Developer’s Substantive Due Process Claim Denied By United States Supreme Court
 
April 1, 2003
 
Christopher B. "Chris" Hanback- Washington
Leo Rydzewski - Washington

On March 25, 2003, the Supreme Court of the United States issued a decision in a much-heralded developer-rights case that has broad implications for all real property owners.  In Cuyahoga Falls v. Buckeye Community Hope Foundation (U.S. 2003), the Supreme Court held that a municipality may use referenda to block affordable housing projects that satisfy zoning requirements but are disfavored by its citizens for allegedly discriminatory reasons.  According to the Supreme Court, a municipality does not violate the Fourteenth Amendment’s prohibition on deprivations of property without due process when it gives effect to such a referendum and denies a property owner the benefit of existing favorable zoning.  However, the Court failed to provide clear guidance on what constitutes a protected property interest.

The case was filed by a nonprofit developer (Buckeye) that proposed to use low-income tax credits to build a 72-unit affordable housing apartment complex on property already zoned for multifamily housing in the nearly all-white city of Cuyahoga Falls, outside Akron, Ohio.  The proposed apartment complex satisfied all applicable zoning requirements, and Buckeye was only required to submit a site plan acceptable to the city council.  The city council in fact approved the site plan over the discriminatory objections of numerous local residents, including the mayor, who were reluctant to admit a more diverse group into their community and who expressed angry opposition because of the likelihood that the property would be occupied by families with children and African-Americans.

Refusing to accept the city council’s determination, however, a group of determined residents collected enough signatures to submit the city council’s decision to a voter referendum.  City officials then stayed the effectiveness of the site plan approval pending the result of that referendum, and refused to issue Buckeye a building permit.  The state Supreme Court ultimately ruled that the referendum violated the state constitution, and following that decision, Buckeye built the now-occupied affordable housing complex. 

Buckeye brought this suit in federal court alleging that the city’s refusal to issue a building permit pending resolution of the referendum violated its constitutional rights to equal protection and substantive due process, as well as its statutory rights under the Fair Housing Act.  Buckeye sought money damages suffered from the delay it experienced in building the project including loss of an initial allocation of tax credits, HOME funds and private funding commitments.  The federal district court granted summary judgment for the city, but the U.S. Court of Appeals for the Sixth Circuit reversed, holding that there were genuine issues of material fact with respect to all three issues. 

The Sixth Circuit found that the discriminatory statements made by local residents, and the fact that no other site plan had ever been submitted to a local referendum, evidenced a discriminatory intent to prevent a significant number of blacks from moving into the predominantly white city.  The Appellate Court then ruled that Buckeye should be allowed to take its equal protection claim to trial.  The Sixth Circuit also held that Buckeye could present a discriminatory impact claim that, by staying the effectiveness of the site plan and refusing to issue a building permit, the city made housing unavailable to potential residents because of their race, in violation of the Fair Housing Act.  Finally, the Sixth Circuit held that the city’s use of a referendum to deny Buckeye the benefit of the lawfully approved site plan, where the proposed use of the property complied with the existing zoning laws, could be found to have violated Buckeye’s Fourteenth Amendment (substantive) due process rights. 

The Supreme Court granted certiorari (review) on three questions: (1) whether under Buckeye’s equal protection claim the city’s intent to discriminate against Buckeye may be demonstrated by the discriminatory motivations of those citizens who submitted a referendum designed to overturn the city council’s approval of the site plan; (2) whether Buckeye established a disparate impact claim under the Fair Housing Act (after the Court granted certiorari, Buckeye abandoned this claim); and (3) whether the city denied Buckeye its right to substantive due process when it used an illegal referendum to deny Buckeye the use of its property.

The Supreme Court held that Buckeye failed to present sufficient evidence of an equal protection violation.  According to the Supreme Court, since the referendum never went into effect, any injury must have resulted from the referendum petitioning process and not from the referendum itself.  (In other words, the Supreme Court held that a referendum must be enacted before it can be challenged on equal protection grounds, despite the fact that the mere process of having a referendum often can effectively defeat a proposed development.  This was particularly true in Buckeye, where the fair housing tax credits were conditioned upon development of the property within a specified limited period of time.)  The Supreme Court also concluded that there was no official government action demonstrating the intent necessary to establish an equal protection violation. 

The referendum was placed on the ballot pursuant to a facially neutral petitioning procedure, the city official who refused to issue the building permits was performing a nondiscretionary, ministerial act, there was no evidence that the allegedly discriminatory statements of individual voters could be attributed to the state, and there was no evidence that city officials coerced voters during the referendum petition drive.

With regard to the substantive due process claim, the Supreme Court refused to decide whether Buckeye possessed a property interest in the building permits.  According to the Supreme Court, the refusal to issue permits did not constitute arbitrary conduct because, as a matter of local law, the site plan could not be implemented until the voters passed on the referendum.  Refusing to distinguish between legislative and administrative referendums, the Supreme Court held that subjecting a site plan ordinance to the referendum process, whether the ordinance reflects an administrative or legislative decision, does not by itself constitute arbitrary conduct in violation of due process.  The Supreme Court noted that the substantive result of a referendum could be held arbitrary based on the facts of a particular case, but that was irrelevant here, where Buckeye did not challenge the referendum itself.  Justice Scalia filed a concurring opinion, with which Justice Thomas concurred, solely to state that even if there had been evidence of arbitrary conduct, any such deprivation of a nonfundamental liberty interest could not be raised as a substantive due process claim, but instead must be raised solely as an equal protection claim.

