City Attorney Continuing Legal Education ProgramLeague of California Cities

February 27, 2003

MELLO-ROOS FORECLOSURES

Robert A. OwenCarol J. Fogleman

Owen & Bradley268 West Hospitality Lane, Suite 302

San Bernardino, California 92408909-890-9027 fax 909-890-9037

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Table of Contents

I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1A. Scope of Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1B. Foreclosure Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1C. Tax Sale Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1D. Bankruptcy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. FORECLOSURE ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2A. Exhaustion of Administrative Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2B. Res Judicata and Collateral Estoppel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5C. Constitutional and Statutory Prohibitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

III. TAX SALE ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14A. Statutory Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14B. Constructive Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16C. Quiet Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17D. Parity of Tax Deeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

1) Overview of California Case Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192) Overview of Minnesota Case Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203) Application of Parity Statute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

IV. BANKRUPTCY ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22A. City’s In Rem Bankruptcy Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22B. Attorney’s Fees in Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

V. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

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I. INTRODUCTION

A. Scope of Paper

I have previously spoken to the League regarding collection of delinquent assessments andspecial taxes and have included a copy of one such speech in the notebook for your reference. Itdiscusses in detail the removal of the delinquencies from the tax roll, filing the judicial foreclosureaction, and enforcement of the judgment at foreclosure sale. This paper will not attempt to revisitthese issues, but will instead provide a synopsis of legal theories, buttressed by the statutoryprovisions and supporting case law, that should allow you to win every single foreclosure action byobtaining a judgment on the pleadings.

B. Foreclosure Issues

The first section will focus on a City’s ability to obtain summary adjudication in everyforeclosure case in which an answer has been filed by any defendant by bringing a motion forjudgment on the pleadings. The doctrines of exhaustion of administrative remedy, res judicata andcollateral estoppel, and constitutional and statutory prohibitions on enjoining the collection of specialtaxes will each be addressed individually as part of the overall strategy to prevent any defendant fromprolonging the litigation. And, finally, a motion for protective order will be discussed to keep anydefendant’s attorney from fishing for issues to litigate.

C. Tax Sale Issues

The next section will focus on statutory protections within the tax code which ensures thesurvival of all unpaid special taxes at a County Tax Sale. There will be a discussion of constructivenotice, followed by a discussion of a defendant’s inability to utilize a quiet title action to eliminatespecial taxes from newly acquired property. Finally, California’s policy of parity of tax deeds will beidentified, as well as the California case law interpreting such statute.

D. Bankruptcy Issues

The final section will briefly clarify a couple of prevalent misconceptions: 1) that a City’sclaim in a defendant’s bankruptcy proceedings will always be reduced; and 2) that attorney fees arenever allowed as part of a creditor’s claim in bankruptcy.

Overall, my intent in discussing the above legal strategy with you is to provide you with aframework for resolving any foreclosure action at a minimal amount of cost and in a reduced amountof time.

1 Government Code section 53340(e).

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II. FORECLOSURE ISSUES

In any Mello-Roos foreclosure action in which a defendant has filed an answer and/or raisedaffirmative defenses, a City should be able to obtain summary adjudication by filing a motion forJudgment on the Pleadings pursuant to Code of Civil Procedure section 438. Moreover, in any quiettitle, declaratory relief or other such action against a City on the basis of challenging the CFD orspecial tax lien, a City should file a cross-complaint in foreclosure and, likewise, submit a motion forjudgment on the pleadings for both the cross-action in foreclosure and the original action filed by theproperty owner, based on the following legal doctrines:

A. Exhaustion of Administrative Remedy

In any foreclosure action, either originally filed by the City to collect delinquent special taxes,or as a cross-action in defense to a property owner’s challenge to the CFD, because the special taxesremain unpaid, the administrative remedy found in the California Revenue and Taxation Code has notbeen utilized, thereby leaving the Court without jurisdiction to even consider defendant’s answer.

The 1982 Mello-Roos Act mandates that

“[t]he special tax shall be collected in the same manner as ordinary advalorem property taxes are collected and shall be subject to the samepenalties and the same procedure, sale, and lien priority in case ofdelinquency as is provided for ad valorem taxes, unless anotherprocedure has been authorized in the resolution of formationestablishing the district and adopted by the legislative body.”1

In keeping with this mandate, to determine the requisite administrative remedy for any defendant orcross-defendant, it is necessary to refer to the pertinent provisions of California’s tax code, i.e., Part9 of Division 1, of the Revenue and Taxation Code, commencing with section 4801. Section 4801establishes that such reference was intended by the Legislature as part of the overall taxation schemeby stating:

“[a]s used in this part, ‘taxes’ includes assessments collected at thesame time and in the same manner as county taxes.” Id.

Sections 5096-5180 (Chapter 5 of Part 9) outline the administrative procedure whereby a taxpayeris to first pay the challenged tax, file and process a claim for refund through the appropriateadministrative body and, upon denial of the claim, seek judicial relief. As section 5097 explicitlystates:

2 See U.S. v. Superior Court (1941) 19 Cal.2d 189, at 194: “Jurisdiction to entertain an action for judicialrelief is conditioned upon a completion of the administrative procedure;” Barnes v. State Bd. of Equalization(1981) 118 Cal.App.3d 994, at 1001: “This failure to exhaust the administrative remedy [is] . . . a jurisdictional barto court proceedings;” and Plaza Hollister Limited Partnership v. County of San Benito (1999) 72 Cal.App.4th 1 inwhich the court relied on prior cases where the failure to satisfy statutorily prescribed prerequisites was fatal tostatutory causes of action.

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“(a) No order for a refund under this article shall be made, except ona claim:

(1) Verified by the person who paid the tax . . .

(2) Filed within four years after making of the payment sought to berefunded . . .” Id.

In addition, section 5140 clearly states:

“The person who paid the tax . . . may bring an action only in thesuperior court against . . . a city to recover a tax which the . . . citycouncil of the city has refused to refund on a claim filed pursuant to. . . this chapter. No other person may bring an action; but if anothershould do so, judgment shall not be rendered for the plaintiff.”[emphasis added.] Id.

Moreover, section 5142 reiterates that paying the tax and filing the administrative claim is essentialto the commencement of any action, by stating:

“(a) No action shall be commenced or maintained under this article,.. . unless a claim for refund has first been filed pursuant to Article 1(commencing with section 5096).

No recovery shall be allowed in any refund action upon any groundnot specified in the refund claim.” Id.

By the plain reading of these remedial sections of the tax code, it is apparent that no court hasjurisdiction to hear a defendants’ answer or affirmative defenses in a City’s attempt to collect unpaidspecial tax installments.

The failure to exhaust administrative remedies has consistently been held by California courtsto be a jurisdictional defect in a litigant’s case.2 Courts have consistently ruled that

3 Mission Housing Development Co. v. San Francisco (2000) 81 Cal.App.4th 522, at 527, citingKuykendall v. State Bd. of Equalization (1994) 22 Cal.App.4th 1194, at 1203.

4 Plaza Hollister Limited Partnership, supra, at 35-36.

5 People v. Coit Ranch, Inc. (1962) 204 Cal.App.2d 52, at 57; City of Los Angeles v. California Towel &Linen Supply Co. (1963) 217 Cal.App.2d 410, at 418; People v. Sonleitner (1960) 185 Cal.App.2d 350, in passim.

6 Sonleitner, supra, at 371.

7 California Towel, supra.

8 Coit Ranch, supra, at 65: “It is clear that the trial court having found that the doctrine of non-exhaustionof an administrative remedy foreclosed defendant from maintaining its defenses . . . at that point . . . all evidencetheretofore adduced in support of defendant’s position became inadmissible.”

9 Sea World, Inc. v. County of San Diego (1994) 27 Cal.App.4th 1390, at 1408-1409, citing generallySierra Investment Corp. v. County of Sacramento (1967) 252 Cal.App.2d 339.

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“Statutes governing administrative tax refunds procedures must bestrictly enforced.”3

As explained by the Plaza Hollister court,

“. . . the judicially developed doctrine of exhaustion of administrativeremedies is distinct from statutorily prescribed jurisdictionalprerequisites. . . . [W]here the Legislature has imposed suchjurisdictional prerequisites but those preconditions have not been met,a court is without power to grant relief.”4

Specifically, it has been held that any taxpayer who does not first exhaust an administrativeremedy may not assert denials or defenses in a later action brought by a public entity to collect thetax.5 In addition, it has been established that a defendant may not contest a public entity’s prima faciecase in its action to collect a tax,6 a defendant may not defend the collection action,7 any evidence adefendant may have in support of his denials or defenses is not admissible,8 and this prerequisite ofan administrative remedy may not be circumvented by appealing to a court’s equitable powers.9 Asreiterated by the Sea World court,

“[w]e decline to exercise our equitable powers where the Legislaturehas spoken and provided a taxpayer with specific legal remedies . . .conditioned upon the taxpayer fulfilling certain requirements, whenthe taxpayer fails to meet those conditions.” Id.

10 California Towel, supra: “ . . . exhaustion of the administrative remedy is a jurisdictional prerequisiteto resort to the courts.”

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Therefore, pursuant to well established California law, a defendant’s answer to a city’scomplaint in foreclosure, their affirmative defenses, or any purported evidence to contravene a City’sjudgment in foreclosure should not be considered by the court, as long as the special taxes remainunpaid. This failure to exhaust the requisite administrative remedy provided by the tax code leavesa court without jurisdiction to consider any issues they may raise,10 or examine any evidence they mayproffer. Accordingly, a City can file for a judgment on the pleadings because the defendant will beleft without a defense to a City’s complaint or cross-complaint in foreclosure. The only importantfact giving rise to this argument is that the special taxes remain unpaid, a fact which is usuallycontained in a defendant’s answer.

B. Res Judicata and Collateral Estoppel

As mandated by the pertinent sections of the Mello-Roos Act, all proceedings establishing aCFD, creating a special tax lien, and issuing Mello-Roos bonds are final and conclusive and beyondthe challenge of any property owner. Government Code section 53325.1(b) states:

“In the resolution of formation adopted pursuant to subdivision (a),the legislative body shall determine whether all proceedings are validand in conformity with the requirements of this chapter. . . It shallmake a finding to that effect and that finding shall be final andconclusive.” Id.

Government Code section 53341 states:

“Any action or proceeding to attack, review, set aside, void, or annulthe levy of a special tax . . . shall be commenced within 30 days afterthe special tax is approved by the voters. Any appeal from a finalJudgment . . . shall be perfected within 30 days after the entry ofJudgment.” Id.

Government Code section 53356.1(f) reiterates the 30 day appeal requirement by stating:

“Any appeal from a Judgment in the action shall be commenced within30 days after entry of Judgment.” Id.

Pursuant to the above statutes, the formation of the CFD, the perfection of the special tax lien,the issuance of the bonds, and the obtaining of a judgment in judicial foreclosure for unpaid specialtaxes are all beyond the reach of any property owner. Moreover, to prevent any collateral attack bya property owner challenging a District’s lawful administration of municipal improvements, thelegislature routinely includes several “validating statutes” during any Legislative Session which

11 Stats. 1989, ch. 17, pp. 46-51.

12 Id., at Sec. 6, p. 50.

13 Id., at p. 51.

14 See Chase v. Trout (1905) 146 Cal. 350; Imperial Land Co. v. Imperial Irrigation Dist. (1916) 173 Cal.660, 663-664; Watkinson v. Vaughn (1920) 182 Cal. 55, 58-59; Southlands Co. v. City of San Diego (1931) 211Cal. 646, 656-657; Miller v. McKenna (1944) 23 Cal.2d 774, 781-782; In re Redevelopment Plan for Bunker Hill(1964) 61 Cal.2d 21, 44.

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prohibit a property owner from litigating issues long ago put to rest. For example, on May 19, 1989the Legislature enacted the First Validating Act of 1989,11 which validated inter alia

“all acts and proceedings heretofore taken by . . . any public bodyunder any law, . . . in connection with, the authorization, issuance,sale, execution . . . of bonds of any such public body for any public arehereby . . . validated and declared legally effective.”12

Moreover, Section 8 of this particular validating act provides a final limitation of action for anychallenge involving any defect or illegality from any procedure undertaken by the public body.Specifically, Section 8 states verbatim:

“Any action or proceeding contesting the validity of any action orproceeding heretofore taken under any law, or under color of any law,for the formation, organization, or incorporation of any public body,or for any annexation thereto, exclusion therefrom, or other change ofboundaries thereof, or for the consolidation, merger, or dissolution ofany public bodies, or for, or in connection with, the authorization,issuance, sale, execution, delivery, or exchange of bonds thereof uponany ground involving any alleged defect or illegality not effectivelyvalidated by the prior provisions of this act and not otherwise barredby any statute of limitations or by laches shall be commenced withinsix months of the effective date of this act; otherwise each and all ofsuch matters shall be held to be valid and in every respect legal andincontestable. This act shall not extend the period in which any actionmay be brought beyond the period in which it would be barred by anypresently existing valid statute of limitations [emphasis added].”13

The California Supreme Court has long interpreted this type of validating act to bar any laterchallenge to procedural defects in proceedings of a public agency.14

“[A] curative statute may validate all defects in proceedings except

15 Hoffman v. City of Red Bluff (1965) 63 Cal.2d 584, 592, citing Chase v. Trout, supra.

16 Id., at 590-591.

17 Id., at 592, citing Chase, supra, at 360-361.

18 Id.

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those . . . which have resulted in violation of constitutional rights.”15

In the Hoffman case, an action challenging the assessments levied by a city for purposes of financinga sewer system, the court determined that the City failed to comply with the procedures required bythe Majority Protest Act.16 Specifically, the court found that the requisite finding of necessity of thecity council pursuant to Streets and Highways Code section 2808 was defective. The propertyowners argued that this defect made the levy of assessments void, which could not be cured by theLegislative Validating Act. Relying on the rationale of the Chase decision that

“[t]he property must be within the jurisdiction of the local board; theremust be the actual performance of some work which is to be paid for...; an assessment or apportionment of the amount to be raised mustbe made; and ... there must be sufficient notice and opposition for thehearing and determination of grievances and objections to constitutedue process of law,”17

the court determined that the essential procedures necessary to levy the assessments had beensatisfied. Thus, pursuant to Chase and its progeny, the court held that the levy of assessments wasvalid and, pursuant to the Legislative Validating Act, beyond challenge by the property owners. Since1989, the legislature has adopted approximately 25 to 30 other Validating Acts, each of which, interalia, bars a property owner from attacking any lawfully formed CFD or its lien. By utilizing theabove-referenced specific and general validating statutes, a City can prohibit any property owner fromattempting to litigate issues that have been beyond challenge for years by pleading res judicata and/orcollateral estoppel.

The doctrines of res judicata and collateral estoppel were very recently clarified by theCalifornia 4th District Court of Appeal as follows:

“In a new action on the same cause of action, a prior judgment . . . isa complete bar . . . In a new action on a different cause of action, theformer judgment is not a complete bar, but is . . . conclusive on issuesactually litigated . . . in the former action.”18

19 Frommhagen v. Board of Supervisors of Santa Cruz County (Cal.App.6th Dist., 1987) 197 Cal.App.3d1292, at 1300, citing Commissioner v. Sunnen (1948) 333 U.S. 591, 598, 68 S.Ct. 715.

20 Id.

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It has previously been held in a tax collection case by the Sixth District Appeals Court that each taxyear is to be considered a different cause of action.19 Quoting a United States Supreme Court case,the Frommhagen Court explained as follows:

“Each year is the origin of a new liability and of a separate cause ofaction. Thus if a claim of liability or non-liability relating to aparticular tax year is litigated, a judgment on the merits is res judicataas to any subsequent proceeding involving the same claim and thesame tax year. But if the later proceeding is concerned with a similar. . . claim relating to a different tax year, the prior judgment acts ascollateral estoppel only as to those matters in the second proceedingwhich were actually presented and determined in the first suit.”20

Pursuant to this determination, a Court should utilize the doctrine of res judicata to preventany challenge that could have been raised regarding all tax years and their legal underpinnings withina previous foreclosure action by a City from being considered in a new action against the sameproperty by subsequent owners. In addition, a Court should utilize the doctrine of collateral estoppelto prevent a challenge to the legal underpinnings of the tax lien for the same CFD against anotherparcel of property in the district, or against subsequent owners of the same property for different taxyear installments. Such determinations will effectively dispense with any matters alleged in adeclaratory relief cause of action, thereby leaving nothing left to litigate before the court. In suchcircumstances, it would be proper for a court to grant a Judgment for a City pursuant to a Motionfor Judgment on the Pleading.

C. Constitutional and Statutory Prohibitions

Because a foreclosure proceeding is a tax collection action, the most important legal doctrineto be used by a City against any challenge is the constitutional and statutory prohibitions againstimpeding such collection.

Article XIII, Section 32 of the California Constitution provides as follows:

“No legal or equitable process shall issue in any proceeding in anycourt against this state or any officer thereof to prevent or enjoin thecollection of any tax. After payment of a tax claimed to be illegal, anaction may be maintained to recover the tax paid, with interest, in suchmanner as may be provided by the Legislature [emphasis added].”

21 Pacific Gas & Electric Co. v. State Bd. of Equalization (1980) 27 Cal.3d 277, at 283.

22 Darr v. Alvord (1980) 101 Cal.App.3d 480, at 484-485.

23 Merced County Taxpayers’ Assoc v. County of Merced (1990) 218 Cal.App.3d 396, at 400.

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The California Supreme Court has previously considered Article XIII, and determined that

“[t]he policy behind Section 32 is to allow revenue collection tocontinue during litigation so that essential public services dependanton the funds are not unnecessarily interrupted. (citation) Any delayin the proceedings . . . of collecting the taxes, may derange theoperations of government, and thereby cause serious detriment to thepublic.”21

Although this Constitutional prohibition applies only to the state’s actions to collect taxes,the California Legislature has included a similar prohibition applicable to local agencies within Part9 of the Revenue and Taxation Code. Specifically, Revenue and Taxation Code section 4807provides that:

“No injunction or writ of mandate or other legal or equitable processshall issue in any suit, action, or proceeding in any court against anycounty, municipality, or district, or any officer thereof, to prevent orenjoin the collection of property taxes sought to be collected[emphasis added].”

The Legislature’s intent behind this passage was to conform the collection of taxes by local agenciesand their officers to the constitutional provisions of Article XIII, Section 32.22 Because

“the language used in each of these provisions is nearly identical, andthe policy behind both provisions is the same: to allow revenuecollection to continue during litigation so that essential public servicesdependent on the funds are not unnecessarily interrupted, . . . casesinvolving the application of California Constitution, Article XIII,Section 32 are relevant to the resolution of this [section 4807] case.”23

The Supreme Court of California has interpreted both the constitutional provision and thestatutory provision to be a complete bar to any taxpayer adjudication prior to payment of the assessedtax followed by the filing of a claim for refund with the applicable administrative tribunal. In thejudicial review of a mandamus proceeding, the California Supreme Court determined that thetaxpayer had no right to such a review prior to paying the tax, because the net result of the relief

24 Modern Barber Colleges Inc. v. California Employment Stabilization Comm. (1948) 31 Cal.2d 720, at723.

25 Pacific Gas & Electric Co. v. State Board of Equalization (1980) 27 Cal.3d 277, at 280.

26 Id.

27 State Bd. of Equal v. Superior Court of Los Angeles (1985) 39 Cal.3d 633, at 638.

28 Id.

29 Connolly v. County of Orange (1992) 1 Cal.4th 1105, at 1114.

30 Id.

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prayed for would restrain the collection of the tax, in violation of the constitutional provision.24 Ina later mandamus and declaratory relief action by property owners seeking to compel the State Boardof Equalization to adjust their real property assessment, the California Supreme Court held that

“[a]n assessment of real property is an integral part of the taxingprocess, and a court order invalidating an assessment will in effect‘prevent or enjoin the collection’ of the tax”

in violation of the constitutional provision.25 The Pacific Gas court also clarified that “a taxpayer maynot circumvent restraints on prepayment tax litigation by seeking only declaratory relief.”26 Inanother case involving a dispute over a Board of Equalization’s sales tax determination, the CaliforniaSupreme Court has concluded that Article XIII, Section 32 established that a post payment refundaction is “the sole legal avenue for resolving tax disputes.”27 As further stated:

“A taxpayer may not go into court and obtain adjudication of thevalidity of a tax which is due but not yet paid.”28

Finally, in a case brought by University of California employees seeking a writ of mandate as to thetaxation of university owned property and a declaratory judgment determining such land exempt fromproperty tax, the Supreme Court held that Revenue and Taxation Code section 4807 was a completebar to the action.29

“That section creates a statutory bar to orders enjoining the collectionof a county tax which is comparable to the constitutional prohibitionagainst enjoining the collection of a state-imposed tax.”30

The court relied on precedent that had been decided pursuant to the constitutional provision, butclarified, as follows:

31 Id.

32 See Code of Civil Procedure Sections 2017(c); Section 2019(b): “The court shall restrict the . . . extentof use of these discovery methods if it determines . . . (2) The selected method of discovery is unduly burdensomeor expensive, taking into account the needs of the case . . . [emphasis added];” Section 2030(e): “. . . The court, forgood cause shown, may make any order that justice requires to protect any party . . . from unwarranted annoyance .. .;” and Section 2031(f) “. . . The court, for good cause shown, may make any order that justice requires to protectany party . . . from unwarranted annoyance . . . or undue burden and expense.”

