Filed 11/27/18 City of Novato v. Bosler CA3

NOT TO BE PUBLISHED

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

THIRD APPELLATE DISTRICT

(Sacramento)

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The City of Novato entered into a 1983 cooperation agreement with the redevelopment agency (RDA) it had previously created. The cooperation agreement provided, among other things, that Novato could advance funds to the RDA for a redevelopment plan and the RDA would reimburse Novato with 10 percent interest. Novato subsequently made various loans to the RDA, and the RDA made payments to Novato.

After dissolution of the RDA, the Department of Finance (DOF) determined that Novato was required to turn over more than $5 million for distribution to local taxing entities because the RDA made payments to Novato that were not supported by enforceable obligations. Under the dissolution statutes, loan agreements between a city and the RDA created by the city are generally not enforceable obligations. (Health & Saf. Code, § 34171, subd. (d)(2).)[1] Novato, both in its municipal capacity and as successor agency of the RDA, filed a petition for writ of mandate challenging DOF’s determination. The trial court entered judgment in favor of DOF.

Novato’s first and second appellate contentions assert that the loan advances made pursuant to the 1983 cooperation agreement are forever deemed valid because no one prosecuted a reverse validation action within 60 days. The contentions lack merit because, even if the loan agreements were valid at the time they were made, which is what a validation or reverse validation action would consider, they are not enforceable obligations under the dissolution statutes. (City of Grass Valley v. Cohen (2017) 17 Cal.App.5th 567, 586 (Grass Valley).)

Novato’s third and fourth contentions assert that the cooperation agreement is an enforceable obligation because it was executed within two years after the creation of the RDA. We need not determine when the RDA was created because the 1983 cooperation agreement is not a loan agreement and thus is not an enforceable obligation.

We will affirm the judgment.

BACKGROUND

The process of dissolving California’s redevelopment agencies, and the statutes involved, are well-documented in our prior decisions. (See Grass Valley, supra, 17 Cal.App.5th at pp. 573-574 and cases and statutes cited therein.) We need not repeat it here. Instead, we recount only the law applicable to Novato’s contentions on appeal.

As the court explained in Grass Valley, supra, 17 Cal.App.5th 567, “the Legislature passed and the Governor signed a law that 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 (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).) Assembly Bill No. 1484 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)). The bill did not change the general definition of ‘enforceable obligations’ that had excluded agreements between a former RDA and its creator, with exceptions. (§ 34171, subd. (d)(2) [‘ “enforceable obligation” does not include any agreements, contracts, or arrangements between the city . . . that created the [RDA] and the former [RDA]’].)

“Assembly Bill No. 1484 (2011-2012 Reg. Sess.) clarified the process of winding down the former RDAs. [Citation.] This case . . . involves . . . ‘clawbacks.’ (See §§ 34179.5, subds. (b) & (c), 34179.6, subds. (c) & (d).) This refers to the administrative unwinding (via the DDR) of specified RDA transactions that occurred after the Great Dissolution [of redevelopment agencies] was proposed in January 2011. The period subject to clawbacks is from January 1, 2011, to June 30, 2012. It includes but is not limited to the approximate six-month period . . . described in the legislative history as the ‘fire sale’ of RDA assets, which lasted until the freeze took effect in June 2011. [Citation.]

“Sponsor entities or successor agencies may seek judicial review when [DOF] disapproves the inclusion of items proposed as enforceable obligations in the periodically filed recognized obligation payment schedules (ROPS). [Citations.]” (Grass Valley, supra, 17 Cal.App.5th at pp. 574-575.)

In 1972, the Novato City Council adopted an ordinance “declar[ing] itself to be the Redevelopment Agency of the City of Novato.” On May 3, 1983, the Novato City Council adopted a resolution designating the city council members as members of the RDA, referencing the 1972 ordinance. In connection with the 1983 resolution, Novato filed paperwork with the California Secretary of State. In 1984 and 1985, an outside firm prepared a report for the California State Treasurer in which the firm listed Novato’s RDA as having been established in 1983 and as having one current project.

On the same day the Novato City Council adopted the 1983 resolution, Novato entered into a cooperation agreement with the RDA. The agreement provided that Novato was authorized to advance funds to the RDA for the preparation and implementation of a redevelopment plan. The RDA agreed to reimburse Novato for the advances with 10 percent interest per year.

The appellate record is silent regarding fund advances from Novato to the RDA until 1998, fifteen years after the cooperation agreement, when the Novato City Council adopted a resolution authorizing a loan to the RDA of $120,000. Over the next several years after 1998, the Novato City Council approved further loans to the RDA.

In 2003, the RDA executed a promissory note in favor of Novato in the amount of $6,596,804.35 for value received from Novato, with payments to be made from tax increment, plus 10 percent interest per year. The note required the RDA to pay the principal sum on or before November 29, 2023, with annual payments of the interest accrued. If the interest was not paid in a given year, the amount not paid would be added to the principal amount of the loan. In a resolution authorizing the promissory note, the RDA declared that Novato had “heretofore advanced not less than $6,596,804.35 to the [RDA]” and that the “advances were made pursuant to that certain Cooperation Agreement dated as of May 3, 1983 . . . .”

