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Law Office Management
May 2, 2008
Treading Water
Last November a federal judge in San Francisco issued a ruling that threatened the existence of Half Moon Bay's city government. It also gave real estate developers throughout the state something to cheer about.
Some 30 miles south of San Francisco lies the quiet, seaside city of Half Moon Bay, a once largely agricultural community now grown to almost 13,000 and given mainly to growing flowers and attracting tourists. For daredevils, there's surfing and sea kayaking at Maverick's, where underwater rock formations create what may be the wildest and most dangerous waves in the world. Every October brings the Art and Pumpkin Festival, with its live music and pumpkin-carving, pie-eating, and scarecrow contests-not to mention the World Championship Pumpkin Weigh-Off, won last year by an Oregon man who took home $9,144 for his 1,542-pound monster. A nearby marine reserve, rugged oceanside trails, and a smattering of local wineries also draw thousands of visitors every year.
But Half Moon Bay has another, less obvious, passion-the blood sport of pitting developers and conservationists against each other in fierce battles over coastal land use. Since the 1980s, Silicon Valley expatriates and disaffected San Franciscans alike have sought refuge in the small, beachside community. This spurred a housing boom and worsened traffic, which in turn drove Half Moon Bay's initially small coterie of environmentalists to fight back-bolstered, in some cases, by the new arrivals. The result has largely been a draw: New structures continue to rise across Half Moon Bay, albeit at a far slower rate than in the 1990s.
Once in a while, the conservationists win one outright. Last August, for instance, long-stalled plans to build 271 homes and commercial buildings on 208 acres known as Wavecrest finally came to an end when the developer agreed to sell the windswept property to a land-conservation trust. And on a 25-acre patch of scrubland called Beachwood, the city blocked construction of as many as 83 homes by declaring it a protected wetlands. This time, however, there was a dramatic twist when, in November, a federal judge in San Francisco ruled that because Half Moon Bay's city government created the wetland conditions by botching a drainage project, it owed the developer $36.8 million, plus another $4.8 million in attorneys fees and interest-a sum roughly four times the city's budget. (Yamagiwa v. City of Half Moon Bay, 523 F. Supp. 2d 1036 (N.D. Cal. 2007).)
The decision would, by most accounts, force the city to choose between such unpleasant options as a drastic curtailment of local services, municipal bankruptcy, or even the dissolution of Half Moon Bay itself. "The very existence of our city government is threatened," Mayor Bonnie McClung wrote not long after the ruling.
On practical and symbolic levels, however, repercussions of the Beachwood decision may go well beyond Half Moon Bay. Many environmentalists worry that it will make coastal cities more reluctant to undertake needed improvements and more willing to sacrifice conservation to the demands of developers and their political allies.
"Of course it's chilling, hugely chilling," said Mike Ferreira, a former Half Moon Bay mayor and city council member. "Any city would look at this and say, 'Holy cow, if an employee digs a ditch without a permit, we're liable for $37 million.' How could that not be chilling?"
The case also has been embraced by the state's property rights movement, which sees Yamagiwa as a rallying cry against what it views as onerous land-use regulations dating back to the 1970s. Another target is the powerful California Coastal Commission, which can veto almost any development plan that involves a broad swath of land up and down the Pacific coast.
"For a lot of people on the coastside, Beachwood is symbolic of what they think is wrong about the development situation on the coast," says Barry Parr, a resident of nearby Montara who runs Coastsider.com, a community news site for the region. "It's a huge judgment against the city, and it's made the issue so huge and urgent that no one can ignore it."
At first glance, Beachwood seems an unlikely place to have generated such passions. The property lies on the inland side of state Highway 1, less than a half mile north of where it intersects Highway 92, the only other road connecting Half Moon Bay to the rest of the San Francisco peninsula. Sandwiched between two small existing subdivisions, the land is covered with dry grasses, wildflowers, bamboo, shrubs, and the occasional blackberry bramble. The land is also marked by two stands of trees, the odd hillock, and, of course, several swampy areas.
Some of these spots are no more than patches of damp ground covered by a faint layer of green slime. Others have standing water filled with rich green aquatic grasses, in sharp contrast to the muted brownish grays of the surrounding vegetation. Several spots have suspiciously regular borders, and from the air (a view available online via such services as Microsoft Virtual Earth) a few of the most obvious wetlands areas look very much as if they had been dredged into existence by earthmoving machinery.
