Russell City Energy Co. v. City of Hayward
2017 WL 3381692
Cal. Ct. App. 5th2017Background
- Russell City Energy and the City of Hayward entered a Cooperation and Option Agreement (2005) for construction and operation of a power plant; Russell paid $10 million under Section 6 (the "Payments Clause").
- The Payments Clause stated Russell's payment "comprise[s] all payments" related to development, construction, ownership and operation of the plant and that the City "shall not impose any other ... taxes ... other than such ... taxes ... generally applicable to similarly situated owners of real property."
- In 2009 Hayward adopted a Utility Users Tax on electricity and gas usage; in 2011 the City required Russell to pay the tax and Russell paid under protest.
- Russell sued (breach of contract, promissory estoppel, anticipatory repudiation, constitutional Contracts Clause, declaratory relief). The City demurred, arguing the Payments Clause is unconstitutional because it surrenders/suspends the City’s taxing power (Cal. Const. art. XIII, § 31).
- Trial court sustained demurrer without leave to amend; on appeal the court accepted Russell’s reasonable contractual interpretation but held that interpretation violated Section 31 and thus the contract-based claims failed.
- The appellate court reversed only as to leave to amend, holding Russell may plead a quasi-contractual restitution claim to recover money paid.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper interpretation of Payments Clause | Clause precludes utility-user tax because it applies to "use" not property; $10M was all payments related to development/operation | Clause allows taxes "generally applicable to similarly situated owners of real property," so the utility tax is included | Court: Russell's reading is a reasonable, not clearly erroneous interpretation at pleading stage; accept it for purposes of review |
| Constitutionality under Cal. Const. art. XIII, § 31 (power to tax) | Clause is an exercise of taxing power (PILOT) or a limited/project-specific/time-limited promise, not an unconstitutional surrender | Clause unlawfully surrenders/suspends the City's power to tax by broadly forbidding non–real property taxes | Court: Payments Clause (as Russell reads it) surrenders/suspends taxing power and thus violates §31; unenforceable |
| PILOT characterization (payment in lieu of taxes) | The $10M is an upfront PILOT that substitutes for future taxes, so constitutional as an exercise of taxing authority | Even if characterized as PILOT, the Clause here functions as an agreement not to impose future taxes and thus violates §31 | Court: Complaint did not plead PILOT; even assuming PILOT, the Clause cannot be reconciled with §31 and is invalid |
| Leave to amend and restitution/quasi-contract remedy | Even if contract provision invalid, Russell can plead quasi-contract/restitution to recover money paid because enforcement of payment would unjustly enrich City | Public-entity quasi-contract claims are disfavored; severability and public-policy limits may bar restitution | Court: Leave to amend denied below was error; Russell may amend to allege quasi-contractual restitution (money paid) despite invalid provision |
Key Cases Cited
- Crowley v. Katleman, 8 Cal.4th 666 (1994) (standard for accepting pleaded facts and contract interpretation on demurrer)
- Rutherford Holdings, LLC v. Plaza Del Rey, 223 Cal.App.4th 221 (2014) (accept reasonable contractual interpretation at pleading stage)
- City of Glendale v. Superior Court, 18 Cal.App.4th 1768 (1993) (municipalities cannot surrender core governmental powers by contract)
- Alameda County Land Use Assn. v. City of Hayward, 38 Cal.App.4th 1716 (1995) (time‑limited/project‑specific surrender of police power invalid)
- 108 Holdings, Ltd. v. City of Rohnert Park, 136 Cal.App.4th 186 (2006) (analysis whether contract surrenders municipal control over function)
- Cane v. City and County of San Francisco, 78 Cal.App.3d 654 (1978) (municipality may pay taxes on lessee’s property but exemptions from taxation are invalid)
- AB Cellular LA, LLC v. City of Los Angeles, 150 Cal.App.4th 747 (2007) (settlement/enforcement of local tax methodology does not address constitutional surrender of taxing power)
- Janis v. California State Lottery Com., 68 Cal.App.4th 824 (1998) (limits on suing public entities on quasi‑contract theories discussed)
- Katsura v. City of San Buenaventura, 155 Cal.App.4th 104 (2007) (private parties generally cannot recover on implied/quasi‑contract against public entity when contract formalities absent)