WHAT PROPOSITION 90 MAY MEAN TO CALIFORNIA

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1 WHAT PROPOSITION 90 MAY MEAN TO CALIFORNIA by Ken MacVey 1 The U. S. Supreme Court s Kelo case ignited a nation-wide firestorm of controversy over eminent domain. It inspired calls for eminent domain reform throughout the country. California was no exception, even though the Kelo decision itself pointed to California as a state where the type of situation in Kelo did not apply and cited cases in California on how the courts are capable of curbing eminent domain abuse. 2 Anita Anderson, funded by a millionaire in New York, sponsored a voter petition drive to place the self-styled Protect Our Homes Act on the ballot. This initiative measure received enough voter signatures to qualify as Proposition 90 on the November 7, 2006 ballot. This measure proposes to amend Article I, Section 19 of the California Constitution. This provision of the State Constitution governs eminent domain and inverse condemnation matters. If Proposition 90 becomes law, it will dramatically change eminent domain in California and may have major legal and financial impacts on pending eminent domain proceedings and public projects. But what is not widely appreciated is that this measure would also dramatically affect other areas of law not traditionally associated with eminent domain. Because of the expansionary definition of regulatory takings proposed in the measure, the traditional police power of government, at all levels, could be drastically constrained. Everything from land use to environmental protection and business regulation would be affected. The measure would become law upon voter approval by a simple majority. It would immediately apply to pending eminent domain actions. The regulatory taking provision would apply prospectively to future governmental actions. In this paper we will analyze provisions of the measure in the order they appear in the measure and assess their legal impact, initially focusing on eminent domain and closing with a focus on regulatory takings. If Proposition 90 becomes law, especially with its redefinition of regulatory takings, it will have a vast but incalculable impact on all public agencies, even those which do not have or use the power of eminent domain. It has implications and consequences beyond the issues in the Kelo case that was its purported inspiration. It has the potential to change every level of state government in California as we know it. 1 Kendall MacVey is a partner in the law firm Best Best & Krieger LLP. The views and opinions reflected in this article are solely his and do not necessarily reflect the views of Best Best & Krieger or any other member of the firm. This paper is for general informational purposes only and should not be construed as legal advice. 2 Kelo v. City of New London (2005) 545 U.S.. For the references to California, see footnotes 17 and 23 in the decision.. -1-

2 . Overview of Proposition 90 s Statement of Findings and Purpose Proposition 90 contains a statement of findings and a statement of purpose. These statements are designed to give guidance in interpreting the substantive provisions of the act. Unfortunately, these statements, and the substantive provisions, are so poorly drafted it is unclear how a court may interpret many of the substantive provisions. For example, the statement of findings asserts that government has undermined private property rights through an excessive use of eminent domain power and the regulation of private property for purposes unrelated to public health and safety. Section 1 (b). Putting aside the assumption of eminent domain abuse, this finding incorrectly assumes that eminent domain and governmental regulation historically focused exclusively on public health and safety. Eminent domain traditionally has been used for additional purposes, such as to build schools and roads. Governmental regulation can address issues other than health and safety, such as protection against fraud or monopoly. The statement of purpose also limits eminent domain to projects of public use. It cites examples of such projects, including road construction, creation of parks, and zoning. Sec. 2(a). Notably it also states that public use projects may use eminent domain for arrangements and contracts between government and private entities. It cites as examples of such arrangements private toll roads and privately-owned prison facilities. Sec. 2(b). It is not clear, as will be discussed, to what extent these arrangements and examples are actually compatible with other provisions of the measure. The statement of purpose further provides that the measure shall apply to any eminent domain proceeding brought by a public agency not yet subject to a final adjudication. Sec. 2(d). In other words, the day it is approved, the measure would apply to any pending eminent domain proceeding. On the other hand, the provision regarding regulatory takings applies only to future enactments: No statute, charter provision, ordinance, resolution, law, rule or regulation in effect on the date of enactment that results or have resulted in a substantial loss to the value of private property shall be subject to the new provisions of Section 19 of Article I. Sec. 2(d). In other words, existing ordinances and statutes in theory will not trigger a regulatory taking as defined under the measure, only future ones would. However, any amendment or supplemental enactment potentially could trigger a regulatory taking claim. Next we will review the proposed language that would amend Article I, Section 19 of the California Constitution. The Requirement of Stated Public Use The measure would add to Section 19 (a) Article I the following highlighted language: Private property may be taken or damaged only for a stated public use... Sec

