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The Case of the Half-Million Dollar Typo: The Supreme Court Traps Property Owners in a Catch-22


Wednesday, Jun. 22, 2005

In recent years, liberals have often complained that the Supreme Court has erected arbitrary roadblocks to federal court adjudication of civil rights claims. This week, however, the Justices showed that they are equal opportunity pedants, by affording the same shabby treatment to the sort of plaintiff for whom conservatives typically feel sympathy.

In the case of San Remo Hotel v. San Francisco, hotel owners argued that the Court's rules about the timing of property claims deprived them of their ability to have their case heard in federal court. But the Court rejected their argument, holding that there is no right to have a federal claim adjudicated in federal court, rather than state court.

Technically, that may be true. But in the past, when conservative Justices have shut the doors to the federal courts, the Court's more liberal members have criticized their brethren (and sisters) for adopting unduly technical interpretations of federal law. They have argued that rather than blaming Congress, the Court's conservatives should interpret Congress's statutes to permit broad court access.

That same criticism now can, and should, be leveled at the largely liberal group of Justices in the San Remo majority.

Background of the Takings Clause

The Takings Clause of the Fifth Amendment to the U.S. Constitution prohibits the government from taking "private property . . . for public use, without just compensation." Originally a restriction only on federal action, it now applies to all levels of government.

The core application of the Takings Clause is the power of eminent domain. If the government wants to build a railroad line, or create a park, or otherwise use land that is privately held, it may "condemn" --that is, appropriate--the property, but under the Takings Clause, it must pay the owner "just compensation" (typically defined as fair market value) for the property.

The Takings Clause applies not only to pure expropriations, but also to what are sometimes called "regulatory takings." What is a regulatory taking? An example will illustrate the concept.

Suppose I own ten acres of undeveloped land in Montana that I purchased in the hope of building a vacation home. Suppose, further, that the state would like to create a nature preserve on my land and surrounding parcels--thereby rendering my planned vacation home unbuildable.

The state could purchase my land outright in a forced sale--employing the eminent domain power. Or, it could use its power to regulate land use by forbidding any development or commercial use of my real estate. In the latter case, I would retain title to the land, but the state would achieve nearly all of the same goals as it could otherwise accomplish by a full expropriation. Either way, it would get its nature preserve.

If such regulations didn't count as takings, under the Fifth Amendment, the state would always have an incentive to opt for them; after all, regulation doesn't cost the state anything. Moreover, the government could render property much less valuable--even valueless--and there would be no remedy. Accordingly, the Supreme Court has long recognized that the government must sometimes pay just compensation for a Taking, even though the title to property technically remains in private hands.

Sorting out exactly which regulations rise to the level of Takings turns out to be an incredibly difficult task, however. Every regulation of property diminishes the property owner's freedom in some respect. But not every regulation can be deemed a Taking: in the interest of the common good, government must be able to enact some regulations without having to pay everyone whose freedom is thereby diminished.

Supreme Court doctrine governing regulatory Takings has thus become ever more complex. Unfortunately, though, it is not clear that the increased complexity represents an advance over the famously vague and unhelpful formulation of Justice Oliver Wendell Holmes, Jr., who wrote in the 1922 case of Pennsylvania Coal Co. v. Mahon that a regulation becomes a Taking if it "goes too far."

The Facts in the San Remo Case

Like Takings Clause doctrine itself, the underlying facts of the San Remo case were highly complex. At its core, the case involved a San Francisco ordinance that required owners of low-cost rental housing to pay a "conversion fee" if they chose to convert their property into a hotel for tourists.

In 1981, the operator of the San Remo Hotel erroneously reported to the city that all of the rooms of the hotel were being used as residences. In fact, for years the hotel had catered to tourists, in addition to some long-term tenants. The reason for the erroneous report seems to have been a simple good-faith mistake, perhaps a typo.

In 1987, the owners of the hotel reported the error to the city. But they were told it was too late to correct the report. The hotel had been classified as a residential building, and that was that.

Eventually, the San Remo Hotel's owners were assessed a fee of $567,000 to "reclassify" the San Remo as a hotel--even though it had been a hotel all along, at least in substantial part. That was one costly typo.

There followed a flurry of activity in the state and federal courts. The owners of the San Remo argued, among other things, that by forcing them to choose between operating as a low-cost rental apartment building, or paying over half a million dollars to operate as a hotel, the city ordinance effected an unconstitutional Taking.

