Deal Or No Deal: Ninth Circuit Says Honolulu May Have to Live Up to Its Eminent Domain Promises

I've had a chance to review Matsuda v. City and County of Honolulu, No. 06-15337 (Jan 14, 2008), a decision by the Ninth Circuit on the Contracts and Due Process clauses, but which also involves how local governments exercise the power of eminent domain.  The case revolves around Chapter 38 of the Honolulu Revised Ordinances, which was the local version of the "land reform act" at issue in Hawaii Hous. Auth. v. Midkiff, 467 U.S. 229 (1984) before it was repealed in 2005.

Background

Finding that the economic ills purportedly caused by the concentrated ownership of private single-family residential property in Hawaii, Haw. Rev. Stat. ch. 516 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. 

Chapter 38

At the state level, those efforts were ultimately unsuccessful, but the City and 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 when it was challenged under the public use clauses of the U.S. and Hawaii Constitutions, the courts predictably, as in Midkiff and Lyman, rejected both federal (Richardson v. City and County of Honolulu, 124 F.3d 1150 (9th Cir. 1995)) and state (Richardson v. City and County of Honolulu, 76 Haw. 46, 868 P.2d 1193 (1994)) challenges. 

Under chapter 38, the owners of many Honolulu condominium projects were permitted to condemn and take the leasehold interests from their lessors.  By 2005, however, public sentiment regarding eminent domain had turned (as noted in this report), and the City Council surprisingly repealed chapter 38.

Matsuda

The story does not end there, however, because at the time of repeal, several condominium apartment owners had begun the process to condemn their leaseholds, and claimed they were entitled to continue the process through to completion. 

In Matsuda, 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.  The owners subsequently received the city's 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 Matsuda's had not received council approval, the taking was denied.

Matsuda and others filed suit against the city in federal court, alleging that the repeal of Chapter 38 was a violation of the U.S. Constitution's Contracts Clause:

No State shall . . . pass any Bill of Attainder, expost facto Law, or Law impairing the Obligation of Contracts. . .

U.S. Const. art. I, § 10.  This provision was designed to prevent states and their political subdivisions from passing laws relieving politically favored persons (and the government itself) of their contractual obligations. The condo owners also alleged violation of the Due Process Clause.  The District Court granted summary judgment to the city and threw the case out.

Reserved Powers / Contracts Clause

The court held that the repeal of Chapter 38 was not a local government impairing its own contracts -- and the Contracts Clause was inapplicable -- because the contracts were not enforceable under the "reserved powers" doctrine, which states that any contract whereby the government purports to contract away its discretion to exercise an essential attribute of sovereignty is void.  Thus, there was no contract to be impaired.  The seminal cases applying this doctrine to the exercise of eminent domain are West River Bridge Co. v. Dix, 47 U.S. 507 (1848) and Contributors to Pennsylvania Hospital v. City of Philadelphia, 245 U.S. 20 (1917).  In those cases, the Court held that contracts whereby the government implicitly and indirectly agreed to not take property were not enforceable.

Best Efforts

The Ninth Circuit reversed, holding that the district court applied the wrong legal test.  The district court should have viewed the repeal of Chapter 38 with "heightened scrutiny" because the repeal of Chapter 38 was the city voiding its own contracts.  The Ninth Circuit held that the reserved powers doctrine was not applicable because West River Bridge and Contributors to Pennsylvania Hospital cases were contracts limiting the exercise of the power of eminent domain, while the contracts at issue in Matsuda required the exercise of the power.  The Ninth Circuit held:

As an initial matter, the City's contracts with the Lessees did not expressly require the City to condemn the property at Discovery Bay.  As discussed above, Chapter 38 imposed several requirements for a successful condemnation which were beyond the City's power to control, and the City only agreed to use its best efforts to achieve those results.  Thus, if an insufficient number of condominium owners applied to the City or if the public hearing held by the Department failed to produce a finding that condemnation would serve a valid public purpose, the City would not have been obligated under the contracts to proceed with the condemnation.

Slip op. at 408.  Presumably, the Ninth Circuit would reach a different result if the contract did require the city to condemn the property, as that would be a clear delegation of sovereign powers also. The court held that the district court should have found that a contract existed, and gone forward to determine whether the repeal of Chapter 38 "impaired" those contracts.

Due Process

The district court, applying the same reserved powers analysis noted above, also held that there were no enforceable contracts, and therefore no property was at stake, and it did not need to address the condo owners' Due Process claims.  The Ninth Circuit reversed and sent the case back for a determination of whether the city/owner contracts were "property." 

Sidebar:  The oral argument recordings are posted here.  KITV's report is here. The Hawaii Supreme Court dealt with another condominium project in City and County of Honolulu v. Sherman,110 Haw. 39, 129 P.3d 542 (Feb. 28, 2006).