A Primer on the Federal Court Challenge to the State of Hawaii Land Use Commission’s Power to Reclassify Land Upon an Order to Show Cause

by Paul J. Schwind, Esq.*, InverseCondemnation.com

Background

A summary of the lengthy and complex factual background in this case begins with the original reclassification of 1,060 acres on the Big Island "agricultural" to "urban" use in 1989, subject to the condition that the original owner develop 60 percent of the proposed 2,760 housing units as "affordable" units. After transfer of the property from Signal Puako Corp. to Puako Hawaii Properties, a limited partnership under Nansay Hawaii, Inc., the LUC Decision and Order was amended in 1991, reducing the project density to 1,560 housing units, provided that no less than 1,000 units be "affordable."

By 1997, PHP had constructed 107 affordable housing units. In November 2005, Bridge Aina Le`a, the successor owner, succeeded in further amending the 1991 D&O to reduce the minimum number of affordable units to 385, although the LUC required that certificates of occupancy be provided for all of these units within five years of the 2005 amendment. In October 2007 the County of Hawaii imposed a new requirement, namely that an environmental impact statement be prepared for plaintiff’s improvements within a public right-of-way, pursuant to Sierra Club v. Dep’t of Transp., 115 Haw. 299, 167 P.3d 292 (2007) (secondary effects of improvements to public transportation infrastructure are not exempt from environmental assessment).

LUC's Order to Show Cause

In December 2008, two years before Bridge’s deadline to provide the 385 affordable housing units, the LUC entered an Order to Show Cause, alleging failure to perform according to the conditions imposed. In April 2009, upon oral motion and voice vote, the LUC acted to reclassify the property to agricultural use. Shortly thereafter, DW Aina Le`a Development moved to become a co-petitioner with Bridge, and to stay entry of the reclassification action, while Bridge moved to rescind the show cause order. In September 2009, the LUC rescinded its previous orders and accepted DW as co-petitioner, but now required as a "condition precedent" that 16 affordable units be completed by March 31, 2010.

Upon the LUC’s request, DW submitted a written status report on June 10 showing its progress on this and other work on the property. Nevertheless, in evident response to comments by the State Office of Planning before and during a hearing on July 1, the LUC voted to keep the prior show cause order "in place," and on July 26 entered an "Order Finding Failure to Meet Condition Precedent for Rescinding Order to Show Cause."

On August 30, 2010, DW filed a Motion to Amend Conditions, and on November 12, Bridge filed a Motion re Order to Show Cause alleging multiple violations by the LUC of relevant statutes and administrative rules. On November 18, 2010 and January 20, 2011, the LUC held hearings on these motions together with the Office of Planning’s motion for a new show cause order. On January 20, the LUC voted 5-3 to reclassify the property back to agricultural use, notwithstanding that six affirmative votes are required for a boundary amendment.

The LUC then voted to deny Bridge’s motion to invalidate the show cause order. On April 25, after meetings earlier that month prior to which the LUC was advised it was exceeding its authority, the LUC executed an order reverting the petition area to agricultural use.

State Court Complaint, Removal to Federal Court

In its complaint filed on June 7 in state court, Bridge filed suit against the LUC and the commissioners in their official and individual capacities, seeking damages of not less than $35.7 million and injunctive relief to allow it to continue developing the property. The State’s motion to dismiss, filed in federal court on July 27, 2011, after removal of the case on June 27, does not [and cannot, under court rules] contest the facts alleged by Bridge, and there is no separate answer that does so.

