[No. F025257. Fifth Dist. Jun 7, 1999.]
[As modified July 7, 1999.]
ROGER GALLAND et al., Plaintiffs and Respondents, v. CITY OF CLOVIS
et al., Defendants and Appellants.
[Opinion certified for partial publication. fn.
[Reprinted without change for tracking pending review and disposition
by the Supreme Court.]
(Superior Court of Fresno County, No. 418831-4, Gary Ray Kerkorian,
(Opinion by Thaxter, J., with Dibiaso, Acting P. J., and Buckley,
Lozano, Smith, Smith, Woliver & Behrens, Thomas J. Riggs, Jerome
M. Behrens and David J. Wolfe for Defendants and Appellants.
Worthington & Worthington and Jaquelynn C. Pope for Plaintiffs
Roger and Virginia Galland own a mobilehome park
in Clovis that is subject to rent control. The Clovis Rent Review
Commission and Clovis City Council (collectively Clovis) denied
or permitted only a portion of the proposed rent increases in 1988,
1989 and 1990. The Gallands [73 Cal.App.4th 373] filed this
action to overturn the rent decisions (Code Civ. Proc., § 1094.5
(section 1094.5)), and for damages for violations of their due process
rights (42 U.S.C. § 1983 (section 1983)).
The trial court found that Clovis's application
of the ordinance resulted in a rent review process that was unfair
and so burdensome and expensive that it violated the Gallands' procedural
and substantive due process rights and deprived them of a fair return
on their regulated property. The court concluded that remand under
section 1094.5 was an inadequate remedy; it dismissed the administrative
proceedings and awarded damages of $1,019,261.50 under section 1983.
The damages included an amount for rent lost during the period of
1988 through March 31, 1995.
Clovis appeals, contending that any error involved
procedural, not substantive, due process rights and the proper remedy
is remand for lawful rent review hearings pursuant to section 1094.5
rather than an award of damages under section 1983. We conclude
the Gallands were deprived of both procedural and substantive due
process rights and the trial court did not abuse its discretion
in dismissing the administrative proceedings and awarding damages
pursuant to section 1983. Further, Kavanau v. Santa Monica Rent
Control Bd. (1997) 16
Cal.4th 761 [66 Cal.Rptr.2d 672, 941 P.2d 851] (Kavanau),
decided while this appeal was pending, does not compel reversal
of the award of lost rent damages against Clovis. We therefore affirm.
The Gallands, residents of Utah, purchased the
Woods Mobile Country Club (the Woods or park) in 1978. The Woods
is a 260-space, upscale mobilehome park with numerous amenities.
The Gallands hired Planned Management Services (PMS), a Utah corporation
which manages mobilehome parks in a number of states, to manage
the Woods. John Chamberlain, the president of PMS, has managed the
Woods and acted as the Gallands' representative in the rent review
proceedings since 1978. PMS's compensation is based on a percentage
of the earnings of the Woods.
The Mobile Home Rent Review and Stabilization
Ordinance, chapter 13, Clovis Municipal Code section 5-13.01 et
seq. (Ordinance) enacted in 1978 (repealed in 1993) was intended
to protect mobilehome park tenants from unreasonable rent increases
while recognizing the need of mobilehome park owners to receive
rent increases sufficient to cover increased costs and to generate
a "fair return on their investment." (Ord., § 5-3.01.) The Ordinance
[73 Cal.App.4th 374] provided that on the filing of a petition
signed by more than 50 percent of the tenants of a mobilehome park,
the Clovis Mobile Home Rent Review Commission (Commission) would
review the rent increase and determine whether it was "so great
as to be an unreasonable increase." (Ord., § 5-3.06(b).) The park
owner had the burden to prove by a preponderance of the evidence
that the rent increase was reasonable in light of the nonexclusive
factors enumerated in Ordinance section 5-3.06(i). Those factors
included utility rates, property taxes, insurance, advertising,
cost-of-living increases attributable to incidental services, repairs
and maintenance, capital improvements, amenity and service upgrades,
fair rate of return on investment, and increased property values.
The Ordinance provided that Commission decisions could be appealed
to the Clovis City Council within 15 days after the final written
decision was mailed to the parties.
In 1983, the Gallands challenged the constitutionality
of the Ordinance and a decision by the Commission permitting only
a portion of a noticed rent increase. This court upheld the constitutionality
of the Ordinance and the Commission's rent decision. In 1985, the
Gallands (by PMS and Mr. Chamberlain) again challenged a Commission
decision permitting less than the noticed rent increase. The trial
court rejected their contentions, and this court affirmed in an
unpublished opinion that sanctioned PMS for a frivolous appeal.
The Challenged Rent Review Proceedings
1988 Rent Increase
The Gallands noticed a $6 a space rent increase
effective April 1, 1988, which raised the monthly rent to $275.
The tenants petitioned the Commission to review the matter. Mr.
