Real Estate, Land Use and Environmental Law Blog

New Legislation on Wrap-up Insurance And Indemnity Clauses

updates@antitrustlawblog.com (Sheppard Mullin) — Tue, 29 Dec 2009 20:23:09 +0000

By Edward B. Lozowicki and James G. Higgins

Owners, developers and major general contractors are ramping up their use of wrap-up insurance policies on building and industrial projects. When sponsored by an Owner, wrap-ups are dubbed Owner-Controlled Insurance Program ("OCIPs"). If the general contractor sponsors the wrap-up, it is termed a Contractor Controlled Insurance Program ("CCIPs"). These policies offer significant cost savings to owners and generals. Traditionally, bid packages required the general contractor and its subcontractors each to carry liability insurance and to indemnify the Owner and name it as an additional insured. This arrangement has been criticized as requiring costly duplication of coverage, and causing needless litigation over indemnity rights. Wrap-ups seek to avoid these consequences by affording liability coverage to all participants on a project under a single policy. However there have been problems with wrap-ups such as inadequate policy limits and gaps in coverage. And the controversy over contractual indemnity clauses continues.

To address some of these problems California has enacted a new law, Assembly Bill ("AB") 2738, which affects wrap-up policies in residential, commercial, and public works construction. It also restricts indemnity clauses in residential projects. In light of the increased use of wrap-ups and continuing controversy over indemnity clauses, AB 2738 will likely have an immediate effect. AB 2738 is codified in California Civil Code sections 2782, 2782.9, 2782.95, and 2782.96.

On new for-sale residential projects which commence construction after January 1, 2009, AB 2738 places restrictions on self-insured retentions ("SIRs"); and requires disclosure of other policy terms. SIRs are limited to a “reasonable” amount but such term is not defined. No premium contribution or SIR allocation to contractors or subcontractors is permitted unless several disclosures are made, for example: the policy limits, the scope of policy coverage, the policy term, and the basis upon which the deductible or occurrence is triggered by the insurance carrier. Moreover, the party obtaining the wrap-up must disclose an estimate of the available limits remaining under the policy. However if the policy is a multi-project or "rolling" wrap, such disclosure could prove difficult, if not impossible, to make accurately. Further, indemnity clauses between participants in the wrap-up on any residential project are unenforceable for claims covered by the policy.

Separate disclosures are required for public works projects and non-residential projects put out for bid after January 1, 2009. For wrap-up policies on these projects, the bid documents must clearly disclose the total amount or method of calculation for subcontractor premiums. The named insured shall also disclose policy limits, exclusions, and the length of the policy term.

In addition contractual indemnity provisions on new for-sale residential construction contracts executed after January 1, 2009 are restricted. Indemnification for reimbursement of insurance or defense costs for claims unrelated to a subcontractor’s scope of work is unenforceable. In addition a subcontractor owes no defense or indemnity obligations until the builder or general contractor provides a written tender of the claim to the subcontractor. Upon tender arising from the subcontractor’s scope of work, the subcontractor may either: (1) defend with counsel of its own choosing and maintain control over that portion of the claim against the builder or general contractor to which the indemnity applies. Written notice of this election must be made within a reasonable time and no later than 90 days after receipt of tender. (2) Alternately, a subcontractor can pay within 30 days of receipt of an invoice from the builder or general contractor, no more than a reasonable allocated share of the builder’s or general contractor’s defense fees and costs on an ongoing basis during the pendency of the claim. Ironically this defense-election provision may lead to higher litigation costs because multiple subcontractors, having cross-claims against one another, could also be paying for a portion of defending third-party claims against the builder / general contractor based on the latter’s reasonable allocations.

AB 2738 may create some conflicts. For example, what is the scope of an insurer’s defense obligation? The legislation states that it does not affect the holding of Presley Homes, Inc. v. American States Insurance Company (2001) 90 Cal.App.4th 571, which held that if the insurer has a duty to defend any portion of a claim, it is obligated to defend the entire claim. But the indemnity provisions of AB 2738 invalidate for-sale residential construction contracts that require the subcontractor to insure, indemnify, and defend the builder/general contractor for claims not arising from the subcontractor’s scope of work. Will insurers be permitted to refuse a defense to an insured subcontractor which is sued for claims which it is not required to defend under AB 2738? This new law could well lead to more litigation over such issues.

This article was originally posted on Sheppard Mullin's Construction and Infrastructure Law blog, which can be found at www.constructionandinfrastructurelawblog.com.

Authored By:

Edward Lozowicki
(415) 774-3273
ELozowicki@sheppardmullin.com

and

James G. Higgins
(415) 774-2926
JHiggins@sheppardmullin.com

U.S. Fish and Wildlife Service Seeks Public Comment on Proposed Strategic Climate Change Plan

updates@antitrustlawblog.com (Sheppard Mullin) — Wed, 25 Nov 2009 21:14:03 +0000

By Robert Uram and Robyn Christo

The United States Fish and Wildlife Service (the "Service") is accepting public comments through November 23, 2009, on its proposed Strategic Plan for Climate Change ("Strategic Plan") and accompanying 5-Year Action Plan ("Action Plan"). Both Plans are part of the Department of the Interior's (the "Department's") commitment to organizing a Department-wide effort to protect the country's water, land, fish and wildlife against the effects of global warming. The Service developed the Plans to provide the basic framework for and specific details of its overall strategy for working with others to "ensure the sustainability of fish, wildlife and habitats in the face of climate change." The Strategic Plan lays out the Service's general climate change goals whereas the Action Plan identifies specific actions the Service will take to accomplish those goals.

The Service recognizes that addressing global warming is a challenge of extraordinary proportions but sees it as an opportunity to "galvanize" the conservation community. The cornerstone of the Strategic Plan is collaboration. The Service understands that collaboration is imperative to success and accepts a leadership role in organizing an "unprecedented cooperation and partnership" among public, private and government entities to formulate a collective response to climate change. This partnership will be lead by a National Climate Team and several Regional Climate Teams (the "Teams") that will operate under the guidance of the Agency through its Climate Change Working Group and, ultimately, the Department's Climate Change Response Council. Once formed, the Teams will undertake the challenge of addressing the effects of climate change on fish, wildlife and their habitats using three overall strategies of Adaptation, Mitigation and Engagement.

The Service's adaptation strategy – planned management actions to help reduce the impacts of climate change – forms the "core" of the Strategic Plan. Over the next five years, the Service will form Regional Climate Change Partnerships that will work to develop a National Fish and Wildlife Adaptation Strategy that focuses on species and habitats that are most vulnerable to climate change. The Adaptation Strategy will utilize both reactive (maintaining current conditions) and anticipatory (managing toward future conditions) responses to climate change. Reactive responses may be utilized in the short-term to build resilience in ecosystems and "buy time" whereas anticipatory responses are long-term solutions to biological planning and conservation design and will be used as certainty about future conditions grows.

The second strategy employed by the Service is mitigation. Mitigation will be effectuated through the reduction of the Service's own carbon footprint with the goal of achieving carbon neutrality by the Year 2020. Carbon neutrality will be effectuated by changing business practices and employing carbon sequestration and carbon credits to offset the balance. The Service sees its mitigation efforts as a model to influence organizational behaviors as well as local, regional, national and international land use and energy policies and actions.

The final strategy found in the Plan is engagement. The Service will reach out – both internally and externally – to join forces in seeking solutions to climate change and its effects on fish and wildlife. The Service will start internally – informing, educating and training its staff on climate change issues – before reaching out to share information with external audiences. The Service will also forge climate change alliances with the goal of exchanging information and influencing global climate change policy.

