McGee v. Balfour Beatty Construction CA2/8
247 Cal. App. 4th 235
| Cal. Ct. App. | 2016Background
- Plaintiffs (McGee and California Taxpayers Action Network) challenged lease–leaseback construction contracts between Torrance Unified School District and Balfour Beatty, alleging the arrangements were shams to avoid competitive bidding under Education Code § 17406.
- Contracts at issue involved a site lease, a sublease, and a construction agreement funded by general obligation bonds; plaintiffs alleged the subleases were not "genuine" leases because the district effectively financed construction and made progress payments.
- This is a follow-up to an earlier related suit (McGee I) where most causes of action were dismissed except a conflict-of-interest claim; the trial court here sustained demurrers to all causes of action and imposed sanctions on plaintiffs’ counsel.
- Two published appellate authorities split on the statutory interpretation: Los Alamitos upheld lease–leaseback arrangements under § 17406; Davis interpreted § 17406 to require a "genuine" lease and thus competitive bidding when the arrangement is a subterfuge.
- The Court of Appeal (Second Dist., Div. 8) follows Los Alamitos: the plain text of § 17406 exempts covered agreements from competitive bidding; it reverses dismissal only as to the Government Code § 1090 conflict-of-interest claim and reverses sanctions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does Education Code § 17406 require competitive bidding or only apply to "genuine" leases? | § 17406 applies only to "genuine" leases; sham/subterfuge lease–leasebacks must be competitively bid. | § 17406 expressly exempts covered lease–leasebacks from advertising for bids; no extra "genuineness" requirement. | Court: § 17406's plain language and legislative history do not impose a competitive-bid requirement; demurrers properly sustained on bidding-based claims. |
| May a taxpayer challenge contracts as void for a Government Code § 1090 conflict of interest (standing)? | Plaintiffs have standing as taxpayers to challenge § 1090 violations affecting public contracts. | Defendants argue lack of taxpayer standing and preclusion by validation or prior rulings. | Court: Plaintiff has standing at this early stage; § 1090 challenge may proceed. |
| Does § 1090 reach independent contractors/corporate consultants who advise public agencies? | Corporate consultants who perform planning/preconstruction roles can be covered; corporate form cannot shield conflicts. | Defendants say § 1090 applies only to officers/employees and not to outside contractors. | Court: In civil context § 1090 can reach independent contractors who effectively act as officers/agents; demurrer to the § 1090 cause should have been overruled. |
| Were sanctions under CCP § 128.7 appropriate for filing this suit? | Plaintiffs: claims were nonfrivolous and raised legitimate statutory/constitutional issues. | Defendants: prior dismissal and widespread use of lease–leaseback made suit frivolous. | Court: Sanctions reversed because the litigation is not frivolous in light of split authority (e.g., Davis). |
Key Cases Cited
- Los Alamitos Unified School Dist. v. Howard Contracting, Inc., 229 Cal. App. 4th 1222 (upheld lease–leaseback agreements under § 17406 and declined to read a separate "genuineness" requirement into the statute)
- Davis v. Fresno Unified School Dist., 237 Cal. App. 4th 261 (concluded § 17406 applies only to "genuine" leases and allowed competitive-bid challenges to sham lease–leasebacks)
- City of Los Angeles v. Offner, 19 Cal. 2d 483 (discussed distinction between leases and conditional sales, and when legal form masks substantive indebtedness)
- Hub City Solid Waste Servs., Inc. v. City of Compton, 186 Cal. App. 4th 1114 (held independent contractors/advisors can fall within § 1090’s reach in civil cases)
- Thompson v. Call, 38 Cal. 3d 633 (supports taxpayer standing to challenge public contracts under conflict-of-interest principles)
- Klistoff v. Superior Court, 157 Cal. App. 4th 469 (contract made by a public officer in which the officer is interested is void)
- Equilon Enterprises v. Consumer Cause, Inc., 29 Cal. 4th 53 (principles of statutory interpretation; courts interpret statutes by plain language and legislative history where appropriate)