GVC ST. GEORGE, LLC v. City of Santa Cruz

• Court: District Court, N.D. California
• Decided: December 6, 2024
• Docket: 5:24-cv-07695
• Status: Unknown

Opinion

1 2 3 UNITED STATES DISTRICT COURT 4 NORTHERN DISTRICT OF CALIFORNIA 5 SAN JOSE DIVISION 6 7 GVC ST. GEORGE, LLC, Case No. 5:24-cv-07695-BLF

8 Plaintiff, ORDER DENYING MOTION FOR 9 v. TEMPORARY RESTRAINING ORDER

10 CITY OF SANTA CRUZ, 11 Defendant. [Re: ECF No. 13]

13 14 Plaintiff GVC St. George LLC seeks to enjoin enforcement of City of Santa Cruz 15 Ordinance 2024-16, which took effect in October. Before the Court is Plaintiff’s Motion for 16 Temporary Restraining Order and Order to Show Cause Why Preliminary Injunction Should Not 17 Issue Pending Trial (“TRO”). ECF No. 13 (“Mot.”). Defendant City of Santa Cruz opposes the 18 motion. ECF No. 20 (“Opp.”). The Court heard oral argument on December 5, 2024. See ECF 19 No. 28. For the following reasons, the Court hereby DENIES Plaintiff’s motion. 20 I. BACKGROUND 21 A. Construction of the Property and Relevant Agreements 22 The predecessor-in-interest to the Plaintiff in this suit is a company called Green Valley 23 Corporation (“GVC”). ECF No. 14, Declaration of Patrick Prindle in Support of Motion for 24 Temporary Restraining Order (“Prindle Decl.”) ¶ 3. After the 1989 Loma Prieta earthquake, GVC 25 developed a multifamily apartment complex in the City of Santa Cruz (the “City”), located at 833 26 Front Street, Santa Cruz, California 95060 (the “Property”). Id. ¶¶ 3–4. GVC received certain 27 funding for the project through entering into agreements that required it to restrict occupancy of 1 rates to amounts that would be affordable to those tenants. Id. 2 One such agreement was a “Participation Agreement and Declaration of Deed Restriction” 3 (“Red Cross Agreement”) entered into with the City in October 1991, which enabled GVC to 4 receive private funds provided to the City by the American Red Cross. Id. ¶¶ 6–7. In that 5 agreement, GVC contracted to “maintain the use and occupancy of the Project for very low, low 6 and moderate income [residents] . . . for a period of thirty (30) years.” Id. ¶ 7 & Ex. A at 2. The 7 agreement also required GVC to comply with the terms of another agreement that GVC entered 8 into with the City in October 1990, the “Reconstruction and Participation Agreement” (“1990 9 Agreement”). Prindle Decl. ¶ 8 & Ex. B. The 1990 Agreement set certain requirements regarding 10 the number and format of units that GVC would be expected to construct. Prindle Decl. Ex. B. 11 The Red Cross Agreement expired in October 2021, and on August 25, 2023, the City Manager 12 recorded a “Release of Reconstruction and Participation Agreement (“Release”) that released 13 GVC and the Property from the 1990 Agreement. Prindle Decl. ¶ 9 & Ex. C at 2. 14 Also in October 1991, GVC entered an agreement with the California Department of 15 Housing and Community Development (“CDHCD”). Prindle Decl. ¶ 10 & Ex. D. Based on that 16 agreement, GVC received a loan from CDHCD intended for use in rehabilitating the original units 17 at the property. Id. Ex. D at 1. In return, GVC again agreed to provide rent-restricted housing for 18 a period of time—in this case, twenty (20) years—and GVC also agreed to prioritize tenants 19 displaced by the Loma Prieta earthquake. Id. Ex. D at 2–3. The agreement with CDHCD 20 (“CDHCD Agreement”) expired on or about October 15, 2011. See id. Ex. D. at 1–2. 21 Today, the Property has 123 rental units and a manager’s unit. Eighty-seven of the units 22 were rent-restricted under the aforementioned Red Cross Agreement, 1990 Agreement, and 23 CDHCD Agreement. Prindle Decl. ¶¶ 12–13. 24 B. State Statutory Frameworks 25 Under California Government Code Section 65863.10, tenants residing in “assisted 26 housing development[s]” are entitled to notice “[a]t least 12 months prior to the anticipated date of 27 . . . the expiration of rental restrictions.” Cal. Gov’t Code. § 65863.10(b)(1). An “assisted 1 receives governmental assistance under any of” certain enumerated programs, including those 2 related to “[g]rants and loans made by the Department of Housing and Community Development.” 