HomeMy WebLinkAbout21CV-0734 - Demurrer Filed - After 1st Appearance_to First Amended Petition1 -
CITY OF SAN LUIS OBISPO NOTICE OF DEMURRER AND DEMURRER
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON
KARMAN AVENUE,SUITE
1000IRVINE,CALIFORNIA 92612JEFFREY V. DUNN, Bar
No. 131926 jeffrey.
dunn@bbklaw.com DANIEL L.
RICHARDS, Bar No. 315552
daniel.richards@bbklaw.
com BEST BEST &
KRIEGER LLP 18101 Von
Karman Avenue Suite 1000
Irvine, California 92612 Telephone: (949)
263-2600
Facsimile: (949) 260-0972 CHRISTINE
DIETRICK, Bar No. 206539
cdietrick@slocity.org CITY OF SAN
LUIS OBISPO CITY ATTORNEY’S OFFICE Attorneys for Defendants and Respondents
City of San Luis Obispo and
City Council of and for
the City of San Luis
Obispo EXEMPT FROM FILING FEES PURSUANT TO
GOVERNMENT CODE SECTION 6103 SUPERIOR
COURT OF THE
STATE OF CALIFORNIA
COUNTY
OF SAN LUIS OBISPO NHC SLO,
LLC,Petitioner and Plaintiff, v. CITY OF SAN
LUIS OBISPO; CITY COUNCIL OF AND
FOR
THE CITY
OF
SAN LUIS OBISPO; AND
DOES 1-10,
INCLUSIVE, Defendants and Respondents. Case No.
21CV-0734 Judge: Rita Federman
CITY OF SAN LUIS
OBISPO NOTICE OF
DEMURRER TO FIRST
AMENDED PETITION AND DEMURRER TO
FIRST AMENDED PETITION Filed concurrently with:
1. Request for
Judicial Notice. 2. Declaration
of Daniel Richards, and 3.
Proposed Order]
Date: December 29, 2022 Time:
9:
00
a.m. Dept.: 2 Action Filed:
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CITY OF SAN LUIS OBISPO NOTICE OF DEMURRER AND DEMURRER
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BEST BEST &KRIEGER
LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612NOTICE
OF DEMURRER TO ALL PARTIES AND TO THEIR ATTORNEYS OF RECORD: PLEASE TAKE NOTICE that on December
29, 2022, at 9:00 a.m., or as soon thereafter as the matter may be heard in
Department 2 of the above-entitled court, located at 1050 Monterey Street, San Luis
Obispo, California 93408, Respondents City of San Luis Obispo and City Council of and for the City of San
Luis Obispo will and hereby does demur to the First Amended Petition of Petitioner NHC SLO, LLC.
The demurrer is brought on the grounds that the first (and only) cause of action
fails to state facts sufficient to constitute a cause of action. The
Demurrer is based upon this Notice, the Demurrer, the accompanying Memorandum of Points
and Authorities, the concurrently filed Declaration of Daniel L. Richards, the concurrently filed Request for Judicial Notice,
all papers and records on file in this action, and on such other matters
as the court may consider at the time of the hearing. This demurrer follows
a conference of counsel that was held on August
10, 2022. Declaration of Daniel L. Richards [“Richards
Decl.”]
at ¶ 11.) Dated:
August 16, 2022
BEST BEST & KRIEGER LLP By:
JEFFREY V. DUNN DANIEL L. RICHARDS Attorneys for
Defendants and Respondents City of San Luis Obispo and
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BEST
BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612DEMURRER Respondents City of San Luis Obispo
and City Council of and for the City of San Luis Obispo will and hereby do
demur to Petitioner’s First Amended Petition pursuant to Code of Civil Procedure § 430.10
and § 430.30. This demurrer is
made on the following grounds: DEMURRER TO FIRST CAUSE OF ACTION 1. The First Cause of Action is barred
as a matter of law because it fails to state facts sufficient to
constitute a cause of action. (Code Civ. Proc. §
430.
10(e).). Dated:
August 16, 2022
BEST BEST & KRIEGER LLP By:
JEFFREY V. DUNN DANIEL L. RICHARDS Attorneys for
Defendants and Respondents City of San Luis Obispo and
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BEST BEST &KRIEGER
LLPATTORNEYS
AT LAW18101VON KARMAN
AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612TABLE
OF CONTENTS Page I. INTRODUCTION .............................................................................................................. 7 II. STATEMENT OF FACTS ................................................................................................. 8
A. Helios Dayspring’s Criminal Conduct and
NHC’s Misrepresentations ................. 9 1.
Spending Money for
Illegal Purposes ....................................................... 10 2. Falsification of Documents .......................................................................
11 3. Perjury ....................................................................................................... 11 4. Tax Fraud and Tax
Evasion ...................................................................... 11 B. Falsehoods in NHC’s Cannabis Operator Application ......................................... 11
C. False Statements in
Connection with Transfer to
Valnette Garcia ....................... 12 D. Subsequent
History ............................................................................................... 13 III. LEGAL ARGUMENT ...................................................................................................... 14 A. Standard of Review ............................................................................................... 14
1. NHC’s Disqualification was authorized by the Municipal Code .............. 14
2. NHC’s Disqualification was Authorized
by NHC’s Agreement .............. 16 B. NHC
has Unclean Hands ...................................................................................... 16 C. NHC’s Claims are
Moot ....................................................................................... 18 D. NHC’s Claim for Declaratory Relief Fails............................................................
