This week, the Los Angeles Court of Appeal decided an important case upholding the requirement that a plaintiff who wishes to challenge an assessment under Proposition 218 must exhaust administrative remedies before suit. In Hill RHF Housing Partners, L.P. v. City of Los Angeles, et al., the Court held that to challenge adoption or re-adoption of a business improvement district (BID) assessment, an assessed property owner must appear at the public hearing and articulate its legal theories. Simply voting “no” is not enough. This is useful and much-needed authority clarifying these procedural requirements, and will be often cited in future assessment and other cases challenging public revenues. [Disclosure: CH&W represented two BIDs in the case.]

The Property and Business Improvement District Law of 1994 (PBID Law), and Proposition 218, authorize cities and counties to establish business improvement districts to assess property  to fund special services for the benefit of assessed property owners, such as supplemental security, marketing, and beautification. Here, owners of residential rental property for low-income seniors sued to dissolve the Downtown Center Business Improvement District (DCBID), serving a 65-block area in Downtown Los Angeles, and the San Pedro Historic Waterfront Business Improvement District (SPBID).

The Los Angeles Superior Court ruled against the property owners on the merits, most fundamentally because Dahms v. Downtown Pomona Property & Business Improvement District “eviscerates” their legal position, in the words of trial judge, the Hon. Mitchell L. Beckloff. Dahms upheld a substantially similar BID in Pomona against a Proposition 218 challenge. The trial court found the DCBID and SPBID’s engineer’s reports and district management plans adequately distinguished special from general benefits flowing from their activities, evaluated the benefits conferred on parcels, and properly allocated the assessments in proportion to the special benefit each parcel received, and provided solid record support for these necessary findings under Proposition 218.

The Court of Appeal affirmed, but only for the plaintiffs’ failure to exhaust administrative remedies. The Court found while the property owners voted against renewal of the BIDS, they did not make a record of the reasons for their objection. Proposition 218 and its implementing statute require an assessing agency to mail notice to the record owner of every assessed parcel of the proposed assessment and the date, time, and location of a public hearing on the proposal. The notice must summarize the procedures for completion, return, and tabulation of ballots, and that a majority protest will defeat the assessment. At the hearing, the assessing agency must “consider all protests against the proposed assessment and tabulate the ballots.” Prop. 218’s implementing statute provides that “[a]t the public hearing, any person shall be permitted to present written or oral testimony.” The PBID Law has similar notice-and-hearing requirements for the formation and renewal of BIDs.

The Court of Appeal’s opinion recites general jurisdictional requirements for exhaustion of administrative remedies, and the need for agencies to be able to reach a reasoned and final conclusion on each and every issue within its jurisdiction before a plaintiff can sue. Citing a property tax case, the Court wrote: “As in Williams & Fickett, we conclude that the procedure outlined in the PBID Law ‘bespeaks a legislative determination that the [City] should, in the first instance, pass on’ the questions Hill, Olive, and Mesa present in their petitions, ‘or decide that it need not do so.’” Voting against the assessments without participating in the hearing and identifying one’s concerns was not sufficient to exhaust that process. The Court explains that allowing a simple “no” vote to constitute exhaustion would frustrate the purpose of the exhaustion rule to allow an agency to consider all concerns and to address them, perhaps avoiding litigation or, at least, making a complete record of both sides of a dispute to assist judicial review.

This case offers useful guidance. For those representing BIDs and assessing cities and counties in litigation, it’s a reminder to review the administrative record carefully to ensure there was adequate exhaustion of remedies. If not, you may be able to resolve your matter quickly and efficiently on a motion for judgment on the pleadings or even demurrer. And, of course, advise your agencies early and often of their procedural obligations under the PBID Law and Proposition 218 and its implementing statute for mailed notice and public hearings for proposed assessments.