3 Id. § 65863.10(a)(3)(A)–(B). Notice must also be given to “affected public entities,” including 4 “the mayor of the city in which the assisted housing development is located[; . . .] the appropriate 5 local public housing authority, if any; and the Department of Housing and Community 6 Development.” Id. § 65863.10(a)(1), (b)(1). Notice must be given again six months prior to 7 expiration of the rental restrictions. Id. § 65863.10(c)(1). Plaintiff asserts that it has adequately 8 fulfilled the notice requirements related to raising rental rates. Prindle Decl. ¶¶ 15, 18. 9 Also relevant to this action is the California Tenant Protection Act of 2019 (“AB 1482”). 10 AB 1482 implemented certain state-wide rent controls, but also permitted owners of rent- 11 controlled units to “upon the expiration of rental restrictions . . . establish the initial unassisted 12 rental rate for units in the applicable housing development” at the time that the rental restriction 13 came to an end. Cal. Civ. Code § 1947.13(a)(1). 14 C. Santa Cruz Ordinance 2024-16 15 On September 24, 2024, the City Council for the City of Santa Cruz adopted Ordinance 16 2024-16 (the “Rent Control Ordinance”). ECF No. 16 (“RJN”),1 Ex. A. The Rent Control 17 Ordinance limits rent increases for affordable housing units in assisted housing developments to 18 the maximum permitted under California Civil Code Section 1947.12 when the household residing 19 there was subject to the prior rent-restricted rate. See id. at 1–2. The relevant portion of the 20 ordinance applies only to properties defined as “assisted housing developments” under California 21 Government Code Section 65863.10(a)(3). Fifty-nine of the units at the Property are impacted by 22 this restriction, as they are occupied by households in possession of their units when the required 23 twelve-month notice was served. Prindle Decl. ¶ 16. 24 25 1 Plaintiff filed a Request for Judicial Notice seeking notice of Santa Cruz City Ordinance 2024-16 26 and the Housing Authority of the County of Santa Cruz Payment Standards effective January 1, 2024. ECF No. 16. The Court grants the request for judicial notice, as these are both “public 27 record[s] that [are] not subject to reasonable dispute.” McKay v. Sazerac Co., Inc., No. 23-CV- 1 D. Procedural Background 2 Plaintiff filed this lawsuit on November 5, 2024. ECF No. 1. The Complaint asserts seven 3 causes of action: (1) violation of the Fifth Amendment of the United States Constitution and 4 Article 1, Section 19 of the California Constitution, id. ¶¶ 55–64; (2) violation of the Equal 5 Protection Clause of the Fourteenth Amendment to the United States Constitution and Article 1, 6 Section 7 of the California Constitution, id. ¶¶ 65–75; (3) violation of the Due Process Clause of 7 the Fifth Amendment to the United States Constitution, id. ¶¶ 76–85; (4) violation of 8 constitutional rights under 42 U.S.C. § 1983, id. ¶¶ 86–93; (5) partial preemption of Santa Cruz 9 Ordinance 2024-16 by California Government Code § 65863.10, id. ¶¶ 94–100; (6) violation of 10 the Contracts Clause of the United States Constitution and Article 1, Section 9 of the California 11 Constitution, id. ¶¶ 101–110; and (7) declaratory relief, id. ¶¶ 111–114. 12 On November 22, 2024, Plaintiff filed the present Motion for Temporary Restraining 13 Order and Order to Show Cause Why Preliminary Injunction Should Not Issue Pending Trial. 14 ECF No. 13. The Court issued an order setting a hearing for December 5, 2024, and setting the 15 deadline for Defendant’s opposition briefing for December 3, 2024. ECF No. 18. 16 II. LEGAL STANDARD 17 The standard for issuing a temporary restraining order is identical to the standard for 18 issuing a preliminary injunction. Stuhlbarg Int’l Sales Co., Inc. v. John D. Brush & Co., 240 F.3d 19 832, 839 n.7 (9th Cir. 2001); Lockheed Missile & Space Co. v. Hughes Aircraft Co., 887 F. Supp. 20 1320, 1323 (N.D. Cal. 1995). An injunction is a matter of equitable discretion and is “an 21 extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled 22 to such relief.” Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7, 22 (2008). 