19 E. The
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BEST BEST &KRIEGER
LLPATTORNEYS AT
LAW18101VON KARMAN
AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612TABLE OF AUTHORITIES Page(s) State Cases
Am. Bd. Of Cosm. Surgery v.
Med. Bd. Of California (2008) 162 Cal.App.4th 534 ...............................................................................................................
14 Avco Community Developers, Inc.
v. South Coast Regional Com. (1976)
17 Cal.3d 785 .......................................................................................................................... 15 Ball
v. FleetBoston Fin. Corp. (2008) 164
Cal.App.4th 794 ............................................................................................................... 19 Blain
v. Doctor's Co. (1990)
222 Cal. App. 3d 1048 ............................................................................................................ 16
Blumenthal v. Superior Ct. (1980) 103 Cal.App.
3d 317 ................................................................................................................ 16 Breneric Associates v.
City of Del Mar (
1998) 69 Cal.App.4th 166 .................................................................................................................
14 Brown v. Grimes (2011) 192 Cal.
App.4th 265 ............................................................................................................... 17 Carrancho v.
Cal. Air Res. Bd. (2003)
111 Cal.App.4th 1255 ............................................................................................................. 14
Chapman v. Superior Court (2005) 130 Cal.
App.4th 261 ............................................................................................................... 14 Cilderman v.
City of Los Angeles (1998) 67 Cal.App.
4th 1466 ............................................................................................................... 20 City & Cnty. of
San Francisco v. Burton (1962) 201 Cal.App.2d 749 ................................................................................................................ 20 Communities
for a Better Envt. v. State
Water Resources Control Bd. (2003) 109
Cal.App.4th 1089 ............................................................................................................. 14 Cryolife,
Inc. v. Superior Court (2003) 110 Cal.App.4th
1145 ............................................................................................................. 14 Goat Hill Tavern v.
City of Costa Mesa (1992) 6 Cal.
App.4th 1519 ................................................................................................................. 15 Molina v.
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BEST BEST &KRIEGER LLPATTORNEYS
AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,
CALIFORNIA 92612People v. Garner (1977) 72
Cal.App.3d 214 .................................................................................................................. 20 Rakestraw
v. California Physicians’ Service (2000) 81 Cal.App.4th 39 ................................................................................................................... 14 San
Diego Cty. Dep't of Pub. Welfare v. Superior
Ct. (1972) 7 Cal.
3d 1, 496 P.2d
453 ........................................................................................................ 16
Simmons v. Ghaderi (2008) 44 Cal.4th 570 .........................................................................................................................
16 Federal
Statutes 18 U.S.C. §
666(a)(2) ...................................................................................................................... 9 State
Statutes Code Civ. Proc. § 1085 ................................................................................................................. 14 Code Civ. Proc. §
1089 ................................................................................................................. 14 Municipal Code § 9.10.070 ......................................................................................... 10, 14, 15,
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BEST BEST &KRIEGER LLPATTORNEYS AT
LAW18101VON KARMAN
AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612MEMORANDUM OF POINTS AND AUTHORITIES I.INTRODUCTION In 2019, NHC SLO,
LLC (“Petitioner” or “NHC”), led and owned by its Chief Executive Officer,
majority owner (88 percent), sole manager, and primary principal, Helios Dayspring, applied for
one of a limited number of Commercial Cannabis Operator
Permits (“Cannabis Permit”) in the City of San Luis Obispo (“City”). As the City later learned,
NHC and Mr. Dayspring concealed and failed to disclose in the application
process – as required – Dayspring’s shocking history of criminal and fraudulent conduct, which included
bribing elected officials and committing felony tax evasion. Prior to the public learning of the criminal
indictment of Dayspring, but clearly during a period of time that such information was known
to Dayspring, he transferred his ownership to his long-time business and romantic partner, Valnette Garcia.
It is this transfer that NHC argues precludes the City from terminating a Cannabis
Permit originally approved only because of NHC’s and Dayspring’s
multiple, knowing, and material misrepresentations and omissions upon which Dayspring actively induced the City to rely
on in the application review and contingent
permit issuance process. In other words, a permit obtained through fraud.The petition for writ of mandate
fails as a matter of law. The City’s Municipal Code
expressly warns applicants that misrepresentation and omissions will result in automatic disqualification,
and NHC and each of its principals contractually agreed that misrepresentation and omissions
would lead to their disqualification and Cannabis Permit nullification. NHC’s representations of Dayspring’s
history of legal compliance and his lies in his background check application
constitute false or misleading statements and/or omissions of material information. Finally, a writ of mandate is
an equitable remedy, and the equities do not favor an order requiring an award of a permit that was
procured by fraud to a party with unclean hands, and a permit that
would financially benefit Dayspring and his applicant partners and affiliates, despite his bribery of public
officials, tax fraud, and fraudulent procurement of a City cannabis permit. NHC has already been given an opportunity
to amend its Petition to state a claim, and it is clear that it cannot do so. NHC’
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612and nearly all amendments are
not further factual allegations, but only legal arguments that do not cure the insuperable defects
in the petition. (See First Amended Petition [“First Amd. Pet.”] at ¶¶ 106–131, 139–141.) Because the
legal defects in NHC’s petition cannot be cured by
further amendment, the demurrer
should be sustained without leave to amend. II.STATEMENT OF FACTS In 2019, NHC applied for
one of a limited number of Cannabis Permits available in the City. (First Amd. Pet. Ex.
