Even If The Policies Behind Affordable Housing Are Thwarted, A Court May Not Use "Equitable Principles" To Avoid Public Entity Immunity In The Tort Claims Act.

By Glen Hansen

In Tuthill v. City of San Buenaventura (2014) ___ Cal.App.4th ___, the Court of Appeal for the Second Appellate District held that a trial court could not apply equitable principles to circumvent the statutory scheme of public entity immunity embodied in Government Code section 815 et seq, in order to award damages against a city based on the city’s failure to disclose affordable housing restrictions that applied to plaintiffs’ townhomes.

In Tuthill, the City of San Buenaventura (“City”) amended its Affordable Housing Program (“AHP”) “to assist in providing ownership and rental housing for low and moderate income households and to ensure that such housing remains in the affordable market.” The amended AHP offered developers incentives to create affordable housing, provided that the developers impose (1) price restrictions on affordable housing units; and (2) restrictions that prevented owners from selling the units for more than a predetermined price. The amended AHP required the City to “[s]et and periodically update the requirements and qualifications for eligible households” and to “[r]eview records submitted by developer and applicant households to identify eligible households.”

In 1992, the City entered into a Development Agreement with the now-defunct Bulmer Development Corporation (“Bulmer”) for the creation of a 57-unit townhome complex. The Development Agreement included a Declaration of Covenants, Conditions and Restrictions (“CCRs”) that provided the affordability restrictions for the units, including the requirement that fifty of the units be  designated as “moderate income” and seven as “low-income.” The Development Agreement provided that (1) only qualified buyers (those with incomes in a specified range) can buy any of the 57 units; and (2) no unit can be sold at a price above certain set limits. Through the Development Agreement the City delegated to Bulmer the discretion to make eligibility determinations, which is customary in the affordable housing industry, and to inform the City of those designations. The Development Agreement also required the City to issue a Certificate of Compliance, certifying that the prospective purchase complies with the Development Agreement. However, Bulmer misinformed the City about buyer qualifications in several cases, resulting in the City’s improper issuance of Certificates of Compliance and the sale of restricted properties to buyers who were not qualified for AHP units because their income levels exceeded AHP qualifying income levels.

Plaintiffs purchased two of the seven “low income” townhomes, but paid more than the restricted prices. Plaintiffs sued Bulmer, which defaulted. Plaintiffs also sued the City (1) for declaratory relief on the ground that the AHP restrictions did not apply to their units and were not enforceable, or, if the court enforced the restrictions, for monetary damages; (2) for negligence per se/violation of statutory duty on the ground that the City breached its “affirmative obligation” under California’s affordable housing statute, the Density Bonus Law (Govt. Code §§ 65580 et seq.), “to enforce the [AHP], or to ensure its enforcement.” Plaintiffs alleged that the City did not tell them that the AHP’s low income restrictions applied to their units and that Bulmer sold the units to them at higher prices than the low income level, and as a result, plaintiffs overpaid for their properties. 

The parties stipulated to the appointment of a temporary judge, who ruled after a bench trial that “equitable principles” under the declaratory relief cause of action not only allowed plaintiffs’ units to retain their lower income designations, but also result in damages to plaintiffs for the overpayment of their properties. The trial court also found the City jointly and severally liable with Bulmer for plaintiffs’ damages because the City “did not comply with some of the responsibilities imposed upon it under the provisions of its enabling ordinance, did not meet the contractual responsibilities imposed upon it under the Development Agreement with Bulmer, [and] failed to properly administer its own program or to provide appropriate safeguards which were required for the services which it delegated ….” The trial court concluded that “[i]f the City is not held accountable for this, the purpose and policy behind affordable housing is thwarted.” However, the Court of Appeal reversed.

On appeal, the court held that the plaintiffs’ damages claims were barred by the public entity immunity provided in Government Code section 815. That statute provides that, “[e]xcept as otherwise provided by statute ... [a] public entity is not liable for an injury, whether such injury arises out of an act or omission of the public entity or a public employee or any other person.” That statute “abolished all common law or judicially declared forms of liability for public entities, except for such liability as may be required by the federal or state Constitution.” The court held that the trial court erred in substituting equitable principles for the analysis required by section 815, because equity “may not be used to find liability where the result would nullify a contrary statute.” The court reasoned that, “[w]hile we might agree with the trial court that the City’s oversight of the AHP was inadequate, the court was not free to graft an equitable exception onto the Tort Claims Act.”

Furthermore, the court held that the statutory “mandatory legal duty” exception to the immunity rule did not apply. To qualify for the exception, a plaintiff must establish (1) the existence of an enactment that imposes a mandatory, not discretionary, duty on the public entity and (2) that the enactment is intended to protect against the particular kind of injury the plaintiff suffered. (Haggis v. Superior Court (2000) 22 Cal.4th 490, 498-499.) Neither of those elements were present here. 

As to the first element of the “mandatory legal duty” exception, Government Code section 815.6 “requires that the enactment at issue be obligatory, rather than merely discretionary or permissive, in its direction to the public entity; it must require, rather than merely authorize or permit, that a particular action be taken or not taken.” (Haggis, supra, 22 Cal.4th at p. 498.) That element was not met here, according to the court, because (a) the trial court did not even inquire into that element; (b) the general statement of public policy regarding affordable housing in section 65580 et seq. could not serve as the basis for a mandatory duty; (c) the amended AHP did not impose an affirmative obligation on the City to prevent sales to ineligible households, to notify the developer or the potential purchaser about his or her eligibility status, or to take any other actions beyond those explicitly stated; and (d) the Development Agreement is a contract between the City and Bulmer, and not a constitutional provision, statute, charter provision, ordinance or regulation, and therefore does not constitute an “enactment” that gives rise to a mandatory duty under the statute.

The court also held that the second element of the “mandatory legal duty” exception did not apply here because neither section 65580 et seq., the amended AHP, nor the Development Agreement was intended to protect ineligible purchasers from economic losses. The intended beneficiaries of all these provisions were “low and moderate income households” who seek to benefit from the AHP, and not plaintiffs here, who were “incidental” beneficiaries. Furthermore, plaintiffs failed to identify any mandatory legal duty that the City violated by failing to warn them that the properties they sought to purchase were subject to AHP restrictions.

Glen Hansen is senior counsel at Abbott & Kindermann, LLP.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.

 

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