Which may be exactly what happened. According to court records, the city effectively created these wetlands back in the 1980s when it installed a storm drain on Beachwood and later dug up the property to produce sufficient "fill" to complete a drainage system in Highland Park, the adjacent subdivision to the south. When the drainage system wasn't maintained, rainwater collected in road cuts created by the dirt removal, and over time this produced wetlands on Beachwood that the city cited in 2000 as a reason to thwart development there.
To federal Judge Vaughn Walker, the city's actions-and inactions-so seriously compromised the economic value of Beachwood that they amounted to an uncompensated taking of the property's entire value. And by that reasoning, the judge found Half Moon Bay liable for all of the money the developer, Charles "Chop" Keenan of Palo Alto, stood to make by building every one of those 83 Beachwood homes.
In his ruling, Judge Walker not only found serious municipal negligence but even hinted at conspiracy. On several occasions, he maintains, Half Moon Bay deliberately acted in ways designed to frustrate development.
For instance, the judge sharply criticized the city's planning commission for allegedly setting aside a 2000 federal study that identified no problematic wetlands on Beachwood, then producing its own finding that the property couldn't be developed as planned. Judge Walker similarly castigated two of Half Moon Bay's wetlands consultants, one of whom allegedly deleted a wetlands-area designation from his map of Beachwood in a location that, to the judge, appeared inconvenient for the city's case. (Another consultant allegedly changed his mind as to whether the wetlands were man-made after being hired by the city as an expert witness in the case.) And the judge charged that the city frustrated the developers' efforts to maintain its drainage system or otherwise minimize the impact of standing water on the Beachwood parcel.
But throughout the litigation the city insisted that the wetlands predated its engineering work on the property. Half Moon Bay's attorneys further argued that Keenan knew in 1993 when he bought the property that Beachwood contained wetlands that would limit his ability to build out the parcel, and that therefore he bore at least partial responsibility for his subsequent problems.
"To reach the conclusion that the property owner was precluded from any development on the property as a result of wetlands created on the property is simply factually wrong," says Peter Douglas, executive director of the Coastal Commission. In fact, he notes that in 2001 the commission found that Keenan could build as many as 19 homes there. And even though a state appellate court later voided that finding for technical reasons, Douglas says he still finds Judge Walker's ruling "bizarre" and "a colossal windfall" for Keenan.
Others complain that the judge took Half Moon Bay to task for putting residential development on hold for seven years while more sewerage capacity was built, when in fact the city wasn't even in charge of the capacity-expansion project. (It was run by a multilateral entity that comprises the sanitary districts of Half Moon Bay and two neighboring towns, Granada and Montara.) Judge Walker also went along with the Beachwood developers' characterization of their efforts to drain standing water from the property as a repair-dismissing out of hand the idea that it was deliberate ecological destruction.
Half Moon Bay is no stranger to land-use conflicts. Originally known as San Benito, the city traces its origin to Mexican land grants issued in the 1840s to Mexican citizens living in what was then called Alta California. Later, the discovery of gold in Northern California and the Mexican-American War (184648) drew Anglo-American settlers. Although the treaty ending that war guaranteed the property rights of the Mexican citizens living in the area, Congress subsequently insisted on further review by a special land commission and the courts.
In the decades that followed, many of the original "Californios," as the Spanish-speaking settlers were called, lost or sold their property under both economic and legal duress. In one locally celebrated case, several heirs of Candelario Miramontes, the first Californio to settle in the area, were stripped of their property in 1863 after failing to repay large loans made with the land as collateral. The same court ordered the subdivision of the Miramontes property in order to clarify the ownership of previously disputed land.
Half Moon Bay, which took its current name in 1908, steadily grew into a supply center for the surrounding agricultural region. It was a vibrant community, but something well short of a boomtown. The city flourished briefly under Prohibition when, attracted by its geographic isolation and a new highway to San Francisco, ships regularly arrived bearing contraband whisky and gin from Canada. But when Prohibition ended in 1933, Half Moon Bay reverted to its largely rural ways.
And so it remained until the 1980s, when a fresh influx of newly affluent home buyers "discovered" the city, setting off a population and development boom that continues to this day. As recently as 1990, Half Moon Bay's population barely hit 9,000 souls; since then that number has jumped by almost 50 percent, bringing traffic snarls and a growing backlash against the further conversion of open space.
