts to regulate rents, it is therefore appropriate to

consider the constitutional limits on governmental regulation of

prices generally.” (Hutton Park Gardens v. Town Council of West

Orange (1975) 68 N.J. 543, 350 A.2d 1, 7-8, fn. omitted.)

As the United States Supreme Court affirmed in Pennell, a rent

control case: “[W]e have long recognized that a legitimate and

rational goal of price or rate regulation is the protection of consumer

welfare.” (Pennell, supra, 485 U.S. at p. 13, 108 S. Ct. at p. 858.)

Thus, that court upheld a facial challenge to a rent control ordinance

that “represents a rational attempt to accommodate the conflicting

interests of protecting tenants from burdensome rent increases while

at the same time ensuring that landlords are guaranteed a fair return

on their investment.” (Ibid.) Accordingly, the notion advanced by

some commentators (see Radford, Regulatory Takings Law in the

1990s: The Death of Rent Control? (1992) 21 Sw. U. L. Rev. 1019)

that rent control laws are subject to a heightened constitutional

scrutiny that goes beyond the substantive due process “rational

relationship” analysis to which other economic regulation is subject,

is without constitutional basis. Nor is it constitutionally sound to

assert that a trial court, sitting as trier of fact, may act as a kind of

“Super City Council” that can evaluate whether a rent control law has

A-27

been successful in achieving its stated purposes. (See ibid.) A trial

court may not arrogate to itself such a role. Neither may an appellate

court. “In a substantive due process challenge, we do not require that

the City’s legislative acts actually advance its stated purpose, but

instead look to whether ‘ “the governmental body could have had no

legitimate reason for its decision.” ’” (Kawaoka v. City of Arroyo

Grande (9th Cir.1994) 17 F.3d 1227, 1234, italics in original.)

Whether rent control is the best way to remedy the problem of

excessive rents in a given locale, and whether the benefits it brings in

terms of lower-than-market rents for some tenants outweighs its

costs, is a matter to be addressed to legislative bodies. [FN 1]

FN1. The notion that rent control laws may now be subject to a

more exacting form of constitutional scrutiny is predicated on a

reading of Nollan v. California Coastal Commission (1987)

483 U.S. 825, 107 S.Ct. 3141, 97 L. Ed.2d 677. (See Radford,

supra, 21 Sw. U. L.Rev. at p. 1030.) We have rejected elsewhere

the contention that Nollan and the related case of Dolan v. City of

Tigard (1994) 512 U.S. 374, 114 S. Ct. 2309, 129 L.Ed.2d 304

represent a new standard of scrutiny of government regulation

other than those regulations that require either a physical

dedication of property, or a development fee levied on an

“individual and discretionary basis.” (Ehrlich v. City of Culver

City (1996) 12 Cal.4th 854, 876, 50 Cal.Rptr.2d 242, 911 P.2d

429.) In the present case, rent control neither requires a physical

dedication nor amounts to an individual and discretionary

development fee. Indeed, as explained above, it is not a land use

regulation at all but a form of price control.

Moreover, the fact that the Pennell decision, which postdates

Nollan, relies on traditional substantive due process analysis in

determining whether a rent control law is within a city’s police

power (Pennell, supra, 485 U.S. at pp. 11-12, 108 S. Ct.

at pp. 857-858), indicates that Nollan does nothing to undermine

the fundamental constitutional validity of rent control laws. “TWle

have ‘consistently affirmed that States have broad power to

regulate housing conditions in general and the landlord-tenant

relationship in particular without paying compensation for all

economic injuries that such regulation entails.’ ” (Pennell, supra,

485 US. at p. 12, fn. 6, 108 S.Ct. at p. 856, fn. 6.) In short,

nothing in recent Supreme Court case law indicates an intent to

A-28

replace the traditionally deferential substantive due process

standard with some heightened takings standard when reviewing

the basic validity of a rent control law or other form of price

regulation. And the mere fact that a plaintiff chooses to label his

or her action as a suit for just compensation after a “taking,” when

it is in essence a substantive due process challenge to an economic

regulation, is without constitutional significance.

*690 Although a government agency’s capacity under the police

power to regulate rents in some manner is seldom in doubt, the

particular form the regulation takes will not pass constitutional

scrutiny if it is confiscatory. This confiscatory analysis, although it

also goes under the rubric of “due process,” is substantially different

than the substantive due process analysis discussed immediately

above. The fixing of a “ ‘just and reasonable’ rate [ |] involves a

balancing of the investor and the consumer interests.... [T]he investor

interest has a legitimate concern with the financial integrity of the

company whose rates are being regulated.” (Federal Power

Commission v. Hope Natural Gas Company (1944) 320 U.S. 591,

603, 64 S.Ct. 281, 288, 88 L.Ed. 333 (Hope ).) In determining a just

and reasonable rate, “it is the result reached not the method employed

which is controlling. [Citations.] It is not theory but the impact of

the rate order which counts. If the total effect of the rate order cannot

be said to be unjust and unreasonable, judicial inquiry under the Act

is at an end. The fact that the method employed to reach that result

may contain infirmities is not then important.” (Id. at p. 602, 64 S.Ct.

at pp. 287-288.) Thus in Hope, for example, Justice Douglas

discussed the utility’s historical earnings and financial status in

considerable detail and concluded that it was able to maintain its

“financial integrity.” (Hope, supra, 320 U.S. at pp. 604-605,

64 S.Ct. at pp. 288-289.) The court more recently did the same in

Duquesne Light Co.. supra, 488 U.S. at page 312, 109 S.Ct.

at page 618.

