United States Court of Appeals for the Federal Circuit
2006-5051
CIENEGA GARDENS, DEL AMO GARDENS, LAS LOMAS GARDENS,
BLOSSOM HILL APARTMENTS, and SKYLINE VIEW GARDENS,
Plaintiffs-Appellees,
v.
UNITED STATES,
Defendant-Appellant.
------------------------------
2006-5052
CHANCELLOR MANOR, GATEWAY INVESTORS, LTD.,
and OAK GROVE TOWERS ASSOCIATES,
Plaintiffs-Appellees,
v.
UNITED STATES,
Defendant-Appellant.
Richard P. Bress, Latham & Watkins, of Washington, DC, argued for plaintiffs-
appellees in 2006-5051. Of counsel on the brief were Everett C. Johnson, Jr., Leonard
A. Zax, Matthew K. Roskoski, Amanda P. Biles, and Susan S. Azad, of Los Angeles,
California.
Kenneth M. Dintzer, Senior Trial Counsel, Commercial Litigation Branch, Civil
Division, United States Department of Justice, of Washington, DC, argued for
defendant-appellant in 2006-5051. With him on the brief were Peter D. Keisler,
Assistant Attorney General, and David A. Harrington, Trial Attorney. Of counsel was
Michael D. Austin, Trial Attorney.
Michael E. Malamut, New England Legal Foundation, of Boston, Massachusetts,
for amicus curiae in 2006-5051, New England Legal Foundation.
William L. Roberts, Faegre & Benson LLP, of Minneapolis, Minnesota, argued for
plaintiffs-appellees in 2006-5052. With him on the brief were Michael F Cockson and
Martin S Chester. Also on the brief were Jeff H. Eckland, Mark J. Blando, and David S.
Laidig, Eckland & Blando LLP, of Minneapolis, Minnesota. Of counsel was Jerry W.
Snider, Faegre & Benson LLP, of Minneapolis, Minnesota.
Kenneth M. Dintzer, Senior Trial Counsel, Commercial Litigation Branch, Civil
Division, United States Department of Justice, of Washington, DC, argued for
defendant-appellant in 2006-5052. With him on the brief were Peter D. Keisler,
Assistant Attorney General, Brian M. Simkin, Assistant Director, David A. Harrington,
Kenneth D. Woodrow, and Timothy P. McIlmail, Trial Attorneys.
Appealed from: United States Court of Federal Claims
Judge Charles F. Lettow
United States Court of Appeals for the Federal Circuit
2006-5051
CIENEGA GARDENS, DEL AMO GARDENS, LAS LOMAS GARDENS,
BLOSSOM HILL APARTMENTS, and SKYLINE VIEW GARDENS,
Plaintiffs-Appellees,
v.
UNITED STATES,
Defendant-Appellant.
-------------------------
2006-5052
CHANCELLOR MANOR, GATEWAY INVESTORS, LTD.,
and OAK GROVE TOWERS ASSOCIATES,
Plaintiffs-Appellees,
v.
UNITED STATES,
Defendant-Appellant.
_________________ _________
DECIDED: September 25, 2007
___________________________
Before MICHEL, Chief Judge, NEWMAN, Circuit Judge, ARCHER, Senior Circuit Judge,
SCHALL, GAJARSA, LINN, and DYK, Circuit Judges.
Opinion for the court filed by Circuit Judge DYK. Dissenting opinion filed by Circuit
Judge NEWMAN.
DYK, Circuit Judge.
These cases involve takings claims resulting from the enactment of the
Emergency Low Income Housing Preservation Act of 1987, Pub. L. No. 100-242, § 202,
101 Stat. 1877 (1988) (“ELIHPA”), and the Low-Income Housing Preservation and
Resident Homeownership Act of 1990, Pub. L. No. 101-625, 104 Stat. 4249 (1990)
(“LIHPRHA”). The Court of Federal Claims held that the enactment of these statutes
effected a taking. Cienega Gardens v. United States, 67 Fed. Cl. 434 (2005) (“Cienega
IX”). Because we conclude that the Court of Federal Claims, notwithstanding its careful
opinion, erred in certain respects in its legal analysis, we vacate and remand for further
proceedings.
BACKGROUND
These consolidated cases return to us after remands in Cienega Gardens v.
United States, 331 F.3d 1319, 1324 (Fed. Cir. 2003) (“Cienega VIII”) and Chancellor
Manor v. United States, 331 F.3d 891, 893 (Fed. Cir. 2003). The pertinent history may
be briefly described.
I
In 1934 Congress, concerned with the declining national stock of affordable
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housing, enacted the National Housing Act. 1 Pub. L. No. 73-479, § 1, 48 Stat. 1246
(1934). Until the 1960s, the National Housing Act primarily subsidized the projects of
local public housing authorities. In 1961 Congress amended the National Housing Act
to “enable private enterprise to participate to the maximum extent in meeting the
housing needs of moderate-income families.” S. Rep. No. 87-281, at 4 (1961), as
reprinted in 1961 U.S.C.C.A.N. 1923, 1926; see Pub. L. No. 87-70, § 101(a)(6), 75 Stat.
149, 149-50 (1961) (“section 221(d)(3)”). Congress amended section 221(d)(3) in 1968
(“section 236”). Pub. L. No. 90-448, § 201, 82 Stat. 476, 498-501 (1968). The newly
enacted section 221(d)(3) and section 236 programs provided financial incentives to
private investors for the creation of additional low income housing. These financial
incentives were threefold.
First, the programs provided below-market-rate mortgages. Under section
221(d)(3), the owners of low-income housing projects entered into mortgage contracts
with private lenders at the market rate. Once the project was completed, the mortgages
were purchased by the Federal National Mortgage Association (“FNMA”). The FNMA,
using government subsidies, then reduced the original rate, charging below-market
rates to the owners. See Pub. L. No. 87-70, § 101(c), 75 Stat. 149, 153 (1961). Under
section 236, the owners also contracted for mortgages with private lenders, but the
government directly subsidized the interest payments to the lender. See Pub. L. No.
90-448, § 201, 82 Stat. 476, 498-501 (1968). The programs permitted the owners to
borrow ninety percent of the overall cost of the project. The mortgage contracts were
1
The National Housing Act established the Federal Housing Administration
(FHA). In 1965 the Federal Housing Administration was subsumed into the then newly
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for forty-year mortgages and included an option to prepay the mortgage without HUD
approval after twenty years. The regulations under the statute were consistent with
these contracts, including providing for prepayment without HUD approval after twenty
years. 24 C.F.R. §§ 221.524, 236.30 (1970); see Cienega Gardens v. United States,
194 F.3d 1231, 1243-44 (Fed. Cir. 1998) (“Cienega IV”).
Second, to encourage lending both sections 221(d)(3) and 236 authorized the
FHA to insure mortgages in order to protect lenders against default. See Pub. L. No.
90-448, § 201, 82 Stat. 476, 498-501 (1968); Pub. L. No. 87-70, § 103, 75 Stat. 149,
158 (1961).
Finally, the owners were entitled to a “Builder’s and Sponsor’s Profit and Risk
Allowance” (“BSPRA”), which was a payment from HUD to the owner toward the
owner’s down payment. The BSPRA was calculated as ten percent of the “actual cost”
of construction.
In addition to the direct incentives provided under sections 221(d)(3) and 236,
entities who entered into these programs received substantial tax benefits. At that time,
the tax laws permitted accelerated depreciation for real estate projects over the real
economic life of the property, allowing the general and limited partners to take large
income tax deductions in the earlier years of the investment. While these tax benefits
were not particular to section 221(d)(3) and section 236 properties, the benefits were
particularly significant under these programs because the properties were highly
leveraged so that the tax benefits the partners received were substantial in comparison
to their limited investment.
established Department of Housing and Urban Development. See 24 C.F.R. §§ 200.1,
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To ensure that the housing created by the programs would continue to be used
for low-income families, Congress provided that the Department of Housing and Urban
Development (“HUD”) would regulate the operation of the low-income housing projects.
Under both programs, the owner and HUD entered into a regulatory agreement where
any important management decisions, including increases in rents, had to be approved
by HUD. See Pub. L. No. 90-448, § 201, 82 Stat. 476, 498-501 (1968). The
agreements, under which HUD provided mortgage insurance and various subsidy
payments, restricted the owners’ annual return to six percent of their initial equity
investment in the property. This six percent dividend was not limited to the owners’ net
cash investment in the property, which was only 1.8 to 3 percent of the value of the
property, but was six percent of the initial equity investment. See Cienega IX, 67 Fed.
Cl. at 440. The initial equity investment included the government’s BSPRA contribution,
and the equity was not reduced by the tax benefits received. Id. Accordingly, the six
percent dividend on the initial equity in the property (the cash investment and the
BSPRA), could represent as much as a twenty-five percent return on the owner’s actual
net cash investment.
The restrictions of the regulatory agreements were effective for as long as HUD
insured the mortgage on the property, i.e., until the mortgage was paid off. The
exercise of the prepayment right under the mortgage agreement with the mortgage
lender would thus have the effect of terminating the regulatory agreement. For
example, the Chancellor Manor regulatory agreement stated that “[i]n consideration of
the endorsement for insurance . . . Owners agree [to the restrictions set forth in the
200.2 (1994).
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agreement]. . . so long as the contract of mortgage insurance continues in effect . . . or
during any time the Commissioner is obligated to insure a mortgage on the mortgaged
property.” Chancellor Manor J.A. 500165. As discussed below, there is a question
whether prepayment rights, as opposed to the other benefits of the transactions, played
a significant role in the owners’ decision to invest in the property.
The owners of these projects were typically limited partnerships. This allowed
the owners to “pass through” the entity’s tax losses primarily to the limited partners.
Along with the general partners, the limited partners also received a pro rata share of
the annual six percent dividend. The plaintiffs here consist of eight partnerships:
Cienega Gardens, Del Amo Gardens, Las Lomas Gardens, Blossom Hill Apartments,
Skyline View Gardens, Chancellor Manor, Oak Grove Towers Associates, and Gateway
Investors, Ltd. The prepayment restrictions on their mortgages were set to expire
between July 15, 1991, and June 6, 1995.