Chamberlain asked what materials and information the Commission
would like produced. The city clerk responded that Clovis would
provide that information, but set the matter for hearing without
specifying what information to submit.
Mr. Chamberlain submitted a letter stating that
the rent increase was less than half the increase in the consumer
price index (CPI). Park expenses had increased $46,000 in the last
year and cash flow in constant dollars had fallen $10,275 since
1986 and $30,000 since 1984. Ray Wyland, the president of the Woods
tenant association, responded that the CPI included increases for
items other than housing, Mr. Chamberlain had not specified which
expenses had increased, and the Woods' rent had increased from $143
in 1978 or 1979 to $269 in 1987. [73 Cal.App.4th 375]
In response, Clovis requested that Mr. Chamberlain
provide a copy of the CPI and documentation demonstrating the increased
expenses and decreased cash flow.
Mr. Chamberlain submitted several applicable CPI's
and prepared tables setting forth the Woods' receipts, disbursements
and pretax cash flows for 1984 through 1987. The tables showed that
expenses had increased more than income resulting in diminishing
cash flows. Mr. Chamberlain also prepared a table showing the Gallands'
return on investment (ROI) for the years 1984 through 1987. The
average ROI for the Woods for the past 10 years was 13.47 percent.
The return on corporate bonds for the same period was 12.47 percent.
Mr. Chamberlain stated that because real estate is a higher risk,
nonliquid investment, it requires a higher rate of return than bonds.
The 1987 ROI for the Woods was between 11.29 and 14.62 percent depending
on how the figures were adjusted for inflation.
The Commission heard the matter on April 13, 1988.
In addition to Mr. Chamberlain, the Gallands' accountant, Certified
Public Accountant Richard Miranda, testified that regardless of
the CPI used, cash flows had decreased over the last four years.
During that period, income had increased 10.8 percent while expenses
had increased 18.3 percent. The tenants argued the rent should not
be increased because the Woods rent was already one of the highest
in Fresno County.
The matter was continued with the consent of the
parties to April 29, 1988, to provide the commissioners additional
time to digest the materials presented. In the interim, the Commission
asked the Gallands to provide substantial additional information
by April 26, 1988. That information included further breakdowns
and explanations for various expenditures, information on vacancies
and cash flow for the prior nine years, and additional information
and calculations related to ROI. Mr. Chamberlain provided much,
but not all of the information requested. He felt that some of the
requested information was irrelevant and other materials could not
be gathered in the short amount of time provided to do so.
At the completion of the continued hearing on
April 29, 1988, the Commission voted three to two that no increase
The Commission issued draft findings and decision
denying the rent increase. The Gallands objected to the decision
on various grounds including that the Commission had relied on information
not presented at the hearing. The Commission met on May 13, 1988,
to consider the draft findings. The commissioners expressed difficulty
in determining a fair ROI based on the evidence before them. The
hearing was continued one week. [73 Cal.App.4th 376]
On May 20, the commissioners reiterated their
decision that no increase was warranted. They justified the decision,
in part, on a portion of Mr. Chamberlain's testimony in the 1985
rent review proceedings regarding fair ROI, which they misconstrued
to support their conclusion that the current rent provided a fair
ROI. The Commission had not notified the parties it would consider
evidence from earlier proceedings. The Commission issued its final
decision on June 3, 1988, finding three to two that the Gallands
had not demonstrated by a preponderance of the evidence that any
rent increase was justified.
The Gallands appealed the decision to the city
council which set the matter for hearing on July 18, 1988. The Gallands
challenged the Commission's findings and decision, and the fairness
of the proceedings. After hearing from both parties, the city council
decided the Gallands had not provided sufficient information to
enable the council or the Commission to make an intelligent decision
regarding a fair rate of return for the Woods. The council remanded
the matter to the Commission for further proceedings and ordered
the Gallands to provide extensive accounting materials and financial
documents which the Commission would consider in determining a fair
rate of return.
The information requested included audited financial
statements for the past 10 years showing assets, liabilities, the
Gallands' equity, the ratio of debt to equity and the results of
operations; and highs, lows, averages and ranges of the rates of
ROI for each of the other mobilehome parks managed by PMS since
1978. The council also instructed the parties that any adjustment
for inflation should be based on the U.S. Shelter Index.
The Gallands objected to producing some of the
information requested because it was extremely costly and time-consuming
to obtain and prepare. The ten-year audit would cost approximately
$75,000 and would take two to three months to complete. Further,
the financial information on the other mobilehome parks was confidential
and PMS could not disclose the data without the permission of the
owners. Mr. Chamberlain and the tenants' attorney met with Clovis
officials and reached a compromise regarding the additional materials
to present, which reduced the Gallands' burden somewhat.
