The City of Stockton has successfully defended against a lawsuit filed by a developer whom the city cut out of two downtown redevelopment projects. The Second District Court of Appeal ruled that the developer, Civic Partners Stockton, LLC, could not pursue its lawsuit alleging breach of contract because the developer did not present the city with a claim for damages before filing suit.

The city had signed two development contracts with Civic Partners, one for rehabilitation of the Hotel Stockton and one for development of a cinema. In May 2001, the city leased Civic Partners 65,000 square feet on the upper floors of the hotel, apparently for development of office space. Three months later, the city repudiated the lease and demanded that Civic Partners find a new use for the space. The city suggested senior housing, so Civic Partners moved forward with planning, designing and financing proposals for senior housing development.

In January 2002, the city notified Civic Partners that Cyrus Youssefi and his company, CFY Development, would take over renovation of the hotel’s upper floors, the housing project and a tax credit application. Stockton Redevelopment Agency officials assured Civic Partners that the city would repay the company’s investment and overhead, and not undermine the hotel development contract. Civic Partners agreed to turn over its plans for the housing project, and a March 15 memorandum from Civic Partners to the redevelopment agency stated that the company understood that the city would assume a $800,000 loan to Civic Partners and would reimburse the company for expenditures after December 1, 2001, and that CFY would lease the first floor of the hotel to Civic Partners for 55 years. Apparently, city officials orally agreed to those terms, and Civic Partners turned over its plans, which the city then gave to Youssefi. However, the city did not pay Civic Partners’ costs or assume the $800,000 obligation.

As for the cinema deal, the city terminated its agreement with Civic Partners after the company had already obtained a lease from Kirkorian Premier Theatres. Instead, the city signed its own lease with a different theater chain.

Civic Partners sued the city, the redevelopment agency and Youssefi, alleging breach of the hotel lease by the city, breach of the hotel development agreement by the agency, breach of the cinema development agreement by the agency, and intentional interference with the development agreements by the city and Youssefi.

The city and its redevelopment agency filed demurrers contending that Civic Partners had failed to present claims prior to filing the lawsuit, as required by the Government Code. Sacramento County Superior Court Judge Jeffrey Gunther rejected the demurrers, concluding that the requirement for submitting a claim did not apply because the lawsuit was based on contracts. The city appealed. A unanimous three-judge panel of the Third District Court of Appeal overruled the lower court and sustained the demurrers.

The Government Claims Act (Government Code § 810 et seq.) requires that all claims for damages or money against a public entity be submitted within either 6 or 12 months, depending on the cause of action, and contain certain details. No lawsuit for money or damages may be brought until the public entity has been presented with the claim and has either acted upon it or been deemed to have acted.

The Third District ruled that Judge Gunther “clearly erred” in determining that the Claims Act did not apply. The court cited Allied Financial v. City and County of San Francisco, (1998) 64 Cal.App.4th 635: “‘In short, unless specifically excepted, any action for money or damages, whether sounding in tort, contract or some other theory, may not be maintained until a claim has been filed with the relevant public entity and either the public entity acts on it or it is deemed to have been denied by operation of law.’” Thus, Civic Partners was required to present a claim to the city, the court ruled.

The developer argued that a February 19, 2002, letter and the March 15 memorandum qualified as a claim because they put the city on notice that litigation could result if Civic Partners was not paid. But the court was not convinced.

“All of the correspondence between Civic and Petitioners [the city and redevelopment agency] amounted to negotiations either to mitigate Civic’s damages from Petitioners’ earlier breaches or for new contractual arrangements to replace the two development agreements and the lease,” Justice Harry Hull Jr. wrote for the court.

The documents “did not notify Petitioners of the amounts Civic claimed to be owed or the basis for such debt and did not alert Petitioners that Civic intended to file suit,” the court ruled. “Thus, they did not serve the primary purposes of the Government Claims Act — to alert Petitioners of the need to investigate and to allow Petitioners an opportunity to decide whether the claims will be litigated.”

The court did rule that the city should not be allowed to pursue a cross-complaint that it had filed against Civic Partners. If the city does pursue the cross-complaint, then Civic Partners may file “any defensive claims they may have,” the court ruled.

The Case:
City of Stockton v. Superior Court, No. C048162, 05 C.D.O.S. 9415, 2005 DJDAR 12870. Filed October 4, 2005. Ordered published October 28, 2005.

The Lawyers:
For the city: Charles Reese, Wulfsberg, Reese, Colvig & Firstman, (510) 835-9100.
For Civic Partners Stockton: Malcolm Misuraca, (925) 284-0840.