Merry-Go-Round to feds: Drop dead!

If you rely on John Knox White (or his online amanuensis) for legal advice, you can stop reading here.

Otherwise, the Merry-Go-Round has a wager to make:

The federal General Services Administration (“GSA”) is threatening to bring an eminent domain action against the State of California to take over McKay Avenue, the state-owned street that provides access and utilities to the federally owned 3.89-acre parcel known as “Neptune Pointe.”  If the GSA follows through on its threat, the GSA should lose.

And we’ll even make it a daily double:

A citizens’ group known as Friends of Crown Beach is circulating a petition to require the City of Alameda to re-zone the Neptune Pointe parcel from residential to open space.  Opponents of the initiative like Mr. Knox White have stated publicly – all right, he’s tweeted to his many Twitter followers– that, if the initiative passes and the property is re-zoned, the City “likely” will be socked with a $3 million judgment.  In fact, if the GSA sues, it should lose that case, too.

Now, we don’t pretend to possess Mr. Knox-White’s powers of prognostication about litigation outcomes.  So maybe we ought to explain the basis for our bet.

First, the undisputed facts:

• In 1942, the federal government developed 100+ acres of land it owned along Alameda’s southern shore as the U.S. Maritime Officer Training School;

• In 1961, the feds conveyed a portion of this property, including Crab Cove and what is now the Robert W. Crown Memorial State Beach, to the State for use as a public park;

• The conveyance included McKay Avenue, in which the federal government reserved an easement for access and utilities to serve 7.6 acres of property it continued to own;

• In 2004, after having used the retained property as offices for the Department of Agriculture (“USDA”), the GSA concluded that it no longer needed the entire parcel; it decided to consolidate USDA operations in the northern portion and to dispose of the remaining 3.89 acres, which it renamed “Neptune Pointe”;

• In 2008, the voters in Alameda County passed Measure WW, which, among other things, designated $6.5 million for the East Bay Regional Parks District to use at Crown Beach, including acquiring “appropriate surplus federal property if it becomes available”;

• In June 2011, the GSA put Neptune Pointe up for auction (since we’re limiting ourselves to undisputed facts, we’ll skip the contentious issue of whether the GSA should, or did, offer the parcel to the EBRPD and on what terms);

• The high bidder was a residential developer, Tim Lewis Communities, which offered $1.8 million for the property; after further negotiations, Tim Lewis agreed to increase its offer to $3.085 million in exchange for a deferred closing;

• In October 2011, Tim Lewis asked the City of Alameda to re-zone Neptune Pointe from APG (Administrative Professional with a Government Combining Zone) to R-4 (Neighborhood Residential);

• In July 2012, the City complied with the request and re-zoned the property to residential with a multi-family overlay.

Now to the potential lawsuits.  The suit threatened by the GSA over McKay Avenue is called a condemnation action.  Any suit by GSA over the re-zoning would be labeled an inverse condemnation action.  (Only the federal government, as owner of the property, would have standing to sue for inverse condemnation; Tim Lewis, as the potential buyer, would not).  Common to both cases is the interpretation and application of the Takings Clause of the Fifth Amendment to the U.S. Constitution: “nor shall private property be taken for public use, without just compensation.”

We’ll start with the condemnation action.

The GSA’s threat has a curious history.  Back in August 2013, the GSA put out an “Announcement” that “the United States has initiated eminent domain proceedings to secure ownership of McKay Avenue . . . .”  In fact, the federal government had not filed suit at the time.  Indeed, to our knowledge, it hasn’t filed one to this day.  Instead, after months of quiescence, the U.S. Department of Justice recently informed the state Attorney General that the feds “intend to commence condemnation” any day now.

Ah, the AG.  When the GSA made its first threat to sue, the Deputy Attorney General wrote to a DOJ environmental lawyer explaining why an eminent domain action was a bad idea:

In light of the highest and best use of this excess property, it becomes difficult to discern how the United States District Court or the Ninth Circuit Court of Appeals will view the taking of State of California property — for the sole purpose of facilitating the sale of land to private developer Tim Lewis Communities (“TLC”) — as a public use or necessity.  But even more to the point, we fail to see how GSA will ever convince a federal court that a street and sidewalk already devoted to a “public use” still necessitates the federal condemnation of it.

The Deputy AG suggested that, rather than suing, the feds should negotiate.  Five months later, the DOJ got around to spurning the suggestion.

