Update on Recent Court Decisions Relating to the Dissolution of Redevelopment Agencies in California (April 2014)

April 16, 2014

This is the first in a series of updates we plan to circulate to briefly summarize recent merits rulings issued in the large number of cases currently pending in Sacramento Superior Court challenging the application of AB1x 26("AB 26") and AB 1484 (collectively, the "Dissolution Law").  The repercussions are still being felt from the California Legislature’s decision in 2011 to dissolve all redevelopment agencies ("RDAs") throughout the state, as the State is now trying to forcibly redirect hundreds of millions of dollars in what were previously redevelopment agency funds to offset its own funding obligations.  One of the more recent significant rulings was the December 2013 decision by Judge Michael P. Kenny that ruled that one of the key enforcement mechanisms of the Dissolution Law was unconstitutional, forbidding the Department of Finance ("DOF") from withholding sales and use tax revenue from cities and successor agencies to collect payments due under the Dissolution Law.  This update tracks the merits decisions that have been rendered since that ruling came down.  It remains to be seen what the Third District Court of Appeal, and ultimately the California Supreme Court, will do about the many varying decisions coming out of Sacramento Superior Court.  We will continue to provide updates as more rulings in this important area of law come down.

League of California Cities, et al. v. Matosantos
Case No.: 34-2012-80001275
December 9, 2013, by Judge Michael P. Kenny

The League of California Cities brought facial constitutional challenges to Sections 34183.5(b)(2)(C) and 34179.6(h)(1)(C) of the Dissolution Law, which authorize the withholding or offsetting of sales and use tax distributions to cities, counties, or successor agencies if they fail to make true-up or due diligence review ("DDR") payments.  The Court held that these provisions are facially unconstitutional under either the traditional or more lenient standards of review because Article XIII, Section 24(b) of the California Constitution (enacted through Proposition 22) provides a complete prohibition against the Legislature "reallocat[ing], transfer[ing] . . . or otherwise us[ing] the proceeds of any tax imposed or levied by a local government solely for the local government’s purposes."  The two challenged provisions were unconstitutional because they sought to do exactly that–"take sales and use tax revenues from one local government entity for the ultimate purpose of paying them to other local government entities."  Further, the Court rejected DOF’s argument that Proposition 22 was not intended to foreclose penalties for wrongful conduct, as it argued the challenged provisions authorized.  The Court further declined to reform the challenged provisions, finding that it would not be possible to stay within the Legislature’s intent while making these provisions constitutional.

City of Azusa, et al. v. Matosantos, et al.
Case No.: 34-2013-80001540
December 11, 2013, by Judge Allen Sumner

The Court denied the City of Azusa’s petition for writ of mandate.  Prior to 2011, the City and its municipal utility (AL&W) made several loans to the City’s RDA.  As part of the dissolution process, DOF deemed these loans to not be enforceable obligations.  The City and AL&W argued that failing to consider these loans enforceable obligations violates several constitutional provisions because: (1) it requires AL&W’s ratepayers to pay higher taxes without a two-thirds vote, in violation of Article XIIIA, Section 3 of the California Constitution; (2) it makes a gift of the ratepayers’ funds in violation of Article XVI, Section 6 of the Constitution; and (3) it results in funds collected as utility fees being transferred to other governmental entities for other unrelated uses, violating Article XIIID, Section 3 of the Constitution.

The Court rejected these arguments, however, because each argument assumed the funds loaned to the RDA retained their status as ratepayer fees following receipt by the RDA.  Instead, the Court held that once the City loaned AL&W’s funds to the City’s RDA, the funds became assets of the RDA subject to reallocation by the Legislature when the RDA was dissolved. 

City of Buellton, et al. v. Matosantos
Case No.: 34-2013-80001468
December 12, 2013, by Judge Eugene L. Balonon

The Court denied the City of Buellton’s petition for writ of mandate and other relief.  DOF had denied a transfer of $6 million made on June 30, 2011, just after passage of the Dissolution Law.  The City first argued the transfer was proper because it was a "loan legally required to be repaid" as set forth in the Dissolution Law.  The Court rejected this because the Cooperation Agreement provided that the City "may, but is not required to" advance the RDA money, which the RDA could repay to the extent that funds are available and consistent with the RDA’s financial ability.  The Court found this Cooperation Agreement imposed no obligation on the City to loan any money, nor did it necessarily require the RDA to pay back any loans on any time schedule.  Thus, it was not a loan agreement and not an enforceable obligation. 

