HomeMy WebLinkAbout21CV-0734 - Demurrerpdf82508.00016\34790572.1 -1 -
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 AND DEMURRER Filed concurrently with:
1. Request for
Judicial Notice. 2. Declaration
of Daniel Richards, and 3.
Proposed Order]
Date: July 7, 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 July 7, 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 Complaint for Damages (“Complaint”) 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 February 7, 2022. Declaration
of Daniel L. Richards [“Richards Decl.”] at ¶¶ 11–
12 &
Ex. A.) Dated:
February 14, 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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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 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 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:
February 14, 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 ............... 10 1.
Spending Money for
Illegal Purposes ....................................................... 11 2. Falsification of Documents .......................................................................
11 3. Perjury ....................................................................................................... 12 4. Tax Fraud and Tax
Evasion ...................................................................... 12 B. Falsehoods in NHC’s Cannabis Operator Application ......................................... 12
C. False Statements in
Connection with Transfer to
Valnette Garcia ....................... 13 D. Subsequent
History ............................................................................................... 14 III. LEGAL ARGUMENT ...................................................................................................... 15 A. Standard of Review ............................................................................................... 15
1. Petitioner’s Disqualification was authorized by the Municipal Code ....... 16
2. Petitioner’s Disqualification was Authorized
by NHC’s Agreement ....... 17 B. Petitioner
has Unclean Hands ............................................................................... 18 C. Petitioner’s Claims are
Moot ................................................................................ 19 D.
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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 ............................................................................................................... 16
Avco Cmty. Devs., Inc. v.
S. Coast Reg'l Com. (
1976) 17 Cal.3d 785 ..........................................................................................................................
17 Babb v. Superior Court (1971)
3 Cal.3d 841 ............................................................................................................................ 21 Ball
v. FleetBoston Fin. Corp. (2008) 164
Cal.App.4th 794 ............................................................................................................... 20 Blain
v. Doctor's Co. (1990)
222 Cal. App. 3d 1048 ............................................................................................................ 19
Blumenthal v. Superior Ct. (1980) 103 Cal.App.
3d 317 ................................................................................................................ 18 Breneric Associates v.
City of Del Mar (1998) 69 Cal.App.4th
166 ................................................................................................................. 15 Buena Vista Mines, Inc.
v. Industrial Indem. Co. (2001) 87 Cal.App.4th
482 ................................................................................................................. 16 C.J.L. Const.,
Inc. v. Universal Plumbing (1993) 18 Cal.
App.4th 376 ................................................................................................................. 21 Carrancho v.
Cal. Air Res. Bd. (2003)
111 Cal.App.4th 1255 ............................................................................................................. 16
Chapman v. Superior Court (2005) 130 Cal.App.4th 261 ............................................................................................................... 15 Communities
for a Better Envt. v. State
Water Resources Control Bd. (2003) 109
Cal.App.4th 1089 ............................................................................................................. 16 Cryolife,
Inc. v. Superior Court (2003) 110
Cal.App.4th 1145 ............................................................................................................. 16 Lawrence
v. Bank of America (1985) 163 Cal.App.3d
431 ................................................................................................................ 16 Mechanical Contractors Assn. v.
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON
KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612Rakestraw v.
California Physicians’ Service (2000) 81 Cal.App.4th 39 ............................................................................................................. 15, 16 San
Diego Cty. Dep't of Pub. Welfare v. Superior
Ct. (1972)
7 Cal. 3d 1, 496 P.2d 453 .......................................................................................................
