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City of Anaheim v. Cohen

California Court of Appeals, Third District, Sacramento

August 30, 2017

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

         CERTIFIED FOR PUBLICATION

         APPEAL from a judgment of the Superior Court of Sacramento County No. 34201380001529, Michael P. Kenny, Judge. Reversed.

          Rutan & Tucker, Jeffrey M. Oderman for Plaintiffs and Appellants.

          Kamala D. Harris and Xavier Becerra, Attorneys General, Douglas J. Woods, Senior Assistant Attorney General, Constance L. LeLouis and Anthony P. O'Brien, Deputy Attorneys General, for Defendants and Respondents.

          Robie, J.

         In this redevelopment case, the city of Anaheim, acting in its capacity as successor to the former Anaheim Redevelopment Agency, sought approval from the California Department of Finance (the department) to obtain money from the Redevelopment Property Tax Trust Fund (the fund or, sometimes, the RPTTF) to pay back the city of Anaheim for payments the City of Anaheim made to a construction company to complete certain real property improvements that the former Anaheim Redevelopment Agency was obligated to provide on a particular redevelopment project (the packing district project).[1] The city and the city as successor characterized the transaction between themselves as a loan, but the department ultimately denied the claim for money from the fund because the city did not disburse the loan proceeds to the city as successor, but instead paid the construction company directly, and because the city as successor did not obtain prior approval for the “loan” agreement with the city from the oversight board.

         Around the same time, the city as successor sought approval from the department to obtain money from the fund to make payments to the Anaheim Housing Authority (the authority) under a cooperation agreement between the agency and the authority, the purpose of which was to provide funding for the Avon/Dakota revitalization project, which was being carried out by a private developer -- The Related Companies of California, LLC (Related) -- pursuant to a contract with the authority. The department denied that claim because the 2011 law that dissolved the former redevelopment agencies renders agreements between a former redevelopment agency and the city that created that agency (or, as relevant here, a closely affiliated entity like the authority) unenforceable.[2]

         The city, the city as successor, and the authority sought mandamus, declaratory, and injunctive relief on both issues in the superior court, but the trial court denied the writ petition and dismissed the complaint for declaratory and injunctive relief.[3]

         On plaintiffs' appeal, we conclude the trial court erred. As we will explain, with respect to the packing district project, the fact that the city contracted directly with the construction company to construct the improvements the agency was legally obligated to provide at that project, and the fact that the city paid the company directly for its work, did not mean the agreement between the city and the city as successor with respect to the transaction was not a loan, as the department and the trial court concluded. Also, the fact that the city as successor did not obtain prior approval from the oversight board to enter into a loan agreement with the city did not give the department a valid reason to deny the city as successor's request for money from the fund to pay off the loan.

         As for the money from the fund claimed for the Avon/Dakota revitalization project, we conclude that enforcing the provision of the dissolution law that renders unenforceable an agreement between a former redevelopment agency and the city that created it (or an affiliated entity like the authority) would, in this case, unconstitutionally impair Related's contractual rights under its agreement with the authority. Accordingly, that provision cannot be enforced here to deny the city as successor the right to obtain money from the fund to pay the authority that, in turn, the authority is obligated to pay Related to carry out the revitalization project.

         Accordingly, we will reverse.

         LEGAL BACKGROUND

         Before June 2011, the Community Redevelopment Law (Health & Saf. Code, [4] § 33000 et seq.) authorized cities and counties to establish redevelopment agencies to remediate urban decay and revitalize blighted communities. (California Redevelopment Assn. v. Matosantos (2011) 53 Cal.4th 231, 245-246 (Matosantos).) To finance their activities, redevelopment agencies relied on “tax increment financing.... [Citations.] Under this method, those public entities entitled to receive property tax revenue in a redevelopment project area (the cities, counties, special districts, and school districts containing territory in the area) [we]re allocated a portion based on the assessed value of the property prior to the effective date of the redevelopment plan. Any tax revenue in excess of that amount -- the tax increment created by the increased value of project area property -- [went] to the redevelopment agency for repayment of debt incurred to finance the project. [Citations.] In essence, property tax revenues for entities other than the redevelopment agency [we]re frozen, while revenue from any increase in value [wa]s awarded to the redevelopment agency on the theory that the increase [wa]s the result of redevelopment.” (Id. at pp. 246-247.)