On October 17, 1988, the Gallands submitted extensive
materials in response to the council's order. The submissions include
information in narrative and table format from 16 other mobilehome
parks that PMS managed. The data indicated that the average ROI
in constant dollars for the parks was 21.7 percent compared to the
Woods' average of 11.9 percent. [73 Cal.App.4th 377] Regarding
vacancy rates over the past 10 years, the Woods averaged a 2.1 percent
vacancy rate while other mobilehome parks in Fresno and Clovis averaged
a 5.03 percent rate. Regarding fair rate of return on the Woods
and similar investments, the Gallands submitted a 19-page discussion
of various types of investments, their attendant risks and their
The Gallands also submitted declarations from
two experts. Accountant Miranda declared that the financial records
from which the Gallands' figures were taken were accurate. Chapman
Findlay, Ph.D., former chairman of the department of finance and
business economics at the University of Southern California, provided
an opinion regarding the fair rate of ROI for the Woods. He compared
the expected return for various types of investments and, based
on the comparisons, opined that a fair rate of return for the Woods
measured before tax on equity was 25 percent.
The tenants submitted a declaration from their
expert Richard Nordstrom, Ph.D., a professor at California State
University, Fresno. Dr. Nordstrom stated that the Woods' rents and
profits since 1978 had increased at a greater rate than the CPI.
His calculations, which compared the Gallands' return after debt
service with their actual investment not adjusted for inflation,
indicated the Gallands received a 24.9 percent ROI in 1987.
At the Commission hearing on December 16, 1988,
the commissioners grappled with defining the "investment" for purposes
of calculating fair ROI. Dr. Nordstrom testified return should be
calculated on actual dollars invested with no adjustment for inflation.
Dr. Findlay stated, albeit in a garbled fashion, that investment
dollars must be adjusted for inflation.
The Commission concluded the Gallands were receiving
a fair ROI and had not justified the rent increase. The commissioners
reasoned that Dr. Findlay was of the opinion that a 25 percent ROI
was fair. By Dr. Nordstrom's calculations (using figures not adjusted
for inflation), the Gallands received a 24.9 percent ROI in 1987.
The Commission also found that both experts had calculated rate
of ROI without adjusting the initial investment for inflation.
The Gallands appealed the decision to the city
council, pointing out that Dr. Findlay's calculations had adjusted
the initial investment for inflation. The city council heard the
appeal on March 3, 1989. The council agreed that the historical
investment was the proper figure to use in calculating ROI and affirmed
the decision of the Commission. On March 29, 1989, the Gallands
requested that Clovis prepare a record of the 1988 rent review proceedings
pursuant to section 1094.6. [73 Cal.App.4th 378]
1989 Rent Increase
In 1989, the Gallands noticed an $18 a month rent
increase effective April 1, 1989. On February 14, 1989, the tenants
challenged the increase and petitioned the Commission to review
the matter. The Ordinance required that rent challenges be heard
no later than 45 days after the petition is filed. Mr. Chamberlain
asked that the hearing be continued for three months because he
was involved in a lengthy civil trial in San Jose. He agreed to
postpone collecting the increased rent until the Gallands prevailed
in the matter. Clovis set the matter for hearing on June 23, 1989,
and ordered the Gallands to submit their documentation supporting
the increase by May 19, 1989. Mr. Chamberlain failed to submit the
Gallands' material because he was still involved in the trial and
asked for a continuance on May 22. The tenants objected and asked
that the matter be dismissed. The Gallands submitted their presentation
on June 7. On June 9, 1989, the Commission dismissed the proceedings
but failed to prepare a written decision on the matter until January
29, 1992, after the Gallands applied to the superior court for an
order requiring Clovis to do so.
On June 29, 1989, the Gallands noticed a $25 a
month rent increase effective September 1, 1989, which raised the
per space rents to $294 a month. The tenants challenged the increase
and the matter was set for hearing on September 29, 1989.
The Gallands supported the rent increase with
updated figures noting that no rent increase had been permitted
for two and a half years. Based on the CPI, the purchasing power
of the current $269 rent (worth $119 in 1978 dollars) was less than
the $144 rent charged in 1978. The $294 increased rent was worth
only $127.89 in 1978 dollars. The increased rent remained below
market levels. In the past six months, four new tenants had rented
spaces at the Woods for $315. The Gallands contended they were not
receiving a fair ROI. They renewed their argument that ROI calculations
must be adjusted for inflation to prevent confiscatory results.
The projected ROI for the Woods in 1989 was 9 percent, the same
return realized in 1988.
The tenants responded that the low ROI appeared
to be due to unusually high operating expenses. The tenants opined
that the increase reflected the Gallands' attempt to pass their
unsuccessful rent review litigation costs on to the tenants.
The Gallands replied that they did not include
legal fees incurred solely to obtain the 1988 rent increase. They
had included the legal and expert fees incurred to comply with the
city council's order on remand which was [73 Cal.App.4th 379]
geared to educating the Commission and the council as to appropriate
guidelines in applying the Ordinance.
