SUPERIOR COURT OF CALIFORNIA

COUNTY OF SACRAMENTO

CITY OF VISALIA Case Number: 34-2013-80001558

v.
TENTATIVE RULING
SUCCESSOR AGENCY TO THE
REDEVELOPMENT AGENCY OF THE
CITY OF VISALIA; et al. Date: November 15, 2013
Time: 10:00 a.m.

Dept.: 29
VISALIA UNIFIED SCHOOL Judge: Timothy M. Frawley
DISTRICT; et al.

Proceeding: Demurrer to First and Second Causes of Action

Tentative Ruling: Sustained

Petitioner City of Visalia has filed a petition for writ of mandate and complaint for
declaratory and injunctive relief (“petition”) against respondents/defendants the
Successor Agency to the Redevelopment Agency of the City of Visalia, the Director of
the Department of Finance, and the Auditor-Controller of the County of Tulare.
Petitioner seeks to challenge the determination by Department of Finance that a 2009
loan agreement between the City and its former redevelopment agency is not an
“enforceable obligation” under the Redevelopment Dissolution Law; the provisions of
the Dissolution Law that require the Successor Agency to transmit the unexpended
proceeds of the loan to the County Auditor-Controller; and the provisions of the
Dissolution Law authorizing a withhold or offset of sale and use taxes and/or property
taxes should the Successor Agency fail or refuse to transmit the proceeds to the
Auditor-Controller. Respondents Department of Finance and its Director (collectively, the Department)
have filed a demurrer to the first and second causes of action of the petition. The court
shall sustain the demurrer.

Background Facts and Procedure

The following is a summary of the facts based on the allegations of the petition and the
matters subject to judicial notice.

In 1989, Petitioner passed an ordinance approving and adopting a redevelopment plan
for the Central Visalia Redevelopment Project. Under the ordinance, the Visalia
Redevelopment Agency was charged with carrying out the redevelopment plan. The
City Council served as the Redevelopment Agency’s governing board. The
Redevelopment Agency’s activities were financed, in part, by tax increment financing.

In October 2009 the City Council, convening jointly as the City Council and as the board
of the Redevelopment Agency, approved a transaction whereby the City agreed to loan
$3.6 million from the City’s general fund to the Redevelopment Agency. The transaction
was evidenced by a Loan Agreement and Promissory Note, both dated November 1,
2009.

Petitioner alleges that the City and Redevelopment Agency entered into the loan
agreement with the understanding that the proceeds of the loan would be used to fund
redevelopment activities in the Central Visalia Redevelopment Project, and that the loan
would be repaid with tax increment revenues received therefrom. However, before
approving the loan agreement, staff had presented the City Council with a
memorandum identifying a risk that the State could prevent repayment of the loan by
taking redevelopment monies. Specifically, the memorandum stated:

The concern here is the State continues to take Redevelopment monies
from cities. If enough money is taken from redevelopment, General Fund
loans could become General Fund contributions to Redevelopment and
the City would never be repaid its loan. In order to minimize the risk of
this approach, Finance recommends borrowing only ½ of the potential
loan amount in order to protect the City’s General Fund.

In March 2011, with knowledge that the Governor was proposing to dissolve
redevelopment agencies on July 1, 2011, and turn over their assets and liabilities to
successor agencies, City Council, on behalf of the City and Redevelopment Agency,
amended the 2009 loan agreement to “prepay” $2.2 million towards the loan and to “pledge” tax increment to repay the balance of the loan. On March 7, 2011, the City and
the Redevelopment Agency executed a First Amendment to the City Loan Agreement
and an Amended Promissory Note, reflecting a twenty-eight year loan in the principal
amount of $1,296,127.

As the City/Redevelopment Agency anticipated, on June 28, 2011, the Legislature
adopted AB X1-26 (the “Dissolution Law”), which dissolved redevelopment agencies,
effective February 1, 2012. As a result, the City’s Redevelopment Agency was
dissolved and all of the assets, rights, duties, and obligations of the former
Redevelopment Agency were transferred to its Successor Agency.

Pursuant to California Health & Safety Code § 34173, the City elected to serve as the
Successor Agency for the dissolved Redevelopment Agency. However, under the
Dissolution Law, the Successor Agency is a “separate public entity” from the public
agency that provides for its governance and “the two entities shall not merge.” (Cal.
Health & Saf. Code § 34173.)