18 Federal
Statutes 18 U.S.C. §
666(a)(2) .................................................................................................................... 10 State
Statutes Code Civ. Proc. § 1085 ................................................................................................................. 16
Code Civ. Proc. § 1089 ................................................................................................................. 15 Municipal
Code § 9.10.070 .................................................................................................... passim Municipal Code §
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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 to obtain favorable treatment in his various cannabis enterprises and committing
felony tax evasion. Prior to the public learning of the federal government’s 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 (also made without disclosure of Dayspring’s criminal and fraudulent
conduct) that NHC now 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 contingent operator permit was issued
to NHC only because of Dayspring’s and NHC’s fraud; and,
but for Dayspring’s misrepresentation and concealment of material information in Dayspring’s and NHC’
s
sole control, no permit, contingent or otherwise, could have been obtained.The petition for writ of mandate
fails as a matter of law. 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 in particular compliance with taxation laws) and his numerous
lies in his background check application constitute false or misleading statements and/or omissions of
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN
AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612control of Dayspring and the NHC applicant. 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. The public
interest does not favor such an outcome. II.STATEMENT OF FACTS In January of 2019,
NHC applied for one of a limited number of Cannabis Permits available in the City. (Pet.
Ex. A at NHCSLO000026.) When NHC applied for a Cannabis Permit in 2019, Helios
Dayspring was the Chief Executive Officer, majority owner (88 percent), 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.) He was one of two people designated as Responsible Parties”
in the NHC application. (RJN Ex. 3 at pp. 2–3.) 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.” (Pet. Ex. E at NHCSLO000038, citing Municipal Code section 9.10.070; see also RJN
Ex. 1.) The Municipal Code also provides that the City’s issuance of Cannabis Permits
creates no vested right to operate a cannabis business under the City’s dual
permitting structure. (Pet. Ex. E at NHCSCLO000040, citing
Municipal Code section 17.86.080; see also RJN Ex. 2.)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
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,
CALIFORNIA 92612Dayspring’s cannabis enterprises. (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, City notified Petitioner that
it was automatically disqualified from activating, obtaining, or holding a Cannabis Permit on October 6, 2021. (
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,1
the City sent a final memorandum of decision affirming the automatic disqualification on October 19,
2021. (Pet. ¶ 25 & Ex. H.) The basis for the 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. Petitioner’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., Pet at
4:25–28, id. at ¶ 20, Pet. Ex. F
at NHCSLO000046.) However, Petitioner 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., 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 [“NHC anticipates that
it will remain liable under its current lease with the landlord Dayspring], which as [sic] a term of 5 years
at an initial monthly rental of $55,000 per month.2”]; 1 The petition ignores the October
14, 2021 hearing, but the hearing was memorialized in the City Manager’s memorandum of
decision. (See Pet. Ex. H at NHCSCLO000063.) A recording of the hearing
is available online at: https://www.youtube.com/watch?v=tZp24IKb22Y. 2 An amount
seemingly well over market value for comparable real estate, supporting an inference of a
collusive arrangement, especially given that the lease was entered by Dayspring and Garcia on July 29, 2021, a single
day after Dayspring’s plea agreement was filed on July 28, 2021. Compare
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612¶ 23 [“NHC anticipates that it
will be liable for the Landlord’s [Helio Dayspring’s] cost and expense of improving the
premises, over of [sic] $4,000,000.00 . . . .”]; ¶ 61 [“Petitioner and its landlord [
Dayspring] spent money in reliance on the permit, undertaking expensive and
extensive renovations of [Dayspring’s] property . . . .”]; Pet. 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,
despite his purported divestiture of interest. Also
noting that updated NHC plans were entitled “Natural Healing Center
Helios Dayspring.].) A.Helios Dayspring’s Criminal Conduct and NHC’s Misrepresentations 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 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 criminal activity to the City in connection with his submission of NHC’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 Petitioner, 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.” (Pet. Ex. E at NHCSLO000039 [citing Municipal Code § 9.10.070(
C)]; see also 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
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612Application, 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. In connection with filling out the questionnaire and in the subsequent
interview, 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.
