San Remo Hotel, et al. v. City & County of San Francisco (06/20/2005)

Question presented: Is a 5th Amendment takings claim barred by issue preclusion based on a judgment denying compensation solely under state law, which was rendered in a state court proceeding that was required to ripen the federal takings claim?

BY BRIAN P. WATSON, MEDILL NEWS SERVICE

Built in 1906, The San Remo Hotel resides in the center of many popular attractions, just blocks away from San Francisco's famous Fisherman's Wharf, Ghirardelli Square and Lombard Street. Its location and European "pension style" layout—it has no telephones in rooms, and the occupants share bathrooms—make it an attractive destination for tourists.

When brothers Thomas and Robert Field bought the historic hotel in 1970, they had no idea where their investment would take them. After a long duel with the City of San Francisco, they've found themselves in the U.S. Supreme Court, battling the constitutionality of a city ordinance aimed at curbing the reduction of affordable housing.

Following a study that found that one-fifth of San Francisco's residential hotel units disappeared by way of demolition or conversion to tourist space in the late 1970s, the city enacted the Residential Hotel Unit Conversion and Demolition Ordinance in 1981. (These enactments are commonly known as Housing Conversion Ordinances, or HCs.)

It required hotel operators to obtain a permit to convert residential spaces to tourist units. To do so, hotel owners had to guarantee to either build or restore the same amount of residential units as those being converted or make a donation to the city's Residential Hotel Preservation Fund Account equal to 40 percent of the cost of conversion to tourist spaces.

The HCO provided that units occupied permanently by one resident as of Sept. 23, 1979 would be deemed "residential." So the city circulated a survey aimed at assessing the number of residential versus tourist units.

When Jean Irribarren, who was then operating the hotel for the Fields, filled out the survey, he mistakenly reported that all of the hotel's units were residential.

The ordinance was replaced in 1990 with even stiffer provisions. They mandated that residential units could not be used for tourist occupancy; owners had to pay an 80 percent donation (double what the prior ordinance required); and owners that rented tourist space during the summer had to offer half of those spaces to residents during the winter. The new ordinance also added that economic hardship was no excuse for failure to comply. It did, however, provide a loophole, allowing owners to pay the original 40 percent charge if they applied before May 12, 1990.

Through their T & R Investment Corp., the brothers applied for a permit to convert the previously registered residential units to tourist rooms. The city objected, citing the registration Irribarren made, which, under then-current zoning laws, prohibited the construction.

After a long wrangle in the municipal court system over a temporary permit, T&R filed suit in federal court against San Francisco, claiming, among other things, that the new ordinance violating the takings clause of the 5th Amendment that prohibits private property from being taken "for a public use, without just compensation."

In 1993, the U.S. District Court for the Northern District of California ruled for the Fields, declaring the HCO unconstitutional and issuing a preliminary injunction. , However, three years later, the court, in fully considering the issue, sided with the city and lifted the injunction.

At that point, the Fields opted to pay the fee—to the tune of $567,000—to convert to an all-tourist hotel, but also decided to keep trying their luck in court.

No such luck. In 1998, the 9th Circuit Court of Appeals sided with the city ,saying the Fields' claims were unripe, in that they needed to seek compensation in state court before pursuing their case on the federal level. In regarding the federal action as unripe, the 9th Circuit relied on the 1985 Supreme Court opinion in Williamson County Planning Commission v. Hamilton Bank of Johnson City.

In state court, in 2000, the Fields' luck turned when the California Court of Appeals sided with them. The court concluded that the city needed to prove that the HCO did not represent an illegal taking under state law because the ordinance was a mandate that applied to residential hotels and not the general population. Judge Lawrence Stevens equated the ordinance's fee requirement to "ransom."

In 2002, the California Supreme Court, by vote of 4-3, reversed, saying that the ordinance did not violate the state's constitution and that the city can charge a fee or force a hotel owner to replace units if conversion goes forward. But all seven justices said they had not ruled on any potential federal questions, so the door remained open for further action.

The following year, the U.S. District Court for the Northern District of California got another crack at the case. This time it ruled that the brothers' federal takings claims were prohibited by issue preclusion, a doctrine which requires that a previous ruling serve as a final determination in the arguments made in a later case. Judge D. Lowell Jensen forbid T&R from re-trying several claims in federal court and dismissed others based on statutes of limitations.

In 2004, the 9th Circuit affirmed on grounds of issue preclusion, scoring another victory for the city of San Francisco. The panel concluded that preclusion can bar federal takings claims even though the state court proceedings were required to ripen those claims. That can be the case, the 9th Circuit reasoned, if the substantive federal takings law is the same as California's state compensation law. And the court said they were the same, in that no heightened scrutiny exists for takings imposed by legislation.

The Fields sought review from the U.S. Supreme Court.

Their principal argument was that the 9th Circuit had set "the Williamson trap," by first deciding that the federal takings claim was unripe, then when it got the case again deciding that the takings claim was precluded from consideration on the merits in any federal court.

They also argued that the 9th Circuit ruling expressly conflicts with a 2003 2nd Circuit opinion (in Santini v. Connecticut Hazardous Waste Management Service), with other circuits divided on the issue too, wrote Paul Utrecht, the San Francisco-based attorney for the Fields.

On Dec. 10, 2004, the Court accepted review in the case, limited to the first question presented in the hotel's petition.

Andrew Schwartz, Deputy City Attorney for San Francisco, said the framers of the U.S. Constitution did not intend to provide the protections Utrecht is fighting for.

"It's whether property owners get two bites of the apple – do they sue first and lose in state court, and then get to sue again in federal court?" he said. "There's nothing unfair or illegal about requiring that takings claimants start their case in state court."

He also said the ability of San Remo to go to federal court despite the state courts' repeated mandate is unfair.

"Now they say they can go [to federal court] and have no deference to state court adjudication," he said. "You would think that it would be hard to conceive of a more wasteful process."

Schwartz, who recently left his city post to join the firm Shute, Mihaly & Weinberger, said he will continue to work on the case, but is currently evaluating potential outside counsel to present the case before the Court.

For Utrecht, it will be his first appearance before the Court.

On June 20, 2005, the Court sided unanimously with San Francisco, declaring that it is not willing to create an exception to the full faith and credit statute to provide a federal forum to advance federal takings claims.

Writing for the Court, Justice John Paul Stevens rejected the argument that the result would be to force parties to litigate their claims in state court without any realistic possibility of ever obtaining review under the takings clause in a federal forum.

Four justices concurred separately to note that they now believe that the Court's 1985 opinion in Williamson "may have been mistaken."

Chief Justice William Rehnquist wrote the concurrence, for himself and Justices Sandra Day O'Connor, Anthony Kennedy and Clarence Thomas.