The Service is seeking "substantive comments, factual information and other constructive criticism" which will help improve the Plans. The Service is particularly interested in feedback on its overall approach to climate change (i.e., the three strategies of adaptation, mitigation and engagement) and the partnership tactic and leadership role the Service envisions in organizing the approach. Comments suggesting improvements to the Plans, pointing to possible inaccuracies or any other related issues are also encouraged.

While the proposed Strategic and Action Plans are stated in general terms, adoption of the Plans could eventually have on the ground impacts for landowners, farmers, ranchers and others whose land management practices could be changed to address climate change concerns.

To see the full Strategic and Action Plans, please visit http://www.fws.gov/home/climatechange/strategic_plan.html. Commenters may use the Service's online response form (http://www.fws.gov/home/climatechange/onlineresponseCC.cfm) or, may mail comments to: Kurt A. Johnson, National Climate Change Scientist, Office of the Science Advisor, U.S. Fish and Wildlife Service, 4401 N. Fairfax Drive, Room 700d, Arlington, VA 22203. Comments must be received by Monday, November 23, 2009.

This article was originally posted on Sheppard Mullin's Climate Change & Clean Technology blog, which can be found at www.cleantechlawblog.com.

California Governor Signs S.B. 827 into Law; South Coast Air Quality Management District Now Permitted to Continue Emissions Trading Program

updates@antitrustlawblog.com (Sheppard Mullin) — Wed, 25 Nov 2009 19:00:09 +0000

By Misti M. Schmidt

In 2008, a superior court judge placed a moratorium on certain aspects of the emissions trading program administered by the South Coast Air Quality Management District ("District"), instructing the District to complete an environmental impact report regarding its 2007 amendments to District Rule 1315 and District Rule 1309.1. See Natural Resources Defense Council v. South Coast Air Quality Management District, Case No. BS110792 (C.D. Cal., Nov. 3, 2008). Rule 1315 sets forth procedures for tracking emissions credits, while Rule 1309.1 establishes a priority reserve to more easily provide credits to certain preferred sources. Perhaps unexpectedly, the decision with respect to Rule 1309.1 had a large impact on small businesses and public services which have not been permitted to expand because the District has been unable to issue any emissions credits to these entities.

In response, the legislature and governor acted together to permit the District to issue emissions credits under the program to certain specified entities without conducting the environmental review required by the court. Senate Bill 827, introduced by Senator Wright in March 2007, was passed by the legislature on September 12, 2009, signed into law by Governor Schwarzenegger on October 11, 2009, and will go into effect in January 2010.

The bill enables the District to continue issuing permits under District Rule 1304 and District Rule 1309.1, which cover small businesses and entities providing "essential public services," such as prisons, police facilities, sewage treatment plants, hospitals, landfills, and public transit. In addition, the District can now use in its program any emission credits that have resulted from emissions reductions and facility shutdowns from minor sources since 1990. The bill has an automatic repeal date of May 1, 2012 and has no effect on the court's decision regarding Rule 1315.

This article was originally posted on Sheppard Mullin's Climate Change & Clean Technology blog, which can be found at www.cleantechlawblog.com.

The EPA Uses the Clean Air Act to Propose New Rules Intended to Reduce GHG Emissions from Large Emitters

updates@antitrustlawblog.com (Sheppard Mullin) — Wed, 25 Nov 2009 18:52:41 +0000

By Kyndra Joy Casper

In a move certain to fuel the debate over climate change legislation in Congress, the U.S. Environmental Protection Agency (the "EPA") recently revealed a new proposal to regulate greenhouse gas ("GHG") emissions from power plants, factories and refineries, which are considered large GHG emitters. The regulations being developed would, for the first time, require the use of best available control technology (“BACT”) to compel large emitting sources to curb GHG emissions whenever a new facility is constructed or a major modification takes place. The proposal would require large industrial facilities that emit at least 25,000 tons of GHGs a year to obtain construction and operating permits. Small businesses such as farms, restaurants, and many other types of small facilities would not be included in these requirements. The EPA’s proposal signals that it will act under the existing authority provided by the Clean Air Act, meaning that if Congress does not pass a climate change bill, the EPA will act on its own to curb emissions.

The EPA stated that large sources are responsible for 70 percent of GHG emissions, mainly carbon dioxide from burning fossil fuels, that are released in the U.S. "By using the power and authority of the Clean Air Act, we can begin reducing emissions from the nation's largest greenhouse gas emitting facilities without placing an undue burden on the businesses that make up the vast majority of our economy," EPA Administrator Lisa Jackson said. "We know the corner coffee shop is no place to look for meaningful carbon reductions."

The proposed rule addresses six GHGs: carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, perfluorocarbons and sulfur hexafluoride.

Earlier this year, the Obama administration announced that it would start developing the first-ever GHG emissions standards for cars and trucks. Those regulations, which would take effect in 2010, require Clean Air Act permits for stationary sources emitting GHGs. The new proposal focuses these permitting programs on the largest facilities.

Industry groups immediately questioned the agency's position since the Clean Air Act typically covers any facility releasing more than 250 tons a year of a recognized pollutant. That statutory threshold would require more facilities to fall under the new regulations than proposed by the EPA.

The EPA estimates that 400 new sources and modifications to existing sources would be subject to review each year for GHG emissions. Further, the EPA said that approximately 14,000 large sources (sources emitting 25,000 tons of GHGs per year) would need to obtain operating permits that include GHG emissions.

The EPA is also requesting comment on its previous interpretation of when certain pollutants, including carbon dioxide and other GHGs, would be covered under the permitting provisions of the Clean Air Act. The EPA has acknowledged that a different interpretation could mean that large facilities would need to obtain permits prior to the finalization of the rule regulating GHG emissions.

The proposed rules and more information are available at: http://www.epa.gov/nsr/actions.html.

This article was originally posted on Sheppard Mullin's Climate Change & Clean Technology blog, which can be found at www.cleantechlawblog.com.

Changes to Penalty for Failure to Timely File CA Entity Change in Ownership Statement

updates@antitrustlawblog.com (Sheppard Mullin) — Thu, 19 Nov 2009 19:00:41 +0000

California recently enacted SB 816 to change the penalty provisions for failure to timely file a transfer of property ownership statement with the State Board of Equalization (the "BOE") upon a change in control or change in ownership of a corporation, partnership, limited liability company, or other legal entity. Note that these new rules apply only to late filings of ownership statements upon the change in control or ownership of a legal entity, and not to late filings of ownership statements required to be filed with the county assessor's office upon the recording of a deed transferring real property.

An entity change in ownership statement is required to be filed with the BOE within 45 days from the date of a change in control or ownership of the legal entity. Under current law, a penalty will be imposed if the taxpayer fails to file within 45 days from the date written request is received from the BOE, and the penalty will be extinguished if the statement is filed within 60 days after notification is received.

Pursuant to the amendments under SB 816, effective January 1, 2010, a penalty will instead be imposed upon the failure to file within 45 days from the earlier of the date of the change in control or ownership of the entity, or the date written request is received from the BOE. Additionally, the automatic waiver if the statement is filed within 60 days of the receipt of notice from the BOE will be eliminated. The BOE will still be authorized to waive the penalty upon a showing of reasonable cause.

The penalty is generally equal to 10% of the taxes applicable to the new base year value reflecting the change in control or change in ownership, or 10% of the current year taxes on the property if no change in control or change in ownership of the entity occurs.

As a practical matter, many taxpayers wait to file an entity change of ownership report until notified by the BOE. Given the new penalty provisions, taxpayers should take a more proactive approach to file within 45 days of a change in ownership or change in control of a corporation, partnership, limited liability company, or other legal entity.