At the conclusion of the hearing, the Commission
voted to disallow legal and expert fees as operating expenses. The
Commission then found, based on its misinterpretation of a document
presented in an unrelated rent proceeding which was introduced after
the hearings in this proceeding were closed, that 60 percent of
the items reflected in the CPI were not relevant to a mobilehome
park. Therefore, the rent should be increased by an amount equal
to 40 percent of the increase in the index. Under this formula,
a $14 increase was justified.
The Commission reviewed the draft findings with
the parties at a hearing on November 3, 1989. Clovis's city attorney
acknowledged the Commission should not have relied on the ex parte
information without notice to the parties. The hearing was continued
to give the parties an opportunity to review and respond to that
The Gallands pointed out the Commission's mistake
in interpreting the CPI table. However, on December 13, 1989, at
a continued hearing on the matter, the Commission readopted its
earlier findings. The Commission did not issue a final decision
until January 29, 1992, after the Gallands sought a court order
directing its issuance. The Gallands could not appeal the 1989 Commission
decisions to the city council until the final written decisions
were issued. When the final decisions issued, the Gallands appealed
to the city council in February 1992.
Under the Ordinance, the Gallands could continue
to collect the full $25 increase until an appeal before the city
council was final. However, they opted not to collect the disputed
$11 portion of the noticed increase as of February 1, 1990.
The appeal was eventually heard by the city council
in May 1992. The council upheld the decisions of the Commission
finding them reasonable and supported by a preponderance of the
1990 Rent Proceedings
In January 1990, the Gallands noticed a rent increase
of $15 a month for tenants of double-wide mobilehome coaches, and
$9 a month for tenants of single-wide coaches, effective April 1,
1990. The tenants petitioned for review of the increases, a hearing
on the matter was set for May 18, 1990, and the parties were given
a briefing schedule with the materials due at 12 noon on the given
dates. [73 Cal.App.4th 380]
The Gallands submitted their opening presentation
on the date it was due but at 2:19 p.m. rather than by noon. They
included current financial figures showing an 8.1 percent return
for the Woods in 1989, approximately the same return generated by
certificates of deposit at local institutions. They again reiterated
that standard accounting principles required the investment be adjusted
for inflation in calculating rate of return.
The tenants responded that the rent increase should
be disallowed and the proceedings dismissed because the Gallands'
materials were not timely submitted. On the merits, the tenants
challenged various items on the Gallands' cash flow table and concluded
since the Woods' rent was the second highest in the area, the Gallands
were receiving more that a fair ROI. With their response, the tenants
filed a request that the city council issue a subpoena duces tecum
requiring the Gallands to produce all financial statements and balance
sheets, all accounting work papers and supporting documents, and
all support and work papers used to generate the cash flow tables
for 1978 through 1989.
The Gallands objected to the subpoena request,
noting that the cost of complying would be "staggering" and their
accountant had verified the accuracy of the figures in earlier proceedings.
On May 8, 1990, 10 days before the scheduled hearing,
the Commission asked the Gallands to provide additional information
including: an auditor's statement supporting the Gallands' reported
expenses, further breakdown of a number of the income and expense
categories, details regarding the Woods purchase, and copies of
the Consumer Price Shelter Index for the Pacific Cities and U.S.
Cities Average for 1986 through 198,. to the tenants' request to
dismiss the proceedings and request for subpoena. They offered to
make the Woods' financial records available for audit by an independent
CPA at the tenants' expense.
The Commission met on June 4, 1990, to consider
the tenants' requests to dismiss the proceeding because of the Gallands'
"late" filing and for a subpoena. After a two-and-a-half-hour hearing,
the Commission denied the motion to dismiss and attempted to broker
a compromise regarding the subpoena. The city attorney proposed
that Clovis hire an independent CPA to review the audit work papers
and auditor's statement for the last five years and to answer specific
questions raised by the tenants. The Commission agreed to that proposal.
In response, the tenants requested extensive detail
regarding the information the Gallands' had prepared in response
to the Commission's request for [73 Cal.App.4th 381] further
information on May 8. The Commission requested that Mr. Chamberlain
provide a sworn declaration setting forth details regarding almost
every aspect of the park's operation since 1978 including: purchase,
ownership, and day-to-day operations; daily, monthly and annual
business and accounting practices; the same information as to PMS;
and auditing practices and procedures for the Woods, for other parks
managed by PMS, and for the Gallands with regard to this investment.
The Commission also requested additional information (the items
cover two and a half, single-spaced, typed pages) regarding utilities,
water and sewer payments, interest income, management fees, lease
The Gallands complied. Mr. Chamberlain provided
a detailed 22-page declaration and 18 pages of additional information.
On July 2, 1990, the Commission met to decide
whether to request a subpoena or an independent audit. After a two-and-one-half-hour
hearing, the Commission decided that neither was necessary. The
matter was set for further hearing on August 13, 1990.
