By Cori Badgley

In Guggenheim v. City of Goleta (2009) 2009 U.S. App. LEXIS 21313, the court made two important rulings: a challenge to an ordinance on its face, instead of as applied to plaintiffs, could be brought as a regulatory taking claim and a mobile home park rent control ordinance constituted a regulatory taking under Penn Central. Courts have rarely upheld regulatory takings claims, and for a rent control ordinance to be found a taking would appear to greatly expand the possible situations in which a regulatory taking has occurred.

Although the Ninth Circuit Court of Appeals dealt with other matters such as claims under due process and equal protection, the focus on the opinion in Guggenheim was the regulatory takings claim. Because the rent control ordinance clearly did not take away all economic value of the property, the parties and the court applied the Penn Central balancing test. Under Penn Central, the court evaluates whether a regulatory taking occurred by balancing the following factors: “the economic impact of the regulation,” interference with “distinct investment-backed expectations,” and the “character of the governmental action.

One of the difficult aspects of this case was that the plaintiffs only asserted a facial challenge[1] to the rent control ordinance, instead of an “as applied” challenge. In other words, plaintiffs sought to have the rent control ordinance declared unconstitutional on its face, instead of merely the way it was applied to them. As the court pointed out, a facial challenge under Penn Central requires considering factors “usually not found in the text of the statute.” Thus, before addressing whether a regulatory taking had occurred, the court had to address “whether a facial challenge under Penn Central is actually a viable legal claim” and “what evidence the Park Owners may present to prove their claim.”

The court held that a facial challenge under Penn Central is viable. In addressing the more complicated question of what evidence could be presented to support the claim, the court admitted that a plaintiff must be able to show the effect of the law on his or her property in order to show that he or she has standing to bring the claim. The court however refused to define the boundaries of permissible and impermissible evidence in facial challenges under Penn Central on the grounds that in this case, the district court relied, for the most part, on expert testimony that would be permissible in any takings case. Therefore, the evidence presented in this case was adequate. This leaves the question open of what types of personal evidence will be admissible and what is necessary to uphold other facial challenges under Penn Central.

After establishing that plaintiffs properly presented their challenge, the court evaluated the Penn Central factors and held that the rent control ordinance constituted a regulatory taking. Under the economic impact factor, the court found that the ordinance caused a “wealth transfer from the Park Owners to the tenants.” “By taking the value of the Park Owners’ mobile home sites and transferring it to the Park’s incumbent tenants, the rent control ordinance ("RCO") has effected the distribution of resources or opportunities to one group rather than another solely on the ground that those favored have exercised the raw political power to obtain what they want.” The City of Goleta argued that even if there was a wealth transfer, the Park Owners can still earn a return on their investment. The court disagreed and held that “the mere enactment of the [ordinance] has caused a significant economic loss for the Park Owners. This factor weighs heavily in the Park Owners’ favor.”

As for the Park Owners investment-backed expectations, the City of Goleta attempted to argue that because the rent control ordinance was adopted prior to plaintiffs’ purchase of the mobile home park they could not have had any investment-backed expectations of earning a larger profit. Quoting Palazzolo v. Rhode Island (2001) 533 U.S. 606, the court stated that if the City’s rule were accepted, “[a] state would be allowed, in effect, to put an expiration date on the Takings Clause.” Although the court was unwilling to accept the City’s argument, it also could not figure out how to address the investment-backed expectations when the property was purchased after enactment of the ordinance. Therefore, the court recognized the dilemma and essentially “passed” on the evaluation of investment-backed expectations.

The last factor evaluated was the character of the governmental action. This factor has been evaluated under two different tests. The first test comes down to whether the action is more akin to a physical invasion “or instead merely affects property interests through some public program adjusting the benefits and burdens of economic life to promote the common good.” The court looked to the case of Yee v. City of Escondido (1992) 503 U.S. 519, in which the court held that a rent control ordinance did not amount to a physical taking under Loretto v. Teleprompter Manhattan CATV Corp. (1982) 458 U.S. 419, which was relied on by the plaintiffs, but that a one-time wealth transfer may constitute a regulatory taking. The court found that the wealth transfer was more akin to a physical invasion than a mere shifting of burdens and benefits.

The second test, more frequently applied, evaluates the purpose of the Takings Clause in barring the government “from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.” Again, the court found that this factor favored the Park Owners. The ordinance only applies to mobile home park owners and comparable costs were not imposed on other property owners within the City. Therefore, the character of the governmental action weighed in favor of the plaintiffs.

In balancing the factors, the court came down strongly in favor of the plaintiffs on the economic impact and the character of the governmental action. The court therefore held that the ordinance facially constituted a regulatory taking and was unconstitutional.

Because the court was unwilling to address what types of evidence can be presented in cases such as these and how to evaluate the investment-backed expectations, the path is unclear for future regulatory takings claims based on similar ordinances. Only time will tell what kind of precedent this case will set.

Cori M. Badgley is an associate 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, 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.

[1] “Facial challenge” in this context refers to the plaintiffs’ assertion that the ordinance affects a taking across the board, regardless of how it is applied. It does not refer to the stage of trial, such as a motion to dismiss based on the pleadings.