The City further argued that the Cooperation Agreement was an enforceable obligation because it was between the City and the RDA and entered into at the time of the RDA’s creation, and would therefore fall within the Dissolution Law’s exception allowing for these types of agreements to be enforceable obligations if they were for a loan of money entered into within two years of the creation of the RDA.  The Court rejected this argument however, largely for the same reasons it found it not to be a loan agreement.

The Court also held that the RDA had no authority to transfer the money when it did on June 30, 2011, two days after the June 28, 2011 enactment of the Dissolution Law.  The Court also rejected the City’s argument that the transfer was made for "goods and services."  Finally, the Court held that DOF’s DDR determination did not violate Proposition 22 because this would only limit the use of RDA funds during the operation, but not the dissolution, of RDAs.  This transfer was made after passage of the Dissolution Law.  Because the Legislature has the power to dissolve the RDAs, and the power to review transfers during their dissolution, DOF’s rejection of the $6 million transfer did not violate Proposition 22.

City of San Diego, et al. v. Matosantos, et al.
Case No.: 34-2013-80001410
December 23, 2013, by Judge Eugene L. Balonon

The Court denied the City of San Diego’s petition for writ of mandate.  At issue were funds loaned by the City to the RDA over a thirty year period, totaling approximately $194 million.  In March 2011, the City and RDA entered into an agreement by which the RDA would repay the debt over the following thirty year period.  The RDA agreed to make payments when such funds were available, and that the City and RDA would determine whether the RDA must make a payment in a given year.  The full balance would be required to be repaid by the thirty-year anniversary of the agreement.  As part of its review of the dissolution process, DOF determined these were not enforceable obligations.

The Court agreed, stating that the agreements fell within the statute’s provisions invalidating agreements between an RDA and the city that created it.  It rejected the City’s argument that DOF’s failure to timely challenge the agreements by validation action consequently made them valid, stating that the Legislature’s enactment of the Dissolution Law necessarily found that failure to bring a validation action did not preclude DOF’s determinations.  The Court also held that the City did not have standing to challenge the determinations based on impairment of contract, and that DOF’s determination did not violate Proposition 22.

City of Redwood City, et al. v. Matosantos, et al.
Case No.: 34-2013-80001447
January 4, 2014, by Judge Allen Sumner

The Court denied the petition for writ of mandate challenging DOF’s decision invalidating a transfer of approximately $10 million to the City from the RDA’s Housing Fund.  In 1990, the City, RDA, and the Legal Aid Society of San Mateo County ("Legal Aid") settled a dispute by entering into an agreement whereby the RDA agreed to deposit nearly $12 million into its Housing Fund as monies became available.  This was in addition to the 20 percent set-aside required by the Community Redevelopment Law.  The agreement provided that these funds shall be maintained and disbursed per the terms that apply to the housing funds of RDAs in California "as set forth in the Community Redevelopment Law, as the same may from time to time be amended."  By 2012, the RDA had deposited over $10 million of this pledge into the Housing Fund.

As part of dissolution of the RDA, the RDA’s successor agency transferred these funds to the City in its capacity as the RDA’s housing successor, as a "housing asset."  DOF ordered these funds returned to the successor agency because it claimed they were not encumbered by an enforceable obligation.  The Court agreed, and held that these funds should not have been transferred to the City in the first place as a "housing asset," but rather should have remained with the successor agency and disbursed to taxing entities as an "amount on deposit" in the Housing Fund.  The Court also found that while the 1990 agreement may have been an enforceable obligation, these funds were not "encumbered" by this agreement.  Rather, the Court held that because the agreement subjected the funds to the Community Redevelopment Law "as the same may from time to time be amended," it therefore subjected the funds to changes in that law, including the Dissolution Law.  Furthermore, these funds were not contractually obligated to be used on any specific project; rather, it was merely required that these funds be deposited into the housing fund.  Because of this, the Court agreed that these funds were not encumbered by enforceable obligations and should be disbursed to taxing entities.  The Court also held that because of the language of the agreement subjecting the funds to changes in the law, there could be no impairment of contract to Legal Aid. 

