Opinion
This is an appeal from the judgment of dismissal following the trial court’s order sustaining defendants’ demurrers without leave to amend. This case concerns the application of Education Code section 17406 (section 17406) which governs lease-leaseback construction agreements. Section 17406 provides an exception to the competitive bid process and, according to all parties and amici curiae, is widely used throughout the state. 1
The gravamen of plaintiffs’ lawsuit is that the lease-leaseback agreements entered into by defendants were a sham to avoid the competitive bid process and are therefore void. Following
Los Alamitos Unified School Dist.
v.
Howard Contracting, Inc.
(2014)
In addition to alleging the school district was required to obtain competitive bids, plaintiffs allege a conflict of interest in violation of Government Code section 1090 (section 1090). We reject defendants’ arguments that plaintiffs’ lack standing to raise the issue and that section 1090 always excludes all independent contractors. We conclude that, at this early stage in the proceedings, plaintiffs have alleged a cause of action for conflict of interest.
We reverse the judgment of dismissal and direct the trial court to enter a new order overruling defendants’ demurrers as to the conflict of interest cause of action only. The order sanctioning plaintiffs’ counsel is reversed. In all other respects, the judgment is affirmed.
FACTS AND PROCEDURE
This is the second appeal between plaintiff and appellant James D. McGee and defendants and respondents Balfour Beatty Construction, LLC (Balfour), and Torrance Unified School District (the District). Plaintiff and appellant California Taxpayers Action Network was not a party to the first appeal. Plaintiffs seek to recover money for the District; they seek no damages unto themselves.
In the first appeal, McGee challenged contracts for construction at Hickory Elementary School, Madrona Middle School, and North Hills High School, all within the District. (McGee v. Torrance Unified School Dist. (Jan. 23, 2015, B252570) [nonpub. opn.] (McGee I).) At each location, the contracts included a site lease, a sublease, and a construction agreement. The following causes of action in McGee I were identical to the causes of action alleged presently: (1) failure to comply with section 20110 of the Public Contract Code (which requires competitive bidding), (2) breach of fiduciary duty, (3) failure to comply with section 17417 of the Education Code (which requires competitive bidding), (4) contractor conflict of interest, (5) improper use of section 17400 et seq. of the Education Code, (6) improper delegation of discretion and (7) declaratory relief.
In the prior case, the trial court sustained defendants’ demurrers and dismissed the litigation. In a nonpublished opinion, we reversed the judgment of dismissal and directed the trial court to enter an order sustaining the demurrer to all causes of action except the one alleging a conflict of interest.
(McGee I, supra,
B252570.) In reaching this conclusion, we followed
Los Alamitos, supra,
Prior to
Los Alamitos
and
McGee I,
McGee filed the instant litigation challenging contracts related to construction of the Riviera Elementary School and the Towers Elementary School. The contracts were awarded to Balfour and were funded through a general obligation bond. Balfour was
Plaintiffs’ counsel modeled the complaint on a 2004 report from the executive officer at the State Allocation Board. After analyzing the lease-leaseback transactions entered into by school districts, the report concluded that there is “no legitimate lease” unless contractors financed the cost of construction. The report stated that the “interpretation and growing use of [Education Code] Section 17406 means that significant numbers of projects and significant sums of public funding are not being subjected to the checks and balances of the competitive bid process.” “Staff believes that virtually none of the projects currently using lease lease-back arrangements actually have financing provided by the developer. If a ‘lease agreement’ other than the site lease exists at all, it serves no significant purpose other than as a construction contract. The full cost of the project is borne by the district using the normal funds it has available for capital projects. Normal progress payments are made to the contractor through the course of construction, and the project is completely paid for by the district at the project completion. The projects are in every regard typical public works projects, except that they have not been competitively bid.” The State Allocation Board did not accept the report. It decided to conduct additional research and make recommendations for changes to regulations at a future meeting.
