Headlands Owners Sue Dana Point : Courts: The action seeks to overturn a referendum blocking a $500-million project on the site.

Owners of the Dana Point Headlands, one of the last undeveloped properties on the Orange County coast, have filed a lawsuit against the city of Dana Point seeking to overturn a voter-approved referendum that blocks a $500-million development at the site.

In the suit filed in Superior Court here, Chandis Securities Co. and M.H. Sherman Co., owners of the 115-acre property near Dana Point Harbor, contend that Measures C and D passed by voters in November are “invalid because they are arbitrary and discriminatory, and are in excess of the police power of the city.”

The measures halted a development plan that had been approved by the City Council in April. The plan would have allowed a 400-room hotel and at least 370 homes at the site.

The suit also asks for at least $3 million in damages from the city.

Dan T. Daniels, president of the Newport Beach-based M.H. Sherman Company, said Tuesday that the suit was filed reluctantly to protect the owners’ “constitutional rights” to use their property.

“This is not something we are excited about doing,” Daniels said. “But we have been pushed into a corner and this is our only alternative.”

City Councilwoman Toni Gallagher, a vocal opponent of the plan, said the landowner should have come back to the city with a smaller plan, rather than a lawsuit. “The developer is trying to get its way at the expense of the townspeople by circumventing our democratic process,” she said.

‘Here we go again,” said Geoffrey Lachner, a local attorney and member of Save The Headlands, a nonprofit group that launched the referendum. “There is absolutely no basis for this.”

*

The companies have owned the property since the 1940s and have proposed various development plans through the years. More than $2.6 million has been spent since 1991 on the most recent plan, according to the suit. Chandis Securities, a firm that oversees the financial holdings of the Chandler family, is a major stockholder in Times Mirror Co., publisher of the Los Angeles Times.

For years, talk of developing the environmentally sensitive property, home to such endangered species as the California gnatcatcher and the Pacific pocket mouse, has sparked furious debate.

Immediately after the City Council approved the plan, opponents organized the petition campaign that placed Measures C and D on the November ballot. Plan opponents argued that the development was too large and that more open space needed to be set aside, and voters seemed to agree, rejecting the plan by a 10% margin.

But supporters of the plan argued that the development would bring much-needed revenue to the tourist-oriented city, which gathers about a third of its annual $11 million in revenues in taxes from hotels.

Daniels said the companies had worked hard to cooperate with the city and had compromised whenever asked by the council.

“We went through a process that involved many years and lots of money,” he said. “Now it is our contention that we have been discriminated against by not allowing a development to go forward.”

The council will discuss the lawsuit in a private session during a special meeting Jan. 3.