Amicus Curiae Brief — Kavanau v. Santa Monica Rent Control Board

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Sy ) DEC 16 1997

United States

OCTOBER TERM, 1997

EarL W. KAVANAU,

Petitioner,

vs.

SANTA MONICA RENT CONTROL BOARD,

an agency of the City of Santa Monica, California,

Respondent.

Petition for Writ of Certiorari

to the

California Supreme Court

BRIEF OF WESTERN MOBILEHOME

PARKOWNERS’ ASSOCIATION, as AMICUS

CURIAE IN SUPPORT OF THE PETITIONER

GEORGE KIMBALL*

KIMBALL & WEINER LLP

555 South Flower Street

Suite 4540

Los Angeles, California 90740

Telephone: 213/538-3800

* Counsel of Record

Bowne of Los Angeles, Inc., Law Printers (213) 627-2200

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TABLE OF CONTENTS

INTEREST OF AMICUS CURIAE ................

SIAIEMeN: OF THE CASE... 2.2... cc ccc eaee

SUMMARY OF ARGUMENT .........00.000000.

I. SANTA MONICA HAS TAKEN KAVANAU’S

PGE ie GS KVUR PEA DS hes Ns ees ebeiseeees 5

Il. WHEN CONFISCATION OCCURS,

COMPENSATION MUST BE PAID

CONCLUSION

ss

TABLE OF AUTHORITIES

Cases

Agins v. Tiburon, 24 Cal. 3d 266, 598 P. 2d 25, 157 Cal.

Rptr. 372, affd on other grounds, 447 U.S. 255

(IDG - cvacnrccsunsngnaphsdepaneiasaan 5,9, 10

Duquesne Light Co. v. Barasch, 486 U.S. 299 (1989) ..5,7,8

Federal Power Comm'n v. Hope Natural Gas Co.,

aoe Ss Oe Ce ov a ncnd cmcsabaeyes sane 7

First English Evangelical Lutheran Church of Glendale

v. County of Los Angeles, 482 U.S. 304 (1987) ..5,9,10

Kavanau v. Santa Monica Rent Control Board, 19 Cal.

App. 4th 730, 23 Cal. Rptr. 2d 724 (1993) ........ 3,6

Penn Central Transportation Co. v. City of New York,

438 U.S. 104, reh’g denied, 439 U.S. 883 (1978)... 7

Pennsylvania Coal Company v. Mahon, 260 U.S. 393

LEE sc ncces * bxebiedicutaeneecda 6

Permian Basin Area Rate Cases, 390 U.S. 747 (1968) 5

Presault v. Interstate Commerce Comm'n, 494

Che DEGUDD 0 iss Nahasduseera ae 10

Regional Rail Reorganization Act Cases, 419 U.S. 102

CRW P OE bc nb bowen deo sbaenaeaes tenes 9

20th Century Insurance Co. v. Garamendi, 8 Cal. 4th

216, 292-295, 32 Cal. Rptr. 2d 807, (1994)....... 8

United States v. General Motors Corp., 323 U.S. 373

CROs 56:50 ose i heed ls oo Sees 6

No. 97-582

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1997

EARL W. KAVANAU,

Petitioner,

VS.

SANTA MONICA RENT CONTROL BOARD,

an agency of the City of Santa Monica, California,

Respondent.

Petition for Writ of Certiorari

to the

California Supreme Court

BRIEF OF WESTERN MOBILEHOME

PARKOWNERS’ ASSOCIATION, as AMICUS

CURIAE IN SUPPORT OF THE PETITIONER

This brief is submitted with the written consent of all

parties, filed with the Clerk of the Court.’

INTEREST OF AMICUS CURIAE

Amicus curiae Western Mobilehome Parkowners’ Associ-

ation (“amicus” or “WMA” ) is the leading trade associa-

tion for California’s mobilehome and manufactured housing

industry. WMA is a nonprofit, tax-exempt organization

organized under the laws of California.

'This brief was prepared by amicus’ counsel, at amicus’ expense.

2

WMaA’s members include owners and operators of more

than eighteen hundred mobilehome and manufactured

housing communities throughout California. For many

young families and older citizens, affordable housing means

manufactured housing. Rent controls, regulations of land

use and constitutional protection of property rights are

matters of great interest to WMA members.

Amicus recognizes that local rent controls and related

regulations are facts of life in many communities. Effective

legal remedies protect owners of rental property from (and

help to deter) such abuses as the action of Santa Monica’s

elected rent board, dominated by tenant partisans, which

deprived this Petitioner of $130,000.

