Public Agencies Can Use Mello-Roos Act Financing To Acquire Property By Eminent Domain

April 20, 2015 | Bulletin No. 1248995.1

Can the Mello-Roos Community Facilities Act of 1982, Government Code section 53311, et seq. ("Mello-Roos Act"), be used to finance acquisition of property by eminent domain?  That is the question the Court of Appeal recently addressed in the case of Golden State Water Company v. Casitas Municipal Water District (April 14, 2015, 2d Civil No. B255408) __ Cal.App.4th __ .  Upon review, the Court concluded that, yes, Casitas could use funds generated by bonds under the Mello-Roos Act to finance the condemnation of Golden State's property.

Background

Parts of the City of Ojai receive water from Golden State, a private utility, and other parts receive water from Casitas, a municipal public utility.  Customers of Golden State became increasingly agitated as their water rates escalated significantly more than rates charged by Casitas.  In fact, rates charged by Golden State were more than double rates charged by Casitas.  This disparity led customers within Golden State to request that Casitas take over Golden State's water service.  Casitas agreed, and determined that the Mello-Roos Act would be the appropriate means for financing the acquisition of Golden State's facilities.  The Mello-Roos Act would allow for the creation of a community facilities district within the area served by Golden State.  Upon voter approval, the residents within the community facilities district would be subject to a special tax, and the special tax would support the issuance of bonds to pay for Golden State's  facilities.  After 87 percent of the voters approved Casitas' proposal, Golden State challenged Casitas' actions, but the trial court rejected Golden State's challenge.

Court's Decision

Golden State's primary argument is that the Mello-Roos Act cannot be used to finance a taking of property by eminent domain.  In addressing this challenge, the Court noted that the Mello-Roos Act allows a community facilities district to finance the purchase of real property with an estimated useful life of five years or longer.  Upon analysis, the Court determined the authority to "purchase" property includes acquisition by eminent domain and is not limited to simply acquisition by a bargain and sale agreement.  The Mello-Roos Act "authorizes a public agency to 'purchase' real property in order to construct and develop government facilities . .  . [and] [g]iven the obvious practical need in certain circumstances of using eminent domain power to acquire property for this purpose, the word 'purchase' should be construed in its broadest sense, which includes a taking by eminent domain in exchange for just compensation." 

Noting that the Mello-Roos Act cannot be used to finance the purchase of intangible property, Golden State also challenged Casitas' attempt to acquire its intangible property and property rights.  The Court, however, also rejected this challenge.  The Court found that Casitas intended to acquire Golden State's facilities "i.e., its real and tangible personal property used for providing water service to Ojai."  The intangible rights were sufficiently connected to the acquisition of the facilities used for providing water service to allow for financing under the Mello-Roos Act.  Finally, the Court concluded that legal costs associated with any eminent domain action, as well as any payment for loss of business goodwill, were properly classified as "incidental expenses" that can be financed under the Mello-Roos Act.  Thus, the Court upheld Casitas' actions and expressly determined that it would not set aside "the will of the voters."

What This Means To You

This opinion confirms that the Mello-Roos Act can provide a mechanism for financing the acquisition of property even if eminent domain is required, and thus provides public agencies with an additional financing option they can consider when looking to acquire property for a public use.

If you have any questions concerning this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult:

William Chisum or Constantine Baranoff | 916.321.4500