Floystrup v. City of Berkeley Rent Stabilization Board ( 1990 )

Opinion

ANDERSON, P. J.

This appeal presents yet another attack on the constitutionality of the Berkeley Rent Stabilization and Eviction for Good Cause Ordinance (Ordinance). Appellants (landlords), owners of apartment units in Berkeley, claim that the provisions of the Ordinance allowing tenants to withhold rent because of landlords’ failure to register¹ are unconstitutional on their face and as applied. McHugh v. Santa Monica Rent Control Bd. (1989) 49 Cal.3d 348 [261 Cal.Rptr. 318, 777 P.2d 91], a recently decided Supreme Court case, supports landlords’ position and mandates reversal.

I. Background Facts

The Ordinance, passed by the Berkeley voters on June 3, 1980, set up a strict scheme regulating increase of rents and eviction of tenants. The Ordinance designated the rent paid on May 31, 1980, as the base rent ceiling upon which future rent adjustments must be calculated. (§§ 13.76.100, 13.76.110, 13.76.120.) The Ordinance required that the landlord register covered rental units by filing an initial registration statement by September 1, 1980, and by paying an annual registration fee. The registration statement must be subscribed under penalty of perjury and includes numerous questions, such as the rent charged on June 6, 1978, and December 30, 1979; the lowest rent in effect between June 6, 1978 and June 3, 1980; and the rent charged on May 31, 1980. (§ 13.76.080.) Landlords claimed that answering these questions might cause them to incriminate themselves (presumably since their rent rates violated the 1978 rent control ordinance and subjected them to criminal penalties under the 1980 ordinance.).

Landlords refused to comply with the registration requirement of the Ordinance. While they placed the registration fees into an escrow account and submitted a registration statement containing only their names and addresses, they refused to provide any other information, claiming that such compelled disclosure would violate their Fifth Amendment right against self-incrimination. Following a warning on May 6, 1981, respondent City of Berkeley Rent Stabilization Board (Board) filed a lawsuit against landlords for failure to register their property in compliance with the Ordinance (City of Berkeley Rent Stabilization Board v. Floystrup, Alameda Co. Super. Ct. No. 545412-5). In that action the Board sought a preliminary injunction to compel landlords to pay the registration fees and to file a registration statement in accordance with the Ordinance. After a hearing on June 10, 1981, the court found landlords’ constitutional claim of self-incrimination to be of substance (see fn. 7, post) and ordered them to pay only the registration fees; it declined to compel them to submit a registration statement. In March 1982 the parties entered into a stipulation whereby landlords agreed to pay the registration fees without penalty and the Board agreed not to seek a preliminary injunction or any other preliminary relief prior to trial of the action for a permanent injunction.

However, instead of seeking a permanent injunction and a court determination of landlord’s pending constitutional claim, the Board dismissed the suit on March 1, 1983, and unilaterally determined² that the registration requirements of the Ordinance were lawful and not violative of landlord’s constitutional rights. Subsequently in a series of letters, the Board notified landlords that their property was not lawfully registered and warned them that their failure to submit the requisite registration information violated the Ordinance and entitled their tenants to invoke the administrative remedies contained in the Ordinance—including rent withholding. Simultaneously, the Board notified the tenants that landlords’ property was not registered in accordance with the rent control law.

On December 21, 1986 (six years after landlords refused to register, five and one-half years after the court order, four and one-half years after the stipulation, and three and one-half years after the dismissal of the court action), tenants Annie Rolfe and Dennis Fantin filed a petition with the Board seeking an authorization to withhold the rent because of landlords’ failure to complete the registration information. (§ 13.76.150(A)(1).) Following a hearing the examiner granted the petition. The “Escrow Order for Rent Withholding” authorized the tenants to deposit the rent into escrow beginning February 1, 1987. On March 31, 1987, the Board rejected landlords’ appeal and affirmed the hearing examiner’s decision on grounds that the property was not properly registered. After the denial of the appeal, other tenants filed consolidated petitions to withhold their rents. On May 1, 1987, the Board issued a second order allowing the remaining tenants to deposit their rents in escrow.

