HALF MOON BAY — City officials were reeling Thursday after a federal judge issued a $36.8 million judgment against the city in a dispute with the owners of the 25-acre Beachwood property.

City Manager Marcia Raines called the ruling by U.S. District Court Judge Vaughn Walker "devastating." The amount the city was ordered to pay is nearly four times the size of the city's annual budget of about $10 million.

The City Council held an emergency closed-door meeting at 5 p.m. Thursday at City Hall to discuss the ruling, which was issued late Wednesday afternoon.

Walker, who is chief judge of the Northern District of California in San Francisco, was harshly critical of Half Moon Bay officials in his 187-page ruling, which found in favor of plaintiff Joyce Yamagiwa, who manages the property for real estate developer Charles "Chop" Keenan.

Walker found that the city of Half Moon Bay inadvertently created wetlands in the 1980s on the gently sloping property east of Highway 1 — the same wetlands that city officials cited in 2000 when denying Keenan's development company a permit to build 85 homes there.

Walker took special note of the fact that, during repeated examinations of the property in 1999, city officials never realized the wetlands were the result of a public works project initiated in 1983.

Members of the City Council were stillreading Walker's decision Thursday afternoon and declined to comment on how the city will manage to pay Keenan. The city may also have to pay some or all of Keenan's legal fees, which amount to several million dollars.

"I'm just trying to digest this," Councilwoman Marina Fraser said before the closed-door session, "but at a minimum, I can say this is not the outcome we hoped for."

Keenan said he felt vindicated by Walker's ruling but felt no pleasure in dealing the city a cruel financial blow.

"We never wanted it to get to this place," said Keenan, who called his 15-year dispute with the city "the darkest period of my 40 years in the real estate business."

The city has 30 days to decide whether to appeal the ruling. Raines said she had some ideas on how the city could pay Walker, if the city decides not to appeal, but "nothing we're prepared to share at this point."

Ed Burg, the lead attorney representing Keenan's company, said the payment could take years to complete.

Keenan's company bought the property, a rectangular parcel north of state Highway 92, in 1993. The previous owner had gotten the city's tentative approval to develop the property but had been unable to move forward due to a city-imposed moratorium on new developments because the city's sewer system was overloaded.

To upgrade its sewer capacity and allow for development, the city raised roughly $12 million by taxing several properties, including Beachwood. Yamagiwa contributed nearly $1 million to the project, which was completed in November 1999.

When it was finished, however, the city decided not to award Yamagiwa a Coastal Development Permit, finding that the property was dotted with numerous patches of wetland.

The property owners sued the city, disputing the city's definition of "wetland." A state First District Court of Appeal judge in San Francisco ruled in the city's favor in 2005.

But when Keenan's attorneys looked into the origins of the wetland, which was never an issue until 1999, they determined that they were caused by the city's project in the early 1980s to improve stormwater drainage on Beachwood and the surrounding area and build roads for a subdivision on an adjacent property.

The project made the drainage on Beachwood worse, the plaintiffs argued, by preventing water from flowing off the property. And a contractor the city hired dug huge pits on Beachwood to get more dirt for the roads to the south.

As a result, Beachwood turned into "a bathtub," said Burg.

The changes made to Beachwood "functioned to trap stormwater on the property rather than take it away," Burg said.

The $36.8 million represents the difference between the developed and undeveloped value of the property.

Keenan said he is open to discussing "creative" means of payment to ease the burden on the city. He said he would consider accepting the development rights for some other property in lieu of payment of some or all of the huge judgment. 

Raines said it was too early to comment on Keenan's offer or what if any changes to city policies Walker's judgment might precipitate.

"We never wanted financial damages," said Keenan. "We just wanted to develop the rights the city had granted us."

Staff writer Aaron Kinney can be reached at 650-348-4302 or at akinney@bayareanewsgroup.com.