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“The statutory command is clear and admits of no exceptions,however. A court may not by mandate or other process enjoin thecollection of a tax. Although decided in the context of theconstitutional bar . . . (citation) . . . the authorities on which thatopinion rests are equally controlling here.”31

By utilizing the plain language of both Article XIII, Section 32 and Revenue and TaxationCode section 4807, a City can compel a Court to disregard any property owner’s challenge to aMello-Roos foreclosure action. The inability to plead that the special taxes have been paid necessarilyprecludes any property owner from alleging exhaustion of administrative remedies, and requires aCourt to determine that the attempted challenge is a violation of Article XIII, Section 32 and Revenueand Taxation Code section 4807.

D. Discovery Protective Order

In the event a party attempts to require a City to respond to various forms of discovery priorto a Court making its determination on a City’s motion for judgment on the pleadings, City shouldimmediately file a motion for a Discovery Protective Order to terminate or stay all discovery requestsuntil the Court makes its decision on the previous motion.

The Code of Civil Procedure contains several provisions allowing the court to protect a Cityfrom having to respond to a property owner’s discovery requests in a foreclosure action.32

Specifically, Section 2017(c) requires that

“[t]he court shall limit the scope of discovery if it determines that theburden, expense, or intrusiveness of that discovery clearly outweighsthe likelihood that the information sought will lead to the discovery ofadmissible evidence.” Id.

On this basis, a City should contend that any response to a property owner’s attempt atdiscovery is unwarranted given that there can be no cause of action against the City, and there canbe no defense to a City’s foreclosure, and neither of these failures can be cured by amending thepleadings. A City should ask the court to determine that “the burden, expense, [and] . . .intrusiveness” of such requests clearly outweigh “the likelihood that the information sought will leadto the discovery of admissible evidence.” Because the court may not consider any evidence a

33 The Greyhound Corporation v. Superior Court of Merced County (1961) 56 Cal.2d 355, at 376.

34 Id.

35 Civil Discovery Act of 1986, commencing at Code of Civil Procedure section 2016, et. seq.

36 See Code of Civil Procedure section 2017(a): “. . . any party may obtain discovery regarding any matter,not privileged, that is relevant to the subject matter involved in the pending action . . .”

37 245 Cal.App.2d 673 (Cal.App.2 Dist., Oct. 18, 1966).

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property owner might proffer, no information obtained from a City pursuant to discovery couldpossibly lead to admissible evidence and, under these circumstances, a party’s discovery requests areburdensome and unnecessary.

Moreover, California case law can be utilized to buttress a City’s argument in this regard. Asexpounded by the California Supreme Court,33 the discovery statutes were

“intended to accomplish the following results: . . . (4) to educate theparties in advance of trial . . . (8) to simplify and narrow the issues;and (9) to expedite and facilitate both preparation and trial.”

Essentially,

“[t]he Legislature intended to take the ‘game’ element out of trialpreparation while yet retaining the adversary nature of the trialitself.”34

To be sure, the discovery statutes have been amended since the Greyhound opinion,35 but the overallpurpose remains the same: to facilitate the efficient handling of trials.36 Pursuant to this purpose, ifa matter will never proceed to trial, there is no point to any discovery and any such request forinformation would be merely superfluous and unwarranted.

Case law supports the determination that any response to discovery requests pursuant to adefective complaint would be unnecessarily expensive and burdensome. In Silver v. City of LosAngeles,37 an action commenced by a taxpayer to recover the salary paid to a superintendent, the Citymoved for a protective order to prohibit discovery on the ground that the complaint stated no causeof action. The motion was placed off calendar pending a hearing on the underlying legal issue.Because the court determined that the defect in the pleading was not a mere matter of form, and thecomplaint could not have been improved by amendment, the court concluded that

38 Id., at 674-675.

39 Terminals Equipment Co., Inc. v. City and County of San Francisco, 221 Cal.App.3d 234 (Cal.App. 1Dist., May 25, 1990).

40 Id., at 247.

41 Foothill Properties v. Lyon/Copley Corona Associates 46 Cal.App.4th 1542 (Cal.App. 4 Dist., June 28,1996).

42 Id., at 1558.

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“[o]nce it is recognized . . . that plaintiff has no claim, all concernedshould be spared the expense of further proceedings.”38

In a later case related to a City’s eminent domain of property within a redevelopmentdistrict,39 the City demurred to a property owner’s complaint, and the trial court stayed discoveryuntil the plaintiff could file an amended complaint that would withstand a demurrer. The Court ofAppeal determined that such stay of discovery was not error.

“Unless and until . . .[Plaintiffs] file a viable complaint stating at leastone triable cause of action, further discovery of [the] documentswould only be an unnecessary and burdensome additional expense . ..”40

Finally, a Fourth District Appeals Court determined that a defendant’s refusal to turn overdocuments pending resolution of its motion for a protective order was substantially justified, and thesanctions imposed by the trial court for this failure to respond was assessed in error.41 As stated bythe court,

“[g]iven Lyons valid claim of a right to a protective order regardingthe unproduced documents, it had substantial justification, as a matterof law, for withholding them until the motion for protective order wasdetermined.”42

In any foreclosure action, defendants will have no claim against the City and will have nodefense against the City’s foreclosure action. Under these circumstances, and pursuant to establishedprocedural case law, a City “should be spared the expense” of having to respond to any method ofdiscovery. A City is, therefore, substantially justified to refuse to respond to a defendant’s discoveryrequests until the court determines the merits of an accompanying motion for judgment on thepleadings.

43 Bolten v. Terra Bella Irrigation District, 106 Cal.App. 313 (Cal.App.4th Dist., June 9, 1930).

44 Id., at 318.

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III. TAX SALE ISSUES

A. Statutory Exceptions

In the County of Riverside, the following language is clearly printed on the face of each TaxDeed recorded by the County Tax Collector for tax defaulted property:

“This deed, between the Tax Collector of Riverside County(“SELLER”) and . . . (“PURCHASER”) conveys to thePURCHASER free of all encumbrances of any kind existing before thesale, except those referred to in Section 3712 of the Revenue andTaxation Code, to the real property described herein . . .” [emphasisadded].

Similar language is included in virtually every county in California. In addition, Revenue andTaxation Code section 3712 clearly states, in pertinent part, as follows:

“The deed conveys title to the purchaser free of all encumbrances ofany kind existing before the sale, except:

(a) Any lien for installments of taxes and special assessments, whichinstallments will become payable upon the secured roll after the timeof the sale.

. . .

(h) Unpaid special taxes under the Mello-Roos Community FacilitiesAct of 1982 (Chapter 2.5 (commencing with Section 53311) of Part1 of Division 2 of Title 5 of the Government Code) that are notsatisfied as a result of the sale proceeds being applied pursuant toChapter 1.3 (commencing with Section 4671) of Part 8.”

Even prior to the enactment of section 3712, the California Courts had consistently held thatan individual cannot wipe out taxes or assessments that had been legally levied under authority of thestate government unless that result is explicitly authorized by statute.43 In the Bolten case, anindividual claiming under a county tax deed attempted to quiet title against the lien of unpaidirrigation district assessments. As noted by the court, because there was an apparent growingtendency on the part of the legislature to treat the taxes or assessments levied under delegatedauthority as equal,44 the court held that a purchaser of land at a general tax sale did not take the title

45 Id., at 327, quoting Rochester v. Kappell, 86 App.Div. 224, affirmed in 177 N.Y. 533.

46 Quelimane Co. Inc. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, at 39-41.

47 Id., at 40.

48 Id., at fn. 5.

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thereto free from the lien of any irrigation district assessments which had previously been leviedagainst it. As reasoned by the court:

“[t]he source of all power to tax within the state . . . is the legislature.. . . The policy of the law is to insure the collection of all taxes. . ..[N]o individual can secure a perfect title to real property purchasedupon a tax sale, without paying all taxes thereon imposed by anypolitical subdivision of the state. . ..”45

This principle has now been codified at Revenue and Taxation Code section 3713, which states:

“It is hereby declared to be the policy of the state and the intent of theprovisions of this code, that the final tax deed or deeds of all taxingagencies, . . . are hereby declared to be, upon a parity with each other. . ..”

A recent California Supreme Court decision necessarily reviewed the exceptions of section3712 in order to determine whether a plaintiff had stated a cause of action against a title insurancecompany for failure to issue title insurance policies on property acquired by plaintiffs at a tax sale.46

As confirmed by the Court, “[w]ith minor exceptions the deed conveys title free of all encumbrances.(Rev. & Tax. Code, §3712.)”47 In addition, the court clarified that the

“[e]xceptions include special assessment installments due after the saleor which were not included in the amount fixed for presale redemptionof the property . . . and unpaid taxes or assessments under theImprovement Bond Act of 1915 or Mello-Roos Community FacilitiesAct of 1982. (Rev. & Tax. Code, §3712.)”48

Accordingly, because a City’s assessments are all special taxes under the Mello-Roos CommunityFacilities Act, the plain language of both section 3712 and the Quelimane case precludes anyconsideration by any court that a City’s unpaid special taxes or special tax lien have been eliminatedby a County Tax Sale.

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B. Constructive Notice

Pursuant to the California recording statutes,

“Any instrument or judgment affecting the title to or possession of realproperty may be recorded pursuant to this Chapter.”

(Cal. Gov. Code § 27280(a).)

In addition, as specified in California Civil Code section 1213,

“Every conveyance of real property on an estate for years thereinacknowledged or proved and certified and recorded as prescribed bylaw from the time it is filed with the recorder for record is constructivenotice thereof to subsequent purchasers and mortgagees; . . .[emphasis added].”

(Cal. Civ. Code §1213.)

“Conveyance” as defined in section 1215 includes

“. . . every instrument in writing by which any estate or interest in realproperty is created, aliened, mortgaged, or encumbered, or by whichthe title to any real property may be affected, except wills [emphasisadded].”

(Cal. Civ. Code §1215.)

In addition,“an unrecorded instrument is valid as between the parties thereto and those who havenotice thereof [emphasis added].” (Cal. Civ. Code §1217.)

Specifically with regard to Mello-Roos taxes, Streets and Highways Code section 3114.5(b)states:

(b) Within 15 days after determination pursuant to Section 53328 ofthe government code that the requisite number of voters are in favorof the levy of a special tax, the clerk of the legislative body shallexecute and record a notice of special tax lien in the office of thecounty recorder . . . The notice of special tax lien shall contain theinformation required by Section 27288.1 of the Government Code .. .

Notice is further given that upon the recording of this notice in theoffice of the county recorder, the obligation to pay the special tax levyshall become a lien upon all nonexempt real property withinCommunity Facilities District No. _________ in accordance withSection 3115.5 of the Streets and Highways Code.” Id.

49 Van Petten v. County of San Diego (App.4th Dist. (1995) 38 Cal.App.4th 43.

50 Sieger v. Standard Oil Co. (1957) 155 Cal.App.2d 649, 657, 318 P.2d 479, citing 25 Cal.Jur. §281, p.832.

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Section 3115.5(b) states:

“(b) From the date of the recording in the office of the countyrecorder pursuant to Section 3114.5, . . . all persons are deemed tohave notice of the contents of the Notice of Special Tax Lien.”

Finally, the doctrine of caveat emptor applies at tax sales.49

California case law is clear in interpreting the above statutes and finding that

“A purchaser is charged with constructive notice of the existence andcontents of all instruments properly of record, affecting the propertypurchased and constituting his chain of title, and is bound by grants,reservations, and recitals contained therein, if sufficiently clear andcertain to convey the requisite information or to put him on inquiry .. . [emphasis added].”50

Based on the above statutory provisions, any purchaser will have had constructive notice of thespecial tax lien, as well as any outstanding judgment, prior to the County Tax Sale, therebypreempting any consideration by the court that the purchaser was a BFP.

C. Quiet Title

A property owner will be unable to sustain a quiet title action against a City as long as thereare unpaid special tax installments and outstanding Mello-Roos bonds.

California Revenue and Taxation Code section 3950 states as follows:

“[w]henever tax-defaulted property has been purchased at tax sale, .. ., and all subsequent taxes levied and payable have been paid, thepurchaser, or any person claiming through the purchaser, may bringan action to determine adverse claims to or clouds upon that property.The complaint shall be verified and shall aver the matters aboveenumerated. [emphasis added]” Id.

Pursuant to section 3950, any plaintiff necessarily has to allege within their complaint that “allsubsequent taxes . . . have been paid” in order to maintain a quiet title cause of action.

51 Sterling Realty Company v. Relfe (1942) 21 Cal.2d 164.

52 Sterling, Id., at 171, citing Stege v. City of Richmond (1924) 194 Cal. 305, at 318.

53 Sterling, Id., citing Hayne v. San Francisco (1917) 174 Cal. 185, at 197.

54 Weber v. City of San Francisco, 1 Cal. 455, as quoted in Stege, supra. at 319.

55 Id.

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The California Supreme Court long ago determined that an owner of property subject to anassessment lien cannot have his title unconditionally quieted against the lien while the assessment andthe obligation of the bonds are viable.51 In the Sterling case, the plaintiffs’ complaint was in theconventional form of quiet title, which merely alleged that plaintiff was the owner of the property andthat the plaintiff’s claimed interest was without right, praying for just relief in equity. Relying on itsown earlier decisions, the California Supreme Court in Sterling concluded that

“[t]he plaintiffs in this equitable action seek to relieve the lands fromthe burden of the assessment for such benefits without paying oroffering to pay their just portion of the cost of the improvements.”52

As determined by the Court, such a

“. . . plaintiff is not entitled to any relief in a court of equity unless heshall pay, or offer to pay, the amount actually due upon theassessment against his property.”53

Typically, a plaintiff’s attorney will file the conventional form of quiet title, without anyallegation, that the special taxes have been paid, as required by Revenue and Taxation Code section3950. Thus, whether or not the subsequent property taxes have been paid after a Tax Sale, byseeking to relieve the property from the burden of the special tax lien, a plaintiff’s pleading will bedefective. A plaintiff cannot invoke a court of equity to consider eliminating a City’s special tax lienagainst a subject property without satisfying the condition precedent to establishing a quiet title causeof action i.e., paying the special taxes attributed to those parcels.54

“. . . [E]very principle of equity and justice demands that the plaintiffshould pay; and it is one of the first maxims of equity jurisprudence,that he who asks equity must do equity.”55

Accordingly, without such payment of delinquent installments and payoff of the special tax lien, acourt will have no jurisdiction regarding the cause of action. Such plaintiff’s complaint in quiet titlemust fail, and a Judgment to that effect should be issued by the court upon proper motion by a City.

56 28 Cal.2d 19, 168 P.2d 965.

57 See: Security Investment Company v. Douglas, (1946) 76 Cal.App.2d 592, 173 P.2d 672; Oswald v.Salter, (1947) 77 Cal.App.2d 599, 176 P.2d 425; Albert, Limited v. Gawn, (1952) 111 Cal.App.2d 610, 245 P.2d23; Albert Limited. v. Federated, etc. Properties, (1953) 120 Cal.App.2d 194, 261 P.2d 783; Rostain v.Guggenheim, (1944) 63 Cal.App.2d 127; Cambell v. Woolmer, (1943 ) 57 Cal.App.2d 511; Cate v. Bourzac,(1946) 74 Cal.App.2d 422, 108 P.2d 1971; Milkes v. Smith, (1949) 91 Cal.App.2d 79, 204 P.2d 419.

58 1 Cal.2d 703.

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D. Parity of Tax Deeds

Cal. Rev. & Tax Code §3713 states:

“It is hereby declared to be the policy of the state and the intent of theprovisions of this code, that the final tax deed or deeds of all taxingagencies, including counties, cities and counties, cities, irrigationdistricts, reclamation districts, and other taxing agencies that annuallylevy, assess, and collect, or cause to be collected, taxes or assessmentsupon real property within the state, should be, and are hereby declaredto be, upon a parity with each other, and that regardless of when thelevy of those taxes or assessments is or has been made, and regardlessof when the final tax deed or assessment deed is or has been taken bythe taxing agency, that the rights of all taxing agencies and all thosedeeds shall be equal and upon a parity with each other.” Id.

1) Overview of California Case Law

In 1946, the California Supreme Court determined in the seminal case of Monheit v. Cigna,56

that because the tax liens of a county and special assessment district are in parity, the holder of onetax deed cannot be compelled to buy out the other in order to acquire his interest and thereby secureto himself a clear title to the property. Rather, the owners would become tenants in common withan equitable lien against the property in favor of each co-tenant in the amount paid by him for theproperty. In the event that the property was later sold, each co-tenant would be entitled toreimbursement for this “lien” amount before the equal division of any equity in the property. This ruleof law has been followed by the California courts which have consistently held that tax deeds fromthe state and deeds issued from the foreclosure of street improvement bonds affecting the sameproperty are in parity, and the holders of such deeds own the property as tenants in common.57

An area of distinction in the Monheit progeny of cases deals with whether this parity statuterelates only to existing and prior liens, or whether a subsequent lien results in a tax deed thatextinguishes all rights from a prior tax deed of a competing agency. This issue was first addressedby the California Supreme Court in Neary v. Peterson,58 which determined that the lien for state taxesdid not destroy the lien for the 1911 Act improvements. However, the tax deed issued in Neary was

59 2 Cal.2d 23.

60 Id. at 25.

61 107 Cal.App.2d 659, 237 P.2d 531.

62 See: 65 A.L.R. 1379 regarding the priority between lien of taxes and lien of special assessments.

63 1905 Minn. Laws, Ch. 200.

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based upon ad valorem taxes for 1924, 1925, 1926, 1927 and 1928; the improvement bond was forthe year 1927. Thus, the same tax year was involved in both of the tax deeds, requiring theapplication of the parity statute.

In Conley v. Hawley, the California Supreme Court59 addressed the issue of subsequent taxdeeds, but these deeds from the same municipality for street improvement assessments were basedon the same Vrooman Act. Because the lien of the plaintiff was subsequent in time to that ofdefendant, plaintiff’s lien was superior and resulted in the elimination of defendant’s lien, as well asall of his rights in the real property. The Court’s interpretation that the then-existing parity statute“referred to existing encumbrances and not to future liens or encumbrances against said propertywhich might come into being thereafter,”60 portends its probable determination in interpreting today’sparity statute.

In Albert Ltd. v. Barnes,61 the Second District Court of Appeal relied on the Conley languageto conclude that the holder of a tax deed based on the foreclosure of an assessment lien at a timewhen there were no existing liens or tax deeds outstanding against the property is not entitled toparity and equality with the holder of a tax deed based on a tax lien levied in a subsequent year.Pursuant to the Conley analysis, the Albert court determined that the parity rule is not applicableunless there are co-existing liens or tax deeds on the same property. Unfortunately, as a SecondDistrict case, Albert offers only persuasive authority to a City and thus is not legally sufficient toclearly predict how a court would determine a purchaser’s property rights following a City’sforeclosure sale. Because research yielded no additional cases addressing this issue in California, thelaw in other jurisdictions was reviewed in order to buttress the California case law on this subsequentlien issue.62

2) Overview of Minnesota Case Law

Like California, the State of Minnesota at an early time established by statute that there wouldbe parity between tax deeds of the various agencies, municipalities and districts within the state ofMinnesota.63 Subsequently, three opinions of the Minnesota Supreme Court added clarity to theapplication of this law and, because the Minnesota statute is similar to California’s parity statute,these opinions are very instructive to a City confronted with the prospect of competing tax deeds.

64 116 Minn. 44, 133 N.W. 74.

65 120 Minn. 172, 139 N.W. 293.

66 124 Minn. 300, 145 N.W. 21.

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The initial case of Smith v. Iten, et al.64 held that under the parity law, a sale under either competingtax deed shall not bar or extinguish the other. Thereafter, in Gould v. City of Saint Paul,65 theSupreme Court explicitly declared that the parity statute only applies to assessments and general taxliens accruing the same year. The state tax deed in Gould was subsequent to the sale for propertytaxes for tax years 1891/92 and 1901 through 1906. The City assessment tax deed was pursuant tothe sale for an assessment delinquency for the tax year 1901. Accordingly, the lien of the localassessment and the lien for the general taxes were declared of equal rank, as mandated by the paritystatute.

Moreover, the court recognized that the parity statute utilized broad language and referredto all local assessment liens and all general taxes, declaring that they shall be of equal rank. Inapplying such broad language, the court determined that

“there must necessarily be a limitation upon the particular liens theLegislature intended to deal with.. . . to give effect to the statute, itmust be construed as applying, when declaring the equal rank ofassessment and general tax liens, to such as arise from taxes orassessments levied during a particular year.” [emphasis added] (Id. at295)

Because both parties in Gould took title subsequent to a tax deed for the same tax year, the courtfound the parties to be joint or concurrent lien holders with common rights in and to the property asa whole.