“In January 2011, the Governor announced his intention to seek the abolition of redevelopment agencies, leading to the resultant frenzy on the part of former redevelopment agencies and their sponsoring agencies throughout the state to lock up unencumbered tax increment. [Citations.]” (City of Tracy v. Cohen (2016) 3 Cal.App.5th 852, 858.)

On February 8, 2011, the RDA adopted a resolution declaring that it owed Novato $21,095,517.19. That amount included $13,333,354.49 for the principal and interest on the 2003 loan. The RDA also declared that, between 1998 and 2005, Novato advanced the RDA additional monies in the cumulative amount of $7,762,162.70, including interest. To evidence this debt, the RDA executed additional promissory notes.

Between February 8, 2011 and June 30, 2011, the RDA paid Novato more than $21 million. After the enactment of the dissolution statutes and the completion of the DDR with respect to the RDA, DOF determined that $6,036,959 of the amount transferred from the RDA to Novato was not transferred pursuant to enforceable obligations. After an adjustment, DOF directed that Novato must make $5,219,813 available for distribution to local taxing entities.

Additional facts are recounted in the discussion.

DISCUSSION

I

Novato claims the loan advances made pursuant to the 1983 cooperation agreement are forever deemed valid because no one prosecuted a reverse validation action within 60 days.

“A public agency may upon the existence of any matter which under any other law is authorized to be determined pursuant to this chapter, and for 60 days thereafter, bring an action . . . to determine the validity of such matter.” (Code Civ. Proc., § 860.) “If no proceedings have been brought by the public agency pursuant to this chapter, any interested person may bring [a reverse validation] action within the time . . . specified by Section 860 to determine the validity of such matter.” (Code Civ. Proc., § 863.) A validation judgment, or the failure to bring a reverse validation action, is “forever binding and conclusive, as to all matters therein adjudicated or which at the time could have been adjudicated . . . .” (Code Civ. Proc., § 870, subd. (a).)

Based on this law, Novato argues the loan advances are forever deemed valid. But this court rejected such a contention in Grass Valley. “[DOF] does not attack the lawfulness of the agreements in question as of the time they were entered. Instead, [DOF] is applying the later-enacted dissolution statutes, which were designed to unwind them. The validity of [DOF’s] actions could not have been adjudicated in the validation cases, which preceded the Great Dissolution. [Citations.]” (Grass Valley, supra, 17 Cal.App.5th at p. 587, italics omitted.)

Novato points to a recent case from the Second Appellate District, Macy v. City of Fontana (2016) 244 Cal.App.4th 1421 (Macy). Novato says the case confirms that the protections afforded by validation actions remain intact and are unaffected by the dissolution law. According to Novato, DOF’s position undermines the Legislature’s purpose in making validation proceedings the exclusive means for challenging specified local agency actions, such as an action authorizing repayment of a debt.

This court rejected such arguments and distinguished the Macy decision in Grass Valley: “The reason [Macy] is distinguishable is that the issues pressed by the challengers in that case were live issues when the validation action in that case had been filed, whereas the issues herein, the applicability of mechanisms designed to unwind RDAs to specific agreements, could not have been presented in the relevant validation actions. As [DOF] points out, it is not challenging the validity of any agreements. [Citations.] Rather, it is determining whether or not the agreements are ‘enforceable obligations’ under the present dissolution statutes, an entirely different question. Contrary to the City’s view, ‘valid’ for one purpose need not equate to ‘enforceable’ for an entirely different purpose, unknown at the time the validation actions were filed. [Citations.]” (Grass Valley, supra, 17 Cal.App.5th at p. 588, italics omitted.) We continue to adhere to the view expressed in Grass Valley and need not revisit its reasoning here.

The absence of reverse validation actions challenging the validity of the loan agreements between Novato and the RDA does not prevent DOF and the courts from applying the dissolution statutes to determine whether the loan agreements are enforceable.

II

Novato further contends the cooperation agreement is an enforceable obligation because it was executed within two years after the creation of the RDA.

While loan agreements between “the city . . . that created the redevelopment agency and the former redevelopment agency” are generally not enforceable obligations, “loan agreements entered into between the redevelopment agency and the city . . . that created it, within two years of the date of creation of the redevelopment agency, may be deemed to be enforceable obligations.” (§ 34171, subd. (d)(2).)

Novato specifically argues that even though its loan agreements with the RDA were executed more than two years after the RDA was created, they are nevertheless enforceable obligations because they were executed pursuant to the cooperation agreement signed in 1983 on the day the RDA was created. DOF responds that the RDA was created in 1972. The trial court did not reach the issue of when the RDA was created because it determined the dispute over the RDA’s creation did not affect the result. We do likewise.