The Court also looked at the City’s loan of $3 million in 2005 to the RDA, and agreed with DOF that it was not pursuant to an enforceable obligation.  The Court held the loan agreement not to be an enforceable obligation because it was between the RDA and the city that created it, nor was it an "indebtedness obligation" to repay bonds issued in 2003. 

City of Livingston v. Matosantos
Case No.: 34-2013-80001460
January 10, 2014, by Judge Michael P. Kenny

The Court denied the City of Livingston’s petition for a writ of mandate.  This case involved a loan of funds between an RDA and the city that created it.  Evidence established that the City and the RDA entered into a Cooperation Agreement within two years of the creation of the RDA whereby the City would loan the RDA money for redevelopment activities.  Despite DOF’s contention that the agreement was invalid as an agreement between an RDA and the city that created it, the Court indicated that this agreement could potentially be valid under the Dissolution Law’s exception for loan agreements between an RDA and city that created it if was entered into within two years of the date of creation.  The Court stated, however, that this would depend not on the date the agreement was entered into, but upon the date the funds were actually loaned, which was the date the loan agreement became operative.  If the loan funds were advanced within that 2 year period, they could potentially be enforceable obligations.

In examining the facts, however, the Court found that there was no proof that the funds were actually loaned within two years of the creation of the RDA.  Because of the absence of such evidence, the Court could not conclude that the loan agreement became operative within the two year window, and therefore concluded that DOF did not abuse its discretion in concluding the loan agreement was not an enforceable obligation.

City of Watsonville, et al. v. Department of Finance, et al.
Case No.: 34-2013-80001523
January 23, 2014, by Judge Timothy M. Frawley

The Court denied the petition for writ of mandate and ruled in favor of DOF.  This case involved two agreements – a Cooperation Agreement between the former RDA and the City, and a Water Fund Loan Agreement between the RDA and City.  The Cooperation Agreement was entered into in January 2011, and on April 12, 2012, pursuant to AB 26, the Oversight Board voted to re-execute the agreement.  However, the Court held this agreement could not be validly re-entered into because it did not actually commit the City to construct any specific projects.  Rather, it gave the City the option of spending tax increment to implement various projects, but did not require the City to do so.  The Court described the list of projects in the Agreement as merely a "wish list" of broadly-defined redevelopment projects that the City might approve, such as "sewer projects," "water projects," and "trail projects."  The Court found that the City was trying to create artificial obligations for the mere purpose of shielding the funds from the Dissolution Law, and therefore held it not to be an enforceable obligation.  The Oversight Board could not resurrect these obligations because they did not arise under the Cooperation Agreement. 

The Court also looked into DOF’s decision to disallow approximately $4.4 million in loan repayments paid to the City prior to the enactment of the Dissolution Law, which DOF contended were unlawful transfers of "unobligated balances."  In looking at the issue, the Court said the question presented was whether Proposition 22 forbids clawback and re-distribution of "unencumbered" funds transferred prior to the effective date of the Dissolution.  Although the funds were arguably encumbered at the time of transfer, they became unencumbered when the Legislature adopted the Dissolution Law and invalidated the creator-agency agreements.  The Court therefore found that the denial of these transfers by DOF did not run afoul of the Constitution, and upheld DOF’s findings.

City of Big Bear Lake, et al. v. Matosantos, et al.
Case No.: 34-2013-80001504
January 24, 2014, by Judge Allen Sumner

The City of Big Bear Lake’s petition for writ of mandate was denied, and DOF’s determinations that payments made by the RDA were not made pursuant to enforceable obligations was upheld.  At issue were payments made by the former RDA pursuant to four different agreements.  The first agreement was a Cooperation Agreement entered into with the City on June 27, 2011, the day before AB 26 was enacted.  This agreement expressly claimed that there were no third party beneficiaries to the agreement.  The Court deemed this agreement invalidated by the Dissolution Law’s provision excepting creator city-RDA loans from the definition of enforceable obligations. 

