Catellus Sues State Department of Finance, Hercules Over $53.3 Million Settlement Agreement

Developer Hercules, LLC. (a subsidiary of Catellus), is suing the State Department of Finance, city of Hercules (as the Hercules Redevelopment Agency successor agency) and Contra Costa County, according to a statement by City Manager Steve Duran.

The developer filed a complaint Thursday over the Department of Finance’s decision to exclude a $53.3 million settlement agreement — entered into in 2010 by Hercules LLC, Catellus Residential Group, the City of Hercules and the now defunct Hercules Redevelopment Agency — from the redevelopment agency’s Recognized Obligations Payment Schedule.

The agreement was initially factored into the payment schedule, which was approved by the Successor Agency (the city of Hercules) and the debt payment Oversight Board. But the State Department of Finance ruled against including the agreement.

Hercules LLC. acted as a developer for Hercules in 2001. Under the Developer and Owner Participation Agreement between the developer and the Hercules Redevelopment Agency, Hercules LLC. would receive semi-annual payments from the city for years after it completed its project in the city. In 2007, Hercules LLC. sued the city for breach of contract, when the city stopped making payments to the company. The city and Hercules LLC. settled the dispute before going to trial in 2010, and the Hercules Redevelopment Agency agreed to pay Hercules LLC. $53 million out of tax increment through 2044.

After all California Redevelopment Agencies were dissolved as part of a new law that took affect Feb. 1, Hercules set up a Successor Agency to manage and continue to make debt services payments with the tax increment money that would have gone to its Redevelopment Agency fund. The city composed the Recognized Obligations Payment Schedule, which included its obligation to Hercules LLC., after forming the successor agency.

On May 17, the city of Hercules received a letter from the state Department of Finance, which had reviewed Hercules’s debt payment schedule. The Department of Finance said the Hercules LLC. payments did not fall under the category of enforceable obligations. 

 “The State of Ca1ifomia’s Department of Finance (“DOF”) has attempted, by the stroke of its pen, to abrogate contractual rights worth tens of millions of dollars that are held by Petitioner,” said the complaint filed by Hercules LLC.. attorneys with the Superior Court of California Sacramento.

“(The Department of Finance) treats this 10-year-old contract (under which many millions of dollars worth of consideration have been exchanged by the contracting parties) as a nullity, one that can be eviscerated by administrative fiat,” the complaint said.

The City of Hercules has no obligation to make payments under the Settlement Agreement, as the payments are based on a percentage of certain tax increment payable to the former Redevelopment Agency, according to Duran's statement.

Duran said it is not clear why Hercules and its Successor Agency was included in the lawsuit, but that the outcome of the lawsuit will not financially impact Hercules, as cities now have no liability for debts of their defunct Redevelopment Agencies.

“We have no dog in this fight.” said Hercules City Manager Steve Duran. “We put all obligations of the former Redevelopment Agency on ROPS and we provided back-up documentation on those obligations the Department of Finance questioned. ABx26 is complicated to say the least and the City isn’t going to take sides on this issue. The court will decide what it decides.”