II
In the 1980s, Congress became concerned that as prepayment dates arrived the
limited partnerships would prepay the mortgages; that the restrictions imposed during
the mortgage period would expire; and that the housing stock represented by these
projects would be withdrawn from the low-income market and converted to traditional
apartment units, rented at market rates. Congress reacted with a carrot-and-stick
approach, first enacting ELIHPA in 1988 (a temporary measure), and then superseding
this statute by LIHPRHA in 1990 (initially planned as a permanent measure). In
enacting these statutes, Congress sought to “balance the public policy need to preserve
housing for low income families with the perceived contractual rights of the owners.”
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H.R. Rep. No. 101-559, at 75 (1990).
LIHPRHA was enacted on November 28, 1990, and is the most pertinent
legislation. Under LIHPRHA, Congress restricted the rights of owners by requiring them
as a condition of exiting the program to offer their property for sale to owners that would
preserve the rent restrictions and barring the owners from exiting the programs (by
effectively barring prepayment of the mortgages) while the properties were offered for
sale. See 12 U.S.C. § 4110 (2000). 2 For a fifteen-month period, the owners were
required to sell the property at the “the fair market value of the housing based on the
highest and best use of the property” to particular organizations that would agree to
preserve the rent restrictions. Id. §§ 4103(b)(2), 4110. After the fifteen month offer
period, if there had been no sale, the owners were permitted to prepay the mortgages.
Id. § 4114(a)(2). If HUD approved the sale, HUD provided the purchaser with financial
assistance. Id. § 4110(d)(3). If HUD failed to provide assistance to the purchasers, the
owners could prepay the mortgage. Id. § 4114(a)(1)(B). While the mortgages could not
be prepaid during the sale period, LIHPRHA permitted the owners to commence the
sale process up to two years before their prepayment eligibility date. Id. § 4119(1)(B).
2
LIHPRHA provided that owners could immediately prepay (without offering
the properties for sale) with HUD approval. However, HUD was only permitted to
approve immediate prepayment upon finding that the effect of prepayment would not
“materially increase economic hardship for current tenants,” including a finding that
alternative housing was available for current tenants and that the supply of vacant,
comparable housing would not be affected. 12 U.S.C. § 4108(a). The Court of Federal
Claims found that this was not a viable alternative for the markets involved here
because “HUD could not make the factual findings that were a necessary predicate for
prepayment approval.” Cienega IX, 67 Fed. Cl. at 467. The record supports this
finding. We will not address this option further since it was not available to the owners
as a practical matter. See also Cienega Gardens v. United States, 265 F.3d 1237, 1239
(Fed. Cir. 2001) (“Cienega VI”) (holding that the model plaintiffs’ claims were ripe even
though they did not seek approval from HUD to prepay the mortgages).
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Accordingly, if an owner promptly filed its notice of intent and if the sale process took
approximately two years to complete, 3 the owner could sell the property or prepay the
mortgage near the prepayment eligibility date. However, the statute imposed two
additional restrictions. If prepayment occurred, the owners could not raise rents for
three years following prepayment and the owners were required to pay at least fifty
percent of any displaced, low-income family’s relocation expenses. Id. § 4113(b), (c)(1).
Congress also provided a carrot to those owners willing to stay in the program.
Owners could elect to receive financial incentives by signing a “use agreement” with
HUD. Id. § 4109. These incentives included limited increases in rents, increased
access to residual receipts accounts, repair and capital improvement loans from HUD,
HUD-insured loans that enabled owners to access equity in their properties through a
second mortgage, and an increased allowed rate of return. Id. § 4109(b); see Cienega
3
The parties dispute precisely how long it would take to complete the sale
process. The Court of Federal Claims did not make explicit factual findings regarding
the duration of the sales period, but it stated that “[a] sale would take two years or more
to complete.” Cienega IX, 67 Fed. Cl. at 478. This statement was supported by
testimony offered by the plaintiffs that “in some cases” it would “take approximately” two
years to process a sale. J.A. 103237.
The two-year timeframe is supported by the deadlines set forth in the regulations.
LIHPRHA permitted owners to file a notice of intent to sell the property twenty-four
months before their original twenty-year prepayment eligibility date. 12 U.S.C. §
4119(1)(B) (2000). The owner’s and HUD’s appraisals were due within four months of
the date that the owner filed the notice of intent. 24 C.F.R. § 248.111(i). If the owner
and HUD did not agree on the appraisal value, they selected a third appraiser whose
appraisal was due four months later. Id. § 248.111(j). Within one more month, HUD
informed the owner whether it would approve the sale. Id. § 248.131(b). HUD then
directed the owner to submit a second notice of intent. Id. § 248.131(b)(6). The owner
submitted the second notice of intent within a month, which triggered the fifteen-month
offer period. Id. § 248.133(b). Thus, according to the timeline set forth in the
regulations, the process should take approximately twenty-five months.
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IX, 67 Fed. Cl. at 442; 24 C.F.R. § 248.231. In exchange for these incentives, owners
had to agree to maintain the remaining restrictions “for the remaining useful life of such
housing.” 4 12 U.S.C. § 4112(a)(2)(A) (2000).
III
None of the plaintiffs here elected to pursue the sale option, and only four of the
plaintiffs entered into use agreements after ELIHPA expired but during the period that
LIHPRHA was in effect. 5 All of the plaintiff owners brought suit in the Court of Federal
Claims claiming, inter alia, that the enactment of ELIHPA and LIHPRHA, by restricting
the owners’ right to prepay and exit the program, constituted a taking and a breach of
contract. The plaintiffs filed two separate actions—one brought in part by the Cienega
Gardens plaintiffs 6 and one brought by the Chancellor Manor plaintiffs. 7 See
4
Under LIHPRHA’s transition provisions, any owner of housing that became
eligible for low-income housing before January 1, 1991, who, before such date, filed a
notice of intent under section 222 of ELIHPA could elect to proceed under either
ELIHPA or LIHPRHA. Pub. L. No. 101-625, § 604 (codified as amended at 12 U.S.C. §
4101 note (Transition Provisions) (2000)). Any owner that elected to enter into a use
agreement under the terms of ELIHPA was required to maintain the restrictions until the
end of the forty-year mortgage. Pub. L. No. 100-242, § 224.
5
These owners are Cienega Gardens, Del Amo Gardens, Las Lomas
Gardens, and Chancellor Manor.
The government argues on appeal that these plaintiffs waived the right to bring a
takings claim by entering into use agreements. We find no error in the Court of Federal
Claims finding that there was no waiver, and therefore reject the government’s
argument. See also Independence Park Apartments v. United States, 449 F.3d 1235,
1247 (Fed. Cir. 2006) (“there is no indication in the use agreements that [the plaintiffs]
were relinquishing their right to sue for damages caused by ELIHPA and LIHPRHA”).
6
Cienega Gardens, Del Amo Gardens, Las Lomas Gardens, Blossom Hill
Apartments, and Syline View Gardens.
7
Chancellor Manor, Gateway Investors, Ltd., and Oak Grove Towers
Associates.
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Chancellor Manor v. United States, 51 Fed. Cl. 137 (2001); Cienega Gardens v. United
States, 33 Fed. Cl. 196 (1995) (“Cienega I”).
On March 28, 1996, after the Cienega Gardens lawsuit was filed but before the
Chancellor Manor lawsuit was filed, and after the four plaintiffs had signed use
agreements, Congress enacted the Housing Opportunity Program Extension Act of
1996, Pub. L. No. 104-120, 110 Stat. 834 (1996) (“HOPE”), which restored prepayment
rights. Id. § 2(b). Congress enacted the appropriations statute for HUD one month
later, on April 29, 1996, which included an express provision allowing an owner to
prepay. Pub. L. No. 104-134, 110 Stat. 1321-265 to 1321-293 (1996). 8 These
provisions did not affect the previously executed use agreements.
Thus, as of April 29, 1996, the statute provided that the plaintiffs that had not
entered into use agreements with HUD were free to prepay their mortgages and exit the
program, although HOPE provided that owners that prepaid could not raise rents for an
additional two months after prepayment. See § 2(b), 110 Stat. at 834-35. The plaintiffs
that did enter into use agreements remained bound to maintain the restrictions either
until the end of the forty-year mortgage (Cienega Gardens, Del Amo Gardens, Las
Lomas Gardens) or for the useful life of the property (Chancellor Manor). 12 U.S.C. §
4112(a)(2)(A) (2000).
8
Later appropriations statutes reiterated the prepayment right. See
Departments of Veterans Affairs and Housing and Urban Development, and
Independent Agencies Appropriations Act, Pub. L. No. 105-276, § 219, 112 Stat. 2461,
2487-88 (1998); Departments of Veterans Affairs and Housing and Urban Development,
and Independent Agencies Appropriations Act, Pub. L. No. 104-204, 110 Stat. 2874,
2884 (1996) (codified at 12 U.S.C. § 4101 note (2000)). The 1998 appropriations
statute added the condition that owners must provide 150 days’ notice before prepaying
under HOPE.
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IV
In the course of the two litigations we established that the government, by limiting
the prepayment rights, did not incur liability to the owners for breach of contract
because HUD was not a party to the mortgage agreements. Chancellor Manor, 331
F.3d at 901; Cienega IV, 194 F.3d at 1234, 1246. This left only the takings claims to be
resolved. After an initial decision by the Court of Federal Claims in the Cienega
Gardens litigation and a further remand by this court, 9 the Court of Federal Claims
selected four model plaintiffs (Sherman Park Apartments, Independence Park
Apartments, Pico Plaza Apartments, and St. Andrews Gardens Apartments) in the
Cienega Gardens litigation. See Cienega Gardens v. United States, 38 Fed. Cl. 64
(1997) (“Cienega III”). The court entered judgment in favor of the government with
respect to all plaintiffs. Cienega Gardens v. United States, No. 94-1C (Fed. Cl. Jan. 8,
2002). It did not render a detailed opinion but essentially followed its decision in
9
After the initial remand, the Court of Federal Claims granted summary
judgment in favor of the government on the takings claims on the ground that the model
plaintiffs’ claims were not ripe because the owners did not exhaust their administrative
remedies by requesting permission from HUD to prepay the mortgages before bringing
suit. Cienega Gardens v. United States, 46 Fed. Cl. 506 (2000) (“Cienega V”). We
rejected that argument on appeal and found that the model plaintiffs’ claims were ripe.
