An appellate court panel has overturned a lower court’s decision ordering Community Bank of Central California to return $4.4 million to King City.
The city says the money was a deposit, and the city wants the money back. The bank says the money was collateral for a bank loan to the developer of a downtown redevelopment project. Because the developer defaulted on the loan, the bank wants to keep the money.
Monterey County Superior Court Judge Kay Kingsley had ruled for King City. However, the Sixth District Court of Appeal determined that Judge Kingsley made a number of errors, including not permitting the bank to perform discovery, the process by which the bank would obtain facts known by the city. According to the Sixth District’s decision, the facts of the case are anything but clear, and the lower court should not have issued a ruling without knowing more.
Among the outstanding questions are whether the City Council — or the redevelopment agency board, which has the same members as the City Council — authorized the deposit with the bank, and whether the money was city general fund money, or redevelopment agency money.
The amount of money at issue is nearly as much as King City’s annual general fund budget. Last year, King City arranged for a loan from Monterey County and closed nonessential offices for a period in order to avoid bankruptcy.
In early 2000, the council/redevelopment board approved a proposal to loan money from the King City Revolving Loan Fund to Town Square Partners, the developer of a block-long redevelopment project featuring a cinema, offices, retail stores and a community college satellite campus. The project, completed several years ago, was intended to anchor a downtown renewal. In March 2000, the redevelopment agency board approved a loan of up to $3.85 million to Town Square Partners.
In April 2000, the city treasurer deposited about $3.8 million into an interest-bearing, two-year certificate of deposit at Community Bank. At about the same time, the mayor assigned the money to the bank as collateral for a $3.8 million debt incurred by Town Square Partners. Several months later, the city increased its deposit to $4.4 million. Again, the mayor signed an “assignment of deposit” stating the money was collateral for the Town Square Partners loan.
A couple years later, the city notified the bank that the city intended to redeem the CD. The bank refused because the developer was unwilling, or unable, to repay the loan. On April 3, 2003, the city filed a petition for writ of mandate demanding that the bank immediately return the $4.4 million “in general fund monies.”
The legal process then moved very quickly. On June 11, 2003, Judge Kingsley ruled that the action taken in February 2000 did not comply with certain Government Code regulations. She decided that the “action” was not authorized by law, and, therefore, was “a gift of public funds.” The bank appealed, and a unanimous three-judge panel of the Sixth District overturned the lower court.
Much of the appellate court’s opinion addressed procedural issues, especially the trial court judge’s heavy reliance on minutes of council/board meetings, unwillingness to allow some evidence into the case and refusal to permit discovery by the bank. The Sixth District clearly was dissatisfied with the city’s presentation of the facts and with the city’s procedural maneuvering — which the court referred to as the “city’s kaleidoscope of ever-shifting claims, contentions, sidesteps and deflections.”
The Sixth District found that the city “made no attempt to establish that the funds in question were deposited with bank ‘for safekeeping.’ There is no testimony by the treasurer or any other city official that anyone intended the funds to be held by bank as ordinary city assets, let alone assets subject to withdrawal on demand. On the contrary, such evidence as appears in this record suggests the opposite — that everyone concerned intended the deposit to be placed at risk as security for a loan by bank to a third party.”
The court repeatedly sided with the bank’s assertion that more facts need to be presented, among them evidence of where the money originated. The city contended the money is from the general fund; the bank argued the money appeared to come from a 1998 redevelopment bond.
“[S]urely city was quite capable of disclosing the true history of the funds,” Presiding Justice Conrad Rushing wrote for the court. “Its persistent failure, indeed refusal to do so should have raised alarm bells as to the true nature and merits of its claims, as least as presently pleaded.
“Issues about the true ownership, source, or character of funds are rarely resolved merely by consulting the title on a given account or asset. In the absence of contrary authority — and city has offered none — we will not give dispositive effect to the label city chooses to attach to funds in its custody,” Rushing continued.
The Sixth District found that the lower court’s near total reliance on “official minutes and resolutions” was erroneous. At the city’s urging, the trial court barred other evidence as inadmissible. The Sixth District conceded that courts do not accept testimony from current or former public officials concerning legislative actions. However, where the issue is the “collective intent of the legislature … courts may and must consult extrinsic evidence including circumstances and information known to the legislature at the time of the enactment, public records of the collective deliberations and expressions of intent collectively adopted by them.”
The minutes, the Sixth District noted, are confusing about which entity’s funds were being loaned and exactly what the council/board authorized.
The court returned the case to the trial court for further proceedings.
The Case:
City of King City v. Community Bank of Central California, Nos. H026888 and H027166, 2005 DJDAR 9344. Filed August 2, 2005.
The Lawyers:
For King City: David Alan Juhnke, Sinsheimer, Schiebelhut & Baggett, (805) 541-2800.
For Community Bank: Richard Carlston, Miller, Star & Regalia, (925) 935-9400.