Finally, in Midway Realty Company v. City of Saint Paul,66 the Minnesota Supreme Courtexpanded on its holding in the Gould case to further clarify its interpretation of the parity law. Thecourt summarized the law as follows:

“General tax liens and city assessment liens are of equal rank. Thegeneral rule as to tax liens of equal rank apply. Each lien is superiorto all that go before it. The lien last in time is first in right, whether itbe a tax or assessment lien. A later tax lien will take priority over allearlier liens, whether for taxes or assessments. Likewise a laterassessment lien will take priority over all earlier liens, whether fortaxes or assessments.” (Id. at 303)

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More importantly, the Court clarified that

“All city assessment liens accruing during any year are equal in rightof priority with the lien of taxes for that year. . . Tax and assessmentliens accruing during any one year are accordingly equal in right ofpriority. Tax and assessment liens accruing during a subsequent yearall take priority over all tax and assessment liens of former years.” (Id.at 303-304)

Applying these determinations to the facts of the case, the Court held that

“Where land is sold in a forfeited tax sale for taxes for a number ofyears, as from 1901-1906, for an entire amount, the lien of the holderof a certificate issued on such a sale is equal in right of priority withan assessment lien in any one of those years.” (Id.)

Therefore, because the forfeited tax sale in Midway was for taxes accruing the same year as the cityassessment, the parties were determined to be tenants in common of the property in controversy.

3) Application of Parity Statute

Applying the above-referenced California case law and the reasoning of the MinnesotaSupreme Court leads to a conclusion that in order for a City to foreclose the property rights of theholder of a Tax Deed, there must be subsequent tax year delinquencies beyond those tax years paidat the County Tax Sale. Because there is no clear California Supreme Court case regarding this typeof circumstance, any attempt to eliminate such property rights through foreclosure would probablybe appealed.

IV. BANKRUPTCY ISSUES

Without going into detail regarding the various scenarios in which a City can become involvedas a creditor for unpaid special taxes in a Bankruptcy case, there are two major misconceptionsrelating to judicial foreclosure that need to be briefly clarified.

A. City’s In Rem Bankruptcy Claim

By filing a Bankruptcy Claim for unpaid special taxes attached to a copy of the recordedNotice of Special Tax, a City will have established prima facie evidence that its claim as calculatedby the City is valid. This forces the debtor to file an objection to the claim, accompanied by evidencerefuting the City’s calculations; the debtor generally will not be able to do so. Through its reply brief,a City can then establish that the nature and scope of City’s lien is determined by California law.

67 (1992) 503 U.S. 393, 112 S.Ct. 1386, 1389, 118 L.Ed. 2d 39

68 Id. citing Mckenzie v. Irving Trust Co. 323 U.S. 365, 379, 65 S.Ct. 405, 408, 89 L.Ed. 305 (1945).

69 Barnhill, supra, citing Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 918, 59 L.Ed.2d 136(1979).

70 Streets and Highways Code sections 3114.5(b) and 3115.5(b).

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Chief Justice Rehnquist reiterated in Barnhill v. Johnson,67 that “in the absence of anycontrolling federal law, ‘property and interests in property’ are creatures of state law.”68

Consequently, because “Congress has generally left the determination of property rights in the assetsof a bankrupt’s estate to state law,”69 it is appropriate that California law be applied within a Chapter11 Reorganization or a Chapter 13 Consumer Payment Plan to determine the nature and scope ofCity’s lien.

From the time a City recorded its Notice of Special Tax Lien, the City’s special taxes becamea lien upon the land, thereby entitling the City to foreclose on any delinquent parcel, unless paid infull.70

Depending on the timing of the Bankruptcy filing, if the foreclosure process has already begunand the tax collector has already been relieved of further duty with regard to a Debtor’s installmentsat the time that Debtor filed its Bankruptcy petition, City’s original Proof of Claim should include alldelinquent taxes, penalties, interest and costs that had accrued up to the petition date. Thereafter,as part of establishing the Bankruptcy Plan, a City should submit an Amended Proof of Claim whichwill include all additional post-petition delinquent tax installments, penalties, interest and costsexpended by the City in pursuit of foreclosure, as required by Government Code section 53356.3.Unless Congress has specifically determined that federal law controls the nature and scope of a City’sperfected lien in a Debtor’s property, this Amended Proof of Claim should be allowed.

Federal Law, however, actually requires that a Debtor-in-Possession comply with Californiatax laws.

Pursuant to 20 U.S.C. Section 959(b),

“. . . a trustee, receiver or manager appointed in any cause pending inany court of the United States, including a debtor-in-possession, shallmanage and operate the property in his possession as such trustee,receiver or manager according to the requirements of the valid lawsof the State in which such property is situated, in the same mannerthat the owner or possessor thereof would be bound to do if inpossession thereof. [emphasis added]”

71 In re Megafoods Stores, Inc. 163 F.3d 1063 (9th Cir. 1998)

72 Streets and Highways Code section 3114.5(b).

73 11 U.S.C. §506(d); 11 U.S.C. §1325.

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In addition, Section 960 specifically mandates that

“Any officers and agents conducting any business under authority ofa United States court shall be subject to all Federal, State and localtaxes applicable to such business to the same extent as if it wereconducted by an individual or corporation.”

Recently, the Ninth Circuit applied these statutes to conclude that Texas tax laws controlled theobligations and liabilities of Debtors within a Chapter 11 reorganization to determine the amount ofinterest paid on delinquent sales tax funds.71 In Megafoods, the Texas Controller argued that becausestate statutes created a tax trust fund at the time the taxes are collected, these funds did not becomepart of the bankruptcy estate, thereby necessitating the application of Texas law to determine theamount of interest to be paid on these funds. The Ninth Circuit agreed, stating that federal lawrequires that the trustee or debtor-in-possession comply with state tax laws. As concluded by theCourt,

“When Debtors failed to comply with payment of the collected salestax monies, they became liable for interest on delinquent taxes asprescribed by Section 111.060 of the Texas Tax Code.” [emphasisadded] Id., at p. 1069.”

Pursuant to Megafoods, a Debtor-in-possession of tax delinquent property in a Chapter 11or a Chapter 13 Bankruptcy case should pay all property taxes on the property during the course ofthe Bankruptcy. Moreover, because a City’s real property tax lien is paramount to all other liensagainst the property except prior assessments and taxation, as established by the Notice of SpecialTax Lien,72 any debtor-in-possession will have violated California law and Federal law by utilizingfunds generated from an encumbered property’s refinancing to pay off other secured liens withoutpaying off a City’s claim for delinquent assessment taxes first.

As an in rem claim, City’s secured claim looks only to the real property to receive payment,and its lien as established by California law proceeds through the bankruptcy process intact.73

Therefore, because a City’s claim pursuant to California law does not conflict with bankruptcy law,California law should determine how much interest, penalties, costs and fees are to be included inCity’s claim. If a debtor-in-possession fails to pay the property taxes, including the subsequentspecial taxes that continued to accrue during the Bankruptcy process, a debtor will become liable foradditional amounts, including penalties, interest, costs and fees, as prescribed in Government Codesection 53356.3 and as mandated by 20 U.S.C. §§959-960.

74 In re Ritter Ranch Dev. LLC, 225 B.R. 760, (9th Cir. BAP, 2000).

75 Sutter Basin Corp. v. Brown, (1953) 40 Cal.2d 235, 241, 253 P.2d 649, 652.

76 In re Ritter Ranch, supra, at 766.

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Moreover, the Ninth Circuit Bankruptcy Appellate Panel has determined that bondholders’rights cannot be modified under the Bankruptcy Code. In a recent Chapter 11 case, the debtorbrought an adversary proceeding for a determination that bondholders in a Mello-Roos district werecreditors whose rights could be modified under the “cram down” provisions of the BankruptcyCode.74 To reach its decision, the Bankruptcy Appellate Panel (“BAP”) applied California case lawwhich has long held that “a contract was created between the property owners and the bondholders,”at the time the bonds were issued.75 Accordingly, any

“change in laws made after the issuance of assessment bonds whichadversely impacts bondholders . . . is an impermissible impairment ofcontract under the Federal and California Constitutions,” Comm.Facil. Distr. No. 88-8 of the County of Riverside v. Harvill, (1999) 74Cal.App.4th 876, 880, 88 Cal.Rptr.2d 405, 408.

As explained by the BAP, because the foreclosure remedy is solely for the benefit of the bondholders,

“The City has little if any discretion under the Mello Roos Act and theBond documents” [emphasis added]76

In response to the debtor’s additional argument that California policy conflicts with the BankruptcyCode, the BAP held that there was no evidence that California law conflicted with the BankruptcyCode. In support of California law, the BAP explained that

“There are strong public policy reasons in terms of bond financing . .. to create facilities, to create housing, to create subdivisions . . . It isnot the intent of Congress to interfere with that . . .” Id., at p. 767.

Therefore, because Congress did not intend to interfere with California’s statutory scheme to createsubdivisions through bond financing, the Bankruptcy Code does not restrict a City’s claim in thisregard; and the amount of a City’s allowed claim should be payment in full as required by Californiastatute.

77 The only issue before the Ron Pair Court was whether post-petition interest is allowed pursuant to§506(b) on a non-consensual lien in a Chapter 11 proceeding. As such, all the Court’s analysis regardingconsensual versus non-consensual liens and its conclusion that attorney fees, costs and other charges are onlyallowed on consensual liens is dicta and entitled to only persuasive authority.

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B. Attorney’s Fees in Bankruptcy

Section 506 of the Bankruptcy Code states in pertinent part as follows:

“(b) To the extent that an allowed secured claim is secured byproperty the value of which after any recovery under subsection (c) ofthis section, is greater than the amount of such claim, there shall beallowed to the holder of such claim, interest on such claim, and anyreasonable fees, costs, or charges provided for under the agreementunder which such claim arose.

(c) The trustee may recover from property securing an allowedsecured claim the reasonable, necessary costs and expenses ofpreserving, or disposing of, such property to the extent of any benefitto the holder of such claim.”

The United States Supreme Court interpreted the application of this bankruptcy section within aChapter 11 plan in United States v. Ron Pair Enterprises, Inc., supra. As stated by JusticeBlackmun, the scope of this opinion was limited to

“The narrow statutory issue [of] whether Section 506(b) [citeomitted] entitles a creditor to receive post-petition interest on anonconsensual oversecured claim allowed in a bankruptcyproceeding.” Id., at p. 1028.

The majority of the Court determined that all oversecured claims are entitled to post-petition interest.Thus, pursuant to the holding of Ron Pair, any amount of a City’s claim attributable to post-petitioninterest should be allowed and is not open to dispute.

The real question regarding a City’s bankruptcy claim is whether reasonable attorney fees,costs and other charges provided for by California law and incorporated into the Bond Indenture forthe CFD at the time the bonds were issued will be allowed under Section 506(b). A City shouldargue that allowing these amounts is consistent with the Bankruptcy Code and with the holding andanalysis of Ron Pair77.

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V. CONCLUSION

The above legal theories have been used successfully in hundreds of foreclosure actions. Byunderstanding the fiduciary nature of a City’s responsibility toward its bondholders, and how thisobligation has been specifically supported by the legislature through provisions in the Revenue andTaxation, Government and other Codes, a City Attorney can better grasp which doctrine has a higherprobability of winning in any given situation. Focusing on the unique requirements of the Mello-RoosAct, should allow you to avoid contentious and prolonged litigation and obtain a foreclosurejudgment and order of sale within a fraction of the usual time.

FINANCIAL MANAGEMENT SEMINARLEAGUE OF CALIFORNIA CITIES

DECEMBER 9 - 10, 1993

COLLECTION OF DELINQUENTSPECIAL TAXES

AND ASSESSMENTSROBERT A. OWEN

LAW OFFICES OF ROBERT A. OWEN135 West Rialto AvenueRialto, California 92376

(909) 874-2390 Fax (909) 874-8873

One Newport Plaza, Suite 320Newport Beach, California 92660

(714) 261-8070 Fax (714) 261-8250

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COLLECTION OF DELINQUENT SPECIAL TAXESAND ASSESSMENTS

BY ROBERT A. OWEN

TABLE OF CONTENTS

PageI. Introduction

A. Scope of Paper............................................................................ 2B. Formation of Districts.................................................................. 2,3C. Issuance of Bonds......................................................................... 3

II. Security for Bonds................................................................................. 4

III. Foreclosure Covenants.......................................................................... 5,6

IV. Overview of Proceedings.......................................................................... 7A. City orders foreclosures/removes delinquencies from County Tax Roll.......... 7B. City sends demand letter (optional)..................................................... 8C. Filing Complaint........................................................................... 8D. Lis Pendens................................................................................. 8E. Service of Process....................................................................... 8F. Defaults..................................................................................... 9G. Enforcement of Judgment/Sale Procedures........................................ 9,10

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I.INTRODUCTION

A. Scope of Paper.

Since the advent of Proposition 13 in 1978, cities, counties, water districts, school districts, and other publicagencies in California have increasingly relied upon special assessment districts and/or community facilities districtsas tools for financing public infrastructure and services related to new development. This paper provides an overviewof procedures relating to assessment districts formed pursuant to the Municipal Improvement Act of 1913 (Streets &Highways Code §§10000 et seq.), where bonds have been issued pursuant to the Improvement Bond Act of 1915(Streets & Highways Code §§8500 et seq.), and community facilities districts formed pursuant to the Mello-RoosCommunity Facilities Act of 1982 (California Government Code §§53311 et seq.).

The primary focus of this paper will be on judicial foreclosure actions for the collection of delinquentassessments and special taxes levied within such special districts. Proceedings relating to bonds issued pursuant to theBond Improvement Act of 1911 are not covered by this paper. This paper does not cover trustee's sales pursuant to theImprovement Bond Act of 1915.

The goal of the author is to provide City Managers, Finance Directors and/or Finance Department Staff withan overview of the procedures which may be used by them to efficiently collect delinquent assessments, and to providean understanding of the reasons why such collections should be of utmost importance to them and their respectivecities. Primary emphasis will be placed on collection of delinquent assessment installments levied in assessmentdistricts, with secondary references being made to similar provisions in the Community Facilities Act. This paper isnot intended to constitute legal authority or a legal opinion and reference should always be made to the pertinentstatutes and the advice of your city's own attorney.

References to the portions of such acts governing foreclosure actions are as follows:

a. Assessment Districts - Part 14 of the Improvement Bond Act of 1915, commencing with CaliforniaStreets & Highways Code §8830.

b. Community Facilities Districts - California Government Code §§53356.1 et seq..

B. Formation of Districts.

In the case of both assessment districts and community facilities districts, the formation procedure begins bya Resolution of Intention to form a district. At such time, the following occurs: (1) the estimated costs of certain publicimprovements and/or services are identified; (2) the degree of benefit from the improvements attributable to each parcelof land located within the boundaries of the district is identified; and (3) assessments (or special taxes) are proposedto be levied on each parcel of land in accordance with the benefit received, in an amount sufficient to pay for thatparcel's pro-rata share of the public improvements. The city then conducts a protest hearing (in the case of anassessment district) or an election (in the case of a community facilities district) to determine whether to form thespecial district. Assuming the special district is formed, the property owners are then notified that they are entitledto prepay the entire assessment or tax before bonds are issued.

C. Issuance of Bonds.

After the special districts are formed, and the period during which a property owner may prepay hisassessment or special tax lien has expired, then the city may issue bonds represented by the unpaid assessments and/orspecial taxes. The bonds are issued to the public, through an underwriter, in exchange for bond proceeds. The bondproceeds are then expended to construct the public improvements for the benefit of the parcels within the district. The

3

lien on each parcel of land is then amortized over the term of the debt service on the bonds. Installments are thentypically levied semi-annually on each parcel, and the proceeds of the levy are used to pay the debt-service on thebonds. If collected on the tax roll, the assessments or special tax installments become delinquent, if not paid, onDecember 10 and April 10 of each fiscal year.

It is with this backdrop that we analyze the issues regarding delinquent assessments and special taxes.

II.SECURITY FOR IMPROVEMENT BONDS

Improvement bonds issued pursuant to the 1915 Act represent and are secured by all unpaid assessmentsauthorized within the assessment district. (Streets & Highways Code §8570). In the case of community facilitiesdistricts, the bonds are secured by unpaid special taxes and charges within the community facilities district.(Government Code §53358)

When a district is initially formed, a Notice of Special Assessment (in the case of assessment districts) or aNotice of Special Tax Lien (in the case of community facilities districts) is recorded pursuant to Streets & HighwaysCode §§3114 and 3114.5, respectively. Upon such recordation, each of the assessments within an assessment districtbecomes a lien upon the property against which it is made. (Streets & Highways Code §3115) The same is true forspecial tax liens in the case of community facilities districts. (Streets & Highways Code §3115.5) Thus, the securityfor the improvement bonds, in either type of district, is the unpaid assessments or special taxes.

When assessment bonds are issued, a city is required to make an election as to whether or not it will obligateits general fund for repayment of the bonds. (Streets & Highways Code § 8768) In the case of community facilitiesdistricts, no such election is authorized and the city typically obligates itself to levy sufficient special taxes to pay bonddebt service as it comes due. Unless a city elects to make the repayment of bonds an obligation of it's general fund orother revenue source, the above described liens are the sole source of security for the bondholders. It is rare that a citywould pledge it's general fund revenues or any other source of revenue and, for purposes of this paper, the assumptionis made that no such pledge is made. In such cases, it is the clear intention that the bonds remain "limited obligations",payable out of the assessment or special tax levies and not the city's general fund.

There is some understandable confusion regarding the priority of such liens. An assessment lien is equal inpriority to a property tax lien or a special tax lien, but inferior to previously imposed assessment liens. (Streets &Highways Code §8702) The lien of special taxes is the same as that provided for property taxes. (Government Code§53340). One thing is clear, however: both liens are superior to privately created liens, no matter when they areperfected.

III.FORECLOSURE COVENANTS

Prior to the issuance of bonds represented by unpaid assessments or special taxes, the legislative body maycovenant for the benefit of the bondholders to commence and diligently prosecute to completion any foreclosure actionregarding delinquent installments of such assessments and/or special taxes (See Streets & Highways Code §8830(b)regarding assessments and Government Code §53356.1 regarding special taxes). Since the bondholder's sole sourceof security for repayment of the bonds is the above described lien upon the land for the unpaid assessment or specialtax, a city issuing the bonds almost always executes a covenant of some sort, thereby giving the bondholders assurancesthat certain actions will be taken when appropriate. The typical covenant provides for the commencement offoreclosure proceedings within 150 days after an assessment or special tax installment becomes delinquent. Thiscovenant will usually be found in the resolution authorizing the issuance of bonds. The entire bond transcript for everyassessment district or community facilities district should be reviewed to determine the existence and content of such

4

covenants.

If the covenant to foreclose is disregarded, as it has been in many instances, then the city will have breachedthe one covenant which serves to enforce the sole source of security of the bondholders. Clearly, if the covenant issimply disregarded, then the bondholders have a strong argument to the effect that the city has breached the covenantand should therefore be held liable (out of it's general fund or any other source of available revenue) for repayment ofthe bonds in a timely manner. In effect, such a result would change a "limited obligation" improvement bond into ageneral fund liability. Such a result could have implications on the annual audit for each city as well as it's creditrating on future bonded indebtedness in general. Such results should be scrupulously avoided.

A brief explanation of why a city might ignore a foreclosure covenant is in order. When the bonds are issued,whether they be for an assessment district or a community facilities district, there is typically established a "reservefund". The reserve fund will usually be in an amount equal to or less than ten percent (10%) of the principal amountof the bond issue. When an installment is delinquent, then the fiscal agent (or trustee) is authorized to withdraw fromthe reserve fund to pay an amount equal to the delinquent assessment or special tax. The reserve fund is usuallyinvested in an interest bearing account of one sort or another. As a result, interest earnings are attributable to thereserve fund and it is common for public officials (including treasurers and finance directors) to mistakenly believethat the reserve fund is extremely "secure" since it exceeds the amount originally authorized because of such interestearnings accruing to it.

However, there are two considerations which must be kept in mind. First, the treasurer or finance director(or fiscal agent or trustee as the case may be) must give consideration to the federal rules regarding rebate of "arbitrageearnings" to the IRS. If the city has not properly accounted for and rebated all "arbitrage earnings" to the IRS, thenit is in danger of the bonds losing their tax exempt status. The typical bond counsel legal opinion relies upon the cityto conduct such inquiries and, therefore, the liability for failing to do so will fall squarely on the city. Second, one mustalways consider the potential for wide spread delinquencies on any one installment which would rapidly deplete thereserve fund. In such an event, a city may find that it is quickly without sufficient reserve fund revenues to paysubsequent installments of debt service, and, hence, face a general fund liability in the event that the delinquentamounts are not redeemed prior to the next debt service payment date.

Another reason commonly given for not commencing foreclosure proceedings is that the assessments arerelatively small. It is true that assessments can be levied in any amount and that they are sometimes levied in amountsbelow $100.00. However, a large number of small delinquent assessments can add up to a large delinquent account.Moreover, prompt and diligent action, as described below, can avoid unnecessarily high legal or administration feesfor collecting relatively small delinquencies.