A at NHCSLO000026.) When NHC applied for a Cannabis Permit in 2019, Helios Dayspring was
the CEO, majority owner, sole manager, and principal of NHC. (RJN Ex. 3 at p. 2; Ex. 4 at p. 30.) He signed
the application submitted by NHC. (RJN Ex. 3 at p. 6.) NHC’
s merits-based application emphasized the expertise, and history of regulatory compliance of Dayspring as a reason
why the City should choose NHC to receive one of the limited
number of permits. (RJN Ex. 4 at, e.g., p. 12.) On the strength
of its application and the representations in that application, NHC was selected as one of the
few applicants allowed to move forward in the approval process. The remaining steps included
a background check and obtaining a number of other local permits. Notably, NHC’s Cannabis Permit would
not become active until “the issuance of a use permit for the commercial cannabis
activity.” (First Amd. Pet. Ex. E at NHCSLO000038; RJN Ex. 1.) As the
City later learned, however, prior to (and apparently continuing through) the submission of
this application and the permitting process, Dayspring engaged in a concealed pattern of
fraudulent and criminal conduct – specifically, conduct involving the operation of Mr. Dayspring’
s cannabis enterprises. (First Amd. Pet. Ex. H at NHCSLO00078–107.) Once the City
became aware of and conducted its due diligence regarding the significance of these
concealments and misrepresentations under the City’s permitting process, the City notified NHC
that it was automatically disqualified from activating, obtaining, or holding a Cannabis Permit on October
6, 2021. (First Amd. Pet. Ex. E.) Following an opportunity provided to NHC to review and
present any information or argument to the City Manager that NHC deemed relevant, held on
October 14th, the City sent a final memorandum of decision affirming the automatic disqualification on October
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA
92612the disqualification was NHC’s misrepresentations and omissions and ongoing concealment throughout the City’
s application and permitting process concerning the
criminal activities of its CEO, owner, landlord, and principal – Helios Dayspring. NHC’s argument presented by
its legal counsel prior to the City’s final determination in the automatic termination and
revocation process, and here, is that Dayspring’s interest in NHC was transferred to
his fellow applicant and business partner, Valnette Garcia, on October 20, 2020, before knowledge
of Dayspring’s various felonies became public knowledge and known to the City. (See, e.g., First Amd. Pet at
4:25–28, id. at ¶ 20, Id. Ex. F at NHCSLO000046.)
However, NHC alleges and acknowledges that Dayspring remains the “landlord/property” owner of the building at which NHC
hopes to operate, and thus remains in a position to both exercise substantial control
over the operation and to benefit financially from NHC’s operation. See, e.g., First Amd. Pet. at p. 4
fn. 2 [Mr. Dayspring . . . has no interest in the cannabis business or permit, other than
as a landlord/property owner.”]; ¶ 12 [“[NHC’s] landlord [Dayspring] has spent approximately $4.
1 million dollars building out the retail cannabis facility. . . .”]; ¶¶ 22–23, 61; Id. Ex.
H at NHCSLO0000148 [Memorandum signed by Sargeant Chad Pfarr, dated October 8, 2021, memorializing
discussion with NHC staff who indicated that they
had had numerous recent conversations with Dayspring regarding the cannabis
store].) A.Helios Dayspring’s Criminal Conduct and NHC’s Misrepresentations The City’s decision
was based in substantial part on the criminal conduct of Dayspring. First, as Dayspring has admitted, he
committed federal program bribery, in violation of 18 U.S.C. 666(a)(2).
Dayspring committed this felony by bribing an elected County Supervisor repeatedly from 2016 to
2019. In 2017, Dayspring unsuccessfully attempted to bribe another unnamed
local mayor. (See First Amd. Pet. Ex. H at NHCSLO00089–97.) From
2014 to 2018, Dayspring admitted that he fraudulently underreported his taxable income by approximately $9,000,
000. (Ibid.) For at least the calendar year 2018, he willfully, knowingly and intentionally submitted
a false tax return that was signed under penalty of perjury in
other words, Dayspring committed perjury. Despite an obligation to disclose, Dayspring failed to disclose any of this
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612NHC’s application or
the City’s subsequent extensive background check process during which he was provided
ample opportunity to disclose and explain any
information pertinent to the application and background process. (RJN Ex. 5.) As the City informed
NHC, Municipal Code section 9.10.070(C) provides for automatic disqualification of an applicant
if the applicant “made one or more false or misleading statements or omissions in the application process.” (
First Amd. Pet. Ex. E; RJN Ex. 1.) In connection with NHC’s
application, NHC also agreed and acknowledged that disqualification and/or nullification would result in the event
of false statements or omissions in connection with its application. The Cannabis
Permit Application, signed by Dayspring on behalf of NHC, provided: “Applicants providing false or misleading
information in the permitting process will result in rejection of the application and/or nullification of
any issued permit.” (RJN Ex. 3 at p. 6 [emphasis added].)