23 “However, a TRO ‘should be restricted to . . . preserving the status quo and preventing irreparable 24 harm just so long as is necessary to hold a [preliminary injunction] hearing and no longer.’” E. 25 Bay Sanctuary Covenant v. Trump, 932 F.3d 742, 779 (9th Cir. 2018) (quoting Granny Goose 26 Foods, Inc. v. Brotherhood of Teamsters & Auto Truck Drivers Local No. 70, 415 U.S. 423, 439 27 (1974)). 1 succeed on the merits, [2] that he is likely to suffer irreparable harm in the absence of preliminary 2 relief, [3] that the balance of equities tips in his favor, and [4] that an injunction is in the public 3 interest.” Winter, 555 U.S. at 20. “[I]f a plaintiff can only show that there are serious questions 4 going to the merits—a lesser showing than likelihood of success on the merits—then a preliminary 5 injunction may still issue if the balance of hardships tips sharply in the plaintiff’s favor, and the 6 other two Winter factors are satisfied.” Friends of the Wild Swan v. Weber, 767 F.3d 936, 942 7 (9th Cir. 2014) (internal quotation marks and citations omitted). 8 III. DISCUSSION 9 As this is a motion for a temporary restraining order, the Court’s analysis is necessarily 10 abbreviated in order to facilitate a rapid resolution. 11 Defendant City of Santa Cruz challenges the TRO on ripeness grounds. Opp. at 12. The 12 City argues that Plaintiff has not complied with certain mandatory notice provisions. The Court 13 disagrees that Plaintiff’s alleged failure to comply with the notice requirement renders this dispute 14 “not ripe for adjudication.” Id. Supposing for the sake of argument that Plaintiff does still need to 15 serve the requisite notices, the Rent Control Ordinance would render any attempt to raise rents 16 instantly invalid to the extent that Plaintiff sought to raise rents above the cap set out in the new 17 law. But that alleged deficiency of notice is not a bar to Plaintiff’s constitutional challenge to the 18 ordinance. See Texas v. United States, 523 U.S. 296, 300 (1998). 19 In addition, the Court finds that Plaintiff has not adequately set out a facial attack on the 20 Rent Control Ordinance. After stating in a conclusory manner that the ordinance is 21 unconstitutional on its face, Plaintiff fails to identify the correct standards for facial invalidity. For 22 the takings claim, Plaintiff would need to show that the “mere enactment” of the ordinance 23 constitutes a taking, something that the Supreme Court has recognized to be an “uphill battle.” 24 Keystone Bituminous Coal Ass’n v. DeBenedictis, 480 U.S. 470, 495 (1987). And to the extent 25 that Plaintiff tries to assert a facial Due Process challenge, it would need to show that “no set of 26 circumstances exists under which the [ordinance] would be valid” or that the ordinance “lacks a 27 plainly legitimate sweep.” Moody v. NetChoice, LLC, 144 S. Ct. 2383, 2397 (2024) (quoting 1 A. Likelihood of Success on the Merits 2 Plaintiff argues its likelihood of success on the merits only as to its (1) Fifth Amendment 3 Takings Claim, (2) Fourteenth Amendment Due Process and Equal Protection Claims, and 4 (3) Contracts Clause Claim. The Court finds that Plaintiff has failed to show a likelihood of 5 success on the merits or serious questions going to the merits on any of these claims. 6 1. Fifth Amendment Takings Claim 7 The Takings Clause of the Fifth Amendment states that “private property [shall not] be 8 taken for public use, without just compensation.” Knick v. Twp. of Scott, 588 U.S. 180, 184 9 (2019) (quoting U.S. Const. amend. V); see Chicago, B. & Q.R. Co. v. City of Chicago, 166 U.S. 10 226, 258 (1897) (incorporating the Fifth Amendment against the states). Although the “classic 11 taking” involves a government “directly appropriat[ing] private property or oust[ing] the owner,” 12 the Supreme Court has also “recognized that ‘if regulation goes too far it will be recognized as a 13 taking.’” Bridge Aina Le’a, LLC v. Land Use Comm’n, 950 F.3d 610, 625 (9th Cir. 2020) 14 (quoting Pa. Coal Co. v. Mahon, 260 U.S. 393, 415 (1922)). This regulatory takings doctrine 15 includes two types of per se takings, where either (1) the “government requires an owner to suffer 16 a permanent physical invasion of her property,” Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 538 17 (2005) (citing Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982)); or (2) the 18 regulation “completely deprive(s) an owner of ‘all economically beneficial us[e]’ of her property,” 19 Lingle, 544 U.S. at 538 (citing Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1015 20 (1992)). 