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TSB Holdings, L.L.C. v. City of Iowa City

Court of Appeals of Iowa

October 11, 2017

TSB HOLDINGS, L.L.C. and 911 N. GOVERNOR, L.L.C., Plaintiffs-Appellants,
CITY OF IOWA CITY, IOWA, Defendant-Appellee. TSB HOLDINGS, L.L.C. and 911 N. GOVERNOR, L.L.C., Plaintiffs-Appellants/Cross-Appellees,
BOARD OF ADJUSTMENT FOR THE CITY OF IOWA CITY, Defendant-Appellee/Cross-Appellant.

         Appeal from the Iowa District Court for Johnson County, Chad A. Kepros (trial) and Mitchell Turner (motion to amend answer and summary judgment), Judges.

         A property owner appeals the district court's grant of summary judgment to the City of Iowa City and the district court's decision in favor of the Board of Adjustment for the City of Iowa City, and the Board of Adjustment appeals the district court's denial of its motion to amend its answer to add affirmative defenses. AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.

          Charles A. Meardon of Meardon, Sueppel & Downer, P.L.C., Iowa City, and James W. Affeldt of Elderkin & Pirnie, P.L.C., Cedar Rapids, for appellants/cross-appellees.

          Elizabeth J. Craig and Sara Greenwood Hektoen, Assistant City Attorneys, Iowa City, for appellees/cross-appellant.

          Heard by Doyle, P.J., McDonald, J., and Blane, S.J. [*]

          BLANE, Senior Judge.

         TSB Holdings L.L.C. and 911 N. Governor, L.L.C. (TSB) appeal the district court's rulings granting the City of Iowa City's motion for summary judgment and denying TSB's rule 1.904(2) motion. TSB also appeals the district court's decision in a separate case in favor of the Board of Adjustment for the City of Iowa City (BOA). At issue in these cases is the City's decision to rezone certain properties owned by TSB and the BOA's decision to deny TSB's site plans for those properties based on the City's rezoning, which TSB contends interfered with its ability to develop the properties and violated the supreme court's decision in Kempf v. City of Iowa City, 402 N.W.2d 393, 401 (Iowa 1987).

         In its case against the City, TSB claims the court erred in granting the City's motion for summary judgment, and in denying its motion, because the City's rezoning ordinance violates the district court's 1987 remand order that was entered following the Kempf decision. TSB also claims the court erred in concluding in the 1.904(2) ruling that TSB failed to meet the notice pleading requirements for its takings claim.

         In its case against the BOA, TSB claims (1) the district court erred in concluding it is not a successor or assign to the properties owned by Kempf, (2) the district court erred in concluding the properties had already been developed through Kempf's inaction and concluding TSB's plans called for the further development or redevelopment of the properties, (3) the district court erred in concluding TSB's actions violate public policy, and (4) the BOA acted illegally in not applying the Kempf decision and remand order to its site plans. In a cross-appeal, the BOA claims the district court abused its discretion in denying its motion to amend its answer to add certain affirmative defenses, specifically the statute of limitations.

         With respect to the litigation against the City, we agree the district court correctly granted summary judgment to the City; however, we reverse and remand the district court's order that dismissed TSB's takings claims based on notice pleading. With respect to the BOA litigation, we affirm the district court's decision that the BOA did not act illegally in failing to apply the Kempf decision and the remand order to TSB's site plans in light of the supreme court's recent ruling in Dakota, Minnesota, & Eastern Railroad v. Iowa District Court (Dakota Railroad), 898 N.W.2d 127, 138 (Iowa 2017). In light of this holding, we need not address the BOA's cross-appeal regarding its motion to amend its answer to add affirmative defenses.

         I. Background Facts and Proceedings.

         The properties at issue in this matter have a long and storied history in our courts. As detailed in the Kempf decision, the properties, located in Iowa City, were acquired by Wayne Kempf and others in 1972 in reliance on the City's 1968 study that proposed the properties be used for medium to high density housing. 402 N.W.2d at 395-96. Kempf started developing the site to construct five apartment buildings and a commercial office building, and invested a total of $114, 500 in the land purchase price and preliminary site development. Id. After Kempf began construction on a twenty-nine-unit apartment building, several neighboring property owners objected, and the City revoked the previously issued building permit. Id. at 396-97. Litigation ensued, which forced the City to reissue permits for the apartment building, and the construction on that building was completed in 1977. Id. at 397. The City imposed a moratorium on further development on the properties and also rezoned the properties in 1978 to prevent further apartment building development. Id. at 398. The litigation between the parties culminated in the supreme court's ruling in 1987, which held:

