Manufactured Home Communities v. City of San Jose
| Decision Date | 18 August 2003 |
| Docket Number | No. C03-01713 JW.,C03-01713 JW. |
| Parties | MANUFACTURED HOME COMMUNITIES, INC., and MHC Operating Limited Partnership, an Illinois limited partnership, dba Westwinds Manufactured Home Community, Plaintiffs, v. CITY OF SAN JOSE, and Enis Rice, Gary DeWet, Martin Vancil, and Marsha Skratt, individually, Defendants. |
| Court | U.S. District Court — Northern District of California |
David J. Bradford, Lisa Scruggs, Jenner & Block, Chicago, IL, Elliot L. Bien, Bien & Summers, LLP, Novato, CA, Paul T. Jensen, San Jose, CA, for Plaintiffs.
Shannon Kathleen Smyth-Mendoza, Office of the City Attorney, San Jose, CA, for City of San Jose.
Bruce E. Stanton, Law Offices of Bruce E. Stanton, San Jose, CA, for Enis Rice, Gary DeWet, Martin Vancil, and Marsha Skratt.
ORDER GRANTING DEFENDANT CITY OF SAN JOSE'S MOTION TO DISMISS; GRANTING DEFENDANT CITY OF SAN JOSE'S MOTION FOR ATTORNEYS' FEES AND COSTS; DENYING DEFENDANT CITY OF SAN JOSE'S MOTION FOR SANCTIONS; GRANTING INDIVIDUAL DEFENDANTS' MOTION TO DISMISS
The following motions were noticed for hearing on August 4, 2003: (1) Defendant City of San Jose's ("City") motion to dismiss Plaintiffs' Manufactured Home Communities, Inc., and MHC Operating Limited Partnership, an Illinois limited partnership, dba Westwinds Manufactured Home Community's (collectively "MHC") Complaint; (2) City's request for judicial notice; (3) City's motion for attorneys' fees and sanctions; and (4) Defendants Enis Rice, Gary DeWet, Martin Vancil and Marsha Skratt's ("Individual Defendants") motion to dismiss MHC's Complaint. MHC timely filed oppositions. The City timely filed replies to MHC's oppositions. The Individual Defendants did not file a reply.
Pursuant to Civil Local Rule 7-1(b), the Court found it appropriate to take all of these motions and objections under submission without oral argument. Based on all papers filed to date, the Court grants City's motion to dismiss this case with prejudice and City's motion for attorneys' fees and costs. The Court denies City's motion for sanctions. The Court grants the Individual Defendants' motion to dismiss this case. The motions are discussed below.
MHC is a large publicly traded real estate investment company that owns and operates Westwinds Manufacture Home Community ("Westwinds"), located in San Jose, California. MHC leases approximately seven hundred twenty-five (725) mobilehome spaces at Westwinds. The four Individual Defendants in this case are mobilehome owners who lease spaces in Westwinds. The amount of rent MHC is permitted to charge its tenants is regulated by the City of San Jose Mobilehome Rent Ordinance ("Ordinance").
The Ordinance was enacted as part of San Jose Municipal Code ("SJMC") § 17.22.010 et seq. for the following purposes: (1) to prevent excessive and unreasonable rent increases to mobilehome park residents; (2) to prevent an exploitation of the shortage of available mobilehome lots in the city; (3) to permit mobilehome park owners to receive a fair and reasonable return; and (4) to establish a process for rent dispute resolution. SJMC § 17.22.020.
The Ordinance limits rent increases for mobilehome spaces hooked up after September 7, 1979, based upon a formula set forth in § 17.22.570. The Ordinance utilizes the "maintenance of net operating income" ("MNOI") approach to stabilize mobilehome rents. Under this approach, a mobilehome park owner may increase rents for mobilehome units up to a "Maximum Annual Percentage Increase" (based primarily on the Consumer Price Index) without the need for review from the City's administrative hearing process. SJMC §§ 17.22.155.C.1 and 17.22.450.A. Furthermore, a park owner may increase rents without review, regardless of the increase, under certain circumstances after the mobilehome owner or tenant vacates the unit or pursuant to a long-term lease of over twelve months. SJMC §§ 17.22.370, 17.22.450.D and 17.22.450.E.
The combination of both the annual rent increases to the controlled spaces and the occurrence of vacancy decontrol over the years would normally allow most parks to increase rental income at a rate that would allow, at minimum, a constitutionally guaranteed return. However, for those instances in which a park owner believes that the annual maximum increase will not allow the owner to recover a reasonable return, the Ordinance provides the right to petition for an increase in excess of the maximum annual percentage increase allowed. SJMC § 17.22.470.A. and 17.22.700 et seq.
