Eminent Domain Report

I wanted to provide a quick update on two recent cases from the California Court of Appeal.

The first, Golden State Water Company v. Casitas Municipal Water District (April 14, 2015), involves what appears to be an issue of first impression in California:  can Mello-Roos financing be used to fund an eminent domain action to acquire a utility company's assets?  In Golden State Water Company, the Casitas Municipal Water District wanted to acquire the assets of the Golden State Water Company for the purpose of taking over the provision of water to many residents in Ojai, California.  The idea is for Casitas to condemn Golden State's assets -- both its physical facilities and its intangible assets such as water rights and business goodwill -- and thereby take over Golden State's utility service to those Ojai residents.  To finance the plan, Casitas intended to use Mello-Roos financing.

Golden State sued, raising three arguments as to why Casitas should not be allowed to do this:

• Mello-Roos Financing Cannot be Used for Eminent Domain.  The Court rejected this argument, holding that "purchase" in the Mello-Roos Act includes involuntary purchases through eminent domain.

• Mello-Roos Financing Cannot be Used to Acquire Intangible Assets.  The Court rejected this argument, holding that intangible assets can be acquired with Mello-Roos financing so long as their acquisition qualifies as "incidental expenses" related to the acquisition of tangible assets.

• Mello-Roos Financing Cannot be Used to Replace One Service Provider with Another.  The Court avoided this argument, concluding that Golden waived the right to make the argument because it did not raise it at the trial court and could not, therefore, make the argument in the Court of Appeal.

Ultimately, the Court upheld Casitas' plan, allowing it to proceed with its eminent domain action funded by Mello-Roos financing.  There is a lot more intrigue to this case, and you can read more about it in our E-Alert, Mello-Roos May Be Used to Fund Condemnation Action of Private Utility Provider.

The second case, Brost v. City of Santa Barbara (March 25, 2015) is an unpublished decision (meaning it cannot be cited in court) that involves many of the same issues as the Court of Appeal confronted in the 2008 Monks case.  The main issue involves a city's liability for a regulatory takings claim where it seeks to limit what, if anything, can be built in areas with known slope stability issues.  In Monks, the Court of Appeal held that the City of Rancho Palos Verdes could not preclude certain lot owners from building homes within the city's Landslide Moratorium Area.

In Brost, the issue involved plaintiffs' attempt to re-build homes destroyed in a 2008 wildfire.  The homes were located in "an active landslide area known as Slide Mass C of the Conejo Slide," and a city ordinance precluded construction on properties within the area.  The city refused to allow plaintiffs to build, and the trial court held that the refusal qualified as a taking.  Not surprisingly, the Court of Appeal focused considerable attention on the Monks decision and how it impacted the Brost plaintiffs' claims.

One issue in Brost was whether plaintiffs' taking claims were ripe, with the city arguing the claims were not ripe because plaintiffs did not submit formal development applications before filing their lawsuit and, therefore, the plaintiffs had not exhausted their administrative remedies.  The Court focused on the "futility exception," holding that where, as in Brost, it was clear that the city would not approve any development plans, the plaintiffs were not required to spend the time and money on a "futile" effort to obtain permits before filing suit.   The Court explained:

We recognize that in most cases, the nature and extent of the land's permissible uses will not be certain and that the processing of at least one development application will be necessary to define those uses. But, as the trial court aptly observed, this case "presents the extraordinary circumstance when no productive or economically beneficial use of land is permitted."

Next, the Court focused on the city's claim that allowing plaintiffs to develop would constitute a nuisance and, as a result, precluding development cannot qualify as a taking.  The Court agreed with the trial court's conclusion that based on expert testimony, the most that could be said was that "uncertainty" existed regarding whether it would be unsafe to allow plaintiffs to rebuild.  And, as explained in Monks, "'uncertainty' regarding the geological stability of [an] area is not a sufficient basis for depriving plaintiffs of the right to rebuild their homes."  The Court upheld the trial court's rejection of the city's nuisance theory:

This speculative harm is insufficient for the City to preclude plaintiffs, for their "own good," from all economically beneficial uses of their properties.

Thus, as in Monks, the city in Brost could not preclude plaintiffs' development of their own properties within the slide area.  Its efforts to do so constituted a regulatory taking.