Some rent control cases speak of confiscatory regulations without

engaging in “end result” analysis. (See Birkenfeld v. City of

Berkeley (1976) 17 Cal.3d 129, 165, 130 Cal. Rptr. 465, 550 P.2d

1001.) In Birkenfeld, we found that Berkeley’s rent control law, as

then drafted, was partly unconstitutional because it failed to make

adequate provision for adjusting base rents. (Id. at p. 169, 130 Cal.

Rptr. 465, 550 P.2d 1001.) Although Birkenfeld used the language

i aca ll

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of confiscation, it is in fact closer to substantive due process analysis.

As we stated: “The provisions [of a rent control law] are within the

police power if they are reasonably calculated to eliminate excessive

rents and at the same time provide landlords with a just and

reasonable return on their property. However, if it is apparent from

the face of the provisions that their effect will necessarily be to lower

rents more than could reasonably be considered to be required for the

measure’s stated purpose, they are unconstitutionally confiscatory.”

(Id. at p. 165, 130 Cal.Rptr. 465, 550 P.2d 1001.) Turning to

Berkeley’s rent control scheme, we concluded that “Here the [law]

drastically and unnecessarily restricts the rent control board’s power

to adjust rents, thereby making inevitable the arbitrary imposition of

unreasonably low rent ceilings.” (Id. at p. 169, 130 Cal.Rptr. 465,

550 P.2d 1001.) Thus, this particular feature of Berkeley’s scheme

was deemed to be constitutionally invalid not because its end result

was actually “confiscatory,” in the sense in which Hope and its

progeny employ that term, but because it was arbitrary and could not

be rationally related to the legitimate state purpose of “eliminat[ing]}

excessive rents and at the same time provid[ing] landlords with a just

and reasonable return on their property.” (Birkenfeld, supra,

17 Cal.3d at p. 165, 130 Cai. Rptr. 465, 550 P.2d 1001.)

Similarly, regulation that set rates for insurers at less than a fair

rate of return in order to compensate for supposedly excess profits

was determined to be a violation of *691 due process in Calfarm Ins.

Co. v. Deukmejian (1989) 48 Cal.3d 805, 819, 258 Cal.Rptr. 161,

771 P.2d 1247. “[T]he concept that rates may be set at less than a fair

rate of return in order to compel the return of past surpluses is not one

supported by precedent.” (Ibid.) Again, this aspect of the law was

declared unconstitutional because it failed to pursue a legitimate state

Purpose--an essentially substantive due process violation--not

because it resulted in fact in the undermining of the financial integrity

of the various insurance companies.

In Duquesne Light Co., supra, 488 U.S. 299, 109 S.Ct. 609,

102 L.Ed.2d 646, the court appeared to use the terms “due process”

and “taking” interchangeably in referring to utility rate regulation that

is confiscatory and therefore constitutionally defective. As the court

stated, “[t]he guiding principle has been that the Constitution protects

utilities from being limited to a charge for their property serving the

public which is so ‘unjust’ as to be confiscatory. Covington and

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Lexington Turnpike Road Co. v. Sandford, 164 U.S. 578, 597,

17 S.Ct. 198, 205, 41 L.Ed. 560 (1896) (A rate is too low if it is “so

unjust as to destroy the value of [the] property for all the purposes for

which it was acquired,” and in so doing ‘practically deprive[s] the

owner of property without due process of law’), [citations]. If the

rate does not afford sufficient compensation, the State has taken the

use of utility property without paying just compensation and so

violated the Fifth and Fourteenth Amendments.” (Duquesne Light

Co., supra, 488 U.S. at pp. 307-308, 109 S.Ct. at pp. 615-616, italics

added.) However, it is clear that the Duquesne Light Co.’s equation

of the two constitutional provisions was made only in reference to

rate regulations that are confiscatory in their end result. (Duquesne

Light Co., supra, 488 U.S. at p. 310, 109 S. Ct. at p. 610.) In other

words, a rate regulation is judged to be a taking when its effect has

been actually confiscatory, not when it violates substantive duc

process. As has been stated, “[A]bsent ... deep financial hardship [of

a regulated public utility], there is no taking, and ... no obligation to

compensate...” (Jersey Central Power and Light Co. v. FERC (1987)

810 F.2d 1168, 1181, fm. 3; accord, 20th Century Ins. Co., supra,

8 Cal 4th at p. 297, 32 Cal Rptr.2d 807, 878 P.2d 566.)

The notion that a price regulation that leads to the actual

confiscation of property is a “taking” of that property is congruent

with the Supreme Court’s evolving takings jurisprudence in the field

of land use law, wherein the impact of land use regulation, either in

economic terms or in terms of physical intrusion on real property, is

paramount in any takings analysis. (See Lucas v. South Carolina

Coastal Council (1992) 505 U.S. 1003, 1015-1016, 112 S.Ct. 2886,

2893-2894, 120 L.Ed.2d 798.) But nothing in the land use cases, or

in Duquesne Light Co., suggests that any regulation that violates

substantive due process is a taking for which just compensation must

be paid. [FN2]

FN2. It is admittedly true that Supreme Court precedent is not

entirely clear on where substantive due process ends and takings

law begins. In the area of land use regulation, the court has held

that a general zoning law is a taking of property if it “does not

substantially advance legitimate state interests.” (Agins v. City of

Tiburon (1980) 447 U.S. 255, 260, 100 S.Ct. 2138, 2141, 65 L.