While the Dissolution Law was intended to eliminate redevelopment agencies in
California, the Dissolution Law was not intended to impair the former redevelopment
agencies’ existing enforceable obligations. Thus, the Dissolution Law established
procedures to assure the payment/performance of “enforceable obligations.”

In general, the Dissolution Law requires successor agencies to list all the enforceable
obligations that they are required to pay on a “Recognized Obligation Payment
Schedule” (or ROPS). (Cal. Health & Saf. Code § 34177.) The first ROPS covered the
six-month period ending on June 30, 2012. The successor agency is required to
prepare a separate ROPS for each six-month period thereafter until the former
redevelopment agency’s enforceable obligations are paid off or retired.

After the ROPS is prepared, the successor agency must submit it for approval to the
successor agency’s “oversight board,” which is given authority to approve or disapprove
each recognized obligation. Once an oversight board either approves or disapproves a
ROPS, the Department of Finance may then undertake its own review of the oversight
board’s action. (Cal. Health & Saf. Code §§ 34177, 34179(h).)

In this case, the City, as the Successor Agency, prepared and adopted ROPS for the
periods January 1 – June 30, 2012 (ROPS 1); July 1 – December 31, 2012 (ROPS 2);
and January 1 – June 30, 2013 (ROPS 3). All three ROPS listed the City Loan as an
enforceable obligation. The Department of Finance subsequently reviewed and
disapproved the City Loan as an enforceable obligation.
As part of its “Due Diligence Review,” the Successor Agency identified the proceeds of
the City Loan as an asset held to satisfy enforceable obligations. The Department of
Finance subsequently reviewed and disallowed retention of the proceeds of the City
Loan as an asset held to satisfy enforceable obligations. The Department determined
that the proceeds of the City Loan are unobligated balances available for transfer to
taxing entities.

The Successor Agency remitted other funds to the Tulare County Auditor-Controller
based on the Department’s findings, but the Successor Agency retained the proceeds of
the City Loan.

On July 10, 2013, Petitioner filed its petition. The first cause of action seeks to impose
against the Department and the Successor Agency a constructive trust upon the
unexpended proceeds of the City Loan held by the Successor Agency. Petitioner
alleges that the Successor Agency holds the proceeds of the Loan by “mistake” in that,
at the time of making the Loan, both the City and Redevelopment Agency believed that
the Loan would be repaid with tax increment revenues but, upon enactment of the
Dissolution Law, this is no longer possible. Petitioner alleges that payment of the
proceeds of the City Loan to the Real Parties in Interest would result in unjust
enrichment. The second cause of action seeks damages from the Department and the
Successor Agency for conversion of the proceeds of the Loan.

Respondent Department has filed a demurrer to the first and second causes of action.
(Respondent also has filed a Request for Judicial Notice, which is granted.)

The Department contends the first and second causes of action are barred because (i)
Petitioner failed to first present a written claim for money or damages in accordance
with the Government Claims Act; (ii) the Department is immune from liability under the
Government Claims Act; and (iii) Petitioner City’s claims against the Successor Agency
are collusive in that the City serves as the Successor Agency. The Department also
demurs to the first cause of action for constructive trust on two additional grounds:
First, the facts subject to judicial notice negate Petitioner’s claim that the Successor
Agency gained the proceeds of the City Loan by mistake. Second, Petitioner cannot
assert an action for a constructive trust against the Department because the
Department has no property in its possession over which the court could impose a
constructive trust. Standard of Review

In reviewing the sufficiency of a complaint against a general demurrer, the Court is
guided by long-settled rules. The court treats the demurrer as admitting the truth of all
factual material allegations properly pleaded in the complaint, regardless of possible
difficulties of proof. However, a general demurrer does not admit contentions,
deductions, or conclusions of fact or law alleged in the complaint; facts impossible in
law; or allegations contrary to facts of which a court may take judicial notice. (Blank v.
Kirwan (1985) 39 Cal.3d 311, 318; Martinez v. Socoma Companies, Inc. (1974) 11
Cal.3d 394, 399.)