Another reason frequently given for not commencing foreclosure proceedings is that nobody (especially electedpublic officials) wants to foreclose on "widows and orphans". The keys to avoiding the criticism incumbent upon suchactions are flexibility in payment plans and commencing procedures early on. By reacting to delinquencies quicklyand with flexibility, cities can avoid being put in a position of threatening to take people's property because of arelatively small assessment. In other words, if the proceedings are commenced at an early stage, then the city, or it'sattorney, has sufficient flexibility within which to establish an informal payment plan under which it is reasonablycalculated that the city will receive the entire delinquent installment before it is ever obligated to commence foreclosureproceedings. Additionally, the author is of the opinion that if the city has a uniform procedure for collection ofdelinquent installments in place, coupled with reasonable guidelines which allow smaller delinquencies to be paidpursuant to informal installment payment plans, then it can be argued that the city has complied with it's covenant to"commence foreclosure proceedings". Of course, such a program must provide for prompt and diligent follow-up onall promised payment plans.

In any event, a city's failure to comply with its covenants regarding foreclosure can not only expose it's general

5

fund to liability, but will also deprive it of much needed revenue to repay it's bonds.

IV. OVERVIEW OF PROCEEDINGS

A. City orders foreclosures and causes delinquent installments to be removed from Assessment Roll.

Streets & Highways Code §8830 enables the legislative body to "order that the [delinquent assessments] becollected by an action brought in the superior court to foreclose the lien thereof...". A similar provision is found forcommunity facilities districts in Government Code §53356.1. Therefore, the first step is for the city council to formerlyorder collection actions.

For the most part, cities opt, as they are authorized to, to collect assessment and special tax installments onthe regular property tax bill. Such procedures are authorized by Streets & Highways §8680 (relating to assessmentdistricts) and Government Code §53340 (relating to community facilities districts). After any property tax installmentbecomes delinquent, the county auditor is supposed to provide a report to the city detailing the delinquent assessmentsand special taxes. The report regarding assessment districts is to be provided within ninety (90) days after eachinstallment becomes delinquent (Streets & Highways Code §8683). The report regarding community facilities districtsis to be provided "promptly"... "at the close of each tax collecting period". (Government Code §53340.5)

Upon receipt of such a report, the city is then in a position to take action to collect the delinquent installments.After ordering the foreclosures, then the next step is to remove the delinquent installments from the tax roll. Suchremoval is contemplated (and arguably authorized), with regard to assessment districts by Streets & Highways Code§8830, and with regard to community facilities districts by Government Code §53326.2. In this manner, the cityrelieves the county auditor of any responsibility for the collection of the delinquent installments. The county auditor(and tax collector) remain responsible for collecting all installments which are subsequently levied upon the property.As for the delinquent installments, however, the responsibility is transferred to the city to collect those amountsdirectly. Local practices for removal of delinquencies vary from county to county. The tax auditor's office should beconsulted prior to such removal.

In this manner, the city can assure that all of it's costs of collection, including attorneys fees, title search costs,administrative charges, and other fees or expenses attributable to the collection action are collected from the propertyowner who is delinquent, rather than being borne by the city. There is no mechanism in place whereby the county taxcollector or county auditor can collect these fees and charges on behalf of the city. The statutes do, however, expresslyrequire that the property owner pay these amounts to the city in order to reinstate the property prior to judgment.(Streets & Highways Code §8833.5 and Government Code §53356.3) If the case proceeds to judgement, the statutesexpressly authorize such amounts to be included in the judgment. (Streets & Highways Code §8831 and GovernmentCode §53356.5)

B. City sends demand letter (optional).

The sending of demand letter is not currently required prior to the commencement of the formal foreclosureaction in superior court. However, it is the regular practice of this office, and this office is currently recommendingan amendment to both pertinent acts, which would require cities to mail a notice of delinquency and demand forpayment prior to the institution of formal litigation. In any event, it is typical for cities to send demand letters which(1) notify the property owner that he or she is delinquent on his or her assessment; (2) explain the differences betweenthe special assessment and general property taxes (because the five year payment plan provisions applicable to paymentof ad valorem property taxes do not apply to assessments); and (3) advise the property owner of the estimated costs

6

which will be incurred in bringing formal litigation and of the fact that said property owner will be responsible for suchcosts.

C. Filing Complaint.

The action requires in rem jurisdiction over the property and is commenced in the superior court to foreclosethe lien of the special assessment or tax. In the case of both assessments and special taxes the action must be broughtnot later than four (4) years after the due date of the last installment of principal on the bonds (See Streets & HighwaysCode §8834 regarding assessment districts and Government Code §53356.1(a) regarding community facilitiesdistricts).

D. Lis Pendens.

At the time of filing the complaint, the attorney for the city should also issue and record a lis pendens. Streets& Highways Code §§3120 et seq. govern the lis pendens. The requirement to record a lis pendens is in addition tothe notice given to subsequent purchasers pursuant to the recordation of the Notice of Assessment Lien (or Notice ofSpecial Tax Lien), discussed above. Care should be taken to assure compliance with California Code of CivilProcedure §§405.20 et seq., including the mailing of the lis pendens, by registered or certified mail, return receiptrequested, to all known addresses of the parties to whom the real property claim is adverse and all owners of recordof the real property affected by the claim as shown on the latest county assessment roll or more recent information inthe possession of the county assessor.

E. Service of Process.

Service of process must be had upon each person or entity holding an interest in the real property in the samemanner as other actions. As stated above, the action is "in rem" and, therefore, publication of the summons andcomplaint is authorized where a due diligence search cannot locate the defendant. (See California Code of CivilProcedure §§415.50 and 801.9) Otherwise, service should be had by (1) personal service, (2) substituted service, orservice by mail (See California Code of Civil Procedure §§415.10, 415.20, 415.30 and 415.410).

F. Defaults.

When a complaint is filed and a lis pendens recorded, both the property owner and others holding an interestin the property are apprized of the action either by receipt of the certified mailing of the lis pendens (as describedabove) or through the service of the summons, complaint and lis pendens upon the defendants. Most delinquenciesare cured at such time. However, some defendants cannot be found or otherwise evade service of process and ignorecertified mailings. Some defendants might respond by filing a bankruptcy action. Some, but few, defendants will filean answer to the complaint. At this point, the attorney must use his judgment to pursue the litigation in the samemanner that he would pursue any other litigation. However, experience has shown that the options regarding thelitigation are not complex. Rather, there are such options as follows:

(i) If a defendant answers, then the city may quickly conduct discovery, consisting generally of onerequest for admission (i.e. that the delinquent installments have not in fact been paid) and then movefor summary judgment. The city may introduce certified copies of all of the resolutions andordinances establishing the district, authorizing the issuance of the bonds, imposing the assessmentor special tax, and levying an annual installment thereof. (See Evidence Code §§451 et seq.)Assuming the summary judgment is granted, the city may then move for enforcement of the

7

judgment.

(ii) In the event no answer is filed, the city should move to request entry of a default against all non-answering defendants pursuant to California Code of Civil Procedure §§585 et seq.. Thereafter,or at the same time, the city may move for default judgment pursuant to said section as well as Codeof Civil Procedure §726 and Streets & Highways Code §§8800 et seq..

(iii) In the event that a defendant has filed or files an action in federal bankruptcy court, then strictadherence must be had to any orders staying collection activities. Depending upon the amount ofthe debt, the willingness of the city to be potentially liable for the debt out of it's general fund, andthe financial condition of the defendant, it may be advisable to file a motion for relief from theautomatic stay under appropriate federal bankruptcy court rules.

G. Enforcement of Judgment.

The judgment is enforced, and the sale conducted, pursuant to Code of Civil Procedure §§700.015 through701.545. Such procedures provide for a Notice of Levy of Writ of Sale, a 120 day redemption period prior to sale anda Notice of Sale twenty days prior to the sale (C.C.P. §701.540). Any defendant has the right to pay the delinquencyand subrogate to the lien during this period (Civil Code §2903). Assuming the delinquency is not paid during thisperiod, then the property proceeds to sale pursuant to Code of Civil Procedure §701.570. Care should be taken toensure that the requirements of Streets & Highways Code §§8832, 8836 and 8840 are adhered to in the securing andlevying the judgment.

It should also be noted that, after the sale occurs, there is no right of redemption. Prior to 1982, Streets &Highways Code §8832 formerly read as follows:

The court shall have the power to adjudge and decree a lien against the lot orparcel of land covered by the assessment or re-assessment for the amount of thejudgment and to order the premises to be sold on execution as in other cases of thesale of real property by the process of the court, with the same rights ofredemption.

However, in 1982, that section was amended by deleting the words "with the same rights of redemption."(Statutes, 1982, Chapter 497, Section 173, Page 2217) The courts have recognized this deletion and concluded thatsuch act was a repeal of the right of redemption as of that date. (Yancey vs. Fink (1991) 226 Cal.App. 3d 1334; 277Cal.Rptr.415)

1

Robert A. Owen {State Bar No. 123205}OWEN, BRADLEY & BARTRAM135 West Rialto AvenueRialto, California 92376Tel. (909) 874-2390Fax. (909) 874-8873

Special Counsel for Plaintiff:VAL VERDE UNIFIED SCHOOL DISTRICT Exempt from Filing Fees(Pursuant to Gov. Code §6103)

SUPERIOR COURT OF THE STATE OF CALIFORNIAIN AND FOR THE COUNTY OF RIVERSIDE

MAIN BRANCH

VAL VERDE UNIFIED SCHOOLDISTRICT, a California Unified SchoolDistrict, ON BEHALF OF PERRIS UNIONHIGH SCHOOL DISTRICT COMMUNITYFACILITIES DISTRICT NO. 87-1, aCalifornia Community Facilities District, ANDTHE BONDHOLDERS THEREOF,

Plaintiff;

-Vs-

MCKENZIE VISTA, L.P., a Washingtonlimited partnership; LANDMARK LANDCOMPANY OF CALIFORNIA, INC.; FIRSTAMERICAN TITLE INSURANCECOMPANY, a California Corporation in itscapacity as Trustee under Trust No. 82-0141-00;FERRIS DEVELOPMENTCORPORATION, Successor in interest to TheWarmington Company; CITY OF MORENOVALLEY; and DOES 1 through 100, inclusive,

Defendants.

AND RELATED CROSS-ACTIONS.

CASE NO. 287257

(CASE NO. 287259 CONSOLIDATEDHEREWITH)

ASSIGNED FOR ALL PURPOSES TO THEHONORABLE GARY TRANBARGER

DEPT: 15

NOTICE OF HEARING ON DEMURRERAND DEMURRER OF PLAINTIFF ANDCROSS-DEFENDANT, VAL VERDEUNIFIED SCHOOL DISTRICT TOCROSS-COMPLAINTS OF DEFENDANTMCKENZIE VISTA L.P.;MEMORANDUM OF POINTS ANDAUTHORITIES IN SUPPORT THEREOF; REQUEST FOR JUDICIAL NOTICE

DATE: TIME: DEPT: 15

TRIAL DATE: None

i

TABLE OF CONTENTS

TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

NOTICE OF DEMURRER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

DEMURRER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii

MEMORANDUM OF POINTS AND AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

I. BACKGROUND - NATURE OF THE CASE,HISTORY OF THE ACT ANDSTATEMENT OF FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

A. BACKGROUND - NATURE OF THE CASE. . . . . . . . . . . . . . . . . . . . . . . . . . . 1

B. BACKGROUND - HISTORY OF PROVISIONS OF THE ACT RELATING TO THE SPECIAL TAX LIEN. . . . . . . . . . . . . . . . . . . 21. The ACT as Originally Adopted in 1982. . . . . . . . . . . . . . . . . . . . . . . . . 22. The 1986 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33. The 1988 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44. Pre-1989 CFDs Were Authorized But Not Required To Record

A Notice Of Special Tax Lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

C. BACKGROUND - STATEMENT OF PERTINENT FACTS. . . . . . . . . . . . . . . 61. Facts Pertinent to Both The VAL VERDE CFD and the PERRIS CFD. . 62. Facts Pertinent to the PERRIS CFD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73. Facts Pertinent to the Val Verde CFD . . . . . . . . . . . . . . . . . . . . . . . . . . . 94. PLAINTIFF’s Recordation of Notices of Special Tax Liens,

after the 1988 Amendments to the ACT. . . . . . . . . . . . . . . . . . . . . . . . . 12

D. BACKGROUND - NATURE OF THE CROSS-COMPLAINTS. . . . . . . . . . . 131. The First Eight Causes of Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132. The Ninth through Sixteenth Causes of Action. . . . . . . . . . . . . . . 14

II. LEGAL ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15A. EACH AND EVERY CAUSE OF ACTION ASSERTED

BY MCKENZIE VISTA IN ITS CROSS-COMPLAINTS IS BARRED BY THE DOCTRINE OF RES JUDICATA . . . . . . . . . . . . . . . . 151. Issues Adjudicated In The Validation Actions Cannot Now

Be Relitigated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152. Each Cause Of Action In The Cross-Complaints Is An

Attempt To Relitigate Those Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

ii

3. This Case Exemplifies The Reasons For Validation Suits. . . . . . . . . . . . 17

B. ARTICLE XIII, SECTION 32 OF THE CALIFORNIA CONSTITUTION AND REVENUE AND TAXATION CODE SECTION 4807 PROHIBIT EACH AND EVERY CAUSE OF ACTION SET FORTH IN THE CROSS-COMPLAINTS. . . . . . . . . . . . . . . . . . . . . . . . 181. The Constitution, Statute and Legislative Intent. . . . . . . . . . . . . . . . . . . 182. The Courts Have Interpreted These Provisions to

Preclude All Pre-Payment Relief. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193. DEFENDANT Is Attempting To Obtain Pre-Payment Relief,

Without Pursuing The Remedy Provided by the Legislature. . . . . . . . . . 214. DEFENDANTS’ Attempts Are Barred By The Prohibition

Against Pre-Payment Relief. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

C. EVEN IF THERE WERE SOME PROCEDURAL ERROR IN THERECORDATION OF THE NOTICE OF SPECIAL TAX LIENAND THERE WAS NO OTHER TAX LIEN IN PLACE,THE LEGISLATURE HAS, ON SEVERAL OCCASIONS, CUREDSUCH HYPOTHETICAL ERROR BY ITS ADOPTION OF VARIOUS VALIDATING ACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

D. EACH AND EVERY CAUSE OF ACTIONSET FORTH IN THE CROSS-COMPLAINTSIS BARRED BY THE STATUTE OF LIMITATIONSSET FORTH IN GOVERNMENT CODE SECTION 53359 . . . . . . . . . . . . . . 26

E. EACH AND EVERY ONE OF DEFENDANT’S CAUSES OF ACTION WHICH ASSERT A CLAIM FOR DAMAGESIS BARRED BY DEFENDANT’S FAILURE TOALLEGE COMPLIANCE WITH THECALIFORNIA TORT CLAIMS ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

III. CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

iii

TABLE OF AUTHORITIES

CASE AUTHORITIES

Alphonzo E. Bell Corp. v. Bellvue Oil Syndicate (1941) 46 Cal.App.2d 684; 116 P.2d 786 . . . 18

Allis-Chalmers v. City of Oxnard (1980) 105 Cal.App.3d 876 . . . . . . . . . . . . . . . . . . . . . . 26, 27

Aughenbaugh v. Board of Supervisors (1983) 139 Cal.App.3d 83; 188 Cal.Rptr. 523 . . . . 24, 25

Calfarm Ins. Co. v. Dukemajian (1989) 48 Cal.3d 805, 839-840; 258 Cal.Rptr. 161 . . . . . . . . 20

City of Ontario v. Superior Court (1993) 12 Cal.App.4th 894; 16 Cal.Rptr.2d 32 . . . . . . . . . . 28

City of Venice v. Lawrence (1914) 24 Cal.App. 350; 141 P. 406 . . . . . . . . . . . . . . . . . . . . . . 25

Connolly v. County of Orange (1992) 1 Cal.4th 1105, 1131; 4 Cal.Rptr.2d 857, 862 . . . . . . . . 20

Cooper v. Leslie Salt Company (1969) 70 Cal.2d 627, 75 Cal.Rptr. 766 . . . . . . . . . . . . . . . . . 17

Daar v. Alvord (1980) 101 Cal.App.3d 480, 484-485 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 20

Dalton v. East Bay Municipal Utility District (1993) 18 Cal.App.4th 1566; 23 Cal.Rptr.2d 230 28

Hacienda La Puente Unified School District of Los Angeles v. Honig(1992) (C.A.9) 976 F.2d 487. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Hatch v. Bank of America Natl. Trust & Savings Assoc (1960) 182 Cal.App.2d 206; 5 Cal.Rptr. 875. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Hazleton v. City of San Diego 183 Cal.App.2d 131, 135 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Hershey v. Cole (1933) 130 Cal.App. 683, 688; 20 P.2d 972 . . . . . . . . . . . . . . . . . . . . . . . . . 25

Louisiana Ex Rel. Hubert v. New Orleans (1909) 215 US 170, 176-177; 54 L.Ed. 144, 148 . . 25

McKendry v. County of Kern (1986) 180 Cal.App.3d 1165; 226 Cal.Rptr.45 . . . . . . . 19, 20, 21

Merced County Taxpayers Assn. v. Cardella (1990) 218 Cal.App.3d 396 at 402; 267 Cal.Rptr. 62. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Modern Barber Col. v. Cal. Emp. Stab. Com (1948) 31 Cal.2d 720, 726; 192 P.2d 916 . . . . . . 18

iv

Nguyen v. Los Angeles County Harbor/UCLA Medical Center (1992) 8 Cal.App.4th 729; 10 Cal.Rptr.2d 709 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Pacific Gas & Electric Co. v. State Bd. of Equalization (1980) 27 Cal.3d 277, 283; 165 Cal.Rptr. 122 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

People v. Skinner (1941) 18 Cal.2d 349, 356-357; 115 P.2d 488 . . . . . . . . . . . . . . . . . . . . . . . 19

Schoderbeck v. Carlson (1984) 152 Cal.App. 3d 1027; 199 Cal.Rptr. 874 . . . . . . . . . . . . . . . . 20

Shouse v. Quinley (1935) 3 Cal.2d 357, 360; 45 P.2d 701 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

State Bd. Of Equalization v. Superior Court (1985) 39 Cal.3d 633, 639-640; 217 Cal.Rptr. 23820

Strickland v. Calancorporation Ltd. (1957) 156 Cal.App.2d 488; 319 P.2d 737 . . . . . . . . . . . . 18

The City of Fairfield v. Hutcheon (1949) 33 Cal.2d 475; 202 P.2d 745 . . . . . . . . . . . . . . . . . . 24

Western Oil & Gas Assn. v. St. Brd. Of Equalization (1987) 44 Cal.3d 208, 213; 242 Cal.Rptr. 334 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Wodicka v. Wodicka (1976) 17 Cal.3d 181; 130 Cal.Rptr.515 . . . . . . . . . . . . . . . . . . . . . . . . 18

STATUTES

Code of Civil Procedure section 430.10(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 8

Code of Civil Procedure section 430.10(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Code of Civil Procedure section 860 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8, 9, 10, 15, 17, 26

Code of Civil Procedure section 861 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 9

Code of Civil Procedure section 869 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 16

Code of Civil Procedure section 870 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11, 15, 16

Government Code section 900 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 27

Government Code section 905 . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

v

. 27

Government Code section 53311 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1

Government Code section 53313 . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1

Government Code section 53317(b) . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Government Code section 53325.1(a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 4

Government Code section 53325.3 . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Government Code section 53328.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 5

Government Code section 53328.5 . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 5

Government Code section 53340 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 2, 3, 5, 7, 10

Government Code section 53345 . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 1

Government Code section 53356.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 2, 9, 12

Government Code section 53356.1(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Government Code section 53356.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 2 Government Code section 53358 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1

Government Code section 53359 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 15, 26

Government Code section 53365 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 1

Government Code section 61765 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . .. 24, 25

vi

Revenue and Taxation Code section 870(a) . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 17

Revenue and Taxation Code section 2187 . . . . . . . . . . . . . . . . . . . . . . . 1, 3, 4, 6, 12, 25, 26, 29

Revenue and Taxation Code section 2192 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 6

Revenue and Taxation Code section 2194 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6

Revenue and Taxation Code section 2704 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Revenue and Taxation Code section 2705 . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 2

Revenue and Taxation Code section 4807 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 18, 20, 21, 22

Revenue and Taxation Code section 5096 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .viii, 21, 28

Revenue and Taxation Code section 5140 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 21, 28

Streets and Highways Code section 2194 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 3

Streets and Highways Code section 3111 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 4

Streets and Highways Code section 3113 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 4

Streets and Highways Code section 3114.5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 12

Streets and Highways Code section 3115.5 . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 3, 4, 5, 7, 10, 12, 26

Streets and Highways Code section 10400 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 27

CONSTITUTIONAL PROVISIONS

Article XIII, Section 32 of the California State Constitution . . . . . . . . . . . . .. . . . . . . . . .. 8, 18

Article XIIIB of the California Constitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

vii

OTHER AUTHORITIES

California Senate Local Government Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

California Tort Claims Act (Gov. Code §§900, et seq.) . . . . . . . . . . . . . . . . .. . . . . . . . . . .8, 27

Senate Bill No. 1115 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 4

Senate Bill No. 2254 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 4, 5

The Mello-Roos Community Facilities Act of 1982 (Gov. Code §§53311, et seq.) . .. . . . . 1

1

TO ALL PARTIES AND THEIR ATTORNEYS OF RECORD:

PLEASE TAKE NOTICE that on _____________, 1997, at 8:30 a.m., or as soon thereafter

as the matter may be heard in Department 15 of the above-entitled court, located at 3547 Tenth

Street, Riverside, California 92501-3703, a hearing will be held on the demurrer of Plaintiff and

Cross-Defendant Val Verde Unified School District (hereinafter “PLAINTIFF” and/or “VAL

VERDE”) to each of the Cross-Complaints filed by Defendant and Cross-Complainant McKenzie

Vista, L.P. (hereinafter “DEFENDANT” and/or “MCKENZIE VISTA”).