The Two Procedural Issues that Concerned the High Court

By the time the case was decided by the Supreme Court--twelve years after the original complaint was filed in state court and roughly twice that long since the original fateful typo designating the San Remo as a "residential" hotel--it had been boiled down to procedural issues.

Plantiffs had challenged the San Francisco ordinance "on its face," that is, apart from its particular application to the San Remo hotel. They also challenged it "as applied" to their particular factual circumstances.

While the case was before the U.S. Court of Appeals for the Ninth Circuit, the plaintiffs asked that court to abstain from resolving the facial claims. They pointed out that parallel litigation in state court might result in a ruling on state law issues that would render resolution of the facial federal Takings claim unnecessary. The Ninth Circuit agreed to abstain.

What about the "as applied" claims? The federal appeals court originally said that these claims were not "ripe." Under the Supreme Court's 1985 decision in Williamson County Regional Planning Comm'n v. Hamilton Bank of Johnson City, a plaintiff challenging state regulation as applied does not have a ripe Takings claim until the plaintiff has applied to the state for just compensation and been denied. This principle is said to implement the text of the Fifth Amendment: If the state does ultimately provide compensation, then the plaintiff's property will not have been taken "without just compensation."

With no live federal claims, in the mid-1990s, the plaintiffs took both their facial and their as-applied claims to state court. There, they lost.

So the plaintiffs returned to federal court. But whereas before they had been told that they were too early, now they were told that they were too late. Because the state courts had already resolved all of the issues in the case, the federal courts would not reconsider the claims.

The Plaintiffs Cry "Catch-22"

The fact that the plaintiffs were deemed to have lost their facial claims is not especially troubling. As the Supreme Court explained, the appeals court only told the plaintiffs to go to state court on the facial claims because that is what the plaintiffs wanted. These claims were ripe when they were originally filed and the federal court would have considered them at the time had it not been for the plaintiffs' own desire that it abstain.

But what about the as-applied claims? How could the federal court tell the plaintiffs to go to state court as a prerequisite to federal adjudication, only then to say that satisfaction of this prerequisite effectively ended the case? If the case were a banana, it would have gone from green to rotten--with no time at which it could be deemed edible.

With respect to the as-applied claims, the Supreme Court said that its hands were tied by a federal statute called the Full Faith and Credit Act. That law requires federal courts to give the same effect to a judgment in a case as the state court that rendered the judgment would give it. And here, the Court said, California would treat its rulings on the plaintiffs' state law claims as resolving not only those claims, but their similar federal law claims, as well.

Why? Because Section 19 of Article 1 of the California Constitution contains a state Takings Clause that is worded similarly to, and has been interpreted by the California courts as identical to, the federal Takings Clause. For this reason, the Supreme Court said, when the California courts resolved the San Remo plaintiffs' state claims against them, they necessarily made all the factual and legal determinations needed to dispose of the federal claims as well--even though the plaintiffs did not expressly assert any federal as-applied claims in the state courts.

Put another way, there was no reason for the federal as-applied claims to be heard in federal court, for there was nothing left for the federal court to decide: The state court had already decided everything that mattered to both the state and federal claims.

The Justices' Defense of the Catch-22

The plaintiffs objected vainly to the Catch-22 to which the Court's ruling subjected them and others like them. Based on the Williamson County ruling, plaintiffs must bring their claims for compensation to state court before they can file an as-applied federal Takings claim in federal court; but if they bring their claims to state court and lose, the door to federal court is barred, at least in states like California, where state Takings Clauses (and the precedents rendered thereunder) mirror their federal counterparts.

Doesn't the Court's holding in San Remo then convert a prerequisite into a prohibition? Yes, said the Supreme Court--while advancing three dubious arguments for that result.

First, the Justices said that there is no right to have federal claims heard in federal court. Writing for the majority, Justice Stevens cited the 1980 case of Allen v. McCurry. There, the Court said that a civil rights plaintiff who unsuccessfully moved to suppress evidence in a state criminal trial can be barred from relitigating that issue as an original matter in the federal courts.

But McCurry itself has been rightly criticized for depriving plaintiffs of a federal forum, and furthermore, the case is not strictly analogous. In McCurry, it is the accused's decision to bring a suppression motion in state court that bars the later federal action; in contrast, in San Remo, it is the Supreme Court's own rule--the one announced in Williamson County--that requires the plaintiff to go to state court first.