Cienega VI, 265 F.3d at 1239. We again remanded for consideration of the model
plaintiffs’ regulatory takings claims. Id.
Here the government again argues that the plaintiffs’ claims are not ripe. The
government argues that: (1) plaintiffs did not petition HUD for prepayment approval, and
(2) they did not pursue the sale option. We reject these arguments. In light of our
holding in Cienega VI and the factual findings made by the Court of Federal Claims, see
Cienega IX, 67 Fed. Cl. at 460-61, we find that it would have been futile for the owners
to apply to HUD for approval to prepay. Moreover, the ripeness doctrine does not
require the owners to apply for voluntary incentives such as the sale option that they did
not wish to pursue. While these incentives are pertinent to the Penn Central factors,
they are not relevant to the ripeness analysis.
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Alexander Investment v. United States, 51 Fed. Cl. 102 (2001). Alexander Investment
held, inter alia, that similarly situated plaintiffs had no property interest that could be
subject to a taking because HUD had reserved the right to amend the regulations
governing sections 221(d)(3) and 236 and thus to alter the prepayment right. Alexander
Investment, 51 Fed. Cl. at 107; see 24 C.F.R. §§ 221.749, 236.249 (1970).
Alternatively, the Court of Federal Claims in Alexander Investment held that there was
no regulatory taking under Penn Central Transportation Co. v. City of New York, 438
U.S. 104, 124 (1978). The court found that there was no significant economic impact
because “[t]he change in regulation did not remove the property from [the owner’s]
possession . . . . They continued to operate low-income housing.” Alexander
Investment, 51 Fed. Cl. at 109. Moreover, the plaintiffs did not demonstrate an
investment-backed expectation because they “could have anticipated that Congress
might concern itself with the possibility of a low-income housing shortage and act to
prevent or delay such a shortage.” Id. at 110.
On appeal, we reversed, based on a partial record and limited arguments made
by the government, finding that the four model plaintiffs had suffered a compensable
temporary regulatory taking and remanding with respect to the others. See Cienega
Gardens v. United States, 331 F.3d 1319, 1324 (Fed. Cir. 2003) (“Cienega VIII”).
Cienega VIII decided several issues that are equally applicable to all parties in these
cases.
First, regarding the character of the government action, we held that to constitute
a compensable taking the statute need not “appropriate the owners’ titles or dispossess
them in any way,” id. at 1339, nor does the restriction have to be permanent. Id.
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Second, we disagreed that the plaintiffs needed to establish “that the prepayment
restrictions denied them all economically beneficial use of their property in order for the
takings to be compensable.” Id. at 1343. We stated that “it is clearly not the law that
only such 100% value regulatory takings are compensable.” Id.
Third, we rejected the government’s argument that the plaintiffs reasonably
should have expected that the prepayment right would be eliminated because “plaintiffs
knew that they were entering a sensitive and highly regulated field that was subject to
continuing congressional interest and attention.” Id. at 1350. We explained that “the
fact that the industry is regulated [is not] dispositive” and that “all regulatory changes are
[not] reasonably foreseeable.” Id. We concluded that the owners could not reasonably
have expected the change in the regulatory approach. Id.
In other respects, the holdings of Cienega VIII were unique to the four model
plaintiffs and based on the particular arguments that the government made. Thus, for
example, the trial court assumed that the appropriate approach was to consider the
taking on a year-to-year basis by comparing lost income under the regulations to a
market rate of return. Id. at 1343 n.38. We stated that “the government neither argues
error in the trial court’s adoption of the plaintiffs’ expert’s calculation of rate of return
value, nor error in the trial court’s repeated rejection of the government’s data.” Id. at
1343 n.40. Based on this assumption, we calculated that the model plaintiffs earned a
return on their equity investment in the property that was about ninety-six percent less
than what they could have earned by investing their money elsewhere. Id. at 1343.
Thus we found that “the Model Plaintiffs' expert's calculations . . . proved sufficient
financial loss on the part of the Model Plaintiffs . . . , especially in view of the lack of any
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specific challenge by the government of the trial court's findings or of the Model
Plaintiffs' methods and data.” Id. at 1345.
The court in Cienega VIII did not resolve the takings issue with respect to the
non-model Cienega Gardens plaintiffs, and we remanded for consideration of the other
plaintiffs’ takings claims. We expressly stated that the resolution of these aspects of the
model plaintiffs’ case did not preclude a different result for the non-model plaintiffs
based on different arguments and a different record:
The government has essentially waived any right to assert any errors in
the Model Plaintiffs’ arguments. Therefore, to the extent that the
government can demonstrate affirmative errors through reference to
additional evidence and flaws in the arguments in future cases in which
plaintiffs make the same arguments, this opinion should not be understood
to bar future courts from also considering that evidence and those
arguments.
Cienega VIII, 331 F.3d at 1337 n.31. Accordingly, we instructed the Court of Federal
Claims on remand to “allow the [government and remaining plaintiffs] to develop an
appropriate record and to rule on liability.” Id. at 1354. We noted that “[o]n remand, the
court may of course consider any materials presented by either party in furtherance of
its case that are relevant under regulatory takings case law.” Id.
We agreed with the Cienega VIII analysis in our decision in Chancellor Manor,
331 F.3d at 904-07. There we also remanded to the Court of Federal Claims for further
factual findings pertinent to the Penn Central factors, concluding:
[i]n rejecting the plaintiffs’ and defendants arguments based on this record
and by remanding for a more searching factual inquiry, we have not
predetermined the question of whether the plaintiffs will be able to
establish the existence of a regulatory taking under the Penn Central
standards. . . . At this stage we have done no more than reject the
arguments of both the United States and the Owners that this matter can
be properly decided on the present record.
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Id. at 906-07.
On remand, the Court of Federal Claims consolidated the suits of the five
remaining Cienega Gardens plaintiffs with the three Chancellor Manor plaintiffs.
Cienega IX, 67 Fed. Cl. at 437-38. After conducting a bench trial, the court issued an
opinion on August 29, 2005, finding that the government’s actions constituted a
temporary regulatory taking. Id. at 438. On November 22, 2005, the court issued an
order awarding just compensation. 10
For present purposes, four aspects of the Court of Federal Claims decision are
particularly pertinent. First, the court did not consider the impact of the regulation on the
value of the property as a whole. The question the court asked was, for each year that
the restriction was in effect, whether there was a compensable taking of income from
the property. In determining the effect of the statute on the owners, the court applied a
“return on equity approach,” which compared the return the owner received on its
10
The court calculated damages up until the end of the takings period or
until the date of the judgment, whichever was earlier. Accordingly, the court awarded
the following damages:
Plaintiff End of Takings Period or Amount of Just
September 30, 2005 (date Compensation Awarded
of judgment)
Cienega Gardens Oct. 10, 2002 $7,219,000
Del Amo Gardens Sept. 30, 2005 $5,008,814
Las Lomas Gardens Sept. 30, 2005 $13,017,377
Blossom Hill Apartments Feb. 17, 1997 $2,801,347
Skyline View Gardens Feb. 17, 1997 $2,228,032
Chancellor Manor Sept. 30, 2005 $10,510,121
Oak Grove Towers Mar. 1, 1997 $1,464,761
Gateway Investors Mar. 1, 1997 $1,697,241
(Rivergate)
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investment for a one-year period under the regulations to a hypothetical return on its
investment without the regulations. In other words, the court compared the owners’
actual return under LIHPRHA, which was limited to a six percent return on the initial
equity investment, to the return that the owner could have received on the total equity in
its property without the restriction (twenty years of mortgage payments having increased
the owner’s equity). Id. at 475. The Court of Federal Claims found that this restriction
of income during a discrete annual period was a significant financial detriment to the
owners. Thus the return on equity approach treated the income from the property for
each individual year as a separate property interest from the value of the property as a
whole.
Second, the Court of Federal Claims did not factor into the takings analysis the
offsetting benefits afforded under ELIHPA and LIHPRHA. The Court of Federal Claims
noted that ELIHPA and LIHPHRA provide two options that operate in lieu of the
contractual prepayment right: (1) selling the property at the fair market value to a HUD-
approved purchaser or prepaying the mortgage in the absence of a sale, or (2) signing a
use agreement. Cienega IX, 67 Fed. Cl. at 467. The Court of Federal Claims held that
these benefits should not be taken into account in determining whether a taking
occurred, though they were relevant in determining the amount of just compensation.
Id. at 470.
Third, the court did not include, as a factor in its analysis, the limited duration of
ELIHPA and LIHPRHA, and the restrictions that these statutes imposed. The court
calculated the annual return on equity for discrete periods beginning at the original
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prepayment date. Id. at 476. The court only considered the duration of the restriction
for the purpose of calculating just compensation.
Finally, the court considered the reasonable investment-backed expectations of
the property owners. Id. at 471. The court first addressed the plaintiffs’ subjective
expectations in entering into the programs. Id. at 471-72. The court concluded that
both groups of plaintiffs “expected to prepay when they invested in their properties.” Id.
The court then found that the owners’ expectations of prepayment were reasonable
“given the deed of trust notes, the existing regulations, the type of properties involved,
the location of the properties, and the importance of an exit strategy in entering such a
program.” Id. at 474. The court did not consider whether there was a nexus between
the owners’ expectations and their investment in the property.
The government timely appealed. We have jurisdiction pursuant to 28 U.S.C. §
1295(a)(3) (2000). 11 We now order the cases consolidated for purposes of this appeal.
DISCUSSION
We review the Court of Federal Claims’ legal determinations without deference
and its findings of fact for clear error. Bass Enters. Prod. Co. v. United States, 381 F.3d
1360, 1365 (Fed. Cir. 2004). Whether a compensable taking under the Fifth
Amendment has occurred is a question of law that is based on factual determinations.
Id.
