The law governing California real estate investment, development, and secured lending evolves in real time | Lessons from the courtroom battlefront

Notable Eminent Domain and Inverse Condemnation Cases from 2017 (and one from 2018)

Here are the cases that caught our attention from the universe of eminent domain and inverse condemnation during 2017 (and one case from January 2018).

We start with the published cases (which are binding precedent) and then recap some interesting unpublished cases.

Published Cases

(some links lead to an unpublished opinion that was later published by separate court order)

Murr v. Wisconsin (U.S. Supreme Court, June 23, 2017) 137 S.Ct. 1933

The United States Supreme Court’s ruling gives government agencies greater leeway to restrict development in environmentally sensitive areas.

The same family owned two separate adjacent parcels for several decades.  One of the lots was vacant and the other was developed with a cabin.  The owners attempted to sell the vacant parcel, but the County blocked the sale, citing 1976 regulations barring new construction in the area to decrease pollution and overcrowding.  A “grandfather” clause exempted existing owners, but the County argued that the clause did not apply to the vacant lot alone because it was connected to the family’s other land.

The family sued for a regulatory taking, arguing the County should pay the value of the vacant property (assessed at $400,000).  A Wisconsin appeals court sided with the County, holding the zoning rules did not eliminate the vacant parcel’s value because the owners could use both lots together as a vacation property or sell them as a unit.

The Supreme Court affirmed.  The Court relied on a multi-factor test which includes examination of state and local laws, the reasonable expectations of the owners, the physical characteristics of the property, and the effect of the regulation on the land’s value.  The Court decided that the family had “not been deprived of all economically beneficial use of their property,” which is the test for determining whether a zoning regulation has gone too far and constitutes an uncompensated “taking” of private property.

Lynch v. California Coastal Commission (Cal. Supreme Court, July 6, 2017) 3 Cal.5th 470

Following a significant bluff failure that destroyed an existing seawall and beach stairway, owners of two bluff-top coastal homes applied to the Coastal Commission to demolish the remainder of the failed wall and build a new seawall and stairway.  The Commission approved the permit as to the seawall with special conditions, including limiting the duration of the permit to 20 years (subject to renewal), prohibiting the stairway, and requiring a deed restriction providing that the special conditions constituted covenants running with the land for the duration of the permit.

The owners signed and recorded the required deed restriction, pulled the permit and constructed the seawall, but at the same time sued the Commission in a writ of mandate action.  The Commission argued that the owners had waived their claims by accepting the benefits of the permit.  The trial court ruled for the owners, requiring the Commission to remove the challenged conditions.

The Court of Appeal reversed, finding that the owners had waived their right to challenge the conditions by accepting the benefits of the permit, and that Government Code section 66020, which ordinarily allows a developer to proceed while simultaneously challenging conditions, did not apply because the Commission’s conditions did not “divest the developers of money or a possessory interest in the property.”

The California Supreme Court affirmed the Court of Appeal’s decision, finding that the owners had forfeited their challenge by accepting the benefits conferred by the permit and moving forward with construction before obtaining a judicial determination of their objections.

Medical Acquisition Company v. Superior Court (4th Dist. Court of Appeal, Jan. 11, 2018) 2018 DJDAR 425; __ Cal.App.5th __

This case addressed a novel issue regarding a condemnation defendant’s post-judgment withdrawal of an increased deposit made by the condemning agency.

The condemning agency (a healthcare district) made a pre-trial deposit of $4.7 million and sought to take immediate possession of the property (a partially completed medical building) through the “quick take” provision of the California Constitution, article 1, section 19(a) and Code of Civil Procedure section 1255.010.  The defendant stipulated to the agency’s possession and withdrew the $4.7 million deposit.

A jury later determined just compensation for the taking was nearly $17 million.  The trial court entered judgment and then ordered the agency to increase its deposit by $12.2 million. The agency filed an appeal of the judgment.  The agency then filed a notice of abandonment of the eminent domain proceeding.  The trial court granted the defendant’s motion to set aside the abandonment. The agency appealed that order. Needing to comply with the trial court’s deposit order while the appeal was pending (or else risking the appeal being dismissed), the agency made the additional deposit.

