Small Property Owners v. San Francisco

• Decision Date: 09 August 2006
• Docket Number: No. A108924.,A108924.
• Citation: 47 Cal.Rptr.3d 121,141 Cal.App.4th 1388
• Court: California Court of Appeals Court of Appeals
• Parties: SMALL PROPERTY OWNERS OF SAN FRANCISCO et al., Plaintiffs and Appellants, v. CITY AND COUNTY OF SAN FRANCISCO, Defendant and Respondent.

47 Cal.Rptr.3d 121

141 Cal.App.4th 1388

SMALL PROPERTY OWNERS OF SAN FRANCISCO et al., Plaintiffs and Appellants, v. CITY AND COUNTY OF SAN FRANCISCO, Defendant and Respondent.

No. A108924.

Court of Appeal, First District, Division 5.

August 9, 2006.

Certified for Partial Publication.^*

Zacks Utrecht & Leadbetter, Paul F. Utrecht, Andrew M. Zacks, San Francisco, Eric D. McFarland, Salvatore C. Timpano, Novato, Kemnitzer, Anderson, Barron & Ogilvie, Mark F. Anderson, San Francisco, Counsel for Plaintiffs and Appellants.

Dennis J. Herrera, City Attorney, Kristen A. Jensen, Deputy City Attorney, Rafal Ofierski, Deputy City Attorney, Counsel for Defendant and Respondent.

REARDON (THOMAS), J.^**

Small Property Owners of San Francisco, Jess Pacias, Dan A. Evans, and John Lockley, on behalf of themselves and a class of San Francisco landlords, appeal from a judgment entered after trial. The trial court ruled that an ordinance of respondent City and County of San Francisco (City), which required landlords to pay tenants interest on security deposits at a rate of 5 percent, did not effect a taking under the California Constitution or the United States Constitution. Appellants contend that the court erred in this conclusion and, in reaching its decision, erred in taking judicial notice of credit card interest rates. In addition, appellants argue that the court abused its discretion in requiring them to provide notice of the adverse judgment to class members by mail.

In the published portion of this opinion, we conclude that the ordinance did not effect a taking. In the unpublished portion, we determine that the judgment should be modified in regard to the notice of the judgment to the class. As so modified, the judgment will be affirmed.

I. FACTS AND PROCEDURAL HISTORY

Beginning in September 1983, San Francisco Administrative Code section 49.2 (Ordinance) required landlords to pay 5 percent interest to their tenants on tenant security deposits held for more than one year. After interest rates on money market accounts dipped below 5 percent, appellants sued the City.

A. THE COMPLAINT

Appellants filed their complaint on April 15, 2002, as a class action on behalf of the owners of one to six residential rental units who, pursuant to the Ordinance, were required to pay tenants 5 percent annual interest on their security deposits. They alleged that, due to state law requiring them to return security deposits within three weeks after termination of the tenancy, landlords had to keep the deposits in money market accounts. The interest rate paid by money market accounts beginning in April 2001 was less than 5 percent. On this basis, appellants contended, the Ordinance worked a taking within the meaning of article I, section 19 of the California Constitution and the Fifth Amendment to the United States Constitution. Specifically, appellants alleged: "The difference between the mandated 5% and the money market account yield is a taking without compensation within the meaning of the state and federal constitutions and the plaintiffs and class members have been damaged by having to pay this difference from their own funds." Appellants sought declaratory relief, damages, and an injunction.

B. PRETRIAL

The trial court overruled the City's demurrer to the complaint and denied its motion for summary judgment. Appellants' motion to certify the class was granted.

The matter proceeded to trial, which was bifurcated by stipulation of the parties. The parties presented four questions for resolution:

1. "Could the difference between what landlords could have earned by investing their tenants' security deposits in money market accounts from April 2001 through July 2002 (`the 16-month period'), and the 5% simple annual interest landlords were required to pay for the 16-month period (`the 16-month difference'), amount to a taking under applicable law?"

2. "If the 16-month difference alone could be a taking, must the takings analysis also consider interest rates that were available to landlords in money market accounts before the 16-month period to determine whether the Ordinance effected a taking under applicable law?" (Underscoring in original.)

3. "If interest rates from before the 16-month period must be considered in the takings analysis, what is the time period that must be considered, e.g (1) since the effective date of the Ordinance in September 1983, (2) since the landlord purchased the rental property for which the interest rate shortfall is being asserted, or (3) since the tenancy began for the security deposit at issue?"

