Richardson v. City and County of Honolulu, Civ. No. 91-00725 DAE.

• Citation: 802 F. Supp. 326
• Decision Date: 16 September 1992
• Docket Number: Civ. No. 91-00725 DAE.
• Court: United States District Courts. 9th Circuit. United States District Court (Hawaii)
• Parties: William S. RICHARDSON, et al., Plaintiffs, v. CITY AND COUNTY OF HONOLULU, Defendant, and Hale Coalition, Intervenor.

802 F. Supp. 326

William S. RICHARDSON, et al., Plaintiffs, v. CITY AND COUNTY OF HONOLULU, Defendant and Hale Coalition, Intervenor.

Civ. No. 91-00725 DAE.

United States District Court, D. Hawaii.

September 16, 1992.

Gail M. Tamashiro, Dennis J. Gaughan, Cades Schutte Fleming & Wright, C. Michael Hare, Cades Schutte Fleming & Wright, Honolulu, Hawaii, for plaintiffs.

Dennis E.W. O'Connor, Jerrold K. Guben, Reinwald O'Connor Marrack Hoskins & Playdon, Honolulu, Hawaii, for intervenor.

Ronald B. Mun, Thomas P. Rack, Deputy Corp. Counsel, Corp. Counsel City & County of Honolulu, Dale W. Lee, Bert T. Kobayashi, Jr., Lex R. Smith, Kobayashi Sugita & Goda, Honolulu, Hawaii, for defendant.

ORDER GRANTING IN PART AND DENYING IN PART MOTIONS FOR SUMMARY JUDGMENT AND CERTIFYING QUESTION TO HAWAII SUPREME COURT

DAVID ALAN EZRA, District Judge.

This court heard the parties' motions for summary judgment on August 10, 1992.

BACKGROUND

On December 4, 1991, the City Council of defendant City and County of Honolulu¹ passed Bills 156 (1990) and 36 (1991) which were later enacted on December 18, 1991 as Ordinances 91-95 and 91-96, respectively. Ordinance 91-95 involves a mechanism for the transfer of the fee simple interest of leasehold property from condominium lessors to condominium lessees in Honolulu. Ordinance 91-96 imposes a ceiling on renegotiated lease rents for ground leases of owner-occupied residential condominium units in Honolulu.

On December 18, 1991, the date of enactment of the aforementioned ordinances, the plaintiff Trustees of the Kamehameha Schools/Bernice Pauahi Bishop Estate ("Bishop Estate") filed the present action alleging that both ordinances are unconstitutional. Bishop Estate asserts the following specific causes of action:

Count I — Deprivation of constitutional rights in violation of 42 U.S.C. § 1983;

Count II — Ordinance 91-96 is facially unconstitutional in that it effects an impermissible taking in violation of the Fifth and Fourteenth Amendments;

Count III — Ordinance 91-96 is facially unconstitutional in that it violates Bishop Estate's substantive due process rights under the Fifth and Fourteenth Amendments;

Count IV — Ordinance 91-96 is facially unconstitutional in that it violates Bishop Estate's procedural due process rights under the Fourteenth Amendment;

Count V — Ordinance 91-96 is facially unconstitutional in that it violates Bishop Estate's equal protection rights under the Fourteenth Amendment;

Count VI — Ordinance 91-96 unreasonably and substantially impairs Bishop Estate's contract rights in violation of Article I, Section 10 of the Constitution;

Count VII — Ordinance 91-95 is facially unconstitutional in that it effects an impermissible taking in violation of the Fifth and Fourteenth Amendments;

Count VIII — Ordinance 91-95 is facially unconstitutional in that it violates Bishop Estate's substantive due process rights under the Fifth and Fourteenth Amendments;

Count IX — Ordinance 91-95 is facially unconstitutional in that it violates Bishop Estate's equal protection rights under the Fourteenth Amendment;

Count X — Ordinance 91-96 violates several provisions of the Constitution of the State of Hawaii;

Count XI — Ordinance 91-95 violates several provisions of the Constitution of the State of Hawaii;

Count XII — Ordinance 91-96 conflicts with various statutes of the State of Hawaii; and

Count XIII — Ordinance 91-95 conflicts with various statutes of the State of Hawaii.

Bishop Estate seeks declaratory relief as well as attorneys' fees, costs, and interest.

On February 14, 1992, Bishop Estate filed a motion for partial summary judgment on Counts I, II, III, VI, XII, and XIII. On June 8, 1992, the HALE Coalition filed a motion for partial summary judgment on the remaining counts of the complaint. On June 9, 1992, the City filed a cross motion for summary judgment on all counts.

