City of Petaluma v. Cohen
238 Cal. App. 4th 1430
| Cal. Ct. App. | 2015Background
- In March 2011 the Petaluma Community Development Commission (the Agency) issued $11.369M in Series 2011 tax‑increment bonds; ~$7M of the proceeds were identified for the Rainier Project (a Highway 101 undercrossing).
- The Agency had entered cooperative agreements and the City/Agency adopted resolutions contemplating Agency contributions to the Rainier Project; some consultant contracts to the City (not the Agency) related to project planning and design.
- After the 2011 dissolution legislation for redevelopment agencies (AB 1X 26 and related statutes), the City became successor agency and was required to submit ROPS (recognized obligation payment schedules) to the Department of Finance (DOF) for approval of expenditures as enforceable obligations.
- DOF disapproved ROPS items seeking to apply Series 2011 bond proceeds to Rainier Project expenses, reasoning the Agency was not a party to the contracts and the items were not ‘‘enforceable obligations.’’
- The City petitioned for a writ of mandate; the trial court denied relief. On appeal the City argued (1) the bond documents and indenture required use of proceeds for Rainier and thus DOF abused its discretion; (2) DOF’s action breached the covenant of good faith and (3) violated the contracts clause; (4) DOF lacked authority to force defeasance or override successor/oversight board decisions.
- The Court of Appeal affirmed: bond repayments are enforceable obligations, but the record did not show an enforceable obligation to apply proceeds specifically to the Rainier Project; DOF did not abuse its discretion in disapproving the ROPS items.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Series 2011 bond proceeds are an enforceable obligation to fund the Rainier Project | Series 2011 Bonds (Supplement/use certificate) identify Rainier as an intended funded project and thus create a binding obligation to spend proceeds on Rainier | The Supplement only restricts allowable uses if proceeds are spent; it does not obligate successor to fund or complete Rainier, and the Agency was not party to the City’s contracts | Held: No. Repayment obligations are enforceable, but no enforceable obligation in record requires using proceeds specifically for Rainier; DOF permissibly disapproved ROPS items. |
| Whether DOF’s refusal breaches covenant of good faith and fair dealing | Preventing use of proceeds frustrates the parties’ intent and injures the City’s contractual expectations | Remedies and consequences (taxability/gross‑up, mandatory defeasance) are provided in the Supplement; DOF’s action does not contradict express terms | Held: No breach. The implied covenant cannot override explicit contract terms; consequences were contemplated in the Supplement. |
| Whether DOF’s action unconstitutionally impairs contract (contracts clause) | Disallowing use of proceeds impairs bond security and will substantially injure bondholders/contract rights | City has not shown a present, specific, substantial impairment; City is not a bondholder and lacks standing to assert impairment on bondholders’ behalf | Held: No unconstitutional impairment shown; City lacks requisite showing (and likely standing). |
| Whether DOF exceeded authority by ordering/forcing defeasance or by not deferring to successor agency/oversight board | DOF may not order defeasance or substitute its judgment for successor agency/oversight board on how to perform bond agreements | DOF has express statutory authority to eliminate/modify ROPS items and to determine enforceable obligations | Held: No. DOF acted within statutory authority; the City’s arguments depend on there being an enforceable obligation to fund Rainier, which was not shown. |
Key Cases Cited
- California Redevelopment Assn. v. Matosantos, 53 Cal.4th 231 (2011) (upholding statutory scheme dissolving redevelopment agencies and addressing related legal consequences)
- Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization, 22 Cal.3d 208 (1978) (standards for establishing present, specific, substantial impairment of contract)
- Vons Companies, Inc. v. Seabest Foods, Inc., 14 Cal.4th 434 (1996) (appellate courts generally consider only the trial‑court record; limits on judicial notice of new evidence on appeal)
- Storek & Storek, Inc. v. Citicorp Real Estate, Inc., 100 Cal.App.4th 44 (2002) (implied covenant of good faith cannot contradict express contract terms)
- City of Emeryville v. Cohen, 233 Cal.App.4th 293 (2015) (interpretation of dissolution‑law procedures and DOF oversight authority)
- Ragland v. U.S. Bank Nat. Assn., 209 Cal.App.4th 182 (2012) (appellate limitation to the record when reviewing trial court judgment)