4. "In the takings analysis, should landlords' transaction costs arising from their handling of tenant security deposits and paying 5% interest to their tenants be considered in determining liability or damages in this action, and if so, what costs incurred by landlords may be included in the calculation of transaction costs?"

C. EVIDENCE AT TRIAL

Evidence was provided to the court by way of declarations and stipulated facts, which included the following.

The Ordinance requiring landlords to pay to tenants 5 percent on security deposits was in effect from September 1983 through August 4, 2002. Effective August 4, 2002, the Ordinance was amended to require landlords to pay interest at the Federal Reserve discount rate, rather than a fixed rate of 5 percent.

The Ordinance did not require landlords to hold the security deposits in any particular type of account. To the contrary, section 49.2(e) of the San Francisco Administrative Code stated: "`Nothing in this Chapter shall preclude a landlord from exercising his or her discretion in investing security deposits.'" According to a declaration submitted by appellants' economics expert, however, the "relatively small sums of money typically involved in residential rental security deposits, together with provisions of the City's Administrative Code and provisions of California [s]tate law [requiring prompt return of the deposit to a vacating tenant], effectively limit a prudent small property owner's options for investing residential rental security deposits to deposit accounts and money market funds whose proceeds generally are available on demand."

During the 16-month period (roughly April 2001 through July 2002), the interest rate that could be obtained on money-market accounts was less than 5 percent. Because the highest rate in bank or money market accounts during the period was 2.2 percent, landlords were required to pay at least 2.8 percent interest on the security deposits from their own funds. The landlord's contribution, therefore, was around 60 percent in the 16-month period.

As to the actual dollar amount of shortfall covered by landlords during the period, appellants' expert estimated $125 on average per landlord, and specifically $281 for appellant Lockley and his two buildings, $51 for appellant Pacias, and $33 for appellant Evans. The City produced evidence, however, that many landlords did not pay tenants any of the required interest on tenant security deposits.

Evidence was also produced as to the significance of these out-of-pocket costs in the broader context of appellants' residential rental enterprises. The parties stipulated that, for landlords who held the maximum permitted security deposit (two months' rent), the amount of the interest difference during the 16-month period was 0.47 percent or less of the landlord's annual gross rental income; and for landlords who held less than the legal maximum, the difference was less than 0.47 percent of their gross annual rental income. Furthermore, the parties stipulated, this difference did not prevent class members from earning a fair return on their investment in residential rental properties and had no economic impact on the fair market value of those properties.

The City submitted evidence that the average annual rate of interest on uninsured money market funds from 1983 through July 2002 — roughly the effective period of the Ordinance — was greater than 5 percent. Appellants countered this evidence with declarations from its expert economist, who estimated that the landlords' administrative and transactional costs in selecting and maintaining their investment accounts amounted to .25 percent to 1 percent of the security deposit, thereby reducing the effective rate of return on money market accounts below 5 percent.

D. TENTATIVE STATEMENT OF DECISION

After oral argument by counsel, the trial court issued a tentative statement of decision which answered the first question in the City's favor: the difference between what landlords could have earned by investing their tenants' security deposits in money market accounts from April 2001 through July 2002, and the 5 percent simple annual interest landlords were required to pay for the 16-month period, did not constitute a taking. With this conclusion, the court found no need to decide the remaining questions. The court did ask the parties to comment on whether it could take judicial notice of the fact that credit card interest rates were higher than 5 percent during the 16-month period.

The parties responded to the tentative statement of decision. Among other things, appellants objected to the court taking judicial notice.

E. FINAL STATEMENT OF DECISION

In its final statement of decision, the trial court determined that the Ordinance was not a taking under any of the tests proposed by appellants. In connection with one aspect of its reasoning, the court took judicial notice of credit card interest rates. The court also concluded it was not bound by the appellate court decision in Action Apartment Assn. v. Santa Monica Rent Control Bd. (2001) 94 Cal.App.4th 587, 114 Cal.Rptr.2d 412 (Action Apartment) — which held that allegations concerning a Santa Monica ordinance requiring landlords to pay 3 percent on tenant security deposits stated a takings claim — because the Santa Monica ordinance was distinguishable.

Judgment was...