Please contact a member of the Sheppard Mullin tax group for more information.

Supreme Court Refuses to Hear Palmer Case - Are Inclusionary Zoning Practices Due for Change?

updates@antitrustlawblog.com (Sheppard Mullin) — Thu, 29 Oct 2009 17:58:26 +0000

By James Pugh & Dave Lanferman

On October 22, 2009, the California Supreme Court decided not to review the Court of Appeal's decision in the landmark Palmer/Sixth Street Properties v. City of Los Angeles case. [See SMRH Blog 08/18/2009, for detailed discussion of Palmer decision.] This decision, although favorable for Palmer, could launch "inclusionary zoning" and similar affordable housing laws across the state into uncertain legal waters as municipalities attempt to enforce now-questionable inclusionary zoning requirements.

Two years ago, Palmer sued the City to avoid having to either provide units for low-income tenants or pay a substantial fee in lieu of providing rent-restricted units. In essence, Palmer challenged the City's inclusionary zoning requirements as applied to his Piero II project that included 350 residential units and 9,705 square-feet of commercial space. The City approved the project, but conditioned the approval on the developer either (1) providing 60 replacement low-income dwelling units and maintaining rent restrictions pursuant to the Specific Plan for at least 30 years, or (2) paying a fee units (approximately $5,770,930) in lieu of providing such rent-restricted units.

Palmer claimed that the City's conditions conflicted with the Costa‑Hawkins Rental Housing Act (Civil Code § § 1954.51-1954.535). The Court of Appeal agreed that this state law pre-empted the City's attempt to regulate the initial rents of newly-constructed units. The Court rejected the City's argument that the option of paying an in-lieu fee should operate to exempt the ordinance from Costa-Hawkins, instead finding the in-lieu fee to be inextricably intertwined with the ordinance's exaction of rent-controlled units. The City petitioned for Supreme Court review. The Court, however, refused to hear the case and thereby rendered the appellate court's ruling final.

So, what does that mean for California's affordable housing laws? It is estimated that there are approximately 170 jurisdictions in California that have some form of inclusionary zoning laws. Thus, the effect of the Palmer case could be wide reaching.

First, it will likely require many jurisdictions that have similar inclusionary zoning policies (that regulate and lower the initial rents that may be charged on newly constructed rental housing units) to reconsider and revise those ordinances to avoid violations of Costa-Hawkins.

Second, even though the City claimed that its inclusionary zoning requirements were enacted as land use regulations pursuant to the City's police power (like other forms of true zoning regulations) the Court held that state law limiting local rent-control measures was nevertheless applicable and pre-emptive. This aspect of Palmer, particularly if read in combination with the BIACC v. City of Patterson decision of March 2009, indicates that local inclusionary zoning practices are still subject to controlling state law notwithstanding efforts to characterize such regulations or exactions of housing units as "zoning" or "land use regulation."

Third, advocates of the existing form of inclusionary housing may seek new legislation to counteract the Palmer case. Several affordable housing groups submitted an amicus brief in support of the City's petition for Supreme Court review. While unsuccessful with the Court, it remains to be seen if those advocacy groups will pursue the issue with the Legislature.

Finally, Palmer reinforces the earlier holding of the Patterson case to the effect that local inclusionary zoning policies that require developers to provide new privately-subsidized housing units at below market rents or sale prices remain subject to controlling state law governing residential rent controls and demonstration of a reasonable relationship justification for such housing. It is likely that additional implications and effects of Palmer will be determined once the residential development market becomes more active.

For now, the Palmer case stands as significant precedent that will likely compel changes in the structure and application of inclusionary zoning practices in many communities throughout California.

Authored By:

James E. Pugh
(213) 617-4284
JPugh@sheppardmullin.com

and

David P. Lanferman
(415) 774-2996
DLanferman@sheppardmullin.com

Regulatory Takings Law: Ninth Circuit Panel Holds A Mobile Home Rent Control Ordinance Is Subject To A "Facial Challenge" And Awards Compensation To Property Owners

updates@antitrustlawblog.com (Sheppard Mullin) — Thu, 01 Oct 2009 21:45:10 +0000

Guggenheim v. City of Goleta (9th Circuit, No. 06-56306, 9/28/2009).

By Dave Lanferman and Deborah Rosenthal

According to a panel of the federal Ninth Circuit Court of Appeal, the City of Goleta owes compensation to mobile home park owners for economic losses resulting from the enactment of a mobile home rent control ordinance. In Guggenheim v. City of Goleta, the panel held that, on its face, the rent control ordinance effectuated a “naked transfer” of approximately 90% of the value of the property from the park owner to the tenants. The court declared that “a facial challenge [to an ordinance] exists as a viable legal claim” under the ad hoc, multi-factor standards first described by the U. S. Supreme Court in 1978, in Penn Central v. City of New York (1978) (438 U.S. 104). Based on the unusual circumstances of this case, the court addressed the merits of the claim and found that this severe loss of value was a compensable regulatory “taking,” even though the park owners continued to earn positive annual returns.

“Regulatory takings” litigation involves claims, usually by property owners or developers, that land use regulations decrease use or value to such an extent as to “take” property interests and require payment of “just compensation” under the Fifth Amendment to the U. S. Constitution and similar state constitutional guarantees. A “facial challenge” is based on a claim that the mere enactment of the regulation constitutes a compensable taking of protected rights or interests. Regulations that diminish, but do not wipe out, property values are analyzed under Penn Central.

The Guggenheim decision addressed many of the most hotly debated issues in current regulatory takings law. In most such cases, procedural hurdles keep plaintiffs out of federal court, on the ground that their claims are not “ripe” for review until there is a final state court decision under the still controversial Williamson County v. Hamilton Bank (1985) 473 U.S. 172. The court majority concluded that “the unusual and lengthy development of the case” (including two earlier rounds of litigation in federal court and at least one round in state court) allowed the court to address the merits of the owner’s claims for the first time.

The opinion broke new ground by holding that a “facial challenge” to a regulation can be pursued as a taking under Penn Central. The majority opinion, by Judge Bybee, addressed and analyzed a wide range of takings issues, including:

Standing: The court held that the plaintiffs had standing to raise the facial challenge, even though they had purchased the mobile home park long after it was subject to the County’s mobile home rent control. The court distinguished cases denying standing to plaintiffs in facial challenges where the plaintiffs came to the property after the regulations were in place, and held that the owners here had demonstrated “actual injury” from the ordinance. [Note: the City did not raise standing in the District Court, which many have affected the result.]
Ripeness: The court held that the “ripeness” requirement for suing in federal court under Williamson County was “prudential” rather than “jurisdictional.” Accordingly, the court could (and did) find that the ripeness defense may be waived. Nonetheless, the court addressed ripeness on its own, and found that the extensive litigation history demonstrated a final state position on the owner’s taking claims, even without a final state court decision.
A Facial Challenge to Regulation Under Penn Central Is Viable: The court concluded that Penn Central applies where mere enactment of a regulation results in a significant (but less than total) economic loss. Although the court acknowledged that such facial challenges to partial takings remain “difficult,” they are viable for the range of claims involving diminution in value resulting from regulation which are not total wipe outs, but nevertheless arguably “go too far” under Pennsylvania Coal Co. v. Mahon (1922) 260 U.S. 393. The court then considered whether the rent control ordinance effected a “regulatory taking” under the three-part Penn Central test:

(a) Economic Impact of the Regulation: First, the court found that the evidence showed the rent control ordinance caused “significant economic loss” to the park owners—an 80% discount in rental value of the park and a 90% “wealth transfer” from the owners to the tenants Even if other evidence showed owners earning up to 10% annual returns on their investment, a taking could be found if the owner could have earned substantially more in the absence of the regulation. This was a significant finding, and in notable contrast to many prior takings cases.