As set forth more fully in the attached Demurrer and Memorandum of Points and Authorities,

the grounds for the Demurrer are that the Cross-Complaints, and each of them, fail to state facts

sufficient to constitute a cause of action against VAL VERDE and that MCKENZIE VISTA, L.P.

lacks standing to assert each cause of action.

The Demurrer is made and based upon this Notice of Hearing, the attached Demurrer, the

attached Memorandum of Points and Authorities, the attached Request for Judicial Notice, all

pleadings and papers on file in these consolidated actions, and on such further evidence and argument

as may be presented at the hearing on Demurrer.

Dated: OWEN, BRADLEY & BARTRAM

BY: ROBERT A. OWEN, Attorneys for Plaintiff

and Cross-Defendant, VAL VERDEUNIFIED SCHOOL DISTRICT

1

DEMURRER OF PLAINTIFFVAL VERDE UNIFIED SCHOOL DISTRICTTO DEFENDANT’S CROSS-COMPLAINTS

PLAINTIFF, Val Verde Unified School District hereby demurrers to each of the

DEFENDANT’s and Cross-complainant’s Cross-Complaints in the above-consolidated actions on

the following grounds:

1. The Cross-Complaints, and each of them, fail to state facts sufficient to constitute a

cause of action (Code Civ. Proc. §430.10(e)); and

2. DEFENDANT lacks standing to assert each cause of action (Code Civ. Proc.

§430.10(b)) in that:

(a) Each of the causes of action in both of the Cross-Complaints concerns issues

which have already been adjudicated by the Riverside County Superior Court,

approximately nine (9) years ago, and are therefore barred by the doctrine of res

judicata.

(b) Each and every such cause of action is absolutely barred by Article XIII,

Section 32 of the California State Constitution and Revenue and Taxation Code

Section 4807 which prohibit any legal process from issuing to prevent or enjoin the

collection of a tax.

(c) The California State Legislature has, since the formation of the Community

Facilities Districts in question, expressly declared said Districts valid, and cured any

technical defects in connection therewith in order to provide security for repayment

of bonded indebtedness incurred on behalf of said Community Facilities Districts.

(d) The statute of limitations for raising any challenge to the validity of the

2

Community Facilities District, the levy of the special tax, and the validity of the lien

securing payment thereof, passed and expired over eight (8) years ago.

(e) Cross-complainant has failed to allege compliance with the California Tort

Claims Act. Cross-complainant has also failed to allege exhaustion of its

administrative remedies to pay the tax under protest and file a claim for refund

pursuant to Revenue and Taxation Code sections 5096, et seq..

(f) Cross-complainant has failed to address the independently enforceable tax lien imposed

as a matter of law under Revenue and Taxation Code section 2187.

Respectfully submitted,

Dated: OWEN, BRADLEY & BARTRAM

BY: ROBERT A. OWEN, Attorneys for Plaintiffand Cross-Defendant, VAL VERDEUNIFIED SCHOOL DISTRICT

1Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

MEMORANDUM OF POINTS AND AUTHORITIESIN SUPPORT OF DEMURRER

I.BACKGROUND - NATURE OF THE CASE, HISTORY OF THE ACT AND

STATEMENT OF FACTS

A.BACKGROUND - NATURE OF THE CASE.

These consolidated actions are actions to collect special taxes. They are brought by the Val

Verde Unified School District, in its capacity as the legislative body of both Val Verde Unified School

District Community Facilities District No. 87-1 (“VAL VERDE CFD”) and Perris Union High School

District Community Facilities No. 87-1 (“PERRIS CFD”), to collect unpaid special taxes levied upon

the subject real property by foreclosing the lien of said special taxes and selling said real property at

public sale.

These consolidated foreclosure actions are brought pursuant to section 53356.1 of the

Government Code, being a portion of the Mello-Roos Community Facilities Act of 1982 (“ACT”).

Said ACT is found in sections 53311 to 53365 of the Government Code, and authorizes the

formation, by a school district, of a community facilities district (“CFD”), being a separate

governmental entity (Gov. Code §53317(b)) with the power to provide various public improvements

and services (Gov. Code §53313), to issue bonds to pay for the same (Gov. Code §§53345, et seq.),

and to levy special taxes to repay the debt service on such bonds (Gov. Code §§53340, et seq.).

Special taxes are levied each year in amounts sufficient to pay bonded indebtedness on bonds

that are outstanding and, when received by the CFD, are paid into a special bond “redemption fund”

which is used to pay debt service on the bonds (Gov. Code §53358).

The special taxes may be collected in the same manner as ad valorem taxes (Gov. Code

§53340) or the legislative body of the CFD may choose another method of collection (i.e., direct

hand-billing). Payment of the special taxes by landowners is secured by two separate and distinct

2Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

tax liens.

The first tax lien is imposed as a matter of law by the levy of the tax. (Rev. & Tax. Code

§2187) CFD special taxes are levied each year under the authority of an ordinance adopted pursuant

to Government Code section 53340. The lien of the tax attaches on January 1 of each year in which

the tax is levied. (Rev. & Tax. Code §2194) The world is placed on notice of the lien of the special

taxes by the recordation of boundary a map showing the boundaries of the CFD (Gov. Code

§53325.1(a)(5)). At the time the subject CFDs were formed, the ACT provided for further notice

to potential purchasers by the recordation of a Notice of Special Tax Authorization. (Gov. Code

§53328.3).

The second lien is a “continuing lien of the special taxes,” imposed upon the recordation of

a “Notice of Special Tax Lien” pursuant to Streets and Highways Code section 3115.5. (Gov. Code

§53328.3-as in effect today).

The special taxes are delinquent if not paid on or before December 10 and April 10 of each

tax year (Gov. Code §53340; Rev. & Tax. Code §§2704 & 2705).

Foreclosure proceedings are authorized as a collection procedure to collect delinquent unpaid

special taxes (Gov. Code §53356.1); and the legislative bodies of each of the CFDs were authorized

to covenant with bondholders, on behalf of each of the CFDs, to promptly foreclose (Gov. Code

§53356.1). When foreclosure is ordered by the legislative body, the County Tax Collector is relieved

of all duty to collect the special taxes for the CFD. (Gov. Code §53356.2) All special taxes, interest,

penalties, costs, fees, and other charges that are delinquent shall be collected in the foreclosure action

(Gov. Code §53356.1(c)); and such items that may occur after judgment and prior to sale may be

included in the judgment or a modified judgment (Gov. Code §53356.1(c)).

B.

BACKGROUND - HISTORY OF PROVISIONS OF

3Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

THE ACT RELATING TO THE SPECIAL TAX LIEN.

The major factual allegation throughout both of the Cross-Complaints, is that PLAINTIFF

never perfected its “special tax lien,” because it never properly recorded its “Notice of Special Tax

Lien.” In order to fully grasp the utter irrelevance of such allegations, one must understand the

legislative history of the ACT, as it pertains to the special tax lien.

1. The ACT as Originally Adopted in 1982.

The ACT was adopted by the California State Legislature and signed into law in 1982. As

originally adopted, the ACT had no provision for a “special tax lien.” The only relevant provision

was contained in Section 53340 and simply provided that:

The special tax shall be collected in the same manner as ordinary ad valorem propertytaxes are collected and shall be subject to the same penalties and the same procedureand sale in case of delinquency as is provided for ad valorem taxes, or anotherprocedure may be adopted by the legislative body. (Emphasis added)

The other “procedure” which the ACT authorizes to be adopted, is another collection or

billing procedure such as directly sending each tax bill to each assessed property owner in the CFD

as opposed to placing the same on the County tax rolls for collection. Regardless of the collection

procedure chosen by the legislative body, the tax constitutes a lien which attaches annually on January

1 prior to the levy thereof and is legally canceled only when paid, or when the property is sold to

satisfy it.

Ad valorem property taxes, in and of themselves, constitute a lien against the property as a

matter of law under Revenue and Taxation Code section 2187, which provides as follows:

Every tax on real property is a lien against the property assessed. (Rev. & Tax. Code

§2187; Emphasis added)

Moreover, tax liens attach as set forth in Revenue and Taxation Code section 2192 which

provides as follows:

4Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

Except as otherwise specifically provided, all tax liens attach annually as of 12:01 a.m.on the first day of January preceding the fiscal year for which the taxes are levied.(Rev. & Tax. Code §2192; Emphasis added)

Finally, tax liens remain in effect until (1) the tax is paid or legally canceled, or (2) the

property is sold to satisfy the tax lien. (Sts. & Hy. Code §2194)

2. The 1986 Amendments.

In 1986, by its adoption of Chapter 1102, section 33, in the Statutes of 1986 effective

September 24, 1986, the Legislature clarified the ACT to specifically refer to the tax lien in section

53340 by striking the stricken language and adding the underlined language in the following quoted

sentence from said section 53340:

“The special tax shall be collected in the same manner as ordinary ad valoremproperty taxes are collected and shall be subject to the same penalties and the sameprocedure and sale, sale, and lien priority in case of delinquency as is provided for advalorem taxes, unless another procedure has been authorized in the resolution offormation establishing or another procedure may be the district and adopted by thelegislative body.”

This amendment in 1986, marked the first reference to the tax lien in the ACT. The 1986

amendments also added Streets and Highways Code section 3115.5 to provide for the recordation

of “Notice of Special Tax Authorization.” This notice did not create the tax lien, but merely gave

notice of it. The Legislature made section 3115.5 applicable by adding section 53328.5 to the ACT,

to read, in pertinent part, as follows:

Division 4.5 (commencing with Section 3100) of the Streets and Highways Codeapplies with respect to any special tax levied pursuant to this chapter. This chapteris a “principal act” as that term is defined in Section 3100 of the Streets and HighwaysCode. . . . The failure of the clerk or recorder to perform the filings shall not subjectthe local agency or any of its officers or employees to civil liability. (Gov. Code§53328.5; Emphasis Added)

In effect, when the CFDs were formed, the only act necessary to perfect the lien was that a

“tax” be “levied” on “real property” within the meaning of Revenue and Taxation Code section 2187.

78 PLAINTIFF’s Request for Judicial Notice, filed concurrently herewith, is referred toherein as “RJN.”

5Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

There was, during this period, no requirement to record any document whatsoever to perfect the tax

lien, but notice thereof was to be given in accordance with said Division 4.5, which included

recording a map showing the boundaries of the CFD (Gov. Code §53325.1(a)(5); Sts. & Hy. Code

§3111, 3113) and the Notice of Special Tax Authorization (Gov. Code §53328.5; Sts. & Hy. Code

§3115.5).

The foregoing constitutes the controlling law in effect at the time that each of the VAL

VERDE CFD and the PERRIS CFD were formed, at the time the special taxes were approved at the

election, and at the time the bonds were issued.

3. The 1988 Amendments.

It was not until the adoption of Chapter 1365, Section 13 in the Statutes of 1988, effective

on January 1, 1989, that the concept of a recordable “Notice of Special Tax Lien,” was introduced

into the ACT.

Chapter 1365 was adopted by Senate Bill 2254 (“SB 2254"). The California Senate Local

Government Committee Report concerning these amendments states, in pertinent part, that:

[I]n response to complaints from new home buyers, the Legislature required thecommunity facilities districts’ legislative body to record a special tax notice soon afterthe formation of the new district (Sen. Bill No. 1115 Mello, 1986). But Mello-Roosspecial taxes are collected with other property taxes and rely upon the property taxlien to secure its collection. For this reason, title companies are unaware of Mello-Roos special taxes. Some new home buyers recently complained they were unawareof the special tax . . . until after they bought their homes. (RJN78, Ex. A-1, p. 1, ¶ 3;See Also p. 3, ¶3; Emphasis added)

SB 2254 permits the district’s legislative body to impose a separate, continuing lienon district property to secure a voter-approved special tax. (RJN, Ex. A-1, p. 3, ¶ 4;Emphasis added)

Said report further explains that:

SB 2254 tightens the procedures for collecting special taxes and clarifies several

6Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

ambiguities in the Act. . . . The creation of a separate recorded special tax lien enablestitle companies to make information on the special taxes easily available toprospective home buyers. (Emphasis added) (RJN, Ex. A-1, p. 4, ¶ 5)

By Chapter 1365, the Legislature added such additional, separate lien to provide such further

notice to title companies and prospective home buyers. First the Legislature amended Government

Code section 53340 to add the second paragraph thereof to provide, in pertinent part, that “all special

taxes levied by a community facilities district shall be secured by the lien imposed pursuant to section

3115.5 of the Streets and Highways Code. . . .” Simultaneously, the Legislature amended said section

3115.5 to amend subdivision (b) thereof to change the reference from that of a “Notice of Special Tax

Authorization,” which merely gives notice of the general tax lien, to that of a “Notice of Special Tax

Lien,” which actually “imposes” a separate, continuing special tax lien. Also effective January 1,

1989, the Legislature added section 53328.3 to require that all new CFDs “shall” record the Notice

of Special Tax Lien imposing such additional lien of the special tax. For the first time, the Legislature

had, only as of 1989, required CFDs to record a Notice of Special Tax Lien, but only in cases where

the voter approval was received after January 1, 1989.

4. Pre-1989 CFDs Were Authorized But Not Required To Record A Notice OfSpecial Tax Lien.

CFDS formed prior to 1989, however, were simultaneously authorized, but not required, to

record such a notice by the Legislature’s amendment of the third sentence of section 53328.5 of the

ACT to provide that:

In all cases in which special taxes have been approved by the qualified electorspursuant to this Chapter prior to January 1, 1989, the legislative body may direct theclerk of the legislature body to impose a lien for the special taxes . . . by performingthe filings required by Division 4.5 . . . (Emphasis added)

The Legislature neither required pre-1989 CFDs to use the new process to impose another,

7Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

second lien of the special taxes, nor did it in any way eviscerate the legal effect of the first, pre-

existing lien imposed and attaching annually pursuant to Revenue and Taxation Code sections 2187

and 2192. Certainly, the pre-existing tax lien was not “legally canceled” by the Legislature within the

meaning of Revenue and Taxation Code section 2194.

C.

BACKGROUND - STATEMENT OF PERTINENT FACTS.

1. Facts Pertinent to Both The VAL VERDE CFD and the PERRIS CFD.

Both CFDs were formed at the behest of the Warmington Co., DEFENDANT’s predecessor

in interest. In both cases, the Warmington Co. was in the process of obtaining land entitlements to

proceed with the development of the property as the “Moreno Valley Ranch.” One of the legal

entitlements required was the provision of school facilities and/or school mitigation fees (collectively

“SCHOOL OBLIGATIONS”). In order to satisfy its SCHOOL OBLIGATIONS to each of the

school districts, the Warmington Co. entered into written agreements (“CFD AGREEMENTS”) with

each district, wherein each district agreed to form its respective CFD to finance the developer’s

respective SCHOOL OBLIGATIONS. (RJN, Exs. A-2 and A-3) In addition, in both cases, the

parties mutually agreed on the specific schools to be funded with the CFD bond proceeds. (RJN, Ex.

A-2, pp. 3-4, §§2 & 3 and Ex. A-3, pp. 2-3, §§2&3)

In both cases, the parties mutually agreed upon virtually identical language showing that the

formation of the CFDs and payment of the special taxes fulfilled the developer’s SCHOOL

OBLIGATIONS, to wit:

It is acknowledged and agreed that the rights and obligations of the Parties under thisAgreement fully satisfy the Parties’ respective obligations with regard to the provisionof school facilities and school fees for the Moreno Valley Ranch Project and that,upon issuance of the Bonds, no other school facilities or school fees shall be requiredby the District of the Company for the Moreno Valley Ranch development withinCFD No. 87-1 and any school fees paid to the District or set aside by Company shallbe released by District. (RJN, Ex. A-2, pp. 5-6, §8; See also, Ex. A-3, p.7, §9)

8Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

Finally and most importantly, both of the CFD AGREEMENTS are made binding upon all

successors in interest, including DEFENDANT. Both CFD AGREEMENTS provide:

This Agreement shall be binding upon and inure to the benefit of the successors andassigns of the Parties. (RJN, Ex. A-2, p. 6, §10 and Ex. A-3, p. 8, §11)

Thus, the proceedings described below, for each of the CFDs, were taken not only with the

landowners consent, but in fulfillment of the districts’ respective obligations to DEFENDANT and

its predecessors in interest.

2. Facts Pertinent to the PERRIS CFD.

In response to a Petition from the then owner of the subject property, on October 14, 1987,

the Board of Trustees of the Perris Union High School District adopted Resolution No. 10 stating

its intention to form the PERRIS CFD (RJN, Ex. B-1) and Resolution No. 11 stating its intention to

incur bonded indebtedness in the amount of $17,000,000 within the PERRIS CFD for the purpose

of financing the planning, design, construction, equipping and acquisition of certain public school

facilities to serve the area within the PERRIS CFD. (RJN, Ex. B-2) Following a duly noticed public

hearing (RJN, Ex. B-3), on December 2, 1987, said Board of Trustees adopted Resolution No. 15

which established the PERRIS CFD and authorized the levy of a special tax within the PERRIS CFD

(RJN, Ex. B-4) and also adopted Resolution No. 16 which determined the necessity to incur bonded

indebtedness in the amount of not to exceed $17,000,000 within the PERRIS CFD and providing

a Special Election to approve the same. (RJN, Ex. B-5) The legislative body did not set forth any

collection procedure other than placement on the tax roll, in any of its Resolutions. (RJN, Ex’s B-1

to B-7) Said Board of Trustees simultaneously adopted Resolution No. 17, officially calling the

special election within the PERRIS CFD for March 31, 1988, on the proposition of incurring bonded

indebtedness, levying a special tax and setting an appropriations limit within the PERRIS CFD. (RJN,

Ex. B-6) The election was duly conducted, received unanimous voter approval, and on April 13,

9Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

1988, the election results were certified by said Board of Trustees. (RJN, Ex. B-7) On April 15,

1988, the Clerk of said Board of Trustees recorded the “Notice of Special Tax Authorization,” as was

authorized by Government Code section 53340 and Streets and Highways Code section 3115.5 as

then in effect. (See Exhibit “3" of the Cross-Complaint in Case No. 287257) As a matter of law, said

Notice of Special Tax Authorization, which MCKENZIE VISTA admits in its pleadings was recorded

in the Office of the County Recorder for the County of Riverside, was in compliance with the then

requirements of Streets and Highways Code sections 3115.5 and 3114.5, as in effect at that time.

However, in order to protect bondholders against property owners or others later challenging any

particular aspect of the Notice or the CFD, the Board of Trustees also adopted Resolution No. 29,

ordering that the above matters be validated as set forth below. (RJN, Ex. B-8)

On April 22, 1988, said Board of Trustees caused a validation action (know as Riverside

County Superior Court Case No. 192833) to be filed against “All Persons Interested in the Matter

of the Issuance of Bonds and the Levy of a Special Tax of the [PERRIS CFD].” (RJN, Ex. C-1) The

validation action was filed pursuant to Code of Civil Procedure section 860 in the Superior Court for

the County of Riverside to declare, inter alia, that:

The provisions of Resolution Numbers 10, 11, 15, 16, 17, 21: 87-88, and 28 werevalid and in accordance with the California Constitution and applicable laws of theState of California; that all proceedings with respect to the formation andestablishment of the PERRIS CFD and the establishment of the boundaries thereof,the determination of necessity of the PERRIS CFD to incur a bonded indebtednessin an amount not to exceed $17,000,000 and the authorization for the annual levy ofspecial taxes on all property within the boundaries of the PERRIS CFD to pay theprincipal of and interest on the bonds of the PERRIS CFD have been properly andvalidly conducted in conformity with the requirements of the ACT; that the PERRISCFD and the boundaries thereof have been properly and validly established; that themethodology of determining and apportioning the annual amounts of special taxes andthe special taxes levied upon lots or parcels of land with the PERRIS CFD inconformance with such methodology “will be validly levied in conformance with saidACT and applicable provisions of the California Constitution” ; that the special taxesare and represent valid special taxes and that the bonds of the PERRIS CFD will be,upon their issuance, sale and delivery, legal and valid obligations of the PERRIS CFD,secured by and payable from the proceeds of special taxes to be levied on land in the

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PERRIS CFD; and that the consolidated special elections on the proposition of thePERRIS CFD incurring a bonded indebtedness and on the propositions with respectto the annual levy of special taxes on land within the PERRIS CFD to pay principalof and interest on the bonds thereof were properly held and conducted and are validand binding elections for purposes of the ACT. (RJN, Ex. C-1, p. 12, l. 15 throughp. 17 l. 21; Emphasis added)

Said action was personally served on the predecessor in interest to DEFENDANT herein.