The City later determined that this statement and related omissions constitute false and misleading
statements and omissions and that Dayspring spent money for the illegal
purpose of bribing an
official. (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
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612and 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. (
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. (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
Application. In the application, NHC proactively, voluntarily and affirmatively represented, that Dayspring
had a history of regulatory compliance, and compliance with taxation laws:
When other cannabis businesses were operating in the shadow without paying
taxes, Helios Dayspring raised the bar by implementing self-regulatory policies and complying with all tax
laws, evidence in his 8+ years of tax history
and his operations running with the highest standards in the industry. RJN Ex. 4 at p. 12.) The City found
this to be a false or misleading statement and that “Helios Dayspring” had not “
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612The City also
found that NHC’s omissions concerning the criminal conduct of Dayspring were misleading and
likely affected NHC’s score. (Pet. Ex. H at NHCSLO000068–70.) NHC’s application
also repeatedly 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. An example of these representations included the following statement:
Helios has a wealth of knowledge in business development,
entitlements, and contract negotiations . . . Helios has also opened six different storefront
dispensaries in the Inland Empire and in Grover beach, gaining invaluable
experience in retail operations . . . Helios has connected all the dots
from cultivation, manufacturing, and retail, completing the seed to sale networks. . . . Helios
Dayspring] is an industry leader and is helping bring cannabis
into mainstream society . . . his
experience and dedication to our community is unmatched in the industry. 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): NHC
has ample access to funding. Primary principal Helios Dayspring will use personal
funds to build and operate the project. A person financial statement documenting $3.6 million in
liquid assets and $12.3 million in real estate equity is enclosed
on the following page. . . . Additionally,
Helios Dayspring has access to a 3 million loan if needed. Id. at p. 32.) The
application satisfied the “Property Control” merit criteria by indicating that the three 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. (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
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,
CALIFORNIA 92612omissions in connection with the transfer of ownership to Garcia. The
City 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
Mr. Dayspring of the prior and ongoing pattern and practice of providing 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.) 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 required only a
ministerial acknowledgement from the City that the
transfer satisfies the facial requirements of the ordinance. (Id. at NHCSLO000071.) 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. (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. (Pet. Ex. H.) On January 7, 2022 – approximately three months later – Petitioner
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612additional two weeks to file an
ex parte application, which was heard on February 1, 2022. This Court
denied Petitioner’s ex parte application, concluding in relevant part that: W]hen comparing
the potential harms to Petitioner’s business interest to the harm to
Respondents’ interest in protecting the integrity of the
application process, the balance of harms tips in favor of Respondents. . . . Mr.
Dayspring personally signed Petitioner’s application for a cannabis operator’s
permit under penalty of perjury, and made other representations during
the permitting process. Respondents have presented persuasive evidence to that
that Mr. Dayspring made material misrepresentations in the application process that adversely impacted
the approval of the permit. Such acts violated the San Luis Obispo Municipal Code.
The fact that Mr. Dayspring is no logner a member or owner of Petitioner
is of no
moment, given that his
statements formed the
basis of the approval.
Richards Decl. Ex. B.) III.LEGAL ARGUMENT A.Standard of Review Mandamus proceedings
are subject to the general rules of pleading applicable to civil actions. (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. To
determine the legal sufficiency of the pleading, the court gives the complaint a reasonable interpretation, reading
it as a whole and its parts in their context, to determine whether the
complaint states facts sufficient to constitute a cause of action. (Breneric Associates v. City of Del Mar (1998)
69 Cal.App.4th 166, 180.) The court may consider matters that
may be judicially noticed. (Rakestraw v. California Physicians’ Service (2000) 81 Cal.App.4th 39, 42-44.) A demurrer
will also 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 properly 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, supra, 81 Cal.App.4th at 42-
44; Mechanical Contractors Assn. v.
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612If the pleading cannot be cured by
amendment, as when there is no liability as a matter of law, the demurrer should be
sustained without leave to amend. (See, Buena Vista Mines, Inc. v. Industrial Indem. Co. (2001) 87 Cal.
App.4th 482, 487; Lawrence
v. Bank of America (1985) 163 Cal.App.3d 431, 436.) Petitioner seeks
a writ of mandate challenging the City’s automatic disqualification of Petitioner. Petitioner'
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. (See Carrancho v.
