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

July 15, 2014

This is the second update we have provided to summarize the recent merits rulings issued in the large number of cases currently making their way through Sacramento Superior Court challenging the application of AB1x 26 (“AB 26”) and AB 1484 (collectively, the “Dissolution Law”).  Although as a whole many of the decisions have been coming down in favor of the State and its agency the Department of Finance (“DOF”), there have been recent victories for the cities and former redevelopment agencies (“RDAs”) as well.  Sacramento Superior Court is unlikely to have the final say in these cases, however, as many of them have been appealed.  We will continue to provide updates as more decisions come down in this somewhat novel area of law.

City of Lynwood, et al. v. Matosantos, et al.
Case No.: 34-2013-80001520
April 1, 2014, by Judge Allen Sumner

The Court denied the City of Lynwood and the Lynwood RDA successor agency’s petition for writ of mandate challenging DOF’s decisions on three questions: (1) use of proceeds from bonds issued in 2011; (2) repayment of a loan the City obtained for housing; and (3) repayment of funds the City loaned the RDA from the City’s Water Fund.  For the bond funds, the RDA issued $24.14 million in bonds in March 2011, prior to enactment of AB 26.  The bonds were to be used to finance thirty redevelopment projects, although the RDA reserved the right to finance other projects.  According to the bond’s Official Statement, the RDA expected to expend the bond proceeds within three years unless prevented by changes in state law.  While the City initially framed the question as whether DOF may order cancellation or defeasance of the bonds, the Court stated that DOF had made no such demand and that the Court would therefore not render an opinion on the propriety of this action.  The Court did state that it is undisputed that the bonds themselves are enforceable obligations under the Dissolution Law.  Rather, the issue was whether the enforceable obligation requires the City to expend the bond funds on redevelopment projects.  The Court agreed with DOF that there was no such obligation.  It stated that bondholders are entitled to repayment and security therefrom — nothing more.  The Court stated that the Bond Indenture did not contain any covenant requiring the RDA to develop any particular project.  Also, the agreement contemplated that changes in state law may prevent the proceeds from being used for redevelopment projects.  Therefore, DOF’s determinations disallowing proposed expenditures to prospective vendors for bond projects were proper.

In addition, in 2002, the City borrowed $7 million for a City redevelopment project, and pledged RDA tax increment as security.  The Court ruled, however, that the agreements were executed by the City and not the RDA.  The City claimed that the RDA pledged tax increment for this agreement in a Tax Increment Pledge Agreement, but this physical agreement was not presented to the Court and the Court could not find what — if anything — the RDA might have pledged in the absence of the actual document.

Finally, in May 2010 the City loaned $1.95 million to its RDA from the City’s Water Fund.  In June 2011, the RDA repaid the entire outstanding amount.  DOF disallowed this transfer because it was not required by an enforceable obligation since it was a City-RDA agreement.  The City challenged this determination as violating Proposition 218, which restricts the use of fees assessed on property, in arguing that the use of the fees paid by the City’s ratepayers would be for purposes other than those for which the fees were imposed.  The Court rejected this argument, however, because the Dissolution Law did not take any money from the City’s Water Fund — the City did when it loaned the money from its Water Fund to its RDA.  Once the City transferred that money to the RDA, it became an asset of the RDA subject to reallocation by the Legislature when it dissolved the RDA.  Therefore, DOF’s determination disallowing the transfer was not invalid.

Foster City, et al. v. Department of Finance, et al.
Case No.: 34-2013-80001572
April 11, 2014, by Judge Allen Sumner

The Court denied Foster City’s petition for writ of mandate challenging DOF’s determinations invalidating three types of transfers made between the City and former RDA.  The first were transfers made on June 29, 2011 totaling $1.2 million from the former RDA to the City in repayment for loans issued by the City in 2005 and 2010.  The second transfer was approximately $76,559 that the City paid on behalf of the former RDA to a contractor for a public improvements project in June 2011 and February 2012.  The third transfer was approximately $19,569 in interest pursuant to an April 2011 agreement between the City and former RDA regarding a stipulated judgment with the local school district.