The City had also entered into a contract with a third party for construction and drainage improvements on June 27, 2011.  However, because this agreement was with the City and the RDA was not a party to the contract, the Court held it was not an enforceable obligation of the RDA.  Similarly, a 2006 contract between the City and another third party for engineering services was deemed not to be an enforceable obligation because the RDA was not a party to it.

Finally, the RDA had also entered into a contract on June 28, 2011 with a third party to provide architectural and design services for seven redevelopment projects.  The Court found this agreement void because it was entered into the day AB 26 was passed, which froze RDA activities.

City of Huntington Beach, et al. v. Matosantos, et al.
Case No.: 34-2013-80001441
January 29, 2014, by Judge Michael P. Kenny

The Court denied the City of Huntington Beach’s petition for writ of mandate to deem various agreements relating to the provision of affordable housing enforceable obligations.  The Court found the payments related to a 2009 Cooperation Agreement between the City and the former RDA, and held that these types of agreements were invalidated by the Dissolution Law.  The Court also looked into whether the issuance of bonds approximately one year after the Cooperation Agreement made the payments an "indebtedness obligation" under the Dissolution Law that could potentially be an enforceable obligation.  The Court held that because the City and RDA did not enter into the 2009 Cooperation Agreement at the same time as the issuance of the bonds, and that the agreements were not entered into solely for the purpose of securing or repaying outstanding indebtedness obligations, they could not be considered enforceable obligations. 

The Court also rejected the City’s argument that the cost of building affordable housing units was an enforceable obligation because it was an obligation of the RDA required under state law.  The Court held that because the City assumed the affordable housing obligations of the RDA after dissolution, it was therefore an obligation of the City and not the RDA.  Also, because the precise obligations at issue arose after the City assumed control of the affordable housing, this agreement bound the City and not the RDA, which was not a party to the new agreements. 

Finally, although ruling for the State on the merits, the Court did rule that the sales and use tax offset enforcement provisions of the Dissolution Law were unconstitutional, and enjoined DOF from using these remedies. 

City of San Diego, et al. v. Matosantos, et al.
Case No.: 34-2013-80001555
January 31, 2014, by Judge Allen Sumner

The Court denied the City of San Diego’s petition for writ of mandate.  The case involved a Memorandum of Understanding between the City and the RDA for reimbursement to the City for construction management costs relating to a bridge project.  The Court found the City was not entitled to reimbursement because the agreement was between an RDA and its creator city, and therefore was invalidated by passage of the Dissolution Law.  The Court also rejected the City’s argument that the costs constituted "employee costs" and could potentially thereby be reimbursed from tax increment.

City of Fresno, et al. v. State of California, et al.
Case No.: 34-2013-80001450
February 11, 2014, by Judge Michael P. Kenny

In this case, the Court partially ruled against the State on a number of determinations, but with the State on another.  The Court first ruled against a State Controller’s order denying a transfer of housing assets from the former RDA to the City.  The Court held that the State Controller lacked authority under the Dissolution Law to review transfers of housing assets, and therefore lacked the authority to make the order.  The Court also held that the transfer of the housing assets was proper.

The Court looked into DOF’s determinations denying certain transfers of cash housing assets from the former RDA to the City, which had elected to assume the role as the entity assuming the housing functions of the former RDA.  These items were submitted to DOF on its Housing Assets Transfer list as required under the Dissolution law, and DOF largely did not object at that time.  Only subsequently, during the DDR, did DOF begin objecting to these transfers.  The Court held that DOF’s initial determination finding that the cash transferred represented housing assets necessarily meant the cash was encumbered by enforceable obligations.  Once DOF made that determination, it could not make a contrary determination in the DDR.

The Court also looked into a DOF determination that assigning an advanced receivable from a third party to the successor agency was not proper.  The Court held that this did not represent a "payable on demand" receivable that should be considered a cash asset during the DDR.  The Court therefore denied DOF’s determination that this must be treated as a cash asset of the successor agency and subject to disbursement to taxing entities. 

Finally, the Court looked into transfers relating to a Downtown Stadium Agreement.  The Court ruled in favor of DOF on this issue, because the issuance of bonds nine months after the agreement was entered into did not qualify as an "indebtedness obligation" under the Dissolution Law.  That is because the statute required that the agreements be entered into "at the time of issuance" of the "indebtedness obligation," and the Court deemed the bond issuance to have occurred too long after the agreement was entered into for the agreement to be considered entered into "at the time of issuance."

