THE INFAMOUS “KAVANAU CONUNDRUM”

There is a maxim of jurisprudence at California Civil Code, Section 3523 that states, “for every wrong, there is a remedy.” Unfortunately, the California Supreme Court has found that this old rule of law does not apply to wrongs done to rental property owners by inventing and applying the “Kavanau Conundrum.”

The American Heritage Dictionary defines “conundrum” as: “1. A riddle in which a fanciful question is answered by a pun. 2. A problem admitting of no satisfactory solution.”

I first heard this term used by Superior Court Judge Stanley M. Weisberg to describe the Rent Board’s rent increase process in the case of Cabinda LLC v. Santa Monica Rent Control Board, Superior Court Case No. SS008498. He described the process as, “A conundrum . . . a rat chasing its tail.” But when he realized that the property owner was the “rat” in his analogy, he quickly changed his statement to “. . . a dog chasing its tail.”

I did not know exactly what the term meant at the time the Judge used it, but I was somewhat relieved that he found that rental property owners to be more similar to dogs than rats because it opened the possibility that the property owner might receive a fair decision in that case. But that did not happen and I did not fully understand the term until I reviewed the California Supreme Court opinion in Kavanau v. Santa Monica Rent Control Board (1997) 16 Cal.4th 761. In that opinion, the Supreme Court created the infamous “Kavanau Adjustment” which I have renamed the “Kavanau Conundrum” because it never resulted in any type of “adjustment.”

Kavanau v. Santa Monica Rent Control Board was a simple case that would have never been a published decision the lower courts that reviewed that case had only applied the rule of law announced by the California Supreme Court in Birkenfeld v. City of Berkeley 17 Cal.3d 129, at 169 when it struck down the Berkeley rent control law in 1976:

“For such rent ceilings of infinite duration an adjustment mechanism is constitutionally necessary to provide for changes in circumstances and also provide for the previously mentioned situations in which the base rent cannot be reasonably deemed to reflect general market conditions. The mechanism is sufficient for the required purpose only if it is capable of providing adjustments in maximum rents without a substantially greater incidence and degree of delay than is practically necessary. “Property may be as effectively taken by long-continued and unreasonable delay in putting an end to confiscatory rates as by an express affirmance of them . . .”

Following the Birkenfeld decision, the California Supreme court reviewed various rent control laws during the 1980’s and repeatedly spoke of the constitutional requirement that rents be adjusted “without a substantially greater incidence and degree of delay than is practically necessary.” See Carson Mobilehome Park Owners Association v. City of Carson (1983) 35 Cal.3d 184, and Fisher v. City of Berkeley (1984) 37 Cal.3d 644 where it reviewed the 120-day limitation of the Berkeley Law in glowing terms and ended the discussion with the following warning at Footnote 52:

“We stress that only the facial validity of the ordinance is currently before the court. Whether individual landlords might prove a denial of due process because of delays exceeding the 120-day time limit is a question of great concern, but it is not before us at this time.”

Although the Court said it was “greatly concerned” about delays in putting an end to confiscatory rates, the Kavanau decision demonstrates that it really wasn’t concerned about that issue at all as the facts of that case demonstrate.

In 1988, Earl Kavanau purchased a 10-unit apartment building that generated approximately $44,000 of income and where he invested well more than $100,000 for repairs and improvements. He then filed a rent increase petition, in which the Rent Board found that he was entitled to substantial rent increases to provide him with “no more than a fair return” under the Santa Monica Rent Control Law. Unfortunately, the Rent Board then placed a 12% limitation on the rent increases so that Earl Kavanau could not actually collect the rent increases for five years or more. But Earl was a retired attorney, so he took the Rent Board to court and in Kavanau v. Santa Monica Rent Control Board (1993) 19 Cal. App 3d 730, he convinced the Court of Appeal that the 12% was unconstitutional as applied to him, (although the Rent Board had no authority under the Rent Control Law to place any limitation of rent increases necessary to provide a “fair return” on anyone).

During the time the limitation was in place, it caused $150,000 of rent losses, so Earl then sued the Rent Board seeking compensation for the injuries it had caused. Although the Court of Appeal found that the Rent Board’s unlawful limitation caused injury to Earl Kavanau, it was not willing to make the Board pay for the injuries it caused. Instead, it came up with the absurd idea that Earl should file a new rent increase petition with the Rent Control Board and seek additional rent increases as compensation for the injury it caused.

