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California Supreme Court Finds Issue Exhaustion Is Not a Prerequisite to Seeking Judicial Review of Business Improvement District Assessments Under Proposition 218

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By Bridget McDonald

The California Supreme Court in Hill RHF Housing Partners, L.P. v. City of Los Angeles reversed the Second District Court of Appeal’s denial of writ challenges to a business improvement district (BID) assessment scheme on grounds that the petitioner-property-owners failed to exhaust their objections in underlying public hearings. The Supreme Court unanimously held that, under Proposition 218, the opportunity to protest the validity of a proposed BID assessment is not a remedy that must be exhausted as a prerequisite to filing suit because it does not involve the type of “clearly defined machinery for the submission, evaluation, and resolution of complaints by aggrieved parties.” [Hill RHF Housing Partners, L.P. v. City of Los Angeles, 12 Cal.5th 458 (Dec. 20, 2021).]

Proposition 218

Proposition 218—the “Right to Vote on Taxes Act”—was approved by voters in 1996 as part of a series of voter initiatives that sought to restrict the ability of state and local governments to impose taxes and fees. Adopted in 1978, Proposition 13 was the first of those measures and prohibited counties, cities, and special districts from imposing special taxes without a two-third vote of the electorate. Prop 218 was subsequently passed to address increased circumvention of Prop 13, wherein municipalities would raise service rates without voter approval by labelling them “fees, charges or assessments,” rather than “special taxes.” Prop 218 supplemented Prop 13 by adding Articles XIII C and XIII D to the California Constitution, which placed similar restrictions on assessments and property-related taxes.

Section 4 of Article XIII D (Section 4) sets forth substantive and procedural ramifications to limit local governments’ ability to impose assessments on properties. For example, the section requires agencies to provide written notice to affected property owners regarding the amount, duration, and basis of the proposed charges, along with the date, time, and location of a public hearing on the assessment. At that hearing, the agency must consider all protests against the proposed assessment and tabulate ballots for or against it. The agency shall not impose the assessment if, at the close of the hearing, ballots submitted in opposition exceed those submitted in favor. The section’s judicial review scheme places the burden on agencies to demonstrate that the underlying property receives a special benefit over and above the benefits conferred on the public at large, and that the amount of any contested assessment is proportional to, and no greater than, the benefits conferred on the property.

The Property and Business Improvement District Law

The Property and Business Improvement District (PBID) Law (Sts. & Hy. Code, § 36600 et seq.) provides a framework for establishing and operating business improvement districts (BID) in the state. A BID is a local business district that funds business-related improvements and activities by levying assessments on businesses or other real property that benefit from those improvements. The Law sets forth the process for creating a BID, which begins with a written petition signed by property owners in the proposed district that details the proposed BID boundaries, proposed service expenses, method and basis for levying assessments, and the calculated assessment amount.

Upon receipt of this petition, the respective city council may adopt a resolution expressing an intent to form the proposed BID. The resolution must provide notice of a public hearing and contain information that is sufficient to enable an affected property owner to discern of the nature and extent of the proposed improvements, maintenance, activities, and charges levied. At the conclusion of the hearing, the city council may resolve to adopt, revise, or change the proposed assessment, so long as the revisions only reduce the proposed assessment. The council must also render a determination on any protests and shall not establish the BID or levy assessments if a majority protest was received.

Factual and Procedural Background

The San Pedro & Downtown Center BIDs

Petitioners Mesa RHF Partners, L.P. (Mesa), Hill RHF Housing Partners, L.P. (Hill), and Olive RHF Housing Partners, L.P. (Olive) provide housing and services to low-income seniors. Mesa owns the Harbor Tower in San Pedro (City), which is within the boundaries of the San Pedro Historic Waterfront Property and Business Improvement District (San Pedro BID). Hill owns the Angelus Plaza and Olive owns the Angelus Plaza North in Downtown Los Angeles, both of which fall within the Downtown Center Business Improvement District (Downtown Center BID). Shortly after both BIDs were created in 2012, petitioners brought legal challenges against them. Petitioners and the City ultimately settled the dispute, wherein the City agreed to reimburse petitioners for their BID assessment payments.

In 2017, both BIDs were proposed for ten-year term renewals. Pursuant to the PBID Law, Prop 218, and the Prop 218 Omnibus Implementation Act, the City Council adopted two ordinances that expressed an intent to establish the BIDs and provided requisite details on the assessments, notices of the public hearings, and voting ballots. The City Council held hearings on the Downtown Center and San Pedro BIDs three weeks apart. On the day of the San Pedro BID, a City representative advised petitioners’ counsel that the previously-negotiated settlement agreements would no longer be in effect due to differences between the former and renewed BIDs. An authorized representative for petitioners voted against both BIDs at each hearing, however, neither the representative nor any other commenter raised specific challenges or legal arguments. At the conclusion of both hearings, there was no majority protest against either BID, thus prompting the City Council to adopt the ordinances to reestablish each BID.