The defendant applied for the prompt release of the entire additional deposit without any bond or undertaking.  The trial court allowed defendant to withdraw an additional $4.4 million without a bond, but required a bond before defendant could make any further withdrawals on the remaining $7.8 million.
Defendant challenged this ruling by way of petition for writ of mandate, arguing that the trial court should not have imposed any bond.  In response, the agency argued that the trial court should have required a bond for the release of any amounts from the additional deposit.

The Court of Appeal affirmed.  The court had to decide which of two different statutes applied: CCP 1255.250(a) (bond required for any withdrawals) vs. CCP 1268.140 (bond at trial court’s discretion for withdrawals of deposit).

The court held that section 1255.250 only applies prior to judgment.  Section 1268.140 applies “after entry of judgment,” which was the case here.  The Court held that the trial court’s imposition of a bond on part of the additional deposit was reasonable and within its discretion.  The bond was justified because if the agency’s pending appeal of the abandonment order succeeded, the appeal would result in the deposit being restored to the agency.

Central Valley Gas Storage LLC v. Southam (3rd Dist. Court of Appeal, April 19, 2017) 11 Cal.App.5th 686

This case addressed the valuation of “different” property in an eminent domain proceeding.

Central Valley operated an underground natural gas storage project in Colusa County.  The project encompassed 677 acres overall, 80 of which were owned by Fred Southam and his entity.  Central Valley negotiated leases for underground storage with almost all of the landowners within the project zone, but Southam refused to enter into a lease.  Central Valley invoked the power of eminent domain under Public Utilities Code section 625 to condemn underground gas storage rights on Southam’s property.

At trial, Southam did not contest the right to take, but contended his property was far more valuable than what Central Valley had offered due to the property’s vast underground storage volume.  Central Valley filed a motion to exclude the evidence of any valuation method that depended on underground storage volume.  In support of the motion, Central Valley’s expert witness stated that a market for natural gas storage leases had developed in California over the past 20 years, and that such leases uniformly compensated owners based on the amount of surface acreage at issue, not underground volume.  Underground volume, the expert opined, was too uncertain and speculative to be used as a valuation metric.

The trial court granted Central Valley’s motion, and a jury rendered a verdict consistent with Central Valley’s position.  Southam appealed.

The Court of Appeal affirmed.  The Court held that when a developed market exists for the type of property at issue, it would be error to admit evidence of a valuation methodology that ignores the developed market. (In contrast, where there is no developed market, then value can be established “by any method of valuation that is just and equitable.”)  The evidence showed that a developed market for natural gas storage leases had developed, and that all leases in evidence were based on surface acreage instead of volume.

Surfrider Foundation v. Martins Beach 1, LLC (1st Dist. Court of Appeal, August 9, 2017) 14 Cal.App.5th 238

The new owners of property containing a local road leading to Martins Beach closed public access to the beach, triggering several lawsuits.  In this case, a nonprofit coastal preservation entity filed suit contending that a coastal development permit (CDP) from the California Coastal Commission was required by the California Coastal Act before closing public access.  The trial court agreed, and issued an injunction requiring the owner to allow public access to the beach until completing the CDP process.

The Court of Appeal affirmed, finding that the owner’s conduct of closing the road which had previously been open to the public for beach access constituted “development” for purposes of the Coastal Act, thus requiring a CDP.  The Court also determined that the owner’s constitutional challenge to the Coastal Act’s permitting requirement under state and federal takings clauses was not ripe, and that the trial court’s injunction did not constitute a taking per se, because the owner had not obtained a final decision on an application for a CDP.  The court also found that the trial court’s injunction was not a taking per se because of its temporary nature – it would expire when the Coastal Commission made a final decision on a CDP application, and thus was not a permanent intrusion.

Dryden Oaks, LLC v. San Diego County Regional Airport Authority (4th Dist. Court of Appeal, Oct. 19, 2017) 16 Cal.App.5th 383

This case emphasizes that an agency cannot be liable for inverse condemnation on a regulatory taking theory where the challenged land use regulation is not the “final say” regarding development of the property.