(b) Investment-Backed Expectations of Subsequent Purchasers: Next, the court applied Palazzolo v. Rhode Island (2001) 533 U.S. 606, holding that even a plaintiff who buys land already subject to regulation may pursue a takings claim. The court acknowledged that a purchaser who paid less for regulated property may have lower “investment-backed expectations,” but required those to be weighed as one factor under Penn Central. The court in Guggenheim found that the owners’ investment-backed expectations were not determinative when considered in tandem with the “economic impact of the regulation.” [Note: The dissent disagreed on this point, contending that the City’s ordinance did not “take” anything from the owners, since the City’s ordinance was merely a re-enactment of a County rent control ordinance in effect when the plaintiffs bought the mobile home park was subjected to rent control.]

(c) Character of the Governmental Action: Finally, the court found that the ordinance effected a “wealth transfer” from one identifiable class to another and therefore is more like a “classic taking” than a mere shifting of regulatory burdens. Mobile home park owners were singled out for disproportionate burdens of trying to provide affordable housing, and the court noted that other forms of housing were not subject to similar rent controls. The court also noted that this ordinance may serve other, less noble, objectives:

The [ordinance] also benefits another group: those who would like to support affordable housing initiatives without paying for it themselves, for example, owners and developers or other forms of housing such as apartments that might otherwise be forced to provide subsidized housing, and taxpayers who want to subsidize affordable housing without actually increasing their own tax liability.

(Slip Opinion at pp. 13851-13852.)

Evidence: The court then discussed what type of evidence is appropriate in such a facial challenge—noting that a plaintiff must be allowed to put in enough evidence of personal economic harm to demonstrate standing to sue (and is not limited to the text of the ordinance itself), but not so much as to convert the case into an “as-applied” challenge. The panel held that the District Court had erred by refusing to allow the plaintiff to put on any evidence. The court noted that both sides had submitted evidence acknowledging some degree of economic loss to the owners from the regulation, which was important to the court’s finding that a taking had occurred.
Compensable Taking: The court found enough evidence in the extensive record of this case to demonstrate the “taking” of the owners’ property interest in what it described as a “transfer premium” the context of rent-controlled mobile home park leases. The rent control regulations create a “below market rent” situation, and the transfer premium represents the current value of enjoying a below market rate lease on a mobile home park space. The City’s ordinance had the undisputed effect of transferring this asset from the park owners to the current tenants. The majority held that the City may lawfully take this approach to attempting to increase the availability of affordable housing -- but the Fifth Amendment requires compensation to the park owners for the value of the loss. The court remanded for determination of the value of the lost premium. [Note: The dissent expressed concern that a repeal of the rent control ordinance would unfairly harm the current tenants, who had paid premiums (to earlier tenants) in excess of $85,000 per unit to buy coaches subject to rent controls.]
Due Process & Equal Protection: The court affirmed the trial court’s rejection of plaintiffs’ due process and equal protection claims, noting that current precedents merely require that regulations be reasonably designed to try to achieve a legitimate governmental objective (such as the provision of affordable housing) and do not require that rent control regulations actually achieve the desired outcomes.
“Affordable Housing”: The court observed that state and local governments have a legitimate interest in increasing the availability of affordable housing for their citizens. “Translating that interest into effective public policy, however, has proven difficult.” The court concluded by noting the Supreme Court’s admonition that some well-intended governmental actions will be found to have gone too far, and to require compensation, if they improperly “force some people alone to bear public burdens which in all fairness and justice should be borne be the public as a whole,” citing Lingle v. Chevron U.S.A. Inc. (2005) 544 U.S. 528, 537 (quoting Armstrong v. United States (1960) 364 U.S. 40, 49.

Dissent: The dissent by Justice Kleinfeld agreed that the case was ripe, and that rent control ordinance would be a regulatory taking under Penn Central, but thought that there was no injury to the plaintiffs because they bought the park with the rent control ordinance in place, “after the takings that mattered.”

Authored By:

David P. Lanferman
(415) 774-2996
DLanferman@sheppardmullin.com

and

Deborah M. Rosenthal
(714) 424-2821
DRosenthal@sheppardmullin.com

Procedural Requirements Of California's "Fix It" Law Upheld

updates@antitrustlawblog.com (Sheppard Mullin) — Thu, 01 Oct 2009 21:40:22 +0000

Standard Pacific Corporation v. Superior Court of San Bernardino (Garlow) (2009) ___ Cal. App. 4th ____ (Aug. 14, 2009, No. E046844)

By James Pugh

The Fourth District Court of Appeal recently held that construction-defect plaintiffs must provide developers with notice and an opportunity to repair before filing suit. This holding in Standard Pacific Corporation v. Superior Court of San Bernardino (Garlow) confirms the procedural requirement of Senate Bill 800, which is also known as the “Fix It Law.”

In this case, a group of homeowners (i.e., Garlow et al., as the real parties in interest) filed an action stating causes for strict liability, strict products liability, negligence and negligence per se based on the alleged faulty construction of homes within a Standard Pacific development. Unfortunately for the homeowners, their attempt to by-pass the Fix It Law’s pre-litigation procedures did not pass muster with the court.

The Section 910 of the Fix It Law requires claimants to provide a developer with written notice and an opportunity to repair before marching into court. In turn, Section 912 sets out certain requirements for developers regarding documentation and information to be provided to homeowners. Here, the homeowners simply argued that they did not have to follow the pre-litigation procedures because the developer had not complied with Section 912. The homeowners’ assertion, however, was not supported by any factual showing that the developer had, in fact, breached any of its obligations.

The court quickly turned to the intent of the Fix It Law and concluded that it was designed to avoid costly construction-defect litigation and provide balanced rights and responsibilities for developers and homeowners alike. Importantly, the court determined that the homeowner’s specific responsibility to provide “notice and opportunity to repair” before filing suit was the “norm” and legislative intent of the Fix It Law. The court gingerly avoid calling that responsibility mandatory and implied that a homeowner could potentially by-pass the procedural requirements of Section 910, but must first bear the burden of showing that they need not follow those procedures. Garlow failed to carry that burden.

Accordingly, the court concluded that “[i]f a homeowner files suit without having followed the pre-litigation procedures, it is incumbent upon the homeowner to factually establish that he has been ‘released’ from this obligation due to the builders failure to comply with section 912.” To avoid a potentially unfair result, the court directed the trial court to rehear the case and grant Standard Pacific’s motion to stay the proceedings unless Garlow could prove that the developer violated Section 912. In other words, the court dealt the homeowners a blow, but allowed them to live another day under its clarified interpretation of the Fix It Law’s pre-litigation procedural requirements.

Authored By:

James E. Pugh
(213) 617-4284
JPugh@sheppardmullin.com

2nd Circuit Allows Public Nuisance Suit Against Greenhouse Gas Emitters

updates@antitrustlawblog.com (Sheppard Mullin) — Wed, 30 Sep 2009 18:20:57 +0000

Connecticut v. American Electric Power Company Inc., ____F.3d ____, No. 05-5104 (2nd Cir. 2009)

By James Rusk

States and private plaintiffs may sue utility operators under the federal common law of nuisance to abate carbon dioxide ("CO₂") emissions that contribute to global warming, the Second Circuit Court of Appeals held this month. Although the 139-page opinion appears to open a new front in the fight over climate change, its full import is uncertain. The court held only that plaintiffs had standing, that they had stated public nuisance claims under the federal common law and that those claims were justiceable. It did not reach the merits of plaintiffs' claims, and it expressly noted that those common law claims could yet be displaced by federal legislative or rulemaking action. With that in mind, the case could prove more significant as an additional impetus for national greenhouse gas regulation than as a tool for judicial control of emissions.