The record discloses admissible testimony the downzoning of the tract in question would not contribute to public health, safety, or welfare. The open invitation the city extended in "The North Side Study" to proceed with such developments carries with it the plain conclusion there would be no adverse impact on city streets or utilities, nor does the city argue otherwise. The large investment Kempf made in filling, grading, and bringing in utilities for the whole tract in reliance on the zoning and the city's study would provide substantial support for application of the vested rights principle.
Under this record, however, we are not required to develop that analysis because a more limited test controls our determination. The overwhelming evidence discloses the lots in the remaining 2.12 acres of the Kempf tract cannot be improved with any development that would be economically feasible. For this reason we find that application of the downzoning ordinance to the lots in the 2.12 acres would be unreasonable.
The relevant principle is found in McQuillin: Where it appears that under existing zoning restrictions property must remain for an unpredictable future period unimproved, unproductive, and a source of expense to the owners from heavy taxes, the zoning ordinance is unreasonable as to such property. 8 McQuillin, Municipal Corporations § 25.45, at 122 [(3d ed. 1982)]. Undergirding this rule is the concept that in these situations there is, in effect, an unconstitutional taking. Although a property owner does not necessarily have a remedy if the police regulation merely deprives the owner of the most beneficial use of his or her property, frustration of investment-backed expectations may amount to a taking. . . .
We agree with the trial court that application of the June 28, 1978 zoning ordinance to Kempf's underdeveloped lots and portions of lots would be unreasonable and therefore invalid. We are left with the question of the present and future status of these lots and portions of lots. . . . .
. . . [W]e hold that [the zoning ordinances at issue] may apply to the Kempf property, provided, however, that Kempf shall be permitted to proceed with the development of apartment buildings, as shown by the record in this case, to the extent that such buildings conform to the ordinances in effect prior to the 1978 rezoning . . . . The city shall be enjoined from prohibiting this use of the property by Kempf. Further development or redevelopment of the property beyond that contemplated by Kempf as shown by this record and noted in this opinion, whether carried out by Kempf or future owners, will be subject to the amended ordinances above designated.

Id. at 400-01 (citations omitted).

         The matter was remanded to the district court "for a disposition in conformance with this opinion." Id. at 401. On remand, the district court issued a supplementary order that outlined the legal description of the 2.12-acre undeveloped portion of Kempf's land and then provided:

The owner or owners of said properties, and their successors and assigns, shall be permitted to develop those properties with multiple dwellings (apartments) in accordance with the provisions applicable to the R3B zone in effect on May 30, 1978, prior to the rezoning of said real estate which was finalized on June 28, 1978.
. . . The City is and shall be enjoined from interfering with development of those properties as herein provided.
Once a use has been developed or established on any of the above-described properties, further development or redevelopment of that property shall be subject to the zoning ordinances in effect at the time such further development or redevelopment is undertaken.

         The language used in the remand order was approved by the attorneys for the parties and the City has never challenged that language.

         Following the remand, Kempf applied for and received a building permit to construct a twelve-unit apartment building in 1988-89. In addition, in 1990, Kempf granted the local energy company an electrical easement across a portion of the undeveloped land to provide utilities to the new apartment building. No other development occurred on the properties.

         In 2005, the company associated with Kempf and his partners sold a portion of the 2.12 acres of the land at issue in Kempf and the land occupied by the two existing apartment buildings to Main Street Partners for $2.4 million. Then in 2009, the properties were sold to TSB for $3.4 million. Tracy Barkalow, owner of TSB, testified he acquired the properties for the existing apartments and to add more apartments per the Kempf order as the sellers provided him a copy of the Kempf rulings and a 1988 site plan created by Kempf that detailed more apartment buildings on the land. In addition, Barkalow testified his appraiser communicated with the City before the purchase and confirmed the pre-1978 zoning would apply to the properties to construct additional apartments on land under the Kempf ruling.

         In 2011, the City received and denied a request from a developer to rezone the portion of the land occupied by the commercial building and a small portion of the 2.12 acres at issue in Kempf, and the City then reexamined the zoning of all the properties in question. City staff recommended rezoning the properties to prevent high density residential development. In March 2012, the portion of the land occupied by the commercial building was sold by the company associated with Kempf and his partners to 911 North Governor L.L.C. for $200, 000.