3 The purpose, meaning, and implications of these provisions are unclear. Formal eminent domain proceedings by statute already require a statement of public use. 3 Takings by inverse condemnation by their very nature almost never involve a stated public use. The measure would also add to the State Constitution that All property that is taken by eminent domain shall be used only for the stated public use. Sec. 3. It further provides that if property is taken by eminent domain and is no longer used for the stated public use, the former owner or any successors are to be offered the right to reacquire the property at its tax assessor base value at the time of the condemnation. This appears to have at least two practical effects. First, use of property acquired by condemnation is limited to the stated public use. If, for example, a school district acquires property for a school, probably the property can only be used as a school and not for some other purpose, such as for administrative facilities. If a city acquires property for stated road purposes, it potentially may be unable to use the street for other unstated purposes, such as drainage, water, sewer, or cable. Second, it would supersede surplus property statutes and regulations for property acquired by eminent domain, creating for the former owner a perpetual reversionary interest in the property. The Prohibition of Takings for Private Use and the Redefinition of Public Use Section 19(a) of Article I of the California Constitution would also be amended to read: Private property may not be taken for private use. Sec. 3. Private use is not defined and what it means is unclear. Investor owned public utilities, such as Southern California Edison Company, are private entities that currently have the power of eminent domain. It is unclear whether this use of eminent domain would be deemed a prohibited private use. There are two references to public utilities in the measure, none of which addresses the question. 4 The measure also states that property taken by eminent domain shall be owned and occupied by the condemnor, another governmental entity, or any entity contracting with the government to perform a public use project. It goes on to state that public use shall not include the direct or indirect transfer of any possessory interest in property taken in an eminent domain proceeding from one private party to another private party unless that transfer proceeds pursuant to a government assignment, contract or arrangement with a private entity whereby the private entity performs a public use project. Sec. 3. As noted above, the statement of purpose contemplates the use of eminent domain by which title is transferred to a private entity, such as for private toll roads and privately owned prisons. What does this do to the use of eminent domain for redevelopment when the property is 3 See, e.g,, Section (d)(1) of the California Code of Civil Procedure. 4 It also appears that Proposition 90 would eliminate certain protections private property owners now have. If a property does not have utility service available to it an owner of private property has the power of eminent domain to provide service to the property upon a showing of great necessity. Section 1001 of the California Civil Code. It is unlikely that this provision would survive if Proposition 90 becomes law because this provision entails private use. -3-

4 being transferred to a private developer? Arguably, the eradication of blight is a public use and eminent domain would be allowed in such circumstances. The measure states that Nothing in this section shall prohibit the use of condemnation powers to abate... blight... provided those condemnations are limited to abatement of specific conditions on specific parcels. Sec. 3. Potentially, this may require that particular parcels be blighted in order to use eminent domain to transfer property to a private developer. At the same time public use is redefined by the measure to have a more narrow meaning than the term public purpose; its limiting effect prohibits takings expected to result in transfers to non-governmental owners on economic development or tax revenue enhancement grounds, or for any other actual uses that are not public in fact, even though these uses may serve otherwise legitimate public purposes. Sec. 3. This language seems to preclude consideration of economic development or tax revenue enhancements when using eminent domain that results in transfer of the condemned property to a private party. Housing authorities arguably may be able to use eminent domain to acquire property that will be transferred to a private party to develop housing, such as for low and moderate income housing, because this would be deemed a contractual arrangement with a private entity to operate a public use project. None of this is clear, however, because of the vagueness of the definition of public use project, the redefinition of public use, and the prohibition of using eminent domain for undefined private use. What is clear is that if the initiative becomes law, the question of whether eminent domain can be properly used for projects in which the acquired property is transferred to a private party or aimed principally at benefiting a private party will be the subject of lengthy litigation. The Immediate Impact on Pending Eminent Domain Proceedings Upon voter approval the initiative will apply immediately to all eminent domain actions that are not finally adjudicated. An eminent domain matter will not be deemed finally adjudicated until the statutory period for all appeals of the judgment has passed. If, for example, a case is on appeal, one possible reading of the initiative would require that all the changes required for eminent domain proceedings would apply to that case. Practically, this could require retrial of the matter in accordance with the new law. One provision in the initiative states that Unpublished eminent judicial opinions or orders shall be null and void. Sec. 3. The rationale or purpose for this provision is unknown. Its potential impact is significant. It is safe to say that, as in all court proceedings, at least 99% of opinions and orders in eminent domain cases are not published. Currently, only appellate decisions are published, and only a small percentage of cases on appeal are ever published. In eminent domain cases, trial judges constantly issue rulings and orders. Most notably, condemning agencies will obtain orders for prejudgment possession that allow the agency to take possession in order to proceed with the project without awaiting final adjudication. If read literally, the initiative upon voter approval would render all orders for possession null and void in pending eminent domain cases because such orders are not -4-