On May 19, 2019, Dayspring submitted a signed cannabis
background check questionnaire. When signing this background check questionnaire, Dayspring acknowledged: I
acknowledge that by signing the documents contained in this Background Package, that all information that
I have provided is true and correct. I acknowledge that any information omitted,
not disclosed, or found to be
false is subject to disqualification for a Cannabis Business Operator Permit. RJN Ex. 5 at p. 2.) As
part of this questionnaire, Dayspring was asked whether he had engaged in a variety of illegal
conduct. In a subsequent interview with Detective Suzie Walsh, he was asked a number
of follow up questions. The City determined following public disclosure of Dayspring’s criminal
pleas, that Dayspring made, at least, the following
false or misleading statements or omissions: (
Id. at pp. 4–6.) 1.Spending Money for Illegal Purposes Dayspring was asked
whether he had ever “spent money for illegal purposes.” He checked the “yes” box. (Id. at
p. 4.) At his subsequent police interview, Dayspring clarified that this affirmative answer was only a
reference to illegal purchases of marijuana before it was legal to purchase in California. He did not,
either in response to the written question, or in response to verbal follow up questioning,
disclose the criminal misconduct that was the basis of his federal plea agreement.
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612false and misleading
statements and omissions and that Dayspring spent money for the illegal purpose of
bribing an official. (First
Amd. Pet. Ex. H at NHCSLO000065–66.) 2.Falsification of Documents Dayspring was asked
whether he had ever engaged in “forgery,” which was explained by the questionnaire to
include, for purpose of the questionnaire, “falsifying any type of document.” He checked the “no” box.” (RJN Ex. 5
at p. 6.) The City determined that the response to the questionnaire constitutes a
false statement and that Dayspring committed forgery, as the term was used in the
questionnaire, by falsifying his tax returns. (Pet. Ex. H at NHCSLO000066.) Additionally,
and as a separate and independent ground for disqualification, the City found that any monies retained or
gained by Dayspring as the result of his fraudulent and/or underreported taxes, if spent for
any purpose other than the payment of taxes as required,
would also
constitute an illegal expenditure of money by Dayspring. (Ibid.) 3.Perjury In reviewing
the application/background forms, the City also noted that Dayspring was asked whether he had ever committed perjury. He
checked the “no” box. (RJN Ex. 5 at p. 6.) The City found that was
a false or misleading statement or omission. Dayspring pled guilty to submitting intentionally
false and fraudulent tax returns signed under penalty of perjury,
acts which constitute perjury. (First Amd.
Pet. Ex. H at NHCSLO000066.) 4.Tax Fraud and Tax Evasion Dayspring was asked whether
he had been involved “in any matter regarding a tax lien, tax fraud, or evasion of taxes.” He checked the “no”
box. (RJN Ex. 5 at p. 7.) The City found that this statement
constitutes a false or misleading statement or omission. Dayspring had committed tax fraud and tax evasion in 2014,
2015, 2016, 2017, and 2018, as evidenced by his
federal plea agreement. (First Amd. Pet. Ex. H.
at NHCSLO000066–68.) B.Falsehoods in NHC’s Cannabis Operator Application The City also determined that
NHC made a series of false
or misleading statements in its merit-based Cannabis Business Operators
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612Dayspring had a history
of regulatory compliance, and compliance with taxation laws. (RJN Ex. 4 at p. 12.) The City found this
to be a false or misleading statement and that “Helios Dayspring” had not “compl[ied]
with all tax laws.” (First Amd. Pet. Ex. H at NHCSLO000068.) The City also
found that NHC’s omissions concerning the criminal conduct of Dayspring were misleading and likely
affected NHC’s score. (First Amd. Pet. Ex. H NHCSLO000068–70.) NHC’s application
also stressed the experience and track record of success of Helios Dayspring and highlighted this
experience and history of success and compliance as a reason why the City should select NHC for
one of the few competitive Cannabis Permits available in the City. See, e.g., RJN Ex. 4 at pp.