The Court first examined whether DOF’s determinations regarding these payments violated Proposition 22, which prohibits the Legislature from requiring an RDA to transfer its tax increment revenues to other local entities.  The Court examined the enactment of the Dissolution Law and concluded that the Legislature intended to render City-RDA agreements unenforceable as of January 1, 2011.  The Court noted that the definition of “enforceable obligation” in AB 26 did not include the exclusion of agreements between an RDA and the city or county that created it during the “freeze” period of dissolution.  These agreements were not excluded until redevelopment agencies were effectively dissolved, which due to the California Supreme Court’s decision in California Redevelopment Association v. Matosantos (2011) 53 Cal.4th 231, did not occur until February 1, 2012.  The Court stated that although it appeared that in AB 26 the Legislature intended for City-RDA agreements to remain enforceable until the RDA was dissolved, with AB 1484 the Legislature instead intended to retroactively invalidate City-RDA agreements and claw back payments that were legal when made.  The Court then turned to the language of Proposition 22 and found that, in the current situation, the funds were transferred to other local entities by either the successor agency or the City — not the redevelopment agency.  Therefore, the Court held that the claw back does not implicate Proposition 22 at all.  Furthermore, the Court held that Proposition 22 was not aimed at prohibiting all reallocations of RDA funds, but rather only “ERAF shifts” (payments by an RDA to county educational revenue augmentation funds).  The Court also stated that because Proposition 22 only restricts the Legislature’s power over redevelopment agencies, the Court would not interpret that language to additionally restrict the Legislature’s power over their successors.

The Court also rejected the City’s arguments that the third party contractor was a third party beneficiary to the agreements between the City and former RDA.

Successor Agency to the Tustin Community RDA, et al. v. Matosantos, et al.
Case No.: 34-2013-80001623
April 24, 2014, by Judge Timothy M. Frawley

The Court granted in part a petition for writ of mandate brought by the successor agency to the Tustin Community RDA, challenging several DOF decisions related to the City of Tustin’s former RDA.  First, DOF disallowed, as not made pursuant to enforceable obligations, 2011 transfers (and associated attorney’s fees) made from the RDA to the City that were part of a 2007 Redevelopment Agreement.  This Agreement required the RDA to pay the City the difference between the fair market value and the below-market sales price the RDA charged developers for land that was formerly part of a Marine Corps base.  Holding that the 2007 Agreement was not an “indebtedness obligation” (effectively, not a bond), the Court upheld DOF’s decision, finding that the Agreement was excluded from the definition of enforceable obligations by Section 34171(d) as an agreement between a city and its RDA.  Further, this decision did not run afoul of Proposition 22 because Proposition 22 does not prevent the Legislature from insisting on transfers of already-allocated tax increment as a means of facilitating the dissolution of RDAs.  Here, disallowing the 2011 transfers was for that purpose.

Second, DOF refused to issue a “finding of completion” as part of the successor agency’s due diligence review process until the agency remitted amounts that were to become due under a 2008 Promissory Note from the City.  The Court found that DOF erred in insisting on this remittance, because the due diligence review should only take into account “cash and cash equivalents,” and the amounts due under a promissory note, even one that matures within six months of the review process, are not cash.

Finally, DOF decided that semi-annual payments due under a 1993 Public Works Agreement between the City and its RDA, listed in the successor agency’s Recognized Obligation Payment Schedule (“ROPS”), were not made pursuant to an enforceable obligation.  The Court upheld DOF’s decision, rejecting the successor agency’s arguments that the Agreement was an “indebtedness obligation” (and thus an enforceable obligation) and further holding that the funds were not protected by Section 34167.5 of the Dissolution Law because they were not unencumbered transfers made after January 1, 2011.

Successor Agency to the Redevelopment Agency of the City of Marina, et al. v. Matosantos, et al.
Case No.: 34-2013-80001606
May 13, 2014, by Judge Timothy M. Frawley

The Court granted in part and denied in part the petition for writ of mandate challenging DOF’s determinations invalidating two transfers between the Successor Agency to the Redevelopment Agency of the City of Marina and the City of Marina.  One transfer was $586,326 made on January 31, 2012, and the other one was a June 9, 2011 transfer of $51,560.  The $586,326 transfer represented proceeds from the sale and lease of certain real property located at Fort Ord, a former military base in Monterey County.  Fort Ord was closed by the federal government in 1993, and the California Legislature thereafter established the Fort Ord Reuse Authority (“FORA”) to facilitate conversion of the property from military to civilian use.  In 1999, Congress passed the No-Cost Economic Development Conveyance Legislation which allowed the Army to transfer the Fort Ord property to FORA without monetary consideration, but required that any proceeds be used for economic development of the property.

In 2001, FORA and the City of Marina entered into an Implementation Agreement whereby each party would split 50/50 any proceeds earned from the sale or lease of the Property.  In 2006, the City and its RDA enacted a joint resolution whereby the City assigned its rights and obligations under the Implementation Agreement to the RDA to oversee the redevelopment of the property consistent with the City’s redevelopment plan.  As part of the agreement, the RDA agreed to pay the City any proceeds received from the sale or lease of the property.  In March 2011, the City and RDA entered into an agreement to reverse this assignment, and to transfer any remaining sale/lease proceeds to the City.  On January 31, 2012, the RDA transferred this amount ($586,326) to the City.  The Court held that this transfer was supported by enforceable obligations in the form of the FORA Act, the Implementation Agreement, and the No-Cost Economic Development Conveyance Legislation enacted by Congress.  The Court ruled for the City and against DOF, and held that the former RDA stood in the shoes of the City for purposes of the redevelopment of the property, and therefore the restrictions applying to the proceeds of these funds applied equally to the RDA.

