57 Cal.App.5th 911
Cal. Ct. App.2020Background
- In 2012 Davis challenged Fresno Unified and Harris Construction on a $36.7 million "lease–leaseback" project, alleging the arrangement violated public bidding rules and created conflicts of interest because the contractor had performed preconstruction consulting work.
- The operative documents were a Site Lease and a Facilities Lease that incorporated detailed Construction Provisions providing progress payments up to a guaranteed maximum price and which characterized payments as "lease payments" and current expenses.
- Davis pleaded both a reverse validation action (Code Civ. Proc. § 863) seeking invalidation of the leases and claims styled as a taxpayer suit seeking return/disgorgement of monies paid (the FAC repeatedly sought repayment of all monies paid).
- In a prior appeal this court (Davis I) concluded the contracts were not genuine leases, lacked a financing component, and did not provide for district occupancy during the lease term, and it permitted conflict-of-interest and bidding claims to proceed.
- After remand defendants moved for judgment on the pleadings as moot because construction was completed; the trial court treated the case solely as an in rem reverse-validation action and dismissed, holding disgorgement is not available in a validation proceeding.
- The Court of Appeal reversed: it construed the FAC as asserting both a reverse validation claim and an in personam taxpayer action under Code Civ. Proc. § 526a, held the specific contracts were not the kind of financing contracts subject to the validation statutes, and concluded disgorgement remains an available, effectual remedy so the taxpayer claims are not moot.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1. Does the FAC assert only a reverse validation (in rem) action or also an in personam taxpayer (§ 526a) action? | Davis argued FAC seeks disgorgement and recovery of funds and therefore includes a taxpayer action as well as a reverse-validation claim. | Defendants argued the lawsuit is exclusively a reverse validation action under § 863. | Held: FAC reasonably construed to include both a reverse validation action and a § 526a taxpayer action; labels are not dispositive—look to allegations and relief sought. |
| 2. Are the disputed contracts "contracts" subject to the validation statutes (Gov. Code § 53511) so that validation bars a taxpayer disgorgement remedy? | Davis argued the contracts lack a financing component and are essentially construction contracts, so they fall outside the narrow meaning of "contracts" in § 53511. | Defendants contended lease–leaseback school projects are financing devices and thus fall within § 53511, making validation the exclusive remedy. | Held: The contracts here lacked a financing component (per Davis I) and therefore are not "contracts" for § 53511 purposes; validation statutes do not bar the taxpayer action. |
| 3. Is the case moot because the contracts were fully performed and expired, making invalidation declaratory relief ineffective? | Davis conceded declaratory invalidation would be moot but argued disgorgement remains available and effectual under § 526a. | Defendants argued completion renders the dispute moot and that disgorgement is unavailable in an in rem validation context. | Held: Declaratory relief (invalidating completed contracts) is moot; but disgorgement in an in personam taxpayer suit is an available and effectual remedy, so the taxpayer claims are not moot. |
| 4. May a taxpayer obtain disgorgement/restitution from the contractor for contracts procured in violation of bidding/conflict rules? | Davis sought disgorgement of monies paid under the allegedly illegal contracts based on competitive-bidding violations and Gov. Code § 1090/common-law conflicts. | Defendants argued disgorgement is unavailable if the validation scheme applies or as a matter of law in this context. | Held: Disgorgement/restoration of public funds is a recognized remedy in a § 526a taxpayer action for illegal expenditures; because these contracts are not subject to validation, disgorgement remains available. |
Key Cases Cited
- Davis v. Fresno Unified School Dist., 237 Cal.App.4th 261 (Cal. Ct. App. 2015) (prior panel decision concluding the specific lease–leaseback documents lacked financing, were not true leases, and stating conflict-of-interest issues warranted further proceedings)
- San Diegans for Open Government v. Public Facilities Financing Authority of City of San Diego, 8 Cal.5th 733 (Cal. 2019) (Supreme Court acknowledged taxpayers may challenge § 1090 violations under § 526a where appropriate)
- Ontario v. Superior Court, 2 Cal.3d 335 (Cal. 1970) (validation statutes provide limited, in rem declaratory relief; restitution and injunctions are not supplied by the validation scheme)
- Regus v. City of Baldwin Park, 70 Cal.App.3d 968 (Cal. Ct. App. 1977) (validation and taxpayer actions are not mutually exclusive)
- Friedland v. City of Long Beach, 62 Cal.App.4th 835 (Cal. Ct. App. 1998) (validation statutes aim to quickly resolve financing-related disputes and limit delay/uncertainty for public agencies)
- McGee v. Torrance Unified School Dist., 49 Cal.App.5th 814 (Cal. Ct. App. 2020) (held some lease–leaseback/§ 1090 claims may fall within validation statutes depending on whether the contracts involve financing)
- Jennings v. Strathmore Pub. Utility Dist., 102 Cal.App.2d 548 (Cal. Ct. App. 1951) (declaration invalidating fully performed contracts provides no effectual relief and is therefore moot)