Background

"There is hardly a political question in the United States which does not sooner or later turn into a judicial one." –Alexis De Tocqueville, Democracy In America

California and seven other states, as well as New York City, filed suit in 2004 against a group of electric power companies that collectively own and operate fossil-fuel-fired power plants in twenty states. Three private land trusts separately sued the same defendants, which allegedly are the five largest emitters of CO₂in the United States and account for approximately 10 percent of all U.S. CO₂ emissions. The plaintiffs alleged that defendants' CO₂emissions contribute to a public nuisance under federal common law, resulting in various current and future injuries to plaintiffs' residents and property. They sought injunctive relief requiring defendants to abate the nuisance by first capping their CO₂ emissions and then reducing those emissions by a fixed percentage each year.

Justiceability

In a consolidated action, the district court dismissed all the plaintiffs' claims on the ground that they presented a non-justiceable political question. Connecticut v. American Electric Power Co., 406 F.Supp. 2d 265, 268 (S.D.N.Y. 2005). In the district court's view, deciding plaintiffs' complaints would require a balancing of the environmental and social costs of greenhouse gas emissions against the economic and social costs of reducing those emissions. According to the court, that balancing was impossible to perform without first making an "initial policy determination" of a type that was clearly reserved to the elected branches of government and which those branches had so far refused to make. Second Circuit slip op. at 13, 31.

The Court of Appeals reversed, holding that although the issue of climate change "may have political implications," plaintiffs' claims did not present a nonjusticeable political question. Plaintiffs sought to limit emissions from specific power plants to redress alleged injuries caused by those emissions, not to "establish a national or international emissions policy." Id. at 22-23 (emphasis in original). Therefore, the case was essentially just a complex common law nuisance action, which the federal courts "have successfully adjudicated . . . for over a century." Id. at 24. Seen in this light, the resolution of plaintiffs' claims would not require the judiciary to overstep its constitutional boundaries. Id. at 22-23. Nor did the failure of the political branches to make an "initial policy determination" regarding CO₂ emissions mean that the federal courts lacked the competence to decide the case or that plaintiffs should be denied any relief. Id. at 32-34.

Standing

Having decided that the district court dismissed the case in error, the Court of Appeals went on to determine that both the states and the trusts had made allegations sufficient to establish standing, at least at the pleading stage. The defendants had argued that plaintiffs could not establish either causation or redressability because global warming is caused by the aggregate effects of emissions around the world, most of which would not be reached by any remedy the court could provide. Significantly, the court rejected this argument. Second Circuit slip op. at 57-64. As the court noted, however, standing is relatively easy to establish at the pleading stage, where the court presumes that the plaintiffs' general allegations embrace the specific facts necessary to support a claim. But plaintiffs eventually must allege and prove specific facts sufficient to support injury, causation and redressability, to survive a motion for summary judgment and prevail at trial. Id. at 37.

Claims Under Federal Common Law

In the third and longest portion of its opinion, the Second Circuit considered whether plaintiffs could state a valid claim for public nuisance under the federal common law. The court looked to the Restatement to define a public nuisance under federal common law as "an unreasonable interference with a right common to the public." The court concluded that the states had stated a valid claim under this standard, based on their allegations of ongoing and future injury to public comfort and safety, natural resources and public property, and ecological values. Second Circuit slip op. at 67-70. The court also held that the trusts had stated a "private" claim for public nuisance, by alleging a harm sufficiently different from that suffered by the public at large. In the process, the court rejected the argument that only a state (or the federal government) may bring a public nuisance claim. Id. at 80-101.

Finally, the court held that plaintiffs' claims under federal common law had not been displaced by federal legislation or regulation. The federal Clean Air Act does give the Environmental Protection Agency ("EPA") the authority to regulate CO₂ emissions as an "air pollutant," as the Supreme Court recently held in Massachusetts v. EPA, 549 U.S. 497 (2007). However, the EPA has not yet made the necessary findings to exercise that authority with respect to emissions from defendants' power plants. The EPA has proposed to make findings that would allow it to regulate greenhouse gas emissions from mobile sources such as automobiles. But those proposed findings would not, by themselves, impose any legal requirements on CO₂ emissions, nor would they apply to stationary sources such as power plants. Accordingly, the Clean Air Act, at least currently, does not "actually regulate" CO₂ emissions or "speak directly" to the issue raised by plaintiffs, so as to displace the federal common law that otherwise applies. Second Circuit slip op. at 114-117.

Conclusion

The Second Circuit allowed the plaintiffs' suit to proceed, remanding to the district court for further proceedings. However, the court disclaimed any opinion as to whether regulation of greenhouse gases by EPA under the Clean Air Act would displace plaintiffs' federal common law claims, "if and when such regulation should come to pass." Id. at 119. Moreover, the opinion necessarily omits any discussion of the climate change bills currently under consideration by Congress. With those limits in mind, it is possible that non-judicial events soon will limit the legal significance of the court's holding. As the court stated in conclusion, "'It may happen that new federal laws and new federal regulations may in time pre-empt the field of federal common law of nuisance. But until that comes to pass, federal courts will be empowered to appraise the equities of the suits alleging creation of a public nuisance' by greenhouse gases." Id. at 139 (quoting Illinois v. City of Milwaukee, 406 U.S. 91, 106 (1972).

This article was originally posted on Sheppard Mullin's Climate Change and Clean Technology blog, which can be found at www.cleantechlawblog.com.

James Rusk is an associate in the Real Estate, Land Use and Environmental Practice Group in the firm's San Francisco office.

A State At Risk Attempts to Adapt to Climate Change

updates@antitrustlawblog.com (Sheppard Mullin) — Wed, 30 Sep 2009 18:07:11 +0000

By Brenna Moorhead

The California Natural Resources Agency (CNRA) led twelve state agencies in preparing the Draft California Climate Adaptation Strategy. The Strategy responds to the mandates of Executive Order S-13-08, which called for development of an adaptation strategy for addressing climate change. Consistent with the Order, the Strategy summarizes the best known science on climate change impacts, assesses the state’s vulnerability to these impacts, and outlines solutions to be implemented by state agencies to promote resiliency.

The Strategy combines climate adaptation and climate change mitigation. Mitigation focuses on reducing state greenhouse gas (GHG) emissions, while climate adaptation consists of efforts to respond to the impacts of climate change. Adaptation is the adjustment in natural or human systems to climate changes in order to minimize harm or benefit from opportunities. The Strategy combines a hazard-based approach with a vulnerability approach, both of which are necessary for the long-term iterative process of climate change adaptation. It builds on existing climate science and frameworks such as the California Air Resource Board’s Climate Change Scoping Plan.

The Strategy considers the impacts, vulnerabilities, and solutions across the following seven sectors: public health, biodiversity and habitat, oceans and coastal resources, water supply, agriculture, forestry, and transportation and energy infrastructure. The Strategy provides recommendations for adaptation specific to each sector as well as preliminary recommendations that cross sectors. The twelve cross-sector recommendations include the following:

Change water management and uses by achieving a statewide 20 percent reduction in per capita water use by 2020, implementing the Delta Vision Cabinet Group recommendations, improving statewide water quality, and implementing other strategies;
Consider climate change impacts for all significant projects as required under the California Environmental Quality Act (CEQA) Guidelines Section 15126.2;
Consider project alternatives to avoid new development in vulnerable areas and protect vulnerable shoreline areas containing existing and proposed development;
Identify key habitats that could change significantly due to climate change and plan for expanding existing protected areas or altering land and water management practices to minimize effects;
Amend general plans and local coastal plans to assess impacts, identify areas of vulnerability, and develop reasonable and rational risk reduction strategies; and
Meet projected population growth and increased energy demand with greater energy conservation and increased use of renewable energy.