At the Trial Court

Petitioners initiated two actions against the City, alleging each BID violated Prop 218. Petitioners contended that the BIDs were premised on an incorrect and inadequately supported understanding of the “special” vs. “general” benefits of each activity, and that the assessments imposed on petitioners would exceed the reasonable cost of the proportional specifical benefits conferred on their parcels. Each complaint alleged petitioners exhausted their administrative remedies. The City disagreed. The Los Angeles Superior Court ultimately determined that petitioners had sufficiently exhausted their objections to the assessments through their act of casting ballots against the BIDs, but nevertheless, denied the petitions on merits.

At the Second District Court of Appeal

Division One for the Second District Court of Appeal upheld the trial court’s denial but declined to reach the merits of petitioners’ claims on grounds that petitioners failed to adequately exhaust their administrative remedies. The court observed that the PBID Law’s:

. . .detailed administrative procedural requirements provide affirmative indications of the [California] Legislature’s desire that agencies be allowed to consider in the first instance issues raised during the BID approval process.

As such, exhaustion under the Law requires:

. . .nothing more of a property owner than submitting a ballot opposing the assessment and presenting to the agency at the designated public hearing the specific reasons for its objection to the establishment of a BID in a manner the agency can consider and either incorporate into its decision or decline to act on.

Because petitioners only submitted ballots opposing the BIDs, but failed to present their specific objections during the public hearings, they failed to adequately exhaust their administrative remedies.

The California Supreme Court’s Decision

The California Supreme Court granted petitioners’ petition for review to consider whether a party must present their specific objections to BID assessments at the appropriate Prop 218 public hearing for those arguments to later be heard on the merits in court. The Court held that the:

. . .opportunity to comment on a proposed BID does not involve the sort of ‘clearly defined machinery for the submission, evaluation and resolution of complaints by aggrieved parties that has allowed [the Court] to infer an exhaustion requirement in other contexts.

Proposition 218 and PBID Law

The Court first concluded that the legislative intent of Prop 218 indicated that its provisions shall be liberally construed to effectuate its purpose of limiting local government revenue and enhancing taxpayer consent. Thus, instead of employing a deferential standard of review, courts should exercise their independent review in determining whether an assessment violates Prop 218. Similarly, the PBID Law elaborates upon Prop 218’s specifications, including the requirement that affected property owners be individually noticed of the assessment’s information and accompanying ballot.

Exhaustion of Remedies

The exhaustion doctrine generally requires a party to raise their specific contentions during administrative proceedings before resorting to the courts. While some statutes expressly require exhaustion, courts may also infer an exhaustion requirement in statutory and regulatory schemes that do not contain an explicit command. In deciding whether to draw such an inference, courts give due consideration to the extra judicial procedures involved and to whether an exhaustion requirement would comport with, and advance the general purposes of, the statutory scheme.

Nevertheless, there are limits to the doctrine. Courts will not impose an exhaustion requirement when the administrative remedy “did not incorporate ‘clearly defined machinery for the submission, evaluation, and resolution of complaints by aggrieved parties.’” In other words:

. . .unless there is clear legislative direction to the contrary, a process proffered as an administrative remedy does not have to be exhausted when its dispute resolution procedures are so meager that it cannot be fairly regarded as a remedy at all. When the relevant extra judicial procedures are so clearly wanting, the exhaustion rule does not come into play because it has been determined there is no genuine remedy to exhaust.

There are also exceptions to exhaustion, such as when the claimed remedy might involve a clearly defined process for aggrieved parties to submit at least some of their complaints.

The Issue Exhaustion Does Not Apply

The Supreme Court held that the doctrine of “issue exhaustion” did not apply to petitioners’ judicial claims against the BID assessments. The Court observed that, unlike other statutes, the relevant portions of Prop 218 do not explicitly limit judicial actions to issues that were previously presented to an agency. Thus, inferring an exhaustion requirement would not comport with the proposition’s statutory scheme.

The Court disagreed with the Second District Court of Appeal’s determination that Prop 218 provided petitioners with an opportunity to participate in a public comment session, which necessarily conveyed an implied intent that objections must be presented to the City before being raised in court. The Supreme Court reasoned that the “machinery” associated with Prop 218’s public comment process is not as suggestive of a scheme designed for “the submission, evaluation, and resolution of complaints.” The Court elaborated that “a public comment session concerning a proposed legislative act, without more, is not obviously geared toward the ‘resolution’ of objections,” such as those raised by petitioners.