The property was directly adjacent to the end of a runway at McClellan Palomar Airport in the City of Carlsbad, and was designated as part of the airport’s Runway Protection Zone on the County’s Airport Layout Plan, a long-range planning tool that eventually became known as the Airport Land Use Compatibility Plan (ALUCP).  The landowner submitted an application to the City of Carlsbad to build a 30,000 square foot industrial building.  The City submitted the application to the regional Airport Authority for review.

The Authority declined to approve the project, but noted that the City could “override” that decision pursuant to Public Utilities Code section 21676.  The City did so, but the landowner failed to act on the permit before it expired in 2012.  Afterward, the City amended its general plan to ensure consistency with the ALUCP.

In 2013, the landowner submitted a new application, which the City denied.  The landowner sued the Authority and the County (but not the City), claiming that the adoption of the ALUCP prevented the City from approving the development.

The Court of Appeal held there was no liability for inverse condemnation.  A prerequisite to such a claim, the court held, was “a final and authoritative determination” regarding the development application. Here, the landowner failed to show that the Authority’s adoption of the ALUCP constituted a “final” land use determination as to the property.  That power rested only with the City, which was not sued.  The court noted that under the terms of the ALUCP, local agencies (such as the City) could overrule the Authority’s compatibility plans.

The court also rejected the landowner’s claim for “Klopping” damages (damages for unreasonable precondemnation conduct).  Usually, to be entitled to Klopping damages, a plaintiff must show that the agency indicated a “a firm intention to acquire” property and then either unreasonably delayed prosecuting a condemnation claim or commenced and abandoned a claim.  Here, there was no evidence that would support Klopping damages – the ALUCP was a broad planning document that only generically referred to the possibility of condemnation; it did not direct such action, and noted that in many circumstances eminent domain would not be appropriate at the site.

Mercury Casualty Co. v. City of Pasadena (2nd Dist. Court of Appeal, Aug. 24, 2017) 14 Cal.App.5th 917

This case held there was no liability in inverse condemnation for damage caused by a fallen tree where the tree was not a work of public improvement.

A storm in 2011 with hurricane-force winds uprooted a tree on city-owned property in the City of Pasadena, which fell on a nearby home owned by the Dusseaults, causing severe property damage.  The owners’ insurer (Mercury) sued the City for inverse condemnation.  There was no evidence regarding who planted the tree, but it was on city-owned property and the city had sporadically maintained it.  The trial court entered judgment in Mercury’s favor, finding the tree was a “work of public improvement.”

The Court of Appeal reversed, holding the tree was not a “work of public improvement.”  The court noted that inverse condemnation liability is based on the concept that a private individual should not be required to bear a disproportionate share of the costs of a public improvement.  Here, there was no evidence that the City planted the tree as part of a construction project serving a public purpose, such as a roadway beautification project.  In fact, there was no evidence at all regarding who planted the tree or for what purpose it was planted.  The City’s ownership and occasional maintenance of the tree were not sufficient to make the tree a work of public improvement that would lead to inverse condemnation liability.

The court noted that other theories of liability might have succeeded, such as dangerous condition of public property, but that claim was not asserted.

Unpublished Cases

Glaser v. City of San Juan Capistrano (4th Dist. Court of Appeal, Apr. 19, 2017) 2017 Cal.App.Unpub.LEXIS 232

This case held there is no liability for inverse condemnation for damage from an overflowing drainage ditch where the ditch was not a work of public improvement.

Plaintiffs owned a home in a small gated subdivision in the City of San Juan Capistrano.  A portion of a drainage ditch was across the street from plaintiffs’ home.  During an unusually high-volume rain storm in 2010, the drainage ditch overflowed, sending mud, water, and debris across a road into the plaintiffs’ home.  Plaintiffs sued the City for inverse condemnation, arguing that the ditch was the City’s responsibility because the subdivision developer had dedicated the ditch to the City.  After a trial, the court entered judgment in favor of the City.

The Court of Appeal affirmed the trial court’s judgment.  The court held that the ditch was not a work of public improvement.  The ditch was constructed by the private developer of the subdivision, who dedicated the ditch to the city, but that dedication was never accepted by the city.  The ditch was never connected to the city’s storm drain system.

