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A judge on Thursday certified a class action brought by small property owners against the city of San Francisco for the alleged illegal “taking” of $7.8 million in interest payments they were forced to pay tenants on security deposits. San Francisco Superior Court Judge James Robertson II rejected a suggestion by the city attorney’s office to try each of the 62,551 plaintiffs’ cases separately. Robertson said there was a “common issue” of whether the landlords lost money by paying their tenants money they couldn’t recoup through short-term market investments. “I’m not going to have [separate] trials on all this stuff, I’ll tell you that right now,” the judge told Deputy City Attorney Andrew Schwartz. However, the judge said, he reserved the right to decertify the class if the plaintiffs’ attorneys couldn’t “develop a rationale” that shows there was a commonality among all the landlord losses. The complaint filed by the property owners alleges that a 1983 city ordinance requiring landlords to pay 5 percent interest on security deposits was an illegal “taking” during the recent economic downturn. Andrew Zacks, lead attorney for the property owners who control 100,000 rental units in San Francisco, said the class period was between April 15, 2001, and Aug. 4, 2002. Zacks, of the Law Offices of Andrew Zacks, said during that period rates on money market funds dropped below 5 percent. He said in August 2002 the money market rate had dipped to 1.19 percent. On Aug. 4, a new city ordinance went into effect that ties the security deposit interest payments owed by landlords to the Federal Reserve’s discount rate. Zacks told the court that the average security deposit held by small property owners, defined as owning up to six units, is $2,081. Schwartz argued that interest rates vary due to length of tenancies, which could make each landlord’s situation different. “Assuming that any landlord is entitled to recovery, which is disputed by the city, only those landlords whose interest payments on tenant security deposits caused them to earn less than a fair return on their investments in their income property would be entitled to compensation,” the deputy city attorney said in his opposition papers to class certification. If successful in their litigation, property owners will be owed an average of $125, their attorneys estimate. Schwartz said although the $125 is “miniscule” for each class member, “it becomes gargantuan when collectively asserted against the city.” “If anything, this suit would appear to be vindictive, motivated by an intent to punish the city for having a rent control ordinance,” he added. Zacks cited Action Apartment Assn. v. Santa Monica Rent Control Board, 94 Cal.App.4th 587, as controlling law. In Action, the Second District Court of Appeal held that a 3 percent interest requirement for Santa Monica’s landlords to pay tenants on security deposits created “an adverse impact.” It reversed a lower court ruling dismissing the case on demurrer. Schwartz has already lost a demurrer seeking to toss Small Property Owners v. City and County of San Francisco, 406-692. He said no decision has been made on whether to seek to throw it out on a summary judgment motion. However, he said, in Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency (2002), S.Ct. 1465, the U.S. Supreme Court held that a 32-month moratorium on building in the Tahoe Basin “did not effect a categorical taking” of the 400 property owners’ land. He argued that Tahoe-Sierra “impliedly overrules” the state appellate court decision in the Santa Monica case.

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