At the hearing for such a petition, a Hearing Officer compares the net operating income ("NOI") from a "base year" — during which a market rent is presumed to have applied so as to provide the park owner with a fair and reasonable return — with the NOI from the year prior to the hearing. SJMC §§ 17.22.480 and 17.22.550. The Ordinance establishes 1985 as the base year. MHC Operating Limited Partnership v. City of San Jose, 106 Cal.App.4th 204, 130 Cal.Rptr.2d 564 (2003).
The Ordinance allows the mobilehome park owner to take the NOI from the base year and adjust it for inflation using a factor based upon a percentage of the Consumer Price Index. SJMC § 17.22.550. The Hearing Officer then determines the rent increase in the amount required to provide the landlord with a fair and reasonable return. SJMC § 17.22.580.A. In doing so, the Hearing Officer determines what a fair and reasonable return in accordance with the Ordinance would be, the gross income required to produce the fair and reasonable return, and the rent increase needed to produce the required gross income. SJMC § 17.22.580.B.
MHC purchased Westwinds in August 1997. Under a deal with the previous owner, the ground-lease rent and other expenses for the Park allegedly increased by $1.3 million per year. (Compl. ¶ 12.) On May 29, 1998 MHC petitioned for an extraordinary rent increase for Westwinds with the City's Rental Dispute Program. (Compl. ¶ 13.) MHC's original Rent Petition used 1985 as the base year and contained an estimate of 1985 NOI. () However, the application was later resubmitted in June or July 1998, wherein MHC subsequently amended its Rent Petition and used 1996 as the base year. (Compl. ¶ 17; MHC Operating Limited Partnership, 106 Cal.App.4th at 211-212, 130 Cal.Rptr.2d 564; and MHC's Mobilehome Petition, at 422-426, attached to City's Motion to Dismiss as Exh. "F".)
At the hearings held on MHC's petition, the City acknowledged that MHC was unable to establish the actual 1985 NOI because the Park's prior owner had not retained adequate financial records for 1985. (Compl.¶ 15.) MHC sought to use 1996 as the base year for determination of NOI, instead of 1985. However, the City hearing officer rejected that approach and denied MHC's petition for an extraordinary rent increase, specifically citing MHC's failure to establish actual base year NOI for 1985. (Compl. ¶ 17.; MHC Operating Limited Partnership, 106 Cal.App.4th at 210, 130 Cal.Rptr.2d 564.)
MHC filed a writ petition on December 29, 1998, in Superior Court Case number CV778980. (MHC's Verified Petition for Writ of Administrative Mandamus, at 00001-00009, attached to City's Motion to Dismiss as Exh. "D".) In a tentative decision dated July 14, 1999, Superior Court Judge John F. Herlihy granted MHC's petition for writ of mandate challenging the Hearing Officer's October 6, 1998 Final Order. (Tentative Decision dated July 14, 1999 in Superior Court Case No. CV 778980, at 00703, attached to City's Motion to Dismiss as Exhibit "G".) In so doing, the state court concluded that the Ordinance was unconstitutional as applied to MHC because it "lacked a mechanism for calculating fair return when mobilehome park owners cannot prove actual base year NOI." MHC Operating Limited Partnership, 106 Cal.App.4th at 211, 130 Cal.Rptr.2d 564.
In response to the trial court's original decision, in 1999, the City enacted an Urgency Ordinance intended to address the concerns raised by the state court. (Urgency Ordinance No. 25996, attached to City's Motion to Dismiss as Exh. "B".) The Urgency Ordinance amended the Ordinance by adding a section giving the Hearing Officer the discretion to consider 1985 estimates of NOI "when actual base year information is unavailable." (Compl.¶ 20.)
At the subsequent administrative hearing in November 1999, further hearings to consider MHC's rent increase application were held. (Compl.¶ 22.) MHC provided no 1985 estimates and instead provided 1996 figures. The City provided an expert witness, Dr. Barr, for the mobilehome tenants who "opined that a reasonable estimate of 1985 NOI could be made using the available information." MHC Operating Limited Partnership, 106 Cal.App.4th at 212, 130 Cal.Rptr.2d 564. The Hearing Officer concluded that "MHC had failed to carry its burden of establishing an estimated 1985 base year NOI, and she again denied MHC a rent increase." Id. Her decision was made "without prejudice", ruling that MHC may reapply for the rent increase based on estimates of 1985 or such other base years as authorized by the Ordinance. Id.
MHC subsequently filed a motion for the issuance of a supplemental writ of administrative mandamus, seeking an order mandating the hearing officer to consider a base year other than 1985. MHC asserted that given its alleged inability to calculate actual or estimate 1985 NOI and the $1.3 million increase in the ground lease expenses which resulted in a significant drop in MHC's net operating income, the City hearing officer ignored the Urgency Ordinance and the court's prior order, and that her refusal to establish MHC's fair rate of return using alternative base years was an abuse of discretion. (Compl.¶ 24, 26.) MHC did not challenge the validity of the Ordinances at this time.
A hearing was held in May 2000, in which the trial court denied...
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