On August 2, 1990, the city attorney notified the
Gallands that a Commission member had contacted the tenants' representative
and provided him with copies of public records relating to the purchase
of the Woods. The Commission provided copies of those materials
to the Gallands and requested additional information regarding the
Woods' purchase, financing and lease payments. Mr. Chamberlain had
supplied this information in his June declaration. The Commission
asked the Gallands to produce the purchase agreement and lease documents
and to provide "a full explanation with details." In addition, because
public records indicated that Mr. Galland was an incorporator of
PMS in 1978, the Gallands should "fully and clearly" explain his
status in this regard. The tenants requested the PMS corporate minutes
from the date of incorporation through the present, and a record
of all stock sales.
Mr. Chamberlain submitted another declaration
and supporting documents which explained the purchase/lease back
agreements. In May 1978, the Margaret G. Rose Testamentary Trust
agreed to provide the Gallands with $600,000 to purchase the Woods
in exchange for title to the land and a 50-year lease back. On June
9, 1978, the Gallands purchased the Woods from a third party for
$4,158,625 (land-$500,000, improvements- $3,613,625, personal property-$45,000).
The Gallands made a $600,000 down payment and the sellers took two
notes. On August 1, 1978, the Gallands executed a grant deed to
the trust as required by the terms of the May agreement. [73
Margaret G. Rose was Mrs. Galland's mother. She
died in 1969 and the trust was created pursuant to her will. Mrs.
Galland's father has a life estate in the trust. Income from the
trust estate and, if necessary, principal, are used for his benefit.
On his death, any remaining assets will be distributed to Mrs. Galland.
Mr. Galland was a 50 percent shareholder in PMS
from 1978 until 1985 but had received no compensation or dividends
after he resigned as president in 1980. In 1985, Mr. Chamberlain
purchased Mr. Galland's shares of stock in PMS.
The Commission, minus the member who had contacted
the tenants, heard the matter on August 13, 1990. The Gallands presented
evidence supporting the $15 and $9 rent increases. Their current
return on their investment in the Woods (adjusted for inflation)
was 8.1 percent whereas equally risky investments enjoyed a 25 percent
rate of return. The ROI in adjusted dollars pursuant to Dr. Nordstrom's
method which the Commission had employed in past years was 16 percent.
The increase would bring that return up to 20.44 percent.
Dr. Nordstrom testified for the tenants. He reversed
his earlier position that the investment need not be adjusted for
inflation and claimed that had been his position all along. He now
believed the requested rent increase was not justified because the
Gallands had misstated their "investment" in past years. He opined
that the purchase/lease-back transaction resulted in a down payment
of $0 rather than $600,000. Thus, the Gallands' investment consisted
of principal payments only. By his calculations, the Gallands received
a 140.63 percent ROI in 1989. Dr. Nordstrom also believed that management
fees, lease payments and extraordinary operating expenses should
be deducted to determine cash flow. And, contrary to his opinion
in 1988 that a 20 percent return was fair, he now believed a 14
percent return was fair.
At the conclusion of the almost seven-hour hearing,
the Commission approved increases of $7.50 and $4.50, half of the
increases requested. The Commission found the Woods was jointly
owned by the Gallands and the Rose Trust. Therefore, the lease payments
were return on investment rather than expenses. In addition, the
Commission disallowed attorney and expert fees incurred in the rent
review proceedings. With these adjustments, the Gallands' return
on the inflation adjusted investment was 11.8 percent. However,
contrary to the opinion of both experts, the Commission concluded
based on "common sense" that the ROI calculation should be based
on historic investment. Using the unadjusted figures, the approved
rent increases yielded a 23.5 percent ROI, which the Commission
deemed fair. [73 Cal.App.4th 383]
The proposed findings and decision were issued
on September 21, 1990. The final decision was not issued until January
29, 1992, pursuant to court order. Both parties appealed. The city
council heard the appeals in May 1992 with the Gallands' appeal
of the Commission's decisions on the 1989 rent increases. The city
council upheld the decisions of the Commission.
In May 1990, the Gallands sued Clovis for damages
for inverse condemnation, denial of substantive and procedural due
process under the state and federal Constitutions, and for violations
of civil rights protected by section 1983. They contended that Clovis's
application of the Ordinance constituted a regulatory taking because
it decreased the value of the property. Clovis's actions also denied
them a fair return on their investment. They filed concomitant petitions
for writ of administrative mandate challenging the process employed
and the denial or modification of the 1988 and 1989 rent increases.
The matters were consolidated for trial. The Gallands filed a first
amended complaint in January 1993 adding allegations stemming from
the 1990 rent review proceedings.
