Pacaso Inc. v. City of St. Helena, 21-cv-02493-WHO

PACASO INC., et al., Plaintiffs, v. CITY OF ST. HELENA, et al., Defendants.

No. 21-cv-02493-WHO

United States District Court, N.D. California

July 15, 2021

ORDER GRANTING ANTI-SLAPP MOTION TO STRIKE FIFTH CAUSE OF ACTION RE: DKT. NO. 18

WILLIAM H. ORRICK UNITED STATES DISTRICT JUDGE

Plaintiffs Pacaso Inc. and PAC 6 CA 2021 LLC (collectively “Pacaso”), who claim that they have created a new and more accessible pathway for second home ownership by allowing co-owners to buy partial interests in real property are suing the City of St. Helena, City Attorney Ethan Walsh Mayor Geoff Ellsworth, and Planning and Building Director Maya DeRosa (collectively “defendants”) for blocking it and its homeowners from enjoying home ownership in St. Helena and attempting to enforce a zoning ordinance that prohibits the creation of a timeshare project. Defendants move to strike Pacaso's fifth cause of action for intentional interference with prospective economic advantage, which is based on a March 16, 2021 letter that City Attorney Walsh sent to all real estate agents in St Helena concerning the City's timeshare and short-term rental ordinances and the potential violation of those ordinances by persons selling fractional interests in residential properties.

Defendants have met their burden under step one of the analysis under California's anti-SLAPP statute, Cal. Code Civ. Proc. § 425.16, by showing that the statements in the letter were made in connection with an issue under consideration by a legislative body and are protected under section 425.16(e)(2) of the anti-SLAPP statute. Under step two, Pacaso cannot show a reasonable probability that it will prevail on its claim because defendants have demonstrated that Walsh sent the letter in the course of discharging his duties to evaluate and prevent violations of the City's ordinances, an act that is privileged under California Civil Code section 47(a)'s official duty privilege. For these reasons, the motion to strike the fifth cause of action is GRANTED. Pursuant to section 425.16(c) of the anti-SLAPP statute, defendants are entitled to attorney's fees in the amount of $20, 126.50.

BACKGROUND

Pacaso (formerly known as Niner Homes) launched in 2020, seeking to “open the second home market, which has traditionally only been accessible to affluent and predominately white buyers, ” by simplifying and streamlining the co-ownership process that makes second home ownership possible at a more accessible price point. Complaint (“Compl.”) [Dkt. No. 1] ¶¶ 15, 24, 26 30. Pacaso creates a property-specific LLC for each home, which owns deeded title to the real property and then “organizes and vets a maximum of eight co-owners, who hold co-ownership interests in the LLC and co-own the home in increments ranging from 12.5% to 50%.” Id. ¶ 27. “At closing, the co-owners enjoy 100% ownership in the property, and Pacaso's only role remains to serve, at the discretion of the homeowners, as program manager overseeing the LLC and employing local businesses to care for the home.” Id. ¶ 28. Pacaso homeowners can “sell their interest at any point after the first year of ownership by listing the property on the Multiple Listing Service (‘MLS') with a local real estate agent, and they are strictly prohibited from renting out the property at any point to anyone.” Id. ¶ 68.

Pacaso currently owns and/or manages five single-family homes in the City of St. Helena in Napa County. Id. ¶¶ 17. 25. It contends that Pacaso homeowners “are part and parcel of the underlying economic ecosystem of St. Helena” unlike “absentee second homeowners” because “Pacaso homeowners use and occupy their home year-round, ” and “Pacaso itself employs between 8-10 local businesses per property, including real estate agents, property managers, landscapers, pool cleaners, home cleaners, laundry services, handymen, local artists, and more.” Id. ¶ 5.

The City first communicated with Pacaso in May 2020. Id. ¶ 79. On May 15, 2020, Maya DeRosa, the City's Planning and Building Director, sent a “Notice of Potential Violation” to a Pacaso homeowner, Jay Jeffers, giving notice that if the home located at 1005 Valley View Street was “used as a timeshare or short term rental, ” such use would be impermissible pursuant to the City Municipal Code. Id.; Declaration of Maya DeRosa in Support of Defendants' Motion to Strike (“DeRosa Decl.”) [Dkt. No. 18-4], Ex. A (May 15, 2020 Letter). On May 19, 2020, Austin Allison (of then-named Niner Homes) responded on behalf of the homeowner to explain “why Pacaso's operations do not violate such ordinances and that the homeowner's use of his property was entirely consistent with such laws.” Compl. ¶ 80; DeRosa Decl., Ex. B (May 19, 2020 Response). Allison clarified that “Mr. Jeffers actually owns two homes in Saint Helena, ” and that he is “selling a portion of his home on Valley View because he no longer desires to own 100% of the home[.]” May 19, 2020 Response at 1.

