Property tax suit expanded

Deirdre Newman

A Superior Court judge’s decision Thursday to expand a property

tax case from a single-plaintiff to a class-action lawsuit could

spell years of financial misery for the area.

Judge John Watson found that a class of property owners exist that

has been affected by “recapturing,” or the raising of property

assessment above the 2% limit required by Proposition 13. Watson

declared unconstitutional last December the practice of recapturing

lost assessment when a home loses value and then rebounds.

While Watson did not declare how many people are eligible to be

part of the suit, Steven Harris, the original plaintiff’s attorney,

estimated it to be more than one million.

“It was just like a huge procedural hurdle that we surmounted,”

Harris said. “It was a great result for the taxpayers of Orange

County because now they’re protected basically by the result of this

case. If we succeed on appeal, they will benefit.”

But that benefit will come at the expense of the Newport-Mesa

Unified School District and cities of Costa Mesa and Newport Beach.

If the lawsuit survives expected appeals, the county would be legally

required to refund millions of dollars that normally go to these

agencies and would not receive the revenue it usually does from the

practice of recapturing.

The original case began when Rob Pool, a property tax lawyer, sued

the county for raising his property assessment above the 2% limit.

The county assessor challenged the potential of a class-action

lawsuit in April, which was denied.

A report issued by the county auditor-controller in January showed

that a successful class-action lawsuit that included all affected

taxpayers between 1998 and 2002 would deprive the county of $285

million through refunds and reduce by $147 million a year the tax

base for school districts, cities and other agencies that rely on

property taxes.

Newport-Mesa schools could lose as much as $11.5 million the first

year, though officials said a loss would probably be closer to $4

million. In subsequent years, the district could lose nearly $6

million.

Newport Beach faces a shortfall of $3.4 million the first year and

$1.7 million in subsequent years. Costa Mesa would get off the

easiest, with an estimated $1.5-million loss the first year and

$780,000 in subsequent years.

The next step is a hearing at the end of January when Harris will

ask Watson to require the county to send out a notice to all property

owners who are eligible for a refund. A final judgment in the case

will then be issued, which will set the stage for an appeal.

Harris called an appeal a “foregone conclusion” and expects the

lawsuit to end up in the state Supreme Court since recapturing is a

statewide practice. If the state Supreme Court upholds Watson’s

interpretation that recapturing is illegal, counties throughout the

state would have to stop using that method and would be liable for

refunds to property owners as well.

If Watson rules that notices are legally required in January, they

would not go out right away because he has already agreed to issue an

order preventing any notices from being distributed until the appeal

process has been fully resolved, Harris said.

On Thursday, Watson also denied a motion by attorneys for the

county assessor to remove himself from ruling on the class-action

status since he could potentially benefit from a refund for a La

Habra condominium he owns.

Watson rejected the motion on the grounds that his decision

involves an interpretation of the California Constitution, not tax

refunds directly. But he did remove himself from the class to erase

any impression of a conflict of interest.

* DEIRDRE NEWMAN covers education. She may be reached at (949)

574-4221 or by e-mail at deirdre.newman@latimes.com.