Chalk one up for the state. A big one.
A three-judge panel of the 9th U.S. Circuit Court of Appeals has shredded the takings claims of Bridge ‘Aina Le‘a, LLC, over the state Land Use Commission’s decision in 2011 to revert 1,060 acres of land in the Big Island district of South Kohala to the Agricultural District. Bridge had sought more than $30 million in damages as a result of the LUC action.
The appellate ruling, issued on February 19, not only nullified a nominal damage award of $1 that had been ordered by Judge Susan O. Mollway of the U.S. District Court in Honolulu following a jury trial, it also deprived Bridge of its status as prevailing party – which would have allowed Bridge to sue the state for the costs of litigating the matter. Now that the state is the prevailing party, it has a green light to go after Bridge for costs. (After the District Court decision, when Bridge was still the prevailing party, it submitted a motion to the court seeking attorney fees and costs of around $725,000.)
Bridge could still appeal. It could ask for a rehearing by the full bench of the 9th Circuit. And it could ask the U.S. Supreme Court to consider the case. Attorney Bruce Voss, who argued the case before the appeals court, told Environment Hawai‘i that his client would be doing just that.
“This Ninth Circuit opinion effectively makes it almost impossible to prevail on a temporary takings claim. We will be petitioning for a writ of certiorari, to see if the U.S. Supreme Court wishes to use this extraordinary case to make clear that a government’s taking of property still requires just compensation under the Takings Clause of the U.S. Constitution,” Voss said in an email.
Years in the Making
The case at issue goes back to 2011. That year, the Land Use Commission voted to revert Bridge’s 1,060 acres of land in the Big Island district of South Kohala to the Agricultural District. The move came some 22 years after the land had been placed into the state Urban District. Over that time, several owners had come and gone without having fulfilled the conditions the LUC had attached to its approval of the initial, 1989 redistricting petition – conditions that had been amended several times over the same period in favor of the landowners.
Bridge sued the LUC and won a favorable ruling from the 3rd Circuit Court in 2012, overturning the reversion. In 2014, the Hawai‘i Supreme Court upheld most of the lower court ruling. It agreed that the LUC did not follow the procedures it should have followed when it voted to downzone the land and the reversion was nullified, leaving the land in the Urban District. Following that, a federal lawsuit alleging unconstitutional takings and violation of due process moved forward in U.S. District Court in Honolulu.
For a while, the state and Bridge – which sought somewhere in the neighborhood of $30 million in damages from the state – were in negotiations. The outcome was an agreement for the state to pay $1 million and be done with it. The Legislature balked and did not approve the payout, and so the lawsuit went to trial.
In March 2018, after an eight-day trial, the jury found that Bridge had suffered damages under two different legal analyses. The first, the so-called Lucas standard, applies when a landowner is deprived of all economically beneficial uses of its land. The second, the Penn Central standard, applies when regulation has had a negative economic impact and has interfered with “distinct investment-backed expectations.”
Bridge also sought to have the federal court determine that it was not fairly treated by the state – that it was denied due process and equal protection, inasmuch as of all the LUC dockets where developers have not built projects in accordance with LUC conditions, Bridge was the only one that was subjected to the harsh penalty of reversion. The federal district court rejected the claim, noting that it had already been litigated (and denied) in state court.
The Appeal
The appellate court disagreed with the lower court on the matter of the takings. Regarding the claim of a Lucas taking, the court found, “the state’s core challenges to that finding are that the land retained substantial residual value in its agricultural use classification and that this classification still allowed Bridge to use the land in economically beneficial ways.
First, the court went on to say, the “permissible uses of land classified as agriculture reinforce our conclusion that the reversion did not completely deprive Bridge of all economically viable uses of the 1,060 acres as a matter of law.” The court took note of the state law permitting “unusual and reasonable uses within agricultural” districts. “Although Bridge offered evidence suggesting that many of the statutorily permitted uses would not have been economically feasible, Bridge did not address all of the state’s permitted uses or account for any of the uses for which the commission had granted special permits in the past, such as a sewage treatment plant or rock quarrying. Some of the specially permitted uses may have been especially suitable for this land.
Bridge intended to place a sewage treatment plant on the adjacent 2,000 acres of agriculturally zoned land. Bridge’s own witnesses also recognized that the land was ‘good for growing rocks.’”
