San Remo Hotel v. San Francisco (04-340)
Oral argument: March 28, 2005
Appealed From: United States Court of Appeals for the Ninth Circuit
Fifth Amendment, Due Process, Taking Without Just Compensation, Issue Preclusion
In 1981 the City of San Francisco enacted the Hotel Conversion Ordinance ("the HCO") in order to stem the depletion of housing for the poor, elderly, and disabled by controlling the conversion of hotel units from residential to tourist use. The HCO, as revised in 1990, places harsh requirements on the owners of hotels who want to convert their property from residential to tourist use. These requirements include the construction of a new residential unit for each unit that is converted, or a payment to the city of 80 percent of the cost of constructing such a replacement. The owners of the San Remo Hotel sought to convert their hotel from residential to tourist use, and challenged the legality of the HCO under the takings clause of the California constitution. The California Supreme Court upheld the HCO, and the owners of the hotel then challenged it in federal court under the takings clause of the U.S. Constitution. The Court of Appeals for the Ninth Circuit, however, ruled that they were precluded from raising this issue by virtue of the state court's prior ruling.
Is a Fifth Amendment Takings claim barred by issue preclusion based on a judgment denying compensation solely under state law, which was rendered in a state court proceeding that was required to ripen the federal Takings claim?
In 1981 the City of San Francisco ("the City") enacted its first Hotel Conversion Ordinance ("HCO"). The San Remo Hotel v. City and County of San Francisco, 145 F.3d 1095, 1099 (9th Cir.1998) ("San Remo I"). The HCO was designed to stop the depletion of housing for the poor, elderly, and disabled by controlling the conversion of hotel units from residential to tourist use. Id. at 1098. According to the HCO, hotel owners seeking to convert their property were required to seek a permit from the City. Id. at 1099. Permits were granted only if the property owner provided relocation assistance to the displaced hotel residents and replaced the units being converted through one of three methods. See id. In May of 1990, the City enacted a new HCO with harsher controls on the conversion of residential units, including a prohibition on using residential units for summer tourist use. See id.The new HCO also doubled the amount a hotel was required to pay to the city in order to avoid having to construct replacement units. Id.
In 1971, petitioners purchased the San Remo Hotel ("the Hotel") in San Francisco's North Beach district. Id. At the time of purchase, the hotel was zoned for commercial use and was not subject to any restrictions on tourist use. Id. From 1977 to 1983 petitioners leased the hotel to Jean Irribarren. Id. Unfortunately for petitioners, Irribarren spoke English poorly, and when the City conducted its initial survey to determine the use of hotels in the North Beach area, he mistakenly indicated that all of the Hotel's units were residential. See id. This meant that despite the fact that the hotel had initially been zoned for commercial use, it was now subject to the HCO. See id. The petitioners had no notice or knowledge of the survey, or Irribarren's responses. Id. They did, however, indicate in a 1984 annual report to the City that the actual use of the hotel was still as "62 residential units and zero tourist units." Id. In 1987, the City enacted a zoning ordinance that required hotels to obtain conditional authorization before operating as tourist hotels. Hotel owners who could establish a prior non-conforming commercial use of their hotels did not have to obtain conditional authorization. Id. Tourist hotels that had erroneously been classified as residential hotels could not, however, establish prior non-conforming commercial uses for exemption from conditional authorization. Id. Despite the fact that the terms of the HCO thus require the Hotel to be operated for purely residential use, it has arguably been operating as a tourist hotel since the mid-eighties. See id.
In 1990, petitioners applied under the 1990 HCO to convert the 62 residential rooms to tourist use. See id. The City Zoning Administrator objected, noting that under the 1990 HCO any tourist use of the Hotel was prohibited. See id. at 1100. Petitioners then applied for a conditional use permit, but the Zoning Administrator found that the hotel had not been zoned for commercial use. See id. Petitioners appealed their case to the City's Board of Permit Appeals, but they ruled that the hotel was bound by the original survey answered by Irribarren. See id. The Board concluded that the HCO did not constitute a taking because the Hotel's prior disobedience to the zoning laws "was not a prior non-conforming use but a special exception allowed (but no longer) by the Zoning Administrator." See id. With the status of the hotel thus determined as residential, the planning commission issued a conditional use permit that required that the "(1) [petitioners pay] 40 percent of the cost of replacement housing to make up for the loss of the 62 residential units (2) [petitioners offer] lifetime leases to existing long-term tenants; and (3) [petitioners fulfill] other minor conditions." Id. Petitioners appealed to the City's Board of Supervisors, which upheld the conditions for the permit. Id.