         In June 2011, as a partial means of closing the state's projected budget deficit, the Legislature passed, and the Governor signed, Assembly Bill XI 26, which, in addition to other things, “dissolve[d] all redevelopment agencies [citation] and transfer[red] control of redevelopment agency assets to successor agencies, which are contemplated to be the city or county that created the redevelopment agency.” (Matosantos, supra, 53 Cal.4th at p. 251.) A successor agency is required to “[c]ontinue to make payments due for enforceable obligations” (§ 34177, subd. (a)), which include “[a]ny legally binding and enforceable agreement or contract that is not otherwise void as violating the debt limit or public policy” (§ 34171, subd. (d)(1)(E)), but which do not include “any agreements, contracts, or arrangements between the city, county, or city and county that created the redevelopment agency and the former redevelopment agency” (ibid., subd. (d)(2)).[5]

         To obtain funds to make payments required by enforceable obligations, a successor agency must prepare, and submit to the department for approval, a recognized obligation payment schedule (ROP schedule) for every six-month fiscal period from January 1, 2012 through June 30, 2016 (§§ 34171, subd. (h), 34177, subds. (a)(1), (l) & (m)) and thereafter for every fiscal year (§ 34177, subd. (o).) An ROP schedule “set[s] forth the minimum payment amounts and due dates of payments required by enforceable obligations for each six-month fiscal period.” (§ 34171, subd. (h).) For each recognized obligation, the schedule must “identify one or more... sources of payment.” (§ 34177, subd. (l)(1).) Among the possible sources of payment is the fund (id., subd. (l)(1)(E)), into which the county auditor-controller is charged with depositing tax increment funding, i.e., “the amount of property taxes that would have been allocated to each redevelopment agency in the county had the redevelopment agency not been dissolved.” (§ 34182, subd. (c)(1).)

         The successor agency's oversight board must approve each ROP schedule. (§ 34180, subd. (g).) Following the oversight board's approval, the agency must submit the ROP schedule to the department for its approval. (§ 34177, subd. (m)(1).) The department then determines “the enforceable obligations and the amounts and funding sources of the enforceable obligations.” (Ibid.)

         In 2012, the dissolution law was amended to provide a mechanism by which the municipality that created a redevelopment agency could lend money to the successor agency to make payments due on enforceable obligations. Specifically, former subdivision (h) was added to section 34173, and at the time relevant here that subdivision provided as follows: “The city, county, or city and county that authorized the creation of a redevelopment agency may loan or grant funds to a successor agency for administrative costs, enforceable obligations, or project-related expenses at the city's discretion, but the receipt and use of these funds shall be reflected on the Recognized Obligation Payment Schedule or the administrative budget and therefore are subject to the oversight and approval of the oversight board. An enforceable obligation shall be deemed to be created for the repayment of those loans.”[6] (Stats. 2012, ch. 26, § 7.)

         With this legal background in mind, we turn to the facts of this case.

         FACTUAL AND PROCEDURAL BACKGROUND

         A

         The Parking And Alley Improvements At The Packing District Project

         On October 26, 2010, the agency and LAB Holding LLC (LAB) entered into an agreement for the redevelopment of several agency-owned properties in the city's “Packing District” (the LAB agreement). Among other things, the LAB agreement obligated the agency to construct a surface parking lot and interior alley improvements to serve the project (the parking and alley improvements).

         In August 2012, the packing district project was nearing completion, but the city as successor had not yet entered into a construction contract for the parking and alley improvements it was obligated to provide under the LAB agreement. In the ROP schedule the city as successor prepared that month for the January 2013 through June 2013 fiscal period, the city as successor applied for a distribution from the fund of a sum needed to complete construction of the parking and alley improvements.

         Despite having previously approved distributions from the fund of other amounts necessary for the city as successor to perform the agency's obligations under the LAB agreement, and despite continuing to approve other such distributions going forward, the department denied the requested distribution for the parking and alley improvements on the ground the money sought was not for an enforceable obligation. The city as successor submitted a meet and confer request to the department to challenge that determination, and the department issued a revised ruling on the matter in December 2012 denying the requested distribution because “no contracts [we]re in place for the construction.”

         Because the parking and alley improvements needed to be made quickly, and the city as successor could not wait for the next round of funding under the ROP system (which would not occur until July 2013), the city as successor sought another source of funding to complete the improvements. In February 2013, the city as successor entered into an agreement with the city entitled “COOPERATION AGREEMENT [¶] (Loan Agreement pursuant to Health & Safety Code Section 34173(h))” (bolding omitted) (the loan agreement). The loan agreement recited the pertinent factual background, up to and including the department's denial of the requested distribution from the fund, and noted that the department's denial “presente[d] a logistical challenge for [the city as successor], by requiring the [city as successor] to enter into a construction contract without prior authorization from the [department] to make the payments required by such contract.” The loan agreement then noted that former subdivision (h) of section 34173 authorized the city to loan funds to the city as successor for an enforceable obligation and recited that the city desired “to assist the [city as successor] by providing a loan to the [city as successor]... to enable the [city as successor] to enter into [a contract for construction of the parking and alley improvements] at this time and to pay for the construction of [those i]mprovements, all as required by the LAB [agreement].” The loan agreement went on to recite that “[c]oncurrently with this Agreement, the [city as successor] and the City desire to enter into a construction contract with Spiess Construction Co. Inc.... for the Parking and Alley Improvements” and that “the total potential expenditure authorized for” those improvements was $1, 111, 102.20.[7]