State's Motion to Dismiss

The State’s legal defenses against the federal and state law claims may be summarized as follows:

• The LUC Commissioners are entitled to judicial immunity in their individual capacity as to claims for injunctive relief, and neither they in their official capacity nor the LUC itself are "persons" under § 1983 as to claims for damages for deprivation of constitutional rights.
• The federal court should refrain from entering any injunctive relief, pursuant to the abstention doctrines because the plaintiffs' administrative appeal (which was not removed) remains pending in state court. See Railroad Comm'n v. Pullman Co., 312 U.S. 496 (1941) (federal courts, when asked for the extraordinary remedy of injunction, will exercise sound discretion in the public interest to avoid needless friction with state policies); Younger v. Harris, 401 U.S. 37 (1971) (possible facial unconstitutionality of a [state] statute does not in itself justify an injunction against good-faith attempts to enforce it, absent any showing of bad faith, harassment, or any other unusual circumstance that would call for equitable relief).
• Finally, although the Aina Le`a project had obtained partial final subdivision approval from the County in 2009, the State argues that plaintiff had not received "official assurance" that it may safely proceed under Life of the Land, Inc. v. City Council of the City and County of Honolulu, 61 Haw. 390, 453, 606 P.2d 866, 902 (1980) (equitable estoppel arises when a land developer makes a substantial expenditure in reliance on official assurance of final discretionary approval of his project, such that further necessary ministerial approvals will be forthcoming in due course and he may safely proceed) [for a comprhensive overview on how Hawaii courts apply the vested rights/zoning estoppel tests, see this law review article].

Download the State's motion to dismiss here.

Developer's Arguments

Bridge’s memorandum in opposition argued, inter alia, that under Ninth Circuit law, the LUC Commissioners are entitled to neither absolute judicial immunity nor qualified immunity in their individual capacity, as they act both as lawmakers and monitors of compliance with their own rules and requirements. See Zamsky v. Hansell, 933 F.2d 677 (9th Cir. 1991) (state officials who unconstitutionally cause land to be rezoned are not absolutely immune from liability for the damage caused by their unlawful conduct, when they act in an executive rather than legislative or judicial capacity). Accordingly, Bridge argued it was entitled to seek declaratory and injunctive relief for its takings claim and just compensation for inverse condemnation, including prospective injuctive relief and damages from the Commissioners in their official and individual capacities.

It also argued that the federal court should hear the case and not abstain, because neither the Pullman nor the Younger abstention doctrines apply. Pullman abstention is inapplicable because (1) the case involves no sensitive area of social policy; (2) plaintiff’s constitutional claims cannot be resolved in the agency appeal; and (3) there is no uncertain state law issue to be resolved. Younger abstention is not applicable because defendants removed the case to federal court.

Finally, in addressing the vested rights/zoning estoppel claim, Bridge argued that the LUC’s reclassification of the project from agricultural to urban use was the "official assurance" required under Life of the Land, and upon which Bridge relied when incurring millions of dollars in expenses to develop the property.

State's Reply

The State’s reply memorandum began by distinguishing the Oregon Land Conservation and Development Commission at issue in Zamsky v. Hansell from the Hawaii Land Use Commission. It argued that Bridge’s reliance on Zamsky is misplaced because the LCDC members exercised executive functions, whereas the LUC process is explicitly quasi-judicial. The LUC is expressly authorized by statute to impose conditions and enforce them by way of a show cause order. The fact that the Commissioners’ actions are under agency review in state court (in the separate administrative appeal) does not militate against absolute judicial immunity in federal court. The State argued that the problem with Bridge’s complaint for injunctive relief is that there is nothing to enjoin – the LUC intended no further action in this case.

The State responded to the developer's argument on absention by asserting that the case presents the Pullman factors: (1) whether the LUC can enforce its conditions is a sensitive issue of social policy and purely a matter of state land use planning law; (2) the constitutional issue (the plaintiffs' taking claim) will unquestionably be eliminated or materially altered upon resolution of the state court agency review; and (3) the final outcome of the state law questions to be resolved in that appeal is anything but certain, presently. abstention is also appropriate because Bridge offers no plausible, non-conclusory facts to support its naked claim that the LUC Commissioners acted on personal and political motivations revealing an irrational and malicious bias.

Finally, Bridge had no "official assurance" to expend funds on its project, because the State’s position is "[y]our development will be permitted provided that you meet conditions relating to affordable housing." [Author's note: this is a classic "Catch 22" – the developer had to expend funds to meet the affordable housing condition, and in effect had to gamble that it could "safely proceed" and receive its "official assurance" after that that expenditure!)