The Penn Central theory of taking was also dismissed by the appellate judges. Bridge’s appraiser, Steven Chee, testified that on April 30, 2009, when the LUC voted to require Bridge to show cause as to why the land should not be reverted, the land value dropped 83.4 percent (from $40 million to $6.36 million). The judges disputed his assumption that the drop in value took place in 2009 and not 2011, when the reversion vote occurred. While the order-to-show-cause vote may have cast a “dark cloud” over the project, the court found, it went on to note, citing to past precedent, “[m]ere fluctuations in value during the process of governmental decision-making, absent extraordinary delay, are incidents of ownership. They cannot be considered as a taking in the constitutional sense.”
In any case, the diminished value of the land was of short duration. “The reversion lasted roughly a year, from the reversion order’s issuance in April 2011 until the Hawai‘i state circuit court’s judgment vacating the order in June 2012. When we account for the reversion’s actual one-year duration, Bridge’s damages are at most $6.72 million if we use the higher 20 percent rate of return that Bridge hoped to receive on its total investment… Bridge’s loss thus amounts to an approximately 16.8 percent diminution in value, a number far lower than the 83.4 percent figure on which it relied at trial. This economic impact weighs against the conclusions that the reversion constituted a taking,” the judges concluded.
Bridge’s Penn Central taking argument was also supported by its claim that the reversion disrupted its sale of part of the land to DW ‘Aina Le‘a, with which it had executed an agreement of sale. But, the court noted, “There is a fundamental problem with using the claimed disruptions to the … sale agreements as evidence of the reversion order’s economic impact.” First, “DW’s contractual default under the February 2009 agreement … occurred some two years before the 2011 reversion order’s issuance. …. Moreover, the record otherwise shows that Bridge’s focus on the disruptions to these agreements overstated the reversion’s impact on its contractual relationship with DW. After the Hawai‘i Supreme Court’s decision, DW agreed to pay Bridge $14 million more than the previously agreed upon $40.7 million to purchase the land. Thus, the contractual defaults during the reversion’s temporary duration do not affect our economic impact analysis.”
Finally, looking to the extent to which the LUC action interfered with “any reasonable investment-backed expectations,” which is another factor considered in the Penn Central analysis, the court found that Bridge could not have expected any profit from its pur- chase of the land “unless and until the commission amended” the 1991 condi- tion it placed on the landowner to have 20 percent of all residential units built be qualified as affordable. (It did so in 2005.)
“Bridge also did not expect that an amendment to the affordable housing condition would translate into immediate profits,” the court found. “Indeed, Bridge represented to the commission that $86 million in initial infrastructure costs and over $200 million in total development costs had to be spent before the construction and sale of any housing units could begin. At the time of the reversion, the project was nowhere near this level of investment – indeed only sixteen affordable housing units existed – and thus Bridge could have had no reasonable expectation of making the 20 percent annual return on the total investment at that time.”
The court also dinged Bridge for what it did not acknowledge. “Bridge expressly committed to build 385 affordable housing units as part of the [2005] amendment to the order governing the land’s conditional urban use classification,” the court found. “Based on Bridge’s representations to the commission, the 2005 order required Bridge to build these units by November 2010. At no point in arguments before us does Bridge acknowledge this deadline, let alone Bridge’s and DW’s repeated representations to the commission as part of seeking the OSC [Order to Show Cause] rescission that they would complete the 385 affordable housing units” (emphasis added.)
The judges continue: “The operative conditions in place at the time of the OSC and the reversion order, and Bridge’s failure to meet them, dispel the notion that Bridge could reasonably expect that the commission would not enforce the conditions.”
After eviscerating Bridge’s arguments on taking, the judges reversed the lower court’s denial of the state’s motion for judgment as a matter of law: “We vacate the judgment for Bridge and the nominal damages award and remand with instructions for the district court to enter judgment for the state.”
—Patricia Tummons
For Further Reading
Environment Hawai‘i has reported extensively on the ups and downs of the ‘Aina Le‘a development. For further background on this litigation in particular, see:
- “Award of $1 in Damages to Bridge Is Subject of Appeal to 9th Circuit Court,” and “A Short History of ‘Aina Le‘a Development,” March 2019;
- “‘Aina Le‘a Controversies on Three Fronts: Federal Court, Bankruptcy Court, and County,” May 2018;
- “$1 Million Settlement of ‘Aina Le‘a Case is Rejected in Final Days of Legislature,” June 2017;
- “After Years of Delay, LUC Revokes Entitlements for Bridge ‘Aina Le‘a,” June 2009.
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