         The loan agreement then provided that the city would loan to the city as successor, and the city as successor would borrow from the city, up to $1, 111, 102.20, and the agreement provided that the city would “disburse proceeds of the [loan] to [the city as successor] or directly to [Spiess Construction], as elected by the City, for work performed by [Spiess Construction] under the [construction c]ontract, all in accordance with the requirements of the” contract. The loan agreement also provided that the city as successor would repay the loan upon receipt of money from the fund.[8]

         Later that month, the city entered into the contract with Spiess Construction (Spiess) for the construction of the parking and alley improvements.

         In the ROP schedule the city as successor prepared that same month (February 2013) for the July 2013 through December 2013 fiscal period, the city as successor requested a distribution from the fund in the sum of $1, 111, 102.20 -- the total potential amount of the loan provided for in the loan agreement. In April 2013, the department denied the request because “the loan was entered into for an item denied by [the department] during a prior ROPS period. Therefore, this item is not an enforceable obligation....” Following the meet and confer process, the department issued a new denial letter in May 2013, denying the request because the city as successor was not a party to the construction contract between the city and Spiess.

         In June 2013, the city and the city as successor commenced the present action by filing a petition for writ of mandate and complaint for declaratory and injunctive relief in the Sacramento County Superior Court. With respect to the parking and alley improvements, plaintiffs sought a writ compelling the department to set aside its previous actions and determinations and to “issue a formal written determination and directive that... the LAB [agreement] and [Cooperation] Agreement are enforceable obligations... eligible for payment from the... [f]und” and that the city as successor is “entitled to an allocation of moneys from the... [f]und in conjunction with future ROPS to the extent [the city as successor] places such agreements on the ROPS with a demand for payment and funds are available in the... [f]und to pay the amounts so requested.”[9]

         The construction of the parking and alley improvements was completed in November 2013, and the city paid for the construction under its contract with Spiess.

         For the next ROP cycle (the fiscal period from January 2014 through June 2014), the city as successor did not renew its request for an allocation from the fund for the parking and alley improvements. However, in approving allocations from the fund for other obligations incurred by the city as successor under the LAB agreement, the department acknowledged that the city as successor's obligation to complete the parking and alley improvements was an enforceable obligation that would be eligible for tax increment funds in the next ROP cycle. Accordingly, despite the pending litigation, the city as successor sought a distribution from the fund for its obligation to the city under the loan agreement in its ROP statement for the fiscal period from July 2014 through December 2014. Initially, the department denied this request because of lack of “additional clarification or documentation, ” but then following the meet and confer process denied the request again in May 2014 because “the [city as successor] did not submit an Oversight Board resolution to [the department] for review prior to entering the loan[].”

         In September 2014, the city as successor obtained a stand-alone resolution from the oversight board approving the loan agreement.[10] The city as successor notified the department of the oversight board's approval in October 2014. Meanwhile, in September, the city as successor had once again submitted an ROP statement (this time for the fiscal period from January 2015 through June 2015) seeking a distribution from the fund for the amount owed to the city under the loan agreement (now fixed at $884, 429).

         In November 2014, the department provisionally denied the city as successor's request for a distribution, noting that it had not yet completed its review of the oversight board's resolution approving the loan agreement. Then, on December 8, 2014, the department disapproved the resolution. The department explained that “it does not appear that the City actually loaned funds to the [city as successor] for amounts owed under a contract in which the [city as successor] is a party. Rather, the Cooperation Agreement seeks to reimburse the City for costs it incurred under an agreement between the City and Sp[ie]ss Construction.” The department further asserted that even if former subdivision (h) of section 34173 applied to the loan agreement, “a request by the [city as successor] to enter into a loan agreement with the city... must be approved by the oversight board and is subject to [the department's] review prior to entering into the agreement. Additionally, the use of the loaned funds must first be presented on a ROPS subject to review by the [oversight board] and [the department]. The [city as successor] took none of these steps prior to entering into the Cooperation Agreement or the alleged expenditure of the funds pursuant to the Cooperation Agreement. Consequently, the [oversight board] has no authority to retroactively approve the actions taken by the [city as successor], and therefore the Cooperation Agreement is not effective.” A week later, on December 17, 2014, the department rejected the city as successor's request for a distribution from the fund for the amount owed to the city under the loan agreement for the reasons stated in its letter of December 8.

