GVC ST. GEORGE, LLC v. City of Santa Cruz

Background

GVC St. George, LLC sought a temporary restraining order to block enforcement of Santa Cruz Ordinance 2024-16 while the lawsuit proceeded. The ordinance limits rent increases for certain affordable-housing units in assisted-housing developments to the maximum allowed under California law when the household was already living there under the prior rent-restricted rate. The restriction affected 59 units at GVC’s property.

GVC’s predecessor had entered agreements involving rent restrictions with the City of Santa Cruz and the California Department of Housing and Community Development. The agreements had expired or, in one instance, had been released. GVC asserted seven causes of action, including federal and state takings, due-process, equal-protection, and Contracts Clause claims; a claim that the ordinance was partially preempted by California law; a claim under 42 U.S.C. § 1983; and a request for declaratory relief.

Legal standard

The court applied the same standard used for a preliminary injunction. GVC had to show either a likelihood of success on the merits or serious questions going to the merits, likely irreparable harm without relief, a balance of equities favoring an injunction, and that an injunction would serve the public interest.

Ripeness and facial challenge

The City argued that the dispute was not ready for judicial decision because GVC had not complied with certain notice requirements. The court rejected that argument, reasoning that the ordinance would still make an attempted rent increase immediately invalid to the extent it exceeded the ordinance’s cap.

The court also found that GVC had not adequately presented a facial challenge, meaning a claim that the ordinance is invalid in all or nearly all applications. The court explained that a facial takings claim would require GVC to show that the ordinance’s enactment itself constituted a taking, and that a facial due-process claim would require showing that the ordinance had no valid application or lacked a plainly legitimate scope.

Merits analysis for preliminary relief

The court concluded that GVC had not shown a likelihood of success, or serious questions, on its takings, due-process, equal-protection, or Contracts Clause claims.

For the Fifth Amendment takings claim, the court applied the three-part test from Penn Central Transportation Co. v. City of New York: the regulation’s economic impact, its interference with distinct investment-backed expectations, and the character of the government action. The court found that neither of the two categorical takings rules applied. It reasoned that fewer than half of the property’s units were affected, that the ordinance did not eliminate the value of those units, and that GVC could still raise rents gradually and set its preferred rent when a unit was vacated, subject to applicable law. The court also found that the property’s history in a historically regulated housing market weakened GVC’s expectations of unrestricted rent increases after the agreements expired. Finally, the ordinance was more like an economic regulation serving the common good than a physical invasion of property.

For the Fourteenth Amendment due-process and equal-protection claims, the court applied rational-basis review because GVC did not identify a fundamental right or suspect classification. The court found that the City had shown a rational connection between the ordinance and the stated interests of preventing tenant displacement and excessive rent increases at properties that had received government assistance. The court did not consider an argument based on Pennell v. City of San Jose because GVC had raised it at the hearing rather than adequately presenting it in its motion, leaving the City without a fair opportunity to respond.

For the Contracts Clause claim, the court found that GVC had not shown a substantial impairment of a contractual relationship. The court emphasized that GVC acknowledged that the relevant agreements had expired or been released, leaving no current, enforceable contract that created a right to avoid the ordinance’s restrictions.

Irreparable harm and other factors

The court found that GVC had not made the required showing of likely irreparable harm. It also stated that the availability of compensatory or other corrective relief later in the litigation weighed against irreparable harm and that GVC’s claims appeared capable of being addressed through compensation.

Because GVC had not shown a likelihood of success or serious questions on any claim, the court declined to fully analyze the balance of equities and public-interest factors. The court nevertheless noted that those factors appeared unlikely to favor GVC because the proposed rent increases could place vulnerable tenants at high risk of homelessness, while GVC’s loss of revenue could be remedied through compensatory damages if GVC ultimately prevailed.

Disposition

Judge Beth Labson Freeman denied GVC’s motion for a temporary restraining order. The denial was without prejudice to GVC filing a renewed motion for a preliminary injunction under the regular rules applicable to noticed motions.