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Equal Protection Claim May Succeed in Oregon

In September 2011, a jury in a federal district court in Oregon found that the City of Forest Grove violated a residential developer’s constitutional rights and ordered it to pay $6.5 million dollars, purportedly the highest award against an Oregon municipality in a land-use case ever. The developer, David Hill Development, asserted that the city imposed changes or additions to a previously approved preliminary subdivision plat approval in violation of the Equal Protection Clause, the Due Process Clause, or the Takings Clause of the U.S. Constitution. As a jury verdict, the decision lacked an accompanying written basis for the ruling. The jury instructions provided that the city was liable if its actions were an “abuse of power” that “shocked the conscience (of the court).”

In September 2005, David Hill received preliminary plat approval to develop a 217-lot subdivision with conditions. The conditions required submittal of scenarios for all future stubbed streets and sanitary sewers that took into account future development. This approval with conditions was not appealed. Once an application is conditionally approved, the developer must then submit detailed plans showing that it can satisfy the conditions of approval as well as building code requirements.

As part of the detailed development review process, the city required that the developer provide multiple plans showing different sewer routes than what David Hill originally proposed, with an analysis of the cost and feasibility of these routes. Although the city acknowledged that the initial sewer proposal met the requirements, in February 2006, agreement was reached on an alternative alignment that ensured service for upstream property owners. David Hill claimed that he agreed to this alternative alignment under protest to get the city to issue building permits.

Because the development site was a recently annexed piece of farmland, David Hill also needed to secure necessary utility access by obtaining private easements from neighboring property owners. Counsel for David Hill argued that the city waited until March, 2006 to inform the developer that the 15-foot easement would be insufficient to accommodate both wet and dry utilities and there was some evidence that the city had allowed utilities to be located within the same 15-foot-wide easement for other developments. A secondary emergency vehicular access was also required.

This was the end of the housing boom. Local governments were scrambling to review proposals while developers rushed to push out product. Tensions ran high between David Hill Development and the city. David Hill claimed that the city did not trust the company president stating that his ideas for the sewer alignment were not “completely thought through.” David Hill also argued that securing the additional private easement was expensive, favored a competing developer, and further delayed the project. The city alleged that site inspections revealed violations of minimum construction standards that caused the scheduling delays.

The detailed plans were approved and building permits issued in June 2006. Final plat approval was issued after the government had inspected and approved the completed development.

David Hill purchased the vacant farm property for $6.9 million. It claimed to have entered into a purchase and sale agreement for finished lots in April, 2006 for approximately $28 million but ultimately sold half the lots for $16 million. As of April 2009, David Hill claimed that the loan interest payments and easement procurement costs left it with a $4 million net profit and 24 unsold lots. The high $6.5 million damage recovery may have been the result of plaintiff-drafted jury instructions that the proper measure of compensation was the difference in the fair market value of the property between May 2006, at the height of the housing bubble, and April 2007, when the market began its descent.

Lacking any written order explaining the jury’s decision, discerning the rationale is like reading tea leaves. It may be that the instructions, focusing on whether the city’s actions constituted an “abuse of power” that “shocks the conscience," find their roots in the Equal Protection Clause. This instruction is different from the language that the U.S. Supreme Court used in the “class of one” case known as Village of Willowbrook v. Olech, 528 U.S. 562 (2000). The equal protection “class of one” test established in Willowbrook requires a rational basis for treating two similar property owners differently, that the local government’s actions were “irrational and wholly arbitrary,” and that the disparate treatment was motivated by government animus.

Further, the David Hill Development court’s order denying the city’s motion for summary judgment seems to resonate in equal protection. The court found there was a genuine issue of material fact as to retaliation; David Hill argued that it repeatedly insisted that the city allow locating the sewer line as originally proposed, and the city, frustrated with the refusal to comply, imposed additional demands. The court went on to find that a “reasonable inference” could be drawn that the city treated David Hill differently with regard to the easements and that the city was responsible for the delays with the project. From there, the trial was set for consideration by a jury.

In addition to the sheer size of the damages award, this case is unique to Oregon for a number of other reasons. First, Oregon has a 40-year old, statewide land use program that requires coordinated comprehensive planning and preliminary conceptual subdivision review where detailed construction and design determinations are delegated to building departments after the initial conceptual land use feasibility has been established. Second, Oregon judicial precedent, largely now codified in state law, does not recognize “abuse of discretion” or “arbitrary and capricious” determinations. The Oregon constitution does not contain a due process clause. Rather, courts are to give a great deal of discretion to local governments when interpreting local regulations allowing reversal only in cases where the local government action is contrary to the express language of the regulation. Third, the legal standards for establishing an equal protection violation are incredibly high. The authors explain that as a factual matter, finding two similarly situated developments is difficult, the threshold for a local government’s disparate treatment requires only a rational basis, and there must be a showing that the local government acted with malice or animus. Finally, the open-ended nature of the conditions, which may have involved the city’s attempt to help this developer, backfired as the developer ascribed darker motives to the city in its retrospective analysis, proving that old adage that no good deed goes unpunished.

If this ruling stands, it is likely that local governments will adopt a much more formal and rigid approach to reviewing and approving applications. Applicants will be required to submit the more detailed construction details up front during the preliminary plan review phase allowing local governments to impose explicit conditions identifying the specific improvements needed to support the development. This case may be wielded like a cudgel by developers seeking to discourage and intimidate local governments from requiring particular public improvement that serve proposed and future development. Certainly, providing greater specificity and explanation in decision findings would benefit all parties.

In November, 2011, the city filed motions asking the court to either reverse the verdict or grant a new trial. The city characterizes this case as nothing more than the city making every effort to assist an inexperienced developer. The city argued that the alleged similar comparison development did not have the sewer access issues and there was no evidence that the development received better treatment. The city claimed that it satisfied the rational basis test in searching for utility connections that take into account the needs of future development. Additionally, the drastic variation in property value was caused by market correction, and, at most, David Hill suffered a temporary taking based on lost rental value totaling damages of less than $220,000. The court has yet to rule on these motions.

David Hill Development, LLC v. City of Forest Grove et al

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