         In January 2013, TSB submitted its first site plan to develop the properties with apartment buildings. That plan was routed to the various City building departments and evaluated under the Kempf ruling. However, the plan was ultimately rejected on January 17, 2013.

         In light of the new rezoning proposal for the properties, the City put a moratorium into effect on January 22, 2013, to prevent the approval of any site plan. Undeterred, TSB submitted additional site plans in January, which included all properties and provided for the construction of three additional apartment buildings and demolition of the current commercial office building. The City denied the site plans as not complying with the proposed new zoning designation without an evaluation of the application of the Kempf ruling.

         The City exercised its statutory authority to engage in municipal zoning.[1] As relevant here, in November 2012, the City amended its comprehensive zoning plan. On March 19, 2013, the City adopted an ordinance to bring the properties at issue "into compliance with the City's Comprehensive Plan." Iowa City, Iowa, Ordinance No. 13-4518 (2013). The ordinance rezoned the properties at issue from mutli-family (R3B) and commercial office (CO-1) to high-density single family residential (RS-12) and medium-density multi-family residential (RM-20). The ordinance, in relevant part, provides as follows:

Whereas, the City of Iowa City has initiated a rezoning of property located of 906 North Dodge Street from Multi-family (R3B) to High-Density Single-Family Residential (RS-12); property located at 911 North Governor Street from Commercial Office (CO-1) to High-Density Single-Family Residential (RS-12); property located at 902 and 906 North Dodge Street from Multi-family (R3B) to Medium-Density Multi-Family Residential (RM-20) in order to bring the properties into compliance with the City's Comprehensive Plan; and
Whereas, City plans and policies, including the Comprehensive and Strategic Plan, have changed considerably in the last 40 years, with the current Comprehensive Plan and Historic Preservation Plan containing policies to encourage preservation of the single family character of the City's older single family neighborhoods and policies that serve to stabilize these neighborhoods by encouraging a healthier balance of rental and owner-occupied housing rather than redevelopment for housing that serves primarily short-term residents; and
Whereas, the Central District Plan indicates that R3B zoning is obsolete and the properties with this designation should be rezoned to a valid zoning designation;
. . . .
Whereas, the Comprehensive Plan policies in place during the 1960s that led to the R3B zoning on Dodge Street encouraged demolition and redevelopment of older neighborhoods at higher densities; and
Whereas, the City's Zoning Code no longer includes the R3B zoning designation due to its inconsistency with the City's current comprehensive planning goals and polices; . . . .
SECTION I APPROVAL. Property described below is hereby reclassified . . . .

Id. The effect of the ordinance on TSB was to allow the existing buildings to remain but prevent any further apartment building construction on the land.

         TSB filed two separate challenges in response to the City rezoning the properties. In February 2013, prior to the passage of the ordinance, TSB filed a declaratory judgment action seeking prospective relief. This was docketed as No. EQCV075292. In Count I of its action, TSB requested

a declaratory decree adjudging the Defendant may not alter the zoning of the property, and that if the Defendant does so, that the altered regulation is, to the extent it applies to the property, unconstitutional and void; that the Court enter a temporary injunction restraining Defendant from altering the zoning of the property until a hearing has been held; for such other relief as the Court deems just and equitable; and the costs of this action.

         Count II of the petition sought a temporary injunction restraining the City from "altering the zoning of the property." In April 2013, TSB timely filed a petition for writ of certiorari challenging the rezoning ordinance. The petition was docketed as No. CVCV075457. It alleged:

The change in the zoning classification was improper, unreasonable, arbitrary and capricious, illegal, contrary to prior rulings of the Supreme Court of Iowa and of the Johnson County District Court, and would result in an unconstitutional taking of Plaintiff's property.

(Emphasis added.) In the prayer for relief, TSB requested a writ be issued and that the Defendant's "rezoning of the property be annulled and declared void." The district court consolidated the cases.

         The City denied the petitions, and both parties filed motions for summary judgment. The motions came on for a hearing on March 20, 2015, and the court issued its ruling on June 3, 2015. The ruling granted the City's motion on all claims pled by TSB and denied TSB's summary judgment motion. TSB filed a rule 1.904(2) motion seeking clarification as to whether the district court's decision also dismissed its takings claim against the City. The City resisted the ...

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