The decision below, however, effectively revives former

California precedents, overruled by this Court, that pre-

cluded compensation when private property is taken by

regulation. The takings clause of the Fifth Amendment has

long protected regulated businesses against confiscatory rate

regulations by assuring investors a fair return and, if neces-

Sary, just compensation. California now denies any compen-

sation, so long as the constitutional issues can be

characterized as denial of due process.

STATEMENT OF THE CASE

Many communities control rents. Santa Monica’s con-

trols, adopted by initiative in 1979, are among the nation’s

most stringent, and have fueled extensive litigation. Many

reported decisions (and scores, possibly hundreds, of unre-

ported lower court cases) involve Santa Monica’s rent law.

Santa Monica’s initiative froze rents, rolled them back to

levels in effect during 1978, and thereafter allowed minimal

annual increases, as well as individual increases, decided

upon applications, after hearing and, if necessary, an appeal

to an elected rent control board. Tenants comprise a major-

3

ity of the local electorate. Tenant partisans dominate the

rent board.

Current regulations restrict individual increases under a

net operating income formula. No increase can, in any

event, exceed twelve percent (12%), twice the Employment

Cost Index, or $50 per month.’

Mr. Earl Kavanau owns ten apartments in Santa Monica,

a prosperous coastal suburb of Los Angeles. His building

was awash in red ink, and lost more than $98,000 in the

twelve months ended October 31, 1989. Under the Board’s

own formula, Mr. Kavanau was entitled to $35,000 in

additional rent, but the Board allowed only $5,184, because

of a regulation that limited increases to 12% per annum.

Additional increases were to be spread over eight years,

condemning Mr. Kavanau to years of heavy losses.

In Kavanau v. Santa Monica Rent Control Board, 19 Cal.

App. 4th 730, 23 Cal. Rptr. 2d 724 (1994) (“Kavanau I”),

the court (1) found the 12% percent limit, as applied to

Mr. Kavanau, was unconstitutional, (2) directed the lower

court to issue its writ, directing the rent board to allow

immediate implementation of the full increase computed by

the hearing examiner, and (3) required the court, and not

the board or its staff, to determine all questions that might

arise concerning implementation of the increases.

These increases were prospective, so Mr. Kavanau filed

suit to recover the $130,000 he had lost during the four years

that elapsed after his original application. Mr. Kavanau

2Santa Monica Rent Control Board (the “Board”) Regula-

tion 4107(a). At the time of Mr. Kavanau’s original application,

Regulation 4107 (a) limited increases to “twelve percent (12%) or twice

the Employment Cost Index, whichever is greater.” Kavanau v. Santa

Monica Rent Control Board, 19 Cal. App. 4th 730, 731, n.1 23 Cal.

Rptr. 2d 724, 725, n.1 (1993).

4

reasoned that the rent board, having subjected him to

confiscatory regulation, had taken his property.

Nonetheless, the California Court of Appeal and the

California Supreme Court affirmed the trial court’s dismis-

sal of Mr. Kavanau’s complaint. The California Supreme

Court characterized the underlying imposition of confisca-

tory rates as a denial of due process, rather than a taking,

and denied any remedy, other than further applications to

the same elected Board that committed the original consti-

tutional violation several years before.

In this case, we need not decide whether a rent regula-

tion that violates a particular property owner’s right to

due process also constitutes a taking, because, assum-

ing it otherwise might, we hold that a remedy for the

due process violation, if available and adequate, obvi-

ates a finding of a taking....

66 Cal. Rptr. 672 at 686.

SUMMARY OF ARGUMENT

This Court upholds price and rate regulations, so long as

they allow investors in regulated businesses a fair return.

This principle, long applied to public utilities, rental housing

and other regulated businesses, rests upon both the due

process and takings clauses of the Fifth Amendment. The

state may neither deprive a citizen of property without due

process of law, nor take that property for public use without

paying just compensation.

The decision below reasons, in effect, that property may

be taken without compensation, so long as (i) the depriva-

tion of property can be characterized as a denial of due

*Santa Monica’s rent law, an initiative amendment to the city charter,

makes no provision for any relief to owners in Mr. Kavanau’s

predicament.

5

process, and (ii) the affected citizen has some uncertain

prospect for relief in further proceedings before the offend-

ing agency.

Price control is unconstitutional if arbitrary, discrimina-

tory or demonstrably irrelevant to legitimate public policies.