11
Given the interrelation between the two cases and because two separate
panels heard the prior appeals, we heard this appeal as a seven-judge panel pursuant
to our statutory authority under 28 U.S.C. § 46(b), which provides that the “Federal
Circuit . . . may determine by rule the number of judges, not less than three, who
constitute a panel.” See also Fed. Cir. R. 47.2(a) (“Cases and controversies will be
heard and determined by a panel consisting of an odd number of at least three judges,
two of whom may be senior judges of the court.”).
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We deal here with an alleged regulatory taking rather than a physical taking. The
focus of the regulatory takings analysis is on fundamental fairness—is it fair for the
government to impose the cost of a regulation on private parties rather than on the
public as a whole through public spending? See Palazzolo v. Rhode Island, 533 U.S.
606, 618 (2001); Penn Cent., 438 U.S. at 123. To make this determination, there is no
set formula. “[T]here simply is no bright line dividing compensable from
noncompensable exercises of the Government's power when a regulatory imposition
causes a partial loss to the property owner. What is necessary is a classic exercise of
judicial balancing of competing values.” Fla. Rock Indus., Inc. v. United States, 18 F.3d
1560, 1570 (Fed. Cir. 1994). Thus the regulatory takings analysis is “characterized by
an ’essentially ad hoc, factual inquir[y]’ . . . designed to allow ‘careful examination and
weighing of all the relevant circumstances.’” Tahoe-Sierra Pres. Council, Inc. v. Tahoe
Reg’l Planning Authority, 535 U.S. 302, 322 (2002) (quoting Penn. Cent., 438 U.S. at
124, and Palazzolo, 533 U.S. at 636 (O'Connor, J., concurring)).
The Supreme Court in Penn Central identified three factors that have “particular
significance” to this “ad hoc, factual inquir[y].” 438 U.S. at 124. First, courts must
consider the character of the governmental action. Id. This is the precise action that
the government has taken and the strength of the governmental interest in taking that
action. Second, courts must consider the economic impact on the regulated parties. Id.
Finally, courts must consider whether the regulated parties had reasonable investment-
backed expectations that they would not be subjected to such regulation. Id. The Penn
Central test is the same whether the regulation is permanent or temporary in nature,
although in the latter situation, the court must carefully consider the duration of the
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restriction under the economic impact prong. See Tahoe-Sierra, 535 U.S. at 342.
In addressing these questions, we must direct ourselves to the practical realities
of the situation. That assessment can be difficult where there is a complex legislative
scheme that, as here, is not a model of draftsmanship. But the fact that the legislative
scheme is complex and confusing makes it all the more important to consider carefully
the actual impact of the legislation on the claimants. Notwithstanding the Court of
Federal Claims’ careful opinion, the court has in several respects committed error.
I ELIHPA
As an initial matter, we consider whether ELIHPA constituted a taking. The
owners do not separately argue that ELIHPA constitutes a taking, and there is no basis
for treating ELIHPA and LIHPRHA the same. ELIHPA was a temporary restriction that
was enacted on February 5, 1988, and was only in effect until LIHPRHA was enacted
on November 28, 1990. None of the owners’ twenty-year prepayment deadlines
expired during the period that ELIHPA was in effect, and the owners that entered into
use agreements all signed the agreements well after LIHPRHA was enacted. 12 There
has been no showing that ELIHPA restricted the plaintiff owners’ freedom of action in
any meaningful way. See Greenbrier v. United States, 193 F.3d 1348, 1357 (Fed. Cir.
1999) (“In order to successfully assert a regulatory takings claim, the Owners must
establish . . . that the regulation has in substance ‘taken’ their property by going ‘too far .
. . .’”). Accordingly, we find that ELIHPA did not effectuate a taking with respect to these
owners.
12
Cienega Gardens and Del Amo Gardens entered into use agreements on
May 26, 1995. Las Lomas Gardens entered into its use agreement on May 16, 1995.
Chancellor Manor entered into its use agreement on February 14, 1995.
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II LIHPRHA
The more serious question is whether the enactment of LIHPRHA constituted a
taking. During the period that LIHPRHA was in effect (from November 28, 1990, until
the HUD appropriations statute implementing HOPE was enacted on April 29, 1996) the
plaintiff owners’ twenty-year prepayment deadline expired and some of the owners, in
view of the regulatory regime imposed by LIHPRHA, entered into use agreements. The
question is whether these restrictions imposed by LIHPRHA resulted in a taking. In our
view, in concluding that they did, the Court of Federal Claims erred as a matter of law in
certain respects.
A. Need To Consider the Effect on the Property as a Whole
We think the Court of Federal Claims erred in not considering the impact of the
restriction on the property as a whole. Rather, the Court of Federal Claims compared
the rate of the return that the owner would receive on its investment with and without the
restriction of a single year. This error impacted the court’s Penn Central analysis.
The Court of Federal Claims applied a “return-on-equity” approach, considering
the income from the project for each individual year as a separate property interest.
Cienega IX, 67 Fed. Cl. at 475-76. For each owner, the court compared the return on
equity that the owner received under the restrictions with the return on equity that the
owner would receive absent the restrictions. The court determined that, under
LIHPRHA, the owner’s return was limited to a six percent dividend on its initial equity
investment. The court found that without the restrictions the owner could receive an 8.5
percent annual return (the Fannie Mae bond rate) on the owner’s entire equity in the
property at the prepayment eligibility date. The initial equity investment was significantly
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smaller than the entire equity value at the prepayment date because the owners had
built equity in the property over the twenty-year period by making mortgage payments.
Accordingly, the court found that the economic impact on the plaintiffs ranged from 90.5
to 97.7 percent. Id. at 476-78.
We believe that, in adopting this approach, the Court of Federal Claims erred.
The Supreme Court, in cases like Penn Central, Concrete Pipe and Products of
California, Inc. v. Construction Laborers Pension Trust for Southern California, 508 U.S.
602 (1993), and Tahoe-Sierra has made clear that in the regulatory takings context the
loss in value of the adversely affected property interest cannot be considered in
isolation.
Penn Central, 438 U.S. 104, arose in the permanent regulatory takings context.
New York City had designated Penn Central station, and the city block that it sat on, as
a historic landmark site, and thus restricted development of the property. The
appellants argued that the taking at issue was a taking of the air space above Penn
Central station. The appellants urged that the economic impact of this restriction on
developing the air space should be considered in isolation, rather than considering the
property as a whole. Id. at 130. The Supreme Court rejected this approach as “quite
simply untenable.” Id. The Court explained:
“Taking” jurisprudence does not divide a single parcel into discrete
segments and attempt to determine whether rights in a particular segment
have been entirely abrogated. In deciding whether a particular
governmental action has effected a taking, this Court focuses rather both
on the character of the action and on the nature and extent of the
interference with rights in the parcel as a whole—here, the city tax block
designated as the “landmark site.”
Id. at 130-31.
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The Supreme Court reaffirmed that the correct approach is to consider the
“parcel as a whole” in Concrete Pipe, 508 U.S. at 643-44. There the Court reiterated
Penn Central’s holding:
[A] claimant's parcel of property could not first be divided into what was
taken and what was left for the purpose of demonstrating the taking of the
former to be complete and hence compensable. To the extent that any
portion of property is taken, that portion is always taken in its entirety; the
relevant question, however, is whether the property taken is all, or only a
portion of, the parcel in question.
Id. at 644. The Court explained that “our test for regulatory taking requires us to
compare the value that has been taken from the property with the value that remains in
the property, [and] one of the critical questions is determining how to define the unit of
property ‘whose value is to furnish the denominator of the fraction.’” Id. (quoting
Keystone Bituminous Coal Ass’n v. DeBenedictis, 480 U.S. 470, 497 (1987)); see also
Andrus v. Allard, 444 U.S. 51, 65-66 (1979) (“where an owner possesses a full ‘bundle’
of property rights, the destruction of one ‘strand’ of the bundle is not a taking, because
the aggregate must be viewed in its entirety”); Seiber v. United States, 364 F.3d 1356,
1368 (Fed. Cir. 2004) (“The Supreme Court has repeatedly instructed that the impact of
an alleged taking must be considered in terms of the ‘parcel as a whole’ . . . .”).
In Tahoe-Sierra, the necessity of considering of the overall value of the property
was explicitly confirmed in the temporary regulatory takings context. 535 U.S. at 331.
There the petitioners argued that a thirty-two-month moratorium on building was a per
se regulatory taking because there had been a complete taking of development rights
during that thirty-two-month period. The Supreme Court rejected this argument stating:
Of course, defining the property interest taken in terms of the very
regulation being challenged is circular. With property so divided, every
delay would become a total ban; the moratorium and the normal permit
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process alike would constitute categorical takings. Petitioners'
“conceptual severance” argument is unavailing because it ignores Penn
Central's admonition that in regulatory takings cases we must focus on
“the parcel as a whole.”
Id. The Court thus concluded that “the District Court erred when it disaggregated
petitioners' property into temporal segments corresponding to the regulations at issue
and then analyzed whether petitioners were deprived of all economically viable use
during each period.” Id. Justice Thomas’s dissent specifically complained that the
majority had improperly compared the reduction in value resulting from the regulation to
the value of the parcel as a whole, i.e., the “land’s infinite life.” Id. at 355 (Thomas, J.,
dissenting). Thus we conclude that in a temporary regulatory takings analysis context
the impact on the value of the property as a whole is an important consideration, just as
it is in the context of a permanent regulatory taking.
The plaintiffs justify the return-on-equity approach by relying on the Supreme
Court’s decision in Kimball Laundry Co. v. United States, 338 U.S. 1 (1949), which held
that just compensation for the taking of a laundry was “the rental that probably could
have been obtained.” Id. at 7. However, the reasoning of Kimball Laundry does not
apply here. First, as the plaintiffs recognize, the Supreme Court in Kimball Laundry
applied the return on equity approach when determining just compensation and not
when determining whether a taking had occurred in the first place. Second, Kimball
Laundry is a physical takings case and thus does not govern the regulatory takings
context. As the Supreme Court concluded in Tahoe-Sierra, “[t]his longstanding
distinction between acquisitions of property for public use, on the one hand, and
regulations prohibiting private uses, on the other, makes it inappropriate to treat cases
involving physical takings as controlling precedents for the evaluation of a claim that
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there has been a ‘regulatory taking,’ and vice versa.” 535 U.S. at 323; see also Tuthill
Ranch, Inc. v. United States, 381 F.3d 1132, 1135 (Fed. Cir. 2004) (“The Supreme
Court has recognized that the government may ‘take’ private property by either physical
occupation or regulation, and that these two categories of takings are subject to
different analyses.”)