The Gallands alleged that Clovis denied them procedural
due process by failing to provide adequate notice as to what
they must prove to establish a rent increase is not an "unreasonable
increase" under the Ordinance. Despite the Gallands' request for
some standards, Clovis issued no written guidelines and the Commission's
decisions were so inconsistent that they provided no de facto notice
as to the owner's burden. In addition, Clovis's application of the
rent review scheme denied the Gallands a fair hearing. The Commission
relied on ex parte information without notice to the Gallands, it
imposed costly and onerous information demands only to ignore the
information when it was produced, it disallowed the Gallands' costs
of complying with those requests as increased operating expenses
to support a rent increase, it ignored uncontroverted expert evidence,
and it made arbitrary and inconsistent findings to justify its decisions.
Further, Clovis failed to issue final Commission decisions and to
prepare the administrative record, thus preventing the Gallands
from obtaining judicial review of the administrative proceedings
The Gallands alleged that the same acts also denied
them substantive due process. Clovis's actions in implementing
rent control were arbitrary and unfair and placed an impermissibly
onerous and costly burden on the park owner. As a result, the Gallands
were denied a fair return on their property. Clovis's actions, which
were taken in accordance with the custom of the [73 Cal.App.4th
384] municipality, deprived the Gallands of the right to due
process in violation of section 1983.
The Gallands also challenged the Commission decisions
pursuant to section 1094.5 on a number of grounds alleging essentially
the same procedural and substantive due process violations as set
forth in their complaint.
Clovis answered the complaint, essentially denying
the allegations of wrongdoing. It did not assert any affirmative
defenses. The case was set for trial on August 19, 1991.
In May 1991, the Gallands filed a motion to compel
and for sanctions for Clovis's failure to respond to discovery requests.
The Gallands took the matter off calendar in reliance on Clovis's
promise to provide responses. In late June, the Gallands filed a
motion to compel further responses. The parties eventually agreed
that Clovis would provide further answers by July 17, 1991. About
that time, the court consolidated the complaint for damages with
the writs of mandate and assigned the matter to Judge Gary Ray Kerkorian
In August 1991, Judge Kerkorian set the matter
for trial on June 29, 1992, and ordered Clovis to prepare final
written decisions of all proceedings to be served on the parties
by October 1, 1991, and to prepare the administrative record by
November 1, 1991. Clovis failed to prepare the final decisions causing
the Gallands to seek relief from the trial court. At the hearing
on that motion, the parties stipulated to a second briefing schedule
and trial was reset a second time for July 14, 1992. The amended
order gave Clovis until January 1, 1992, to complete the administrative
proceedings. By mid-January 1992, Clovis had not prepared the final
Commission decisions and the Gallands returned to court to force
Clovis to comply with the court orders. At the hearing on the motion,
the parties stipulated to a third briefing schedule and trial was
reset for October 15, 1992. Clovis served the final Commission decisions
on January 29. The parties agreed the appeal to the city council
would be heard on March 9, 1992, and the council's final decision
would be prepared by March 17, 1992.
Clovis continued the hearing before the city council
until mid-May, after the city council elections. Clovis had still
not prepared the administrative record. At a status conference on
May 11, 1992, the parties stipulated to a fourth pretrial briefing
schedule and order. The order required the appeal to be heard on
May 19 and a final decision to be issued by June 1, 1992. Trial
was reset a fourth time for December 1, 1992. [73 Cal.App.4th
In October 1992, Clovis substituted its current
counsel for its former counsel,
Meanwhile, the Gallands had noticed rent increases
in 1991 and 1992, which the tenants challenged. The Gallands protested
that further rent review proceedings should be postponed until Clovis
completed the 1989 and 1990 proceedings. Clovis initially agreed
but, in November 1992, it notified the Gallands it intended to proceed
with the rent challenges. The Gallands petitioned the court for
a peremptory writ of prohibition staying further administrative
proceedings pending judgment on the pending writs of mandate. Clovis
opposed the stay. In February 1993, the trial court granted the
Gallands' petition and stayed the 1991 and 1992 rent increase proceedings.
The court found the Commission could not meaningfully review the
rent increases when prior increases remained unsettled.
Pursuant to a fifth amended briefing schedule,
the parties filed extensive briefs in May and June 1993. The administrative
record was lodged with the court on June 3, 1993. At a status conference
on June 22, 1993, the parties agreed the court would determine liability
from the administrative record, the parties' briefs and the court's
file in the matter. If the court determined the Gallands had prevailed
on the petitions for writ of mandate and/or the complaint, the court
would hold further proceedings to determine remedies and damages.
Trial Court Decision
In August 1994, the court issued a statement of
decision. It found that the manner in which the Commission and council
applied and administered the Ordinance during the 1988, 1989 and
1990 rent review proceedings violated the Gallands' procedural and
substantive due process rights. However, the violations did not
effect a taking under the Fifth Amendment to support an inverse
Based on the due process violations, the court
granted the petitions for writ of administrative mandate, vacated
the Commission decisions and dismissed the administrative proceedings.