Cal. Air Res. Bd. (2003) 111 Cal.App.4th 1255, 1265 Mandamus may issue to
correct the exercise of discretionary legislative power, but only if the action taken is so palpably unreasonable
and arbitrary as to show an abuse of discretion
as a matter of law. This is a highly deferential test.”].) Petitioner’s challenge
involves the interpretation of the Municipal Code, and the City is entitled to deference in its
interpretation of its municipal code. (See, e.g., Communities for a Better Envt. v. State Water
Resources Control Bd. (2003) 109 Cal.App.4th 1089, 1107 [Courts extend
considerable deference to an administrative agency's
interpretation of . . . the regulatory scheme which the agency implements or
enforces.”].) 1.Petitioner’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
false or misleading statements or omissions in the application process.” Section 9.10.070(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).)3 As Petitioner admits, it has not complied with 3 Notably, section 9.10.
080, governing renewals, provide that an application for renewal of a commercial cannabis operator permit “
shall be rejected” if any of the following exists: “Any of the grounds for disqualification for
prequalification set forth in Section 9.10.070(C).” (RJN Ex. 1.) As discussed above, Section
9.10.070(C)(4) provides for automatic disqualification if “the applicant made one
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612the requirement of Section 9.10.070(d), and the
permit is not active. (
See, e.g., Pet. at ¶¶ 13, 21–22, 44, 54, 63.) Until the Cannabis Permit
is active, Petitioner has no operative permit, and may still be disqualified from . . .
obtaining” the Cannabis Permit under Section 9.10.070(c). This interpretation comports
with the general law of vested rights, which only provides protections once a business has
obtained necessary land use entitlements and begins to operate (Avco Cmty. Devs., Inc. v.
S. Coast Reg'l Com. (1976) 17 Cal.3d 785, 797). Petitioner’s claim that it
had a “vested right” to operate a commercial cannabis is without merit. 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 Petitioner’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, disqualifying
criminal misconduct. (Pet. at ¶¶ 61, 23.) Further,
the Municipal Code warns applicants that licensure creates no vested right: No person shall
have any entitlement or vested right to operate a cannabis business
solely by virtue of licensing under these regulations. Operation of cannabis activity(ies) requires
both the approval of a conditional use permit and a commercial cannabis operator permit
under Chapter 9.10, which is a revocable privilege and not a right in the
city. The applicant bears the burden of proving that all qualifications for
licensure have been satisfied and continuously maintained prior to conducting
a cannabis business at an otherwise allowed location within the city. RJN Ex. 2 at § 17.86.
080(E)(2).) Petitioner made numerous false statements
in the application process, any one of which would mandate
disqualification. 2.Petitioner’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. made numerous misleading
statements or omissions in the application process. If NHC were to activate its permit,
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA
92612In NHC’s original commercial cannabis application form, NHC acknowledged that: Applicants providing
false or misleading information in the permitting process will result in rejection of the application
and/or nullification or revocation of any issued permit.” (RJN Ex. 3 at p. 6 [emphasis added].)4 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. NHC and
Dayspring provided false or misleading information in the permitting process by failing to disclose Dayspring’s
crimes, representing that he had a history of legal and tax compliance, and by falsely indicating
that Dayspring had not engaged in a variety of crimes and other bad acts. 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.Petitioner 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, or where the conduct of
the party applying for the writ has been such as to render
it inequitable to grant him relief.”] [internal citations and alterations omitted].) When the relevant facts
are not in dispute (and here, they are alleged by Petitioner, incorporated by reference
into Petitioner’s complaint, or subject to judicial notice) a demurrer may be sustained on the grounds that
the doctrine of unclean hands bars a cause of action. (See, e.g., Blain v. Doctor's Co. (
1990) 222 Cal. App. 3d 1048, 1064 [affirming demurrer premised on unclean hands] [“For these reasons
and in light of the precedents discussed we conclude that the doctrine of unclean hands bars
a cause of action premised on the alleged injury of emotional 4 Similarly,
the background check form, submitted by Helios Dayspring, Valnette Garcia, and others involved with NHC,
required each individual to attest that “all information I have provided is true and correct. I acknowledge
that any information omitted, not disclosed, or found to be
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BEST
BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612distress.”].) NHC’s success in the early
stages of the process is because of NHC and Dayspring’s 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 of, e.g., bribing government officials related to
cannabis operations. 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. 4–5.5)
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, Petitioner alleges he is still the landlord and
stands to reap substantial financial benefit from the operation of a cannabis enterprise. (Pet. at
4:25–28.) Dayspring’s undeniably unclean hands weigh against the issuance of an injunction that would
inure to his benefit and that of
his fellow applicant and longtime business
and romantic partner, Ms. Garcia. C.Petitioner’s Claims are Moot Petitioner is not
beneficially interested in the issuance of the requested writ and cannot obtain the relief it seeks
for another reason independent of the failure of Petitioner’s claims – Even if the City’s decision
were overturned, Petitioner’s permit expired by operation of law on October 22, 2021. San Luis
Obispo
Municipal Code section 9.10.070(D) provides in relevant
part: Duration and Activation of Permit. Each commercial cannabis operator permit issued pursuant to
this chapter shall expire twelve months after the date of
its activation. . . . Each commercial cannabis operator permit must be activated within 5 See also RJN Ex. 4 at
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612twelve months of issuance.