In response to plaintiffs’ complaint, Balfour moved for sanctions against plaintiffs’ attorney Kevin R. Carlin under Code of Civil Procedure section 128.7. That statute requires an attorney certify that “[t]he claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law.” (Code Civ. Proc., § 128.7, subd. (b)(2).) Balfour argued the litigation was frivolous because Attorney Carlin’s prior complaint reviewed in McGee I raised the same issues and was dismissed by the trial court. (At the time the sanction motion was filed, we had not decided McGee /.) Balfour argued that lease-leaseback agreements were commonly used throughout the state and had been approved in numerous validation actions. Ultimately, the trial court accepted this argument, and citing to the sister trial court judgment dismissing McGee’s first lawsuit, issued sanctions against Carlin.
After judgment was entered in this case, the Fifth District decided
Davis, supra,
DISCUSSION
We independently review the complaint to determine whether the alleged facts are sufficient to state a cause of action.
(Davis, supra,
We review the sanction order under the abuse of discretion standard.
(Peake
v.
Underwood
(2014)
1. The Trial Court Properly Sustained the Demurrer to All Causes of Action Alleging the District Was Required to Obtain Competitive Bids
Putting aside the cause of action for conflict of interest, plaintiffs’ remaining causes of action are premised on the assumption that the lease-leaseback agreements were not “genuine,” and the District was required to obtain competitive bids for the construction projects. In their first cause of action, plaintiffs alleged that Education Code sections 17400 through 17429 permit only genuine leases. Plaintiffs alleged that the leases in this case were “sham leases entered into as a subterfuge to avoid” the competitive bid process. The alleged breach of fiduciary duty cause of action is similarly premised on the failure to obtain competitive bids. The third cause of action for failure to comply with Education Code section 17417 also is based on the alleged failure to obtain competitive bids. Plaintiffs alleged the legal conclusion that section 17406 applies only to the site lease agreement, not the sublease agreement. Plaintiffs alleged improper use of section 17400 et seq. also alleged that section 17406 applies only to a genuine lease and applies only when the district does not have sufficient funds to finance the cost of construction. In their sixth cause of action for improper delegation of
Competitive Bids Were Not Required Under Section 17406
Education Code section 17417 requires competitive bidding unless there is an exception. Section 17406 provides an exception.
Specifically, section 17406, subdivision (a)(1) provides: “Notwithstanding Section 17417, the governing board of a school district, without advertising for bids, may let, for a minimum rental of one dollar ($1) a year, to a person, firm, or corporation real property that belongs to the school district if the instrument by which this property is let requires the lessee therein to construct on the demised premises, or provide for the construction thereon of, a building or buildings for the use of the school district during the term of the lease, and provides that title to that building shall vest in the school district at the expiration of that term. The instrument may provide for the means or methods by which that title shall vest in the school district before the expiration of that term, and shall contain other terms and conditions as the governing board of the school district may deem to be in the best interest of the school district.” (Italics added.)
Los Alamitos
and
Davis
disagree regarding whether section 17406 applies only to ‘“genuine” leases defined by
Davis
as “something more than a document designated by the parties as a lease.”
(Davis, supra,
Davis
relied on
City of Los Angeles
v.
Offner
(1942)
In contrast to
Davis,
in
Los Alamitos
the court held the following evidence was sufficient to uphold a lease-leaseback agreement: The school
The plain language of the statute is consistent with the holding in
Los Alamitos.
The statute requires the real property belong to the school district, the lease is for the purposes of construction, and the title shall vest in the school district at the end of the lease term. (§ 17406, subd. (a)(1).) Plaintiffs’ efforts to engraft additional requirements—such as the timing of the lease payments, the duration of the lease, and the financing—are not based on the plain language of the statute. Moreover, in contrast to
Offner,
this case does not involve a contract that potentially violated the constitutional provision on indebtedness and no party argues otherwise.
2
Even though there may be, as plaintiffs suggest, strong reasons to require competitive bidding in all circumstances, our role is to interpret the language of the statute, not to rewrite the statute.
(Equilon Enterprises v. Consumer Cause, Inc.
(2002)
We observe that the legislative history buttresses the conclusion reached in
Los Alamitos.