DISCUSSION

I. ORDINANCE 91-96

A. Background

Ordinance 91-96 imposes a ceiling on renegotiated lease rents for ground leases of owner-occupied residential condominium units in Honolulu. In the "Findings and Purpose" section of Ordinance 91-96, the City found that there were 25,203 owner-occupied condominium housing units in Honolulu in 1987. Ord. 91-96 § 1(1)(A). The City further found that 16,291 of such units, or approximately 65% of the total, were on leased land.²Id. § 1(1)(B). The City indicated that residential leaseholds have had, and continue to have, numerous undesirable socio-economic effects including: increases in lease rental negotiations of up to 1,000%; inequality of bargaining power favoring lessors; and increasing lease rentals forcing lessees to give up their leases and look for other accommodations. In sum, the City stated:

The purpose of this Ordinance is to set maximum renegotiated lease rents which are affordable to condominium apartment owner-occupants and fair to lessors. This Ordinance is intended to be in conformance with Richardson I.³

Ordinance 91-96 applies to all leases that contain provisions for renegotiation of lease rents for individual residential owner-occupant apartments. Ord. 91-96 § 1.3. An "owner-occupant" is defined as an owner of a residential apartment who, on the date of renegotiation of the lease of the residential apartment, occupies the residential apartment as the owner's principal residence. Id. § 1.2(a). Pursuant to the ordinance, the first renegotiation shall not be scheduled before the fifteenth year following the initial date of the lease and subsequent renegotiations shall occur no more frequently than every ten years. Id. § 1.4(a)(1).

Ordinance 91-96 provides that the maximum annual renegotiated lease rent shall be the initial lease rent multiplied by a rent factor. Id. § 1.5(b). The "initial lease rent" is the greater of the beginning lease rent specified in the lease or the reasonable market value rent prevailing at the effective date of the lease.⁴ Id. § 1.1. Furthermore, the "rent factor" is the average consumer price index ("CPI")⁵ for the six-month period in which the rent negotiation occurs divided by the average CPI in effect at the time of the effective date of the initial lease rent. Id. § 1.5(b).

When a lease comes up for renegotiation, the lessor and lessee are encouraged to attempt to reach agreement as to the renegotiated lease rent. Id. § 1.4(b). If the parties are unable to reach an agreement, however, they must proceed to arbitration. Id. If the lease at issue is subject to section 516D-12 of the Hawaii Revised Statutes, the arbitration shall proceed pursuant to chapter 516D. Id. Otherwise, the City Department of Housing and Community Development (the "Department") shall arbitrate the matter. Id. The Department is also charged with enforcing the provisions of Ordinance 91-96. Id. § 1.14.

Ordinance 91-96 also provides a mechanism for adjusting the renegotiated lease rent biennially in order to account for further changes in the CPI. Id. § 1.6. Furthermore, under certain narrowly-defined circumstances, the ordinance allows for an administrative adjustment of annual renegotiated lease rent to an amount higher than the maximum annual renegotiated lease rent. Id. § 1.7. In general terms, a lessor may petition the Department for an administrative adjustment when the lessor pays the operating expenses from lease rent proceeds and the lessor's current net operating income is less than the lessor's net operating income in the last year of the fixed rent period. Id. § 1.7(c). When authorized, the lease rent shall be adjusted so that the net operating income, as adjusted for inflation measured by the CPI, stays the same as the net operating income in the last year of the fixed rent period. Id. § 1.7(b), (c). Either the lessor or lessee may appeal the Department's approval, disapproval, or modification of a proposed adjusted lease rent. Id. § 1.7(g).

Every renegotiated lease rent, whether set by agreement or arbitration, must be submitted to the Department for certification that the rent is within the applicable maximum. Id. § 1.9. The renegotiated lease rent shall be deemed within the maximum unless, within thirty days of the submission of the renegotiated lease rent, the Department certifies that such rent is not within the maximum. Id. § 1.9(d). If the Department rejects the proposed renegotiated lease rent, the lessor and lessee must continue their renegotiation. Id.

Any party aggrieved by the Department's action or inaction may appeal to the Department. Id. § 1.9(e). Upon the filing of an appeal, the Department shall (1) hold a hearing in accordance with the contested case procedures of Chapter 91 of the Hawaii Revised Statutes, and (2) issue an appropriate decision.⁶ Id.

If an owner-occupant transfers his lease-hold interest during a renegotiated rent period to another person intending to be an owner-occupant, the renegotiated lease rent shall be applicable to the new owner-occupant. Id. § 1.10. However, if an apartment owner ceases to be an owner-occupant or if an owner-occupant transfers his leasehold interest to a person who is not an owner-occupant, the lessor may reopen the negotiated lease rent. Id. § 1.12, 1.13. Once reopened, the renegotiated lease rent must be set in accordance with the lease agreement and without regard to the provisions of Ordinance 91-96. Id.

B. The Takings Clause (Count II)

1. Richardson I

In Richardson v. City and County of Honolulu, 759 F.Supp. 1477 (D.Haw.1991) ("Richardson I"), this court considered the constitutionality of Ordinance 91-96's statutory predecessor, Ordinance 90-95. This court held that Ordinance 90-95 violated the Takings Clause of the United States Constitution. As the City drafted Ordinance 91-96 so as to attempt to correct the constitutional deficiencies of Ordinance 90-95, it is necessary to review Richardson I.

Ordinance 90-95 was designed to impose a maximum ceiling on renegotiated lease rents for residential condominiums in Honolulu. The ordinance provided...