Court case triggers alarm
Will Ventura Harbor sink Proposition 13?

By Timm Herdt
State bureau chief
Published Sunday August 22, 1999

Ventura Group Ventures would have no need for any of that, for the investors had no intention of producing goods or services of any kind.

The company was formed for a singular purpose, succinctly expressed in documents filed with the state. Asked to describe the "type of business," company officials replied: "Investment in lawsuit."

Nearly a decade later, the company is still in business. Its lawsuit is still alive, pending before the California Supreme Court and heading toward a decision that could ultimately cost every Ventura homeowner $100 and blow a hole through the tax-limiting protections of Proposition 13.

The lawsuit is the last relic of a development deal gone sour between the Ventura Port District and Ocean Services Corp., the development company the district turned to in the late '70s to convert the sleepy, small-craft harbor into a thriving center of tourism and commerce.

The deal got bogged down in litigation and finger-pointing, and by the time a shopping center and marina were built, Ocean Services had taken on so much debt it filed for bankruptcy.

The district responded by evicting the company and taking over the projects it had built. The company sued, claiming bad faith and deceit.

The lawsuit languished until, years later, some of the investors decided to cut their losses and walk away. Others teamed to form Ventura Group Ventures and bought exclusive interest in it. Although the price was not divulged, several people familiar with the deal say it was a relative pittance, about $100,000.

Within six months of purchase, that investment began to look pretty good. On Sept. 25, 1990, a Ventura County jury decided the lawsuit was worth $31 million -- the amount of damage inflicted when the Ventura Port District pulled the rug out from under Ocean Services.

The award was reduced by half on appeal, and the process of collecting has been tortuous.

Still, the return on this $100,000 investment hasn't been too bad. Last October, the Port District, under the terms of its own bankruptcy, sold $15 million in revenue bonds and from the proceeds cut a check to Ventura Group Ventures for $7.7 million.

And now, depending on the Supreme Court's decision, the return on investment could become spectacular.

Proposition 13, approved by voters in 1978, caps property taxes at 1 percent of a property's assessed valuation, unless an increase above that is approved by two-thirds of the voters. If Ventura Group Ventures' attorneys can persuade justices that Proposition 13 was never intended to allow government entities to dodge their obligation to pay off a court judgment, it could force the county to levy $20 million in taxes on Ventura property owners to pay off the remainder of the debt, plus interest.

The bottom line, say Port District officials, is that the average homeowner in the city of Ventura would be on the hook for about $100 to pay off the judgment.

The case has drawn statewide attention and the alarm of taxpayer groups.

"This is something every taxpayer ought to be concerned about," said Greg Turner, general counsel for the California Taxpayers Association. "We have a history of taxpayers being able to vote on taxes, and this would give judges the ability to impose a tax."

"This cuts right to the heart of Proposition 13," said Jonathan Coupal, president of the Howard Jarvis Taxpayers Association, the group founded by the author of Proposition 13.

If the court were to rule in favor of Ventura Group Ventures, Coupal said, the potential for court-imposed tax increases would be endless.

Coupal and others rattle off the possibilities: An employees' union successfully sues a city for raises, and taxpayers have no choice but to pony up. A civil rights group sues a transit agency to provide more bus service for the poor, and up go property taxes. An environmental group sues a county to protect an endangered species, and taxpayers get sent the bill to buy up more habitat.

As alarming as all that may sound, Ventura Group Ventures attorney John Johnson paints an equally unappealing scenario: the prospect of government running roughshod over citizens by breaking contracts without having to pay a price.

In a brief to the U.S. 9th Circuit Court of Appeal, Johnson argued that Proposition 13 was never intended "to penalize E those who had been damaged when a local entity failed to perform a contract. E If that were the purpose, local government could E make contract commitments, use the funds it had budgeted for these purposes for other programs and then, having spent its revenues elsewhere, avoid payment of a judgment by claiming additional taxes could not be levied."

In an interview, Johnson stated the case more bluntly: "Either voters in passing Proposition 13 have empowered municipalities to thumb their noses at judgment creditors or they have not."

The case of Ventura Group Ventures vs. Ventura Port District has bounced around state and federal courts for a decade. The state Supreme Court declined to hear it once, when the Port District appealed the original judgment.

Several legal permutations later, it is back to the high court again -- this time with the legal issues narrowed to a single explosive question:

Can a government agency be compelled to raise taxes to satisfy a legal judgment against it?

That is the question distilled by justices of the 9th Circuit, who in June invoked a relatively new rule of court in California and asked the state's highest court to rule on the state constitutional questions before them.

The state Supreme Court is expected to decide within weeks whether to take up the request. If it does, the federal court will abide by the state Supreme Court's opinion.

Since these interjurisdictional transfers were first authorized in California in 1998, requests for certification have been submitted four other times, with the high court accepting three.

In this case, both parties are asking Supreme Court justices to take up the question -- and they are joined in that request by 30 California cities and the Jarvis Taxpayers Association.