Earl Kavanau quickly realized that giving the Rent Board an opportunity to decide the amount of compensation it owed him for its violation of the law would be an exercise in futility and a violation of his constitutional rights. The 5th Amendment of the U.S. Constitution states, “nor shall property be taken without just compensation.” Historically, this has been taken to mean that if the government takes the right, then the government must pay the compensation. When the Court of Appeal refused to follow that rule of law, the Kavanau case continued on to the California Supreme Court where it became Kavanau v. Santa Monica Rent Control Bd. (1997) 16 Cal.4th 761. A review of that Opinion reveals the “Kavanau conundrum” as follows:

First, the Kavanau opinion at 16 Cal 4th 768 begins by citing a few phrases from past Supreme Court decisions including Birkenfeld, Carson and Fisher at 16 Cal.4th 772:

“Among other things, this [rent adjustment] process may not entail “a substantially greater incidence and degree of delay than is practically necessary. (Birkenfeld supra, Fisher supra, . . .)

[After reviewing some of the holdings in these cases which indicate a right to a prompt determination, the Court then reverses direction by concluding . . .]

All of these characteristics would serve to reduce the delay and make the petition process less burdensome, but we did not hold the state or federal constitutions required any of them per se.”

The final sentence clearly demonstrates the Court’s intellectual dishonesty. In Birkenfeld, the Court invalidated the Berkeley law because it was “constitutionally necessary” to put an end to “confiscatory rates” without unreasonable delay. That was a successful “facial” challenge of the law that was not dependent upon any specific set of individual facts. Yet the Kavanau Court now ignores its own history by saying that it never held that putting a prompt end to confiscatory rates was required as a matter of law (“per se.”).

The Kavanau opinion then rambles on about different rate-making requirements, although the Board’s Rent Adjustment formula was never at issue in his case. Earl Kavanau never challenged the Board’s formula. He simply wanted to collect the rent increases that the Board’s “fair return formula” provided without waiting for waiting for 5 years or more for the limitation to end.

After making a meaningless review of constitutional provisions concerning “due process” and “taking of property without just compensation” the Kavanau opinion finally addresses the issue of Earl’s damages at 16 Cal. 4th 780 where it progresses from dishonesty to absurdity by making the following statements:

“. . .This case does not involve a regulation that ‘prohibited a beneficial use to which [Kavanau’s building] had previously been devoted’ thus interfering with Kavanau’s “primary expectation.” Rather, the 12 percent limit affected Kavanau largely because he changed the use of his building by making costly capital improvements. [Emphasis in original, citations omitted.]

It is hard to find a better example of a more absurd statement than to say that an apartment building owner “changed the use of his building by making costly capital improvements.” However, the statement served as a transition so that the Court could then discuss decisions relating to mining interests and the landmark status of New York City’s Grand Central Train station instead of applying its previous decisions concerning the rights of California rental property owners. The “smoke and mirrors” continue in the sentences immediately following the quote above:

“Nor did the 12 percent limit abrogate Kavanau’s entire property holding, as might occur when someone owns only mineral rights and a land-use regulation prohibits mining those minerals. (Penna. Coal v. Mahon, supra, Penn Central v. City of New York . . . ) Nor did the 12 percent limit “prevent the best use” of Kavanau’s building or “extinguish a fundamental attribute of ownership.” [Penn Central, supra.] In addition, the Rent Board did not impose the 12 percent limit as a condition for granting a permit.”

Thus, the Supreme Court changed its requirement from,” Rent control laws must be “reasonably calculated to . . . provide landlords with a just and reasonable return on their property without long continued and unreasonable delay.” (Birkenfeld supra), to holding that no compensation is owed unless the government action abrogates the “entire property holding” or “extinguishes a fundamental attribute of ownership.” The road to absurdity then continues where the Supreme Court finally gets around to addressing Earl Kavanau’s remedy at 16 Cal. 4th 783-784:

“. . .We think one of the costs associated with rent control that the Rent Board must consider is the cost to Kavanau of any confiscatory rent ceilings the Rent Board previously imposed on the apartments in question. [Citations omitted.] Thus, irrespective of whether section 1983 would have afforded Kavanau a remedy for the due process violation, his continuing right to an adjustment of future rents can provide an adequate remedy.

Moreover, this remedy, as opposed to an award of damages against the Rent Board, places the cost of compensating Kavanau roughly on those tenants who benefited from unconstitutionally low rents. [Citations omitted] We note in this regard that if any of Kavanau’s tenants have vacated an apartment, then state law may have authorized Kavanau to set the rent at for his new tenants that may have enabled him or will enable him to recoup past losses. In that case, he would not be entitled to an additional rent adjustment. Thus, in practice, future rent adjustments are likely to affect only those tenants who have not moved and who benefited from unconstitutionally low rents.”