Ed.2d 106.) Whether and to what extent this standard differs from

the ordinary substantive due process “rationally related” standard

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is a question beyond the scope of this opinion. The “substantially

advance” standard has not been applied by the Supreme Court

outside the special area of forced dedications of property in

exchange for development permits. (See Nollan v. California

Coastal Commission, supra, 483 U.S. 825, 107 S$.Ct. 3141, 97 L.

Ed.2d 677; Dolan v. City of Tigard, supra, 512 U.S. 374, 1145S.

Ct. 2309, 129 L.Ed.2d 304.) In any case, the Supreme Court has

not indicated any intent to extend the “substantially advance” test

beyond the realm of zoning and similar laws which restrict the use

of land, and has not applied such a test to price regulations. (See

fn. 1, ante ).

In the present case, the basis of the Court of Appeal’s holding in

the original Kavanau decision (see Kavanau v. Santa Monica Rent

Control Bd. (1993) 19 Cal. App.4th 730, 23 Cal. Rptr.2d 724

(Kavanau I )) is unclear. The opinion can be read as a substantive

due process case, concluding that the 12 percent cap found in the

Santa Monica ordinance is arbitrary. As the majority herein explain,

however, there is no reason why a 12 percent cap cannot “be one

aspect of a comprehensive scheme that as a whole providefs]

landlords *692 a fair return.” (Maj. opn., ante, at page 683 of 66 Cal.

Rptr.2d, at page ---- of --- P.2d.) It appears from the dollar figures

alleged in Earl W. Kavanau’s complaint and stated in the majority

opinion (maj. opn., ante, at page 676 of 66 Cal Rptr.2d, at page 855

of 941 P.2d), that Kavanau may have made a bad business decision

purchasing the rental property in question, since the amount of debt

service and operating expenses exceed rental income. These facts on

their face do not indicate a constitutional violation. “ ‘A regulated

firm has no constitutional right to a profit.” ” (20th Century Ins. Co.,

supra, 8 Cal.4th at p. 294, 32 Cal. Rptr.2d 807, 878 P.2d 566.

brackets omitted.) Although, as the majority point out, we are bound

by the law of the case to the Court of Appeal’s conclusion that a

12 percent cap was arbitrary, this conclusion does not signify that

Kavanau was in fact subject to “deep financial hardship” as the result

of the rent regulation. The judgment of the Kavanau I court does not

translate into the claim that Kavanau deserves just compensation

under the Fifth Amendment to the United States Constitution.

As the majority properly conclude, the cost of past confiscatory

rent regulation is “one of the costs associated with rent control that

the Rent Board must consider” in setting a present just and reasonable

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rent. (Maj. opn., ante, at page 686 of 66 Cal Rptr.2d, at page 865 of

941 P.2d.) If Kavanau can establish not only that the 12 percent cap

was arbitrary, but that as the result of its imposition, he in fact

suffered a sustained period of financial hardship that defeated any

reasonable investment-backed expectation for the market in which he

operated, then he may be entitled to a rate increase that compensates

for such a confiscatory rate. But since, even if Kavanau I is taken at

face value, it is far from clear that the result of the Santa Monica Rent

Control Board’s rate order was the actual imposition of an unfairly

low rate of return, and since the post-Kavanau I remedy may have

adequately compensated Kavanau for whatever supposed losses he

suffered at the hands of the rent board, the majority is correct to

conclude that Kavanau may not be entitled to any further rent

readjustment. (See maj. opn., ante, at page 687 of 66 Cal. Rptr.2d,

at page 866 of 941 P.2d.)

There is yet another reason why a landlord’s claim for damages

would be, at the very least, vitiated under a scheme of rent regulation.

As I stated in my concurring opinion in 20th Century Ins. Co., supra,

8 Cal 4th at page 330, 32 Cal.Rptr.2d 807, 878 P.2d 566, it is

evidently the case that “ ‘[a] property owner must be legally

compelled to engage in price-regulated activity for regulations to give

rise to a taking. [Citations.] For example, public utilities generally

are under a state statutory duty to serve the public, and must furnish

“service on demand to all applicants” at government-determined

rates. [Citations.] Because utilities are compelled to employ their

property to provide services to the public, the Fifth Amendment

requires regulators to provide utilities with reasonable compensation

for their services. [Citations.] [§] By contrast, where a service

provider voluntarily participates in a price-regulated program or

activity, there is no legal compulsion to provide service and thus

there can be no taking.” ” A “voluntary” participation in a price-

regulated program is said to occur when an individual or company

has the “right to withdraw therefrom.” (Id. at p. 331, 32 Cal. Rptr.2d

807, 878 P.2d 566.)

Thus, one who persists in engaging in a regulated activity over an

extended period of time, when withdrawal from that activity is an

option, cannot lay at the doorstep of government regulation the

reason for its economic failure. Government regulation may indeed

place some firms in financial jeopardy, but that in itself does not give

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A-33

rise to a constitutional violation when the government does not block

the outflow of assets from these no-longer-profitable enterprises.