Consideration of the property as a whole is particularly important because our
cases have established that a regulatory taking does not occur unless there are serious
financial consequences. In Cienega VIII, we stated that “[w]hat has evolved in the case
law is a threshold requirement that plaintiffs show ‘serious financial loss’ from the
regulatory imposition in order to merit compensation.” 331 F.3d at 1340; see Loveladies
Harbor, Inc. v. United States, 28 F.3d 1171, 1177 (Fed. Cir. 1994). We previously have
explained that the requirement of “severe economic deprivation” comes from the nature
of regulatory takings claims, which lack “the ‘typically obvious and undisputed’ predicate
of a physical invasion or appropriation of private property by the government” and are
“in essence, a claim that ‘a taking has occurred because a law or regulation imposes
restrictions so severe that they are tantamount to a condemnation or appropriation.’”
Rose Acre Farms, Inc. v. United States, 373 F.3d 1177, 1195 (Fed. Cir. 2004) (quoting
Tahoe-Sierra, 535 U.S. at 322 n.17).
We note that in a temporary taking situation, there appear to be at least two ways
to compare the value of the restriction to the value of the property as a whole so as to
determine if there has been severe economic loss. See Rose Acre Farms, 373 F.3d at
1188 (stating that “there are a number of different ways to measure the severity of the
impact of the restrictions”). First, a comparison could be made between the market
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value of the property with and without the restrictions on the date that the restriction
began (the change in value approach). The other approach is to compare the lost net
income due to the restriction (discounted to present value at the date the restriction was
imposed) with the total net income without the restriction over the entire useful life of the
property (again discounted to present value). Neither approach appears to be
inherently better than the other, and on remand the Court of Federal Claims should
consider both as well as any other possible approaches that determine the economic
impact of the regulation on the value of the property as a whole. 13
B. Need To Consider the Offsetting Benefits
The second error committed by the Court of Federal Claims lies in its failure to
consider the offsetting benefits that the statutory scheme afforded which were
specifically designed to ameliorate the impact of the prepayment restrictions. This error
affects all of the plaintiffs. The Court of Federal Claims characterized the government’s
argument as “overreaching,” Cienega IX, 67 Fed. Cl. at 470, theorizing that “Congress
may not establish through an option that it will provide value equal to forty, or fifty, or
sixty cents on the dollar for a taking, and thereby evade paying the constitutionally-
required just compensation.” Id. The court stated that the value of any options the
plaintiffs were offered should not “change the character of the governmental action or
the way that the Penn Central takings analysis is applied.” Id. The court held instead
that any benefits “should be addressed in the determination of just compensation,” not
13
We note, however, that the Court of Federal Claims awarded Chancellor
Manor $10.5 million in damages—significantly more than the property's appraised value
of $7 million. See Cienega IX, 67 Fed. Cl. at 477 n.54. Logically speaking, the
government cannot take more than what the plaintiffs actually possess. A determination
that damages exceed the value of the property should be indicative that the method of
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as part of the takings analysis. Id.
The Supreme Court in Penn Central, 438 U.S. at 137, clearly held that offsetting
benefits must be accounted for as part of the takings analysis itself. There, in exchange
for restrictions on the development of historic properties, New York City’s zoning laws
provided developers with the right to develop nearby parcels that the developer already
owned. Id. at 113-14. The Court explained that “to the extent appellants have been
denied the right to build above the [Penn Central] Terminal, it is not literally accurate to
say that they have been denied all use of even those pre-existing air rights.” Id. at 137.
Thus, the plaintiff’s “ability to use these rights has not been abrogated; they are made
transferable to at least eight parcels in the vicinity of the Terminal.” Id. The Court
concluded that these benefits “undoubtedly mitigate whatever financial burdens the law
has imposed on appellants and, for that reason, are to be taken into account in
considering the impact of the regulation.” Id.
The Court of Federal Claims did not take into account this aspect of the Penn
Central decision, finding support for its holding instead in our decisions in Whitney
Benefits, Inc. v. United States, 926 F.2d 1169 (Fed. Cir. 1991), and Whitney Benefits,
Inc. v. United States, 752 F.2d 1554 (Fed. Cir. 1985). The Whitney Benefits cases
provide no support for the Court of Federal Claims’ approach. At issue in the Whitney
Benefits cases was a statute that prevented a land owner from mining its property, but,
in exchange, the Department of the Interior was authorized “to agree with such [land
owners] to convey the fee to, or lease in exchange, other federal land embodying coal
deposits.” Whitney Benefits, 752 F.2d at 1555. This court stated that the value of the
computing damages is flawed.
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new property offered in exchange for the restriction could not be considered under the
takings analysis because “the exchange transaction is a method of ascertaining and
paying just compensation for a taking, which may be negotiated and agreed upon either
before or after the taking itself, and is optional with the claimants.” Whitney Benefits,
926 F.2d at 1175; see also Whitney Benefits, 752 F.2d at 1560. However, unlike in
Penn Central where the benefits were tied to the property already owned by the affected
parties, in Whitney Benefits the government offered those parties new properties.
This case does not involve a transfer of new property to the owner as in Whitney
Benefits, but rather an amelioration of the restrictions imposed on the existing property.
There can be no claim here that the government compensated the owner by providing
substitute property. The benefits must be considered as part of the takings analysis. 14
The Court of Federal Claims, we think, overstated the effect of the statute when it
concluded that “[n]one of the options available to plaintiffs permitted them to exercise
their right to transfer their property to a purchaser of their choice.” Cienega IX, 67 Fed.
Cl. at 467. As a practical matter LIHPRHA provided owners with two alternatives: (1)
14
Such benefits, of course, would be pertinent as well to a just
compensation analysis if a taking had occurred. In Cienega VIII, we held that a taking
had occurred with respect to the model plaintiffs (two of which had entered into use
agreements under LIHPRHA—Sherman Park and St. Andrews), and directed the Court
of Federal Claims to enter the damages awarded in Cienega III, 38 Fed. Cl. 64. See
Cienega VIII, 331 F.3d at 1353. On remand, the Court of Federal Claims reinstated the
damages award for the model plaintiffs, and we reviewed that award in Independence
Park Apartments v. United States, 449 F.3d 1235 (Fed. Cir. 2006). There we stated
that, for purposes of determining just compensation, “the calculation of damages should
be adjusted [for the two model plaintiffs that entered into use agreements] to treat the
ban on prepayment as lasting as long as the use agreements provided for, with the
amount of the damages adjusted to account for any benefits . . . obtained as a result of
the use agreements.” Id. at 1248. However, the Independence Park decision does not
suggest that these benefits should not also be considered as part of the takings
analysis.
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the right to sell the property at its fair market value or, if there was no offer or if HUD
failed to provide financial assistance to the purchasers, the right to prepay the mortgage
and eliminate the regulatory restrictions; or (2) entering into a use agreement with HUD
under which HUD would provide financial incentives to the owner. See 12 U.S.C. §§
4107, 4110 (2000).
With respect to the first option, the owners here do not dispute that the
opportunity for a fair market value sale would eliminate any takings claim. See Florida
Rock Indus., Inc. v. United States, 791 F.2d 893, 903 (Fed. Cir. 1986) (“if there is found
to exist a solid and adequate fair market value [for the property] which [the owner] could
have obtained from others for that property, that would be a sufficient remaining use of
the property to forestall a determination that a taking had occurred or that any just
compensation had to be paid by the government”). Rather the owners complain that
sale to qualified buyers was unlikely, that the sale process took time during which the
rent and other restrictions remained in place, that appraisal value was not adjusted over
the course of the two-year sale period, and that prepayment was not possible until the
sale process was complete (and unsuccessful). However, any trouble finding a buyer
only increased the probability that the owner would be able to prepay if a sale was not
completed.
Moreover, the sale process was not as time consuming as the plaintiffs assert.
To reduce any administrative delays, LIHPRHA permitted the owners to begin the sale
process by filing a notice of intent up to two years before their prepayment eligibility
date. 12 U.S.C. § 4119(1)(B) (2000). The owners and HUD would then appraise the
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property to determine “the fair market value of the housing based on the highest and
best use of the property.” Id. § 4103(b)(2). Upon HUD’s approval of the sale, the owner
would file a second notice of intent with HUD. 15 Id. § 4106(d)(1). This triggered a
fifteen month period for which the owner was required to keep the offer to sell open. Id.
§ 4110(b)(1). First, the owner was required to make an offer to sell to a “priority
purchaser” for twelve months. Id. § 4111(b)(1). A “priority purchaser” was a resident
council organization or a nonprofit organization “that agrees to maintain low-income
affordability restrictions for the remaining useful life of the housing.” Id. § 4121(a). The
negotiated sale price could not exceed the appraised value of the property. Id. §
4110(b)(1). If no priority purchaser made an offer, the owner was required to hold the
offer open for three additional months to any “qualified purchaser.” Id. § 4110(c). A
“qualified purchaser” was “any entity that agree[d] to maintain low-income affordability
restrictions for the remaining useful life of the housing.” Id. § 4121(b). If no sale was
completed after fifteen months, the owner could then prepay the mortgage.
Alternatively, if HUD failed to provide assistance to the purchasers to enable them to
complete the sale, the owner also could prepay the mortgage. Id. § 4114(a)(1)(B).
However, the prepaying owner could not raise the rents for any tenants who were
residents when the owner filed its notice of intent to sell the property for three years. Id.
§§ 4113(c)(1), 4114(a).
The duration of these restrictions is an important factor in the takings analysis.
15
The requirement for HUD approval of the sale did not substantially affect
the process. If HUD approval was not forthcoming, the various options were still largely
available. In effect, the owner could still offer the property for sale and prepay if the sale
did not occur. The only lost opportunity was apparently the ability to negotiate the price.
