By Cori Badgley

While compensation for regulatory takings remains elusive for California landowners, recovery of monetary damages for physical takings is established jurisprudence. In a stunning reminder of the physical/regulatory taking dichotomy, a federal court recently awarded over $36 million dollars in damages against the City of Half Moon Bay (“City”) whose assessment district project created wetlands on private property. The plaintiff’s case was based on theories of inverse condemnation, trespass and nuisance. Further, the court granted injunctive relief against the City from collecting assessments from the plaintiff. Not surprisingly, the City just announced that it will appeal the decision.  We will see if they have more luck with the Ninth Circuit Court of Appeals.

The Setting

The facts in Yamagiwa v. City of Half Moon Bay (N.D. Cal. 2007) 2007 U.S.Dist.LEXIS 22573 are long, detailed, and consumed 110 pages of Judge Walker’s 167 page opinion. The facts, as viewed by the judge, were as follows:

The property at issue, known as Beachwood, was a 24.7 acre undeveloped parcel that changed hands three or four times between the 1970’s and today. The current owner, the Keenan Trust, is managed by Joyce Yamagiwa, trustee. All of the previous owners as well as Yamagiwa envisioned residential development on the property and bought it for that purpose. One of the previous developers applied for a Vesting Tentative Map (VTM) in 1990, which was granted by the City. Before the developer could obtain other necessary permits, the City imposed a sewer moratorium in 1991 that was extended 11 times and spanned seven years. Without the ability to pinpoint a sewer source that would service the proposed subdivision, the original developer, and later Yamagiwa, was unable to apply for a Coastal Development Permit. The City made no mention of wetlands during the VTM approval process, but once plaintiff was finally able to apply to the City for a Coastal Development Permit, the City denied the permit because wetlands existed on most of the property. Interestingly, the only portion of the property unaffected by the City’s wetlands determination was the portion on which the City was going to build a new street. In plaintiff’s previous challenge to the City’s determination,the California appellate court upheld the City’s finding that there were wetlands on the property. (Yamagiwa v. City of Half Moon Bay (2005) 2005 Cal.App.Unpub.LEXIS 6468.) The factual issue faced by the federal district court in the present case was whether the City’s actions or lack thereof caused the formation of the wetlands on the Beachwood property, in turn leading to a lack of development potential.

For the purposes of this litigation, there were three time periods of importantance: Pre-TAAD, TAAD, and Post-TAAD. TAAD stands for the Terrace Avenue Assessment District, which was established by the City in 1982 in order to, among other things, construct certain water and sewer improvements. The City included Beachwood within the assessment district, constructed certain storm and drainage pipes on Beachwood, and acquired an easement over those sections of the property where maintenance would have to be done. The construction-phase of TAAD was important to this case because the ultimate factual question of what caused the formation of the wetlands hinged on whether the construction and maintenance done by the City during the TAAD project led to pooling on the property or whether pooling occurred prior to TAAD.

In the end, the court agreed with all the facts as the plaintiff presented them. There had been no pooling on the property prior to TAAD. During the construction-phase, the topography of Beachwood changed due to moving fill and grading areas. This change in topography impeded the water drainage from the property. In addition, the City never maintained the storm pipes, and therefore, debris collected on top of the entrance to the pipe, forcing at least 50 percent of the water to drain onto Beachwood, instead of draining into the pipe. The court also pointed out that the City never mentioned the existence of wetlands on the property prior to 1998, even though the initial study drafted in 1976 as well as the environmental checklist created in 1982 contemplated possible impacts to the environment. Both documents determined that there would not be any significant environmental effects.

The court finally concluded that the wetlands were man-made and created by the City through the initial construction during TAAD and the failure to maintain the storm pipes. This determination put the first nail in the City’s coffin.