5 published. This would be true even for projects already constructed or under construction. Perhaps the provision could be interpreted to apply only to the appellate level and therefore it would not affect orders for immediate possession. Unfortunately, the provision does not explicitly state it applies only to appellate opinions and orders. The Determination of Public Use by Jury The measure provides that a property owner has the right to a jury determination as to whether the taking is actually for a public use. Sec. 3. Under existing law all such determinations are considered a question of law for the judge. The intent behind inserting the word actually is not clear. It may mean that this jury determination is limited to the question whether there is some ulterior purpose of serving a private party. Or it may mean that all questions of whether a use is a public use is a question for the jury. Under either interpretation, the provision would increase the prospect of right to take challenges to public works projects. Because one public works project can involve multiple parcels, one project could face multiple challenges in which the success of one challenge could undermine or delay the project. The Redefinition of Just Compensation and Fair Market Value The measure would require that a condemning agency give the property owner copies of all appraisals prior to the agency s occupancy. This would appear to include appraisals upon which offers were never made. The measure would change existing principles of eminent domain valuation. It would prohibit consideration of dedication. Under existing law, if the highest and best use of the acquired property requires a use that would trigger dedication to allow for that use (such as to alleviate traffic impacts for a commercial development), a property owner cannot claim that the property to be dedicated should be valued at this highest and best use. Otherwise, the courts have held, this results in a windfall to the owner who gets compensated for property that would never be put to that highest and best use. This measure would overturn that principle and require payments not now required by law and not usually made in normal private purchases. Under existing law, fair market value of the property to be acquired is not to be valued based on the condemnor s need for the property. The measure would change this fundamental principle that goes back to the 1800 s. 5 It states that If private property is taken for any proprietary governmental purpose, then the property shall be valued at the use to which the government intends to put the property, if such use results in a higher value for the land taken. Sec. 3. It is not clear what proprietary means here, but there is an old line of cases that 5 See, e.g., San Diego Land & Town Co. v. Neale (1888) 78 C 63, 75: [I]t seems monstrous to say that the benefit arising from the proposed improvement is to be taken into consideration as an element of the value of the land.. -5-

6 would suggest that it refers to business activities that generate revenue. For example, it would appear that if a governmental agency is acquiring property for a toll road, then the property should be valued at that use if it results in the highest possible price. Although the statement of purpose expresses its intent to allow eminent domain for private toll roads, as a practical matter eminent domain may be pointless because the property could be valued based on the prospective toll road revenue. This point has particular significance with respect to redevelopment and other projects that involve ultimate property transfers to a developer. The question is whether such projects would be deemed involving a taking for governmental proprietary purposes. It could be argued that such projects do not involve a governmental proprietary purpose. But if they are found to be takings for such purposes, the project could practically be in jeopardy because the property could be valued based upon the projected use by the developer. The measure also redefines just compensation as that sum of money necessary to place the property owner in the same position monetarily, without any governmental offsets, as if the property had never been taken. Sec. 3. This phrasing regarding the same position monetarily could be interpreted narrowly or broadly. Existing eminent domain case law uses similar definitions of just compensation. 6 On the other hand, it could be interpreted broadly, incorporating consequential damages, such as lost income, relocation costs, or even speculative uses of the property. What is clear is that the latter part regarding governmental offsets would prohibit using benefits of a project to offset severance damages. For example, a road might greatly raise the value of the remaining property but that enhancement could not be considered in offsetting severance damages, as is the case under existing law. 7 Just compensation is also refined to include compounded interest and reasonable costs and expenses actually incurred. Compounded interest on the award is already normally included in the award. However, it is not clear what reasonable costs and expenses actually incurred entails. The measure does not specify for what purpose the costs and expenses are incurred, whether it includes costs and expenses incurred with respect to the acquisition or to any proceedings regarding the acquisition, or both. For example, does this include relocation costs? Does it automatically include expenses for appraisers and attorney fees? It is anticipated that property owners will ask for the broadest interpretation of the provision. Since these items would be defined as part of just compensation, it would also appear that they could be subject to jury trial because the parties are entitled to a jury trial on the issue of just compensation. The measure also redefines fair market value to be the highest price the property would bring on the open market. Sec. 3. Current law focuses on the highest price that a fully informed buyer and seller under no undue pressure or urgency to buy or sell would agree to. 8 It appears that what a misinformed and pressured buyer would pay for property may become relevant if it results in the highest price. Ironically, this redefinition of fair market value could also hurt property owners. 6 See, e. g., U. S. v. Reynolds (1970) 397 U.S. 14, See Los Angeles County Metropolitan. Transportation Authority v. Continental Developmental Corp. (1997) 16 C 4th See, e.g., Section of the California Code of Civil Procedure. -6-