The feds should have listened to the AG.

The Takings Clause, found in the same amendment to the Constitution as the Due Process Clause and the Equal Protection Clause, imposes a significant restraint on governmental power.  On its face, the Clause requires the government to demonstrate a “public use” for taking a citizen’s property.  As interpreted by the United States Supreme Court, this means that the government “may not take the property of A for the sole purpose of transferring it to another private party B, even though A is paid just compensation.”  On the other hand, the government “may transfer property from one private party to another if future ‘use by the public’ is the purpose of the taking.”

The GSA’s reasons for wresting ownership of McKay Avenue from the State thus are crucial.  But the GSA has been coy about explaining why it wants the street.  Initially, the feds attempted to assert grounds unrelated to the deal with Tim Lewis.  Federal ownership was necessary, the GSA said, to “allow proper management of an antiquated and out-of-compliance storm drainage system”; “comply with regulatory standards for operating sanitary sewer systems”; “permit installation of appropriate security improvements,” and “clarify title matters.”

Yeah, right.  This explanation fooled nobody, so lately the DOJ has restated its position in terms of the purported necessity to “modernize” McKay Avenue.  As the Deputy AG pointed out, this pressing need must have arisen only recently, since the feds hadn’t ever complained before about the condition of the street.  Moreover, even if “modernization” was essential, ownership by the federal government wasn’t required to get it done.  If the feds truly “desire[d] improvements or upgrades to the roadway and sidewalk to address any access or security issues for the Alameda Federal Center,” the Deputy AG told the DOJ, the State was more than willing to discuss how to do them.

The truth is that all the talk about “modernization” is what the courts call a “pretext.”  In fact, the GSA wants to take ownership of McKay Avenue so that it can complete the sale of Neptune Pointe to the developer who was the high bidder at the auction for the property.  If the GSA acquires McKay Avenue, it intends to give Tim Lewis an easement for access and utilities — which the State had refused to do – to Neptune Pointe.  Then it will close the $3.085 million sale.

There can be no doubt that an easement over McKay Avenue would benefit Tim Lewis.  With it, he can reap the profits from building and selling 48 luxury homes.  Without it, well, he’ll own a nice piece of vacant land fronting on the Bay (unless, of course, he walks away from his deal with the GSA).

Unfortunately for the feds, the Takings Clause forbids the government from taking property “for the purpose of conferring a private benefit on a particular private party.”  So the DOJ would have to convince a judge that, notwithstanding the beneficial impact on Tim Lewis, taking over McKay Avenue really is intended to serve a legitimate public purpose.  We agree with the Deputy Attorney General that this is, to say the least, a stretch.

The taking of McKay Avenue can be justified only if the sale of Neptune Pointe to Tim Lewis itself is necessary.  But is it?  The DOJ argues that selling the property would enable the feds to recover the cost of consolidating the USDA’s operations in the northern portion of federal land.  But that doesn’t require a sale to Tim Lewis.

According to the DOJ, the USDA has spent $1.5 million “to upgrade and expand its facilities.”  As it happens, $1.5 million reportedly is the amount the EBRPD offered to pay to acquire Neptune Pointe.  If the “public purpose” truly is cost recovery, accepting the Park District’s offer would have permitted the GSA to accomplish it – without condemning McKay Avenue.

Sure, Tim Lewis has agreed to pay more for Neptune Pointe than the Park District offered.  But it is hard to see how profit maximization can be considered a legitimate “public purpose” sufficient to justify a taking.  The GSA’s concern for the federal fisc is indeed admirable.  But if the feds can get away with seizing one piece of property on the grounds that it would allow them to obtain the “highest monetary return” from selling another parcel, no one’s land is safe.

Now on to inverse condemnation, the claim that Mr. Knox White is so worried about.

In addition to the standard “takings” case, which involves the transfer of title from a property owner to the government, the Supreme Court has recognized so-called “regulatory takings” claims, which focus on the economic harm imposed by governmental action on the property owner.  If the government enacts a regulation like a zoning ordinance that deprives the property owner of “all economically viable use” of her property, she is entitled to “just compensation.”  (The leading Supreme Court case involved the purchaser of two beachfront lots who saw the state pass a law prohibiting “all permanent habitable structures” on the beach).  But even if the regulation does not destroy all economic value, the property owner still may be owed money if the regulation adversely affects the use of her property to an extent not permitted under a three-part “balancing” test created by the Supreme Court.