Legal Conclusions

In addition to grappling with the differing factual stories, the court had to decide five legal claims brought by the plaintiff and a myriad of defenses brought by defendant. The court rejected all of the City’s defenses. The five legal issues were: 1) whether the City’s creation of the wetlands constituted a taking under the California Constitution, Article I, section 19; 2) whether the City’s creation of the wetlands constituted a taking under the Fifth Amendment of the federal constitution; 3) whether the City committed a nuisance; 4) whether the City committed a trespass; and 5) whether plaintiff was entitled to a permanent injunction that would enjoin the City from collecting assessment fees for sewer service expansion and highway improvements. The court found in favor of the plaintiff on all issues.

State Takings Claim

Plaintiff and defendant urged the court to apply two different tests to determine whether a physical taking occurred under California law: the strict liability test and the reasonableness test. The reasonableness test has been applied in flood control cases in which the state has built a dam, and the dam has caused flooding on private property where flooding occurred prior to the dam. (See Belair v. Riverside County Flood Control District (1988) 47 Cal.3d 550.) Instead of applying the strict liability test, the California courts apply a reasonableness standard to these state actions. Defendant urged the use of the reasonableness test, claiming that the creation of wetlands should be equated with the flood control situations. The court disagreed and instead applied the strict liability test. However, the court also found that even if the reasonableness test was applied, plaintiff would still prevail.

The strict liability test states that “the government is strictly liable for any physical injury to property substantially caused by a public improvement as deliberately designed and constructed.” (See Bunch v. Coachella Valley Water Dist. (1997) 15 Cal.4th 432.) In order to satisfy the strict liability test, plaintiff had to prove the following:

First, that she has an interest in real or personal property; Second, the City substantially participated in the planning, approval, construction or operation of a public project or public improvement; Third, Yamagiwa’s property suffered damages; and Fourth, the City’s project, act or omission was a substantial cause of the damage. (P. 111.)

Since Yamagiwa exercised control over the property and represented the true owner in her capacity as trustee, the first element of interest or ownership was easily satisfied. The court also found that the second element of public project or public improvement was easily satisfied. According to the court, the approval of the project by the City, the construction of the drainage system done at the behest of the City, and the acquisition by the City of an easement on Beachwood clearly established that TAAD was a public project or improvement.

The element of damage is satisfied when the plaintiff can show any depreciation in the market value of the property. Here, both the defendant’s appraiser and the plaintiff’s appraiser found that the market value had been “massively diminished” due to the wetlands. Therefore, the court found that the plaintiff had suffered adequate damages. In evaluating the element of substantial cause, the court emphasized that the test is not whether the City’s actions were the substantial cause of the damage but whether the City’s actions were a substantial cause. Again, the court had no problem finding in favor of the plaintiff. The court re-stated its factual finding that the wetlands were created through the actions of the City, and therefore, the court concluded that the City’s public project was a substantial cause of the damage arising from the existence of wetlands on Beachwood.

Federal Takings Claim

Citing Aris Gloves, Inc. v. United States (Ct. Cl. 1970) 420 F.2d 1386, the court stated “[a] taking can occur simply when the Government by its action deprives the owner of all or most of his interest in his property.”  Before stating the elements that the plaintiff had to satisfy, the court described a line of cases in which a taking was found when the government built a dam that caused a lake to rise, subsequently flooding properties around the lake. (See Pumpelly v. Green Bay Co. (1871) 80 U.S. 166.) Although the court did not rely on these cases to determine whether there was a taking, it used them to illustrate what sort of actions may constitute a taking. The court never explicitly drew parallels between the flooding cases and the creation of the wetlands on Beachwood, but it did seem to imply that they were similar situations. 