7 Under existing law, special use property for which there is no market, such as certain church or special nonprofit property, is to be valued by a method that is fair and equitable even if the value otherwise would be lower under the traditional definition of fair market value. 9 This measure would abolish that rule. A non-profit organization could invest $1,000,000 in special improvements which has no value to anyone else and would fetch little or nothing in the open market. The nonprofit probably would be unable to resort to existing law that provides for a higher award of just compensation. It should be noted that the definitions of fair market value and just compensation and the new principles of valuation required by the measure are not consistent. For example, ignoring dedication issues or valuing the property based upon governmental proprietary use is probably incompatible with valuing the property based on what it would fetch in the open market. The Expansion of Regulatory Takings As significant as the proposed changes discussed so far are, perhaps the most significant of all is the measure s proposed redefinition of regulatory takings. Under existing state and federal law, under certain limited circumstances governmental regulation can be deemed to result in a taking of property requiring the payment of just compensation even if there is no physical taking. The measure would redefine regulatory takings in a manner that has never been defined before anywhere, anytime in this country. The measure states: Except when taken to protect public health and safety, damage to private property includes government actions that result in substantial economic loss to private property. Examples of substantial economic loss include, but are not limited to, the down zoning of private property, the elimination of any access to private property, and limitations on the use of private air space. Government action shall mean any statute, charter provision, ordinance, resolution, law, rule or regulation. Sec. 3. First, except for consideration of public health and safety, no longer is the rationale or the circumstance of the government action pertinent. No matter how needed or reasonable the action is, if it results in substantial economic loss to private property liability for payment of just compensation is automatic and mandatory. The defense of justifiable exercise of police power would be abolished. The traditional factors analysis in the Penn Central 10 case would no longer have much, if any, bearing in regulatory takings cases as a matter of state constitutional law. Second, substantial economic loss is not defined. It is unknown, for example, whether if it involves a 10, 20, 30% diminution in value or any absolutely large amount of economic loss (for example, is a one percent diminution in value of a one billion dollar property 9 See Section 824(a) of the California Evidence Code. 10 Penn Central Transportation Co. v. New York City (1978) 438 U.S