Petitioners next brought their case before the Ninth Circuit district court, filing the current action against the City in 1993. See id. Among other things, they alleged that the first condition of the use permit, the 40 percent fee, constituted a taking under the Fifth Amendment of the Constitution. See id. The Takings Clause of the Fifth Amendment provides that private property may not be taken for public use without just compensation. U.S. Const. amend. V. Petitioners advanced two takings theories: (1) that the HCO deprived them of the economically viable use of the hotel, and(2) that the HCO "is not sufficiently related to legitimate state interests." See id. The first claim relied on Lucas v. South Carolina Coastal Council, which held that a land use regulation constitutes a taking when it is so severe that the land has no economically beneficial or productive use." 505 U.S. 1003, 1019 (1992).This case in turn relied on Pennsylvania Coal v. Mahon, which first established the proposition that "while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking." 260 U.S. 393, 415 (1922). The second claim relied on Nollan v. California Coastal Commission 483 U.S. 825 (1987) and Dolan v. City of Tigard 512 U.S. 687 (1994).Nollan held that "[a] development exaction . . . is void as an uncompensated taking unless there is a ‘nexus' between the thing to be exacted and some public impact or problem the development will cause." Roger A. Cunningham et al., The Law of Property §9.32, 682 (2d ed. 2000). Dolan refined the "nexus" test by adding the requirement that there must be a "rough proportionality" between the exaction on the property owner and the impact or problem that the development will cause. See id. at §9.32, 684.
The district court granted the City's motion for summary judgment, and the appeals court concurred. See San Remo I, 145 F.3d at 1100. It held that petitioners' challenge was not ripe, and required plaintiffs to seek compensation in state court. See id. The federal courts of the United States adhere to the ripeness doctrine, under which a court will turn away claims that involve uncertain events that the parties anticipate in the future, but that may not occur, if at all. Wright & Miller, Federal Practice and Procedure, 13A Fed. Prac. & Proc. Juris.2d § 3532.
In state court, petitioners sought (1) an administrative mandate to overturn the City's administrative determination requiring the conditional use permit, and (2) compensation for the taking of private property without just compensation in violation of the California constitution. San Remo Hotel v. City and County of San Francisco, 41 P.3d 87, 90 (Cal. 2002) ("San Remo II").Similar to the Fifth Amendment of the federal constitution, article 1, section 19 of the California constitution provides that: "Private property may be taken or damaged for public use only when just compensation, ascertained by a jury unless waived, has first been paid to, or into court for, the owner." The petitioners specifically refrained from asserting their federal takings claims in state court. San Remo Hotel v. City and County of San Francisco, 364 F.3d 1088, 1093 (9th Cir. 2004) ("San Remo III").
The state trial court denied the petition and sustained a demurrer to the takings claims. See San Remo II, 41 P.3d at 90. A demurrer is a party's pleading that the facts, even if true, are insufficient to state claim for relief and for the adversary to answer. Black's Law Dictionary (8th ed. 2004). The California Court of Appeal reversed, but the California Supreme Court affirmed the conclusion of the trial court. See id. The California Supreme Court held that the state constitution protects a "‘somewhat broader range of property values than the corresponding federal provision, but that it otherwise generally construes the clauses congruently." See San Remo III, 364 F.3d at 1093 (citing San Remo II). Reasoning under Nollan and Dolan, the Supreme Court concluded that heightened scrutiny should not be applied to generally applicable ordinances such as the HCO, and that the "fee imposed by the statute bore a reasonable relationship in both intended use and amount to the perceived problems stemming from a change in the hotel's use" to a tourist hotel. See San Remo III, 364 F.3d at 1093 (citing San Remo II).
