sr-031081-13d'3
DATE: March 10, 1981
T0: Mayor and Council Members
FROM: Bill Jennings
SUBJECT: Request for City Attorney's Report on Effect of Judgments
Rendered by Courts Concerning Rent Control Board
h~AR 1 0 191
During the trial of the Baker case, David Shulman (the economist used
by the City and .the Rent Control Board) testified that landlords have
lost millions of dollars because of rent control. The Notice of Intended
Decision by Judge Levine in the Baker case declares that the way in which
the Rent Control Board has calculated rent adjustments is unconstitutional,
at least if such rent adjustments are not based upon the fair market value
of the property.
I have also been informed recently of the judgments in several lawsuits
which were filed only against the Rent Control Board, in which the judge
found that the Rent Control Board has, as a general practice, acted
arbitrarily and unreasonably in connection with petitions for individual
rent adjustments and other proceedings before the Board. Since the United
States Supreme Court has recently held that civil rights actions may be
brought against local governments, even though they have acted in good faith,
the holdings in these various court cases may result in substantial damages
being awarded against the City and the Rent Control Board.
Because of these facts, I request that the Council direct the City Attorney
to prepare a report for presentation at the next City Council meeting
concerning the following points:
1. A summary of the comments made by the Courts in judgments
already rendered against the City or Rent Control Board
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PEAR 1 0 X981
To: Mayor and City Council -2- March 10, 1981
concerning the matter in which the charter amendment is being
enforced by the Rent Control Board.
2. Whether there is any substantial likelihood that actions
based upon civil rights violations or other claims may be
brought against the City or Rent Control Board based upon
their procedures in enforcing the charter amendment.
3. If a substantial verdict is awarded against the Rent Control
Board arising out of its enforcement
could the Rent Control Board require
Monica to pay such judgment through
through a general rent increase? Or
Rent Control Board to raise rents or
in order to pay such a judgment?
of the charter amendment,
the tenants of Santa
the registration fees or
could a court order the
the registration fees
4. If a substantial verdict is awarded against the Rent Control
Board arising out of its enforcement of the charter amendment,
and if the Rent Control Board does not have sufficient funds
to pay such judgment, could the City be required to use its
general tax revenues to pay such a judgment? Could the City
be required to raise taxes in order to pay such a judgment?
5. Does the City Council have any power to ensure that the
charter amendment is enforced in a fair and constitutional
manner?
WHJ:cIs
CA:SSS
Council Meeting 3/11/81
To: Mayor and City Council
From: City Attorney
Subject: Report on Rent Control Litigation
This report responds to Councilmember Jennings' request for
information concerning litigation involving the Rent Control
Board. It also serves to inform the Council and the public about
the basic features of the recent Baker decision. Amore thorough
report will be prepared if Council directs.
I. RESPONSES TO MR. JENNINGS' QUESTIONS
1. What comments have courts made in judgments rendered
against the City and Rent Board?
While some decisions in cases where the City was a party have
held parts of the Charter Amendment unconstitutional, e.9., Nash,
Canon, the judges have not commented upon the Board's enforcement
procedures. The Board's legal staff has informed us that the same
is true in cases where the Board alone was a party to suit.
2. Is there a substantial likelihood that actions alleging
violations of civil rights may be brought against the City or
Board based upon procedures for enforcing the Charter Amendment?
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Yes. There are at least 5 pending lawsuits, and one
additional claim, which allege the City and the Board have
violated the civil rights of persons subject to rent control. The
primary contentions are (1) the City and the Board have
confiscated property and abridged property rights, and (2) the
City and the Board have denied plaintiffs due process of law.
The recent United States Supreme Court decision of Owen v.
City of Independence holds that a City is liable for violations
of constitutional rights caused by its agents, even if done in
good faith. Individuals are not liable for good faith violations.
It is not clear if the Rent Board is a "person" liable under the
Civil Rights Act.
Another Supreme Court case, Agins v. City of Tiburon, holds
that a city may be liable for "inverse condemnation" if it
regulates property in a manner which deprives an owner of
substantially all beneficial use. Thus, if the City is ultimately
held to have confiscated the property of landlords through
enforcement of rent control, numerous actions alleging millions
of dollars in damages can be anticipated.
