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City of Big Bear Lake v. Cohen

California Court of Appeals, Third District, Sacramento

June 14, 2017

CITY OF BIG BEAR LAKE et al., Plaintiffs and Appellants,
v.
MICHAEL COHEN, as Director, etc., et al., Defendants and Respondents.

         APPEAL from a judgment of the Superior Court of Sacramento County No. 34-2013-80001504-CU-WM-GDS, Allen Sumner, Judge. Affirmed as modified.

          Best Best & Krieger, Iris P. Yang and Irene S. Zurko for Plaintiffs and Appellants.

          Kamala D. Harris and Xavier Becerra, Attorneys General, Douglas J. Woods, Senior Assistant Attorney General, Marc A. LeForestier and Nancy J. Doig, Deputy Attorneys General, for Defendants and Respondents.

          NICHOLSON, J.

         After the Legislature passed the bill to freeze redevelopment activities and eventually dissolve redevelopment agencies but before Governor Brown signed it into law (Assem. Bill No. 26 (2011-2012 1st Ex. Sess.) enacted as Stats. 2011, 1st Ex. Sess. 2011-2012, ch. 5 (Assembly Bill 1X 26)), City of Big Bear Lake entered into what it called a Cooperation Agreement with its soon-to-be-dissolved redevelopment agency. Under the Cooperation Agreement, City of Big Bear Lake agreed to complete several projects in the city and the former redevelopment agency agreed to pay for the projects. On the same day, City of Big Bear Lake (not the former redevelopment agency) entered into two contracts with private companies for services related to the projects. The next day, Governor Brown signed the Dissolution Law, and it became effective immediately. (Id. at § 16.) On the same day Governor Brown signed the law, the former redevelopment agency entered into a contract with a private company for services related to another project listed in the Cooperation Agreement. Eventually, the former redevelopment agency transferred $2.6 million to City of Big Bear Lake to fund the contracts mentioned.

         The Dissolution Law[1] (Assembly Bill 1X 26) immediately froze redevelopment (taking from redevelopment agencies the authority to create new enforceable obligations) and provided that only existing enforceable obligations of the former redevelopment agency could be paid from the funds held by the redevelopment agency and from future tax increment revenue. The law provided that any excess after payment of enforceable obligations would be distributed to local taxing entities. Later legislation (Assembly Bill 1484) declared that certain agreements between local municipal governments and their sponsored redevelopment agencies, such as the Cooperation Agreement here, are not enforceable obligations.

         In this case, we determine, consistent with the trial court: (1) the contested transactions did not create enforceable obligations of the former redevelopment agency, (2) the Dissolution Law's invalidation of sponsor agreements (agreements between a city and its former redevelopment agency) does not violate the California Constitution, and (3) it is irrelevant that City of Big Bear Lake claims it no longer possesses the funds it received from the former redevelopment agency. We also conclude, consistent with our decision in City of Bellflower v. Cohen (2016) 245 Cal.App.4th 438 (Bellflower), that the statutory remedy of offsetting City of Big Bear Lake's sales, use, and property taxes to capture the $2.6 million is unconstitutional. Therefore, we modify the trial court's judgment to the extent it found the proposed sales, use, and property tax offsets constitutional. And we affirm the judgment as modified.

         BACKGROUND

         The Dissolution Law directed redevelopment agencies to continue making payments on enforceable obligations (Health & Saf. Code, § 34169, subd. (a))[2] but prohibited those agencies from incurring additional obligations, freezing all such activities (§ 34162, subd. (a)). A primary goal of the Dissolution Law was “to preserve, to the maximum extent possible, the revenues and assets of redevelopment agencies so that those assets and revenues that are not needed to pay for enforceable obligations may be used by local governments to fund core governmental services including police and fire protection services and schools.” (§ 34167, subd. (a).) The Legislature expressed the desire “that redevelopment agencies take no actions that would further deplete the corpus of the agencies' funds regardless of their original source.”[3] (Ibid.)

         On June 27, 2011, the day before the Dissolution Law was signed by Governor Brown and became effective, City of Big Bear Lake and its former redevelopment agency, knowing about the imminent change of law and the Legislature's intent, signed the Cooperation Agreement. The agreement stated that the former redevelopment agency “desires to transfer that certain amount of redevelopment tax increment funds, and the Bond Proceeds secured with redevelopment tax increment funds... to the City, and the City desires to accept such funds for the City to acquire land and construct and install certain public improvements within the Project Areas.” Under the terms of the Cooperation Agreement, the former redevelopment agency agreed to transfer to City of Big Bear Lake $23.5 million and the city agreed to undertake specified public improvements.

