Judge Allows Lawsuit Over House Color : Ruling: A Laguna Beach couple can seek $1 million for the city’s refusal to OK their incorrectly colored home.

A federal judge ruled Thursday that a couple temporarily prevented from moving into their house because they did not paint it a city-mandated shade of white has legal grounds to pursue damages against Laguna Beach.

U.S. District Judge Lawrence T. Lydick turned down the city’s motion to dismiss a $1-million lawsuit filed by Nick and Denise Karagozian, who originally painted their home “eggshell white” instead of “sandstone,” as mandated by the city Design Review Board. Lydick’s ruling in Los Angeles clears the way for the case to go to trial.

“This case is about who has the right to decide how you live your own life,” said Eugene Gratz, the Karagozians’ attorney. “I think the city was relying very heavily on getting this dismissed.”

The Karagozians are seeking $1 million in damages for mental distress they allege was caused by the panel’s refusal to allow them to move into their home until resolution of the dispute over what shade of white to paint the house.

City Atty. Philip D. Kohn said he believes that Lydick ruled in favor of the couple because he simply wanted to see the facts presented in court.

“I think it’s premature for any celebration in the streets,” he said. “Despite our initial disappointment, I think we have cause for optimism once this gets into court.”

The trial is expected to be scheduled shortly after a June 2 pretrial conference.

The controversy began in the summer of 1990, when a neighbor complained that the Karagozians had painted their home “eggshell white” instead of “sandstone.” The Design Review Board, arguing that “eggshell white” would reflect harsh sunlight, refused to allow utilities to be connected until the house was repainted, preventing the Karagozians from moving in.

After the City Council upheld the board’s ruling, the Karagozians--egged on by a radio talk-show host and community residents who criticized the city’s design standards as too restrictive--responded in February, 1991, with a house-painting party, during which the exterior of their empty house was swabbed with red, white and blue stripes in protest.

The Karagozians and the city finally compromised on “seashell white,” and the couple moved in last April. Shortly after, they filed the lawsuit in federal court.

“This city has vastly exceeded the bounds of thought control,” Gratz said. “They believe that they can tell people how to live. But the Karagozians are determined. The city picked on the wrong people this time.”

City Manager Kenneth C. Frank said the city expressed good faith last year in compromising on a color with the Karagozians. “The City Council has tried to resolve this by allowing them to use an alternate color,” he said. “It’s too bad things have gone this far.”

Laguna Beach is embroiled in two other lawsuits over decisions made by the Design Review Board. M. William Dultz is suing the city over its rejection of plans for his oceanfront home after neighbors complained that it would block their views.

A hearing in Orange County Superior Court was postponed last week after Judge Floyd H. Schenk recognized Dultz as a social acquaintance and dismissed himself from the case, said Kohn, the city attorney. A new hearing is expected in the next few weeks.

In the third case, Gratz himself is suing the city over denial of his plans to build a hillside home, which the Design Review Board ruled would cast a shadow on neighboring residences. That lawsuit is pending.

Despite the recent explosion of lawsuits, Andrew Wood, a Design Review Board member, said the board’s work will not be affected by the controversies.

“I don’t think that will happen,” he said. “I think we’re being as careful now as we ever have been. Laguna Beach has to have some sort of organization to keep buildings and building sizes from going crazy.”