Some features of the rate regulation may be a violation of substantive

due process if they cannot be said to be part of a rational regulatory

scheme, and these would therefore be subject to invalidation through

injunctive and declaratory relief. But it does not follow that one who

has a right to withdraw his capital from the regulated enterprise in

question may press a damages claim against the government, either

a just compensation claim for a taking or a statutory claim for

damages under section 1983 of title 42 of the United States Code. It

appears doubtful therefore that a landlord who is subject to

lower-than-*693 reasonable rents, and has the option of withdrawing

from the rental market, or recouping his previous losses prospectively

through a compensatory rent order, can ever press such a claim.

BAXTER, Justice, dissenting.

I respectfully dissent from the majority’s holding that a

compensable taking cannot occur even though the government, acting

through its rent control board, deprives a landlord of the opportunity

to earn a fair and reasonable return on the landlord’s property through

unconstitutional and confiscatory application of its rent control

regulations. | share Justice Croskey’s view. expressed in his dissent

below: “I can perceive of no reason in law or logic why a

confiscatory rent control regulation, found to be unconstitutional on

due process grounds, would not result in a compensable taking if it

were nevertheless enforced and a monetary deprivation resulted. |

can imagine no clearer example of a case where compensation should

be paid than where the government has illegally taken or diverted to

its own social goals the private property of one of its citizens.

Indeed, such a common sense result and statement of principle should

need no citation of authority.”

In a decision now final (Kavanau v. Santa Monica Rent Control

Bd. (1993) 19 Cal. App.4th 730, 23 Cal.Rptr.2d 724 (Kavanau ])),

the Court of Appeal held that, as a result of the constitutionally

impermissible action of defendant Santa Monica Rent Control Board,

plaintiff was denied a fair and reasonable return on his rental

property. As a result he allegedly suffered damages of $113,095 as

of the date of his complaint. He sought to recover that amount plus

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interest, attorney fees, costs, and other sums from the governmental

body responsible for his loss, the Santa Monica Rent Control Board

(the Board), in a complaint stating a cause of action in inverse

condemnation. His complaint was dismissed. The Court of Appeal

affirmed the trial court judgment and a majority of this court now

affirms that judgment on the grounds that plaintiff's allegations, if

true, do not establish a taking and, even if the Board’s action denied

him due process because it denied him a fair return on his property,

he has another remedy--increased rents--by which means third parties

may eventually reimburse him for what the Board allegedly took

from him.

The majority err. There has been a taking of a substantial property

right--plaintiff's right to seek a fair and reasonable return from his

property. Plaintiff has both a federal and a state constitutional right

to recover the loss he suffered as a result of that taking from the

Board. By mandating rents so low that its action denied plaintiff due

process of law, the Board took from him a significant stick in the

bundle of sticks that together constitute ownership of real property

(see Kaiser Aetna v. United States (1979) 444 U.S. 164, 176, 100 S.

Ct. 383, 391, 62 L_Ed.2d 332)--the opportunity to earn a reasonable

return on his property. Since the rent ceiling imposed by the Board

denied plaintiff the reasonable return his property would otherwise

have earned, it necessarily denied plaintiff economically productive

use of his rental property and to that extent took a right to which he

was constitutionally entitled. Under both the Fifth and Fourteenth

Amendments to the United States Constitution (Fifth Amendment)

and article I, section 19 of the California Constitution (article I,

section 19), plaintiff must be compensated for that taking by the

governmental entity that took his property. It is not sufficient that he

is permitted to raise the rent paid by his tenants from which increases

he may eventually recoup his losses.

THE “TAKINGS” CLAUSE AND RENT CONTROL

The Fifth Amendment taking clause, incorporated into and made

applicable to the states by the Fourteenth Amendment (Chicago,

Burlington & Q.R. Co. v. Chicago (1897) 166 U.S. 226, 239, 17 S.Ct.

581, 585-586, 41 L.Ed. 979), provides, inter alia that “private

property [shall not] be taken for public use without just

A-35

compensation.” Article I, section 19 contains a similar command,

providing inter alia: “Private property may be taken or damaged for

public use only *694 when just compensation, ascertained by a jury

unless waived, has first been paid to, or into court for, the owner.”

When the government fails to meet its constitutional obligation under

these provisions, an action in inverse condemnation lies against the

government to recover “just compensation.” (Customer Co. v. City

of Sacramento (1995) 10 Cal.4th 368, 377, fn. 4, 41 Cal Rptr.2d 658,

895 P.2d 900.) And, even though the confiscatory rent ceiling

imposed on plaintiff has been judicially invalidated, compensation

must be paid for the income he lost while the impermissible rent

ceiling was in effect, a period during which there was a “temporary

taking.” (First Lutheran Church vy. Los Angeles County (1987)

482 US. 304, 321, 107 S.Ct. 2378, 2387, 96 L. Ed.2d 250.)

The Board may not avoid either a finding that there has been a

taking or the obligation to pay constitutionally mandated

compensation on speculation that plaintiff's loss may be reduced at

some time in the future by increased rent paid by tenants who

benefited from the reduced rent or, if those tenants leave, by new

tenants who pay market rate rent. The question of whether there has

been a taking must be decided independently of the value for just

compensation purposes of any future monetary recovery from third

parties allowed the owner whose property has been taken. (Suitum v.

Tahoe Regional Planning Agency (1997) --- U.S. ----, 117 S.Ct

1659, 137 L. Ed. 2d 980.)