Permian Basin Area Rate Cases, 390 U.S. 747, 769-770

(1968). If regulated rates are insufficient, use of the regu-

lated property is taken without just compensation. Duquesne

Light Co. v. Barasch, 486 U.S. 299, 309 (1989). The

constitutional protections are complementary, not mutually

exclusive.

| When private property is taken, compensation must be

paid. This Court so held in First English Evangelical Lu-

theran Church of Glendale y. County of Los Angeles,

482 U.S. 304, 314-315 (1987) (“First English”’), rejecting

California’s former rule in Agins v. Tiburon, 24 Cal. 3d 266,

598 P.2d 25, 157 Cal. Rptr. 372, affd on other grounds,

447 U.S. 255 (1980) that, when regulations take a citizen’s

property, equitable and declaratory relief were the only

possible remedies, and compensation cannot be paid.

In effect, the decision below revives California’s former

tule in Agins, denying compensation for regulatory takings

| of property. Santa Monica has confiscated a substantial

portion of Mr. Kavanau’s rental income, in violation of the

Constitution. This Court has held that when private property

is taken, just compensation must be paid.

I.

SANTA MONICA HAS TAKEN KAVANAU’S

PROPERTY.

Under the Constitution, private property may not be

taken for public use without just compensation. This Court

has held that the Constitution protects all property, real and

personal, tangible and intangible. The term “property” as

6

used in the takings clause includes the entire “group of

rights inhering in the citizen’s [ownership].” United States

v. General Motors Corp., 323 U.S. 373 (1945). It is not used

in the “vulgar and untechnical sense of the physical thing

with respect to which the citizen exercises rights recognized

by law. [Instead, it] denote[s] the group of rights inhering

in the citizen’s relation to the physical thing, as the right to

possess, use and dispose of it.... The constitutional provi-

sion is addressed to every sort of interest the citizen may

possess.” Id. at 377-78.

The Fifth Amendment’s takings clause thus protects

Mr. Kavanau, his small apartment building, and the income

he receives to operate the property. Most rental properties

are small businesses, owned by individuals or small partner-

ships. Rental properties are usually mortgaged. Owners

suffering confiscatory returns risk losing the property to

creditors through foreclosure or bankruptcy. In a very real

sense, their property may be taken from them if regulated

rents are insufficient to pay the mortgage. Mr. Kavanau

evidently held on long enough to obtain some prospective

relief after Kavanau I. Not everyone will necessarily be so

fortunate.

In Kavanau I, the Court of Appeal determined that Santa

Monica’s arbitrary limitation on rent increases was confisca-

tory, as applied to Mr. Kavanau’s small property. There can

be no doubt that confiscatory regulation “goes too far.” This

Court long ago recognized, in a seminal opinion by Justice

Holmes, that “while property may be regulated to a certain

extent, if regulation goes too far it will be recognized as a

taking.” Pennsylvania Coal Company v. Mahon, 260

U.S. 393, 415 (1922).

Later decisions have elaborated upon Pennsylvania Coal,

identifying various factors that may have particular signifi-

cance, including a regulation’s economic impact, the extent

of interference with the owner’s reasonable, investment-

7

backed expectations, the character of the regulation, its

purpose and the benefits to the owner, among others. Penn

Central Transportation Co. v. City of New York, 438

U.S. 104, 123-25, reh’g denied, 439 U.S. 883 (1978).

Here, the impact of confiscatory regulations has been

substantial, and might have been ruinous. Mr. Kavanau’s

expenditures and investment are undisputed. He was fairly

entitled to expect Santa Monica’s rent law to be applied

constitutionally. As for character and benefit, the applica-

tion of Santa Monica’s arbitrary limit was confiscatory,

without benefit to Mr. Kavanau. Indeed, rent control gener-

ally provides no benefits to the owners of rental property.

There can be few clearer cases of regulatory taking than

confiscatory application of rate regulations.

Kavanau I’s determination that Santa Monica had denied

Mr. Kavanau a fair return echoed decisions of this Court.

More than fifty years ago, the U.S. Supreme Court inter-

preted a statutory “just and reasonable” standard for gas

rates to assure a:

return to the equity owner ... commensurate with

returns on investments in other enterprises having cor-

responding risks. That return, moreover, should be

sufficient to assure confidence in the financial integrity

of the enterprise, so as to maintain its credit and to

attract capital.

Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S.

