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HomeMy WebLinkAbout02 PROMISSORY NOTE SETTLEMENT AGREEMENT WITH DOF Agenda Item 5P2 Reviewed: AGENDA REPORT City Manager tLto Finance Direvor N/A MEETING DATE: NOVEMBER 18, 2014 TO: JEFFREY C. PARKER, CITY MANAGER AND SUCCESSOR AGENCY & HOUSING AUTHORITY EXECUTIVE DIRECTOR FROM: CITY MANAGER'S OFFICE SUBJECT: PROMISSORY NOTE SETTLEMENT AGREEMENT WITH THE STATE OF CALIFORNIA DEPARTMENT OF FINANCE SUMMARY Approval s requested to enter into a Promissory Note Settlement Agreement ("Settlement Agreement") with the State of California Department of Finance ("DoF"). RECOMMENDATION 1. It is recommended the City Council take the following actions: a. Approve the Settlement Agreement with DoF in a form substantially consistent with the attachment; and b. Authorize the City Manager to execute and transmit the Settlement Agreement to DoF and to take all actions necessary to implement its provisions; and c. Authorize the F nance Department to appropriate $5,000,000 from Fund 189 (Land Held for Resale) and send payment as provided in the Settlement Agreement upon execution of the Agreement by all parties; and d. Authorize the Finance Department to make future payments consistent with the terms of the Settlement Agreement. 2. It is recommended the City Council, acting as the Successor Agency, take the following actions: a. Approve the Settlement Agreement with DoF in a form substantially consistent with the attachment; and b. Authorize the Executive Director to execute the Settlement Agreement and to take all actions necessary to implement its terms. 3. It is recommended the Tustin Housing Authority Commissioners take the following actions: a. Approve the Settlement Agreement with DoF- in a form substantially consistent with the attachment; and b. Authorize the Executive Director to execute the Settlement Agreement and to take all actions necessary to implement °ts terms. Agenda Report November 18, 2014 Page 2 FISCAL IMPACT As outlined in the Settlement Agreement, the City will make a $5,000,000 payment against the Promissory Note between the City and the former Tustin Community Redevelopment Agency. This will leave a balance of $16,404,683 to be paid off in four annual payments starting in December 2015. The final payment will occur by December 31, 2018. ALIGNMENT WITH STRATEGIC PLAN The Settlement Agreement contributes to the City's Strategic Plan Goal C, by negotiating a prudent agreement that fulfills a City contractual obligation while sustaining long-term financial strength. BACKGROUND/DISCUSSION On December 2, 2008, the City Council adopted Resolution No. 08-83 and the former Tustin Community Redevelopment Agency Board adopted RDA Resolution No. 08-06, authorizing the City to issue a Promissory Note ("Note") in the principal amount of $18,881,750 and authorizing the former Tustin Community Redevelopment Agency ("Successor Agency") to purchase the Note. The City used the funds to acquire approximately 34 acres of land adjacent to the 55 freeway, south of Edinger Avenue. The property was acquired for new freeway ramps and the extension of Newport Avenue. Unless amended and/or extended, the Note incurred interest at 4.25% and was to be paid off by December 1, 2013. In June 2011, the State Legislature and the Governor passed legislation that dissolved Redevelopment Agencies ("Dissolution"). As part of the Dissolution, loans where former Redevelopment Agencies borrowed money from cities were either disallowed or reinstated under certain conditions and at a Local Agency Investment Fund ("LAIF") interest rate at the time of reinstatement. Despite the disparate treatment, Dissolution requires all loans where cities borrowed funds from former Redevelopment Agencies to be repaid and at the interest rate stated in the loan. On May 13, 2013, the Successor Agency submitted a request to DoF for a Finding of Completion ("Finding"). The Finding would allow the Successor Agency to utilize the MCAS Tustin 2010 Tax Allocation Bonds for their intended purpose and to seek reinstatement of loans where the Successor Agency borrowed funds from the City. In July 2013, the DoF declined issuing the Successor Agency a Finding, stating the Note was effectively due at the time the City requested a Finding as opposed to the Note's December 1, 2013 due date. On August 29, 2013, the City, the Successor Agency and the Tustin Housing Authority filed a Petition for Writ of Mandate with the Superior Court Agenda Report November 18, 2014 Page 3 of the State of California, challenging DoF's denial of the Finding. On April 24, 2014, the Honorable Timothy M. Frawley California Superior Court Judge. 'ssued a Writ of Mandate compelling DoF to issue a Finding. DoF issued the Finding on May 1 2014. Since that time, staff have been negotiating a Settlement Agreement with DoF to pay off the Note. Although DoF has denied the Successor Agency's efforts to reinstate loans where the Successor Agency owes the City over $42,000,000, staff have moved forward with attempting to reach an agreement on the Note. What has been agreed upon by staff and DoF is as follows: 1. Although the City staff sought from DoF a similar application of the LAIF variable rate calculat-on being used on funds owed to a jurisdiction, the DoF has agreed to use the LAIF rate as of December 2008, which was 2.54%. This is a significant reduction to the interest rate in the Note of 4.25%. 