On June 23, 1987, landlords filed a petition for a writ of mandate in the superior court seeking reversal of the rent withholding orders and a declaration that the registration requirements of the Ordinance and the remedies provided therefor were unconstitutional either on their face or as applied. In urging relief landlords attacked the Board’s decisions on numerous grounds, including the claim that the issuance of the rent withholding orders violated the judicial powers clause of the California Constitution (art. VI, § 1) and that the Board’s orders breached the parties’ stipulation. Following a hearing the trial court denied landlords’ petition and entered judgment in favor of the Board.

II. Discussion

Although landlords challenge the court’s ruling on numerous grounds,³ we agree with them that the judgment sustaining the rent withholding orders violates the judicial powers provision of the Constitution. In addition, we are persuaded that the Board was estopped from issuing the rent withholding orders because it breached the parties’ stipulation. Each of these reasons compels us to reverse the trial court’s judgment.

A. The Rent Withholding Provisions of the Ordinance Are Unconstitutional

Article VI, section 1 of the California Constitution provides that “The judicial power of this State is vested in the Supreme Court, courts of appeal, superior court, municipal courts, and justice courts. All except justice courts are courts of record.” Case law has long taught that agencies not vested by the Constitution with judicial powers may not exercise such powers. “[Article VI disposes of all judicial power not expressly disposed of elsewhere in the Constitution .... [Although the Legislature retains the authority to grant a multitude of powers to local bodies pursuant to article XI, powers of a judicial nature are no longer at its disposal.” (Strumsky v. San Diego County Employees Retirement Assn. (1974) 11 Cal.3d 28, 42 [112 Cal.Rptr. 805, 520 P.2d 29], original italics.)

The issue of whether the rent withholding provisions of the Ordinance fall within the protective umbrella of the judicial powers clause of the Constitution, has just been determined by McHugh v. Santa Monica Rent Control Bd., supra, 49 Cal.3d 348.

In McHugh, two tenants, Smith and Plevka, filed an administrative complaint against plaintiff landlord for recovery of excess rents. In an appeal from the initial decisions of the hearing examiner. The board ruled that the tenants were entitled to recover the excess rents together with treble damages and interest under the charter amendment to the Santa Monica rent control ordinance. Tenant Smith, who had vacated the premises, was awarded restitution in the sum of $1,593.03. Tenant Plevka, who remained in possession of the rental unit, was authorized to withhold the award from his future rent payments in accordance with the rules established by the board. The landlord filed a petition for writ of mandate to set aside the decision of the board, claiming a violation of the judicial powers clause of the Constitution.

After reviewing a number of cases delegating judicial power to administrative agencies, the Supreme Court concluded that while the administrative adjudication and award of restitution does not offend the judicial powers clause of our Constitution when the requisite substantive and procedural limitations are respected, the board order which authorizes immediate rent withholding without judicial review or approval represents an unwarranted intrusion into the power of the courts to “check” administrative adjudications. (McHugh v. Santa Monica Rent Control Bd., supra, 49 Cal.3d at pp. 353, 373, 377.) In its reasoning the court emphasized that the rent withholding order issued to Plevka fell within the above prohibition, because it took effect immediately without further judicial review and served as a defense to an unlawful detainer action based upon nonpayment of rent: “Under present procedures, the Board possesses the ability to make an order that, although not ‘final’ or ‘self-enforcing’ in the typical sense of those terms, is in fact immediately enforceable in a real sense at the discretion of a private party. By its own regulations, the Board’s decision becomes final ‘at the time of Board action[,]’ i.e., immediately after the Board renders its decision. Thereafter a tenant may withhold rent up to the amount specified by the Board. In this fashion the Board’s order is given immediate practical effect: before the landlord has even the opportunity to obtain judicial review by petition for writ of mandate (Code Civ. Proc., § 1094.5, subd. (a)) and a stay of the Board’s order (id., subd. (g)), the tenant is allowed to withhold rent money otherwise due. In addition, the Board’s order is also thereby given legal effect: the order, pursuant to the Charter Amendment, is an affirmative defense to an unlawful detainer action based on the tenant’s nonpayment of rent. [Citation.]” (Id., at p. 376, italics added, fn. omitted.)