If implemented, these recommendations will likely affect land use planning and environmental review processes. While the Strategy explores the impacts of climate change, it does not fully explore how these proposed programs or policies might in turn affect the economy or the public.

CNRA accepted comments on the draft and will prepare a final adaptation strategy based on input received from the public. The California Building Industry (CBIA), in cooperation with other trade and commercial organizations, submitted a comment letter (dated Sept. 17, 2009) to CNRA. The letter criticized the state agencies for taking a "Doomsday" approach to climate change without recognizing the proven commitment and adaptability of Californians in dealing with other environmental risks. It also emphasizes that the appropriate role of government is as a disseminator of "timely and science-based information to the public."

CBIA's letter addresses each of the Strategy's key recommendations individually. Notably, several of those recommendations seek to clarify the appropriate relationship between CEQA, proposed amendments to the CEQA Guidelines, and the Strategy. At recent public hearings on the proposed amendments held by CNRA in Sacramento and Los Angeles, other members of the public voiced similar interest in clarifying the relationship. Based on the public's focus on this issue, CNRA would be well served to gather additional stakeholder input from agencies, professionals, and the public and consider seriously how the revised Strategy might clarify an appropriate relationship that best serves the goal of adapting to climate change.

This article was originally posted on Sheppard Mullin's Climate Change and Clean Technology blog, which can be found at www.cleantechlawblog.com.

For more information please contact Brenna Moorhead. Brenna Moorhead, AICP, is an associate in the Real Estate, Land Use, Natural Resources and Environmental practice group in the firm's San Francisco office.

New Construction General Permit Imposes Significant New Requirements for Storm Water Discharges

updates@antitrustlawblog.com (Sheppard Mullin) — Thu, 10 Sep 2009 17:31:15 +0000

By Robert Uram & Keith Garner

On September 2, 2009, the State Water Resources Control Board (“State Board”) adopted a new General Permit for Discharges of Storm Water Associated with Construction Activities (“CGP”) that imposes significant new and potentially burdensome requirements for discharging storm water from construction sites. The CGP would apply to all construction activities disturbing one or more acres of land or to smaller areas that are part of a common plan for development, as well as to construction activities related to linear overhead/underground projects, which were previously covered under a separate general permit. Unless the CGP is challenged and set aside, the new permit will become effective on July 1, 2010, allowing current dischargers to get through the 2009-2010 rainy season before the new standards go into effect.

The CGP represents a fundamental shift storm water management practices from the existing general permit for construction activities, Order 99-08-DWQ. The existing permit contained a narrative effluent limit that required the iterative application of Best Management Practices (“BMPs”) to ensure that water quality standards were not violated. The new CGP contains Numeric Action Levels (“NALs”) and, for certain “high risk” sites, Numeric Effluent Limitations (“NELs”) for pH and turbidity. NALs serve as benchmarks that, if exceeded, require the discharger to apply additional BMPs. Exceedance of an NAL does not itself constitute a violation of the CGP, but failure to take the required corrective action may result in a violation. Exceedances of NELs are violations of the CGP and could result in substantial penalties. One problem with this new approach is that NALs and NELs do not account for high natural variation in turbidity that occurs throughout the State, including some areas where the background levels of turbidity exceed the 500 NTU NEL established by the CGP. The State Board may reconsider the numeric limits in light of the pending rulemaking for effluent limitation guidelines that the EPA is currently undertaking and expected to complete by December 1, 2009.

Other significant changes introduced by the CGP include:

Minimum Requirements Specified: The new CGP imposes mandatory minimum BMPs and other controls that were previously only required as elements of the Storm Water Pollution Prevention Plan (“SWPPP”) or were suggested by guidance.

Rain Event Action Plan: In addition to a SWPPP, the new CGP requires certain sites to develop and implement a Rain Event Action Plan (“REAP”) that must be designed to protect all exposed portions of the site within 48 hours prior to any likely precipitation event.

Increased Monitoring and Reporting: The existing permit relied primarily on visual monitoring, requiring sampling only in limited circumstances. In addition to visual monitoring of all sites, the CGP requires sampling and monitoring for non-visible pollutants at all sites, effluent and receiving water monitoring for pH and turbidity at certain high risk sites, and sampling of receiving waters for bioassessment purposes at high risk sites. Most reports—including violations of NELs, exceedances of NALs, results of receiving water monitoring, and annual reports—under the new CGP must be filed electronically within narrow time limits. All reports will be contemporaneously available online to the general public.

Post-Construction Storm Water Performance Standards: The new CGP specifies runoff reduction requirements for all sites not covered by a Phase I or Phase II MS4 NPDES permit, to avoid, minimize and/or mitigate post-construction storm water runoff impacts. The post-construction requirements do not apply to projects that will be completed (i.e., no longer covered by the CGP) by September 2, 2012.

Certification/Training Requirements for Key Project Personnel: The new CGP increases the training and certification requirements for key personnel (e.g., SWPPP preparers, inspectors, etc.).

Authored By:

Robert J. Uram
(415) 774-3285
RUram@sheppardmullin.com

and

S. Keith Garner
(415) 774-2991
KGarner@sheppardmullin.com

Administrative Fee for Tax Collection is an Unconstitutional Hidden Tax

updates@antitrustlawblog.com (Sheppard Mullin) — Fri, 28 Aug 2009 13:49:54 +0000

Weisblat, et al., v. City of San Diego, ___ Cal. App. 4th ____ (Aug. 18, 2009, No. D052787)

By Jeffrey W. Forrest and David P. Lanferman

In 1997, in an attempt to clarify the sometimes blurry distinction between a government “fee” and a government “tax,” the California Supreme Court explained that “taxes are imposed for revenue purposes, rather than in return for a specific benefit conferred or a privilege granted.” (Sinclair Paint Co. v. State Bd. of Equalization (1997) 15 Cal.4^th 866, 874.) Recently, on August 18, 2009, California’s Court of Appeal for the Fourth Appellate District further clarified the distinction in Weisblat, et al., v. City of San Diego (Super. Ct. No. GIC871893). The issue was whether the City of San Diego’s “Tax Collection Fee” charged to landowners to cover the expense of collecting and administering the City’s rental unit business tax was, in fact, a general tax. The court held that it was a general tax because the purpose of the Tax Collection Fee was not to provide a government service to landlords (such as building inspection), but rather to facilitate the City’s general tax collection efforts (processing rental tax applications, answering taxpayer questions, and generating and mailing out billing statements to collect the rental tax). As a general tax, the court voided the Tax Collection Fee because the City Council levied it in 2004 without approval of a majority of qualified voters in the City as required by the California Constitution. The City’s underlying rental unit business tax, which was established in 1942 and generates $11 million annually, was not challenged and remains in effect.

In its holding, the court rejected three City arguments that the Tax Collection Fee was a fee that required no voter approval. First, the City claimed that the Tax Collection Fee afforded a specific benefit to landlords because it funded a courtesy billing notice that helped landlords avoid penalties for failure to timely register their rental businesses. The court disagreed finding that the central purpose of such notices was to facilitate collection of the rental unit business tax. Assisting landlords in avoiding penalties was only an incidental benefit. The court looked to the City’s resolution approving the Tax Collection Fee, which stated that its purpose was “to recover costs associated with processing applications and renewals for [rental unit business tax certificates].”

