The developer of Hercules' Victoria by the Bay subdivision this week sued the city and two higher levels of government over the state's refusal to recognize a $53.3 million debt owed by the defunct Hercules Redevelopment Agency.

But Hercules City Manager Steve Duran, in a news release Wednesday, said the suit will have no effect on the city's finances and that it is not clear why the plaintiff included Hercules among the defendants. He predicted that the Hercules suit will be one of many that will test the state's ability to intervene in contracts made by former redevelopment agencies.

"We have no dog in this fight," Duran said, noting that under the state legislation that abolished redevelopment agencies as of Feb. 1, cities are not liable for the debts of their former redevelopment agencies.

Developer Hercules LLC, represented by attorney Andrew Sabey of Cox, Castle & Nicholson LLP of San Francisco, filed suit Wednesday in Sacramento County Superior Court against the state Department of Finance and its director Ana Matosantos; Contra Costa County Auditor-Controller Robert Campbell; and the city of Hercules, as successor agency of the dissolved Hercules Redevelopment Agency.

The suit seeks to invalidate a finding by the state, expressed in a May 17 letter, that the debt to Hercules LLC is not an enforceable obligation.


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The debt exists by virtue of a 2001 development agreement between the city, the redevelopment agency and Hercules LLC, then an affiliate of Catellus Corp., that led to the transformation of 200 blighted acres formerly occupied by the defunct Pacific Refining Co. petroleum refinery into the 880-home Victoria by the Bay. A dispute arose in 2007 over the amount that Hercules owed the developer for public improvements.

Hercules LLC sued the city and agency in late 2007, and the parties settled in 2010. The settlement called for the redevelopment agency to pay Hercules LLC more than $50 million out of property tax increments over more than 40 years.

In May, the successor agency's oversight board included the Hercules LLC debt in a recognized obligation payment schedule submitted to the state. The state, in its May 17 letter, said the debt is not enforceable because the property tax increments in question were low- and moderate-income housing set-asides, and such taxes are no longer allocated to the agency.

"The state ... has attempted, by the stroke of its pen, to abrogate contractual rights worth tens of millions of dollars," Hercules LLC's petition reads. The state, the petition continues, is pushing the city to "disavow and breach" the former redevelopment agency's written pledge of tax increments to the developer.

In his news release, Duran says that with none of its finances at stake, the city will not take sides on the issue.

"However, there is a lot at stake for Hercules LLC and the state of California," Duran continued. "This suit will probably be one of many that will determine how much authority the state has to decide who gets paid and who doesn't when it comes to contracts made by former redevelopment agencies."

Sabey, in an email Thursday, said Hercules was included as a co-defendant to protect the developer's rights and "to prevent the state Department of Finance from ordering the city or county to deliver to it tax revenues that are due to Hercules LLC."

The 2001 development agreement, Sabey added, "has priority over any rights the state is asserting to those funds."

Contact Tom Lochner at 510-262-2760.