In 1983, Novato and the RDA entered into an agreement titled a “Cooperation Agreement.” The agreement provided that Novato “may, but is not required to, advance necessary funds to the [RDA] or to expend funds on behalf of the [RDA] for the preparation and implementation of a redevelopment plan . . . .” The RDA “agree[d] to reimburse [Novato] for all costs incurred for services by [Novato] pursuant to this Agreement . . . .” The agreement continued: “Although the parties recognize that payment may not occur for a few years and that repayment may also occur over a period of time, it is the express intent of the parties that [Novato] shall be entitled to repayment of the expenses incurred by [Novato] under this Agreement, consistent with the [RDA’s] financial ability, in order to make [Novato] whole as soon as practically possible.” The agreement concluded: “The obligations of the [RDA] under this Agreement shall constitute an indebtedness of the [RDA] within the meaning of Section 33670 et seq. of the Community Redevelopment Law, to be repaid to [Novato] by the [RDA] with interest at ten percent (10%) per annum or the maximum rate allowed by law.” (Underline in original.)

The trial court rejected Novato’s characterization of the 1983 cooperation agreement as a loan agreement: “The cooperation agreement . . . did not actually obligate [Novato] to loan or advance any money to the RDA. Instead, it merely provided that [Novato] ‘may, but is not required to, advance necessary funds’ to the RDA. [Record citation.] The evidence submitted by [Novato] demonstrates that it made its first loan to the RDA in 1998 -- which is 15 years after the RDA was created. It is thus clear that all of the loans were made well beyond the two year exception created by section 34171, subdivision (d)(2).” (Italics in original.) The trial court continued: “[Novato] argues, however, that the actual loans merely ‘implemented’ the 1983 cooperation agreement (which [Novato] usually refers to as the ‘1983 Loan/Cooperation Agreement’), and that all of the loans are thus enforceable obligation[s] because the cooperation agreement was made within two years of the RDA’s creation. In essence, [Novato] wants to piggy-back all of the actual loans onto the 1983 cooperation agreement. The problem with this argument, as just noted, is that the cooperation agreement did not obligate [Novato] to loan any money to the RDA . . . . If [Novato] decided to loan money to the RDA, the cooperation agreement provides the RDA will pay it back, when it can, with ten percent interest. The cooperation agreement thus cannot be deemed a loan agreement between [Novato] and the RDA, because, pursuant to its plain terms, [Novato] did not actually agree to loan the RDA any money.” (Italics in original.)

On appeal, Novato argues it agreed in the cooperation agreement to extend funds to the RDA. But that does not properly characterize Novato’s legally binding duties under the cooperation agreement. The cooperation agreement allowed, but did not require, Novato to loan money to the RDA, as the trial court properly held.

In support of its argument on appeal, Novato cites Oaks v. Weingartner (1951) 105 Cal.App.2d 598. In that case, a homebuyer executed a deed of trust in favor of the lender, including a provision that the deed of trust would secure future advances from the lender to the homebuyer. Further advances were made after the execution of the deed of trust. Each new advance was evidenced by a promissory note. After the advances had been made, a materialman filed a lien on the property. He argued that his lien should be senior to the advances because the specific advances were not specified in the deed of trust. This court disagreed, holding: “Under the circumstances the deed of trust was security prior to the lien of the materialman for materials furnished after the advances had been made.” (Id. at p. 600.) Oaks is not on point and is not helpful to Novato. The issue there was whether the further loan advances were senior to the materialman’s lien. No such question arises in this case.

Novato cannot successfully argue that the cooperation agreement created an enforceable obligation because Novato committed no money to the RDA. It was only later, through actual loan agreements, that Novato loaned money to the RDA. Interpreting a similar provision in Grass Valley, this court held that a cooperation agreement “created a structure for how to treat future agreements, but was not a loan under any definition.” (Grass Valley, supra, 17 Cal.App.5th at p. 583, citing Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1174.)

In interpreting statutes, our objective is to implement legislative intent. (California Redevelopment Assn. v. Matosantos (2011) 53 Cal.4th 231, 269; County of San Bernardino v. Cohen (2015) 242 Cal.App.4th 803, 817.) Subdivision (d)(2) of section 34171 provides that agreements between a city and its RDA are not enforceable with the exception of “loan agreements entered into between the redevelopment agency and the city . . . that created it, within two years of the date of creation of the redevelopment agency.” Because Novato was not obligated to loan any money under the 1983 cooperation agreement, it cannot rightfully be called a loan agreement. At best, it was an agreement to consider making loans in the future. We see no evidence that the Legislature intended to make enforceable the type of cooperation agreement involved in this case.

DISPOSITION

The judgment is affirmed. Respondents are awarded their costs on appeal. (Cal. Rules of Court, rule 8.278(a)(2).)

/S/

MAURO, J.

We concur:

/S/

HULL, Acting P. J.

/S/

ROBIE, J.