Thus, as the majority of the Supreme Court justices decided this case, Earl Kavanau had an adequate remedy because it fell “roughly on those tenants who benefited from unconstitutionally low rents.” Then it “notes” that Earl Kavanau cannot receive compensation from tenants who vacated the property between 1990 when the rent increase petition was decided and some date after 1997 when the “Kavanau Adjustment” was invented. Therefore, he may “roughly” receive future compensation only from those tenants who have not moved away and are not protected by the 12 percent rent increase limitation that still exists.

Finally, it should be noted that Supreme Court never said that the Board had to grant additional rent increases. The Opinion says, “We think one of the costs associated with rent control that the Rent Board must consider is the cost to Kavanau of any confiscatory rent ceilings the Rent Board previously imposed on the apartments in question.”

Thus, the Court did not order the Rent Board to do anything except to “consider the cost” of confiscatory rent ceilings. Therefore, should any property owner say in the future, “I am entitled to a Kavanau Adjustment” then the Supreme Court can say, “We were only thinking about it. As we made clear in Kavanau, “all of these characteristics would serve to reduce the delay and make the petition process less burdensome, but we did not hold the state or federal constitutions required any of them per se.’”

A dissenting opinion written by Justice Marvin Baxter and joined by Justice Janice Brown recognized the majority opinion for the gobbledygook it is at 16 Cal.4th 803-804:

“The majority apparently assume that plaintiff’s rental units are and will continue to be occupied by some tenants who enjoyed the benefit of past impermissibly low rents. Therefore, the majority reason, we may justify compelling those tenants to pay rents which exceed the amount necessary to ensure plaintiff a reasonable return in order to reimburse plaintiff for what the government took. Additionally, new tenants who pay market rate rents will help to reimburse him since those rents also exceed the amount necessary to ensure a reasonable return. Because plaintiff may recover his losses in this manner, there has been no taking and there is no need for an inverse condemnation remedy. Again, I disagree.

The taking has already occurred. Plaintiff has already lost almost $150,000 because of the Board’s action. Both the Fifth Amendment and article I, section 19 impose the obligation to pay just compensation on the governmental entity that takes an owner’s property. Moreover, assuming . . . [t]hat the obligation to pay just compensation for a taking may be satisfied by shifting the burden to tenants through extraordinary rental increases, there is no assurance here that any present tenants on whom those increases fall will remain and pay the authorized increases. The majority’s assumption that they will do so is unfounded.

Also unfounded is the assumption that because plaintiff is allowed to raise the rent for vacant units, he will be able to recover his past losses from new tenants. The higher, presumably market rate, rents paid by new tenants are those which plaintiff would receive in any event since vacant units are no longer subject to rent control except to the extent that the preemptive state law imposes transitional limits. By no stretch of the legal imagination do these higher rents include a premium that will reimburse plaintiff for the past rental income which the Board wrongfully denied him.

Thus, the majority’s holding that increasing the rents allowed for plaintiff’s rental units is an adequate alternative to an action in inverse condemnation, rests entirely on speculation that plaintiff will someday recover the amount he allegedly lost from past tenants who will remain tenants even though the permitted rent increases will of necessity fix their rents at a figure above that otherwise permitted. It should be apparent to all that this illusory alternative remedy will not and cannot be considered an offsetting benefit that mitigates plaintiff’s loss and relieves the Board of its obligation to pay for taking plaintiff’s property.”

Therefore, whenever attorneys have endless intellectual discussions about the constitutional requirements, strict scrutiny, due process, the equal protection and/or the takings clause of the Constitution, I generally tune out such silliness because I understand the “Kavanau Conundrum.” Judge Stanley Weisberg was right after all. It IS just like a rat chasing its tail.

The “Kavanau Adjustment” has proven to be a completely “illusory alternative remedy.” Earl Kavanau never received any compensation for the “remedy” named in his honor, nor did any other property owner. It does not exist, except in the imaginations of Chief Justice “Boy George and the Culture Court,” where it was applied in Galland v. City of Clovis (2001) 24 Cal.4th 1003, 103 Cal.Rptr.2d 711 as an excuse to deny compensation to another rental property owner.

And if you don’t believe it, read this column next month where I will cover the truly bizarre and terrifying Story of how the “Kavanau Adjustment” was applied in Galland v. City of Clovis. In that opinion, Justice Janice Brown cites Alice in Wonderland in an unsuccessful attempt to shock the majority back to rendering sane and honest opinions.

A federal Judge who follows the law instead of making it up as she goes along is very scary to those who benefit from making second class citizens of rental property owners.