Suppose the initiative passes and the City re-zones Neptune Pointe to “open space.”  Will the federal government have the chutzpah to sue the City of Alameda for inverse condemnation on a “regulatory taking” theory?  If so, the suit surely would lead the national political news, and not in a way that the Obama administration would like.  Talk about federal government overreach!

But even if the feds could slough off the bad press, they still would face a couple of threshold hurdles before the case ever got to the “balancing” stage.

First, the Takings Clause is intended to protect private property against governmental action.  Indeed, the Clause itself says that it is “private property” that shall not be taken.  You don’t have to be Justice Scalia to interpret those words to mean what they say – and thereby to hold that re-zoning of government-owned property like Neptune Pointe does not trigger the Fifth Amendment.

Second, the re-zoning may have no affect – adverse or otherwise – on use of the property by the federal government.  It’s easy to find cases holding that, if a local law like a zoning ordinance “substantially impedes federal activities” on federally owned land, it is “presumptively invalid.”  Under this line of authority, as long as the GSA continues to own Neptune Pointe, it can conduct whatever “federal activities” it wants on the property even if the City re-zones it to “open space.”  (Settle down, Tim Lewis.  This rule doesn’t extend to subsequent non-governmental owners).  If so, no regulatory taking has occurred, and the inverse condemnation claim fails.

Even if the GSA were able to surmount these obstacles, the “balancing” test does not necessarily lead to an outcome in its favor.  The test provides that a court should evaluate “[1] the economic impact of the regulation on the claimant and, particularly, [2] the extent to which the regulation has interfered with distinct investment-backed expectations” as well as “[3] the character of the governmental action.”  There is no bright-line rule; instead, each case is evaluated on its own facts.

At the Merry-Go-Round, we tend to regard “balancing” acts as more appropriate for circus clowns than for federal judges.  So we are especially reluctant to predict how, if the case got that far, a judge would weigh the specified factors in an inverse condemnation action by the GSA against the City.

We do note, however, that, unlike the private property owner who bought the beachfront lots in the Supreme Court case, the federal government probably won’t be able to cite any “distinct investment-backed expectations” for the property that includes Neptune Pointe.  One doubts that the feds were thinking about returns on real estate investments when they built the maritime training center in 1942.

We also can point to a blog run by a prominent law firm that summarized the current state of the law this way: “The bottom line is that the courts have found myriad ways to find fault in property owners’ [regulatory taking] claims, both procedurally and substantively, with the end result being that few such claims are ever successful.”  And an admittedly quick search revealed no such cases in which the plaintiff was the federal government.

With all due respect, we thus are forced to disagree with Mr. Knox White’s conclusion that a multi-million-dollar judgment against the City is “likely” if the initiative passes and the Neptune Pointe parcel is re-zoned.  But it is hardly surprising that Mr. Knox White, as a member in good standing of the Inner Ring, would make such an argument.

All too frequently, when our current City Council is asked to take an action that will offend its financial backers, the politicians throw up their hands and cry in dismay, “We can’t do that! We’ll get sued!”  That’s how we got stuck with public safety contracts costing a net $2.6 million over four years – remember the “grievance” that had to be “settled” even though the Assistant City Manager found it had no merit?  And that’s why we haven’t made any significant progress in controlling the costs of providing retiree health benefits to public employees – remember how the Mayor insisted – despite California Supreme Court and Ninth Circuit cases to the contrary – that these benefits couldn’t be touched?

But, hey, both of those examples involved the firefighters’ union, which furnishes the funds for the Mayor and her allies — except for the Vice Mayor, who is willing to pay the freight out of her own family pocket — to run for office.  As far as we know, the federal government doesn’t make – indeed, it’s probably illegal for it to make — campaign contributions to local officeholders.

So what’s the risk in telling the feds to take a hike?  Maybe Council can hire the same lawyer who won the Gallant and Kapler cases to bring an anti-SLAPP motion.  When she beats the GSA in court, the Russo/Gilmore administration then can issue another press release crowing about its successful defense of the public interest: “City Defeats More Frivolous Lawsuits.”

Sources:

U.S. Supreme Court cases: Kelo (Kelo v. City of New London); Penn Central (438 US 104 Penn Central Transportation Company v)

AG – DOJ correspondence: 2013-11-07 AG letter to DOJ; 2014-03-11 DOJ letter to AG

GSA announcement: 2013-08-12 GSA announcement