Petitioners then brought the case before the federal district court in the Ninth Circuit, asserting their takings claim under the federal Constitution. See San Remo III, 364 F.3d at 1093–94. The district court ruled on several grounds, one of which was that the "takings claims were barred by the doctrine of issue preclusion because the substantive California takings law was coextensive with federal takings law." See id. at 1094. The appeals court affirmed the district court's decision on the grounds of issue preclusion. See id. at 1096. "Issue preclusion applies [in federal court] if the state courts would give preclusive effect to the judgment of the state court and the state and federal substantive law of takings are equivalent." See id. at 1094 (citing Dodd v. Hood River County, 59 F.3d 852, 863 (9th Cir. 1995) and Dodd v. Hood River County, 136 F.3d 1219, 1225 (9th Cir. 1998)). Under California law, a state court would apply the doctrine of issue preclusion to this case because "(1) the issue decided in the prior case [was] identical with the one now presented; (2) there was a final judgment on the merits in the prior case, and (3) the party to be estopped was a party to the prior adjudication." See id. at 1096. The court held that the second part of the Dodd test was met because it found that the takings claim raised under the California constitution was "an equivalent determination" to that raised under the federal constitution. See id. at 1095. The owners of the San Remo Hotel seek review from the Supreme Court in the hope that the Court overturn the Ninth Circuit's decision that the takings questions are the same under the California and federal constitutions.
In Williamson County Regional Planning Commission v. Hamilton Bank, the Supreme Court held that a federal takings claim cannot be adjudicated in federal court until the property owner first seeks, and is denied, compensation in state court. See 473 U.S. 172 (1985). Unfortunately for property owners, many federal courts have since held that these initial determinations have not ripened the takings claim, but instead have extinguished it. See Dodd, 136 F.3d at 1225. These federal courts hold that the state's denial of compensation under state takings laws can act as res judicata against the owner's similar federal claims. If the Supreme Court here affirms the Ninth Circuit's ruling, it will effectively remove federal takings cases from the federal courts. The Court could reverse the Ninth Circuit's ruling by either overturning Williamson County or refusing to apply issue preclusion to the situation.
One of the reasons why issue preclusion has been held to apply in these cases is the perceived interaction between Williamson County and an earlier Supreme Court case, Younger v. Harris 401 U.S. 37 (1971). The Younger Court invoked abstention to prevent defendants in state court criminal challenges from filing federal civil rights claims and interrupting the criminal trial. See 401 U.S. 37 (1971). Abstention involves the postponement of the exercise of federal jurisdiction. Younger abstention requires the dismissal of the federal suit. The Ninth Circuit, in Mission Oaks Mobile Home Park v. City of Hollister, extended the doctrine of Younger abstention to prevent a plaintiff in a state court suit from filing a federal court complaint. See 989 F.2d 359 (9th Cir. 1993). Under a literal reading of Mission Oaks, a federal suit is prohibited after filing in state court, but Williamson County required an initial state proceeding in order to ripen federal claims.
Under one interpretation that would reconcile Williamson County and Younger, a plaintiff can preserve the opportunity to have a federal claim heard in federal court by first suing in federal court and then seeking a Pullman abstention, which permits the suit to be filed in state court under the state law issues. Pullman abstentions, unlike Younger abstentions, do not require dismissal of the federal suit, but only stays the federal proceedings. See Railroad Comm'n v. Pullman Co., 312 U.S. 496 (1941). In suggesting this interpretation, Michael M. Berger notes that this approach, while avoiding Younger abstention, risks sanctions under Rule 11 of the Federal Rules of Civil Procedure, given the Williamson County holding, and is, at best, a waste of time and money. See Michael M. Berger, Supreme Bait & Switch: The Ripeness Ruse in Regulatory Takings, 3 Wash. U. J.L. & Pol'y 99, 114-115 (2000). In this case, Plaintiff San Remo Hotel succeeded in its first appeal to the Ninth Circuit in obtaining a Pullman abstention, but still had issue preclusion applied against it on its return trip to the federal court.