         Also on June 27, 2011, City of Big Bear Lake entered into an agreement with Matich Corporation for street and drainage improvements for about $2.5 million. The city also had a 2006 agreement with Wireless Consulting - Joseph A. Cylwik (also referred to as Cylwik Property Management) to provide engineering services on an as-needed basis. Under this contract, Cylwik Property Management provided services related to the Matich Corporation project.

         On June 28, 2011, the day the Dissolution Law and its freeze on the activities of redevelopment agencies took effect, the former redevelopment agency entered into an agreement with RRM Design Group for professional services related to several projects. The former redevelopment agency agreed to pay RRM Design Group about $900, 000.

         The Dissolution Law required redevelopment agencies to prepare an Enforceable Obligation Payment Schedule (EOPS) listing all of its own enforceable obligations. (§ 34169, subds. (g) & (h).) As required by the Dissolution Law, the former redevelopment agency prepared its EOPS, listing its enforceable obligations. The EOPS included City of Big Bear Lake's contracts with Matich Corporation and Cylwik Property Management and the former redevelopment agency's contract with RRM Design Group. But the EOPS did not list the Cooperation Agreement; nor did it reflect that the former redevelopment agency would be transferring $2.6 million to City of Big Bear Lake for payment on the listed contracts. Department of Finance (DOF) reviewed the EOPS and requested documentation on the Matich Corporation contract, but DOF did not return the EOPS to the former redevelopment agency for reconsideration as allowed by the Dissolution Law. (§ 34169, subd. (i).)

         Before the former redevelopment agency was dissolved by operation of law on February 1, 2012(Matosantos, supra, 53 Cal.4th at p. 275), the former redevelopment agency paid to City of Big Bear Lake $2.6 million and the city paid the money to Matich Corporation, Cylwik Property Management, and RRM Design Group.

         When the former redevelopment agency was dissolved, City of Big Bear Lake became the successor agency to wind down the affairs of the former redevelopment agency.

         After the California Supreme Court decided Matosantos upholding the constitutionality of the Dissolution Law, the Legislature passed and the Governor signed Assembly Bill 1484, which required an audit of successor agencies to determine whether unobligated tax increment revenues were available for transfer to taxing entities. (See Assem. Bill No. 1484 (2011-2012 Reg. Sess.) adding Stats. 2012, ch. 26, §§ 17, 40.) This “due diligence review” or DDR (§ 34179.5, subd. (a)) identified “[t]he dollar value of assets and cash... transferred after January 1, 2011, through June 30, 2012, by the redevelopment agency or the successor agency to [a sponsoring entity] and the purpose of each transfer.” (§ 34179.5, subd. (c)(2).) The amendment to the Dissolution Law required the successor agency to submit the results of this audit to the successor agency's oversight board (§34179.6, subd. (c)) and to DOF, which had the authority to adjust any amounts in the DDR (§ 34179.6, subd. (d)).

         Crucial to this case, Assembly Bill 1484 also modified the definition of “enforceable obligations” to exclude all agreements between a former redevelopment agency and its sponsoring entity (sponsor agreements), with exceptions not relevant to this appeal. (§ 34171, subd. (d)(2).)

         As required by the Dissolution Law, City of Big Bear Lake, acting as the successor agency, obtained a DDR, which listed transfers from the former redevelopment agency to City of Big Bear Lake. Included in that list was $2, 629, 622 for “[r]eimbursement to City [of Big Bear Lake] for street capital project expenses.”

         After review of City of Big Bear Lake's DDR, DOF adjusted the amount available for distribution to local taxing entities to include the money paid by the former redevelopment agency to the city under the Cooperation Agreement for work performed by Matich Corporation, Cylwik Property Management, and RRM Design Group. (§ 34171, subd. (d)(2).)

         DOF met and conferred with City of Big Bear Lake but reiterated its position that the $2.6 million “was transferred in accordance with an agreement between the City and the [former redevelopment agency].” DOF informed City of Big Bear Lake in a letter that, if the city did not comply within 30 days, DOF would direct the Board of Equalization to withhold sales and use tax from the city. In response, City of Big Bear Lake informed DOF that it was not in possession of those funds.

         City of Big Bear Lake, both in its municipal capacity and as successor agency of the former redevelopment agency, sought a writ of mandate and declaratory relief against DOF and others. As relevant to this appeal, City of Big Bear Lake challenged DOF's determinations that the Cooperation Agreement and the contracts with Matich Corporation, Cylwik Property Management, and RRM Design Group did not result in enforceable obligations. City of ...


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