The majority assume, but are reluctant to decide, whether a rent

regulation which, as applied, denies a property owner due process

constitutes a taking within the meaning of the Fifth Amendment and

article I, section 19. I do not share that reluctance and I disagree with

the view that there has been no taking in this case. I would hold that,

because the rent regulation was adjudicated in Kavanau I to be so

arbitrary as to deny due process by preventing plaintiff from earning

a fair and reasonable return on the property, a taking occurred for

which just compensation must be paid by the Board.

The interests which enjoy constitutional protection as “property”

are generally defined by state law. (Civ.Code, § 755; Lucas v. South

Carolina Coastal Council (1992) 505 USS. 1003, 1030, 112 S.Ct.

2886, 2901, 120 L-Ed.2d 798.) In California “[t]he right to acquire

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and possess property, guaranteed by the constitution, includes the

right to dispose of it, or any part of it, and for that purpose to divide

it in any possible manner, either by separating it into estates for

successive periods or otherwise, and to dispose of one or more of

such estates.” (Tennant v. John Tennant Memorial Home (1914)

167 Cal. 570, 575, 140 P. 242; Gregory v. City of San Juan

Capistrano (1983) 142 Cal App.3d 72, 88, 191 Cal. Rptr. 47.) Just as

that right encompasses the power to grant a license to use a portion

of the owner’s property temporarily (see Ex Parte Quarg (1906)

149 Cal. 79, 84 P. 766 [theater ticket] ), it includes the nght to create

a leasehold estate.

Because the Board has not appropriated or physically invaded

plaintiff's property, his claim is that there was a “regulatory taking,”

a restriction on his use of the property that went “too far” (Penna.

Coal Co. v. Mahon (1922) 260 U.S. 393, 415, 43 S.Ct. 158, 160,

67 L.Ed. 322 (Pennsylvania Coal)), during the period for which he

seeks damages. There was a “temporary taking.” The contrary

conclusion implicit in the majority opinion is foreclosed by the final

judgment of the Court of Appeal in Kavanau I, supra, 19 Cal.

App.4th 730, 23 Cal.Rptr.2d 724. The majority err both factually and

legally therefore when they hold that there has been no taking

because application of the Santa Monica rent control ordinance has

not denied plaintiff “ ‘all economically beneficial or productive use

of his property.” (Maj. opn., ante, at p. 684 of 66 Cal. Rptr.2d,

p. 863 of 941 P.2d.) The Board did deny plaintiff all economically

beneficial use of his property.

The legal conclusion that a taking occurred during the time that

plaintiff was denied a fair and reasonable return on his rental property

cannot be avoided under the United States Supreme Court precedent

on which the majority rely. As the majority recognize, a regulatory

taking may occur in a variety of contexts. The Supreme Court has

identified many, implicitly concluding in some that because the

governmental restriction went “too far,” the property owner had been

unfairly called upon to sacrifice a property *695 interest for the

benefit of the public in circumstances in which the burden should be

shared by the public as a whole. While the contexts in which the

court has found a regulatory taking or rejected a taking claim differ,

a common thread runs through the analysis. Although phrased

somewhat differently in the court’s various decisions, the economic

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impact of the regulation on the property owner has been a

determinative factor. When the regulation denies the owner

economically productive use of the owner’s property for its

customary use, the regulation goes too far. It is irrelevant in those

circumstances that the regulation furthers or is necessary to

accomplish a legitimate public purpose that is otherwise within the

police power of the government. A taking occurs for which just

compensation must be paid.

“[W]hen the owner of real property has been called upon to

sacrifice all economically beneficial uses in the name of the common

good, that is, to leave his property economically idle” a taking occurs.

(Lucas v. South Carolina Coastal Council, supra, 505 U.S. at p. 1019,

112 S.Ct. at p. 2895, fn. omitted.) The same is true if a regulation

deprives the owner of economic use to the extent that the owner is

unfairly singled out to bear a burden that should be borne by the

public as a whole. (Yee v. Escondido (1992) 503 U.S. 519, 522-523,

112 S. Ct. 1522, 1526, 118 L.Ed.2d 153.) [FN1] A taking also occurs

if a land use regulation extinguishes a fundamental attribute of

ownership. (Agins v. Tiburon (1980) 447 U.S. 255, 262, 100 S.Ct.

2138, 2142, 65 L.Ed.2d 106; Kaiser Aetna v. United States, supra,

444 US. at pp. 179-180, 100 S.Ct. at pp. 392-393.)

FN1. The court noted in Yee that it had never considered whether

a mobilehome rent control ordinance like that of the City of

Escondido effected a regulatory taking, but refrained from

addressing that issue only because the question has not been

properly raised. (503 US. at p. 538, 112 S.Ct. at p. 1534.) The

court expressed no doubt that a rent control ordinance could effect

a regulatory taking. (Ibid., see also Pennell v. San Jose (1988)

485 U.S. 1, 108 S.Ct. 849, 99 L._Ed.2d 1.)

The taking clause necessarily applies to rent control ordinances

which affect the ability of a property owner to earn a fair return on

property which is generally used for rental Purposes since the

regulations restrict both the owner’s fundamental right to create

leasehold estates and the owner’s right to make economically

productive use of the property. The Fifth Amendment taking clause

“is addressed to every sort of interest the citizen may possess”

including leasehold interests. (U.S. v. General Motors Corp. (1945)