Second, the City claimed the Tax Collection Fee funded regulatory activities, noting the Supreme Court’s pronouncement that “all regulatory fees are necessarily aimed at raising ‘revenue’ to defray the cost of the regulatory program in question, but that fact does not automatically render those fees ‘taxes.’” (Sinclair Paint, supra, at pp. 876, 880). A City employee for the City’s tax department provided a declaration that the Tax Collection Fee funded 22 full-time employees who provided tax and regulatory services. However, the Court of Appeals disagreed, noting the Supreme Court’s “primary purpose” test for determining whether a regulatory fee should be deemed a tax:

[I]f revenue is the primary purpose, and regulation is merely incidental, the imposition is a tax, but if regulation is the primary purpose, the mere fact that revenue is also obtained does not make the imposition a tax. (Sinclair Paint, supra, at p. 880.)

Here, the court found that the City provided no details about how its services regulated the conduct of any person. Furthermore, the City staff report recommended the City Council adopt the fee “as one of the solutions to offset the $17.3 million State budget reduction.” As such, the Court of Appeals found that the primary purpose was to raise revenue, not to regulate.

Third, the City claimed that the Tax Collection Fee fell within the provision of Government Code § 50076 which provides that a fee may be treated as a special tax only when (1) the fee exceeds “the reasonable cost of providing the service or regulatory activity for which it is charged,” and (or) (2) the fee is levied for “general revenue purposes.” (Gov’t Code § 50076, italics added; [citation omitted].) The Court of Appeal disagreed holding that Government Code § 50076 only applied where the fee is imposed to provide either a service or a regulatory activity. In this case the record was clear that the primary purpose of the Tax Collection Fee was to raise revenue, not to provide a service or regulate activity.

Having determined that the Tax Collection Fee was a tax, the Court of Appeal then held that it was a general tax requiring approval of a majority of eligible voters under California’s Constitution,[1] instead of a special tax (a tax levied for specific purposes) that would have required two-thirds voter approval.[2] These constitutional requirements were created in 1996 via Proposition 218 in a statewide taxpayer revolt against rising local government fees. The court found that the Tax Collection Fee had special tax characteristics because it was tracked in accounts separate from other tax receipts in the General Fund, monitored annually to ensure it did not exceed the cost of the City’s Business Tax program, and served a specific purpose. However, because the rental unit business tax was a general tax used to raise revenue for the General Fund, which could be used for any and all governmental purposes, the court held that the Tax Collection Fee indirectly raised revenue for the General Fund, making it a general tax. The court remanded the matter back to the trial court to rule on Weisblat’s motion to order a refund of the fees collected.

At a time when local government budget shortfalls (exacerbated by State budget cutbacks) force hard choices between less government spending and raising revenue, this case clarifies the procedures local governments must follow when opting to raise revenue. Understanding and properly identifying taxes versus fees improves transparency, helps the taxpayer know where money is being spent, and assists government officials in making informed choices about the level of public support needed for revenue increases. In this case, a tax was levied on landlords within the City to provide benefits to society at large without an electoral-level debate or voter consent. Likewise, the City Council voted without knowing whether voters agreed that this group should be targeted to provide general benefits for all.

During such voter debates, government officials have the opportunity to vet the fairness and efficiency of such measures. For example, the City estimated the cost of collecting and administering the rental unit business tax was $3.5 million a year ($25 per landlord, later reduced to $15 per landlord). Therefore, at the time it was adopted, the City was spending $3.5 million to collect only $11 million for the City’s General Fund -- an inefficiency rate of 31.8 cents per tax dollar. In contrast, the IRS in 2006 spent approximately $10 billion to collect $1.236 trillion in individual income tax -- an inefficiency rate of only 0.8 cents per tax dollar.[3] If the Tax Collection Fee had been properly labeled a tax, voters could have questioned whether or not (1) it was appropriate to target landlords; and (2) it was an efficient means of raising General Fund revenue. However, the cost of seeking voter approval to raise only $3.5 million, even if successful, would have exacerbated this already high inefficiency rate.

To the extent local governments believe they are not collecting fees that fully recover the cost of services they provide to a discrete group, Weisblat v. City of San Diego highlights the importance of identifying the primary purpose of imposing a fee, the specific benefit provided to the group, and some details on the group’s exact conduct the fee proposes to regulate. California’s courts are increasingly looking past the label given a fee or tax to determine the true nature of revenue-raising measures. Due to the fact that valid fees, special taxes or general taxes are each established through different procedures, understanding the nature of the revenue-raiser at the outset is critical. Whether a local agency or a regulated entity, consulting legal counsel can assist greatly in navigating the web of constitutional, state, and local rules and court opinions that govern the process of raising government revenue in California. The pressure to raise revenue to cover budget gaps without evoking a new tax revolt is growing in these economic times, which creates a strong incentive to label every revenue increase a fee regardless of its true nature. Traps abound for unwary local governments and taxpayers alike.

Authored By:

David P. Lanferman
(415) 774-2996
DLanferman@sheppardmullin.com

and

Jeffrey W. Forrest
(619) 338-6502
JForrest@sheppardmullin.com

[1] Art. 13C, § 2, subd.(b)

[2] Art. 13C, § 2, subd.(d)

[3] Joseph Henchman and Travis Greaves, Charging Taxpayers for Tax Collection Is a Tax: Weisblat v. City of San Diego, Taxpayer Foundation Fiscal Fact No. 160 (February 2009).

Sheppard Mullin's New Climate Change and Clean Technology Blog

updates@antitrustlawblog.com (Sheppard Mullin) — Thu, 20 Aug 2009 18:57:14 +0000

Please visit our new Climate Change and Clean Technology Blog at www.cleantechlawblog.com.

Affordable Housing: Could California's Inclusionary Zoning Laws be on the Brink of Collapse?

updates@antitrustlawblog.com (Sheppard Mullin) — Tue, 18 Aug 2009 19:53:49 +0000

by James Pugh

On July 22, 2009, the California Court of Appeals issued a ruling that could send California’s affordable housing laws into a tailspin. The case is Palmer/Sixth Street Properties, L.P., et al., v. City of Los Angeles, and it questioned whether cities can impose mandatory affordable housing, also known as inclusionary zoning, requirements on the development of market-rate apartment projects. The Second Appellate District Court believes not.

Specifically, the court affirmed a superior court decision that precluded the City of Los Angeles from enforcing an affordable housing ordinance against a mixed-use project that is being developed by Palmer. The court concluded that, as applied to Palmer’s project, the ordinance conflicts with, and is preempted by, the rent control provisions of the Costa-Hawkins Rental Housing Act ("Costa‑Hawkins"), which allows residential landlords to set the initial rent levels at the commencement of a tenancy. It appears, however, that the battle is not over. Based on recent statements from the City Attorney’s Office, it is likely that the City will petition the California Supreme Court for review of this decision.

The case grew out of Palmer’s 2006 Piero II project in downtown Los Angeles. The project included 350 residential units and 9,705 square feet of commercial space on a 2.84-acre parking lot site. The site previously contained a 60-unit low income apartment hotel that was demolished in 1990. The project was within the boundaries of the Central City West Specific Plan area, which imposes an affordable housing requirement on residential and mixed use projects of more than 10 dwelling units per lot. The City approved the project, but conditioned it to (1) either provide 60 replacement low-income dwelling units or pay an approximately $5,770,930 in-lieu fee; and (2) maintain rent restrictions pursuant to the Specific Plan for at least 30 years. Palmer claimed that these conditions conflicted with Costa‑Hawkins.