Although the popular legal media has focused most of its attention on the other claims and issues presented by the case, it is the Supreme Court’s resolution of the substantive due process claim that likely will have the greatest impact upon developers and owners of real property. 

What Is Substantive Due Process?

The Constitution states that no “State [may] deprive any person of life, liberty, or property, without due process of law.”  U.S. Const. amend. XIV, §1.  This is called the Due Process Clause of the Fourteenth Amendment and confers both procedural and substantive rights.  United States v. Salerno (U.S. 1987).  The substantive component of due process protections recognizes that governmental deprivations of life, liberty or property are subject to limitations regardless of the adequacy of the procedures employed.  Pearson v. City of Grand Blanc (6th Cir. 1992).  With regard to the property protections, land owners are guaranteed the substantive right to be free from arbitrary or irrational government actions that infringe on their rights.  Village of Arlington Heights v. Metro. Hous. Dev. Corp. (U.S. 1977).  The question is whether the governmental restriction produces arbitrary or capricious results.  City of Eastlake v. Forest Enters., Inc. (U.S. 1976).

Most people are familiar with substantive due process as it applies to protected liberty interests, such as a woman’s right to have an abortion.  See Roe v. Wade (U.S. 1973).  That may be because the Supreme Court rarely considers substantive due process claims, like that presented here, which involve the rights of real property owners to develop their property.  The Court so rarely hears such claims that it is still unclear under the Supreme Court’s precedent what is required to even have a “real property” interest sufficient to invoke due process protections.  This uncertainty manifested when the Court held, in Board of Regents v. Roth (U.S. 1972), that government benefits qualify as property within the meaning of the Due Process Clause, if there is a “legitimate claim of entitlement” to the benefit.  Some lower courts have held that this test applies to the government’s restrictions on the right to use real property.  The prevailing view, however, is that the Roth entitlement inquiry is confined to government benefits cases.  The Supreme Court suggested such a limitation in City of Eastlake, in which it impliedly recognized the distinction between property interests in land ownership and government benefits, when it assumed that a real estate developer who had applied for a zoning change had a sufficient property interest to warrant due process protections.  In Buckeye, however, the Court did little to clarify this important issue, again refusing to define the contours of the property interest at issue in the case. 

Local Voters Can Ignore Legislature’s Will

Instead, the Court sidestepped this issue when it decided that a municipal law may grant voters the unqualified right to deny a landowner the benefit of existing zoning regulations by submitting an ordinance approving a land use to a public vote.  On only four previous occasions had the Court considered whether citizen consent provisions (i.e., citizens’ freedom to reject a land use proposal) violate the Due Process Clause, and three of these cases were decided more than 75 years ago.  Eubank v. City of Richmond (U.S. 1912); Thomas Cusack Co. v. City of Chicago (U.S. 1917); State of Washington ex. Rel Seattle Title Trust Co. v. Roberge (U.S. 1928).  In the fourth decision, City of Eastlake (U.S. 1976), the Court upheld, in the face of a due process challenge, a municipal charter requiring that land use changes be ratified by referendum, and did not clearly state whether due process prohibits a law that grants citizens unbridled administrative decision-making power to adjudicate property rights. 

Before Buckeye, many lower courts had indicated that a referendum on administration of an ordinance, which does not guide voters with standards, ignores the legislature’s will and deprives a landowner at the voter’s whim of the right to the benefit from existing zoning.  The view espoused in these cases was that such a standardless election would “exemplif[y] popular justice, the mode by which an Athenian jury, without deliberation, without instruction or control by professional judges, without possibility of correction on appeal, and without the assistance of lawyers, condemned Socrates.”  Club Misty, Inc. v. Laski (7th Cir. 2000).  Such an electoral free-for-all, it was held, would result in arbitrary decision making untied to any legislative standard.

The National Multi Housing Council, National Leased Housing Association, National Association of Industrial and Office Properties and the National Apartment Association, filed in an amicus (friend of the court) brief prepared by Holland & Knight that anticipated the important implications of this substantive due process ruling for developers of real property.  As noted in this amicus brief, one result of the Supreme Court’s ruling in Buckeye is that landowners may be limited in their use and enjoyment of their property at the sufferance of the electorate, since voters may be granted an administrative veto that is unconstrained by legislative standards.  Following this decision, a developer that selects property based on an existing zoning law, complies with all existing zoning requirements, and obtains the local government’s approval of a site plan as consistent with the zoning code does not have the absolute right to the benefit of those zoning regulations.  A law that subjects these property rights to referenda may allow voters to circumvent those rights, and in this way may prevent landowners from making fully informed decisions about the intended use of their property.  The Supreme Court in Buckeye held that the Due Process Clause does not prohibit such results. 

There are other important public policy implications of the Supreme Court’s ruling in Buckeye.  The national economy and the rights of millions of Americans are negatively affected when local governments arbitrarily abuse land-use policies to block the development and construction of any type of housing in a particular community, but this is particularly true when the development is intended for apartments or affordable housing.  While the federal Fair Housing Act and other laws prohibit discrimination in housing, a local government now may more easily do indirectly (by permitting voters to deny a property owner the benefit of existing zoning regulations) what it cannot do directly – “arbitrarily” prevent the development of affordable housing that is consistent with existing zoning laws and presents no threat to the general safety or welfare.

For more information about this subject or Holland & Knight’s apartment industry practice, contact Chris Hanback, toll free, at 888-688-8500.