(RJN, Ex. C-2) In addition, on April 25, 1988, the Superior Court granted the application of the

PERRIS CFD (RJN, Ex. C-3) for an Order Authorizing the Publication of Summons in said validation

action. (RJN, Ex. C-4) On June 13, 1988, after due posting and publication of the summons (RJN,

Ex’s. C-5, C-6 & C-7), and in response to Plaintiff’s application (RJN, Ex’s C-8 & C-9), the Superior

Court, Judge Victor Miceli, entered judgment and issued its statement of decision in favor of the

Perris Union High School District (collectively, the “PERRIS JUDGMENT”). (RJN, Ex’s C-10 &

C-11) Pursuant to a further Court order (RJN, Ex. C-12), the PERRIS JUDGMENT was duly

posted (RJN, Ex. C-13) and published. (RJN, Ex. C-14)

The PERRIS JUDGMENT contained numerous findings of fact, regarding each and every

detailed fact of the proceedings leading up to the issuance of bonds (RJN, Ex. C-11; p.1, l.16 through

p. 11, l. 19) and the following conclusions of law:

(1) that the jurisdiction of all persons was had by the publication of the summonspursuant to section 861, (2) that the action was properly brought under Code of CivilProcedure sections 860, et seq., (3) that the provisions of Resolution Numbers 10, 11,15, 16, 17, 21:87-88, and 28 are valid and in accordance with the CaliforniaConstitution and the applicable laws of the State of California, (4) that all proceedingswith respect to the formation and establishment of the [PERRIS CFD] and theestablishment of the boundaries thereof, the determination of the necessity of the[PERRIS CFD] to incur a bonded indebtedness in an amount not to exceed$17,000,000, and authorizing the annual levy of special taxes on all property withinthe boundaries of the [PERRIS CFD] to pay the principal of and interest on the bondsof the PERRIS CFD have been properly and validly conducted in conformity with therequirements of the ACT; (5) that the [PERRIS CFD] and the boundaries thereofhave been properly and validly established; (6) that the methodology of determiningand apportioning the annual amounts of special taxes, and the special taxes leviedupon lots and parcels of land within the [PERRIS CFD] in conformance with such

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methodology will be validly levied in conformance with said ACT and all applicableprovisions of the California Constitution; (7) that the special taxes, and saidmethodology for determining annual amounts of special taxes and maximum annualamounts of special taxes set forth in Exhibit C to Resolution No. 10 are and representvalid special taxes; (8) that the principal of and interest on the bonds of the [PERRISCFD], when issued, will be properly payable from the proceeds of the special taxesto be levied on land in the [PERRIS CFD] in accordance with said methodology; thatthe bonds of the [PERRIS CFD] will be, upon their issuance, sale and delivery, legaland valid obligations of the [PERRIS CFD], secured by and payable from theproceeds of the special taxes to be levied on the land in the [PERRIS CFD]. (RJN,Ex. C-11; p. 11, l. 21-p. 15, l.23; Emphasis added)

On June 29, 1988, said Board of Trustees adopted Resolution No. 42:87-88 approving a

Bond Purchase Agreement (RJN, Ex. B-9) and Resolution No. 41:87-88 providing for the issuance

of $17,000,000 in special tax bonds to provide funds for the acquisition and construction of certain

public school facilities. (RJN, Ex. B-10) In accordance with section 53356.1 of the ACT, the Board

of Trustees covenanted with the bondholders that it would foreclose in the event the special tax

payments were delinquent. (RJN, Ex. B-10, p.22, ¶4) The world was placed on notice of a tax lien

by the recorded boundary map of the PERRIS CFD. (RJN, Ex. B-11) The bonds were issued on

July 20, 1988, only after the expiration of the right of any person to appeal the Validation Action.

(RJN, Ex. B-12) All of such taxes as were levied against the subject properties have been paid, save

those installments referenced in the complaint and any subsequent installments.

3. Facts Pertinent to the Val Verde CFD .

Also based upon the landowner’s Petition (RJN, Ex. D-1), on September 1, 1987, the Board

of Trustees of the Val Verde School District adopted its Resolution No. 5 declaring its intention to

establish the VAL VERDE CFD and to authorize the levy of a special tax within the VAL VERDE

CFD (RJN, Ex. D-2), and adopted its Resolution No. 6 declaring its intention to incur bonded

indebtedness in the amount of $20,000,000 within the proposed VAL VERDE CFD. (RJN, Ex. D-3)

After modifying the proceedings to finance a certain high school rather than a middle school (RJN,

Ex. D-4), on November 2, 1987, said Board of Trustees adopted its Resolution No’s 11 and 12

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declaring the VAL VERDE CFD formed, subject to an election of the qualified electors and

submitting a bond proposition to the qualified electors within the VAL VERDE CFD. (RJN, Ex’s D-5

and D-6) On November 16, 1987, the formation of the VAL VERDE CFD was unanimously

approved at an election held for such purpose by the qualified elector within the VAL VERDE CFD.

(RJN, Ex. D-7) On November 24, 1987, the Val Verde School District duly recorded its “Notice of

Special Tax Authorization” as required by Government Code section 53340 and Streets and

Highways Code section 3115.5. (See Exhibit "1" of the Cross-Complaint in Case No. 287259)

On December 22, 1987, said Board of Trustees caused a validation action (known as

Riverside County Superior Court Case No. 191022) to be filed against All Persons Interested in the

Matter of the Issuance of Bonds and the Levy of the Special Tax of the VAL VERDE CFD. (RJN,

Ex. E-1) This validation action was also filed pursuant to Code of Civil Procedure section 860 in

the Superior Court for the County of Riverside to obtain an adjudication of the validity of the special

tax and the bonds issued pursuant thereto. On PLAINTIFF’s application (RJN, Ex’s E-2 & E-3), on

December 23, 1987, the Superior Court granted an Order Authorizing the Publication of the

Summons in said validation action. (RJN, Ex. E-4) On February 22, 1988, after due publication of

the summons and PLAINTIFF’s recordation of a Lis Pendens (RJN, Ex. E-5), the Superior Court,

Judge Victor Miceli, entered judgment in favor of the then Val Verde School District (“VAL VERDE

JUDGMENT”). (RJN, Ex. E-9) The VAL VERDE JUDGMENT expressly “ordered, adjudged and

decreed,” inter alia, that:

the “action was properly brought pursuant to the provisions of Code of CivilProcedure section 860, et seq., and Government Code section 53359 and the Courthas jurisdiction over all defendants;” that “Resolution No’s 4, 5, 6, 10, 11, 12, and 17declaring the intention of the School District to enter into certain Joint FinancingAgreements, to form the [VAL VERDE CFD], modifying certain proceedings,declaring the intent to issue bonds, establishing [VAL VERDE CFD], declaring thenecessity to incur bonded indebtedness, submitting to the qualified voters of [VALVERDE CFD] a proposition to incur bonded indebtedness in an amount not to exceed$20,000,000 within [VAL VERDE CFD] and certifying the results of the election and

13Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

directing the levy of the special tax, respectively, are valid and in conformity with theACT, the Constitution and other applicable laws of the State of California;” that “theNovember 16, 1987 election was valid and binding for purposes of (a) authorizing thelevy of the special tax in the manner set forth in Resolution No. 11 and the issuanceof $20,000,000 in bonds by [VAL VERDE CFD] and (b) establishing anappropriations limit . . .;” that “the special tax provided for in Resolution No. 11 is avalid special tax under the provisions of Sections 1 and 4 of Article XIIIA of theConstitution of the State of California and not an impermissible ad valorem tax;” andthat “the special tax of the [VAL VERDE CFD] will be, upon levy, a legal and validobligation of the land within the [VAL VERDE CFD] and it may be levied andapportioned at the rate, in the manner and for the purposes set forth in Resolution No.11.” (Emphasis Added) (RJN, Ex. E-9, p.4, l. 23 to p. 6, l. 3)

The VAL VERDE JUDGMENT further validates other aspects of the transaction, including

the validity of the bonds and the validity of the appropriations limit for VAL VERDE CFD. (RJN,

Ex. E-9, p. 6, ll.8-15) It also contains a declaration that the subject special taxes are not subject to

the limitations of Article XIIIB of the California Constitution. (RJN, Ex. E-9, p. 6, ll. 17-24) Finally,

the Judgment provides as follows, in Section 11 thereof:

Pursuant to Code of Civil Procedure section 870, this Judgment permanently enjoinsthe institution by any person of any action or proceeding raising any issue as to whichthis Judgment is binding and conclusive. (RJN, Ex. E-9, p. 7, ll. 5-8)

On April 12, 1988, said Board of Trustees adopted its Resolution No. 32 approving a Bond

Purchase Contract and Preliminary Official Statement. (RJN, Ex. D-8) On April 19, 1988, said

Board adopted its Resolution No. 33 authorizing the issuance of its 1988, $19,000,000 Special Tax

Bonds. (RJN, Ex. D-9)

On May 5, 1988, said Board of Trustees issued $19,000,000 in special tax bonds to provide

funds to pay for the costs of the acquisition and construction of two elementary schools, two parks,

and certain engineering, design and planning costs for a high school to serve the property within the

VAL VERDE CFD. (RJN, Ex. D-11) Again, the VAL VERDE CFD bonds were issued only after

the expiration of the statute of limitations for contesting the VAL VERDE JUDGMENT. Also again,

the legislative body of the VAL VERDE CFD covenanted to the bondholders that it would foreclose

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against properties represented by delinquent special taxes. (RJN, Ex. D-9, “Exhibit B” thereto, p.

28, ¶ 5) Also again, the legislative body did not provide for another collection procedure in any of

its resolutions. (RJN, Ex’s. D-1 to D-9) Also again, the world was put on notice of the tax lien

securing these bonds by the recordation of a boundary map (RJN, Ex. D-10) and a Notice of Special

Tax Authorization. (RJN, Ex. D-12) In each year since 1988, the PLAINTIFF has levied special

taxes in accordance with the ACT against the subject property. All of such special taxes levied

against the subject property have been paid, except for those specified in the complaint and any

subsequent special taxes against said properties.

4. PLAINTIFF’s Recordation of Notices of Special Tax Liens, after the 1988Amendments to the ACT.

Later, after the 1988 amendments to both the ACT and sections 3114.5 and 3115.5 of the

Streets and Highways Code, PLAINTIFF voluntarily and under no legal compulsion whatsoever,

recorded its Notices of Special Tax Liens for each of the PERRIS CFD and the VAL VERDE CFD.

(See Exhibit "5" to DEFENDANT’s Cross-Complaint in Case No. 287257 and Exhibit "4" to

DEFENDANT’s Cross-Complaint in Case No. 287259) The Notices of Special Tax Liens were

recorded, not because they were legally required to be recorded, but because they were authorized

to be recorded and served to impose a further lien of the special tax, in addition to the tax lien

previously imposed pursuant to Revenue and Taxation Code section 2187.

DEFENDANTS’ Cross-Complaints assail the “special tax lien,” but flagrantly ignore the

general tax lien imposed as a matter of law upon the levy of a tax on real property. DEFENDANT

cannot point to any provision of the ACT wherein the Legislature required the legislative body of a

community facilities district which was formed prior to January 1, 1989 to record a Notice of Special

Tax Lien. Nor can DEFENDANT cite any provision of the ACT which sets forth the date by which

a pre-1989 CFD should record such a notice. In fact, the ACT does not require that a pre-1989 CFD

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ever record such notice. Yet, at all times since the ACT was adopted, it has always permitted

foreclosure actions, as a cumulative remedy, to collect delinquent special taxes. (Gov. Code

§53356.1) Clearly, pre-1989 CFDs are authorized to foreclose on delinquent special taxes based upon

the lien imposed by law under Revenue and Taxation Code section 2187. Pursuant to this authority,

and the covenants to foreclose of each of the CFDs, PLAINTIFF filed these two actions, on behalf

of all bondholders of the CFDs, to collect the delinquent taxes by foreclosing on the lien of the

delinquent special taxes previously levied.

D.

BACKGROUND - NATURE OF THE CROSS-COMPLAINTS.

Each of the Cross-Complaints in the consolidated actions are substantially identical. Each

contains sixteen (16) causes of action against PLAINTIFF and Perris Union High School District,

which has now been joined in this action by DEFENDANT. DEFENDANT has also joined the

County Tax Collector and the County Auditor in the action. Each Cross-Complaint was filed and

served in response to the Complaints in the consolidated actions herein, nearly ten (10) years after

the CFDs were formed and their bonds issued. For the convenience of the Court, reference will be

had to the Cross-Complaint in the action assigned case number 287257. All such comments,

however, pertain with equal force, to the Cross-Complaint filed in the action assigned case number

287259.

As will be shown in a separate motion for sanctions, if the Cross-Complaints are not

dismissed, they are completely void of any colorable merit whatsoever and have been filed by

DEFENDANT to deliberately further the improper, but expressly written, intentions of

DEFENDANT to delay these foreclosure actions “for 2 or 3 years,” in conscious furtherance of

DEFENDANT’s desire to cause a bond “default,” and, in turn, force the bondholders to accept less

than the full amount of taxes due in satisfaction of the entire lien thereof. In short, the Cross-

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Complaints amount to nothing more than a malicious prosecution overtly furthering an extortion

against the bondholders.

1. The First Eight Causes of Action.

The first eight causes of action are for (1) cancellation of instruments, (2) slander of title, (3)

declaratory relief, and (4) injunctive relief, set forth separately against each of Perris Union High

School District and the Val Verde Unified School District, being the PLAINTIFF herein.

Each of the first eight causes of action relates to the validity of the special tax imposed against

the subject property. The first 2 causes of action are to cancel all instruments authorizing the special

tax and imposing the lien of the special tax. The 3rd and 4th causes of action are to remove a

“slander of title” from the property (in the form of the special tax and the lien securing payment of

the special tax). The 5th and 6th causes of action are for declaratory relief to declare all of the

proceedings, in both the VAL VERDE CFD and the PERRIS CFD, to be null and void and of no

effect. The 7th and 8th causes of action are for injunctive relief to prohibit PLAINTIFF from

collecting the delinquent taxes by foreclosing against DEFENDANT’s property.

2. The Ninth through Sixteenth Causes of Action.

The 9th and 10th causes of action are for inverse condemnation against each of the

PLAINTIFF and the Perris Union High School District. Such causes of action allege, in essence, that

the CFDs were created and bonds were issued “for the purpose of financing the construction of

schools within the” respective CFDs, without specifying whether said CFDs and bonds were issued

for the purpose of financing all school facilities within the respective Districts. Each such cause of

action goes on to allege that “because there exists no realistic expectation that users of the Property

will have access to public schools, Cross-Complainant is currently unable to attract any purchasers

or merchant builders to the property.” It is further alleged that “PERRIS and VAL VERDE seek to

charge the Property for benefits it has not received, nor will it ever receive.” Finally, said causes of

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action allege that PERRIS and VAL VERDE “are estopped and should be barred from imposing any

special assessments against the Property, imposing or asserting any lien interests in the Property, or

otherwise attempting to foreclose any alleged lien interests in the Property.”

In causes of action 11 & 12, DEFENDANT urges the Court to impose “a resulting trust”

against the special taxes which have previously been paid by DEFENDANT, based upon the same

arguments as are set forth above. For the Court’s information, said amounts have already been paid

from the County to the School District, to the Trustee for the Bondholders, and to the Bondholders.

Similarly, the 13th through 16th causes of action, for breach of covenant and anticipatory

repudiation, are also premised on the allegation that DEFENDANT never received, and purportedly

never will receive, school facilities or “benefit” in accordance with the tax burden imposed upon it

by the special tax formula.

As will be shown hereinbelow, there are at least five separate bodies of authority, each of

which standing alone, mandates that DEFENDANT cannot possibly state a cause of action based on

the matters set forth in the Cross-Complaints.

\ \ \ \

\ \ \ \

\ \ \ \

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II.

LEGAL ARGUMENT

A.EACH AND EVERY CAUSE OF ACTION ASSERTED BY MCKENZIE VISTA IN ITS CROSS-COMPLAINTS IS BARRED BY THE DOCTRINE OF RES JUDICATA

1. Issues Adjudicated In The Validation Actions Cannot Now Be Relitigated.

As outlined above, each CFD was the subject of a validation action brought pursuant to Code

of Civil Procedure sections 860, et seq., which provides as follows:

A public agency may, upon the existence of any matter which under any other law isauthorized to be determined pursuant to this Chapter, and for sixty days thereafter,bring an action in the superior court of the county in which the principal office of thepublic agency is located to determine the validity of such matter. The action shall bein the nature of a proceeding in rem. (Emphasis added)

The “other law” which authorizes the instant matter to be the subject of a validation action

is section 53359 of the ACT, which provides as follows:

An action to determine the validity of bonds issued pursuant to this chapter or thevalidity of any special taxes levied pursuant to this chapter may be brought pursuantto Chapter 9 (commencing with section 860) of Title 10 of Part 2 of the Code of CivilProcedure . . .. Any appeal from a judgment in that action or proceeding shall becommenced within thirty days after entry of judgment. (Emphasis added)

As detailed above, each of the CFDs received the benefit of a validation adjudication from the

Riverside County Superior Court. In each case, the validation action specifically adjudicated the

special tax to be a legal and valid obligation of the land located within the respective CFDs.

Code of Civil Procedure section 869 provides as follows:

No contest except by the public agency or its officer or agent of anything or matterunder this chapter shall be made other than within the time and the manner hereinspecified. (Emphasis added)

The final and conclusive effect of the judgment is set forth in Code of Civil Procedure section

870(a) which provides as follows:

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(a) The judgment, if no appeal is taken, or if taken and the judgment is affirmed,shall, notwithstanding any other provision of law including, without limitation,Sections 473 and 473.5, thereupon become and thereafter be forever binding andconclusive, as to all matters therein adjudicated or which at that time could havebeen adjudicated, against the agency and against all other persons, and the judgmentshall permanently enjoin the institution by any person of any action or proceedingraising any issue as to which the judgment is binding and conclusive. (Emphasisadded)2. Each Cause Of Action In The Cross-Complaints Is An Attempt To Relitigate

Those Issues.

Each and every one of the 16 causes of action set forth in each of MCKENZIE VISTA’s

Cross-Complaints attacks, in one way or another, the validity of the special tax. As such, each such

cause of action is barred by the provisions of Code of Civil Procedure sections 869 and 870 and the

doctrine of res judicata. Certainly, the existence and priority of each tax lien, as assailed in causes

of action 1 through 8 “could have been adjudicated” in the validation actions and therefore was

“conclusively” adjudged “valid” and DEFENDANT, and all others are “forever” enjoined from ever

“raising any issue” with regard thereto. It can even be said that the Court did specifically validate the

liens in that the issue of the validity of the liens is subsumed in the specific findings, in each of the

validation actions, that the special taxes at issue are valid and enforceable obligations of the land

within the CFDs. Clearly, the validity of a special tax, as determined by its lien, includes the validity

of such lien. Although the word “lien” was not used at the time of the validation action due to the

historical anomaly regarding the evolution of the ACT, the tax liens were necessarily adjudicated, or

at a minimum could have been adjudicated, in the validation actions.

The claims of inverse condemnation, which are based upon the argument that the property

has not received any equitable benefit arising from the bonds also “raises issues” which were

conclusively adjudicated in the validation actions. A judgment which “validates the special taxes,”

and a tax rate formula, or “methodology,” which was before the Court as part of the action,

necessarily also validates the spread of the tax obligation among the various parcels in the CFD, as

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set forth in such tax rate formula. In addition, it should be noted that, under the ACT “there is no

requirement that the tax be apportioned on the basis of benefit to any property,” but the tax “may”

be allocated on any “reasonable basis as determined by the legislative body.” (Gov. Code §53325.3)

The legislative body’s allocation of the special tax was actually and necessarily adjudicated as part

of the validation actions.

The 11th and 12th causes of action, for the imposition of a resulting trust, and the 13th and

14th causes of action, for breach of a covenant to provide school facilities, are premised upon the

very same barred arguments. The 15th and 16th causes of action, for “anticipatory repudiation,” also

deal with the allegations that the Plaintiff has not provided “adequate school facilities for all students

that would reside within the VAL VERDE CFD, such that those owners of real property within the

VAL VERDE CFD would enjoy and obtain the benefit of the schools for which the bonds were

issued . . . .” (Cross-Complaints, p. 42, ll. 19-22) As such, these actions are also barred by the res

judicata doctrine since they depend solely on MCKENZIE VISTA’s argument that the property did

not receive benefit in accordance with its obligations.