The Ordinance upon which the Berkeley Board orders rest is very similar to the Santa Monica board regulations analyzed in McHugh. The Ordinance authorizes either the Board or the tenant to withhold rent without court review or approval if the landlord fails to register the apartment unit or if he or she demands or receives excessive rent. Similar to the Santa Monica rent regulations, the Ordinance also bars an unlawful detainer action based upon rent withholding by the tenant. Moreover, the Ordinance goes even further than Santa Monica’s inasmuch as it forbids a rent increase while the withholding order is in effect or the landlord is otherwise in violation of the Ordinance; in addition, it authorizes not only temporary withholding of rent, but also a forfeiture of the withheld rents in the discretion of the Board; and each such action may be taken without any judicial “check.”⁴ Indeed, the Board’s orders authorizing rent withholdings by the tenants took effect automatically without judicial review (for tenants Fantin and Rolfe on Feb. 1, 1987, and for the rest of the tenants on May 1, 1987); following those dates tenants were allowed to place their rents into an escrow account; and the May 1, 1987, withholding order explicitly advised landlords that if they did not register within 60 days, 50 percent of the rent would be distributed to the tenants, i.e., forfeited by them. The conclusion is thus inescapable that the rent withholding orders of the Board do not pass constitutional muster.

The Board’s argument that the violation of judicial powers issue is not properly before this court because landlords failed to raise that issue in the administrative proceedings is without merit. A party has standing to challenge an ordinance or a statute invalid on its face without first exhausting its administrative remedies. (Ebel v. City of Garden Grove (1981) 120 Cal.App.3d 399, 409 [176 Cal.Rptr. 312].) It is likewise settled that a litigant, who seeks to challenge the constitutionality of the statute under which the agency operates, need not raise that issue in the proceedings before the agency as a condition of raising the issue in the courts. Quite the contrary, in this type of situation the party, after pursuing the available administrative procedure, may present the constitutional claim for the first time in the courts. (State of California v. Superior Court (Veta) (1974) 12 Cal.3d 237, 251 [115 Cal.Rptr. 497, 524 P.2d 1281]; Nissan Motor Corp. v. New Motor Vehicle Bd. (1984) 153 Cal.App.3d 109, 115 [202 Cal.Rptr. 1]; Laird v. Workers’ Comp. Appeals Bd. (1983) 147 Cal.App.3d 198, 204 [195 Cal.Rptr. 44].)

B. The Issuance of the Rent Withholding Orders Was Barred by the Stipulation

Although our holding that the judicial powers clause has been violated is dispositive of this case, we note that the rent withholding orders also breached the parties’ stipulation.⁵ Pursuant thereto the Board was obligated to seek a permanent injunction and to obtain therein a judicial resolution of the self-incrimination issue before it imposed the sanction of rent withholding.

The stipulation, which was entered into following the Board’s unsuccessful attempt to compel landlords to file a registration statement, reads as follows: “It Is Hereby Stipulated by and between the parties that defendants will pay the required registration fees due as of the date of this Stipulation under the provisions of Measure D, but no penalties, within twenty (20) days of the filing of this Stipulation. Said payments will be made without prejudice to defendants right to contest the validity of said fees and to seek return of said fees at the time of trial in this action, [fl] The parties further stipulate that in consideration of said payment, plaintiff will not seek a preliminary injunction or other preliminary relief prior to trial of the action for permanent injunctive relief. The parties agree that a time estimate of one day shall be utilized in any Memorandum to Set filed by either party to this action.” (Italics added.)

