LOS ANGELES — San Bernardino, Calif.’s attempts to use its bankruptcy case to win a dispute with the state over its shuttered redevelopment agency haven’t worked so far.
The state government shut down redevelopment agencies in 2012, and says San Bernardino inappropriately held on to $15 million that belonged to the former city redevelopment agency.
The city lost the first round when U.S. Bankruptcy Judge Meredith Jury ruled on Sept. 11 that the city and the successor agency to its redevelopment agency are separate entities, making it a non-bankruptcy court issue.
In that ruling, Judge Jury said in court documents that if the successor agency had a dispute with the state’s Department of Finance, it should take the issue to state court. Jury also left the door open for the city to file before her a second time, which the city did.
She has yet to rule on the second filing.
The California Department of Finance filed an appeal Tuesday with the U.S. Ninth District Court of Appeals arguing that Judge Jury doesn’t have jurisdiction on the issue.
“The successor agency still has to make the taxing entities whole,” said H.D. Palmer, a DOF spokesman. “It is a separate legal entity.”
The issue arose in March when the DOF told the city’s successor agency that it had to pay $15 million to San Bernardino County to be redistributed to the school district, special district, the city and every municipal entity that receives a split of property taxes.
The state benefits from the process, because the more money school districts receive locally, the less the state has to dole out under an equalization law that insures all the state’s school districts receive the same level of funding.
The city is one of many squabbling with the state about how to divide money after the dissolution of redevelopment agencies, but its Chapter 9 bankruptcy filing puts San Bernardino in a unique position.
The DOF sent the letter to the city’s successor agency as part of the dissolution process in which the state reviewed what it considered unencumbered funds originally planned to construct affordable housing. Any unused funds needed to be returned to the county.
The California Department of Finance sent a letter on March 4 telling the city it had until April 4 to hand over $15 million in unencumbered funds for affordable housing from the former redevelopment agency.
The state also threatened to dock the city’s sales and property taxes to pay the $15 million if the successor agency didn’t hand over the money.
State officials claim the city improperly transferred the money to the city from the redevelopment successor agency.
In the city’s lawsuit, San Bernardino City Attorney James Penman claims the disputed amount only involves $300,000 in cash, and the remainder concerns real estate assets and the insolvent city doesn’t have the money to give the state.
The city named Ana Matosantos, then-director of the Department of Finance; State Controller John Chiang; Cynthia Bridges, director of the state Board of Equalization; and Larry Walker, San Bernardino County Auditor Controller/Treasurer Tax Collector in the suit.
Penman argued in his original filing that the city could not afford the $15 million and would be forced to shut down. Bankruptcy protection prevents creditors from seizing assets or from suing entities under that protection. Penman tried to make the DOF order part of the bankruptcy case.
He claimed in the filing that state officials violated federal bankruptcy code by making the claim.
“The city is protected by the “automatic stay” provision of the bankruptcy code, which prohibits creditors and other third parties from taking actions against the property, assets, monies, funds/and or other interests of the city without first obtaining bankruptcy court approval of such actions,” according to the city’s filing.
“The harm to the city if a preliminary injunction is not issued will significantly outweigh any harm suffered by the defendants if the March 4 order is enjoined,” the city argued.
“The root issue is whether there was an improper transfer of money from the redevelopment agency to the city,” Palmer said.
City officials relented to a state request in a separate issue involving its successor agency.
The City Council voted Sept. 23 to transfer $108.4 million in former redevelopment agency assets that had been transferred to the city’s nonprofit economic development corporation back to the successor agency.
In a March audit, California State Controller John Chiang had found that a city action two years prior to move the redevelopment agency properties to the EDC was illegal.