3. This Case Exemplifies The Reasons For Validation Suits.

The belated attempts by property owners, to escape clear and definite tax liability, such as

MCKENZIE VISTA is attempting herein, was precisely the reason that the Legislature adopted and

implemented Code of Civil Procedure sections 860, et seq. PLAINTIFF is responsible for

administering the repayment of thirty-six million dollars ($36,000,000) in bonded debt. The debt is

in no way secured by PLAINTIFF’s general fund or any other source, other than the special taxes and

the right to foreclose in the event of delinquency. None of such debt was incurred until after each

CFD was adjudged and decreed, by a court of competent jurisdiction, to be validly formed, and to

have valid special taxes that can be legally levied against the properties for the purposes of securing

the repayment of valid bonds. The case of Cooper v. Leslie Salt Company ((1969) 70 Cal.2d

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627, 75 Cal.Rptr. 766) is on point. In Cooper, the California Supreme Court held that a general

demurrer was correctly sustained, without leave to amend, as to an attempt to allege a taxpayer’s

cause of action to recover sums of an improvement district allegedly applied to private purposes. The

Court specifically held as follows:

Once the district’s existence is established, either de facto or de jury, it follows thata private person may not contest the validity of proceedings leading to its formation.(Citing Hazleton v. City of San Diego, supra 183 Cal.App.2d 131, 135) In the presentcase, the prior validation judgment declared the district was validly created. Thedistrict’s existence is thus not subject to the attack here attempted.

In the present case, the prior validation judgments declared that the CFDs were validly created

and that the special taxes levied thereby are legal and valid obligations of the land therein. Neither

the CFDs’ existence, nor the enforceability of the liens securing the special taxes, nor the spread of

the special taxes, are subject to the belated attacks herein attempted.

Both the express language of Code of Civil Procedure section 870(a), and a long and

consistent line of case law on the doctrine of “res judicata” specifically provide that a prior

adjudication is binding not only on issues that were actually litigated, but also binding and conclusive

as to all issues “which at that time could have been adjudicated,” or which were “necessarily

adjudicated.” (Code of Civ. Pro. §870(a); Wodicka v. Wodicka (1976) 17 Cal.3d 181; 130

Cal.Rptr.515; Alphonzo E. Bell Corp. v. Bellvue Oil Syndicate (1941) 46 Cal.App.2d 684; 116 P.2d

786; Strickland v. Calancorporation Ltd. (1957) 156 Cal.App.2d 488; 319 P.2d 737; Hatch v. Bank

of America Natl. Trust & Savings Assoc. (1960) 182 Cal.App.2d 206; 5 Cal.Rptr. 875) Clearly, all

of the issues complained of in the Cross-Complaints, including the validity of the lien and the spread

of the tax, “could have been adjudicated” or were “necessarily adjudicated” as part of the validation

actions, nearly 10 years ago. They are all, therefore, forever barred. PLAINTIFF’s Demurrer to each

of the Cross-Complaints should be sustained in its entirety, without leave to amend, on this ground

alone.

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B.

ARTICLE XIII, SECTION 32 OF THE CALIFORNIA CONSTITUTION AND REVENUE AND TAXATION CODE SECTION 4807

PROHIBIT EACH AND EVERY CAUSE OF ACTION SET FORTH IN THE CROSS-COMPLAINTS.

1. The Constitution, Statute and Legislative Intent.

Article XIII, Section 32 of the California Constitution provides as follows:

No legal or equitable process shall issue in any proceeding in any court against thisstate or any officer thereof to prevent or enjoin the collection of any tax. Afterpayment of a tax claimed to be illegal, an action may be maintained to recover the taxpaid, with interest, in such manner as may be provided by the Legislature.

Revenue and Taxation Code section 4807 provides as follows:

No injunction or writ of mandate or other legal or equitable process shall issue in anysuit, action, or proceeding in any court against any county, municipality, or district,or any officer thereof, to prevent or enjoin the collection of property taxes sought tobe collected.

The Legislature’s intent behind the passage of Revenue and Taxation Code section 4807 was

to make the provisions of Article XIII, Section 32 of the Constitution applicable to the collection of

taxes by local agencies and their officers. (Daar v. Alvord (1980) 101 Cal.App.3d 480, 484-485)

The policy behind Section 32 is to allow revenue collection to continue duringlitigation so that essential public services dependant on the funds are not unnecessarilyinterrupted. (Citing Modern Barber Col. v. Cal. Emp. Stab. Com. (1948) 31 Cal.2d720, 726; 192 P.2d 916) Any delay in the proceedings of the officers, upon whom theduty is devolved of collecting the taxes, may derange the operations of government,and thereby cause serious detriment to the public. (Pacific Gas & Electric Co. v. StateBd. of Equalization (1980) 27 Cal.3d 277, 283; 165 Cal.Rptr. 122)

In the instant case, DEFENDANTS are deliberately trying to cause a bond default on

$36,000,000 worth of bonds. Such a result would unquestionably constitute a “serious detriment to

the public.”

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2. The Courts Have Interpreted These Provisions to Preclude All Pre-Payment

Relief.

The rule was set forth early and has been consistently followed by the California Supreme

Court and all Courts of Appeal. In People v. Skinner (1941) 18 Cal.2d 349, 356-357; 115 P.2d 488,

the Supreme Court, sitting In Bank, observed that a taxpayer is not entitled to litigate the legality,

constitutionality, or validity of any tax in advance of payment:

. . . The usual procedure for the recovery of debts is reversed in the field of taxation.Payment precedes defense, and the burden of proof, normally on the claimant, isshifted to the taxpayer. The assessment supersedes the pleading, proof and judgmentnecessary in an action at law, and has the force of such a judgment. The ordinarydefendant stands in judgment only after a hearing. The taxpayer often is afforded hishearing after judgment and after payment, and his only redress for unjustadministrative action is the right to claim restitution. (People v. Skinner, supra, at356-357)

MCKENZIE VISTA’s attempt to deny its tax liability on the technical basis that a “Notice

of Tax Lien” was not timely recorded, or even properly recorded at all, is squarely on all fours with

McKendry v. County of Kern ((1986) 180 Cal.App.3d 1165; 226 Cal.Rptr.45). In McKendry v.

County of Kern, a property taxpayer challenged the County’s recording of a certificate or renewal

certificate of delinquency for unpaid taxes, which certificates were filed for the purposes of perfecting

the County’s lien in property taxes beyond the statutorily permitted ten year period from the date of

the delinquency. The taxpayer brought a separate class-action complaint for declaratory relief against

the County, asserting that the County could not record such a certificate of delinquency for unpaid

taxes more than ten years after the taxes became due and that such recordation was an illegal and

improper attempt to create a lien on its real property. The taxpayer requested a judgment that the

certificate of delinquency filed against his property was invalid and unenforceable. Based on the

above authorities, and on its recognition that the Legislature has provided a post-payment remedy

for such taxpayers by its adoption of Revenue and Taxation Code section 5140, the trial court

24Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

determined that plaintiffs lacked standing to sue because they had not paid the delinquent taxes and

submitted a claim for refund prior to bringing their complaints for declaratory relief. The Court of

Appeal affirmed the denial of any pre-payment remedy, specifically holding that:

“Plaintiffs, by their suits to have defendants’ actions declared illegal, seek a pre-payment adjudication that would effectively prevent the collection of a tax and are,therefore, barred by section 4807 of the Revenue and Taxation Code.” (McKendryv. County of Kern, supra, at 1169, citing State Bd. Of Equalization v. Superior Court(1985) 39 Cal.3d 633, 639-640; 217 Cal.Rptr. 238 and Daar v. Alvord, supra)

The McKendry Court expressly rejected the taxpayer’s contention that, by its actions, it did

not seek to enjoin the collection of a tax, but rather, sought only a declaration that the procedure used

by the County in recording the certificates of delinquency was not authorized under the Revenue and

Taxation Code. The Court specifically precluded such a “pre-payment” form of relief.

In a similar action, where the taxpayers argued that the above constitutional prohibition

against an action to enjoin or prevent the collection of a tax did not apply because they disclaimed

any right to a tax refund, the Court held that “Section 4807 bars mandamus relief in this action,”

stating as follows:

Nevertheless, by seeking to lower their assessments, the Taxpayers were seeking toavoid the future payment of taxes. Thus, despite the disclaimer, the Taxpayers werepursuing pre-payment relief. The application of Section 4807 should not depend uponsuch a procedural fortuity. It would open a loop hole in the ban on prepayment suitsto permit such a suit whenever the Taxpayer opted to disclaim the right to a refundof past overpayments. (Merced County Taxpayers Assn. v. Cardella (1990) 218Cal.App.3d 396 at 402; 267 Cal.Rptr. 62; citing Calfarm Ins. Co. v. Dukemajian(1989) 48 Cal.3d 805, 839-840; 258 Cal.Rptr. 161)

Similarly, in Schoderbeck v. Carlson (1984) 152 Cal.App. 3d 1027; 199 Cal.Rptr. 874, the

Court held that an injunction and writ of mandamus were not remedies that were available to plaintiffs

in an action challenging the method of assessment of local ad valorem real property taxes, inasmuch

as the plaintiffs had an adequate remedy at law to a claim for refund followed by a suit for refund,

which they had in effect pursued by including a prayer for damages in their complaint.

25Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

As recently as 1992, the California Supreme Court, in bank, has again reaffirmed this rule,

stating it very simply that:

We agree in all respects with the Court of Appeal’s holding that Revenue andTaxation Code Section 4807 is a bar to this action. That section creates a statutorybar to orders enjoining the collection of a county tax which is comparable to theconstitutional prohibition against enjoining the collection of state-imposed tax. [CitingArt. XIII, §32; Western Oil & Gas Assn. v. State Bd. of Equalization (1987) 44Cal.3d 208, 213; 242 Cal.Rptr. 3341]; (Connolly v. County of Orange (1992) 1Cal.4th 1105, 1131; 4 Cal.Rptr.2d 857, 862)

3. DEFENDANT Is Attempting To Obtain Pre-Payment Relief, Without PursuingThe Remedy Provided by the Legislature.

Indeed, had MCKENZIE VISTA paid the tax to the County, or in the future whenever

MCKENZIE VISTA pays its taxes to the County, it may have standing pursuant to Revenue and

Taxation Code section 5140 to file a claim and, failing adequate redress, a legal action for a refund

of such tax. That section provides, in pertinent part, as follows:

“The person who paid the tax . . . may bring an action only in the superior courtagainst a county or a city to recover a tax which the board of supervisors of thecounty or the city council of the city has refused to refund on a claim filed pursuantto Article I (commencing with Section 5096) of this Chapter. . . .” (Rev. & Tax. Code§5140)

However, DEFENDANT opted not to pursue its legally available remedy. Instead,

DEFENDANT failed to pay the subject taxes, failed to file a claim for refund and failed to file a

lawsuit for refund. As such, DEFENDANT’s belated attempts to obtain injunctive, declaratory,

resulting trust, or any other clever form of relief dreamed-up by DEFENDANTS which “prevents or

enjoins” the collection of the tax, is strictly prohibited by the State Constitution and Revenue and

Taxation Code section 4807.

The case law is abundant, well established and long standing, and consistently applied

statewide. Moreover, the constitutional and statutory prohibitions appear to be black letter law.

26Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

PLAINTIFF’s research has revealed no case where a court allowed a property owner to avoid,

prevent, delay, or otherwise enjoin the collection of an unpaid, but previously levied, tax by assailing

either the validity of the tax or the procedures relative to the collection of that tax. Such prepayment

remedies are uniformly forbidden by the State Constitution, statutes and case law.

4. DEFENDANTS’ Attempts Are Barred By The Prohibition Against Pre-PaymentRelief.

The foregoing authorities bar each and every cause of action raised by MCKENZIE VISTA’s

Cross-Complaints. DEFENDANT’s 1st-8th causes of action, are all based upon the theory that the

“Notices of Special Tax Authorization” and “Notices of Special Tax Liens” for each of the respective

CFDs, are “of no force or effect.” (Cross-Complaint p. 19, L. 27) Each of these first 8 causes of

action fall squarely within the holding of the McKendry Court, wherein the Court refused to address

the enforceability of the tax lien on the grounds that to do so would interfere with the tax collection

process in violation of the State Constitution and Revenue and Taxation Code section 4807.

The 9th and 10th causes of action, for inverse condemnation, seek damages and allege that

PLAINTIFF should be “estopped and . . . barred from imposing any special assessments against the

Property, imposing or asserting any lien interests in the Property, or otherwise attempting to foreclose

any alleged lien interests in the Property.” (Cross-Complaint, P. 36, ll. 3-5) As such, they must fall,

for the same infirmity. The 11th and 12th causes of action, for imposition of a resulting trust,

although more creative in nature, must fail for the same reasons. The 13th and 14th causes of action

“for breach of covenant” are for “an order and judgment declaring that VAL VERDE is equitably

estopped from proceeding with its foreclosure proceedings against the Property, or from any further

efforts to impose special assessments against the Property.” (Cross-Complaint, P. 47, ll. 23-25; P.

48, ll. 1-3) As such, they squarely violate the above authorities. Similarly, the 15th and 16th causes

of action each ask for the same equitable relief. They too, violate the above well established tenets

27Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

of taxation litigation. Nowhere in MCKENZIE VISTA’s Cross-Complaints, or either of

them, does MCKENZIE VISTA argue or allege that it has paid the special taxes being sued upon by

VAL VERDE. In fact, by alleging the payment of installments of such special taxes which became

due prior to those being sued upon in this action, DEFENDANT has, under the doctrine of inclusio

unius est exclusio alterius, admitted that the taxes at issue in this suit have not been paid. The above

authorities stand for nothing short of the proposition that no process whatsoever may issue by the

Court to prevent or enjoin the collection of the taxes which have admittedly not been paid. As such,

the Demurrers to the Cross-Complaints, and each of them, should, also on these grounds alone, be

sustained in their entirety without leave to amend.

C.

EVEN IF THERE WERE SOME PROCEDURAL ERROR IN THERECORDATION OF THE NOTICE OF SPECIAL TAX LIEN

AND THERE WAS NO OTHER TAX LIEN IN PLACE,THE LEGISLATURE HAS, ON SEVERAL OCCASIONS, CURED

SUCH HYPOTHETICAL ERROR BY ITS ADOPTION OF VARIOUS VALIDATING ACTS

The repayment of public debt issued in the form of bonds is critical to the State Legislature.

The Legislature has repeatedly confirmed its mandate that technical errors or defects relating to bond

issuances not serve as a basis to in any way invalidate the obligations securing such bonds, by its

adoption, between 1 and 3 times each year and approximately twenty (20) times since the formation

of the subject CFDs, of “curative and validating statutes.” (RJN, Ex’s F-1 to F-10, inclusive) Using

the First Validating Act of 1995 (RJN, Ex. F-10) as an example only, the Legislature adopted such

Act to “validate the organization, boundaries, acts, proceedings and bonds of the State and counties,

cities, and specified districts, agencies, and entities.” (RJN, Ex. F-10, preamble) First, it should be

noted that the ACT specifically includes “community facilities districts.” (RJN, Ex. F-10, § 2(a))

Next, the ACT provides, in pertinent part, in Section 6 thereof, as follows:

28Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

All acts and proceedings heretofore taken by or on behalf of any public body underany law, or under color of any law, for, or in connection with, the authorization,issuance, sale, execution, delivery, or exchange of bonds of any public body for anypublic purpose are hereby authorized, confirmed, validated, and declared legallyeffective. (RJN, Ex. F-10, §6)

In addition, Section 7 thereof provides, in pertinent part, as follows:

This act shall operate to supply legislative authorization as may be necessary toauthorize, confirm, and validate any acts and proceedings heretofore taken pursuantto authority the Legislature could have supplied or provided for in the law underwhich those acts or proceedings were taken. (RJN, Ex. F-10, §7(a); Emphasis added)

Reading the Validating Act as a whole, the Legislature clearly intended that, where the

repayment of bonds is concerned, any act which the Legislature could have taken in order to supply

authority for an act of a local agency, even if not actually provided for in the law, is considered to

have been included in the law so that the bonds, and all acts taken in connection therewith, are valid

and enforceable obligations. The fact that the Legislature adopts such curative and validating statutes

each year evidences its long standing, incessant and conclusive mandate that the very types of

assertions being raised by DEFENDANT herein are strictly forbidden. The forbidding language is

contained in Section 8 of the Validating Act, which provides, in pertinent part, as follows:

Any action or proceeding contesting the validity of any action or proceedingheretofore taken under any law, or under color of any law, . . . for, or in connectionwith, the authorization, issuance, sale, execution, delivery, or exchange of bondsthereof upon any ground involving any alleged defect or illegality not effectivelyvalidated by the prior provisions of this act, and not otherwise barred by any statuteof limitations or by latches shall be commenced within six months of the effective dateof this act; otherwise each and all of those matters shall be held to be valid and inevery respect legal and incontestable. . . (RJN, Ex. F-10, §8; Emphasis added)

The Validating Acts have been used by the Legislature for many years, to assure that bonds

get repaid. The State Legislature, unlike the DEFENDANTS, recognizes the vital nature of public

entities meeting their financial obligations in the form of bonded indebtedness. The courts have joined

with the Legislature and supported it in this effort. In The City of Fairfield v. Hutcheon (1949) 33

29Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

Cal.2d 475; 202 P.2d 745, a City issued bonds to repair its waterworks system pursuant to a bond

act of 1901 that authorized municipal corporations to incur bonded indebtedness for the “acquisition,

construction or completion of any municipal improvements.” (Statutes 1901, p. 27 and Amendments,

2 Deerings General Laws, Act 5178) After an election and the issuance of the bonds, the plaintiff

filed suit for an order declaring that the “repair” of the waterworks systems was “not a proper

purpose for a bonded indebtedness.” (City of Fairfield, supra, at 477) The court held that “it is not

necessary, however, to decide that question, for we have concluded that the Validating Act of 1948

. . . supplied the necessary legislative authorization for the issuance of the bonds, even if certain

purposes of the proposed indebtedness were unauthorized at the time of the election.” (Id.) The City

of Fairfield court proceeded to point out that the Validating Act is not limited, in its application, to

the correction of procedural errors in carrying out the provisions of the Bond Act. Rather, it also

“operate[s] to supply such legislative authorization as may be necessary to validate any such

proceedings heretofore taken which the Legislature could have supplied or provided for in the law

under which such acts or proceedings were taken.” (City of Fairfield, supra, at 478-479) “There can

be no doubt that the Legislature could have provided in the law under which the proceedings were

taken that indebtedness could be incurred for the repair of sewer and water systems.” (City of

Fairfield, supra, at 479)

More recently, in 1983, the Fifth District Court of Appeal decided Aughenbaugh v. Board of

Supervisors (1983) 139 Cal.App.3d 83; 188 Cal.Rptr. 523). In Aughenbaugh, owners of certain

properties brought an action against the County Board of Supervisors and a local community services

district for refund of water stand-by charges, alleging that the $78 per year stand-by charge exceeded

the $10 per year charge allowed by Government Code section 61765. The Trial Court sustained the

defendant’s general demurrer to the complaint without leave to amend. The Court of Appeal

affirmed, first pointing out that (just like in the case of a special tax levied to repay CFD bonds) “the

30Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

method of paying the principal and interest of the revenue bonds is part of the bond contract.”

(Aughenbaugh, supra, at 88; citing Shouse v. Quinley (1935) 3 Cal.2d 357, 360; 45 P.2d 701;

Hershey v. Cole (1933) 130 Cal.App. 683, 688; 20 P.2d 972; Louisiana Ex Rel. Hubert v. New

Orleans (1909) 215 US 170, 176-177; 54 L.Ed. 144, 148) Next, the court notes that “an

examination of [certain] statutes contained in the Revenue Bond Law of 1941 leads us to conclude

that the stand-by charges are part of the bond contract.” (Id.) Citing eighteen validating acts between

the date the stand-by charges were initially imposed and the date the lawsuit was filed, the Court

noted that “such statutes also provide legislative authority for any act which the Legislature could

have supplied in the law under which the acts or proceedings were taken. The Court then held that

“since Government Code section 61765 is merely a legislative limitation on the amount to be

prescribed for stand-by charges each year, the legislative ratification cured any violation of the

statutory limitation insofar as the bonds are concerned.” (Aughenbaugh, supra, at 90-91) The

Aughenbaugh Court cited, as authority for such a conclusion, the case of City of Venice v. Lawrence

(1914) 24 Cal.App. 350; 141 P. 406 for the proposition that:

It has repeatedly held that the legislature may validate past transactions when it couldin advance, without contravening constitutional provisions, have authorized theproceedings taken as a precedent condition to the exercise of municipal power inissuing bonds. In other words, as to all steps which the legislature could, in the firstinstance, have dispensed with, it may by retroactive statute declare the taking thereofunnecessary.

In the instant case, it is clearly conceivable that the Legislature “could have” authorized, and

in fact did authorize, the collection of the special tax based upon enforcement of the lien of general

taxes as set forth in Revenue and Taxation Code section 2187. Similarly, with regard to

DEFENDANT’s allegations of inappropriate spread of the “benefit” of school facilities, the

Legislature clearly “could have” added to the ACT a provision to the effect that facilities may be

provided first to developed properties and that facilities do not need to be provided to vacant land

31Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

such as the DEFENDANT’s vacant land, until it develops. More importantly, no matter what alleged

“defects” or “improprieties,” the DEFENDANT may imagine or assert (that are not already in the

Cross-Complaints), if there be any, the Legislature could have avoided them and did in fact cure them

by the adoption of subsequent Validating Acts.