Plaintiff also expressly refrained from raising federal issues in the state court, in order to reserve the federal claims under England v. Louisiana State Board of Medical Examiners, 375 U.S. 411 (1964). Under England, a litigant foregoes his rights (under the abstention doctrine) to submit federal claims to a federal court if these claims are first submitted to a state court for decision. See England, 375 U.S. 411. According to Plaintiff's interpretation of the jurisprudence, issue preclusion would not apply to federal takings claims where the state takings claims were submitted to state court purely to fulfill the requirements under Williamson County, and the plaintiff has specifically reserved his federal claims. This interpretation was endorsed by the Eleventh Circuit in Fields v. Sarasota Manatee Airport Authority 953 F.2d 1299 (1992)and the Second Circuit in Santini v. Connecticut Hazardous Waste Management Services It was previously rejected by the Ninth Circuit, however, in Palomar Mobilehome Park Ass'n v. City of San Marcos, 989 F.2d 362, 365 (9th Cir. 1993), and the Ninth Circuit followed its own precedent in applying issue preclusion to the plaintiffs federal claims in San Remo Hotel III despite their England reservation.
The Supreme Court should overturn the Ninth Circuit's San Remo III holding due to the very nature of the claim at issue, a federal takings claim. A federal takings claims is not only a federal issue, but a federal constitutional issue and should not be removed from the federal courts. See Michael M. Berger, Supreme Bait & Switch: The Ripeness Ruse in Regulatory Takings, 3 Wash. U. J.L. & Pol'y 99 (2000). The framers of the U.S. Constitution granted to the federal courts the judicial power to hear those cases "arising under" the Constitution. U.S. Const. art. 3. § 2. Given that a takings claim arises under the Fifth Amendment of the federal Constitution, such a claim should certainly come under the jurisdiction of the federal courts. If the Court were to affirm the Ninth Circuit's ruling that a state court determination precludes a federal court claim, then the Court would effectively obliterate the opportunity to be heard on a federal constitutional claim in a federal forum.
While the Supreme Court, in its own ruling, Williamson Country 473 U.S. 172 (1985), created a requirement of ripeness, it did not contemplate the removal of federal takings claims from federal courts. Indeed the Williamson Court held that a plaintiff could bring a takings claim in federal court, so long as that plaintiff exhausted the remedy provided in state court, and so long as the state remedy was adequate. After Williamson, a plaintiff could claim a federal takings violation and could avail himself of the federal courts if he has been denied just compensation in state court.
The Supreme Court could reverse the holding in San Remo III by requiring an England reservation, in which a plaintiff must specifically reserve federal claims when asserting a state claim, and then by denying issue preclusion with respect to the federal claim. See the Eleventh Circuit in Fields v. Sarasota Manatee Airport Authority 953 F.2d 1299, C.A.11 (Fla.), (1992)and the Second Circuit in Santini v. Connecticut Hazardous Waste Management Services 342 F.3d 118, C.A.2 (Conn.), (2003). In the alternative, the Supreme Court could overturn Williamson County, and refuse to require that state court adjudication first ripen federal takings claims. See City of Chicago v. International College of Surgeons 522 U.S. 156 (1997) (allowing removal of a takings claim to federal court without mentioning the ripening requirement of Williamson County).
On the other hand, the Supreme Court may affirm the Ninth Circuit's San Remo III holding by affirming the bases for the Williamson County decision. In other words, the Court may hold that the federal takings issue is precluded simply because the factors necessary for issue preclusion exist in this case. On the facts, the question of whether the HCO constituted a takings was fully litigated and determined against Petitioner San Remo Hotel in the state court. Moreover, since California's takings law is essentially coterminous with federal takings law, the Petitioner has had its opportunity to be heard in a judicial forum, and, to counter the argument that a federal claim may never be heard in federal court, the Court may insist that there will always exist those cases where issue preclusion will not apply because the factors involved in the state law determination are sufficiently different from a determination under the federal law.