The Act provides in relevant part that all residential landlords may “establish the initial rental rate for a dwelling or unit.” Civ. Code §1954.53(a). The court quickly honed in on how this provision of Costa‑Hawkins preempted the Specific Plan’s affordable housing requirements. The court found that the Specific Plan’s affordable housing requirements were “hostile or inimical” to Costa‑Hawkins because they stripped Palmer of the right to establish initial rent rates and effectively locked in rent levels for 30 years. The court felt that the language of Costa‑Hawkins was clear and unambiguous, and therefore the City’s constraints on the project were unlawful.

The City then argued that the in-lieu fee provisions of the Specific Plan were severable and did not conflict with Costa‑Hawkins because it does not mention impact fees. The court disagreed and found that the fee provisions were inextricably intertwined with the Specific Plan’s affordable housing requirements. In other words, the Specific Plan boxed Palmer into either paying for, or building, the affordable units, which is in conflict with Costa‑Hawkins because neither of those options allow the landlord to establish the initial rental rate for the units.

In summary, it appears that the court may have dealt similar affordable housing laws a serious blow, at least to the extent that they may attempt to mandate the dedication or provision of rent-restricted affordable units. Although the court recognized that affordable housing requirements could still apply to certain projects, such as those receiving government support or under contract with a public entity, the ruling appears broad enough to call into question affordable housing programs across California. Adding to the uncertainty, the Fifth Appellate District Court decided the Building Industry Association of Central California v. City of Patterson case in March 2009, which questioned the legitimacy of affordable housing in-lieu fees. Are these recent appellate court decisions the harbingers of substantial change in the way local communities address the provision of affordable housing? It is too early to tell. For now, however, the affordable housing atmosphere is unstable while cities, developers and affordable housing advocates anxiously await the next step in the Palmer case. The City has until August 31 to file its petition to the California Supreme Court.

Authored By:

James Pugh
(213) 617-4284
JPugh@sheppardmullin.com

COURT OF APPEAL LIMITS 'TEXT' REQUIREMENT FOR LOCAL REFERENDUM PETITIONS

updates@antitrustlawblog.com (Sheppard Mullin) — Fri, 14 Aug 2009 19:55:39 +0000

Lin v. City of Pleasanton., ___ Cal. App. 4th ____, No. A121147 (1st App. Dist. 2009)

by James Rusk

A referendum petition challenging the approval of a development plan need not include the text of the plan itself, if the plan was neither attached to the ordinance approving the plan nor explicitly incorporated by reference, the First District Court of Appeal has held. Although the content of the development plan clearly was relevant to a decision on the referendum, the court in Lin v. City of Pleasanton declined to extend the "text" requirement of Election Code section 9238(b) to require that the petition include the development plan, in addition to the text of the challenged ordinance. Expanding the text requirement would force citizens to guess at the documents that must be included in a valid referendum petition—a burden the court found unwarranted, absent "extreme circumstances" that otherwise would render the petition "affirmatively misleading."

Background

After preparation of an environmental impact report, the City of Pleasanton ("City") adopted an ordinance approving a development plan that allowed Jennifer and Frederic Lin to construct a 51-unit residential development on a portion of a 562-acre property they owned within the City. The ordinance contained two exhibits that were incorporated by reference into the ordinance itself: the City's Conditions of Approval for the proposed development, and the findings required by the California Environmental Quality Act ("CEQA"). The development agreement between the City and the Lins was also attached, as an exhibit to the Conditions of Approval. The ordinance referred to the development plan, but the plan itself was neither attached to nor incorporated by reference into the ordinance.

Former city council member Kay Ayala, a member of an association named "Save Pleasanton's Hills," sought to challenge the ordinance approving the development plan. Ayala circulated a referendum petition that included a copy of the ordinance approving the development plan, the CEQA findings and Conditions of Approval, and the development agreement. The petition did not include a copy of the development plan. Ayala obtained the necessary signatures and submitted the petition to the city clerk, who certified it for filing.

The Lins sought, and the trial court granted, a writ of mandate ordering the city clerk to declare the petition invalid on the ground that it violated section 9238 of the California Election Code because it did not contain the development plan approved by the challenged ordinance. Subdivision (b) of section 9238 provides, in part, "Each section of the referendum petition shall contain . . . the text of the ordinance or the portion of the ordinance that is the subject of the referendum." The California courts previously have interpreted the phrase "text of the ordinance" to mean the words of the challenged ordinance itself and any documents physically attached as exhibits or incorporated by reference.

Analysis

In essence, the Lins argued that the referendum petition must include the text of the development plan because the plan was crucial to an understanding of the challenged ordinance and to an informed decision on the referendum. But the court of appeal rejected this reasoning and declined to extend the "plain language" of section 9238, reversing the trial court's decision. "It may well be the case that an informed voter would prefer to review portions of the Development Plan before determining whether to sign a referendum petition that could ultimately result in that Plan being set aside," the court of appeal wrote. "But section 9238 . . . requires the 'text' of the ordinance being challenged, not the inclusion of additional information a conscientious voter might want to know before signing the petition."

In reaching its conclusion, the court distinguished Mervyn's v. Reyes, 69 Cal. App. 4th 93 (1998), which involved a voter initiative to reenact certain portions of the City of Hayward's general plan. In Mervyn's, the initiative petition failed to include the text of the portions of the general plan that were to be reenacted. The Mervyn's court held that the affected portions of the general plan were part of the "text of the measure" and should have been included in the petition, rendering it invalid.

The Lin court did not find the development plan analogous to the general plan sections at issue in Mervyn's. In Mervyn's, the "measure" proposed by the initiative actually consisted of the portions of the general plan that were to be reenacted. Because the petition did not contain those portions, but referred to them only by their titles, "it did not contain the full text of the measure at issue and voters reading the petition would not have known the substance of the law whose enactment was sought." Conversely, in the Lin case, the referendum petition "advised voters of the precise language of the ordinance being challenged and its attached exhibits," despite not including the development plan. (Emphasis in original).

The court found it significant that Mervyn's involved an initiative, which "is drafted by its proponents and is the very law whose enactment is sought," making it reasonable to require that the petition include the full text of the language to be enacted. By contrast, Lin involved a referendum, which "seeks to set aside a law that has been drafted by others" and is therefore constrained by the language that others have chosen. Ayala had no control over the drafting of the ordinance that approved the development plan and, in the court's view, "it would place an unreasonable burden on her and on other referenda proponents to determine whether additional documents that were neither included nor incorporated by reference ought to be included in the referendum petition."

Finally, the court sought to avoid requiring city and county clerks, who are charged with certifying referendum petitions, to make "quasi-judicial" evaluations of the validity of petitions. This could occur, the court feared, if clerks were asked to assess on a case-by-case basis whether documents not attached to or incorporated into the challenged ordinance ought to be included in the petition. Currently, clerks perform only the "straightforward" ministerial task of comparing the text of the submitted petition with the procedural requirements set forth by law.

Conclusion

The court's holding leaves open the possibility that a referendum petition might be required to include material that was neither attached to the challenged ordinance nor incorporated by reference, but only in the "extreme circumstances" in which the failure to include additional information would render the petition "affirmatively misleading." That situation was not presented here, because the text of the ordinance and accompanying exhibits adequately described the project covered by the development plan. Some voters "might have wanted additional information contained in the [plan] itself, but there was nothing misleading about the information that was provided." The case therefore leaves for another day the intriguing question of what municipal ordinance would be so misleading, as enacted, that including its complete text in a referendum petition would leave voters confused regarding the measure sought to be overturned.

Authored By:

James Rusk
(415) 774-3232
JRusk@sheppardmullin.com