See 12 U.S.C. § 4111(b)(1), (c).
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The Supreme Court in Tahoe-Sierra concluded that “the duration of the restriction is one
of the important factors that a court must consider in the appraisal of a regulatory
takings claim.” 535 U.S. at 342; see also Rose Acre Farms, Inc. v. United States, 373
F.3d 1177, 1195 (Fed. Cir. 2004) (instructing the trial court to consider the temporary
nature of the restriction—two years—on remand). Thus to the extent that owners could
initiate and complete the process near the original prepayment date and sell the
property for fair market value, the restriction had no practical significance beyond the
three-year restriction on raising rents and the requirement that the owner pay a portion
of tenants’ relocation expenses. On remand, the Court of Federal Claims should
assess whether the sale process prescribed by LIHPRHA provided the opportunity for a
fair market value sale at or near the original prepayment date.
Alternatively, an owner could enter into a use agreement. The owner was
required to file a “plan of action.” 16 12 U.S.C. § 4107(a) (2000). This plan of action
included the types of financial incentives requested. Id. § 4107(b)(1)(A)-(F). These
incentives included the right to earn higher dividends, rent increases for current tenants,
repair and capital improvement loans, and second mortgages. 17 LIHPRHA required
16
The owner was required to file the plan of action within six months of
HUD’s determination that the preservation rents were within the federal cost limit. 12
U.S.C. § 4107(a) (2000).
17
Specifically, LIHPRHA authorized HUD to provide the following incentives:
increased access to residual receipts accounts; an increase in the rents permitted under
an existing contract under section 1437f of Title 42, or additional assistance under
section 1437f of title 42 or an extension of any project-based assistance attached to the
housing (subject to the availability of amounts provided in appropriations Acts); an
increase in the rents on units occupied by current tenants as permitted under section
4112 of LIHPRHA; financing of capital improvements under section 201 of the Housing
and Community Development Amendments of 1978; financing of capital improvements
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HUD to approve the plan if it was “the least costly alternative that [was] consistent with
the full achievement of the purposes of this title” and if the owner made a binding
commitment to extend the restrictions on the property, including agreeing that “the
housing [would] be retained as housing affordable for very low-income families or
persons, low-income families or persons, and moderate-income families or persons for
the remaining useful life of such housing.” Id. § 4112(a)(1)-(2). If HUD approved the
plan but did not provide the funding incentives within fifteen months, the owner could
prepay the mortgage. Id. § 4114(a)(1)(A). If the owner did prepay under this
circumstance, as with a sale, the owner was still prohibited from raising rents on any
existing tenants for three years following prepayment and was required to pay fifty
percent of relocation expenses. Id. § 4113(b), (c)(1).
The sale and use agreement options thus conferred considerable benefits on the
owners. The major effect of the statute on an owner who did not elect to enter into a
use agreement and wished to prepay was to keep the restrictions in place during the
sale period which might expire near the prepayment date; to compel the owner to offer
the property for sale at a fair market value; and, if there was no sale (and the owner
prepaid the mortgage), to restrict rent increases for a three-year period. This sale
option was plainly an available alternative because many owners in fact elected to sell
their property. See Cienega IX, 67 Fed. Cl. at 444 (noting that of a group of 205 to 210
through provision of insurance for a second mortgage under LIHPRHA; in the case of
housing defined in section 4119(1)(A)(iii) of LIHPRHA, redirection of the Interest
Reduction Payment subsidies to a second mortgage; access by the owner to a portion
of the preservation equity in the housing through provision of insurance for a second
mortgage loan insured under section 1715z-6(f) of LIHPRHA or a non-insured mortgage
loan approved by the Secretary and the mortgagee; or other incentives authorized in
law. 12 U.S.C. § 4109(b) (2000).
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projects in California, 37 percent intended to sell); see also Cienega Gardens J.A. at
103174 (testimony by Richard Mandel, from the California Housing Partnership
Corporation, that he was not “aware of any [properties involved in the sale process] that
did not receive a bona fide offer”).
The benefits to the owners electing to enter into use agreements were also
considerable, as confirmed by the legislative history to LIHPRHA. “The bill authorize[d]
an array of financial incentives” that “[t]he Committee believe[d] . . . . [would] provide
sufficient economic incentive for the vast majority of owners of eligible low income
housing to retain the current use and occupancy restrictions on their projects.” H.R.
Rep. No. 101-559, at 76 (1990); see also 136 Cong. Rec. H6053-01 (July 31, 1990)
(statement of Rep. Conte) (“The provision offers a package of incentives for owners to
maintain their projects as low-income housing.”). When signing LIHPRHA, President
Bush expressed concern that the incentives were in fact too generous:
One important preservation strategy is to provide project owners with
economic incentives to maintain their properties for low-income use. I am
concerned, however, that the incentives in S. 566 are more generous than
are necessary, providing excessive benefits over the long term that will be
paid by all taxpayers.
Statement on Signing the Cranston-Gonzalez Nation Affordable Housing Act, 26
Weekly Comp. Pres. Doc. 1931 (Nov. 28, 1990). The President’s sentiment was
echoed in the hearings leading to the enactment of HOPE, where HUD’s Inspector
General testified that the government should “[d]iscontinue paying owners windfall
profits for projects that threaten to prepay their mortgages and remove the low income
character of the units.” Hearing Before the Subcomm. on VA, HUD, and Independent
Agencies of the H. Comm. on Appropriations, 104th Cong., 1st Sess. (Jan. 24, 1995)
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(statement of Susan Gaffney, HUD Inspector General).
In summary, we think the Court of Federal Claims erred in not considering
offsetting benefits with respect to those owners who entered into use agreements and
those that did not. In considering whether the owners that elected to enter into use
agreements suffered a taking, available offsetting benefits must be taken into account
generally, along with the particular benefits that actually were offered to the plaintiffs.
C. Need To Consider the Duration of the Legislation
In its decision, the Court of Federal Claims did not consider the duration of the
legislation. We believe existing takings law requires consideration of the duration of the
legislation as part of the takings analysis. See Tahoe-Sierra, 535 U.S. at 342. The
LIHPRHA restrictions remained in effect from November 28, 1990, until the HUD
appropriations statute, implementing HOPE, was enacted on April 29, 1996. 18 Four
owners did not enter into use agreements and were thus relieved of the LIHPRHA
restrictions in April 26, 1996, when the HOPE appropriation was enacted. 19 These
18
The Court of Federal Claims found that, after the enactment of HOPE,
HUD “exerted strenuous efforts” to extend LIHPRHA’s prepayment restriction by issuing
preservation letters that refused to permit prepayment without HUD approval. 67 Fed.
Cl. at 480; see id. at 445, 468. The court concluded that HUD’s actions “extend[ed] the
takings period beyond the enactment of HOPE.” Id. at 480. We find that the Court of
Federal Claims erred in extending the takings period beyond the enactment of HOPE.
We have stated that “[a] compensable taking arises only if the government action in
question is authorized.” Del-Rio Drilling Programs Inc. v. United States, 146 F.3d 1358,
1362 (Fed. Cir. 1998). The owner’s remedy for HUD’s refusal to recognize the effect to
the HOPE legislation was to bring an action in a United States district court under the
Administrative Procedure Act challenging HUD’s actions. Id. at 1363.
19
These owners are Blossom Hill, Skyline View Gardens, Gateway Investors
(Rivergate), and Oak Grove. Both Blossom Hill and Skyline View Gardens filed notices
of intent to sign use agreements, but HUD never funded those agreements. If the
incentives had remained unfunded for fifteen months, Blossom Hill and Skyline View
would have been permitted to prepay their mortgages. However, HOPE was enacted
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owners only had their prepayment rights restricted for at most a short period—from
nineteen to twenty-seven months—when the legislation was in effect. 20 The Court of
Federal Claims erred in not considering the duration of the legislation in deciding
whether a taking had occurred. On remand, the court must consider that the owners
who did not enter into use agreements were only subjected to the legislation for a
limited period of 19 to 27 months.
Four of the owners elected to enter into use agreements after the enactment of
LIHPRHA but before the HOPE enactment: Cienega Gardens, Del Amo Gardens, Las
Lomas Gardens, and Chancellor Manor. The temporary nature of the legislation is
irrelevant with respect to those who had use agreements in place when HOPE was
enacted since those owners acted reasonably on the assumption that the restrictions
were permanent.
D. Need To Consider the Nexus Between the Investment and the Expectation
Finally, the Court of Federal Claims erred in its treatment of the investment-
backed expectations prong of the Penn Central analysis. See 438 U.S. at 124. In
before Blossom Hill and Skyline View prepaid under LIHPRHA. See Cienega IX, 67
Fed. Cl. at 450-52. Gateway and Oak Grove also filed notices of intent to sign use
agreements, but they withdrew their applications upon hearing that Congress was
considering the HOPE legislation. Id. at 455-56.
20
The HOPE appropriation was enacted on April 26, 1996, and HOPE
provided that owners could not raise rents for two months following prepayment. Pub.
L. No. 104-120, § 2(b), 110 Stat. 834-35. Accordingly, Blossom Hill’s twenty-year
prepayment period expired on October 31, 1994, meaning that the restriction period
lasted roughly 20 months. Skyline View’s twenty-year prepayment period expired on
March 15, 1994, meaning that the restriction period lasted roughly 27 months.
Gateway’s twenty-year prepayment period expired on June 6, 1995, meaning that the
restriction period lasted roughly 19 months. Oak Grove Towers’s twenty-year
prepayment period expired on January 31, 1994, meaning that the restriction period
lasted roughly 26 months.
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Cienega VIII, we explained that, in determining whether the plaintiffs had a reasonable
investment-backed expectation, “we start with an analysis of the . . . [p]laintiffs’ actual
expectation because we require actual expectation of, or reliance on the government
not nullifying the . . . [p]laintiffs’ contractual and regulatory rights as a threshold matter.”