2. The Principal balance to be paid off is $21,404,683, the amount that was due on December 31, 2013 at..54% interest rate. I Upon execution of the Settlement Agreement, the City will make a $5,000,000 payment. 4. The remaining Principal i $16,404,683 and will be paid in four annual installments of $4,101,171_ The final payment will be due on December 31, 2018. The Principal balance will not accrue interest during this four year period. 5. The Settlement Agreement will resolve claims related to the Note, and those claims only. 6. The Settlement Agreement will not prejudice the parties' rights with respect to any other disputes between them. 7. DoF will dismiss its pending cross-appeal regarding the Finding issue. Staff is requesting approval of the Settlement Agreement and authorization for the City Manager/Executive Director to execute the Settlement Agmement. In order to make the initial payment, $5,000,000 will need to be appropriated from Fund 189. Staff will be available to answer any questions the City Council may have. Jerry Craig Economic velo t & ousing Manager A me . Promissory Note Settlement Agreement SETTLEMENT AGREEMENT Successor Agency to the Tustin Community Redevelopment Agency v. Michael Cohen, et al. (formerly Successor Agency to the Tustin Community Redevelopment Agency, et al v. Ana J. Matosantos, et al), Sacramento Superior Court, Case No. 34-2013-80001623 (appeal pending in California Court of Appeal, Third Appellate Disirict, Case No. C076836) PARTIES This Settlement Agreement ("Agreement")is entered into by the following parties: (1) the Successor Agency to the Tustin Redevelopment Agency, a public entity("Successor Agency"); (2)the City of Tustin, a California municipal corporation("Tustin"); (3) the Tustin Housing Authority, a public body corporate and politic("Housing Authority"); and (4) Michael Cohen, in his official capacity as Director of the California Department of Finance("Finance") (collectively, the"Parties"). RECITALS A. The cross-appeal resolved by this Agreement relates to the wind down of the Tustin Redevelopment Agency("RDA")pursuant to Assembly Bill 26 of the 2011-12 First Extraordinary Session of the California Legislature("AB xl 26") and Assembly Bill 1484 of the 2011-12 Regular Session of the California Legislature("AB 1484") (AB xl 26 and AB 1484, collectively the"Dissolution Law"). B. In 2008,Tustin arranged to borrow $18,881,750 i'rom is RDA by means of a promissory note issued by Tustin to the RDA ("promissory note"). Under the tennis of the promissory note, the RDA immediately provided Tustin with $18,881,750. Tustin was required to repay the principal, plus interest, by December 31, 2013. Following the dissolution of the RDA, the promissory note owned by the RDA was transferred to the Successor Agency by operation of law. C. On January 14, 2013, the Successor Agency submitted to Finance an independent auditor's due diligence review of the unencumbered"other funds and accounts" ("OFA DDR") to be remitted to the Auditor-Controller of the County of Orange("Auditor-Controller") for distribution to local taxing entities. The Successor Agency submitted the OFA DDR as required by the Dissolution Law. The OFA DDR noted that the accumulated principal and interest on the promissory note amounted to $21,877,282 as of January 2013. D. Finance issued a letter, dated May 5, 2013, which included, among other things, a final determination that the Successor Agency must remit the$2I,877,282 to be clue under the promissory note as a precondition to receiving a"finding of completion." E. Successor Agency, Tustin, and Housing Authority filed the above-referenced action on August 29, 2013 in Sacramento County Superior Court("RDA Action"). An amended petition was filed on January 14, 2014. F. After a hearing on March 28, 2014, the Sacramento Superior Court rendered its ruling, dated April 7, 2014, in which the Court noted that the promissory note matured on December 31, 2013 and that the Successor Agency was obligated to remit unencumbered balances to the Auditor-Controller. At the same time, the Court held that Finance erred in insisting that the Successor Agency remit the$21,877,282 due under the promissory note as a precondition to receiving a"finding of completion." G. On April 25, 2014, the Sacramento Superior Court entered its order and judgment in the RDA Action. The judgment granted the petition for writ of mandate in part and denied it in part. H. Pursuant to the peremptory writ of mandate subsequently issued by the Court, Finance issued a finding of completion to the Successor Agency, effective May 15, 2013. I. On June 19, 2014, Successor Agency, Tustin, and Housing Authority filed a notice of appeal from the judgment in the RDA Action("the RDA Appeal"). On July 8, 2014, Finance filed a notice of cross-appeal to challenge the judgment that Finance had abused its discretion in refusing to issue a"finding of completion" until the amount due under the promissory note had been remitted ("the RDA Cross-Appeal"). Both the RDA Appeal and