323 US. 373, 378, 65 S.Ct. 357, 359-360, 89 L.Ed. 31 1.) That the

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Fifth Amendment taking clause applies to restrictions imposed by

rent control ordinances has been acknowledged by the United States

Supreme Court since at least 1921. In Block v. Hirsh (1921)

256 U.S. 135, 41 S.Ct. 458, 65 L.Ed. 865, the court upheld a rent

control law applicable to the District of Columbia and made

necessary by exigencies of the first World War. In so doing, the

majority recognized that rent control regulations could be so

restrictive as to amount to a taking. (Id. at p. 156, 41 S.Ct.

at pp. 459-460.) In Bowles v. Willingham (1944) 321 U.S. 503, 518,

64 S.Ct. 641, 649, 88 L.Ed. 892, the court upheld a World War II

price control act, some provisions of which applied to rental property,

stating in reference to those provisions that “the restraints imposed on

the national government in this regard by the Fifth Amendment are

no greater than those imposed on the States by the Fourteenth.”

The protection afforded by article I, section 19 is, of course, even

broader than that of the Fifth Amendment. (Varjabedian v. City of

Madera (1977) 20 Cal.3d 285, 298, 142 Cal. Rptr. 429, 572 P.2d 43.)

It is beyond dispute, therefore, that a rent control regulation that

denies due process may also violate the taking clause of the Fifth

Amendment, and article I, section 19. That being so, it is necessary

to determine whether denying plaintiff the might to seek a fair return

on his property did so. None of the decisions to which the majority

look for identification of the factors relevant to determining whether

a taking has occurred support the conclusion that no taking occurred

here. It is clear to me that there has been a compensable taking.

In Pennsylvania Coal, supra, 260 U.S. 393, 43 S.Ct. 158, 67 L. Ed.

322, a seminal *696 decision in the regulatory taking area, the

Supreme Court considered the application of a Pennsylvania statute

prohibiting anthracite coal mining in such a manner as to cause

subsidence to a parcel of property. The property was subject to a deed

executed by a coal company conveying the surface but expressly

reserving the right to mine coal. The grantee of the surface interest

expressly assumed all risk and waived all damage claims arising from

the mining. The court held that application of the statute in these

circumstances exceeded the police power of the state and constituted

a compensable taking.

In reaching that conclusion the court recognized that property

interests must yield “to some extent” to the police power, but this

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implied limitation on the police power itself has limits imposed by

the due process and contracts clauses of the Constitution. When

exercise of the police power exceeds those limits, the government

must exercise its power of eminent domain and pay just

compensation. The “extent of the diminution” of the values incident

to property determines when the limits of the police power have been

exceeded. (Pennsylvania Coal, supra, 260 U.S. at p. 413, 43 S.Ct.

at p. 159.) The coal company’s reserved mining rights were recog-

nized under Pennsylvania law, and therefore by the high court also,

as a valuable estate in land. The extent of the taking was great, as

application of the statute abolished that estate. (Id. at p. 414, 43 S.Ct.

at pp. 159-160.)

In Pennsylvania Coal the court stated the general rule which

continues to guide regulatory takings jurisprudence: “[{W]hile

property may be regulated to a certain extent, if regulation goes too

far, it will be recognized as a taking... [A] strong public desire to

improve the public condition is not enough to warrant achieving the

desire by a shorter cut than the constitutional way of paying for the

change.” (Pennsylvania Coal, supra, 260 U.S. at pp. 415-416, 43 S.

Ct. at p. 160.) [FN2]

FN2. The rule actually appears earlier in Block v. Hirsh, supra,

256 U.S. at page 56, 41 S. Ct. at pages 459-460, the decision in

which the court held that rent control, including vacancy control,

is not a per se taking. The law in question, applicable to

Washington, D.C., property, provided procedures to assure the

owner a reasonable rent. There, Justice Holmes explained that

rent control is permissible when a public exigency makes that

form of land use regulation necessary. Analogizing rent control

to other permissible regulation of property he explained: “We do

not perceive any reason for denying the justification held good in

the foregoing cases to a law limiting the property rights now in

question if the public exigency requires that. The reasons are of

a different nature but they certainly are not less pressing.... All the

elements of a public interest justifying some degree of public

control are present. The only matter that seems to us open to

debate is whether the statute goes too far. For just as there comes

a point at which the police power ceases and leaves only that of

eminent domain, it may be conceded that regulations of the

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present sort pressed to a certain height might amount to a taking

without due process of law.” (Ibid., italics added.)

Subsequent decisions applying and further explicating that general

rule make it clear that the property interest at issue here is a valuable

right and that the manner in which the Board applied its rent control

ordinance to plaintiff went “too far.”

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

104, 98 S.Ct. 2646, 57 L.Ed.2d 631 (Penn Central ), application of a

landmark preservation law to plaintiffs property precluded a

proposed development of the airspace above an historic railroad

terminal building. The law did award transferable development

rights to owners of landmark properties that could not be further

developed. The court recognized that the availability of those nghts

was relevant in determining the economic impact of the regulation

when deciding whether application of the law effected a taking. (See

also Suitum v. Tahoe Regional Planning Agency, supra, --- U.S. ----,

117 S.Ct. 1659, 137 L.Ed.2d 980.) The question before the court was

whether denying the owner the right to build above the existing

landmark structure constituted a taking. The court again recognized

that whether a taking has occurred depends on the circumstances of

the individual case, and requires what is essentially an ad hoc, factual

inquiry. It identified as a factor to be considered the “economic

impact of the regulation on the claimant and, particularly, the extent

to which the regulation has interfered with distinct investment-backed

expectations.” (*697 Penn Central, supra, 438 U.S. at p. 124, 98 S.