331 F.3d at 1346. If the plaintiffs demonstrated a subjective reliance on the prepayment
provision, the court was then required to “determine whether a reasonable developer in
the . . . [p]laintiffs’ circumstances would believe that the twentieth-year prepayment right
was guaranteed by the regulations and that HUD ‘authorized’ and endorsed mortgage
contracts expressly including it.” Id. at 1348 (internal citation omitted). As with the
other factors, the burden is on the owners to establish a reasonable investment-backed
expectation in the property at the time it made the investment. Forest Props., Inc. v.
United States, 177 F.3d 1360, 1367 (Fed. Cir. 1999).
We find no error in the Court of Federal Claims’ conclusion that the owners
subjectively expected to have the option to prepay their mortgages after twenty years.
However, we do think the Court of Federal Claims erred in part in its analysis of the
reasonableness of the plaintiffs’ expectations.
One important aspect of investment-backed expectations is whether, in the
regulatory environment, it would be expected that the law might change to impose
liability. The test in this respect was set forth at length in Commonwealth Edison Co. v.
United States, 271 F.3d 1327 (Fed. Cir. 2001) (en banc). 21 There we explained that
21
While Commonwealth Edison was a due process case, we have
recognized that it governs in the closely related takings area as well. See Cienega VIII,
331 F.3d at 1346 n.42; Chancellor Manor v. United States, 331 F.3d 891, 904 (Fed. Cir.
2003); see also Appolo Fuels, Inc. v. United States, 381 F.3d 1338, 1349 n.5 (Fed. Cir.
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“[t]he reasonable expectations test does not require that the law existing at the time of
[entering into the program] would impose liability, or that liability would be imposed only
with minor changes in then-existing law. The critical question is whether extension of
existing law could be foreseen as reasonably possible.” Id. at 1357. Conducting an
analysis under Commonwealth, we explained in Cienega VIII that “[w]e have no
evidence that the housing programs involved here were part of” such a highly regulated
field that the owners’ expectations were necessarily unreasonable. 331 F.3d at 1350.
We concluded that the plaintiffs could not reasonably have expected the change in
regulatory approach. Id.; see also Chancellor Manor, 331 F.3d at 904. We see no
basis for revisiting this issue.
However, the reasonable expectations prong also requires that the expectations
be investment backed, and in this regard further analysis is required. The first step of
the analysis is to determine the actual investment that the general and limited partners
made in the property. The second step is to determine the benefits that the owners
reasonably could have expected at the time they entered into the investment. The third
step is to determine what expected benefits were denied or restricted by the
government action. (The latter two have been discussed earlier in this opinion.) In
other words, it is impossible to determine whether the owners’ expectations were
reasonable without knowing the total value of the investment; its relationship to the
benefits available to the owners, including any tax benefits; and the anticipated benefits
that were denied or restricted by the government action. 22 Finally, the claimant must
2004).
22
In conducting this analysis, the court should consider any reduction in the
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establish that it made the investment because of its reasonable expectation of receiving
the benefits denied or restricted by the government action, rather than the remaining
benefits. The importance of this analysis is confirmed by the cases. For example, in
Penn Central, the Supreme Court explained that the takings analysis requires
consideration of “the extent to which the regulation has interfered with distinct
investment-backed expectations.” 438 U.S. at 124. The Supreme Court noted that a
taking does not lie where the restriction “did not interfere with interests that were
sufficiently bound up with the reasonable expectations of the claimant,” id. at 125, but
that “a . . . statute that substantially furthers important public policies may so frustrate
distinct investment-backed expectations as to amount to a ‘taking.’” Id. at 127. The
Court determined that the relevant investment in Penn Central was the purchase of the
property before the zoning regulation was enacted and that the expectation was that it
would be used as a rail terminal. Thus “the New York City law [did] not interfere in any
way with the present uses of the Terminal. Its designation as a landmark . . .
contemplate[d] that appellants [could] continue to use the property precisely as it ha[d]
been used for the past 65 years.” Id. at 136. The Court concluded that the zoning
restriction did “not interfere with what must be regarded as Penn Central’s primary
expectation concerning the use of the parcel.” Id. at 136 (emphasis added); see also
MacLeod v. Santa Clara County, 749 F.2d 541, 547 (9th Cir. 1984) (“[I]t is clear that the
denial of the permit did not interfere with MacLeod’s primary ‘investment-backed
expectation’ concerning the use of the parcel.”).
return that would be the result of phantom income resulting in tax liability without the
receipt of actual income. In determining the return for the general partners, the court
should make allowance for any nonmonetary contributions, such as the performance of
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Based on Penn Central, the government argues that “a taking will not lie” “where
multiple uses can be expected of property, but the law does not interfere with an
owner’s ‘primary’ investment-backed expectation.” Chancellor Manor Appellant’s Br. at
56 (emphasis added). The owners disagree with the government’s formulation of the
reasonable investment-backed expectations test, and argue instead that “an
expectation—even if not the ‘primary’ one—is nonetheless ‘investment-backed’ if an
investor would not have invested but for the expectation.” Cienega Gardens Appellees’
Br. at 52. While the government’s view appears to be supported by Penn Central, we
need not determine at this stage in the proceeding whether the reason for the
investment must be the “primary” expectation or simply that reasonable owners would
not have invested “but for” the expectation for as yet the owners have not established
either standard.
In addressing this question on remand, it is particularly important that the Court
of Federal Claims first determine the precise scope of the benefits denied. The owners
were not, as discussed earlier, entirely denied the right to prepay; rather that right was
denied for a short period, and rents were frozen for a period after prepayment. The
Court of Federal Claims must determine on remand whether the rights thus denied were
the primary or “but for” cause of the investment. At this stage, the plaintiffs have not
established that a reasonable owner’s expectation of an unrestricted right of
prepayment after twenty years would have satisfied either standard. The substantial
benefits that the owners received, other than the absolute prepayment right, may well
have been such that the absolute prepayment right might not have been either the
services without compensation.
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primary or “but for” reason that a reasonable owner would have invested in the property.
Indeed, it is not even clear that a reasonable owner would rely on any aspect of the
prepayment right in making the investment, much less that a reasonable owner would
rely on an unrestricted right to prepayment.
In determining whether expectations of prepayment were reasonably investment
backed, it is necessary to inquire as to the expectations of the industry as a whole.
Here the expert testimony on this issue was conflicting and, unfortunately, was limited to
the expectations as to the general prepayment right rather than the expectations as to
the limited restrictions actually imposed by the statute. On one hand, at trial the
government presented the expert testimony of Kenneth Malek, an expert in tax
accounting and tax-advantaged investments. He testified that “neither the general
partners nor the limited partners considered residual value [of the property] to be a
significant motivation.” Chancellor Manor J.A. 102633. This was because “[t]he
dividends that could be paid as operating cash flow distributions to the investors were
limited, and so the benefits that made a material impact on the project from the
standpoint of the present value of those benefits were the tax benefits and the . . . front
end cash flow to the developers.” Id. at 102637. He concluded that the twenty-year
prepayment right “was not a material incentive.” Id. at 102806. On the other hand,
William Dockser, Deputy Assistant Secretary of HUD and FHA Commissioner from
1969 to 1972, testified that “the ability to discuss an exit strategy in 20 years . . . was a
reason why people would undertake to do these programs and a reason why people
would invest in the programs.” Id. at 500105.
The actual contemporaneous offering memoranda appear to provide more
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reliable evidence of industry expectations with respect to the general prepayment right
(though even those do not consider the possibility of the limited restrictions imposed by
the statute). Unfortunately the record contains few examples of such memoranda. But
those few that are in the record are revealing. For example, when Skyline View
Gardens was syndicated, the owners circulated a prospectus that touted the tax
benefits of owning the property. While the prospectus assumed that the restrictions
would be lifted after twenty years, it also indicated that the owners placed little value on
the right to sell the property (or in the absence of a sale, the right to prepay the
mortgage). The schedules demonstrating the tax benefits were based on the
assumption that the partnership would sell the property after twenty-one years for only
$1. Other private placement memoranda did not even assume that the property would
be sold after twenty years. For example, the private placement memorandum for
Gateway Investors only states that the property is subject to a forty-year mortgage
without mentioning the prepayment date. These few contemporaneous documents
suggest that the owners entered the programs without relying on the ability to prepay
after twenty years.
The plaintiffs argue that the prospectus only described the expectations of the
limited partners and not the partnership as a whole. This argument is unavailing.
Under the securities laws the prospectuses were required to be truthful. See 15 U.S.C.
§ 77l(a)(2). In this respect, the prospectuses are particularly reliable. Under the
securities laws, the prospectus cannot contain any “untrue statement of a material fact
or omit[] . . . a material fact.” Id. This includes misstatements and omissions about the
general partner’s interest in the properties. See Currie v. Cayman Res. Corp., 835 F.2d
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780, 783 (11th Cir. 1988) (finding material misrepresentations and omissions under 15
U.S.C. § 77l(a)(2) regarding a general partner’s interest in a partnership). Accordingly,
the prospectuses must contain any material information about both the limited and the
general partners’ interest in the properties, and are the most reliable indication of the
relative importance of the anticipated benefits.
On remand, it is important that the parties provide the Court of Federal Claims
with sufficient contemporaneous documents for the court to determine the actual
investment and the expectations of the industry at the time that LIHPRHA was enacted.
CONCLUSION
For the foregoing reasons, we vacate and remand for a new Penn Central
analysis under the correct legal standard. In view of our clarification of the legal
standard, we conclude that on remand the Court of Federal Claims should allow both
sides to supplement the record with additional relevant evidence if they wish to do so.
VACATED AND REMANDED.
COSTS
No costs.
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United States Court of Appeals for the Federal Circuit
2006-5051
CIENEGA GARDENS, DEL AMO GARDENS, LAS LOMAS GARDENS,
BLOSSOM HILL APARTMENTS, and SKYLINE VIEW GARDENS,
Plaintiffs-Appellees,
v.
UNITED STATES,
Defendant-Appellant.
------------------------
2006-5052
CHANCELLOR MANOR, GATEWAY INVESTORS, LTD.,
and OAK GROVE TOWERS ASSOCIATES,
Plaintiffs-Appellees,
v.
UNITED STATES,
Defendant-Appellant.