The expense and delay caused by the due process violations rendered
the rehearing remedy provided by section 1094.5 "patently inadequate."
The court concluded the Gallands were entitled to damages under
section 1983 for their loss of a fair ROI and for the expenses,
costs and reasonable attorney fees incurred as a result of Clovis's
arbitrary and unreasonable actions.
After hearings on the issue, the court awarded
the Gallands damages pursuant to section 1983 as follows: (1) $247,885
for costs incurred as a [73 Cal.App.4th 386] result of the
arbitrary and unreasonable administrative proceedings ($254,860
[amount actually spent] minus $6,975 [amount the Gallands would
have spent absent the constitutional violations]); (2) $236,806
for lost rents from 1988 through March 31, 1995, based on the methodology
stipulated to by the parties for calculating fair ROI; (3) prejudgment
interest on items (1) and (2); (4) attorney fees of $378,955; (5)
costs of suit pursuant to Code of Civil Procedure section 1033.5;
and (6) postjudgment interest from October 10, 1995.
1. -3. fn. *
* * *
4. Kavanau does not compel reversal of the
award of lost rent damages against Clovis.
Reference Note In Kavanau, supra,
Cal.4th 761, an apartment house owner incurred expenses improving
the property and applied for a rent increase. The Santa Monica Rent
Control Board granted an increase but required that the rent be
increased gradually over an eight-year period subject to the board's
rule that total increases not exceed 12 percent a year. In a prior
action, the Court of Appeal had concluded that the 12 percent limit
deprived Kavanau of a fair return and ordered the board not to apply
the limit to his application for rent increases. (Kavanau v.
Santa Monica Rent Control Bd. (1993) 19 Cal.App.4th 730, 736
[23 Cal.Rptr.2d 724].) Subsequently, Kavanau filed this action to
recover damages stemming from the temporary application of the limitation.
He alleged causes of action for inverse condemnation and for a deprivation
of due process (section 1983). The trial court granted the board's
demurrer. (Kavanau, supra, 16 Cal.4th at pp. 766-768.)
The Supreme Court questioned the appellate court's
reasoning that application of the 12 percent limit to Kavanau's
petition for rent increases violated his due process rights. However,
the judgment in that case was final so the court accepted as true
the conclusion that application of the limit deprived Kavanau of
a fair return and thus violated his right to due process. (Kavanau,
supra, 16 Cal.4th at pp. 777-779, 781.) Kavanau abandoned
his section 1983 claim for damages on appeal, choosing to focus
on his claim for inverse condemnation damages. (Kavanau,
supra, at p. 780.) [73 Cal.App.4th 387]
The Kavanau court concluded it need not
decide whether a rent regulation that violates a property owner's
right to due process also constitutes a regulatory taking. Assuming
it might, the availability of an adequate remedy for the due process
violation obviated the taking. The adequate remedy was a valuable
benefit that satisfied the takings clause. (Kavanau, supra,
16 Cal.4th at p. 782.) The court reasoned, since due process required
that future rent increases must enable the owner to achieve a fair
return, the rent board, when setting rent ceilings, had to consider
the cost to Kavanau of any confiscatory rent ceilings the board
had previously imposed. Thus, "irrespective of whether section 1983
would have afforded Kavanau a remedy for the due process violation,
his continuing right to an adjustment of future rents can provide
an adequate remedy." (16 Cal.4th at p. 783.) This remedy placed
the cost of compensating Kavanau on the tenants who benefited from
the unconstitutionally low rents and avoided imposing a burden on
the court to determine appropriate rent in order to measure damages.
(Id. at p. 784.)
The court noted, if the landlord promptly challenged
the confiscatory rent setting, and sought a stay of that order during
litigation, lost rents, and thus any future rent adjustments, were
likely to be relatively small. On the other hand, a landlord who
permitted large losses to accumulate could not complain if market
forces prevented him from recouping those losses. (Kavanau,
supra, 16 Cal.4th at p. 785.) The court did not decide what
alternative remedy might be appropriate if a landlord established
that future rent adjustments were unavailable. But, the court held,
before a landlord could allege such unavailability, he must petition
for those adjustments, the rent board must determine, subject to
judicial review, their appropriate amount, and he must attempt to
impose them. (Ibid.)
Subsequently, in Yee v. Mobilehome Park Rental
Review Bd. (1998) 62 Cal.App.4th 1409 [73 Cal.Rptr.2d 227],
the court applied Kavanau to a mobilehome park owners' claim
for damages for "lost profits" during the period when they were
denied sufficient rents to receive a fair return. In earlier proceedings,
the appellate court found that the rent control board's decision,
which authorized lower rent increases than requested by the Yees,
was not supported by substantial evidence. After the Yees eventually
were awarded the requested rent increase, they sought damages. The
trial court found the Yees had lost $591,415 in rents, but denied
their request for damages on the grounds the rent board was immune
from liability under Government Code section 820.2 and the park
tenants were not parties to the action. (62 Cal.App.4th at pp. 1416-1417.)