11–12.) The application satisfied financial criteria by relying on the wealth of Dayspring (wealth which was, at
least in part, the result of bribery and tax evasion). (Id. at p. 32.) The
application satisfied the “Property Control” criteria by indicating that the APNs associated with the
project “are fully owned by Helios Dayspring.” (Id. at p. 31.) The City found that NHC likely
would not have received the score it did and would not have been allowed to move
forward had the City known of the substantial and ongoing criminal history
of Dayspring. (First Amd. Pet. Ex. H at pp. NHSCLO000068–70.) The City also
concluded that Dayspring’s failure to disclose the substantial back taxes owed to the IRS
on his personal financial statements constituted a false or misleading statement or omission. (Id.
at NHCSLO000070.) This failure resulted in a substantial overstatement of the financial assets available
to NHC and Dayspring. (Ibid.) The City found that these were misleading omissions
that likely would have affected the outcome of the application
process. C.False Statements in Connection with Transfer to Valnette Garcia The
City also concluded that the circumstances surrounding Dayspring’s transfer of ownership to Garcia supported an
inference that Garcia and NHC knew or should have known of the criminal
investigation of Dayspring and potentially the forthcoming criminal charges at or around the time NHC and Dayspring
undertook to transfer his interest to Garcia. (Pet. Ex. H at NHCSLO000070–72.) The City concluded
that the failure to disclose these matters to the City in connection with
the transfer of ownership to Garcia constituted “a continuation and reaffirmation by NHC, Ms. Garcia and
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612providing false or
misleading statements or omissions of highly relevant information to the City in order
to obtain and wrongfully maintain the Cannabis Operator Permit.” (Ibid.)1 In its memorandum of
decision, the City also noted that, in each formal communication to NHC since the facts of the
criminal misconduct became known to the City, the City has advised that the City was conducting a
separate inquiry into the implications of the criminal plea and that any actions or
communication related to the construction permits should not be construed as related to
the Cannabis Permit considerations. (Id. at NHCSLO000072.) Finally, the City found that NHC had
engaged in misrepresentations in connection with the revocation process, in that NHC omitted or
affirmatively hid the fact that Dayspring remained NHC’s landlord, continuing to derive
substantially above market financial benefit from NHC, and his continuing involvement with NHC until “caught”
by the City. (
First Amd. Pet. Ex. H at NHCSLO000072–74.) D.Subsequent History The
City issued its final memorandum of decision, re-affirming the automatic disqualification of NHC, on October
19, 2021. (First Amd. Pet. Ex. H.) On January 7, 2022 – approximately three months
later – NHC served the petition for writ of mandate. NHC then waited an additional two weeks to
file an ex parte application, which was heard on February 1, 2022. This Court denied NHC’
s ex parte application. Following the hearing on the ex parte application, the City demurred, and
that demurrer was heard on July 7, 2022. This Court sustained the City’s demurrer, with
leave to amend, concluding, among other things, that (1) the Municipal Code permitted
automatic disqualification of NHC in light of NHC and Dayspring’s misrepresentation; (2) NHC’s unclean
hands barred the relief NHC seeks; and (3) NHC’s petition was moot in light of
the expiration of NHC’s unactivated permit on October 22, 2021. On July 15, 2022,
NHC filed a First Amended Petition. The only new factual allegations in the Amended Petition are found
at paragraphs 97–99, in which NHC argues that the City engaged
in selective enforcement of its municipal code because Helios Dayspring “provided 1 In its final memorandum of decision,
the City also reiterated its limited role in the transfer of ownership to Garcia, in light of the
regulations applicable at the time and the fact that Garcia had already been
through the City’s background check process. The applicable process effectively
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612financial capital for all three
successful cannabis retail business permits with the City of San Luis Obispo.” The
remaining amendments are largely found at paragraphs 106–131
and paragraphs 139–
141, and consist of
NHC’s legal arguments. III.LEGAL ARGUMENT A.Standard of Review Mandamus proceedings
are subject to the general rules of civil proceedings. (Chapman v. Superior Court (2005) 130 Cal.
App.4th 261, 271.) Where the pleading fails to allege specific facts showing entitlement to relief,
the petition is subject to a general demurrer. (Ibid; see also, Code Civ. Proc. § 1089.)
A demurrer tests the legal sufficiency of factual allegations in a pleading. (Breneric Associates v. City of
Del Mar (1998) 69 Cal.App.4th 166, 180.) A demurrer will lie where the face of
the complaint or matters subject to judicial notice clearly disclose a defense or bar to recovery. (Cryolife,
Inc. v. Superior Court (2003) 110 Cal.App.4th 1145, 1152.) While the court must assume
the truth of all material facts pleaded, it must disregard contentions, deductions, conclusions of fact or
law, or allegations to the contrary of facts of which judicial notice may be taken. (Rakestraw
v.
California Physicians’ Service (2000) 81 Cal.App.4th 39, 42-44.) NHC seeks a
writ of mandate challenging the City’s automatic disqualification of it. NHC’s challenge is
properly reviewed as petition for ordinary mandamus because no hearing was required by law. (Code Civ. Proc. §
1085; Am. Bd. Of Cosm. Surgery v. Med. Bd. Of California 2008) 162 Cal.App.4th
534, 547.) The standard of review in ordinary mandamus is highly deferential. (Carrancho v.
Cal. Air Res. Bd. (2003) 111 Cal.App.4th 1255, 1265.) NHC’s challenge
involves the interpretation of the Municipal Code, and the City is entitled to deference in its
interpretation of its municipal code. (Communities for a Better Envt. v. State
Water Resources Control Bd. (2003) 109 Cal.App.4th 1089,
1107.) 1.NHC’s Disqualification was authorized by the Municipal Code Municipal Code section 9.