The second argument advanced by Justice Stevens was that the Court's hands were tied by Congress. The Court lacks the power, he said, to simply make up exceptions to the Full Faith and Credit Act.

That's fair enough, but this answer overlooks the fact that the Court itself, in a real sense, simply made up the Williamson County requirement that plaintiffs first present their as-applied Takings claims to state court. That requirement does not, after all, literally follow from the language of the Takings Clause. It was the Court's Williamson County decision, not the language of the Constitution, that treated the failure to pay just compensation as occurring only after a plaintiff has sought that compensation--rather than from the moment the regulation or exaction was applied, and the right to compensation thus could have been said to come into existence.

So the Court didn't have to countermand Congress by making up exceptions tot the Full Faith and Credit Act. Instead, having fashioned the Williamson County requirement in the first place, the Court could also, if it so chose, weaken it, as Chief Justice Rehnquist suggested in a separate opinion in San Remo.

The Court might have weakened Williamson County by saying something like this: A federal court defendant may demand that a plaintiff bringing an as-applied Takings Claim first provide the state authorities with an opportunity to pay just compensation. But a defendant who so demands thereby waives the ability to use the state court judgment later to preclude litigation of the federal issue in federal court.

Taking this route, the defendant would make a choice, from which it presumably hoped to gain some advantage, and then suffer the consequences of that choice--an outcome that is arguably fair. Under the route the Court actually took, in contrast, the plaintiff makes no choice, and suffers anyway: He's forced into state court, and forced, by going there, to lose his federal forum.

The third argument Justice Stevens offered for rejecting the plaintiffs' position was simply a disguised version of the first, largely unpersuasive, argument. He wrote: "we reject petitioners' contention that Williamson County forbids plaintiffs from advancing their federal claims in state courts." He contended that a plaintiff bringing an as-applied claim can argue in state court that he's entitled to compensation under state law, and simultaneously argue in the alternative that, if he is not entitled to such compensation under state law (including the state's Constitution), he thereby suffers a Taking contrary to the federal Constitution.

That's a fair point--but it concerns what the plaintiff can argue while in state court, not the distinct question of whether he's being forced into state court, and barred from federal court. It is hard to see how the availability of state court review of federal Takings claims responds to the objection--lodged by the San Remo plaintiffs--that they had been deprived of a federal forum. Hard to see, that is, unless one falls back on Justices' Stevens' argument that there is no right to a federal forum in the first place.

Fighting Substance with Form

Liberals tend to dislike regulatory takings claims, and with good reason. They can be, and sometimes have been, used to block environmental and other regulations of property use in ways that frustrate important objectives of the modern state.

For instance, in San Remo itself, the facial claims, which do not rely on the original misclassification of the hotel, pose a threat to government's ability to provide affordable housing. These claims contend, in effect, that the government cannot require a rental property to remain a rental property--rather than being converted into a hotel--unless it pays the landlord for the loss of the chance to make an apartment building a hotel.

If correct, these claims would thus limit the government's ability to maintain, by regulation, a large rental housing stock--and thus an affordable market--in rental housing. Those who predictably would be hurt would be people stretching to afford to rent; those helped would be people wealthy enough to not only rent or buy, but also to avail themselves of hotel rooms--such as business travelers and tourists.

Potential results like these make it understandable why the Court's most liberal members--all of whom (plus Justice Scalia) joined the majority opinion in San Remo--would be unsympathetic to regulatory takings claims. Broadening the Takings category inevitably benefits property owners at the expense of the broader, and poorer, public.

But the Justices' views of the underlying merits of the litigation should not be the basis for formulating procedural rules that shut the doors to the federal courts. Ironically, the San Remo decision was justified by reference to earlier cases denying civil rights claims that liberals would find sympathetic. So, too, we may expect that in future cases, San Remo itself will be invoked as support for closing the federal courthouse doors to plaintiffs for whom this week's majority may feel greater sympathy. He who distorts procedural law to achieve substantive ends may find that his decision returns to bite the hand that wrote it.

Michael C. Dorf is the Michael I. Sovern Professor of Law at Columbia University in New York City. His book, Constitutional Law Stories, is published by Foundation Press, and tells the stories behind fifteen leading constitutional cases.

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