The Court did rule for DOF, however, in disallowing the $51,160 transfer.  This was made pursuant to loan agreements between the City and former RDA entered into in 2003.  The Court held that these were City-RDA agreements that were not enforceable obligations under the Dissolution Law, and therefore DOF properly disallowed the transfer.

City of Pinole, et al. v. Cohen, et al.
Case No.: 34-2013-80001692
May 19, 2014, by Judge Timothy M. Frawley

The Court denied the petition for writ of mandate brought by the City of Pinole challenging determinations by both DOF and the State Controller’s Office invalidating various transfers of real property made to third parties.  In February 2011, the Pinole City Council and Pinole Community Redevelopment Agency adopted resolutions authorizing the conveyance of certain real properties from the RDA to the City.  On February 24, 2011, the RDA executed grant deeds conveying title in the properties to the City.  In March 2011, the City and RDA filed a validation action in Contra Costa Superior Court to validate these transfers, and in July 2011 the Court entered an order validating these transfers.  On June 28, 2011, the City executed a purchase and sale agreement to sell some of the property to a private party for $2.5 million.  In December 2011, the City executed purchase and sale agreements to sell the remaining properties for a total of approximately $13.1 million.  In April 2013, the successor agency’s Oversight Board voted to ratify the prior city resolutions that authorized these purchase and sale agreements.

On December 12, 2012, the State Controller issued an Asset Transfer Review Report and disallowed the transfers, demanding that the City reverse the disallowed transfers and turn over the affected assets to the successor agency.  DOF similarly demanded that the amount available for distribution to taxing entities be increased by the value of the properties that had been conveyed.

The Court rejected the City’s argument that at the time of the orders, it was contractually obligated to sell the properties to third parties.  The Court said that because the City had not shown that it was contractually committed before June 28, 2011, the State Controller’s order was proper.  Furthermore, the validation action did not help the City, because the prior court granting the judgment did not have jurisdiction in that it was not the type of action that could be subject to a validation action.  The Court similarly found DOF’s determinations proper, because the Dissolution Law gave it the power to review transfers retroactively to January 1, 2011.

Successor Agency to the Brea Redevelopment Agency, et al. v. Matosantos, et al.
Case No.: 34-2013-80001592
May 21, 2014, by Judge Michael P. Kenny

The Court granted in part and denied in part the petition for writ of mandate challenging DOF’s determinations disallowing certain transfers between the Successor Agency to the Brea Redevelopment Agency and the City of Brea.  The main issues before the Court were whether grant agreements between the City and other governmental agencies amounted to enforceable obligations under the Dissolution Law, and also whether DOF had authority to disapprove a transfer of land from the RDA to the City that took place before the RDA was dissolved.  The Court ruled for DOF on the first issue, but against DOF on the second issue.

In 2007, the City and RDA began to move forward on a “Tracks Project,” which was for the construction of a dual-tread bicycle trail and separate pedestrian trail that would traverse the City.  In 2008, and again in 2011, the RDA issued Tax Allocation Bonds to help finance this project and other redevelopment projects.  As part of the Tracks Project, the City had received multiple grants from other governmental entities such as the California Department of Transportation, the U.S. EPA, and the California Natural Resources Agency.  The City entered into agreements with these agencies stating that the grants would be used for the Tracks Project.  The RDA meanwhile used bond proceeds to purchase abandoned railroad rights of way for the Tracks Project.  After the EPA grant was awarded, the EPA informed the City that title to the property the RDA had acquired for the Tracks Project needed to be transferred to the City.  Accordingly, the RDA transferred certain property to the City on January 17, 2012.

As part of the dissolution process, the successor agency listed debts to the City on its ROPS relating to the Tracks Project.  DOF disallowed this.  The City argued to the Court that the grants and accompanying agreements made these transfers enforceable obligations.  The Court disagreed and ruled for DOF, however, because none of the grant agreements involved the RDA — they were all obligations solely of the City.