8 a substantial economic loss?). What is clear is that it will no longer be necessary for an owner to prove a loss of substantially all economic viable use to establish a taking. 11 Third, the definition is not limited to real property, it includes all private property. 12 This would include losses to intangible business property caused by any government action at any level of government. It would include personal property, such as automobiles. This provision would apply to environmental, land use, and business regulation if it is deemed to result in a substantial economic loss to private property. Potentially this could include animal welfare protection measures, adoption of general or specific plans, environmental protections for endangered species, historic preservation, minimum wage and worker regulations, zoning, consumer protection measures, gambling prohibitions, adult entertainment restrictions, subdivision map conditions, securities and accounting fraud measures, rent control, usury bans, antitrust and unfair competition laws, banking regulations, and much more. Ironically, it could even apply to laws that de-regulate industry and open up previously protected businesses to new competition. In other words, any governmental action as defined in the measure that can be said to result in substantial economic loss to private property would trigger the requirement to pay just compensation. It would even apply to criminal laws. It is difficult to imagine any governmental action of any significance that would not trigger a claim by someone for just compensation. Taken literally, the measure would apply even to tax increases, although we are skeptical that the courts would interpret the measure to apply in that context (if not for the practical reason that taxes might have to be raised to pay for the new regulatory takings claims). The exceptions are limited. There is an exception for takings to protect public health and safety. This phrase is undefined. But it should be noted that the phrase states public health and safety not public health or safety. It would appear that a showing of both elements must be made to qualify for the exception. It is also unclear whether a property owner could still argue that purported public health and safety measures are not really aimed at protecting public health and safety and therefore the exception does not apply. There is an exception for declared states of emergency, a rare occurrence. There is also an exception regarding public utilities. But even this exception is limited: Nothing in this section shall prohibit the California Public Utilities Commission from regulating public utility rates. The PUC does more than regulate rates, it regulates other aspects of public utilities. 13 As noted earlier, the regulatory takings provision applies prospectively, not to existing government actions as defined. But new government actions, potentially including any supplemental or amending actions, would be subject to potential regulatory takings claims. The measure states that Any statute, charter provision, ordinance, resolution, law, rule or regulation in effect on the date of enactment that is amended after the date of enactment shall continue to be exempt from the provisions added to this section provided that the amendment both serves to promote... [its] original policy and does not significantly broaden the scope of application [of the provision]... being amended. Sec. 6. It would appear, for example, that an amendment 11 See, e.g., Buckley v. California Coastal Commission (1998) 68 CA 4th 178 for a discussion of this test that mirrors federal constitutional law. 12 The recent attention-getting Oregon initiative that expanded the definition of regulatory takings, Measure 37, was confined to land use regulation. 13 See, e.g., Section 761 of the California Public Utilities Code, which gives the PUC the authority to regulate the quality of services provided by a utility. -8-

9 that raised the minimum wage or designated a new endangered species could trigger a takings claim because the amendment could be deemed a broadening of the scope of application. The regulatory takings provision, simply put, is sweeping. It imposes the risk of catastrophic economic liability on every level of government throughout California regarding future legislative and executive actions on virtually any subject. Overall Impact This measure applies to the State, its political subdivisions, agencies, any public or private agent acting on their behalf, and any public or private entity that has the power of eminent domain. Sec. 3. If the measure becomes law, it will have an immediate impact on pending eminent domain cases. It could result in their dismissal even for projects already built. For pending eminent domain cases, it will result in increased costs that were never contemplated or budgeted. Public projects for roads, water, sewer, power, blight eradication, flood control, levees, housing, and schools will be more difficult, take longer, and cost more. With respect to any future governmental actions as defined in the measure, it is likely that the measure will trigger costly takings claims regarding subjects having nothing to do with eminent domain, such as consumer protection or adult entertainment laws. For that reason, there will be a disincentive to change the legal status quo. Despite this chilling effect on future enactments, some future government actions may be mandatory, such as updates of city or county general plans. 14 In other words, inaction is not necessarily an option. 14 See, e.g., Section 65103(a) of California Government Code. -9-

10 SUMMARY OF PROPOSITION 90 Eminent Domain Limits use of property acquired by eminent domain to stated public use If no longer so used ex-owner gets right to reacquire Prohibits use of eminent domain for private use, which is undefined Redefines public use not to mean public purpose Under limited circumstances eminent domain may be used to transfer property to a private party will limit or prohibit at least to some degree transfer to developer for redevelopment Requires all agency appraisals to be given to property owner Gives jury right to determine whether there is a public use Changes eminent domain valuation rules generally in favor of property owners Redefines just compensation e.g., benefits would no longer offset severance damages Redefines fair market value to mean what the property would get in the open market Renders void all unpublished eminent domain opinions and orders appeal Upon approval, applies to all pending eminent domain proceedings, including cases on Regulatory Takings Broadly expands regulatory takings to government actions Except for public health and safety, any government action that results in substantial economic loss to private property is a compensable taking Substantial economic loss to private property is undefined Not limited to real property, applies to all private property Prospective, applies to future government actions Initiative applies to all levels of government: State, its political subdivisions, agencies, any agent, and any public or private entity that has the power of eminent domain