21 Neither per se rule applies here. Plaintiff’s regulatory taking claim is analyzed under Penn 22 Central Transportation Company v. City of New York, 438 U.S. 104 (1978). In evaluating a 23 regulatory Penn Central claim, courts consider: “(1) the economic impact of the regulation on the 24 claimant, (2) the extent to which the regulation has interfered with distinct investment-backed 25 expectations, and (3) the character of the governmental action.” Bridge Aina Le’a, 950 F.3d at 26 630 (internal quotations omitted). The objective is to “determine whether a regulatory action is 27 functionally equivalent to the classic taking.” Id. (citing Guggenheim v. City of Goleta, 638 F.3d 1 Under the first Penn Central factor, the Court must “compare the value that has been taken 2 from the property with the value that remains in the property.” Bridge Aina Le’a, 950 F.3d at 3 630–31 (quoting Colony Cove Props., LLC v. City of Carson, 888 F.3d 445, 450 (9th Cir. 2018)). 4 Defendant argues that the diminution in value here is insufficient to support Plaintiff’s takings 5 claim, because fewer than half of the units at Plaintiff’s property are even affected by the Rent 6 Control Ordinance. See Opp. at 15. Defendant also points out that Plaintiff may still increase the 7 rent for each of those units by approximately eight to ten percent annually, and Plaintiff is free to 8 set rent at its preferred level for any unit that is vacated, assuming that it complies with applicable 9 law in doing so. Id. The Court agrees with Defendant. Even if the regulation eliminated the 10 value of the fifty-nine impacted units, the diminution in value of the Property would be less than 11 fifty percent. Courts have rejected significantly greater reductions in value as insufficient under 12 prong one of Penn Central. See, e.g., MHC Fin. Ltd. P’ship v. City of San Rafael, 714 F.3d 1118, 13 1127 (9th Cir. 2013) (“[T]he 81% diminution in value . . . would not have been sufficient 14 economic loss.”). In any event, the regulation does not eliminate the value of those units: Plaintiff 15 itself admits that it planned to set “most rents at $1595,” Prindle Decl. ¶ 24, and that the current 16 rental rates for studios on the Property “range from $561 to $1300,” id. ¶ 22, meaning that the 17 overall diminution in value of the Property is likely closer to twenty-five percent. The Court finds 18 that Plaintiff’s own estimate of the value of its units is a fair comparator, and thus looking at 19 diminution in value of the Property as a whole, Plaintiff has not established that the diminution is 20 significant enough to show its likelihood of success on this claim. 21 On the second prong, the Court acknowledges that the Rent Control Ordinance might 22 interfere somewhat with Plaintiff’s “distinct investment-backed expectations.” Penn Central, 438 23 U.S. at 124. Plaintiff’s predecessor-in-interest entered into agreements with definite terms—30 24 years in the case of the Red Cross Agreement, and 20 years in the case of the CDHCD 25 Agreement—for how long it was expected to maintain certain rent restrictions. As a result, 26 Plaintiff may have had certain expectations regarding its ability to raise rents after the end of those 27 terms. However, the Court agrees with Defendant that those expectations should have been 1 “given the historically regulated nature of the housing market and the City’s longstanding efforts 2 to address housing affordability and homelessness.” Opp. at 17; see Guggenheim v. City of 3 Goleta, 638 F.3d 1111, 1120 (9th Cir. 2010) (indicating that investment-backed expectations are 4 informed by “the burden of rent control”). And again, the Rent Control Ordinance does not 5 entirely forbid Plaintiff from raising rental rates; it merely requires that Plaintiff do so gradually 6 over time. 7 Finally, the “character of the governmental action” is not akin to “a physical invasion by 8 government.” See Penn Central, 438 U.S. at 124. Rather, this is more like a “public program 9 adjusting the benefits and burdens of economic life to promote the common good,” id., and thus 10 the third factor of the Penn Central test also weighs against finding a taking. 