RDA Cross-Appeal are currently pending in the California Court of Appeal, Third Appellate District, case number C076836. J. No amount due and payable on the promissory note has yet been paid or remitted. K. By entering into this Agreement, the Parties have agreed to resolve two issues only: (1) the terms and conditions for Tustin's payment of the amount due on the promissory note and (2) the pending RDA Cross-Appeal. This Agreement does not resolve the issues raised by the RDA Appeal. AGREEMENT Accordingly, in consideration of the mutual promises contained herein, the Parties agree as follows: 1. Principal Terms: The Parties agree to the following resolution of the RDA Cross-Appeal: (a) Finance agrees to abandon or dismiss the RDA Cross-Appeal in exchange for Tustin's payment to the Successor Agency of the eighteen million eight hundred eighty-one thousand seven hundred fifty dollar($18,881,750)principal due on the promissory note plus two million five hundred twenty-two thousand nine hundred thirty-three dollars ($2,522,933) in interest (which accrued from December 31, 2008 at a rate of 2.54 percent compounded annually), for a total payment of twenty one million four hundred four thousand six hundred eighty-three dollars ($21,404,6$3) (the"Cross-Appeal Settlement Payment"), in accordance with the provisions of sections 1(b)—(e)below. (b) Within two business days of the Effective Date of this Agreement(defined in Section 16 below), Finance shall file a notice in the Sacramento County Superior Court that it is abandoning the RDA Cross-Appeal or, if the record on appeal has been filed on or before the Effective Date of this Agreement, Finance shall file in the Court of Appeal a request for dismissal of the RDA Cross-Appeal. Finance shall serve the notice of abandonment or request for dismissal upon the Successor Agency's counsel of record by electronic mail on the date of - 1) - filing. Within 7 days after Finance has filed a notice of abandonment, or if Finance instead must file a request for dismissal in the Court of Appeal, within 7 days after the Court of Appeal has dismissed the appeal, Tustin shall pay Successor Agency five million dollars ($5,000,000). That amount shall be used to pay approved enforceable obligations of Successor Agency during the 12 months immediately following payment. To the extent the five million dollars received by the Successor Agency exceed the amounts needed to pay Successor Agency's approved enforceable obligations in the 12 months immediately following payment, the excess amount shall be remitted to the Auditor-Controller by December 15, 2015 for distribution to the taxing entities. (c) Within 24 hours of its receipt of Tustin's payment in accordance with section 1(b) above, Successor Agency shall inform Finance's litigation counsel designated below by e-mail that it has received the payment and provide counsel with confirmation of payment, such as a copy of the wire transfer, check, or warrant. (d) On or before December 31, 2015, and again on or before December 31 of each of the following three years (2016, 2017, and 2018), Tustin shall make an additional payment to the Successor Agency, each time in the amount of four million one hundred and one thousand one hundred seventy dollars and seventy-five cents($4,101,170.75). Each time, Successor Agency shall send an e-mail to Redevelopment_Administration@dof.ca.gov informing Finance that it has received the payment and providing confirmation of the payment, such as a copy of the wire transfer, check, or warrant. Each time, the additional payment shall be used to pay the approved enforceable obligations of Successor Agency during the 12 months immediately following payment. To the extent payment received by the Successor Agency exceeds the amounts needed to pay Successor Agency's approved enforceable obligations in the 12 months immediately following the payment, the excess amount shall be remitted to the Auditor-Controller by December 15 of the year following each payment for distribution to the taxing entities. (e) By December 31, 2018, Tustin shall have paid the full Cross-Appeal Settlement Payment of twenty-one million four hundred and four thousand six hundred eighty-three dollars ($21,404,683) to Successor Agency. (t} Should Successor Agency or Tustin fail to comply with the provisions of sections I(b)—(e) above, Finance shall have the right to enforce the original terms of the promissory note and seek full and immediate recovery according to those terms. 2. Claims Disputed: The Agreement does not constitute, nor shall it be construed as, an admission or concession by any of the Parties for any purpose. This Agreement is a compromise settlement, and by executing this Agreement, none of the Parties admits wrongdoing, liability, or fault in connection with either the Action or the allegations asserted in the Action. 3. Mutual Release: The Parties specifically and mutually release and discharge each other, including their respective officers, directors, commission members, trustees, agents, employees, representatives, attorneys, insurers, departments, divisions, sections, successors and assigns from all obligations, damages, costs, expenses, liens, attorney fees of any nature whatsoever, whether known or unknown, suspected or not suspected to exist, claimed or not claimed, disputed or undisputed, pertaining to the RDA Cross-Appeal, and pertaining to the promissory note The - 3 - finding of completion issued to the Successor Agency effective May 15, 2013 shall remain in full force and effect at all times. 