In one dramatic incident twelve years ago, a partially constructed luxury hotel called the Beach House burned to the ground while onlookers cheered. Investigators called it arson, but the culprits were never identified. For the hotel's developer, Chop Keenan, the crime was a baptism by fire; he called it an "act of terrorism" and vowed to rebuild.
More prosaically, the increasing demands on Half Moon Bay's road, water, and sewer infrastructure led to two growth-limiting initiatives in the 1990s. Measure A—formally known as the Half Moon Bay Growth-Control Ordinance—passed by citizen initiative in 1992 and capped annual residential expansion at 3 percent of the city's population. Seven years later voters tightened the limit to 1 percent, although various exemptions have blunted the measure's impact.
Even so, the Beachwood development generated little public opposition—or public notice—until Judge Walker's ruling. The city had first tentatively approved development on the plot in 1976, when its then-owner, the William Lyon Company, planned to put 96 houses there. But the project was slow to get off the ground. By contrast, its southern neighbor, the Highland Park subdivision, was well under development by the early 1980s.
In 1982, the city launched a major storm-drain project to serve both Highland Park and Beachwood-which environmentalists now consider an illegal "pre-installation" of sewer infrastructure for the planned Beachwood subdivision. City contractors dug trenches and installed drainpipes and drain connections along the northern, western, and southern edges of Beachwood, altering the topography of the property and, presumably, the flow of rainwater runoff across it. When the drainage project ran short of dirt fill in Highland Park, the city arranged to borrow soil from Beachwood, digging it out where the expected development's plans called for roads to be cut through.
Those changes, Judge Walker wrote, transformed Beachwood "into the equivalent of an elongated east/west bathtub." In subsequent years, rainfall collected in the road cuts and was prevented from flowing away by debris in the poorly maintained southern storm drains and limited drainage along the property's northern edge.
When work on the drainage project began, the Lyon Company didn't appear to be in a hurry to actually build the Beachwood neighborhood, and near the end of the eighties it sold the property to a local developer named William Crowell. Because the original building plan had expired, Crowell obtained fresh tentative approval in 1990 to put 83 houses on the property. But a few months later a shortage of sewer capacity led the city to halt new residential development, and Beachwood was again in limbo.
Out of money in 1993, Crowell sold Beachwood for $1 million to Keenan, who kept Crowell on to manage the property. (Technically, Keenan trustee Joyce Yamagiwa purchased the land. She would later file suit on Keenan's behalf.) As the sewer moratorium dragged on, the developers pressed Half Moon Bay to approve the 1990 development map without further changes. Then, in 1997, Keenan sued the city to force quick approval of the 83-house plan as soon as the moratorium expired, and early the next year he sought a coastal-development permit that would allow construction to begin.
In January 1999, however, a city consultant determined that Beachwood was home to at least one new wetland, and Crowell promptly ordered a crew to begin pumping water out of the road-cut depressions. Alarmed neighbors reported the activity to thencity planning director Anthony Carney. According to Judge Walker's opinion, Crowell stopped the pumping after the city called in police and federal authorities in a show of force that the judge described as "the near-arrest of Crowell."
Carney tells a different story. Initially, he says, he simply dispatched an employee to photograph the pumping, only to learn that the developers wouldn't let his representative on the Beachwood property. So Carney directed his employee to take a police officer with him. When they arrived, the pumping crew "packed up their stuff and took off," Carney says. (Federal agencies weren't involved in the incident, although they did consider whether Beachwood harbored endangered species.) Carney wasn't called to testify at the trial.
That fall, with two more city consultants determining the existence of new wetlands on the property, the Beachwood developers applied for permission to clear a blocked storm drain and to regrade the plot to fill in "certain low spots" and improve drainage. Half Moon Bay never responded to either request, causing Judge Walker to note dyspeptically that "[t]he City did not want to allow any action that might reduce the impacts of wetlands on Beachwood."
In May 2000 the Half Moon Bay city council formally rejected the development permit, declaring that wetlands on the property made it impossible to approve the 83-house plan.
But what's a wetland? The city's planning commission had originally intended to rely on a U.S. Army Corps of Engineers assessment of wetlands on Beachwood. Judge Walker noted, however, that the panel later opted for a different, more expansive definition of wetlands after the Corps found no new wetlands on the property.
