Russell City Energy Co. v. City of Hayward
A144749
| Cal. Ct. App. | Aug 7, 2017Background
- In 2005 Russell City Energy (Russell) and the City of Hayward (City) executed a Cooperation and Option Agreement to facilitate construction and operation of a natural‑gas power plant; Russell paid $10 million to the City under Section 6 (the "Payments Clause").
- The Payments Clause stated Russell’s payments “comprise all payments…in connection with the development, construction, ownership and operation” of the plant and that the City “shall not impose any other…taxes” except those “generally applicable to similarly situated owners of real property.”
- In 2009 Hayward adopted a Utility Users Tax (UUT) on electricity and gas usage; the City assessed the UUT against the plant and Russell paid assessments while disputing liability.
- Russell sued in 2014 for breach of contract, promissory estoppel, anticipatory repudiation, constitutional Contracts Clause violations, and declaratory relief; the City demurred arguing the Payments Clause unlawfully surrendered the City’s taxing power (Cal. Const., art. XIII, § 31).
- The trial court sustained the demurrer without leave to amend, finding Russell’s interpretation of the Payments Clause plausible but unconstitutional under Section 31; Russell appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Payments Clause precludes application of the UUT to Russell | Payments Clause bars taxes based on utility usage (not property); clause is reasonably susceptible to that meaning | Clause permits taxes “generally applicable” to similarly situated real property owners; UUT is generally applicable | Court: Russell’s contract interpretation is not clearly erroneous and is reasonably susceptible to that meaning (accepted at pleading stage) |
| Whether the Payments Clause unlawfully surrenders or suspends the City’s power to tax in violation of Cal. Const., art. XIII, § 31 | Clause is an exercise of taxing power (a PILOT/up‑front payment) and thus permissible | Clause contracts away/suspends taxing power by forbidding future taxes except real‑property taxes | Held: Payments Clause, as Russell interprets it, surrenders/suspends the City’s power to tax and violates Section 31; unconstitutional and unenforceable |
| Whether treating the clause as a PILOT (payment in lieu of taxes) saves it | Clause is effectively a PILOT and represents legitimate municipal taxing flexibility | PILOT characterization not pleaded; even if pleaded, clause operates as an exemption and is constitutionally invalid | Held: PILOT theory not pleaded; and even if it were, the clause would still violate Section 31 and is invalid |
| Whether Russell should be denied leave to amend or can plead quasi‑contract/restitution for money paid | Russell seeks leave to amend to plead restitution/unjust enrichment (money paid under a void provision) | City argues quasi‑contract claims against public entities are barred and severability/complexity preclude restitution | Held: Demurrer sustained as to contract claims, but reversal limited to permit Russell leave to amend to allege a quasi‑contractual restitution claim; leave to amend granted on remand |
Key Cases Cited
- Coker v. JPMorgan Chase Bank, N.A., 62 Cal.4th 667 (review standard for demurrer and pleading interpretations) (court must accept reasonable interpretation unless clearly erroneous)
- Rutherford Holdings, LLC v. Plaza Del Rey, 223 Cal.App.4th 221 (interpretation of contract at pleading stage; accept reasonable constructions)
- City of Glendale v. Superior Court, 18 Cal.App.4th 1768 (local government cannot surrender core governmental powers by contract)
- 108 Holdings, Ltd. v. City of Rohnert Park, 136 Cal.App.4th 186 (contracts that divest municipal control of functions are invalid)
- Cane v. City & County of San Francisco, 78 Cal.App.3d 654 (municipality may assume tax payments but provisions granting exemption are invalid)
- Katsura v. City of San Buenaventura, 155 Cal.App.4th 104 (limits on suing public entities on implied/quasi‑contract theories; necessity of municipal authority for enforceable obligations)
- County Mobilehome Positive Action Com. v. County of San Diego, 62 Cal.App.4th 727 (time‑limited/project‑specific surrender of police power invalid)