10.070(c) provides that “an applicant shall be disqualified from applying for, or
obtaining, a commercial cannabis operator permit if . . . The applicant made one or more
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 926129.10.070(d) provides a permit is “
activated by the issuance of a use permit for the commercial cannabis activity . . . together
with all other applicable city permits and state licenses, and
the commercial cannabis operator thereafter opening and continuously operating the commercial cannabis activity.” (RJN Ex. 1 at § 9.10.
070(d).) As NHC admits, it has not complied with the requirement of Section 9.10.070(d), and the
permit is not active. (See, e.g., First Amd. Pet. at ¶¶ 13, 21–22, 44, 54, 63.) Until
the Cannabis Permit is active, NHC has no operative permit, and may still be “disqualified
from . . . obtaining” the Cannabis Permit under Section 9.10.070(c). NHC’s claim that it
had a “vested right” to operate a commercial cannabis location is without merit. NHC seems
to conflate traditional vested rights in the land use and development context (which can allow a
developer to complete construction in accordance with the terms of an issued
permit regardless of subsequent legislative changes, see Avco Community Developers, Inc. v. South Coast Regional Com. (
1976) 17 Cal.3d 785) with the “fundamental vested rights” inquiry which determines whether
a court must exercise independent judgment in a writ proceeding. (See Goat Hill Tavern v. City of Costa Mesa (
1992) 6 Cal.App.4th 1519, 1525.) NHC does not argue that the independent judgment test
applies. Nor could NHC so argue; NHC’s desire to sell
marijuana involves a quintessentially economic interest, and no “vested, fundamental right.” Molina v.
Board of Administration, etc. (2011) 200 Cal.App.4th 53, 60.) Even if the
traditional vested rights land use doctrine was implicated here, the doctrine generally only
provides protections once an entity has obtained all necessary land use entitlements and
the entity performs substantial work and incurs substantial liabilities in good faith reliance on those land use
entitlements. (Avco Cmty. Devs., Inc. v. S. Coast Reg'l Com. 1976) 17 Cal.3d 785, 797.) A
Cannabis Permit, and especially one that is not yet active, is merely a step in the
process. An aspiring cannabis operator must also obtain a conditional use permit and a variety of approvals from the City (see RJN
Ex. 2 at § 17.86.080(E)(1)(a).) To the extent funds
have been spent to undertake “expensive and extensive renovations of [the] property,” those funds were
expended by NHC’s landlord, Helios Dayspring, during a period of time when he was inarguably aware
that he had engaged in, and concealed on an ongoing basis from the City,
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612Municipal Code warns
applicants that licensure creates no vested right. (RJN Ex. 2 at § 17.86.080(E)(2).) NHC
made numerous false statements
in the application process, any one of which would mandate
disqualification. 2.NHC’s Disqualification was Authorized by NHC’s Agreement In connection
with its application for a Cannabis Permit, NHC contractually agreed that any false
or misleading representation or omission would result in disqualification and revocation
of permit, and waived any inconsistent rights in the Municipal Code.
In NHC’s original commercial cannabis application form, NHC acknowledged that: Applicants
providing false or misleading information in the permitting process will result . . . nullification or revocation of any issued
permit.” (RJN Ex. 3 at p. 6 [emphasis added].) This is evidence of the
City’s interpretation of its own ordinance, NHC’s acknowledgement and agreement with
this interpretation, and an independent contractual agreement and waiver of any broader rights provided by the Municipal
Code. (See, e.g., Simmons v. Ghaderi (2008) 44 Cal.4th 570, 585 [A person
may waive rights and privileges, including
those conferred by statute, unless otherwise prohibited by specific statutory provision].) NHC
and Dayspring provided false or misleading information in the permitting process. As NHC agreed, this
merits “rejection of the application and/or nullification or revocation of
any issued permit.” (RJN Ex.
3 at p. 6 [emphasis added].) B.NHC has Unclean Hands A writ of mandate
is an equitable remedy, and equitable defense such as unclean hands can bar the issuance of such
equitable relief. (See, e.g., Blumenthal v. Superior Ct. (1980)103 Cal.App.3d 317, 320 [“it is
within our discretion to deny a petition on such equitable grounds including unclean hands].”]; San Diego Cty.
Dep't of Pub. Welfare v. Superior Ct. (1972) 7 Cal. 3d 1, 9, 496 P.2d 453, 458 [“[T]he writ should
not issue in aid of one who does not come into court with clean hands . . . .”].) When
the relevant facts are not in dispute (and here, they are alleged by NHC,
incorporated by reference into the Amended Petition, or subject to judicial notice) a demurrer may be sustained
on the grounds that the doctrine of unclean hands bars a cause of action. (Blain
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612NHC’s success
in the early stages is because of its knowing misrepresentations, made with the intent that the City rely upon
the representations, and the City did in fact rely upon the misrepresentations to its detriment –
the City would not have issued a Cannabis Permit had NHC not lied about Dayspring’s criminal
conduct. NHC only proceeded as far as it did because of fraud. NHC has unclean hands,
and equity should not allow it to profit from its fraud. Further, Dayspring’
s romantic partner, Garcia, has never shown or represented that she did not know
of Dayspring’s forthcoming indictment when she received his transfer of ownership, and it strains credulity to
believe that she had no such knowledge, given Garcia’s and Dayspring’s
close personal relationship and because the transfer was, apparently, for no consideration. (RJN Ex. 6 at pp. 4–5.)