While the Court agreed with the City’s interpretation of Section 4 as requiring agencies to consider protest votes and oral/written objections, the provision did not resolve whether the process had to be exhausted through presentation of specific objections at public hearings. The Court found it significant that Section 4 only requires the City to “consider” specific objections—it does not impose a legal obligation on agencies to “respond” to such comments. It therefore followed that lawmakers did not intend for this public comment process to carry “a preclusive edge” that must “be fully exploited in order to preserve objections for a later lawsuit.”

Policy Rationales—Not Requiring Exhaustion Comports with Prop 218

While exhaustion traditionally supports the development of a record suitable for judicial review, Prop 218 and the PBID Law require preparation of documents that may, by themselves, provide a sufficiently substantial record. Because neither law legally requires agencies to actually respond to public objections, the effectiveness of comments as a vehicle for resolving disputes short of judicial involvement is likely reduced. Other provisions also militate against imposing an exhaustion requirement, such as PBID Law’s 30-day deadline for filing suit or courts’ application of the independent standard of review under Prop 218.

For these reasons, the Supreme Court resolved that:

. . .a rule requiring the presentation of specific objections regarding a BID to an agency at the appropriate public hearing certainly would have no value whatsoever as applied to disputes such as those at bar.

While exhaustion could amend or explain the contested assessment, the doctrine:

. . .does not apply in every situation in which an abstract possibility exists that an objection lodged through some channel will alter or otherwise affect an agency action.

Moreover, the inapplicability of issue exhaustion is in sync with the Court’s previously articulated understanding of Prop 218:

With the initiative having the goal of facilitating challenges to assessments, this would be odd terrain in which to expand the exhaustion doctrine by regarding a public comment process such as the one before [the Court] as an adequate remedy that must be exhausted prior to suit, especially when there are no especially compelling policy justifications for doing so.

Amici Curiae Arguments Do Not Justify Exhaustion Requirement

Arguments raised by the League of California Cities, the Association of California Water Agencies (ACWA), the California State Association of Counties, and the California Special Districts Association in amici curiae briefs were similarly unpersuasive. The Court rejected their assertion that not imposing an exhaustion requirement “would give short shrift to the provisions” of Prop 218 because objectors “could just ignore the hearing and proceed directly to the court if the BID is approved.” The Court explained that there are:

. . .good reasons why property owners might raise their complaints at the appropriate hearings, and why agencies are bound to consider these objections when made, even if the articulation of issues at these forums is not an absolute prerequisite for their subsequent presentation in court.

The Court also rejected the notion that a party’s ability to sue upon unexhausted objections to an assessment would require litigants to rely on facts outside the administrative record to develop their claims, thereby thwart traditional principles of judicial review in mandate proceedings. The Court explained that, under the circumstances here, “there is no necessary congruence between issue exhaustion and a rule limiting judicial review to evidence in the administrative record.” Because Prop 218 places the burden on agencies to demonstrate that an assessment conforms to the law, and courts exercise their independent judgment in determining whether this demonstration has been made, the “interest in extending due deference to agency determinations…does not carry the same weight” as claims raised under the traditional substantial evidence standard.

Conclusion and Implications

The California Supreme Court’s holding advances a significant procedural interpretation of Prop 218. In sum: a petitioner need not articulate their specific objections to a BID assessment scheme at the corresponding public hearing to subsequently present those arguments in court. While petitioner-side practitioners no longer need to worry about the specificity of their public hearing comments, their clients should still adhere to Prop 218’s other procedural requirements, such as casting their ballots in opposition to the proposed scheme, before bringing a legal challenge. While practitioners representing public agencies may find the Court’s decision unfavorable, the opinion does concede that Prop 218 does not legally obligate agencies to specifically respond to assessment objections. Therefore, agencies should focus their efforts on producing detailed copies of all documents required by the statute to ensure the administrative record is sufficiently adequate. A copy of the Supreme Court’s opinion is available at: https://www.courts.ca.gov/opinions/documents/S263734.PDF.

Bridget McDonald is an associate attorney in the Sacramento-based law firm of Remy Moose Manley, LLP, which specializes in environmental law, land use and planning, water law, initiatives and referenda, and administrative law generally. Ms. McDonald joined the firm in 2019.

Ms. McDonald’s practice focuses on land use and environmental law, handling all phases of the land use entitlement and permitting processes, including administrative approvals and litigation. Her practice includes the California Environmental Quality Act, the National Environmental Policy Act, the State Planning and Zoning Law, natural resources, endangered species, air and water quality, and other land use environmental statutes. Bridget serves on the Editorial Board of the California Land Use Law & Policy Reporter.