To the judge, the city's actions "call[ed] into question the trustworthiness of the opinions and conclusions presented by the City at trial regarding the location and cause of wetlands on Beachwood," leaving it with "impaired credibility on the key wetlands issues in the case." But Ferreira, who served on the planning commission at the time, says the city would have been wrong to rely on the Corps's definition of wetlands, because it was bound to use California state standards. "I don't know if it's conspiratorial to use the right definition," he says. "We're held guilty here for doing what's correct."
Keenan sued the city in state court over the rejected permit, insisting in court papers that the tentative approval of the 1990 development plan should be binding. A trial court found that Half Moon Bay had improperly applied its own definition of wetlands in the case, and it ordered the permit issued. Then an appellate court reversed that ruling-sparking, in turn, the federal suit.
As Half Moon Bay pondered its legal options, it seemed more than a little ironic that this fight, which eventually threatened Half Moon Bay with extinction, started when its leaders were for the most part regarded as pro-growth. In fact, throughout much of its half century of incorporation, the city has been friendly to builders.
No one more effectively championed that attitude than Dolores Mullin, a conservative Republican and two-time mayor who essentially ruled the city for the latter half of the 20th century. Mullin, who died in 1995, drove a Cadillac bearing a license plate that read "GODMOTHER" and had a hand in many of the region's civic improvements and tourist attractions. She founded the Half Moon Bay Art and Pumpkin Festival, which now draws upward of 300,000 tourists to Half Moon Bay each year, and she paved the way for nearby golf courses, shopping centers, and a medical center. Today her stepson, Gene Mullin, represents the city's district in the state Assembly.
Since Mayor Mullin's era, city governments have generally followed her lead. The major exception came in the early 2000s, when a slate of slow-growth candidates won a bare majority on Half Moon Bay's city council-and held it for six years. The ascendance of these increasingly outspoken environmentalists, including Ferreira, especially rankled the city's old guard. But what happened at Beachwood, and in federal court, paved the way for the old guard's resurgence.
"When they denied [development at] Beachwood, the environmentalists became drunk with power," claims George Muteff, a former city council candidate. "But at the same time, Beachwood woke up a lot of people." Now the city is on the hook financially "to a guy we don't even know, because we allowed the council to screw him."
Although Muteff lost his council race in 2005, pro-development candidates won more seats overall on the panel that year. In the same election, McClung defeated incumbent Mayor Ferreira by just 15 votes.
Ferreira himself emphatically denies that environmentalists on the council had it in for Keenan. "I don't see that the city had many choices in the matter," he says. "The law doesn't give us an option to say, 'That's not a wetland because the city created it.'"
For months after Judge Walker's decision, the city talked bravely of an appeal, firing its longtime lawyers at Meyers, Nave, Riback, Silver & Wilson of Oakland and replacing them with the high-powered firm Orrick, Herrington & Sutcliffe. In the end, however, Half Moon Bay essentially capitulated. On April 1, the city council approved a settlement that gave Keenan a cornucopia of costly benefits.
Where the developer had originally sought to build 83 houses, the city instead guaranteed a plan to build 129-sited on Beachwood and on an adjacent twelve-acre property. Half Moon Bay will also effectively take over the job of readying the land for construction, installing a chain-link fence around the area, maintaining the drainage system, and pursuing the blessing of both state and federal authorities at its own expense, paying for any mitigation measures as well. If the city's efforts fall short for any reason, it will be forced to purchase the property from Keenan for $18 million-an amount less than half the original judgment. However, paying that sum would likely require a 40-year bond issue, city officials said, which could easily push the total cost above $50 million.
To dodge that liability, Half Moon Bay will attempt a Hail Mary pass: proposing a state law to exempt the property from all California environmental laws, including the Coastal Act. Although the bill is designed as a "one-off" measure with no bearing outside this particular case, it could face an uphill battle in Sacramento if environmentalists weigh in against it.
Meanwhile, the clock is running. Unless the special legislation passes and federal approvals are secured by June 2009, the city will be on the hook for annual bond payments of $1.3 million that could eat up more than an eighth of its budget. "It's a stinky deal," said a disappointed Ken King, an environmentalist recently appointed to Half Moon Bay's planning commission. "You or I could have negotiated a better deal than this one."
David P. Hamilton is a former Wall Street Journal reporter and a freelance writer in San Francisco.
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Alexandra Brown
Daily Journal Staff Writer
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