City of Inglewood, et al. v. Matosantos
Case No.: 34-2013-80001591
February 19, 2014, by Judge Allen Sumner

This decision hinged on the question of when exactly AB 26 went into effect and froze redevelopment activities.  In this case, the RDA made a loan to a private developer that was executed on June 28, 2011, the same day the Governor signed AB 26 into law.  The Court denied the petition for writ and ruled in favor of DOF, holding that this agreement was not an enforceable obligation.  It held that AB 26 took effect June 28, 2011 when the Governor signed it, and not the following day when it was filed with the Secretary of State.  Because AB 26 took effect on June 28, 2011 and froze RDA activities that day, the loan agreement with the developer was not timely and therefore void ab initio.  The Court further held that because the agreement was void ab initio, there could be no impairment of contract claim.

The Court also rejected the argument that the passage of AB 27, which allowed some RDA activities to continue post AB 26 but was later ruled unconstitutional by the California Supreme Court, could not save the agreements.  Although the effect would be to void the activities of the RDA retroactively, the Court held that such retroactive application was not unconstitutional and appeared to be explicitly desired by the Legislature.  The Court also held that the enforcement mechanisms of the Dissolution Law did not violate Propositions 1A and 22 because DOF was threatening to withhold the successor agency’s property tax allocation, and not the City’s.  Because of this distinction, there was therefore no constitutional impediment to this offset procedure. 

City of Moreno Valley v. Matosantos, et al.
Case No.: 34-2013-80001478
February 24, 2014, by Judge Shelleyanne W.L. Chang

The Court denied the City of Moreno Valley’s petition for writ of mandate.  In 1993, the cities of Riverside, Perris, and Moreno Valley, and the County of Riverside, formed the March Joint Powers Authority ("JPA") to redevelop land that the federal government had previously used as part of the March Air Force Base.  The March JPA in turn formed the March RDA, through unique approval from the Legislature, to accomplish this task.  When the March RDA was dissolved by the Dissolution Law, the March JPA became its successor agency, which DOF approved.  The City of Moreno challenged this approval and the March JPA’s listing of a third-party development agreement entered into by the former RDA in its ROPS.  The Court rejected the City’s challenge, holding first that the City’s petition, brought more than six months after the JPA assumed its successor agency role (and after the City had participated in the JPA’s actions as successor agency), was barred by both the statute of limitations and by laches.  It further held that the City’s standing to bring this challenge was questionable. 

As to the merits of the action, the Court found that, although the Dissolution Law provides that each of the entities that created an RDA in the form of a JPA would be successor agencies unless they expressly opt-out, the Dissolution Law does not directly speak to whether a JPA that itself created the RDA should be its successor agency.  Relying on the Legislature’s intent that RDAs be expeditiously wound down, the Court found that the March JPA was the appropriate successor agency.

City of West Covina v. Matosantos, et al.
Case No.: 34-2013-80001479
February 25, 2014, by Judge Michael P. Kenny

The Court denied the portion of the City of West Covina’s petition for writ of mandate challenging DOF’s determination that certain items listed in its ROPS were not enforceable obligations and making payment demands pursuant to the DDR process, but granted the portion of the City’s petition challenging as unconstitutional the Dissolution Law’s provisions allowing for the use of sales and use tax offsets as a remedial measure.  DOF denied payments made by the City to its RDA under a Funding Agreement the City included in its ROPS, and the Court upheld this determination.  Under Section 34171(d)(2), a loan agreement must be "entered into" between an RDA and its creating city within two years of the RDA’s creation in order to generate enforceable obligations.  The Court held that the relevant date under this section was not the date of execution of the unilateral Funding Agreement, which was within two years, but rather the dates on which funds were actually loaned to the RDA, which were not.  The Court also upheld DOF’s determination that two Sales Tax Reimbursement Agreements between the City and its RDA were not enforceable obligations because their primary purpose was not to repay bond indebtedness.