Given the vast and sweeping effect of the numerous validating acts which have been adopted

between the issuance of bonds by the CFDs in 1987 and 1988, and the filing of the Cross-Complaint

in 1997, it is indisputable that the Legislature has evidenced its intent to declare all acts in connection

with the formation of the CFDs, including the imposition of both the general tax lien under Revenue

and Taxation Code section 2187 and the Special Tax Lien imposed pursuant to Streets and Highways

Code section 3115.5, valid and enforceable and that any errors or technical defects in connection with

such liens were cured by the Legislature.

In short, DEFENDANTS cannot possible state any cause of action based upon any defect,

impropriety, or irregularity which is “in connection with” the CFD bonds, because any such defect,

impropriety or irregularity has, many times over, already been cured and validated by the State

Legislature and is beyond attack at this time. As such, PLAINTIFF’s Demurrer should be sustained

without leave to amend and the Cross-Complaints should each be dismissed with prejudice on this

ground alone as well.

D.

EACH AND EVERY CAUSE OF ACTIONSET FORTH IN THE CROSS-COMPLAINTS

IS BARRED BY THE STATUTE OF LIMITATIONSSET FORTH IN GOVERNMENT CODE SECTION 53359

Government Code section 53359 provides, in pertinent part, as follows:

An action to determine the validity of bonds issued pursuant to this chapter or thevalidity of any special taxes levied pursuant to this chapter may be brought pursuantto Chapter 9 (commencing with Section 860) . . . of the Code of Civil Procedure but

32Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

shall, notwithstanding the time limits specified in Section 860 of the Code of CivilProcedure, be commenced within 30 days after the voters approve the issuance of thebonds or the special tax if the action is brought by an interest person pursuant toSection 863 of the Code of Civil Procedure.

In the case of both the PERRIS CFD and the VAL VERDE CFD, the legislative bodies

deliberately waited until this statute of limitations had expired before they issued bonds and incurred

public indebtedness. Again, each of DEFENDANT’s 16 causes of action attempts to “determine the

[in]validity of [the] special taxes levied pursuant to [the ACT].”

Even DEFENDANT’s claim for “inverse condemnation” is governed by the 30 day statute

of limitations. In Allis-Chalmers v. City of Oxnard (1980) 105 Cal.App.3d 876; 165 Cal.Rptr. 128,

a property owner alleged that a city’s levy of assessments against his property for an improvement

district constituted a “taking” in inverse condemnation. The Trial Court sustained the defendant’s

demurrer to the complaint without leave to amend on the ground that the complaint was not filed

within the 30-day period provided by Streets and Highways Code section 10400, for contesting the

validity of such an assessment. The Court of Appeal affirmed, holding that Plaintiff’s allegations did

not create a cause of action under the due process clause of the Federal Constitution and that, even

if it did, the 30-day period is a statute of limitations and not a substantive impediment to the exercise

of a federally created right, if one in fact exists. (Allis-Chalmers, supra, 882) The Court of Appeal

also rejected Plaintiff’s contention that the Trial Court should have allowed them leave to amend,

holding that additional allegations proposed by the Plaintiffs would not raise any litigable issue.

(Allis-Chalmers, supra, 883) As succinctly stated by the Chalmers Court:

The short statutes of limitations such as Section 10400 are essential to theconsummation of the proceedings and to provide assurance to bond buyers that theirinvestment will be reasonably safe and secure. Under such circumstances, the trialcourts action in sustaining the city’s demurrer without leave to amend was proper.(Id.)

Similarly, when a school district is faced with a default on a CFD bond issue containing its

33Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

name, such as is threatened by DEFENDANT’s both expressly in writing and by its continual refusal

to pay the delinquent special taxes at issue, the court sustaining of the PLAINTIFF’s Demurrer,

without leave to amend, is proper, especially in light of the fact that the statute of limitations expired

in each case, approximately nine (9) years ago.

Again, on this ground alone, PLAINTIFF’s Demurrer to each of the Cross-Complaints should

be sustained without leave to amend.

E.

EACH AND EVERY ONE OF DEFENDANT’S CAUSES OF ACTION WHICH ASSERT A CLAIM FOR DAMAGES

IS BARRED BY DEFENDANT’S FAILURE TOALLEGE COMPLIANCE WITH THECALIFORNIA TORT CLAIMS ACT

The California Tort Claims Act, contained at sections 900, et seq., of the Government Code,

provides, in pertinent part, that “all claims for money or damages” against a public entity must be

presented in the form of a claim against that entity. (Gov. Code §905) Notice of claims provisions

in the California Government Code, and all related provisions, constitute more than a statute of

limitations; compliance with such provisions, when they apply, is a condition precedent to the cause

of action. (Hacienda La Puente Unified School District of Los Angeles v. Honig (1992) (C.A.9) 976

F.2d 487; Dalton v. East Bay Municipal Utility District (1993) 18 Cal.App.4th 1566; 23 Cal.Rptr.2d

230; City of Ontario v. Superior Court (1993) 12 Cal.App.4th 894; 16 Cal.Rptr.2d 32)

The presentation of a claim to a public entity and its rejection are prerequisites to maintaining

suit against the entity; failure to comply with the mandatory requirements is fatal to the cause of

action. (Nguyen v. Los Angeles County Harbor/UCLA Medical Center (1992) 8 Cal.App.4th 729;

10 Cal.Rptr.2d 709)

Also, as set forth in Section II.B. of these Points and Authorities, DEFENDANT is required

to “exhaust its administrative remedies” by payment of the tax in question and filing a claim for refund

34Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

in accordance with Revenue and Taxation Code sections 5096. (Rev. & Tax. Code §5140)

These grounds too, justify the sustaining of Plaintiff’s Demurrer.

IV.CONCLUSIONS

The validity of the CFDs, the bonds issued by the CFDs and the special taxes levied to secure

repayment of the bonds, are all matters which have already been adjudicated by the Superior Court,

nearly ten (10) years ago. Even if these matters had not been adjudicated, DEFENDANTS are

attempting to draw the Court into violating the State Constitution and the Revenue and Taxation

Code by issuing process to enjoin or prevent the collection of the taxes which are admittedly unpaid.

Even if there were a technical defect in the proceedings, the State Legislature has repeatedly validated

all aspects of the bond issue, including the enforcement of the special tax. Moreover, DEFENDANT

has filed the Cross-Complaints approximately 9 years after the statute of limitations expired, without

filing any claim whatsoever or pursuing any other available remedy as required by law. Even if

DEFENDANT were able to scale all of these forbidding hurdles, DEFENDANT has not even

addressed the separate, independently enforceable lien established by Revenue & Taxation Code

section 2187.

/ / /

/ / /

35Points & Authorities in Support of Demurrer Document prepared on Recycled Paper v

WHEREFORE, cross-defendant respectfully requests that its demurrer be sustained without

leave to amend, and that the cross-complainants, and each of them, be dismissed with prejudice.

Dated: Respectfully submitted,

OWEN, BRADLEY & BARTRAM

By: ROBERT A. OWEN, Special Counsel for

Plaintiff and Cross-Defendant

1

HYPOTHETICAL AND ARGUMENTS OF DELINQUENT PROPERTY OWNER

Wheeler Dealer recently attended a County Tax Sale and bought two parcels of commercialproperty for a small fraction of the assessed value of the property. He had researched the propertyhimself by looking at online property records and calling the Tax Collector’s office. He was pleasedthat he had saved the price of a title search on the property and confident that the purchase was agood investment. He planned to immediately list it for sale and expected to make a substantial profitwithin a year!

On the morning of the Tax Sale, Wheeler Dealer arrived at the sheriff’s office early tointroduce himself to the officer in charge and to see if there were any other bidders for these twoparcels of property. Lucky for him, no one else had indicated an interest in the property. There wasa representative from the City that indicated it had a recorded judgment against the property fordelinquent Mello-Roos taxes, but because Wheeler Dealer had done his research, he felt confidentthat the absolute title conveyed to him under the Tax Deed would eliminate whatever judgments andliens were recorded against the property.

Everything went smoothly at the sale. Wheeler Dealer was the only bidder for the twocommercial parcels and, therefore, was able to purchase them for the minimum bid amount. As soonas the Tax Deed was recorded, he would be on his way to finding a buyer and receiving a hugewindfall!

About three weeks later, Wheeler Dealer received his copy of the recorded Tax Deed, whichverified that he had absolute title to these two commercial parcels. Everything had transpired soeasily, Wheeler Dealer began to contemplate developing the property himself; he envisioned himselfthe owner of an office building filled with lawyers and office workers. He might have stumbled ontoa future income stream, all by making a nominal investment at a tax sale! Rather than listing theproperty for sale immediately, he decided to visit the City to see what was involved in planning suchan office building.

Unfortunately for Wheeler Dealer, on his visit to the City, he was presented with a copy ofthe recorded Judgment in Foreclosure and Order of Sale for delinquent special taxes for eight taxyears in an amount close to $1 million, along with another recorded document entitled Notice ofIntent to Remove Delinquent Special Tax Installments, and a payoff letter addressed to WheelerDealer and indicating that, as the new property owner, he owed the City over $1.5 million. BecauseWheeler Dealer was certain he had absolute title as stated on his Tax Deed, he thought the City wasmistaken. Instead of taking the three documents to an attorney for proper analysis of the situation,Wheeler Dealer demanded to speak with the City Attorney personally to take care of thismisunderstanding. Initially being denied such a meeting, he threatened to cause a public relationsnightmare for the City until he met with the City Attorney.

Reluctantly, City Attorney agrees to meet with Wheeler Dealer and at the meeting ispresented with the following Top Ten list prepared by Wheeler Dealer outlining why he owes nomoney to the City for Mello-Roos taxes.

2

WHEELER DEALER’S TOP TEN ARGUMENTS THAT HE OWES NO MONEY TO THE CITY

FOR MELLO-ROOS TAXES

1. MY TAX DEED CONVEYS THE PROPERTY TO ME FREE OF ALLENCUMBRANCES OF ANY KIND EXISTING BEFORE THE TAX SALE.

• Rev. & Tax. Code §3712(h) excepts unpaid special taxes under the Mello-Roos Actfrom elimination by Tax Deed.

• Rev. & Tax. Code §3712(a) excepts future installments of special taxes fromelimination by Tax Deed.

• Delinquent Mello-Roos taxes that have been removed from the Tax Roll are noteliminated by the County Tax Sale, whether or not the City objects to the sale.

2. REV & TAX CODE 3712 DOES NOT LIST JUDGMENTS IN ITS LIST OFEXCEPTED LIENS, SO CITY’S JUDGMENT FOR DELINQUENT MELLO-ROOSTAXES WAS WIPED OUT AT THE TAX SALE.• There is no requirement that such special taxes be in a judgment, or not.• Rev. & Tax. Code §3712(h) excepts all unpaid special taxes from elimination by Tax

Deed.

3. BECAUSE CITY FAILED TO RECORD A LIS PENDENS WHEN THEFORECLOSURE ACTION WAS FILED, AND FAILED TO RECORD THEJUDGMENT UNTIL AFTER THE TAX SALE, I RECEIVED NO NOTICE OF THISJUDGMENT, AND AM A BFP WITH NO OBLIGATION TO PAY CITY’SJUDGMENT.

• Pursuant to Sts. & Hy. Code §3114.5, the Notice of Special Tax Lien was recordedat the time the CFD was formed, thereby creating a lien upon the property.

• Pursuant to Sts. & Hy. Code §3115.5, from the date of the recordation of the Noticeof Special Tax Lien, “all persons are deemed to have notice of the contents of theNotice of Special Tax Lien.”

• The doctrine of caveat emptor applies at Tax Sales.• Regardless of City’s failure to record a lis pendens or the resulting judgment, the

purchaser received constructive notice of the special tax lien and cannot be a BFP.

4. BECAUSE NO LIS PENDENS WAS RECORDED, A QUIET TITLE ANDDECLARATORY RELIEF ACTION CAN ELIMINATE CITY’S LIEN, INCLUDINGITS JUDGMENT, AS OF THE DATE OF THE COUNTY TAX SALE.

• Rev. & Tax. Code §3950 mandates that all subsequent taxes be paid in order to statea cause of action in quiet title.

• California case law establishes that title cannot be unconditionally quieted against aspecial tax lien while the obligation of the bonds remains viable.

• The face of the Tax Deed contradicts any attempt by the purchaser to eliminatespecial taxes through the Tax Sale.

3

5. ONCE THE LAWSUIT IS FILED, MY ATTORNEY CAN UTILIZE DISCOVERYMETHODS TO REQUIRE THE CITY TO DISCLOSE ALL DOCUMENTSRELATED TO THE FORMATION OF THE DISTRICT, INCLUDING THE LEVYOF THE SPECIAL TAX LIEN AGAINST THE REAL PROPERTY IN THEDISTRICT.

• Code Civ. Proc. §2017(c) requires Court to terminate or stay discovery when no quiettitle cause of action exists and no defense can be maintained in the foreclosure action.

• Code Civ. Proc. §2017(a)’s purpose of discovery to facilitate handling of trials isthwarted if protective order not granted.

• City should file a motion for Judgment on the Pleadings along with a Motion forProtective Order to terminate or stay discovery until the decision is reached on theJudgment on the Pleadings.

6. BY ALLEGING FRAUD AGAINST THE CITY DURING THE DISTRICTFORMATION PROCESS, THE COURT WILL HAVE TO ALLOW MY ACTIONTO CHALLENGE THE SPECIAL TAX LIEN AGAINST MY PROPERTY ASUNFAIR AND UNEQUALIZED.

• Res Judicata/Collateral Estoppel defeats any allegation of fraud.• Pursuant to Statute: Govt. Code §53325.1(b) (formation);

Govt. Code §53341 (levy)• Pursuant to Legislature: yearly validating acts• Pursuant to final Foreclosure Judgment: Govt. Code §53356.1(f)• A Judgment on the Pleadings for City is the proper disposition of this case.

7. EVEN IF ULTIMATELY UNSUCCESSFUL, I CAN TIE UP THE PROPERTY INLITIGATION FOR SEVERAL YEARS UNTIL THE CITY AGREES TO WAIVEALL AMOUNTS EXCEPT THE DELINQUENT INSTALLMENT PRINCIPAL.

• Rev. & Tax. Code §§5096-5180 require payment of tax and filing of claim for refundbefore any answer or affirmative defense can be raised by property owner.

• Failure and/or inability to plead exhaustion of administrative remedy compelssummary adjudication of foreclosure without trial.

• Government Code section 53340(f) authorizes waiver of delinquency penalties andredemption penalties under specified conditions.

• Government Code section 53331.5 authorizes bond tenders for payment of specialtaxes and at foreclosure sales.

4

8. EVEN IF SECTION 3712 EXCEPTS OUT DELINQUENT MELLO-ROOS TAXESFROM THE LIENS ELIMINATED BY THE COUNTY TAX SALE, AND EVEN IFTHE LITIGATION WILL BE UNSUCCESSFUL, REV & TAX CODE 3713REQUIRES PARITY OF TAX DEEDS; SO THE CITY CAN NEVER ELIMINATEMY INTEREST THROUGH FORECLOSURE OF THE DELINQUENT SPECIALTAXES.

• Rev. & Tax. Code §3713 mandates parity of tax deeds.• Parity only applies to co-existing liens or tax deeds on the same property.• Once a purchaser at a Tax Sale allows subsequent property taxes to become

delinquent, including special taxes, the foreclosure of this subsequent tax year willeliminate purchaser’s interest in the property.

9. EVEN IF THE CITY CAN FORECLOSE AND ELIMINATE MY INTEREST, I CANALWAYS FILE FOR BANKRUPTCY WHICH WILL ALLOW ME TORENEGOTIATE THE CITY’S CLAIM AND ELIMINATE SOME, IF NOT ALL, OFTHE CITY’S JUDGMENT.

• City’s claim in bankruptcy is in rem.• California law determines nature and scope of City’s lien.• Section 506(b) of Bankruptcy Code allows interest on an oversecured claim and,

arguably, any reasonable fees, costs, or charges.• In a Chapter 7 Discharge, City can get relief from stay to pursue foreclosure.• In a Chapter 11 Reorganization or a Chapter 13 Consumer Payment Plan, California

law controls the amount of penalties and interest to be paid on the delinquent specialtax debt.

10. EVEN IF THE CITY’S JUDGMENT CANNOT BE ELIMINATED INBANKRUPTCY, I CAN FORCE THE CITY TO SPEND MONEY FORATTORNEYS’ FEES IN BANKRUPTCY COURT WHICH CAN NOT BEINCLUDED AS PART OF THE CITY’S SECURED CLAIM.

• As long as City’s lien is oversecured, attorney fees in pursuit of foreclosure can beincluded in City’s claim pursuant to Government Code section 53356.5 andBankruptcy Code section 506(b).

CALIFORNIA PUBLIC DEBT ISSUANCE BY TYPE AND REFUNDING

FOR THE PERIOD JANUARY 1, 2002 TO DECEMBER 31, 2002*

% of Issues

Refunded

11.6

.0

31.0

34.6

.0

.0

.0

22.9

.0

31.0

12.4 18.0 22.6 45.9 62.8 42.6 18.8

100.0 44.5 38.7

.0 .0

.0

.0

.1

4.4

4.5 9.1 1.6 4.2 7.1 1.8 .7 .0 .6

2.4

9.9 16.4

.3

.1

0

1,044,764,386

426,264,975 1,244,700,250

271,218,117 1,457,066,289 3,411,449,144

569,834,975 104,353,036 28,765,000

209,166,448 718,959,570

0 0

0

0

55,500,000

3,367,991,440

3,449,353,128 6,909,092,004 1,198,241,620 3,174,807,595 5,432,284,920 1,338,115,000

554,305,679 28,765,000

470,166,098 1,859,837,390

7,508,998,117 12,500,000,000

225,000,000

45,455,000

4

214

200 251 111 37 84 47 30 1

62 76

3 4

1

1

0

1,044,764,386

8,441,777,804

0

0

0

4,734,064,210

.1

4.4

32.1

26.3

.3

.1

27.2

55,500,000

3,367,991,440

24,414,968,434

20,008,998,117

225,000,000

45,455,000

20,641,908,993

4

214

899

7

1

1

165

Commercial Paper Commercial paper

Commercial Paper Subtotal

Certificates of Participation/Leases Certificates of participation/leases

Certificates of Participation/Leases Subtotal

Notes Other note Revenue anticipation note

Notes Subtotal

Commercial Paper Commercial paper

Commercial Paper Subtotal

Certificates of Participation/Leases Certificates of participation/leases

Certificates of Participation/Leases Subtotal

4,734,064,210 53.9 40,921,362,110 174

LOCAL ISSUERS STATE ISSUERS TOTAL

Bonds Conduit revenue bond General obligation bond Limited tax obligation bond Other bond Public enterprise revenue bond Public lease revenue bond Revenue bond (Pool) Sales tax revenue bond Special assessment bond Tax allocation bond

Bonds Subtotal

STATE ISSUERS Bonds

Conduit revenue bond General obligation bond Public enterprise revenue bond Public lease revenue bond

Bonds Subtotal

% of Total**

Refunded Amount($)

Issued Amount($)

# of Issues

88 54 15 8

3,103,378,993 3,710,320,000

12,982,725,000 845,485,000

1,450,488,744 2,510,320,000

773,255,466 0

4.1 4.9

17.1 1.1

46.7 67.7 6.0 .0

Notes Bond anticipation note Grant anticipation note Other note Revenue anticipation note Tax allocation note

7 3

15 4 5

181,143,000 50,700,000

193,562,927 73,930,000 14,180,000

5,705,000 0

2,962,546 0

2,565,810

.2 .1 .3 .1 .0

3.1 .0

1.5 .0

18.1

CALIFORNIA PUBLIC DEBT ISSUANCE BY TYPE AND REFUNDING

FOR THE PERIOD JANUARY 1, 2002 TO DECEMBER 31, 2002*

% of Issues

Refunded

18.9 14,390,038,333 100.0 75,988,531,488 1,974TOTAL CALIFORNIA PUBLIC DEBT ISSUES STUDENT LOAN CORP ISSUERS TOTAL 14.6

27.9

.0

72.6

96.7

.2

.0

72.6

96.7

1.0

.2

.0

0

136,500,000

21,698,577

750,000,000

188,000,000

22,448,577

2

4

3

0

136,500,000

21,698,577

11,233,356

1.0

.2

.0

8.2

750,000,000

188,000,000

22,448,577

6,268,260,927

2

4

3

674

Notes Other note

Notes Subtotal

Other Other type of debt

Other Subtotal

136,500,000

9,519,474,123

1.2

44.9

938,000,000

34,129,169,378

6

1,794

STUDENT LOAN CORP ISSUERS LOCAL ISSUERS TOTAL

Bonds Conduit revenue bond

Bonds Subtotal

# of Issues

LOCAL ISSUERS Notes

Tax and revenue anticipation note Tax anticipation note

Notes Subtotal

% of Total**

Refunded Amount($)

Issued Amount($)

639 1

5,661,545,000 93,200,000

7.5 .1

0 0

.0 .0

* Totals may include taxable debt issuances. **Totals may not add due to rounding. Source: California Debt and Investment Advisory Commission January 21, 2003.