It's essential that justices take the case, said Port District attorney Thomas Bunn, because, "When the Supreme Court decides, that's going to be the decision."

A federal court decision, he said, could be cited by attorneys in future cases but would not be binding on California courts.

As far back as 1993, when the district first attempted to claim bankruptcy to avoid being devastated by the judgment, attorneys for Ventura Group Ventures were arguing that taxes had to be levied, despite Proposition 13's constitutional promise.

They have argued, in essence, that Proposition 13 doesn't apply here -- that the law under which the Port District was formed in 1952 is still on the books, and that law says the district has to go to the county each year and ask that sufficient property taxes be assessed to pay off its liabilities.

At a '93 hearing, Port District attorney Irving Sulmeyer poked fun at the company's argument.

"Ventura Group Ventures says, 'You shouldn't raise Proposition 13 in your response because Proposition 13 is a red herring.' Only it's more like a blue whale; it's there."

That view is shared today by Mike Saliba, executive director of the Ventura County Taxpayers Association. "I don't know how a court could say you can assess property taxpayers to pay off a private debt," he said. "If they were to succeed in that argument, it would open up a complete can of worms."

But in this can of worms, the contents are not so cut and dried as Saliba suggests.

The laws under which the district was formed were not repealed by Proposition 13, nor were 1973 statutes governing the tax rates local entities could levy to pay judgments.

Ventura Group Ventures argues that the purpose of Proposition 13 was "to control local taxation for local programs and services." Other state laws, it says, are intended to assure that local governments honor court judgments.

Larry Matheney, a former Port District commissioner, was also the assistant county counsel who filed the county's brief in the case before the federal appeals court. Although he has since left the County Counsel's Office, he acknowledges that as the case has dragged on over the years, Ventura Group Ventures' legal arguments, while once outrageous, "have been distilled and distilled and distilled. E They certainly at least pass the snicker test now."

Indeed, there is precedent on the side of the investors. In a case involving the city of Lindsey, the court held that taxes could be raised to satisfy a judgment in an inverse condemnation lawsuit.

Further, there is a century-old principle in California law that holds when public agencies engage in business the courts must treat any dispute "as if both contracting parties were private persons. Both stand upon equality before the law."

Boiled down, that means if one party has damaged another, the offending party must pay up if it has the means to do so -- and, argues attorney Johnson, the Port District has the means to pay off its debt by raising taxes.

Deciding which judgments a local district will pay, said Johnson, "is not something the statewide electorate can turn over to voters in local districts to decide."

Timeline of troubles

1979 -- Ventura Port District leases property at Ventura Harbor to Ocean Services Corp. to develop a commercial marina and what is to become the Harbor Village shopping center. Unbeknownst to the company, the property carries a restrictive covenant that prohibits development for 10 years. The district assures it will be removed.

1981 -- The owners of the restrictive covenant get a court injunction to stop development.

1982 -- Ocean Services says injunction caused losses of $1.8 million.

1983 -- Restrictive covenant lawsuit is settled, but district won't renegotiate Ocean Services lease or help cover its losses.

1984 -- Ocean Services sues for breach of contract and deceit.

1987 -- Ocean Services files for bankruptcy; the district secures an order from the bankruptcy court declaring that the lease has been rejected. The district evicts Ocean Services and takes control of the development.

April 1990 -- Ocean Services sells its interest in the lawsuit to Ventura Group Ventures, formed by some of its former shareholders.

September 1990 -- Jury awards Ventura Group Ventures $31.4 million in the bad-faith lawsuit. Judge later reduces it to $17 million.

May 1993 -- Appeals court affirms verdict, reduces award to $15.5 million, plus interest.

Aug. 19, 1993 -- California Supreme Court declines to review the appeals court decision.

Aug. 20, 1993 -- District files for Chapter 9 bankruptcy. Ventura Group Ventures contests it in federal district court, saying district cannot file for bankruptcy because it is not insolvent.

January 1997 -- Federal district court rules Proposition 13 prohibits district from levying taxes to pay off the judgment, clearing the way for the district to seek bankruptcy protection.

Aug. 20, 1997 -- Ventura Group Ventures asks Ventura County Superior Court to enforce the judgment, arguing state law requires district to pay off either by selling property or levying additional taxes.

Aug. 21, 1997 -- District files Chapter 9 bankruptcy claim, putting on hold Ventura Group Venture's claims against district.

April 1998 -- Federal court approves district's bankruptcy plan to sell $15 million in revenue bonds to pay off debts. Ventura Group Ventures accepts plan but retains the right to appeal the tax issue.

October 1998 -- Revenue bonds sold; district pays Ventura Group Ventures $7.7 million.

January 1999 -- Ventura Group Ventures appeals the tax issue to the U.S. 9th Circuit Court of Appeal.

June 9, 1999 -- The 9th Circuit asks California Supreme Court to rule on state constitutional issues and says it will abide by state Supreme Court's decision.