The Court of Appeal affirmed. Assuming without
deciding that the Yees' lost profits claim amounted to a due process
violation, Kavanau's remedy [73 Cal.App.4th 388] applied.
Regardless of whether section 1983 would have provided the Yees
relief for the due process violation, their continuing right to
an adjustment of future rents provided an adequate remedy. (Yee
v. Mobilehome Park Rental Review Bd., supra, 62 Cal.App.4th
at pp. 1421, 1424-1425.) The Yees, like Kavanau, could recover the
lost rents by a request to the rent control board for an adjustment
of future rents to reflect the past deficiencies. (Id. at
p. 1425.) The ongoing process of setting rent ceilings dispelled
the due process violation. (Id. at p. 1427.)
Clovis submits Kavanau and Yee support
its claims that the lost rent damages must be paid by the tenants
through future rent adjustments and are not a proper element of
damages against the public entity. The Gallands contend Kavanau
does not apply in this section 1983 case. The Gallands have the
Unlike this case, Kavanau and Yee
do not involve viable section 1983 claims. Kavanau abandoned his
civil rights claim on appeal, and the Yee court determined
the rent board was immune from section 1983 liability under Government
Code section 820.2. Thus, in concluding that irrespective of whether
section 1983 would have afforded the landlords relief, the right
to future rent adjustments provided an adequate remedy, neither
court addressed whether an adequate state remedy precluded an alternative
remedy under section 1983 for the substantive due process violation.
That is the issue before this court.
The purpose of damages under section 1983 is to
compensate the plaintiff for injuries caused by the deprivation
of constitutional rights. (Farrar v. Hobby (1992) 506 U.S.
103, 112 [113 S.Ct. 566, 573, 121 L.Ed.2d 494].) Section 1983 was
intended to provide a remedy for violations of civil rights where
the state remedy, though adequate in theory, is not available in
practice. Thus, overlapping state remedies are generally irrelevant
to whether the plaintiff is entitled to damages under section 1983.
(Zinermon v. Burch (1990) 494 U.S. 113, 124 [110 S.Ct. 975,
982-983, 108 L.Ed.2d 100.) Under section 1983 and Zinermon,
the trial court properly awarded the Gallands lost rents damages
from Clovis as an element of their injuries caused by Clovis's substantive
due process violations. Nothing in Kavanau precludes that
award in this case.
In addition, Kavanau is distinguishable
because it involved a "takings" claim rather than a deprivation
of due process claim. Takings claims require the plaintiff to attempt
to obtain compensation before the claim is ripe. (Kavanau,
supra, 16 Cal.4th at p. 783.) Substantive due process claims
[73 Cal.App.4th 389] brought under section 1983 are ripe
at the time of harm, and the plaintiff need not seek compensation
under state remedies. (Zinermon v. Burch, supra, 494
U.S. 113.) Thus, Kavanau's rule that the plaintiff must seek
compensation through the rent review process is inapplicable to
the Gallands' right to recover for denial of substantive due process
under section 1983.
Moreover, certain policy considerations underlying
the Kavanau future rent adjustment remedy to compensate for
lost rents do not apply in this case. For example, to the extent
Clovis's irrational application of the Ordinance resulted in rents
insufficient to provide the Gallands a fair return, the tenants
in this case, like the tenants in Kavanau, received a corresponding
benefit and should bear the financial burden of correcting the error.
However, Kavanau's lost rent losses and thus the future rent adjustments
were probably relatively small. (Kavanau, supra, 16
Cal.4th at p. 782.) In contrast, the Gallands' lost rents and interest
as of 1995 exceeded $235,000. Responsibility for the substantial
accumulation of lost rent damages lies with Clovis rather than the
Gallands or the tenants because Clovis's delay in issuing final
decisions and preparing the administrative record precluded the
parties from obtaining more timely judicial review.
Additionally, the lengthy delays in this case
and the fact that many of the Woods' tenants are elderly render
Kavanau's remedy less likely to place the cost of compensating
the Gallands on those tenants who benefited from the confiscatory
rents in 1988, 1989 and 1990. Finally, the long and tortured path
this case has taken to date militates against sending the matter
back for further administrative proceedings addressing these ancient
Accordingly, Kavanau and Yee do
not compel reversal of the award of lost rent damages against Clovis.
[73 Cal.App.4th 390]
Disposition: The judgment is affirmed. Respondents are awarded
costs on appeal.
Dibiaso, Acting P. J., and Buckley, J., concurred.
FN *. Pursuant
to California Rules of Court, rules 976(b) and 976.1, this opinion
is certified for publication with the exception of parts 1-3 of
FN *. See
footnote, ante, page 371.