After discussing the flood cases and other enunciations of the federal takings rule, the court laid out a four pronged test for finding a physical taking, citing Ridge Line, Inc. v. U.S. (Fed. Cl. 2003) 346 F.3d 1346. The first two prongs contain two alternative findings that satisfy the prong. The court enunciated the four prongs as follows:

1)        

A) the City intended to invade a protected property interest; or

B) the asserted invasion was the direct, natural, or probable result of an authorized activity and not the incidental or consequential injury inflicted by the action;

AND

2)        

A) the invasion must appropriate a benefit to the City at the expense of the property owners;

or

B) the invasion must at least preempt the owner’s right to enjoy the property for an extended period of time, rather than merely inflict an injury that reduces its value. (P. 134-135.)

AND

3)         the owner must have a "legally protected property interest" (P. 135);

AND

4)         the owner must show damages.

The court focused on prong 1(B) and 2(B), finding that 1(A) and 2(A) were not applicable to this case. The court described prong 1(B) as an objective foreseeability requirement. Although the court had addressed the cause of the wetlands, it had not yet addressed whether the creation of the wetlands was a foreseeable result of the City’s actions. The court found that the failure to implement a maintenance plan and the change in the topography of the land “set in motion a chain of events that ultimately and foreseeably resulted in the formation of wetlands on Beachwood.” Therefore, the court held that the first prong was satisfied. In holding that the second prong of substantial injury was also satisfied, the court emphasized that the existence of wetlands has made residential development, the sole interest of Yamagiwa in owning the property, infeasible. 

Lastly, the plaintiff had to show an interest in the property and damages. The court found that these requirements had been discussed under the state takings claim, and the plaintiff had met the requirements.

Nuisance and Trespass

Relying on many of the same legal and factual conclusions, the court went on to hold that the City had committed a nuisance and a trespass on Beachwood. Under the nuisance claim, the court focused on the issues of consent and reasonableness, since most of the other elements (i.e., property interest, interference with enjoyment, damages, and substantial cause) had already been found in the takings claims. Defendant argued that by granting an easement to the City and allowing the construction on Beachwood, the plaintiff had consented. In rejecting defendant’s argument, the court stated that consenting to the construction and easement was distinct from consenting to the creation of wetlands on the property. Not surprisingly, the court also found that an ordinary person would be reasonably annoyed with the existence of wetlands on his or her property, and therefore, the reasonableness prong was satisfied.

The main element discussed by the court under the trespass claim was intent. In order to prove that there was a trespass, the plaintiff must show that the City acted intentionally, recklessly, or negligently. The court relied on two facts in holding that the City had the requisite intent: first, at least 50% of the stormwater entering the southeast corner did not make it into the drain pipe due to the debris on the debris rack at the entrance of the pipe, and second, the change in topography forced water from the street to flow directly onto the property. Without engaging in any analysis of how these facts satisfied the intent element, the court concluded that the City had the requisite intent and was, therefore, liable for trespass since the other elements were satisfied.

Damages

After holding the City liable for state and federal inverse condemnation, nuisance and trespass, the court determined the amount of damages that should be awarded. The court based the award on expert testimony establishing the depreciation in value of the property, i.e., the value of the property if it was suitable for development versus the value of the property with the wetlands. The defendant’s expert stated that the depreciation amounted to $26,620,000.00, whereas the plaintiff’s expert testified to $36,795,000.00. The court found the latter assessment more credible and awarded the plaintiff over $36 million in damages.

Permanent Injunction

In Furey v. City of Sacramento (1978) 24 Cal.3d 862, the California Supreme Court held that taxpayers, who paid assessment fees for benefits that they could no longer enjoy, could not seek a refund for assessment fees previously paid. However, the court granted injunctive relief enjoining the government from collecting further assessments. Here, the court found that the facts in Furey as well as the law enunciated in that case compelled the court to enjoin the City from collecting any further assessment fees for the expansion of sewer facilities and highway improvements. These improvements would have served the Beachwood subdivision had it been built.  Since it would now be impossible to build residences on the property, the court granted the permanent injunction.

Cori Badgley is an associate with Abbott & Kindermann, LLP.  For questions relating to this article or any other California land use, environmental and planning issues contact Abbott & Kindermann at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor 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.