Ct. at p. 2659.)

In applying its takings jurisprudence to Penn Central’s property

the court refused to consider the interest in airspace in isolation. It

explained, “this Court focuses rather both on the character of the

action and on the nature and extent of the interference with rights in

the parcel as a whole--here, the city tax block designated as the

‘landmark site.’ ” (Penn Central, supra, 438 U.S. at pp. 130-131,

98 S.Ct. at pp. 2662-2663.) After rejecting arguments that

application of the landmark law to the property had diminished the

value of the site and burdened Penn Central more than other property

Owners subject to it, noting that in these respects, the law was similar

to a zoning ordinance, the court turned to the severity of the impact

of the landmark law on the parcel as a whole. In concluding that the

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impact was not such as to constitute a taking the court observed that

the law did not interfere in any way with the existing use of the

property, thus Penn Central’s “primary expectation” about use of the

parcel was unaffected. (Id. at p. 136, 98 S.Ct. at p. 2665.) It also

noted that there had been no determination that all use of the airspace

was prohibited since there had been no application for scaled-down

development. Thus in this case, there had been no taking because

“[t}he restrictions imposed are substantially related to the promotion

of the general welfare and not only permit reasonable beneficial use

of the landmark site but also afford appellants opportunities further

to enhance not only the Terminal site proper but also other

properties.” (Id. at p. 138, 98 S. Ct. at p. 2666, fn. omitted, italics

added.) The court emphasized that this holding assumed Penn

Central’s “present ability to use the Terminal for its intended

purposes and in a gainful fashion.” (Id. at p. 138, fn. 36, 98 S.Ct.

at p. 2666, fn. 36.)

The importance of the right to use one’s property in an

economically viable manner as the determinative factor in assessing

whether a taking has occurred was again emphasized by the court in

Agins v. Tiburon, supra, 447 U.S. 255, 100 S.Ct. 2138, 65 L.Ed.2d

106. There the validity of zoning ordinanes which limited the

number of homes that could be constructed on a five-acre parcel was

challenged. Because the property owners had not sought a

development permit, the only question before the court was whether

enactment of the ordinances alone constituted a taking. In rejecting

the property owners’ taking claim, the court stated: “The application

of a general zoning law to particular property effects a taking if the

ordinance does not substantially advance legitimate state interests,

see Nectow v. Cambridge, 277 U.S. 183, 188 [48 S.Ct. 447, 448,

72 L.Ed. 842] (1928), or denies an owner economically viable use of

his land, see Penn Central Transp. Co. v. New York City, 438 U.S.

104, 138, n. 36 [98 S.Ct. 2646, 2666, n. 36, 57 L.Ed.2d 631] (1978).”

(Id. at p. 260, 100 S.Ct. at p. 2141, italics added.) Neither occurred

as a result of the adoption of the Tiburon zoning ordinances. While

they limited development, “they neither prevent[ed] the best use of

appellants’ land [citation], nor extinguish[ed] a fundamental attribute

of ownership [citation].” (Id. at p. 262, 100 S. Ct. at p. 2142.)

Here, of course, the holding in Kavanau I, supra, 19 Cal.App. 4th

730, 23 Cal.Rptr.2d 724, establishes that plaintiff was not permitted

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“economically viable” or “reasonably beneficial” use of his property.

Application of the rent control ordinance to the property seriously

interfered with his, or any owner of rental property's, “primary

expectation” about the use of rental property, since the Board did not

permit him to earn a reasonable rate of return. Moreover, by denying

plaintiff that nght, the Board effectively extinguished a fundamental

attribute of ownership of rental property.

While the determination of whether a taking has occurred often

does require weighing of private and public interests (Agins v.

Tiburon, supra, 447 U.S. at p. 261, 100 S.Ct. at p. 2142), outside the

realm of measures necessary to protect life and property (see, e.g.,

Miller v. Schoene (1928) 276 U.S. 272, 48 S.Ct. 246, 72 L. Ed. 568),

the balance has never been struck in favor of public interest when

governmental action has denied an owner economically viable use of

the owner’s property.

*698 The importance of the impact of governmental action on the

profitability of property in the weighing process appears in Keystone

Bituminous Coal Assn. v. DeBenedictis (1987) 480 U.S. 470, 107 S.

