In what could be the final chapter of the Hawaii “land reform” process that started in the 1960’s, the U.S. Court of Appeals for the Ninth Circuit held that the City and County of Honolulu did not violate the Contracts Clause of the U.S. Constitution (U.S. Const. art. I, § 10) when it repudiated its agreement with condominium leaseholders to condemn the fee simple interests underlying their condominiums.

In Young v. City & County of Honolulu, No. 09-16034 (Mar. 22, 2011), the court concluded that in its agreements with the leaseholders, the City did not make an unconditional agreement to condemn, but rather the agreement was conditioned on the City Council first deteremining that the taking would further the public interest. Slip op. at 3387. Since the City Council had earlier made the determination that such takings were not in the public interest when it repealed the ordinance authorizing them, the court held that the City did not impair its obligations. 

Some background. The story begins long ago when the Hawaii legislature enacted the statute that was challenged and sustained in Hawaii Hous. Auth. v. Midkiff, 467 U.S. 229 (1984). Finding that the economic ills purportedly caused by the concentrated ownership of private single-family residential property in Hawaii would be bettered by individual land ownership, in Haw. Rev. Stat. ch 516 the legislature allowed homeowner/lessees to petition the Hawaii Housing Authority to exercise eminent domain on the homeowner’s behalf and condemn the fee simple interest underneath their homes from the lessor, and transfer it to the lessee upon payment of just compensation.

After that statute was upheld by the U.S.Supreme Court against a Fifth Amendment public use challenge in Midkiff, and under the Hawaii Constitution’s public use clause by the Hawaii Supreme Court in Hawaii Hous. Auth. v. Lyman, 68 Haw. 55, 704 P.2d 88 (1985), efforts were made to pass similar legislation affording condominium owners the same ability to force condemnation of their leasehold interests. 

At the state level, those efforts were ultimately unsuccessful, but the City & County of Honolulu eventually enacted a local version, codified as Hon. Rev. Ord. ch. 38. The ordinance relied on the same “anti-oligopoly” rationale as the Land Reform Act, and like the Land Reform Act, the ordinance was challenged under the public use clauses of the U.S. and Hawaii Constitutions. And, as in Midkiff and Lyman, those challenges were rejected by both federal (Richardson v. City and County of Honolulu, 124 F.3d 1150 (9th Cir. 1997)) and state courts (Richardson v. City and County of Honolulu, 76 Haw. 46, 868 P.2d 1193 (1994)).

Thus, under chapter 38, the owners of many Honolulu condominium projects were permitted to condemn and take the leasehold interests from their lessors. The way the process worked was that the condo owners applied to the city to “convert” (condemn) their leases, and entered into written contracts with the city in which the condo owners each agreed to pay the city $1,000, in return for which the city promised that after its acquisition of the lease, it would convey it to the condo owners. In these agreements, the City reserved its ability to condemn, and conditioned it upon a determination that the condemnation would further the public interest. Of course, the City Council virtually never determined that a condo condemnation would not further the public interest.

By 2005, however, public sentiment regarding eminent domain had turned, and the City Council repealed chapter 38. At the time of repeal, several condominium apartment owners had begun the process to condemn their leaseholds, had entered into contracts with the City, and claimed they were entitled to continue the process through to completion. In Young, the owners had received the city’s preliminary approvals, but final approval by the City Council was withheld because the council was already considering repealing Chapter 38. The ordinance repealing Chapter 38 eventually contained a provision allowing any conversion proceeding which has been approved by the City Council to be completed, but because the Young condo owners had not received council approval, the taking was denied.

When the City refused to condemn, several condo owners sued, alleging that the City had bound itself to take the leaseholds, and that its repeal of Chapter 38 violated the Contracts Clause. The District Court dismissed because the City-condo owner contracts were void under the reserved powers doctrine (the government cannot contract away an essential sovereign power, like eminent domain) (378 F. Supp. 2d 1249), but the Ninth Circuit held the contracts were valid and did not violate the reserved powers doctrine, and sent the case back for a determination of the merits. Matsuda v. City & County of Honolulu, 512 F.3d 1148 (9th Cir. 2008.

On remand, the District Court again ruled against the condo owners, concluding that the City did everything it agreed to do. The Ninth Circuit affirmed. While the standard of review when a government is using its regulatory powers to impair contracts to which it is a party is somewhat high, the court concluded the City’s repeal of Chapter 38, and its subsequent refusal to further process the condo condemnations was not an “impairment” of the contract, because the City did not agree to condemn the leaseholds without first making an inquiry into whether the takings would serve a public purpose. 

The City’s repeal of Chapter 38 was its determination that the condo coversion takings no longer did. See slip op. at 3888 (“Contrary to the Lessees’ contention, this ordinance did not legislate aay the City’s contractual obligations. Rather, the Repeal Ordinance simply reflects the City Council’s judgment that no further condemnations under chapter 38 — including condemnation of Lessees’ property — would promote the public interest. The Agreements explicitly contemplate that the City Council might make such a determination, and there is nothing in the record to suggest that the Council did so in bad faith or without due care.”) (footnote omitted).

Two lessons from this case. First, public sentiment — and the legislative bodies that reflect that sentiment — are a sometimes fickle thing. There was nothing about these condemnations that made them any different in kind from the thousands of condemnations that had taken place under Chapter 38, all of which were determined to be “for public use,” except that they were not finished before the City repealed Chapter 38. What the government claims will serve a public purpose today may not tomorrow. Second, courts will strive hard to avoid enforcing the Contracts Clause, and it’s a rare case in which the government will be found to have violated it. Caveat emptor when contracting with the government; it’s not your usual contracting party, since it has the power to alter its own obligations by its regulatory powers, and there is little a court will do to stop it.

Here’s the opinion:

Young v Honolulu, 09-16034 (9th Cir 3/22/2011)
Continue Reading 9th Circuit: City Did Not Impair Its Contract To Condemn