Laguna Wins Reversal of Big Judgment : Courts: Legal fight over streets in rural neighborhood isn’t over, plaintiffs’ attorney vows.

An appeals court has overturned an $18-million judgment against Laguna Beach that officials feared would have bankrupted the city.

The state’s 4th District Court of Appeal on Friday ruled against 38 property owners in Laguna Beach’s rural Diamond-Crestview community who had won the judgment two years ago because streets were not installed in their undeveloped tract in a reasonable period of time. Without streets, the court had agreed, the housing lots were rendered useless, and the city should have to pay the owners for their loss.

The appeals court, by a 2-1 vote, overturned that judgment and held that the trial court didn’t give the city a chance to form an assessment district to pay for the street work.

City officials were jubilant over the decision in what has become one of Southern California’s longest land-use battles. The city was facing the possibility of declaring bankruptcy over the $18-million debt if the judgment was not overturned, City Councilman Wayne J. Baglin said.

“It’s fantastic news,” Baglin said. “This takes a terrible black cloud away from the city and allows us to do our job, part of which is to work with the property owners in Diamond-Crestview in a positive, conciliatory manner so they will be able to develop their property now.”

An attorney for the Diamond-Crestview property owners said he would seek a rehearing with the appeals court within two weeks and possibly a review by the California Supreme Court.

“It’s been 10 years, and it looks like it could go another five,” said Joseph Gughemetti, the attorney representing the original 38 property owners, who have dwindled to 13 people now. The opinion “just says do it over again. . . . It’s not a victory for the city, it’s basically another round of litigation.”

The decade-long court fight has centered on a 40-acre woodsy hillside now called Diamond-Crestview that was subdivided by the county in the 1920s without a requirement for public improvements. The area, which has breathtaking views of the city and coastline, sits between the Arch Beach Heights and Woods Cove neighborhoods.

Accessible until recently only on barely paved or dirt roads, the area has been developed sporadically over the years, and the question became who was responsible for bringing the streets up to current standards, the city or the landowners.

In 1985, the owners of 38 empty Diamond-Crestview lots sued the city in an attempt to have streets installed. An appellate court ruled in that case that the streets belonged to the city and it must improve the roads or abandon them and compensate the lot owners for their properties.

By September, 1992, the city had approved a development plan for the area that included the installation of all public improvements including the streets, storm drains and sewers. Under that plan, the city would pay for the work up front and assess the property owners later for the cost.

But that same month, Orange County Superior Court Judge David H. Brickner ruled that the city must build and pay for the streets itself and gave the city a 45-day deadline to submit a new plan. When the city missed the deadline while trying to appeal his decision, Brickner ruled Laguna Beach had chosen to effectively abandon the streets and ordered it to pay $18 million to the property owners in damages.

The city recently did install streets in the area, at a cost of about $2 million. But Gughemetti said they are not up to code and not wide enough for emergency vehicles.

“This whole thing began 10 years ago because those streets aren’t safe,” Gughemetti said. “That underlying factor hasn’t changed.”

But with the new ruling, Laguna Beach City Atty. Philip Kohn said he hopes the property owners will meet with city officials and finally resolve their dispute.

“The city’s position is there is not that much more to fight about,” Kohn said. “Even though the final chapter in this has not been written, it is the city’s sincere desire to sit down with the plaintiffs to find out what issues remain in dispute and see if they can be resolved without further litigation.”

Still to be decided is who ultimately will pay for the streets, and whether an assessment district will be formed to repay the city for that cost.