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A&W Litigators Secure Landmark Ruling from the Ninth Circuit

Aleshire & Wynder partners Sunny K. SoltaniJune Ailin, Steve Onstot and Jeff Malawy obtained a landmark ruling from the United States Court of Appeals for the Ninth Circuit reversing a nearly $8 million trial verdict against firm client, the City of Carson.  In a unanimous decision, the Court of Appeals reversed a trial court ruling that application of the City’s rent control law violated the Fifth Amendment of the Constitution by “taking” the park owner’s property without just compensation, concluding instead that the City’s Rent Control Review Board acted lawfully in rejecting two requests to greatly increase the rents on over a thousand residents, many of whom are senior citizens, living at the Colony Cove Mobile Estates mobilehome park in Carson.

The appellate court emphatically rejected the notion that a law that merely reduces an owner’s potential profit is an unconstitutional taking.  Local governments routinely regulate business activity to protect tenants, the environment, and consumers.  The Court’s ruling emphasizes that there is no constitutional requirement that local governments pay compensation when they adopt laws to protect their citizens.

This decision has statewide implications because it provides clear guidance that only the most extreme—and therefore unusual—regulation can constitute a ‘taking’ of private property under the Fifth Amendment.  The decision makes clear that loss of profits due to a regulation does not equate to a ‘taking.’  The Ninth Circuit’s ruling confirms that public agencies have broad discretion in implementing rent control and other regulatory programs adopted in the public interest.

The disputes started in 2006 when Mr. James Goldstein, acting through one of his many shell companies, purchased Colony Cove Mobile Estates in Carson for $23 million, $18 million of which he borrowed.  The annual debt service on this huge loan — $1.2 million — far exceeded the prior owner’s annual profit of $718,000 from this mobilehome park.

Convinced he could shift the burden of servicing this huge loan to the residents of this park, in 2007 Goldstein requested a rent increase of $618.05 per space, later amended to seek $200 per space.  The City approved a $36.74 increase.  In 2008 Goldstein requested a $342.46 rent increase.  The City granted an increase of $25.02.  Still unhappy, Goldstein sued the City in federal court.  Over the City’s objections, the trial judge allowed the case to go to trial before a jury.

The jury found that the City’s 2007 and 2008 decisions were “regulatory takings” and awarded Goldstein $3.3 million in damages, which was increased by the district court when he awarded Goldstein prejudgment interest, attorneys’ fees, and costs, entering a final judgment of $7.5 million against Carson. On appeal, the three-judge panel concluded that it had jurisdiction, under 28 U.S.C. § 1291, to review the City’s Federal Rule of Civil Procedure 50(b) motion for judgment de novoUnited States ex rel. Hopper v. Anton, 91 F.3d 1261, 1268 (9th Cir. 1996).

The panel held that “Penn Central [Transportation Co. v. City of New York, 438 U.S. 104 (1978)] instructs us to consider “[1] the regulation’s economic impact on the claimant, [2] the extent to which the regulation interferes with distinct investment-backed expectations, and [3] the character of the government action.”  (Citation omitted.)  The question is whether Colony presented sufficient evidence on these factors to allow a reasonable finder of fact to conclude that the Board’s denials of Colony’s requested rate increases were the functional equivalent of the direct appropriation of the Property.”

Turning to each of these factors, the three judges concluded that Goldstein did not present sufficient evidence to create a triable question of fact as to the economic impact caused by the City’s denial of his huge rent increase requests.  In a telling observation, the panel held:  “The Federal Circuit has noted that it is ‘aware of no case in which a court has found a taking where diminution in value was less than 50 percent.’  CCA Assocs. v. United States, 667 F.3d 1239, 1246 (Fed. Cir. 2011).  Nor are we.”

The panel next held that Goldstein failed to present sufficient evidence supporting its investment-backed expectations claim.  “To form the basis for a taking claim, a purported distinct investment-backed expectation must be objectively reasonable.  See CCA Assocs., 667 F.3d at 1247; see also Lucas v. S.C. Coastal Council, 505 U.S. 1003, 1035 (1992) (Kennedy, J., concurring in the judgment) (noting that investment-backed “expectations protected by the Constitution are based on objective rules and customs that can be understood as reasonable by all parties involved”); Chancellor Manor v. United States, 331 F.3d 891, 907 (Fed. Cir. 2003) (holding that courts must use “an objective analysis to determine the reasonable investment-backed expectations of the Owners”).”

Finally, the panel held that the character of the City’s action could not be characterized as a physical invasion by the government.  Here again, the court concluded:  “The City’s rent control ordinance . . .  striv[es] to ‘protect[ ] Homeowners from excessive rent increases and allow[ ] a fair return on investment to the Park Owner.’  This central purpose of rent control programs ‘counsels against finding a Penn Central taking.’  MHC Fin., 714 F.3d at 1128.”

The panel concluded that, based on the evidence, “no reasonable finder of fact could conclude that the denials of plaintiff’s requested rent increases were the functional equivalent of a direct appropriation of the property.”  Accordingly, Ninth Circuit held that the district court should have granted the City’s motion for judgment as a matter of law and directed the district court to dismiss the action against the City.