         In July 2015, a notice of hearing was filed in this mandamus proceeding, with the hearing set for December 2015 (later continued to January 2016). In their memorandum, plaintiffs argued that the city as successor was entitled to money from the fund as reimbursement for the costs expended to construct the parking and alley improvements at the packing district project, and plaintiffs set out to refute the various reasons the department had given over time for denying that funding. In response, the department argued that it did not abuse its discretion in denying the city as successor's request for money from the fund related to the parking and alley improvements because: (1) the city as successor was not a party to the construction agreement with Spiess, and therefore that agreement was not an enforceable obligation; (2) the city as successor did not obtain oversight board approval and submit that approval to the department before entering into the loan agreement with the city; and (3) former subdivision (h) of section 34173 did not contemplate loan agreements in which a third party, rather than the successor agency, receives the funds loaned.

         The trial court issued its ruling on submitted matter in February 2016. With regard to the parking and alley improvements and the loan agreement, the court noted that the city as successor was seeking to enforce an obligation that “is based on a contract between the City and the construction company.” According to the court, while the LAB agreement “clearly created an enforceable obligation, funds are only due to the extent the [city as successor] actually expended funds to complete the parking and alley improvements. Because the [city as successor] is not a party to the construction contract with Spiess, it is the City, not the [city as successor], [that] expended funds to build the parking and alley improvements. There is no reference to the [city as successor] in the contract, and it is the City, not the [city as successor], that is given the express right to oversee construction and terminate the contractor's employment should the need arise.... [¶] Although the [loan a]greement anticipates that the City might pay loaned funds directly to the construction company, it does not indicate that the [city as successor] is authorizing or directing the City to enter into the parking construction contract on its behalf. The City Council, not the [city as successor] via the Oversight Board, ‘passed and adopted, approved and authorized' the construction, converting it into a City controlled project. Consequently, the City paid funds pursuant to the City's contractual obligations with Spiess Construction, and as the funds sought are not for payment of the [city as successor]'s enforceable obligation, [the department] is correct in its denial of the request.”

         In March 2016, the trial court issued its order denying the writ petition and dismissing the complaint for declaratory and injunctive relief based on its earlier ruling and entered judgment in favor of the department. This timely appeal followed.

         B

         The Avon/Dakota Neighborhood Revitalization Project

         The Avon/Dakota neighborhood is a multifamily residential neighborhood that is one of the city's most blighted areas. To revitalize that neighborhood, on June 22, 2010 the authority entered into a revitalization agreement with Related (the revitalization agreement), under which the authority and Related (referred to in the agreement as Developer) were to “jointly and cooperatively prepare a revitalization plan for th[e] neighborhood” and implement that plan. The revitalization agreement recited that “[p]ursuant to one or more separate cooperation agreements between or among the Authority, the City of Anaheim, ... and/or the Anaheim Redevelopment Agency, ... to be considered and action taken concurrently with this Revitalization Agreement, it is anticipated that the Authority will be allocated by the City and/or by the Agency certain federal, state, and local funds that will be authorized to be expended to carry out this Revitalization Agreement and provide financial assistance for the Project along with preparation and implementation of the Plan.” With respect to the agency, the agreement stated that the sources of the anticipated funds to be provided “may include... monies from the Agency's Low and Moderate Income Housing Fund (‘Housing Fund')” and “such other funds as may be allocated by... Agency to Authority.” The revitalization agreement also recited that “Agency receives tax increment revenues pursuant to Section 33670(b) of the [California Community Redevelopment Law] and is required to deposit no less than thirty percent (30%) of the tax increment revenues allocated to Agency into Agency's Low and Moderate-Income Housing Fund (‘Housing Fund') pursuant to Sections 33333.10, 33333.11, 33334.2 and 33334.6 of the [California Community Redevelopment Law] and to use such funds in order to increase, improve, and preserve the community's supply of low and moderate-income housing available at an affordable housing cost.”

         The revitalization agreement went on to specify that the authority would provide up to $4.8 million for the preparation and implementation of the revitalization plan. The agreement expressly identified the city and the agency as “intended third party beneficiaries of this Revitalization Agreement, with full right, but no obligation, to enforce the terms hereof.” The agreement further provided that “[t]his Revitalization Agreement (together with the other Authority Documents) contains the entire agreement between Authority and Developer with respect to the Properties, and all prior negotiations, understandings and agreements are superseded by this Revitalization Agreement and such other Authority Documents. No modification of any Authority Document (including waivers of rights and conditions) shall be effective unless in writing and signed by the Party against whom enforcement of such modification is sought, and then only in the specific instance and for the specific ...


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