The land transfer in January 2012, however, was approved by the RDA’s Oversight Board and also approved by the State Controller’s Office.  DOF tried to disapprove the land transfer in its review of the Oversight Board’s actions.  However, the Court held that because the transfer was made in January 2012, it was before the effective date of dissolution, and was therefore a transfer of the RDA, not the successor agency.  Because the Oversight Board only has authority to review actions of a successor agency, its action approving the transfer had no legal effect, and DOF’s attempt to overturn the Oversight Board’s decision was improper.  The Court stated that review of this transfer was properly in the purview of the State Controller’s Office, and their decision approving the transfer controlled.

City of Orange, et al. v. Cohen, et al.
Case No.: 34-2013-80001653
May 30, 2014, by Judge Allen Sumner

The Court granted the petition for writ of mandate brought by the City of Orange and two private developers (collectively, “Serrano”) challenging DOF’s determination that a $7.1 million loan from the RDA to Serrano was not an enforceable obligation.  On March 8, 2011, the RDA approved the loan to Serrano from its Housing Fund to finance the construction of a low income housing project.  The loan and its material terms were memorialized in a Commitment Letter signed by both parties.  The loan was contingent on Serrano receiving certain tax credits and satisfactory completion of an environmental review. In March 2011 the City completed the environmental review, and on June 22, 2011, Serrano received the required tax credits.  In November 2011, a Loan Agreement between the parties was executed, and the RDA disbursed the funds to Serrano in December 2011.

DOF challenged this payment because, while the statement of intent to issue the loan was executed in March 2011, the actual loan agreement was not entered into until November 2011, after the enactment of AB 26 in June 2011.  The Court, however, found that while the agreement was not enforceable when the parties executed the Commitment Letter, it did become enforceable when the two conditions to the RDA’s obligation were satisfied.  Because both conditions were satisfied prior to enactment of AB 26, the Commitment Letter therefore became binding and an enforceable obligation at that time.

Successor Agency to the Community Redevelopment Agency of the City of Citrus Heights, et al. v. Matosantos, et al.
Case No.: 34-2013-80001587
June 3, 2014, by Judge Allen Sumner

The Court denied the petition for writ of mandate brought by the City of Citrus Heights challenging DOF’s determination invalidating two transfers as not being made pursuant to enforceable obligations.  The first transfer was from the RDA to the City for $872,112 to help it repay a loan pursuant to a 2005 grant from the Department of Housing and Community Development which the City was required to match.  The second transfer was for a $7.7 million loan from the City to the RDA in 2008 to finance redevelopment projects.  This loan was paid off on June 15, 2011.  The Court held that neither transfer was made pursuant to an enforceable obligation because they were City-RDA agreements that had been invalidated by the Dissolution Law.

The Court also held that DOF’s determination did not violate Proposition 22 because once the funds were transferred to the RDA, they became an asset of the RDA and subject to dissolution and reallocation by the Legislature.  Furthermore, the Court held that Proposition 22 only restricts the Legislature’s power over RDAs, but that it does not restrict the Legislature’s power over their successors.  Finally, the Court held that the Legislature’s clear intent was that the Dissolution Law apply retroactively to transfers dating back to January 1, 2011, and it was therefore proper for transfers made even before passage of AB 26 to be invalidated by the Dissolution Law.

City of Redlands, et al. v. Matosantos, et al.
Case No.: 34-2013-80001610
June 11, 2014, by Judge Timothy M. Frawley

The Court granted in part the City’s petition for a writ of mandate commanding the State to recognize two loans made from the City of Redlands to the successor agency to the City’s former RDA, which had been listed by the successor agency in its 2013 ROPS.  On July 11, 2012, the successor agency received a “true-up” demand from the San Bernardino County Auditor-Controller relating to property tax increment funds that had been issued to the City’s RDA.  Because the successor agency did not have sufficient funds to pay this “true-up” obligation, the City issued it a loan (the “True-up loan”).  After making this “true-up” payment, the successor agency had insufficient funds to pay obligations listed in its second ROPS so the City issued another loan to the successor agency (the “ROPS loan”).  The successor agency listed both of these loans in its next ROPS, but DOF did not approve the True-up loan as an enforceable obligation, and only partially approved the ROPS loan because it was issued to replenish RPTTF funds that had been used to pay true-up debt.

The Court found that the True-up loan did not constitute an enforceable obligation for ROPS purposes, because enforceable obligations are meant to cover debts incurred by the former RDAs and true-up payments are the obligations of successor agencies.  Because the true-up payment for which the loan was issued was not an enforceable obligation, neither was the loan.  The Court continued to find that the ROPS loan, however, did constitute an enforceable obligation.  Holding that “[w]hat is important is how the ROPS loan was used, not why [it] became necessary,” the Court found that the ROPS loan was used to pay enforceable obligations (for which the depleted RPTTF funds would have otherwise paid), not to directly pay true-up debt, and thus the loan was an enforceable obligation itself.