(CN) - In a major reversal, the full 9th Circuit on Wednesday ruled for the city of Goleta, Calif., in a nearly decade-long battle over a rent-control ordinance for mobile homes.
The 11-member federal appeals panel in Pasadena vacated an earlier finding that the city should pay three mobile-home park owners for limiting how much rent they could charge tenants.
"This case is about far more than rent control on mobile homes: it goes to the heart of a government's ability to make land use decisions on behalf of the public good," said Goleta attorney Andrew Schwartz of Shute, Mihaly & Weinberger in a statement. "The court did the right thing in protecting the rights of cities to make land use decisions, including enacting rent-control ordinances that protect vulnerable populations."
The city adopted the rent-control ordinance in 2002 when it was first incorporated.
An identical rent-control law had burdened the property since 1979, when it was part of unincorporated Santa Barbara County.
Daniel Guggenheim, Susan Guggenheim and Maureen Pierce bought the mobile home park in 1997 when it was still in the county. In 2002, when the city incorporated and carried over the county's ordinance, the Guggenheims sued, arguing that the law amounted to a taking of their property without compensation.
The Guggenheims claimed that rents for mobile home sites in their park would average about $13,000 a year without rent control, instead of just $3,300 a year with the ordinance in place. At the same time, rent control enabled mobile home owners in the park to sell their trailers - which would be worth $14,000 without rent control - for an average of $120,000, according to the ruling.
The Guggenheims initially won summary judgment in federal court after settling with the city over claims at the state level.
After the U.S. Supreme Court's landmark takings decision in Lingle v. Chevron, however, the parties agreed to reopen the case in district court, which then ruled for the city. On appeal, a three judge panel of the 9th Circuit reversed and later agreed to rehear the case before the full circuit.
The full panel vacated the three-judge panel's reversal on Wednesday in a 9-3 decision.
The Guggenheims, who knew before they bought the mobile home park that it was burdened by the county ordinance, failed to show their "investment-backed expectations" were hindered by the law, the majority found.
"Whatever unfairness to the mobile home park owner might have been imposed by rent control, it was imposed long ago, on someone earlier in the Guggenheims' chain of title," Judge Andrew Kleinfeld wrote for the panel's majority. "The Guggenheims doubtless paid a lot less for the stream of income mostly blocked by the rent-control law than they would have for an unblocked stream. The 2002 City of Goleta adoption by reference of the Santa Barbara County ordinance did not transfer wealth from them to their tenants. That transfer occurred in 1979 and 1987, from other landlords, and probably benefitting other tenants."
Kleinfeld added that leaving the ordinance in place would not impair the Guggenheims' investment-backed expectations, whereas cancelling the law would erase any value that the tenants had gained.
"The people who really do have investment-backed expectations that might be upset by changes in the rent-control system are tenants who bought their mobile homes after rent control went into effect," the ruling states. "Ending rent control would be a windfall to the Guggenheims, and a disaster for tenants who bought their mobile homes after rent control was imposed in the '70s and '80s. Tenants come and go, and even though rent control transfers wealth to 'the tenants,' after a while, it is likely to affect different tenants from those who benefitted from the transfer. The present tenants lost nothing on account of the city's reinstitution of the county ordinance. But they would lose, on average, over $100,000 each if the rent-control ordinance were repealed. The tenants who purchased during the rent-control regime have invested an average of over $100,000 each in reliance on the stability of government policy."
The majority was equally unconvinced by the Guggenheims' arguments that the ordinance violated their due process and equal protection rights by treating mobile-home park owners differently from other landlords.
"The ordinance protects mobile home owners, not all renters," Kleinfeld wrote. "Such a purpose does not protect mobile home renters from all market increases in the value of occupancy. It protects owners of mobile homes from the leverage owners of the pads have, to collect a premium reflecting the cost of moving the mobile home on top of the market value of use of the land. This is a legitimate government purpose, related to but distinct from lowering housing prices for all renters."
In a lengthy dissent, Judge Carlos Bea, joined by Judge Sandra Ikuta and Chief Judge Alex Kozinski, argued that the majority had "misapplied" the U.S. Supreme Court's established three-prong test for takings claims by concentrating only on the investment-backed expectations element while ignoring other factors.
"This converts a three-factor balancing test into a 'one-strike-you're-out' checklist," Bea wrote. "Not content to rewrite one binding precedent, the majority ignores the court's recent holding in Palazzolo that an investor can validly expect that a land control measure, in place when he invests, is not necessarily eternal and therefore does not disqualify his claim of regulatory taking."
Bea also questioned the majority's ruling on the Guggenheims' equal protection claims.
"The Goleta ordinance is not a rent-control law for the simple reason that it is not designed to - nor does it - control rents," he wrote. "It does not just miss the mark because of unintended consequences or inefficient administration. Its very structure was designed and intended not to provide housing rent control, but to transfer wealth from mobile home park owners to one group of lucky tenants. The measure we deal with here is a wealth transfer, pure and simple, with none of the features of rent control thought legitimate governmental interests."