The permit is activated by the issuance of a use permit for the
commercial cannabis activity pursuant to Section 17.86.080, together with all
other applicable city permits and state licenses, and the
commercial cannabis operator thereafter opening and continuously operating the commercial cannabis activity. 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).)
Petitioner was granted an un-activated permit on October 22, 2019. Pet. Ex. A.) Through three
resolutions, NHC and other applicants were granted a total of one additional year to active permits. (RJN
Exs. 7, 8, 9.) Two years from October 22, 2019 was October 22, 2021. Petitioner did not
obtain a further extension of this time frame, and did not request an extension of
this deadline in Petitioner’s unsuccessful effort to seek a temporary restraining order. Petitioner’
s un-activated Cannabis Permit terminated by operation of law on October 22, 2021, and Petitioner’
s claims are
moot and Petitioner is not beneficially interested in
the requested writ. D.Petitioner’s Claim for Declaratory Relief Fails To the extent Petitioner’
s First Cause of Action also attempted to state an independent claim for declaratory relief,
that claim fails. Petitioner’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 [“Where
a trial court has concluded the plaintiff did not state sufficient facts to support a statutory claim
and therefore sustained a demurrer as to that claim, a demurrer is also properly sustained as to
a claim
for declaratory relief which is ‘wholly derivative’ of the statutory claim.”].) To the extent
Petitioner contends the declaratory relief claim is not derivative of the Petition, then it fails because it
solely seeks a declaration that the City erred and abused its discretion in the
past, and does not allege any actual present controversy. Declaratory relief operates only prospectively – to
clarify obligations and rights going forward. It is not a remedy for past wrongs or breaches: “The
purpose of a judicial declaration of rights in advance of an actual tortious incident is to enable the
parties to shape their conduct so as to avoid a breach. D]eclaratory procedure
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BEST BEST &KRIEGER LLPATTORNEYS AT LAW18101VON KARMAN AVENUE,SUITE 1000IRVINE,CALIFORNIA 92612. [I]n short, the remedy is to
be used in the interests of preventive justice, to declare rights rather than execute them.” (
Babb v. Superior Court (1971) 3 Cal.3d 841, 848.) Additionally, the availability of another form
of adequate relief justifies denial of declaratory relief. (See C.J.L.
Const., Inc. v. Universal Plumbing (1993) 18 Cal.App.4th 376, 390.) Finally, Petitioner
is not
entitled to the declaration sought for the reasons described above. IV.CONCLUSION For
all of the aforementioned reasons, the demurrer should
be
sustained in full.
Dated:February 14,
2022 BEST BEST & KRIEGER LLP
By:JEFFREY V. DUNN DANIEL L. RICHARDS Attorneys
for Defendants and Respondents City of San Luis Obispo
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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 February
14, 2022, I served a copy of the within document(
s): CITY OF SAN LUIS OBISPO NOTICE OF DEMURRER AND DEMURRER 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