Further, the Court upheld DOF’s determination that a Financing Agreement and Cash Flow Loan were not enforceable obligations under the DDR process because the relevant Dissolution Law section incorporates the same exclusion of creating city-RDA loans made more than two years after formation.  The Court also found that these agreements were not enforceable indebtedness obligations, which must be between an RDA and a third-party, and that they were not made solely for goods and services within the meaning of Section 34179.5(b)(3).

The Court then rejected the City’s argument that DOF’s determinations represented a gift of public funds in violation of Article XVI, Section 6 of the California Constitution, because the money being distributed to the taxing entities as a result of these determinations is for public purposes.  The Court also found that the DDR process, pursuant to which DOF demanded compensatory payments, could retroactively review transfers between the City and its RDA, that this review was not precluded by earlier EOPS process findings, and that Proposition 22 did not bar DOF from making payment demands based on the DDR process because the RDA was no longer in existence.

Finally, the Court held that the Dissolution Law’s enforcement mechanisms authorizing the offset of sales and use taxes and the reduction in property tax allocations are constitutionally invalid pursuant to the Court’s prior December 9, 2013 ruling in the League of California Cities matter, described above.

Successor Agency to the Bell Gardens Community Development Commission v. Harris, et al.
Case No.: 34-2013-00146710
March 17, 2014, by Judge Timothy M. Frawley

The Court entered judgment in a validation action in favor of the successor agency to the Bell Gardens Community Development Commission, and against a number of California State officials in their official capacity (Attorney General, Director of DOF, State Controller), the County Auditor-Controller, and a number of taxing entities.  The action sought to validate the three series of municipal bonds issued in 2013 in order to refund and achieve cost savings for two series of existing bonds and to pay a defaulted promissory note issued by the former RDA.  The successor agency noted that, although under the Dissolution Law successor agencies are not permitted to incur new obligations or establish any new redevelopment projects, AB 1484 authorizes those agencies to issue bonds or other indebtedness in order to refund existing bonds or indebtedness and thereby provide savings to the successor agency or finance debt-service spikes, including balloon maturities (citing to Cal. Health & Safety Code § 34177.5(a)(1).).  The issuance of these bonds had been approved by the Oversight Board by resolution.  None of the named parties challenged the action and default was entered as to each of them.  The Court thus entered judgment in favor of the plaintiff, validating the issuance of these new bonds.

Hilda Cuenca, Habitat for Humanity of Orange County, et al. v. Department of Finance, et al.
Case No.: 34-2013-80001427
April 1, 2014, by Judge Shelleyanne W.L. Chang

The Court granted in part and denied in part the petitioners’ petition for writ of mandate challenging DOF’s determinations.  First, the successor agency to the former RDA of the City of Santa Ana included in its ROPS five stipulated judgments that had come out of lawsuits regarding redevelopment in the City.  Four of the Stipulations had the effect that the City’s RDA had to enact resolutions to set aside a certain percentage of revenue from a specific redevelopment project area for low to moderate income housing, and the fifth included language to that effect in the stipulation itself.  DOF rejected these items as not enforceable obligations, and the Court upheld this determination.  It first held that a resolution is not a binding contractual obligation that can be enforced.  Second, nothing in any of the Stipulations constrained the State from exercising its police powers.  Because the State exercised such powers to eliminate the RDA, there was no longer any RDA revenue to set aside.  Thus, the Court held the Stipulations were not enforceable obligations and any remaining funds previously collected under them, which were not attached to any specific project, had to be remitted to the appropriate authority.

Second, DOF determined (reversing an initial determination) that a development agreement between the former RDA and Habitat for Humanity is an enforceable obligation according to the DDR provisions of the Dissolution Law, but that the successor agency had to request funds to pay outstanding obligations on this agreement (and other development agreements) on future ROPS instead of simply keeping already set-aside funds in its Low and Moderate Income Housing Fund.  The Court rejected this determination, finding that the successor agency can retain the entire amount owing under the agreement because it is an enforceable obligation under Section 31479.5(c)(5)(D).