11 In sum, Plaintiff has failed to establish a likelihood of success on the merits—or even a 12 serious question going to the merits—of its takings claim. 13 2. Fourteenth Amendment Due Process and Equal Protection Claims 14 Under the Fourteenth Amendment’s Equal Protection Clause, “[u]nless a classification 15 trammels fundamental personal rights or implicates a suspect classification, to meet constitutional 16 challenge the law in question needs only some rational relation to a legitimate state interest.” 17 Nelson v. City of Irvine, 143 F.3d 1196, 1205 (9th Cir. 1998) (quoting Lockary v. Kayfetz, 917 18 F.2d 1150, 1155 (9th Cir. 1990)). Plaintiff does not argue that there is a fundamental right or 19 suspect classification at issue, so the Rent Control Ordinance is subject to rational basis review. 20 The same standard applies to Plaintiff’s substantive due process claim. See Lingle, 544 U.S. at 21 541; Vill. of Euclid v. Ambler Realty Co., 272 U.S. 365, 395 (1926) (upholding zoning ordinance 22 that was not “clearly arbitrary and unreasonable, having no substantial relation to the public 23 health, safety, morals, or general welfare”). 24 Plaintiff has not shown its likelihood of success in defeating the City’s rational basis 25 analysis. The City’s evidence shows that the law directly serves the City’s asserted interest in 26 “preventing tenant displacement and excessive rent increases at properties that have received 27 governmental assistance,” see Opp. at 18, by requiring that landlords of such properties increase 1 the Rent Control Ordinance is arbitrary because it “applies unequally to similarly situated property 2 owners who have restricted rents at their properties.” Mot. at 14. However, the City persuasively 3 argues that the ordinance applies specifically to those properties falling within the definition of 4 “assisted housing developments,” as defined under state law, because of the unique characteristic 5 of having “received governmental assistance in developing their properties . . . with the clear 6 understanding that they would support the creation of affordable housing.” Opp. at 18. 7 At the hearing, Plaintiff sought to invoke Pennell v. City of San Jose, 485 U.S. 1 (1988), 8 for the proposition that a rent-control-related ordinance that lacks the specific procedures 9 enumerated in that case violates the Due Process clause. See id. at 13. This argument was not 10 presented in Plaintiff’s moving papers, and Defendant did not have a fair opportunity to respond. 11 While the Court has its doubts that Pennell stands for the proposition Plaintiff attempts to assert, 12 Plaintiff may choose to assert the argument in a motion for preliminary injunction. However, 13 because the issue was not properly developed at this stage, it will not be considered as a basis for 14 issuing the requested temporary restraining order. 15 Accordingly, Plaintiff has not shown a likelihood of success on the merits or serious 16 questions going to the merits with respect to its Fourteenth Amendment Equal Protection and Due 17 Process claims. 18 3. Contracts Clause Claim 19 Under the Contracts Clause of the Constitution, “No State shall . . . pass any . . . Law 20 impairing the Obligation of Contracts.” U.S. Const. art. I, § 10, cl. 1. In assessing whether a law 21 runs afoul of the Contracts Clause, courts ask: (1) “whether there is a contractual relationship;” 22 (2) “whether a change in law impairs that contractual relationship;” and (3) “whether the 23 impairment is substantial.” Gen. Motors Corp. v. Romein, 503 U.S. 181, 186 (1992); Energy 24 Rsrvs. Grp., Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411 (1983). “Factors relevant to 25 that consideration include ‘the extent to which the law undermines the contractual bargain, 26 interferes with a party’s reasonable expectations, and prevents the party from safeguarding or 27 reinstating his rights.’” Apartment Ass’n of Los Angeles Cnty., Inc. v. City of Los Angeles, 10 1 step, a court concludes that the state law has “operated as a substantial impairment of a contractual 2 relationship,” the court can then consider “whether the law is drawn in an appropriate and 3 reasonable way to advance a significant and legitimate public purpose.” Id. (quoting Sveen, 584 4 U.S. at 819) (internal quotations omitted). “A heightened level of judicial scrutiny is appropriate 5 when the government is a contracting party.” Id. (citation omitted). 