De Rosa replied on May 22, 2020, saying that she appreciated Allison's statement “that your company, Niner Homes, only serves owner-occupants and that you ‘explicitly prohibit short term rentals and time-sharing uses' that the City's Municipal Code seeks to prevent.” DeRosa Decl. Ex. C (May 22, 2020 Letter); see Compl. ¶¶ 81-82. DeRosa explained, “The City's concerns regarding both properties stem from apparent unpermitted short-term rentals of Mr. Jeffers' properties in the past, which is in part the reason for the City's initial notice of potential violation.” May 22, 2020 Letter at 1. Because the May 22, 2020 letter “dropped any reference to a violation of the City's time-share ordinance, ” Pacaso alleges that it interpreted it as a “presumed green-light to move forward with its operations from this standpoint.” Compl. ¶ 82.

On July 14, 2020, reacting to “concerns” from neighbors about a listing for a Pacaso home, then-acting City Attorney Karen Ueda prepared a report to the City Council “regarding timeshare uses and fractional ownership of residence in the City.” Id. ¶ 8 and Ex. A (“July 2020 Report”). The City of St. Helena has a timeshare ordinance, codified in Section 17.112.130, which states: “The creation of a time-share project as a means of ownership of any single-family, two-family or multiple-family dwelling or any apartment house shall be prohibited within the city.” Id. ¶ 37; see Declaration of Ethan Walsh in Support of Defendants' Motion to Strike (“Walsh Decl.”) [Dkt. No. 18-2], Ex. B (copies of the City's local ordinances pertaining to timeshares and short-term rentals).

The July 2020 Report found that timeshares are “somewhat similar to short-term rentals and fractional ownership hotels but differ from both in important ways.” July 2020 Report at 324. It addressed the “challenges and limitations to regulating partial ownership in single-family residences, ” finding that the “most fundamental challenge to amending the Zoning Code to regulate fractional or partial ownership in single-family residences is that by law zoning regulations must focus on the use of land, ” and “may not target individuals.” Id. at 325. That is, “zoning based solely on ownership, as opposed to the use of land, is impermissible.” Id. at 326. The July 2020 Report concluded with the following “recommended action”:

Receive this report, discuss, and provide direction to staff if desired. City staff is seeking guidance and clarification from the City Council concerning the specific problem(s) a Zoning Code amendment could help resolve, but with the limitations noted above for regulating timeshares and partial ownership.

Id.

Ueda presented her July 2020 Report findings to the City Council, reiterating that “whether a residence is owned by a non-permanent city resident, for example, who may use that residence as a second home, isn't an issue that can be regulated by the zoning code. And so, we can't regulate based on the identity of the owner or of a tenant.” Compl. ¶ 10 (citing Recording of July 14, 2020 City Council Meeting (“July 2020 Meeting”) at 3:20:58 -3:21:13, available at https://sthelena.civicweb.net/document/42347?splitscreen=true&media=true×tamp=11860).^[1] Pacaso quotes from the July 2020 Meeting, describing it as an “[e]xtensive discussion . . . about the limitations and impropriety of the City attempting to regulate partial ownership of single-family homes[.]” Id. ¶ 11. Despite those findings, Pacaso alleges, “[d]efendants decided to change course in early 2021, threatening that unless Pacaso immediately ceased its efforts to market a home in St. Helena to prospective home buyers, it would contact all real estate agents in the area to ‘educate' them on the ‘illegality' of Pacaso's ownership model.” Id. ¶ 12.

On January 25, 2021, a real estate agent for Pacaso received a letter from DeRosa regarding four Pacaso property listings. Id. ¶ 87. DeRosa's letter stated: “The City is proactively sending this letter to communicate that there are local regulations in place pertaining to timeshares and short term rentals and we request that this letter be forwarded to both the buyer and the buyer's agent to ensure that no zoning violations occur following these transactions.” DeRosa Decl., Ex. E (January 2021 Letter at 1). Pacaso responded on January 26, 2021 to confirm that “Pacaso is not a time-share, nor does the service allow time sharing use, and that Pacaso prohibits short-term rentals.” Compl. ¶ 90; see DeRosa Decl., Ex. G (January 2021 Response).

City Attorney Walsh, who replaced Ueda, raised the issue about the timeshare ordinance at the City Council's February 9 2021 meeting. Compl. ¶ 91. Pacaso alleges that Walsh's update to the City Council “confirms that he and the City had not reached a different conclusion regarding the time-share...