(See
Equilon Enterprises v. Consumer Cause, Inc., supra,
The proposed amendment did not survive the Governor’s veto, at which time the Governor explained: “ T am supportive of using a competitive process for public works projects and understand that this bill is needed to clarify that process. However, this bill imposes restrictions on lease-leaseback contracts that could limit competition, inadvertently limit schools[’] flexibility, and drive higher administrative costs; thereby potentially increasing the overall cost of school facility construction. [¶] For this reason, I cannot sign this measure.’ (Governor’s veto message to Assem. on Assem. Bill No. 1486 (2003-2004 Reg. Sess.) (Sept. 24, 2004).) The attempt to amend section 17406 to delete reference to the language ‘without advertising for bids’ implies that section 17406 as it reads now does not require competitive bidding.” (Los Alamitos, supra, 229 Cal.App.4th at pp. 1228-1229.)
The Legislature again considered section 17406 in 2014. In an analysis of the bill that led to the amendment, the Senate Committee on Education referred to the same State Allocation Board report relied on by plaintiffs, stating: “In January 2004, the State Allocation Board was presented with a report to discuss the use of lease/lease-back agreements for project delivery of facilities funded through the School Facility Program. According to that report, the use of this project delivery method was growing. Increasingly, districts were interpreting existing law to allow the use of these provisions to award a public works project without a competitive bid. The report noted that some districts do institute a competitive selection process voluntarily, but many do not, and expressed concern that an interpretation that would potentially allow billions of state bond dollars to be contracted through a ‘sole-source’ mechanism should be closely examined.” (Sen. Com. on Education, Analysis of Assem. Bill No. 1581 (2013-2014 Reg. Sess.) as amended Apr. 10, 2014, p. 4.) The analysis further described the conclusions of the report, noting that the State Allocation Board did not accept the report. (Id. at p. 5.) The committee’s analysis noted that the current bill “does not propose changes or clarifications to the broader issues and concerns surrounding lease/leaseback agreements and competitive bidding. However, it does provide clarification that when these types of projects go before the State Allocation Board to secure state general obligation bonds to fund these agreements, these projects are subject to the pre-qualification requirements statutorily required for competitively bid projects.” (Ibid.)
The Legislature could modify section 17406 to require competitive bidding in all circumstances or to clarify that it applies only when a contractor funds the project and when the school district is not permitted to accelerate payments, conditions alleged by plaintiffs to support their claim that the
Plaintiffs’ remaining arguments, which were rejected by both
Los Alamitos
and
Davis,
are not persuasive. The District was not required to comply with Education Code section 17417, because section 17406, subdivision (a)(1) expressly exempts the requirements of section 17417 when it states “[notwithstanding [sjection 17417.” Section 17406 applies to both a site lease and a sublease. “[T]he phrase ‘[notwithstanding Section 17417’ means the bidding procedures set forth in section 17417 do not apply to agreements covered by section 17406(a)(1). The phrase ‘without advertising for bids’ provides a further indication that competitive bidding is not required for agreements falling within section 17406(a)(1).”
3
(Davis, supra,
2. The Trial Court Should Have Overruled the Demurrer to the Conflict of Interest Cause of Action
Because plaintiffs alleged a cause of action for violation of section 1090, the trial court should have overruled defendants’ demurrers as to that cause of action.
a. Background
In their conflict of interest cause of action, plaintiffs alleged that Balfour had a conflict of interest based on its professional program management, construction management, and preconstruction services to the District. Plaintiffs alleged Balfour provided preconstruction services including budgeting, development of plans and specifications and that these services “filled the roles and positions of officers, employees and agents” of the District.