City of Brentwood, et al. v. Department of Finance, et al.
Case No.: 34-2013-80001568
April 2, 2014, by Judge Allen Sumner

The Court denied the City of Brentwood’s petition for writ of mandate challenging, on various grounds, DOF’s determination that transfers of monies made pursuant to five Public Improvement Agreements ("PIAs") between the City and its former RDA were not enforceable obligations.  DOF then determined that the City had to refund these monies to the RDA’s successor agency, which would then remit those monies to the county auditor-controller for distribution to local taxing entities.  Reversing its previous tentative ruling, the Court found that DOF’s clawback determination was constitutionally proper.  The Court concluded that City-RDA agreements like the PIAs were retroactively rendered unenforceable as of January 1, 2011, six months before the Dissolution Law’s enactment.  Because AB 1484’s procedures require the successor agency’s DDR to identify and claw back all asset transfers by the RDA between January 1, 2011 and June 30, 2012 not made pursuant to enforceable obligations, the Legislature signaled a clear intent to unwind actions taken before the Dissolution Law was enacted.  The PIA-related transfers were such actions.  Further, the City and RDA could not bring constitutional challenges to this retroactive application because they are subordinate political entities of the State.

The Court also found that DOF’s clawback determination did not violate Proposition 22, relying on the presumption that the Legislature’s actions are valid and the California Supreme Court’s analysis in California Redevelopment Association v. Matosantos (2011) 53 Cal.4th 231.  First, Proposition 22 is focused on prohibiting the Legislature from requiring RDAs to make payments to county educational revenue augmentation funds, which is not the case here.  Second, Proposition 22 restricts the Legislature’s authority with regard to RDAs, not their successors.  Third and finally, the Legislature has the authority to retroactively make City-RDA agreements unenforceable, and nothing prevents the Legislature from then directing successor agencies to distribute the remaining money to other local entities. 

The Court further rejected various other challenges raised by the City, concluding that the PIA-related transfers were not payments for goods and services and were not intended to benefit third parties, and DOF is not estopped from challenging the PIAs by previous ROPS determinations.  Finally, the Court found that the City’s constitutional challenge to the Dissolution Law’s enforcement provisions, allowing withholding or offsetting of sales and use taxes, was premature.

City of Twentynine Palms, et al. v. Matosantos, et al.
Case No.: 34-2013-80001474
April 8, 2014, by Judge Michael P. Kenny

The Court granted the City’s petition for writ of mandate challenging DOF’s determination that an agreement between the City and its former RDA to transfer bond proceeds that the former RDA had raised to fund the redevelopment of an area in the City was not an enforceable obligation.  The City and the successor agency to its former RDA in 2012 entered into a Bond Proceeds Agreement transferring proceeds from bonds issued for a redevelopment project, to the City to further the project.  This Agreement was approved by the successor agency’s Oversight Board and notice of the Agreement was given to DOF.  DOF did not respond to this notice, but later found that this Agreement did not create an enforceable obligation because it was made after the enactment of AB 26 and was not made pursuant to an enforceable obligation on an approved ROPS. 

The Court rejected this determination, finding that Section 34178(a) permits a City and its RDA’s successor agency to enter into contracts for furthering redevelopment projects of the former RDA upon approval of the successor agency’s Oversight Board.  DOF had notice of the Oversight Board-approved Agreement but did not attempt to disapprove it.  Thus, the Agreement became effective three days after notice.  Because the Agreement was valid, and because it incorporated an implementation plan that specifically enumerates work to be done pursuant to the Agreement (including the project for which the bonds were issued), the Court held the Agreement was an enforceable obligation and DOF erred in disapproving it.

The Court further rejected DOF’s argument that Section 34177.3 (barring successor agencies from transferring assets without DOF approval after the passage of AB 26) applied to render the Agreement invalid because that section was enacted in AB 1484 after the date the Agreement became effective, and there was no specific language in that section to signal the Legislature’s intent that it apply retroactively to limit the successor agency’s antecedent powers.  Further, other provisions of AB 26, limiting the authority of RDAs to enter into contracts like the Agreement, were inapplicable to the successor agency.

Gibson, Dunn & Crutcher LLP  

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following lawyers in the firm’s Environmental Litigation and Mass Tort Practice Group in Los Angeles:

Jeffrey D. Dintzer (213-229-7860, jdintzer@gibsondunn.com)
David Edsall (213-229-7881, dedsall@gibsondunn.com)
John O’Hara (213-229-7393, johara@gibsondunn.com)

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