In other words, NHC now relies on the success of its wrongful misrepresentations
and concealment of criminal misconduct to contend that the
City is precluded from taking action based on its dishonest conduct. Finally, despite Dayspring’
s purported divestiture of interest in NHC, NHC alleges he is still the landlord and stands
to reap substantial financial benefit from the operation of a cannabis enterprise. (First Amd. Pet. at
4:25–28.) Dayspring’s undeniably unclean hands weigh against
the issuance of an injunction that would inure to his benefit. NHC’s newly minted argument
that the City, too, has unclean hands is meritless. The City did not commit a host of felonies,
or lie on any application concerning a history of felony bribery and felony tax evasion. The
only “unclean hands” NHC points to is an allegation of selective enforcement. As
is explained below in Section III.F, this allegation is meritless. In any event, the
doctrine of unclean hands acts defensively, and prevents a party with unclean hands from obtaining relief.
It cannot be used affirmatively to seek relief against a party with allegedly unclean hands. (See, e.
g., Brown v. Grimes (2011) 192 Cal.App.4th 265, 284 Even if the unclean hands
doctrine against Grimes did bar Brown's action, the doctrine cannot be used affirmatively by Grimes
to recover on his cross-complaint, for unclean hands is a defense.”].) The City seeks no
affirmative relief in this lawsuit. NHC does seek relief, and this Court should again conclude
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON
KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612C.NHC’s Claims are Moot NHC’s permit expired by operation
of law, and NHC’s claims are moot. San Luis Obispo
Municipal Code section 9.10.070(D) provides in relevant
part: Each commercial cannabis operator permit must be activated within twelve months
of issuance. . . . Failure to timely activate the permit shall be
deemed abandonment of the permit and the permit shall automatically lapse. RJN Ex. 1 at § 9.10.070(D).)
NHC was granted an un-activated permit on October 22, 2019. First Amd. Pet. Ex. A.) NHC was
granted a total of one additional year to activate its permit. RJN Exs. 7, 8, 9.) Two years from
October 22, 2019 was October 22, 2021. NHC’s un-activated permit terminated by operation of
law on October 22, 2021, and NHC’s claims are moot. In the First Amended Petition,
NHC argues that its claims are not moot because “the City made it legally and factually
impossible for Petitioner to ‘activate’ its permit.” (First Amd.
Pet. at 119.) This argument fails for a number of reasons. First, NHC fails to show or allege
that it took any steps to protect its rights or prevent automatic termination. There
is no allegation that NHC requested that the City extend this deadline. There is no allegation
that the City misled NHC into believing the time period before automatic termination was tolled or
suspended. NHC did not file this lawsuit or seek a temporary restraining order until January
of 2022, well after the unactivated permit had expired by operation of law. Even when NHC did seek
injunctive relief, it did not seek the more modest relief of extending this deadline, and instead sought
only the full reissuance of its permit.
NHC slept on its rights, and its claims are now moot. Further, there is
no showing that the legislative purpose of San Luis Obispo Municipal Code section 9.10.070(D) would be served
by tolling its operation in a time period when it is impossible” to
activate a permit. Presumably, applicants would not allow an unactivated permit to expire unless there was some bar to
activating it, e.g., an inability to obtain state licensure or pass building
inspection. The automatic expiration provision of the Municipal Code serves the salutary purpose
of providing finality and certainty of termination to “unactivated” permits that could otherwise forever
languish in a liminal state of unactivated but impossible to activate. Finally, the
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612or capricious act of the City.
The only cause of the “impossibility” of NHC activating its permit was NHC and
Dayspring’s misconduct and conscious decisions to lie
about that misconduct. D.NHC’s Claim for Declaratory Relief Fails To the extent NHC also
attempted to state a claim for declaratory relief, that claim fails. NHC’s declaratory relief claim
is derivative and duplicative of the petition for writ of mandate, and the demurrer should
be sustained because the petition fails for the reasons described above. Ball
v. FleetBoston Fin. Corp. (2008) 164 Cal.App.4th
794, 800.) E.The City did Not Engage in “Selective Enforcement” NHC’s argument that
the City engaged in “selective enforcement” fails. The City did not engage in “selective enforcement,” and
if it had this would not preclude the City from enforcing the law and
would not grant NHC immunity from the consequences of its misconduct. First, and most
fundamentally, NHC has not shown or alleged that the applicants were required to disclose
third parties who provided “financial capital.” NHC has thus not effectively alleged that
any of the other operators made prohibited misrepresentations or omissions, much less
misrepresentation even remotely analogous to NHC and Dayspring’s lies concerning Dayspring’s history of
felony bribery and tax evasion. (Compare First Amd. Pet. at ¶ 97 allegation that
other operators failed to disclose Dayspring’s financial involvement] with RJN Ex. 3 [requirement
that individuals with 10% or greater ownership stake be disclosed and
background checked, but no similar requirement for contributors of “financial capital”].) Second, NHC has not
shown or alleged that any of the other retailers’ permits are unactivated such
that the City could determine that grounds for automatic termination exist. Finally, “selective enforcement”
is not a stand-alone doctrine that could support NHC’s claim for affirmative relief from this
Court. Even if the City was seeking to enforce a penal statute, NHC could
not state an equal protection based “selective enforcement” claim. NHC, by virtue of Helios Dayspring’
s ownership and control at the time of the misrepresentation and omissions, is not similarly situated
to the other cannabis retails in the City. NHC and Helios Dayspring, by
virtue of making misrepresentations concerning the criminal history of NHC’s Chief Executive
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612not similarly situated
to any other cannabis operator who did not make such misrepresentations concerning
the criminal history of their owners, managers, and Chief Executive Officers. NHC does not belong to any
protected class, and it was rational for the City to determine that grounds for automatic
termination existed only as to NHC, because only NHC submitted an application signed by Helios
Dayspring lying about the criminal acts of Dayspring. (See, e.g., People v. Garner (1977) 72 Cal.