NEWMAN, Circuit Judge, dissenting.
I respectfully dissent, for this panel has no authority to revoke our prior decision in
Cienega Gardens v. United States, 331 F.3d 1319 (Fed. Cir. 2003) (Cienega VIII). The
threshold issues here reviewed were already decided; that decision is the law of this case.
The National Housing Act of 1968 led to the program here at issue, where the
federal government provided financial incentives to private investors to construct housing to
be rented to low-income tenants at rents below the market rate. The investment incentives
included guaranteed 40-year mortgages from Fannie Mae at low interest, cost
contributions, and other substantial economic subsidies and incentives. In return, the
housing owners were limited in the rents they could charge, the income they could earn,
and the changes they could make. After twenty years the owner could choose to prepay
the subsidized mortgage and remove the property from the arrangement; the property
owners had the unencumbered right to do so. An implementing regulation provided:
24 C.F.R. '236.30 (1970). A mortgage indebtedness may be prepaid in full
and the Commissioner's controls terminated without the prior consent of the
Commissioner where . . . the prepayment occurs after the expiration of 20
years from the date of final insurance endorsement of the mortgage . . . .
As the Court of Federal Claims observed, the right to leave the program after twenty years
was an "incentive [that] enabled property owners to provide low-income housing for twenty
years, and then terminate the low-income housing restrictions and make a long-term profit
by charging market rates for rentals at the properties." Cienega Gardens v. United States,
67 Fed. Cl. 434, 440 (2005) (Cienega IX).
As twenty years approached, the owners invoked the right to prepay the mortgage
and leave the plan. Congress then enacted the ELIHPA (the Emergency Low Income
Housing Preservation Act of 1987), which prohibited leaving the plan, and then in 1990 the
LIHPRHA (Low Income Housing Preservation and Resident Homeownership Act), which
provided a partially mitigating arrangement after twenty years. The statutes are complex.
This and related litigation followed; for these plaintiffs, the first Cienega Gardens case was
filed in 1994. Prepayment rights were eventually restored by the Housing Opportunity
Program Extension Act of 1996 (HOPE). The question of whether a constitutional "taking"
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occurred during the interim period was fully discussed and finally decided in (Cienega VIII).
That decision is the law of this case, as to the four "model plaintiffs" whose facts were the
premises of the takings analysis, and as to the other similarly situated plaintiffs. The
Cienega VIII decision and remand to the Court of Federal Claims was with instructions to
apply that law to determine whether a taking occurred on the specific facts of each plaintiff,
and to assess damages. In the case now on appeal there are eight plaintiffs for eight
properties, including Cienega Gardens. The trial court visited the sites, conducted twenty-
two days of trial, and assessed damages. Cienega IX, 67 Fed. Cl. 434 (2005) is the
decision now before us.
This court in Cienega VIII resolved that the legislative enactments that forbade
removing this privately-owned housing from the low-income low-rent market after twenty
years, and then restored that right, were a temporary taking of property within the purview
of constitutional protection. That aspect was reached and decided. This court so
recognized in Independence Park Apartments v. United States, 449 F.3d 1235 (Fed. Cir.
2006):
[In Cienega VIII] we held -- based on the factual findings made in Cienega III
-- that the plaintiffs had suffered a "serious financial loss" by being deprived
of the opportunity to prepay their mortgages. See Cienega VIII, 331 F.3d at
1340-45. Based on our analysis of the Penn Central factors and the
extensive record already developed in the case, we ruled in favor of the
plaintiffs on their regulatory takings claims.
Id. at 1239-40.
In Cienega VIII this court reviewed the "Use Agreements" that were made available
by the LIHPRHA, and explored the various mechanisms whereby owners responded to the
legislative changes until Congress reversed itself via the legislation enacted in HOPE. The
remand to the Court of Federal Claims was with instructions to consider these individual
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differences and assess damages accordingly. This court ruled that the prepayment right
was "the critical inducement" to enter the program, and that "they would not have
participated in the programs otherwise." Cienega VIII, 331 F.3d at 1334, 1348. Those
issues are closed; these rulings bind this panel, as they bound the Court of Federal Claims
in Cienega IX. After thirteen years of litigation, the remaining issue is the application of
Cienega VIII and the assessment of damages; this panel has no authority to revoke
Cienega VIII.
My colleagues acknowledge that this court in Cienega VIII ruled that "the four model
plaintiffs had suffered a compensable temporary regulatory taking," maj. op. at 12, but state
that this court acted "on a partial record and limited arguments made by the government,"
apparently impeaching the parties, the trial court, and ourselves. This is as unwarranted as
it is incorrect. In Independence Park Apartments, 449 F.3d at 1240, another panel of this
court remarked on "the extensive record already developed in the [Cienega] case." If there
indeed were inadequate arguments by the government and an incomplete record at trial,
the concern should have been raised by the panel in that appeal, not four years later when
the trial court has acted on and fulfilled the remand instructions, conducted lengthy
proceedings, and completed a thorough application of this court's decision in accordance
with its terms. See Icicle Seafoods, Inc. v. Worthington, 475 U.S. 709, 714 (1986) (if the
appellate court is dissatisfied with the adequacy of the record and is unable to reach a
proper resolution of the legal question, the proper course is to remand to the trial court).
Review of the eight Cienega cases makes clear that the record and presentation in
Cienega VIII cannot be discarded as "partial" and "limited," for they were thorough and
complete, as well as built on the seven earlier Cienega trials and decisions.
2006-5051 4
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On this appeal, the government repeats the arguments it presented in Cienega VIII,
shifting its emphasis to the argument that the congressional goal of protecting low-income
tenants served an "important public interest." In Cienega VIII this court agreed:
"Unquestionably, Congress acted for a public purpose (to benefit a certain group of people
in need of low-cost housing), but just as clearly, the expense was placed disproportionately
on a few private property owners." 331 F.3d at 1338. This court explored whether this was
"the kind of expense-shifting to a few persons [that] amounts to a taking," id. at 1338-39,
and applied the principles of Pennsylvania Coal Co. v. Mahon, 260 U.S. 393 (1922) that the
"strong public desire to improve the public condition is not enough to warrant achieving the
desire by a shorter cut than the constitutional way of paying for the change," id. at 416. As
reiterated in Lingle v. Chevron U.S.A., Inc., 544 U.S. 528 (2005), "the Takings Clause
presupposes that the government has acted in pursuit of a valid public purpose." Id. at
543.
The Constitution assures that when the government changes its obligations to
private entities with which it has entered into contractual and other specific relationships,
the government is as responsible for its direct violation of those relationships as would be
any private person. See Mobil Oil Exploration & Producing Southeast, Inc. v. United
States, 530 U.S. 604, 607-08 (2000) (the United States is bound by the same principles of
contract law as in contracts between private persons). Legislative abrogation of property
rights, albeit for public purpose, is tolerated because the Constitution assures that the
contracting party is not required to bear the burdens of the public as a whole. In Winstar v.
United States, 518 U.S. 839 (1996) the Court explained: "Just as we have long recognized
that the Constitution 'bar[s] Government from forcing some people alone to bear public
2006-5051 5
2006-5052
burdens which, in all fairness and justice, should be borne by the public as a whole,' so we
must reject the suggestion that the Government may simply shift costs of legislation onto its
contractual partners who are adversely affected by the change in the law, when the
Government has assumed the risk of such change." Id. at 883 (quoting Dolan v. City of
Tigard, 512 U.S. 374, 384 (1994)).
The issues on this appeal are limited to the application by the Court of Federal
Claims of the remand instructions of Cienega VIII. Instead, this court proposes that the trial
court redecide the basic question of whether a taking occurred at all. 1 No new arguments
have been presented, nor any previously unavailable factual information, nor any other
basis for reopening what is closed. It is singularly unfair to these plaintiffs to require them
to start again, after thirteen years of judicial process.
The issue of this appeal, the appropriate measure of damages, is barely touched.
The trial court received extensive briefing and argument and evidence, including expert
testimony from all sides. The court gave weight to the partial mitigation by those owners
who accepted the "Use Agreements," and evaluated the issues of the owners who sold
their properties while the law was in effect. A serious flaw in the majority's analysis is its
blurring of the distinction between liability and damages, resulting in its skewed approach to
the takings analysis. The panel majority's new requirement that the owners must prove that
the right to leave the program after twenty years was "the primary incentive" for their initial
participation in the program is contrary to all of the rules of evaluating integrated contractual
1 The court is not here acting en banc; we simply consolidated the two appeals
and enlarged the panel. En banc action is required to overturn prior final decisions.
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2006-5052
arrangements, for each provision and obligation is deemed significant to the whole.
Whatever weight a party may have given to each of the complex restrictions and benefits,
this absolute prepayment right was included in all of the arrangements. The prepayment
right has been demonstrated, by the experience of this litigation, to be of large economic
significance. The prepayment right was included in all of the relevant documents and
prospectuses, as well as in the authorizing legislation and regulations. It is not disputed
that the removal of this condition spawned this litigation.
My colleagues apply another incorrect premise, for the value of property is
measured when it is taken. See First English Evangelical Lutheran Church of Glendale v.
Los Angeles County, 482 U. S. 304, 320 (1987) ("the valuation of property which has been
taken must be calculated as of the time of the taking"); Almota Farmers Elevator &
Warehouse Co. v. United States., 409 U.S. 470, 474 (1972) ("the owner is entitled to the
fair market value of his property at the time of the taking.") We need not speculate whether
the government would have designed a different arrangement in 1968 had the future
housing situation been foreseen, or what variation in incentives would have been needed to
obtain private participation; the panel majority errs in suggesting that because some other
terms might have obtained the required low-rent housing, those other terms now determine
the economic consequences of legislative annulment of the terms that were actually put
into place.
The creative theories propounded by my colleagues for redetermining whether a
taking occurred ignore the law of this case, as well as the constitutional authority that holds
the government to its obligations. I must, respectfully, dissent.
2006-5051 7
2006-5052
Cienega Gardens v. United States
Court: Court of Appeals for the Federal Circuit
Date filed: 2007-09-25
Citations: 503 F.3d 1266
Copy CitationsCombined Opinion