Pot Cos. Say California City Reneged On Fee Waiver Promise

Pot Cos. Say California City Reneged On Fee Waiver Promise

By Mike Curley

Law360 (April 10, 2024, 1:29 PM EDT) — Six cannabis companies are suing the city of Cudahy in California federal court, saying the city breached its contracts by refusing to waive fees accrued during national emergencies and city-caused delays, costing the companies more than $26 million in damages.

In a complaint filed Monday, Cuper Development LLC, Go Cudahy LLC, Davina LLC, Genius Distribution LLC, Herbal Dragon LLC and Daniel & Goliath LLC said they signed development agreements with the city in 2018, but after nearly six years, only one had been able to begin operations after paying the fees under duress.

According to the complaint, the development agreements promised that the city would prioritize the businesses, hold annual review hearings, and waive fees if there were delays caused either by the city or by major emergencies, such as the COVID-19 pandemic and the resulting stay-at-home orders. Since the agreements were signed, the companies said they had spent more than $10 million on construction, but still had not been able to begin operation, as the city has held up permits by demanding that the companies first
pay $5.4 million in illegal fees.

The companies told the U.S. District Court for the Central District of California that the development agreement allows the city to collect operating fees based on receipts, not “non-operating” fees. Among the delays caused by the city are the redesign of approved plans, which the companies said constitute a default on the city’s part under the agreement, and a failure to expedite permits.

In addition, the city has held none of the annual review hearings before the City Council, depriving the companies of the opportunity to present claims for fee waivers based on the COVID-19 shutdowns, according to the complaint.

The complaint also alleges a racketeering conspiracy among the city and its council members, who it says told the state’s Department of Cannabis Control that the companies were in default in a bid to extort the illegal fees using a threat to revoke their state licenses.

The city has also attempted to extort the fees by issuing temporary 90-day permits, to be renewed only if the plaintiffs pay the disputed fees, even though such temporary permits are not part of the development agreements, which vested with the companies the right to begin and continue construction, according to the complaint.

And even after Go Cudahy was able to open, the companies allege that City Manager Alfonso Noyola demanded an immediate $200,000 payment via text message in September, with the threat of revocation if the money wasn’t sent within three days.
The companies said they informed the city of the breach in January, but the city has ignored the notice, and its activities in the meantime show that they plan to continue attempting to collect the fees.

The complaint includes claims for breach of contract, violation of equal protection and due process rights, violations of the Racketeer Influenced and Corrupt Organizations Act, violations of city law and wrongful use of administrative proceedings.

“It is unfathomable that a city would not engage the operators when it received the notice to cure,” Sebastian Rucci of Law Offices of Sebastian Rucci PC, representing the companies, told Law360 on Wednesday. “The city’s silence in resolving their breach displays arrogance, which has forced the city to face $26.4 million in lost profits due to pure arrogance by city officials. This level of recklessness is dumbfounding. We look forward to litigating this case to a jury verdict to send a message to others who believe they are above the law by abusing their power in office.”

Representatives for the city and the city could not immediately be reached for comment Wednesday.
The companies are represented by Sebastian Rucci of Law Offices of Sebastian Rucci PC.
Counsel information for the city and officials was not available Wednesday.

The case is Cuper Development LLC et al. v. City of Cudahy et al., case number 2:24-cv-02833, in the U.S. District Court for the Central District of California.

https://www.law360.com/articles/1823644/pot-cos-say-california-city-reneged-on-fee-waiver-promise