Discussion

The demurrer to the first cause of action for constructive trust is sustained. A
constructive trust is an involuntary equitable trust created by operation of law as a
remedy to compel the transfer of property from a person who is wrongfully holding it to
its rightful owner. (Burlesci v. Peterson (1998) 68 Cal.App.4th 1062, 1069.) The
purpose of a constructive trust is to prevent unjust enrichment and to prevent a person
from taking advantage of his or her own wrongdoing. (Ibid.) Under Civil Code sections
2223 and 2224 and the case law applying them, to impose a constructive trust a plaintiff
must establish: (1) the existence of property or some interest in property; (2) the
plaintiff’s right to that property; and (3) the defendant’s wrongful acquisition or detention
of the property. (Ibid.)

Here, Petitioner has not alleged that the Department has, or ever had, the disputed
Loan proceeds. Rather, Petitioner alleges that the Department “exercised control” over
the proceeds by determining that the City Loan did not qualify as an enforceable
obligation under the Dissolution Law. However, such “control” is not sufficient to give
rise to an action for constructive trust. Accordingly, the petition does not state facts
sufficient to constitute a cause of action for constructive trust against the Department.

Unlike the Department, Petitioner alleges that the Successor Agency gained and holds
possession of the proceeds of the City Loan. Petitioner alleges that the Successor
Agency’s acquisition of the proceeds was “wrongful” because the Successor Agency
gained possession of the proceeds by “mistake.” In particular, Petitioner alleges that, in
making the Loan, the parties mistakenly believed tax increment financing would
continue to be available to repay the Loan. In fact, the Dissolution Law eliminated those
funds and made repayment impossible.

However, the supporting exhibits to the petition contradict the facts alleged in the
petition. (Sarale v. Pacific Gas & Electric Co. (2010) 189 Cal.App.4th 225, 245 [where
the facts appearing in an attached exhibit contradict those expressly pleaded, those in the exhibit are given precedence].) The memorandum attached to the petition
demonstrates that the City and the Redevelopment Agency entered into the agreement
for the Loan knowing that the State could eliminate tax increment as a source of
repayment for the Loan. Staff recommended, and the City ultimately agreed, to lend
only one-half of the potential loan amount, specifically to minimize this risk. Thus, the
exhibits incorporated by reference into the petition demonstrate there was no mistake;
the City expressly assumed the risk that the law might be changed to eliminate or
reduce tax increment as a source of repayment.

Since it is not ‘reasonably possible’ for Petitioner to cure these defects, the demurrer to
the first cause of action is sustained without leave to amend.

The demurrer to the second cause of action for conversion also is sustained. The
elements of an action for conversion are (1) the plaintiff’s ownership or right to
possession of the property at the time of the conversion; (2) the defendant’s conversion
by a wrongful interference with the plaintiff’s property rights; and (3) damages. (Haro v.
Ibarra (2009) 180 Cal.App.4th 823; Oakes v. Suelynn Corp. (1972) 24 Cal.App.3d 271,
279; Chatterton v. Boone (1947) 81 Cal.App.2d 943, 946.)

Because damages are an element of the cause of action, Petitioner was required to
comply with the claims presentation procedures of the Government Claims Act before
filing suit. Petitioner’s failure to allege compliance with the Claims Act bars its claim for
damages for conversion. (Shirk v. Vista Unified School Dist. (2007) 42 Cal.4th 201,
209.)

Although it seems unlikely that Petitioner will be able to amend its pleadings to cure this
defect, the court shall grant Petitioner leave to amend the second cause of action for
conversion.

In light of the court’s ruling, the court need not consider Respondent’s alternative
arguments that the first and second causes of action are barred because of the
immunity provisions of the Government Claims Act and because the claims are
collusive.

Disposition

The court sustains the demurrer to the first cause of action, without leave to amend, and
to the second cause of action, with leave to amend. Petitioner is hereby granted fifteen
(15) days leave to amend the second cause of action for conversion. In the event that this tentative ruling becomes the final ruling of the court, counsel for
Respondent Department is directed to prepare a formal order consistent with this ruling;
submit it to opposing counsel for approval as to form; and thereafter submit it to the
court.

This tentative ruling shall become the ruling of the court unless a party desiring to be
heard so advises the clerk of this Department no later than 4:00 p.m. on the court day
preceding the hearing, and further advises the clerk that such party has notified the
other side of its intention to appear. Any party desiring an official record of this
proceeding shall make arrangements for reporting services with the clerk of the
department where the matter will be heard not later than 4:30 p.m. on the day before
the hearing. The fee is $30.00 for civil proceedings lasting under one hour, and
$239.00 per half day for proceedings lasting more than one hour. (Local Rule 9.06(B)
and Government Code § 68086.)