State Court Ruling

Bridge’s and DW’s separate state court agency appeals were consolidated in September in the Third Circuit, and oral argument was heard by Judge Strance on December 16, 2011. On the eve of the federal court hearing on the State's motion to dismiss, the state court concluded that the LUC could not reclassify the land from urban to agricultural, as reported here and here. However, the transcript and final written order in that case are not presently available, so we will have to wait for the details. See DW Aina Le'a Dev. LLC v. Bridge Aina Le'a LLC et al., 3CC11-1-00112K (Haw. 3d Cir., Apr. 7, 2011).

Federal Court Hearing

At the outset of the hearing on the motion to dismiss, U.S. District Judge Susan Oki Mollway asked whether the federal court may exercise jurisdiction over Bridge’s inverse condemnation claim. Prior to the hearing, Judge Mollway circulated to counsel her written inclinations (as is her practice) to dismiss with prejudice most of the action (claims for injunctive relief, money damage claims against the LUC and its Commissioners in their official capacity, and procedural claims against the Commissioners in their individual capacities), for lack of jurisdiction and for absolute judicial immunity. If the claims were not dismissed, the court would abstain and stay those claims pending the outcome of the state court agency appeal. Judge Mollway also asked counsel to come prepared to discuss whether removal of the case affects how the inverse condemnation claim may brought. See Jachetta v. United States, 653 F.3d 898 (9th Cir. 2011) (in an Alaskan native lands claim, sovereign immunity barred the entire action against the state but only part of the action against the Bureau of Land Management),

During oral argument, Deputy Attorney General William Wynhoff argued for the State that the jurisdictional question raises Eleventh Amendment, Williamson County, and San Remo issues. See, e.g., San Remo Hotel, L.P. v. City and County of San Francisco, 545 U.S. 323, 346 (2005) (Williamson County ripeness requirements do not preclude state courts from hearing simultaneously a plaintiff's request for compensation under state law and the claim that, in the alternative, the denial of compensation would violate the Fifth Amendment of the Federal Constitution). Under San Remo, both federal and state takings claims must be brought in state court, but by removal, the State has arguably waived its Eleventh Amendment immunity, so that the federal court now has jurisdiction over the takings claim. The seeming conflict between Will v. Michigan Dept. of State Police, 491 U.S. 58, 71 (1989) (official capacity state officials are not "persons" under 42 U.S.C. § 1983) and Ex parte Young, 209 U.S. 123 (1908) (allowing prospective injunctive relief) is reconciled by the “legal fiction” described in Cardenas v. Anzai, 311 F.3d 929, 935 (9th Cir. 2002). See also Colony Cove Prop., LLC v. City of Carson, 640 F.3d 948 (9th Cir. 2011) (absent factual allegations that reflect action that was arbitrary, irrational, or lacking any reasonable justification in the service of a legitimate government interest, dismissal of an applied substantive due process takings claim ]denial of rent increase under a rent control scheme[ was appropriate).

Bruce Voss argued for Bridge as respondent that the state claims should be remanded, given Judge Strance’s ruling for Bridge in the state court action. He is concerned about the delay in resolving the takings claim, and would like the state claims remanded to state court while preserving the federal claims for supplemental briefing. He cited to Potrero Hills Landfill, Inc. v. County of Solano, 657 F.3d 876, 889-90 (9th Cir. 2011) (federal courts are not required to send a case to state court if doing so would simply “impose expense and long delay upon the litigants without hope of its bearing fruit,” to the contrary, under such circumstances, "it is the duty of a federal court to decide the federal question when presented to it").

Judge Mollway concluded the hearing by requesting the parties to submit supplemental briefing by February 17, 2012, stating their positions on the question of how the state court's ruling (when available) may affect the issues before the federal court, including the jurisdictional question.

The hearing was continued until March 19, 2012.

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*inactive member of the Hawaii Bar