In construing stipulations we apply the rules for construction of contracts. (J.C. Penney Co. v. Superior Court (1959) 52 Cal.2d 666, 669 [343 P.2d 919]; Imperial Ins. Co. v. California Casualty Indem. Exchange (1984) 158 Cal.App.3d 540, 546 [204 Cal.Rptr. 819].) Under settled law “A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.” (Civ. Code, § 1636; Ticor Title Ins. Co. v. Rancho Santa Fe Assn. (1986) 177 Cal.App.3d 726, 730 [223 Cal.Rptr. 175].) The intention of the parties must be first determined from the language of the contract itself. (Civ. Code, § 1638; Spitser v. Kentwood Home Guardians (1972) 24 Cal.App.3d 215, 220 [100 Cal.Rptr. 798].) However, where the language of the contract is ambiguous, it is the duty of the court to resolve the ambiguity by taking into account all the facts, circumstances and conditions surrounding the execution of the contract. (Civ. Code, § 1647; Moss Dev. Co. v. Geary (1974) 41 Cal.App.3d 1, 13 [115 Cal.Rptr. 736].) In resolving ambiguity, the court may consider not only the express, but the implied terms of the contract as well. In California there is an implied covenant of good faith and fair dealing in every contract, which imposes a duty upon the party to the contract to perform faithfully and not to deprive the other party of the benefits of the contract. (McWilliams v. Holton (1967) 248 Cal.App.2d 447, 451 [56 Cal.Rptr. 574].) As succinctly stated in Harm v. Frasher (1960) 181 Cal.App.2d 405, 417 [5 Cal.Rptr. 367]: “There is implied in every contract a covenant by each party not to do anything which will deprive the other parties thereto of the benefits of the contract. [Citations.] This covenant not only imposes upon each contracting party the duty to refrain from doing anything which would render performance of the contract impossible by any act of his own, but also the duty to do everything that the contract presupposes that he will do to accomplish its purpose.” (Accord April Enterprises, Inc. v. KTTV (1983) 147 Cal.App.3d 805, 816 [195 Cal.Rptr. 421]; Vale v. Union Bank (1979) 88 Cal.App.3d 330, 336 [151 Cal.Rptr. 784]; 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 743, p. 674.)

The stipulation unequivocally provides that in consideration of the payment of landlords’ registration fee the Board promised to forego seeking another preliminary injunction or any other preliminary relief before trying the action for a permanent injunction. Trial of the permanent injunction action was deemed necessary by the parties mainly because the issue of self-incrimination raised by landlords had been left undecided in the preliminary injunction proceeding. Thus, the administrative record demonstrates that, at the hearing on the petition for preliminary injunction, landlords did raise the issue that the completion of the registration statement would violate their constitutional rights against self-incrimination. Counsel for the Board acknowledged that the defense relied on by landlords involved an important issue requiring a judicial determination.⁶ The trial judge likewise recognized that there was substance to the self-incrimination point raised by the defense. As a matter of fact, the trial court’s denial of the preliminary injunction to compel registration rested on the self-incrimination aspect of the registration.⁷

Despite the explicit promise in the stipulation and the reasonable expectations of landlords, the Board unilaterally dismissed the suit for permanent injunction and never initiated another one; it thus foreclosed a judicial determination of the still undecided self-incrimination issue. Instead, the Board took upon itself the adjudication of the pending constitutional issue and imposed the rent withholding sanctions upon landlords. By doing so the Board breached not only the express term of the agreement, but also the implied covenant of good faith and fair dealing; landlords were thus deprived of the benefit of the contract. (Rest.2d Contracts, § 205, com. d.)⁸ It is, of course, well established that where, as here, the party to a stipulation lulls his opponent into a false sense of security and thereafter breaches the agreement, the party aggrieved may invoke the remedy of estoppel precluding the party from proceeding or acting in breach of its promise. (Driscoll v. City of Los Angeles (1967) 67 Cal.2d 297, 305 [61 Cal.Rptr. 661, 431 P.2d 245]; Woley v. Turkus (1958) 51 Cal.2d 402, 407 [334 P.2d 12]; Farrar, Herrick & Associates v. Safecare Co. (1981) 115 Cal.App.3d 123, 131 [171 Cal.Rptr. 191].)

In light of our conclusion the additional issues raised by landlords (see fn. 3, ante) need not be decided.

III. Disposition

The judgment is reversed. The Board is to pay costs and attorney fees. The matter is remanded to the trial court: (1) to issue a writ of mandate directing the Board to vacate its decisions in case numbers RWN 554, 578, 579, 581 and 582⁹ and ordering the Board (and/or the tenants) to repay the rents withheld and the registration fees paid by landlords pursuant to the stipulation; and (2) to determine the costs and reasonable attorney fees payable to landlords (Gov. Code, § 800; Plumbing etc. Employers Council v. Quillin (1976) 64 Cal.App.3d 215, 224 [134 Cal.Rptr. 332]; Campbell v. Residential Rent Stabilization & Arbitration Bd. (1983) 142 Cal.App.3d 123, 128-130 [190 Cal.Rptr. 829]).

Channell, J., concurred.

1 Berkeley Municipal Code section 13.76.150(A)(1), (2). Unless otherwise indicated, all section references are to the Ordinance.