3. If damages are rendered against the Board, could the
Court or the Board order rents or fees increased to pay them?
This has not happened in any case litigated thus far. The
Board is empowered to charge fees necessary to defray its
reasonable expenses. It is questionable if the costs of a
constitutional violation could be passed on as a reasonable
2
expense. It is unlikely a court would order the Board to increase
rents or fees.
4. If the Board lacks funds to pay a judgment, could the
City be held liable?
Yes. The City is primarily liable for damages for civil
rights violations and for condemnation. The Board is an agency of
the City, and not an independently financed district or other
type of separate corporate entity. No court has ever required a
city to raise taxes; indeed, we are specifically prohibited from
raising taxes except under narrow circumstances, when authorized
by a 2/3 vote of the people.
5. Does the City Council have the power to ensure that the
Charter Amendment is enforced in a fair and constitutional
manner?
Yes. The City Council is empowered to exercise all rights
and duties under the City Charter except those specifically
conferred on other agencies by the Charter. If a portion of the
Charter Amendment is declared unconstitutional, the Council may
take action necessary to avoid the consequences of such a holding
(damages).
Thus, while the Council cannot, under the Charter, regulate
tents, if a final court judgment declares the actions of the
Board to be invalid as a confiscation of property or a denial of
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equal protection or due process of law, the Council may act to
cure the defect and avoid liability to the general fund.
The power of the City to act to prevent a waste of public
funds, in the absence of a final judgment, is more complex. The
Council has adopted an ordinance delegating to the Board
independent control over its financial, personnel, and budgetary
affairs. The validity of this delegation, together with related
questions concerning the allocation of powers between the Board
and other agencies established by the Charter, is the subject of
opinions requested by various City officials and agencies. We
expect these opinions to be prepared before April 1, 1981.
II. THE BAKER DECISION
On March 6, 1981, Judge Richard Lavine issued a "Memorandum
of Intended Decision" in the case challenging the validity of the
rent adjustment provisions of the Charter Amendment and the Board
regulations which implement it. The court ruled that the Charter
Amendment would be confiscatory if it was not interpreted to
allow landlords a fair return on their "property" (as opposed to
"historical investment"). The court held that the concept of
"property" must take into account current fair market value.
Board Regulation 4040, which establishes a formula for
calculating return on investment, was struck down in its
entirety. He ruled the 1979 (78) and 1980 (6.5~) general rent
adjustments granted by the Board were unconstitutionally low. He
struck those provisions of the Amendment which required the Board
4
to consider the "speculative nature" of investment and to
discount forseeable negative cash flows.
Judge Lavine held that the principal defect of the law as
implemented was its abridgment of the Fifth Amendment prohibition
against the taking of private property for public use without
just compensation. The judge also ruled the Amendment violated
the Fourteenth Amendment guarantee of equal protection of the
laws. He further found violations of related provisions of the
California Constitution.
The Court did not issue an injunction or a final declaration
of rights. He read Agins v. City of Tiburon to encourage him to
take action before a "taking" of property occurred "in order to
prevent the imposition upon the taxpayers of Santa Monica of a
liability in a huge sum for compensation to the landlords of any
future "taking" of property." He thus balanced the competing
interests in order to (a) produce a result which is
non-confiscastory to the landlords; (b) prevent the result of an
actual "taking" of real property; and (c) preserve as much of the
Charter Amendment as can be salvaged, to carry through the wishes
of the Santa Monica voters.
Thus, Judge Lavine, having dclared the basic validity of
rent control and delineated those features of the Santa Monica
law which he believed to violate the constitution, reserved final
judgment pending a further hearing. The Board and the City
Attorney were given an opportunity to present a new plan or
regulations to meet the constitutional infirmities set forth in
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the cecision._ If submitted, the flan must Ue filed with tine
court by June i, 1481.
Phe determination of ~,+hat to do in response to the decision
rests with the Rent Control Eoard and the City Council. ~rhe
City Attorney's ot~°ice and the Board's legal staff are
conferring on natter, of litigation strategy; options and
recormiendations caill be fort_ico*7ing.
Pre_~ared by: Stephen S. Stark
Acting City Attorneg