Ct. 1232, 94 L.Ed.2d 472. There a state law, which required that

50 percent of extractable coal be left in place under specified

structures to protect them against subsidence, was applied to property

owned by the petitioners. The high court rejected a facial challenge

to the law and distinguished Pennsylvania Coal, supra, 260 U.S. 393,

43 S.Ct. 158, on the ground that the petitioners had not shown that

their mining operations were not profitable under the restrictions

imposed by the law. “The two factors that the Court considered

relevant have become integral parts of our takings analysis. We have

held that land use regulation can effect a taking if it ‘does not

substantially advance legitimate states interest, ... or denies an owner

economically viable use of his land.” Agins v. Tiburon, 447 U.S. 255,

260 [100 S.Ct. 2138, 2141, 65 L.Ed2d 106] (1980) (citations

omitted); see also Penn Central Transportation Co. v. City of New

York, 438 U.S. 104, 124 [98 S.Ct. 2646, 2659, 57 L.Ed.2d 631]

(1978).... [T]he character of the governmental action involved here

leans heavily against finding a taking; the Commonwealth of

Pennsylvania has acted to arrest what it perceives to be a significant

threat to the common welfare. Second, there is no record in this case

to support a finding ... that the Subsidence Act makes it impossible

for petitioners to profitably engage in their business, or that there has

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been undue interference with their investment-backed expectations.”

(Id. at p. 485, 107 S.Ct. at p. 1242.)

Under any of the high court’s formulations of the test or factors

relevant in assessing whether a regulatory taking has occurred, there

has been a compensable taking in this case. When application of a

rent control ordinance to a parcel of property is so arbitrary and

unreasonable as to be confiscatory and deny due process, by

definition that application has denied the owner all economically

beneficial use of the property. When a rent ceiling is constitutionally

impermissible because it denies a property owner a fair and

reasonable return on the property, the owner’s investment-backed

expectations have been extinguished as the state has made use of the

property “commercially impracticable,” an action which constitutes

a taking. (See Pennsylvania Coal, supra, 260 U.S. at pp. 414-415,

43 S.Ct. at pp. 159-160.) [FN3] The character of the government

action is placement of the burden of assuring affordable rental

housing, a burden that should be borne by the public as a whole,

unfairly on the individual property owner. The owner is denied a

reasonable return on his investment in order to benefit tenants. And,

because the opportunity to lease property for an amount that will

generate a reasonable return on the owner’s investment is a

fundamental aspect of property ownership, application of a rent

control ordinance in a manner which denies the owner that

opportunity extinguishes that incident of ownership.

FN3. An apartment building, unlike undeveloped land, is not

amenable to a variety of uses or any alternative economically

feasible use.

There can be no dispute over the fact that rent control is a taking

for public use or common good. Rent control is constitutionally

permissible precisely because it is perceived as a means by which the

adverse impact on the public of a housing shortage may be cured or

mitigated. (Birkenfeld v. City of Berkeley (1976) 17 Cal. 3d 129,

160, 130 Cal.Rptr. 465, 550 P.2d 1001.) “[A] primary purpose of

rent control is the protection of tenants.” (Pennell v. San Jose, supra,

485 US. at p. 13, 108 S.Ct. at p. 858.) It follows that when a rent

ceiling is confiscatory the owner’s right to use the property in an

economically beneficial way “is being pressed into some form of

public service under the guise of mitigating serious public harm.”

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(Lucas v. South Carolina Coastal Council, supra, 505 U.S. at p. 1018,

112 S.Ct. at p. 2895.)

Application of the additional factors identified by the majority

(maj. opn., ante, at pp. 681-682 of 66 Cal.Rptr.2d, pp. 860-861 of

941 P.2d) as potentially relevant in determining whether a consti-

tutional taking has occurred also leads ineluctably to the conclusion

that there has been a taking in this case. The *699 contrary reasoning

of the majority is not supported by the authorities, discussed above,

on which the majority rely. Those factors, in the order addressed by

the majority, demonstrate the merit of plaintiff's claim:

1. The regulation of plaintiff's right to seek a reasonable return

from his rental property does interfere with a property interest.

Contrary to the majority view, the regulation did not simply delay the

time at which plaintiff would receive the constitutionally adequate

rents to which he was entitled. Application of the Santa Monica rent

control ordinance by the Board has already denied plaintiff a fair

return on his property. That temporary taking of this fundamental

aspect of ownership allegedly cost plaintiff $113,095. Additionally,

as his complaint alleges, the delay in receiving what would have been

a fair return denied plaintiff the use of that moncy and interest of

$30,956 that could have been earned.

Moreover, even assuming, as do the majority, that the

government’s obligation to pay just compensation may be shifted to

third parties, there is no assurance that plaintiff will ever recoup his

losses. It is true that he received some rental income, but that income

was not a fair and reasonable return on the property. The complaint

in inverse condemnation seeks to recover the rents that would have

assured plaintiff a reasonable return, the amount taken from him by

the Board’s illegal application of the rent control ordinance.

2. The regulation did affect the existing use of plaintiff's rental

property. It interfered to a constitutionally impermissible extent with

his primary ownership expectation of receiving a reasonable return

from rental property. Kavanau I, supra, 19 Cal.App.4th 730,

23 Cal.Rptr.2d 724, determined this.

3. It may be assumed that Santa Monica has a substantial interest

in maintaining an adequate supply of affordable rental units, but that

establishes only that the rent regulation is not invalid per se and that

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plaintiff's property was taken for a public purpose. None of the

authorities on which the majority rely suggest that this factor may

ever outweigh the denial of an economically feasible use of property

for its customary purpose in determining whether a taking has

occurred.

4. The regulation did abrogate a substantial interest plaintiff holds

in the property--the use of the property to produce a fair and

reasonable return on plaintiff's investment. While he still owns the

property, when rental property cannot be used to produce a fair and

reasonable return, the only alternative to use of it for producing rental

income is to sell it at a depressed price. Neither the Fifth Amendment

nor article I, section

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