2 Letter from the Board to Eva Floystrup, dated February 18, 1983, advised as follows:

“The City Attorney’s office has advised this Program that your constitutional objections are without merit. . . .”

3 Aside from the grounds discussed post, landlords claim that the judgment below is erroneous because the initiation of the administrative actions was barred by: (1) the statute of limitations; (2) laches; (3) compliance with the Ordinance; (4) is constitutionally infirm because the composition of the board denying landlord representation violates the equal protection and due process provisions of the Constitution; (5) the rent withholding orders constitute a “taking” of property without due compensation; and (6) the registration requirement of the Ordinance runs counter to the constitutional privilege against self-incrimination.

4 Section 13.76.150, the remedies chapter of the Ordinance, provides in pertinent part: “A. For violation of Rent Ceilings or Failure to Register. If a landlord fails to register in accordance with Section 13.76.080 of this chapter, or if a landlord demands, accepts, receives or retains any payment in excess of the maximum allowable rent permitted by this chapter, a tenant may take any or all of the following actions unftil] compliance is achieved: [ft] 1. A tenant may petition the board for appropriate relief. If the board, after the landlord has proper notice and after a hearing, determines that a landlord has willfully and knowingly failed to register a rental unit covered by this chapter or violated the provisions of Sections 13.76.100, 13.76.110 and 13.76.120 of this chapter, the board may authorize the tenant of such rental unit to withhold all or a portion of the rent for the unit until such time as the rental unit is brought into compliance with this chapter. After a rental unit is brought into compliance, the board shall determine what portion, if any, of the withheld rent is owed to the landlord for the period in which the rental unit was not in compliance. Whether or not the board allows such withholding, no landlord who has failed to comply with the chapter shall at any time increase rents for a rental unit until such unit is brought into compliance, [ft] 2. A tenant may withhold up to the full amount of his or her periodic rent which is charged or demanded by the landlord under the provisions of this chapter. In any action to recover possession based on nonpayment of rent, possession shall not be granted where the tenant has withheld rent in good faith under this section.” (Italics added.)

5 Contrary to the position of the dissent, this issue must be addressed in order to decide the question of attorney fees which are requested by appellants.

6 “Ms. Juergens [counsel for the board]: ‘These defendants [landlords] have raised constitutional issues we have offered to drop in the past. We have interrupted everybody’s status, come in today and these constitutional issues are not going to be resolved. If they are sincere in their desire to raise these constitutional issues, they have to be resolved whether it’s now or after August 20th when we can further pursue enforcement. . . . [U] But I think getting a clear understanding from you [the court\ on the constitutional issues is important both for the Council and the landlord public being urged to comply with the law. [H] Many of these people have stated, who have called—and I have spoken personally with several litigants before they were represented by Mr. Wilson [counsel for landlords], said, ‘Isn’t this unconstitutional? I would register, but I don’t want to “give you my June ’78 rent levels. . . .’” ” (Italics added.)

7 Excerpts from the court’s ruling: “The Court: ... I am not going to order registration and this is without prejudice to the whole—both issues being raised in the future and the whole question of constitutionality, of course, is still alive as far as I’m concerned on the bases [s/c] set forth in Monger and I believe that there is enough substance to the self-incrimination of this point raised by Mr. Wilson that is something that heretofore has not been raised. . . . [U] In any event enough substance has been raised as to the self-incrimination aspect of the registration, so that that’s further grounds for my not granting the injunction respecting registration. So, my order will be the injunction is granted as to payment of the registration fees without the penalties or interest. . . .” (Italics added.)

8 Restatement Second of Contracts section 205, comment d states in part: “Subterfuges and evasions violate the obligation of good faith in performance even though the actor believes his conduct to be justified. But the obligation goes further: bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty. A complete catalogue of types of bad faith is impossible, but the following types are among those which have been recognized in judicial decisions: evasion of the spirit of the bargain . . . .” (Italics added.)

9 Case numbers RWN 554, 578, 579, 581 and 582 were part of the record, were before the court and were specifically disposed of by the court’s June 23, 1985, “order Directing Issuance of Alternative Writ of Mandamus,” contrary to the assertion of our dissenting colleague. The ultimate decision denying the writ necessarily adjudicates these cases.