591 at 603, (1944) Losses like those Mr. Kavanau suffered

preclude maintenance of credit, and invite foreclosure of

mortgaged property.

The Court reaffirmed these principles in Duquesne Light

Co. v. Barasch, 488 U.S. 299 (1989).

The 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

8

confiscatory ... . If the rate does not afford sufficient

compensation, the State has taken the use of utility

property without paying just compensation and so vio-

lated the Fifth and Fourteenth Amendments.

488 U.S. at 307-308. Duquesne confirmed that the constitu-

tional assurance of a fair return rests upon the takings clause

of the Fifth Amendment.

California has recognized these principles in other con-

texts. For example, in 20th Century Insurance Co. v.

Garamendi, 8 Cal. 4th 216, 292-295, 32 Cal. Rptr. 2d 807,

855-57 (1994), a challenge to initiative regulation of con-

sumer insurance, California’s Supreme Court explained

that:

The takings clause limits the power of the states to

regulate, control or fix prices that producers charge

consumers for goods or services ... The crucial ques-

tion under the takings clause is whether the rate set is

just and reasonable. If it is not just and reasonable, it is

confiscatory ... “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 [.]’” Thus, a producer may complain of confisca-

tion only if the rate in question does not allow it to

operate successfully. (Citations omitted.)

Mr. Kavanau’s heavy losses can scarcely be described as

“successful” operation. Plainly, he suffered confiscation, and

thus, a taking.

9

Il.

WHEN CONFISCATION OCCURS,

COMPENSATION MUST BE PAID.

The takings clause does not prohibit appropriation of any

citizen’s property, but compels the state to pay compensa-

tion when property has been taken. Thus, Santa Monica

must compensate Mr. Kavanau.

The decision below avoided this seemingly inescapable

conclusion by declining to decide whether Santa Monica’s

violation of Mr. Kavanau’s rights constituted both a taking

and a deprivation of property without due process of law

because further proceedings before the Board are a “valua-

ble benefit that satisfies the takings clause.”

Santa Monica’s initiative rent control law authorizes no

relief to owners in Mr. Kavanau’s predicament. The opinion

gives no direction, other than an admonition to consider the

cost of “confiscatory rent ceilings . . . previously imposed” in

any future proceedings. 66 Cal. Rptr. at 686. Mr. Kavanau

has no “reasonable, certain and adequate provision for

obtaining compensation”. Regional Rail Reorganization Act

Cases, 419 U.S. 102, 124-25 (1974). He can only hope that

the same Board, applying the same law, and lacking any

explicit power to compensate him, will be more generous

now, after two lawsuits, and eight years of proceedings in

four different courts.

This Court has held, however, that when confiscation

occurs, compensation must be paid. In First English, supra,

the plaintiff church, owner of a camp in the San Gabriel

Mountains outside Los Angeles challenged flood control

regulations that temporarily precluded all use of the

church’s property. California courts denied any relief, rely-

ing upon the California Supreme Court’s opinion in Agins,

supra, “that damages are unavailable to address a ‘tempo-

10

rary’ regulatory taking.” 482 U.S. at 312. This Court over-

ruled Agins:

[The Fifth Amendment] provides in relevant part that

“private property [shall not] be taken for public use,

without just compensation.” As its language indicates,

and as the Court has frequently noted, this provision

does not prohibit the taking of private property, but

places a condition on the exercise of that power....

[I]t is designed not to limit the governmental interfer-

ence, but rather to secure compensation . . . Thus, gov-

ernment action that works a taking of property rights

necessarily implicates the “constitutional obligation to

pay just compensation.” . . . [T]he Court has fre-

quently repeated the view that, in the event of a taking,

the compensation remedy is required by the

Constitution.

First English, 482 U.S. at 314-316. See also, Presault v.

Interstate Commerce Comm'n, 494 U.S. 1, 11 (1990).

CONCLUSION

For these reasons, amicus respectfully requests that this

Court grant Mr. Kavanau’s petition for a writ of certiorari to

review and overturn the decision below, which:

¢ Contravenes authoritative decisions of this Court,

¢ Implicitly revives precedents overruled by this Court,

and

* Deprives Mr. Kavanau of the constitutional remedy

for confiscation, merely because the underlying consti-

11

tutional violation can be characterized as deprivation of

property without due process of law.

Dated: December 16, 1997

Respectfully submitted,

GEORGE KIMBALL

KIMBALL & WEINER LLP

Attorney for Amicus Curiae

Western Mobilehome

Parkowners’ Association