6 Here, the Court need not consider the second step of the Contracts Clause inquiry, because 7 Plaintiff has failed to show that the Rent Control Ordinance “operated as a substantial impairment 8 of a contractual relationship.” Apartment Ass’n of Los Angeles Cnty., 10 F.4th at 913. As 9 Defendants correctly point out, there is no active contract here that could be impaired. Plaintiff 10 clearly asserts that all relevant agreements have expired or been released. Mot. at 16. Plaintiff 11 may not have expected that rental rates would continue to be restricted after the contracts expired, 12 but Plaintiff does not have a current, enforceable contract creating a right against that outcome. At 13 the hearing, the Court asked Plaintiff if there was any case authority supporting this argument and 14 counsel acknowledged that she was aware of none. 15 Thus, Plaintiff has not shown a likelihood of success on the merits or serious questions 16 going to the merits with respect to its Contracts Clause claim. 17 B. Irreparable Harm 18 The next Winter factor asks whether the movant is “likely to suffer irreparable harm in the 19 absence of preliminary relief.” Winter, 555 U.S. at 20. The Ninth Circuit has been clear that a 20 plaintiff alleging a constitutional violation “usually demonstrates he is suffering irreparable harm 21 no matter how brief the violation” if he establishes a likelihood of success on the merits. Baird v. 22 Bonta, 81 F.4th 1036, 1040 (9th Cir. 2023). However, Plaintiff has failed to make the requisite 23 showing on the first factor of the Winter test. Besides, “[t]he possibility that adequate 24 compensatory or other corrective relief will be available at a later date, in the ordinary course of 25 litigation, weighs heavily against a claim of irreparable harm,” Sampson v. Murray, 415 U.S. 61, 26 90 (1974), and it appears that Plaintiff’s claims could be adequately addressed through 27 compensatory relief. 1 C. Balance of Equities and the Public Interest 2 The final two Winter factors ask whether “the balance of equities tips in [the movant’s] 3 favor” and whether “‘an injunction is in the public interest.” Winter, 555 U.S. at 20. “Where, as 4 || here, the party opposing injunctive relief is a government entity,” these two factors “merge.” 5 Fellowship of Christian Athletes v. San Jose Unified Sch. Dist. Bd. of Educ., 82 F.4th 664, 695 6 || (9th Cir. 2023) (quoting Nken v. Holder, 556 U.S. 418, 435 (2009)). 7 Had Plaintiff established a likelihood of success on the merits or serious questions going to 8 the merits of any of its claims, the Court would have needed to analyze this final, merged factor. 9 Plaintiff failed to do so, so the Court declines to reach it. The Court notes, though, that the 10 || equities and the public interest seem unlikely to favor Plaintiff’s position. Plaintiff's intended rent 11 increases would place a number of vulnerable tenants “at high risk for becoming homeless,” which 12 || would impose a “significant” cost to state and local governments and to nonprofit organizations 13 assisting houseless people, see ECF No. 22, Declaration of Larry Imwalle in Support of 14 || Defendant’s Opposition to Plaintiff's Motion for a Temporary Restraining Order 4] 6-7, while 15 || Plaintiff's countervailing interest is a loss of revenue that could be remedied by compensatory a 16 || damages were Plaintiff ultimately to prevail in this dispute. 2 17 |) IV. ORDER Z 18 For the foregoing reasons, IT IS HEREBY ORDERED that Plaintiff's motion for a 19 |) temporary restraining order is DENIED. The denial is without prejudice to Plaintiff filing a 20 || renewed motion for preliminary injunction under the regular rules applicable to noticed motions. 21 22 IT IS SO ORDERED. 23 24 || Dated: December 6, 2024 25 feiliflecan TH LABSON FREEMAN 26 United States District Judge 27 28