Further, the city did not regularly maintain or otherwise exercise control over the ditch.  The evidence showed that it was the local homeowner association’s duty to maintain the ditch pursuant to the association’s written CC&Rs.

Preece v. Imperial Irrigation Dist. (4th Dist. Court of Appeal, Sep. 18, 2017) 2017 Cal.App.Unpub.LEXIS 6367

This case holds there is no inverse condemnation liability where an irrigation project functioned as intended, but a storm exceeded the project’s design capacity.

A substantial storm in 2012 overwhelmed an irrigation district’s complex system of canals and drains. Flooding and silt deposits caused approximately $1.9 million in damages to the landowner’s alfalfa fields, barns, and ditches.  The landowner sued the Irrigation District for inverse condemnation, arguing that the District could have and should have taken several measures that would have resulted in less damage.  The trial court found the district liable, and entered judgment in favor of the landowner.  The District appealed.

The Court of Appeal reversed.  The court noted that strict liability does not apply to flood control projects; instead, a plaintiff must show that that agency’s design, construction, or maintenance of the project posed an unreasonable risk of harm to the plaintiff’s property and that the unreasonable design, construction, or maintenance of the project was a substantial cause of the damage.

The court held that the irrigation project functioned as intended and there was nothing faulty with the design, but the storm simply exceeded the project’s design capacity.  The court noted that without the benefit of the project, the flooding to the landowner’s property would have been much worse.  The project did not accelerate the natural flow of the storm runoff, or divert it to the landowner’s property.

Noting that the property was located in a historical flood plain, the court held that an agency has “no duty to improve on nature.”  The agency was not required to do more, or to upgrade its systems.

Palacios v. City of San Luis Obispo (2nd Dist. Court of Appeal, Aug. 24, 2017) 2017 Cal.App.Unpub.LEXIS 5838

This case held there is no inverse condemnation liability for a City’s ministerial approval of private construction that interferes with a neighbor’s views.

Plaintiffs owned a home in a hillside development in San Luis Obispo.  Their home was on the highest elevation, and enjoyed expansive views of the City and the mountains.  New neighbors purchased a vacant lot across the street and showed plaintiffs some preliminary plans for a 2-story house.  Plaintiffs were initially cooperative, but soon discovered their new neighbors were actually constructing a 3-story house that would obstruct plaintiffs’ views.

Plaintiffs learned the City had approved the 3-story plan, and sued for inverse condemnation based on the construction approvals.  The trial court sustained the City’s demurrer and dismissed the action.

The Court of Appeal affirmed, holding: “No taking arises without public use or enjoyment. A city is not liable in inverse condemnation for injury to private property within a subdivision resulting from completely private construction – privately designed, financed, and built – on a private street where the city’s sole affirmative action was the issuance of permits and approval of the subdivision map.”

The Court noted that new home specifications were controlled by the subdivision’s CC&Rs and Architectural Control Committee.  The City merely performed a brief “over-the-counter” review of the design package.

Cal. Cartage Co. v. City of L.A. (2nd Dist. Court of Appeal, May 1, 2017) 2017 Cal.App.Unpub.LEXIS 3008

This case held that there is no inverse condemnation liability for an agency’s termination of a month to month tenancy, despite the tenant’s long-term build-up of goodwill and valuable improvements on the property.

The City owned 55 acres near the port of Los Angeles.  Plaintiff had leased the property from the City since the 1950s.  Over time it had constructed extensive physical improvements and developed goodwill.  Leases had historically been in a series of fixed terms, but had recently lapsed to month to month.

The City terminated the lease as part of an infrastructure project to modernize the harbor.  Plaintiff sued for inverse condemnation, arguing that the lease termination was the “substantial equivalent” of an eminent domain proceeding.

Trial court sustained the City’s demurrer, and dismissed the case.

The Court of Appeal affirmed.  The court acknowledged a few other cases where agencies were found liable for terminating a tenant’s lease.  But in those cases, the public agency threatened to use its eminent domain powers before the lease termination.  Here, the agency never threatened to use its power of eminent domain – it didn’t have to because it already owned the property (and had owned it continuously for 60 years).

Leave a Reply

Basic HTML is allowed. Your email address will not be published.

Subscribe to this comment feed via RSS