4. Successors and Assigns: This Agreement shall be binding upon the Parties' respective officers, directors, commission members, trustees, agents, employees, representatives, attorneys, departments, divisions, sections, successors and assigns. 5. Assumption of Risk: The Parties each represent that they fully understand that if the facts pertaining in any way to the RDA Action, the RDA Appeal, or the RDA Cross-Appeal are later found to be different from the facts now believed to be true by any Party, each of them expressly accepts and assumes the risk of such possible differences in facts and agrees that this Agreement shall remain effective notwithstanding such differences in facts. The Parties also each represent that this Agreement was entered into under the laws current as of the effective date, and agree that this Agreement shall remain effective notwithstanding any future changes in the law. 6. Independent Advice of Counsel: The Parties each represent that they know and understand the contents of the Agreement and that this Agreement has been executed voluntarily. The Parties each further represent that they have had an opportunity to consult with an attorney of their choosing and that they have been fully advised by the attorney with respect to their rights and obligations and with respect to the execution of this Agreement. 7. Entire Agreement: No promise, inducement, understanding, or agreement not expressed has been made by or on behalf of the Parties, and this Agreement contains the entire agreement between the Parties related to the subject matter of this Agreement. 8. N_oA_ssigpment : Each Party represents that it has not assigned, transferred, or purported to assign or transfer to any person or entity any matter released herein. 9. Amendments in Writin : This Agreement may not be altered, amended, modified, or otherwise changed in any respect except by a writing duly executed by the Parties. The Parties agree that they will make no claim at any time or place that this Agreement has been orally altered or modified or otherwise changed by oral communication of any kind or character. 10. Construction: The Parties agree that this Agreement is to be construed and interpreted without regard to the identity of the party drafting this Agreement. 11. Additional Acts: The Parties agree to take such actions and to execute such documents as are necessary to carry out the terms and purposes of this Agreement. 12. Attorneys Fees: The Parties shall each bear their respective attorneys fees and costs incurred in the RDA Cross-Appeal, and incurred with respect to the promissory note. 13. Enforcement: If any Party to this Agreement files a lawsuit to enforce or interpret this Agreement, including an action to force payment of any unpaid portion of the Cross-Appeal Settlement Payment, or an action to enforce any part of the finding of completion, the prevailing - 4 - Party in any such suit shall be entitled to reimbursement for its reasonable attorney fees and costs. 14. Choice of Law and Jurisdiction: This Agreement shall be governed by the laws of the State of California. If any Party to this Agreement brings a lawsuit to enforce or interpret this Agreement, the lawsuit shall be filed in the Superior Court for the County of Orange, California. 15. Counterparts: This Agreement may be executed in counterparts by electronic mail or by facsimile, each of which is deemed an original and all of which shall constitute this Agreement. 16. Effective Date: The Agreement shall become effective on the date on which the last counterpart of this Agreement is executed such that it is executed in full. 17. Authority to Execute: Each Party represents that they have the authority to enter into and perform the obligations necessary to provide the consideration described in this Agreement. . This Agreement consists of Recital Paragraphs A—K and Paragraphs 1-17. DATED: SUCCESSOR AGENCY TO THE TUSTIN REDEVELOPMENT AGENCY By Its DATED: CITY OF TUSTIN By Its DATED: TUSTIN HOUSING AUTHORITY By Its DATED: MICHAEL COHEN, IN HIS OFFICIAL CAPACITY AS DIRECTOR OF THE CALIFORNIA DEPARTMENT OF FINANCE By KARI KROGSENG Its Chief Counsel - 5 - Approved as to Form and Content: RICHARDS, WATSON & GERSHON By: T. PETER PIERCE, Esq. Outside Counsel Attorneys for Petitioners/Plains s Successor Agency to the Tustin Redevelopment Agency, City of Tustin, and Tustin Housing Authority Approved as to Form and Content- KAMALA D. HARRIS Attorney General of California By: KAMALA D. HARRIS Attorney General of California TAMAR PACHTER Supervising Deputy Attorney General REI R. ONISHI Deputy Attorney General (SBN 283946) California Attorney General's Office 455 Golden Gate Avenue, Suite 11000 San Francisco, CA 94102-7004 Telephone: (415) 703-1613 Fax: (415) 703-1234 E-mail: Rei.Onishi@doj.ca.gov Attorneys for Respondent/Defendant Michael Cohen, Director of California Department of Finance - 6 -