A 2008 agreement attached to the complaint indicated that Balfour would provide construction management services to the District. The services
b. Analysis
Section 1090 “ ‘codifies the long-standing common law rule that barred public officials from being personally financially interested in the contracts they formed in their official capacities.’ [Citation.] Government Code ‘section 1090 is concerned with ferreting out any financial conflicts of interest, other than remote or minimal ones, that might impair public officials from discharging their fiduciary duties with undivided loyalty and allegiance to the public entities they are obligated to serve. [Citation.] Where a prohibited interest is found, the affected contract is void from its inception [citation] and the official who engaged in its making is subject to a host of civil and (if the violation was willful) criminal penalties, including imprisonment and disqualification from holding public office in perpetuity [citations].’ ”
(Quantification Settlement Agreement Cases
(2011)
Section 1090 provides in pertinent part: “(a) Members of the Legislature, state, county, district, judicial district, and city officers or employees shall not be financially interested in any contract made by them in their official capacity, or by any body or board of which they are members. Nor shall state, county, district, judicial district, and city officers or employees be purchasers at any sale or vendors at any purchase made by them in their official capacity.”
i. Standing
The threshold issue is whether plaintiffs have standing to allege a section 1090 violation. Relying on our high court’s decision in
Thomson v. Call
(1985)
In contrast to
Davis,
in
San Bernardino County v. Superior Court
(2015)
Davis
is closer to this case than
San Bernardino.
As in
Davis,
this case involved a validation action in which the court had authority to set aside void contracts. A contract in violation of section 1090 is void.
(Klistoff v. Superior Court, supra,
While section 1090 refers to “city officers or employees,” in the civil context, it has been interpreted broadly to include independent contractors. (§ 1090, subd. (a).) For example, in
Hub City, supra,
As the
Davis
court explained, interpreting section 1090 to exclude corporate consultants “would allow the use of the corporate veil to insulate conflicts of interest that otherwise would violate the prohibition against local government officers and employees from making contracts in which they are financially interested. A corporate consultant is as capable of influencing an official decision as an individual consultant.”
(Davis, supra,
Here, plaintiffs allege that Balfour “filled the roles and positions of officers, employees and agents of [the District].” At this early stage in the proceedings, the allegation must be credited.
(Zelig v. County of Los Angeles
(2002)
3. The Sanctions Against Plaintiffs’ Attorney Must Be Reversed
Following Balfour’s motion, the trial court found the litigation frivolous and ordered Attorney Carlin pay Balfour sanctions. As Balfour concedes, in light of Davis, the litigation cannot be characterized as frivolous, and the sanction order must be reversed.
DISPOSITION
The judgment of dismissal and order awarding sanctions are reversed. The trial court is directed to enter a new order sustaining defendants’ demurrer
A petition for a rehearing was denied May 23, 2016.
Notes
Amicus curiae California School Boards Association/Education Legal Alliance represents (without evidentiary support) that one school district has spent more than $2.7 billion using lease-leaseback contracts.
Article XVI, section 18 of the California Constitution now restricts indebtedness including for school districts. Plaintiffs do not contend this provision was violated.
Because we conclude plaintiffs’ causes of action based on the failure to obtain competitive bids cannot go forward, we need not consider the trial court’s conclusion that the Government Claims Act (Gov. Code, § 810 et seq.) also bars plaintiffs’ cause of action for breach of fiduciary duty.
Balfour argues that San Bernardino stands for the proposition that plaintiffs’ lack standing as to the first through fifth causes of action. San Bernardino, however, considers only a cause of action for conflict of interest. (San Bernardino, supra. 239 Cal.App.4th at pp. 684—688.)
We recognize that in the criminal context
People
v.
Christiansen. supra.
At respondents’ request, we have taken judicial notice of the legislative history of Assembly Bill No. 1059 (2013-2014 Reg. Sess.), which was never codified. The proposed amendment to extend section 1090 to independent contractors failed for reasons not explained in the history provided to us. The legislative history provided to us does not suggest the Legislature intended to modify the statute to overrule the analysis in Hub City, which was decided prior to the proposed amendment and which was followed after this proposed amendment in Davis.
On our own motion we take judicial notice of the record on appeal in McGee I. supra. B252570. This renders moot plaintiffs’ request for judicial notice of the docket in that case. We deny plaintiffs’ request for judicial notice of complaints in other cases because they are not helpful to the resolution of the issues on appeal. We decline plaintiffs’ request for judicial notice of a letter from the general counsel of the Fair' Political Practices Commission providing advice to the City of San Diego on a potential conflict of interest from hiring the same contractor for the design and construction phases of a project. (Gov. Code, § 1097.1, subd. (c)(5).)