App.3d 214, 217–18 [“The selective enforcement of the statute against bookmakers and
not against bettors, however, is not based on an invidious and unjustifiable standard. A distinction drawn
on the basis of the difference in the kind of criminal conduct, even though
of equal culpability under the law, is neither suspect nor invidious.”]; Cilderman v. City of Los Angeles (
1998) 67 Cal.App.4th 1466, 1470 [“What the equal protection guarantee
prohibits is state officials purposefully and intentionally singling out individuals for
disparate treatment on an invidiously discriminatory basis.”] [internal citations omitted]; City & Cnty. of San Francisco v. Burton (
1962) 201 Cal.App.2d 749, 755 [“Assuming the city had permitted’ others to violate
the ordinance, mere inaction is not necessarily the result of an intentional
or arbitrary scheme to discriminate against defendants. . . . Permitting some persons to
violate a zoning regulation does not preclude its enforcement against others”].) Finally, NHC failed to
exhaust its’ administrative remedies as to this issue and has waived it. NHC had the
opportunity to address the City’s determination that grounds for automatic disqualification existed,
and generally argued that NHC had made no misrepresentation and that the City’s municipal code
did not permit termination of its unactivated permit. (See First Amd. Pet. Ex. F; see also
Ex. H at pp. NHCSLO000063 [describing arguments made by NHC at meeting with City].) NHC may not raise
this argument for the first time now, in reliance on extra-record evidence that was
not before the City Manager at the time of the decision. More fundamentally, irrespective
of any other alleged conduct by any other party, there is simply no allegation, nor could
there be, that there is any evidence of similar criminal misconduct or misrepresentations on the part
of any other party. There is no allegation of such criminal conduct confirmed
by an independent investigative or enforcement agency. It was more than rational for the City
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1000IRVINE,CALIFORNIA
92612Dayspring and the vague financial entanglements alleged by NHC. IV.CONCLUSION The
demurrer should be sustained in full and without
leave
to amend. Dated:
August 16, 2022
BEST BEST & KRIEGER LLP By:
82508.00018\34822950.1
PROOF OF SERVICE
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BEST BEST &KRIEGER
LLPATTORNEYS AT LAW18101VON KARMAN
AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612Proof of Service I, Janice Liu, declare: I am a citizen of the
United States and employed in Orange County, California. I am over the age of eighteen years and not
a party to the within-entitled action. My business address is 18101 Von Karman Avenue,
Suite 1000, Irvine, California 92612. On August
16, 2022, I served a copy of the within
document(s): CITY OF SAN LUIS OBISPO
NOTICE OF
DEMURRER TO FIRST AMENDED PETITION AND DEMURRER TO FIRST AMENDED PETITION by transmitting via facsimile
the document(s) listed above to the fax number(s)
set forth below on this date before 5:00 p.m. by placing the
document(s) listed above in a sealed envelope with postage thereon fully prepaid,
the
United States mail at Irvine, California addressed as set forth below. by placing
the document(s) listed above in a sealed envelope and affixing a pre-paid air bill,
and
causing the envelope to be delivered to a agent for delivery. by personally delivering
the document(s) listed above
to the person(s) at the address(es) set forth below. by transmitting
via e-mail or electronic transmission the document(s) listed above to the
person(s)
at the e-
mail address(es) set forth
below.John Armstrong Armstrong
Law Group 23232 Peralta
Drive, Suite 102
Laguna Hills, CA
92653 Phone: (949) 942-6069 Email: john@armstronglawgroup.co Attorneys for Petitioner I am readily
familiar with the firm's practice of collection and processing correspondence for mailing. Under that practice it would
be deposited with the U.S. Postal Service on that same day with postage thereon fully prepaid
in the ordinary course of business. I am aware that on motion of the party
served, service is presumed invalid if postal cancellation date or postage meter date is more
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612I declare under penalty of perjury
under the laws of
the State of California that the above is
true and