RUSSELL CITY ENERGY COMPANY, LLC, Plaintiff and Appellant, v. CITY OF HAYWARD, Defendant and Respondent.
A144749 (Alameda County Super. Ct. No. RG14752278)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA FIRST APPELLATE DISTRICT DIVISION FIVE
Filed 8/7/17
CERTIFIED FOR PUBLICATION
The answer is yes. We conclude Russell‘s interpretation of the Payments Clause—that the City contractually promised not to impose any taxes other than real property related taxes—violates Section 31 because it surrenders and suspends the City‘s power to tax the power plant. Thus, the trial court properly determined the Payments Clause was unenforceable and sustained the City‘s demurrer to Russell‘s complaint alleging claims premised on a breach of the agreement.
We also conclude, however, that Russell must be permitted an opportunity to amend its complaint to allege a quasi-contractual restitution claim.
FACTUAL AND PROCEDURAL BACKGROUND
On appeal from an order sustaining a demurrer, we “accept as true the properly pleaded material factual allegations of the complaint, together with facts that may properly be judicially noticed.” (Crowley v. Katleman (1994) 8 Cal.4th 666, 672.)
The Agreement and the Utility Tax
In October 2005, Russell and the City entered into a Cooperation and Option Agreement (agreement). The purpose of the agreement was to facilitate Russell‘s construction and operation of the Energy Center, a natural gas-fired, combined cycle electric generating facility in Hayward. In the agreement, the City granted Russell an optiоn to purchase 12.5 acres of City-owned land as the site for the Energy Center. The City also promised to help Russell obtain permits, regulatory approval, and water treatment services for the power plant. Pursuant to the agreement, Russell conveyed a 3.5-acre parcel to the City.
Section 6 of the agreement—the Payments Clause—required Russell to “pay to the City $10,000,000 . . . for the City‘s design and construction of a new library.”1 The Payments Clause also provides in relevant part: “In the interest of clarity, the Parties acknowledge that payments to be made by
or portion thereof, shall be deemed severable, shall not be affected, and shall remain in full force and effect.”
When Russell entered into the agreement, it relied on the authority of the City and its representatives to enter into the Payments Clause.2 Russell acquired real property, entitlements, permits and other assets necessary to build the Energy Center, and incurred “tens of millions of dollars in construction-related” and development costs. In June 2009, Hayward voters approved a Utility Users Tax Ordinance (tax оr utility tax) on the usage of electricity and gas, which, as relevant here, imposes “a tax upon every person using electricity in the City. The tax imposed . . . shall be at the rate of five and one-half percent (5.5%) of the charges made for such electricity. . . . The tax shall be collected from the service user.” The provision regarding gas usage is substantially similar.
Russell began building the Energy Center in October 2010. In April 2011, the City informed Russell it must pay the utility tax. Russell claimed the Payments Clause prohibited the City from imposing the tax, but it made payments to cover the utility tax assessments. In October 2011, Russell paid the City $10 million as required by the agreement. The Energy Center is complete and operational.
The Lawsuit
In 2014, Russell filed a verified complaint against the City alleging claims for: (1) breach of contract; (2) promissory estoppel; (3) anticipatory repudiation; (4) violation of the Contracts clauses of the federal and state constitutions;
“aside from those expressly authorized under the Agreement” was a “material aspect of the bargain” between Russell and the City. According to the complaint, the City‘s “bad faith” application of utility tax to Russell “was . . . an intentional breach and deliberate anticipatory repudiation of its promises, covenants and obligations made under the [a]greement.” Russell also alleged the City breached the agreement by claiming the City “had no authority to enter into its promise that [Russell] not be subject to certain levies, fees, taxes, contributions or charges.” According to the complaint, the City‘s bad faith conduct “unfairly and unreasonably” deprived Russell of a “substantial portion of the benefits it bargained for under the Agreement, and for which [Russell] . . . paid fair and good consideration . . . .”
The promissory estoppel cause of action alleged the City promised not to impose levies, fees, taxes, or charges “other than expressly allowed in the Agreement” and “warranted its authority to make such promises.” Russell relied on those promises by acquiring “real property, entitlements, permits and other assets necessary for development . . . of the Energy Center,” beginning construction on the Energy Center, incurring “tens of millions of dollars in construction-related costs,” and paying the City $10 million pursuant to the agreement.
In its Contracts clause claim, Russell alleged the imposition of the utility tax in contravention of the agreement violated Russell‘s contract rights under the United States and California constitutions. According to the complaint, the imposition of the utility tax “effectively nullifies the City‘s obligations under the [a]greement by imposing . . . unexpected and new liabilities and limitations on the exercise of [Russell‘s] contractual rights under the [a]greement, which related obligations and covenants [Russell] has already substantially performed.” Russell‘s final claim, for declaratory relief, alleged the parties disagreed regarding the interpretation of the agreement and “whether the City‘s wrongful retention of fees and monies already paid to the City by [Russell] under the [a]greement, including the $10,000,000 payment made by [Russell], . . . would unjustly enrich the City.” Russell sought a judicial declaration the City breached the agreement, and “damages in an amount according to proof.”
The City demurred, arguing the complaint was based on “an erroneous and unconstitutional interpretation of the Payments Clause” and, as a result, failed to state a viable claim. It claimed Russell had no enforceable contractual right to avoid paying the utility tax, explaining: (1) the Payments Clause authorized imрosition of taxes ” ‘generally applicable to similarly situated owners of real property located in the City’ “; and (2) the utility tax was ” ‘generally applicable to similarly situated owners of real property in the City.’ ” In other words, applying the utility tax to the power plant‘s operations did not breach the agreement because the Payments Clause did not preclude the City from imposing “generally applicable taxes, [which] are simply the cost of doing business in Hayward.” The City also argued a contractual provision exempting Russell from future taxes would unconstitutionally surrender or suspend the City‘s power to tax in violation of Section 31, which provides, “[t]he power to tax may not be surrendered or suspended by grant or contract.” Finally, the City contended Russell‘s promissory estoppel claim failed because Russell could not “use promissory estoppel to procure ‘the indirect enforcement of an illegal contract.’ ”
In opposition, Russell claimed the utility tax “turn[ed] on the usage of services” not property ownership. Russell also argued the court must accept its interpretation of the Payments Clause at the pleading stage, as long as the interpretation ” ‘does not place a clearly erroneous construction’ ” on the provisions of the contract. Next, Russell claimed the Payments Clause did not violate Section 31 because it represented an exercise—not a surrender—of the City‘s taxing power. According to Russell, the Payments Clause was an upfront payment in lieu of future taxes, also known as a PILOT agreement.4 The City‘s reply argued Russell was impermissibly trying to “secure
benefits . . . it never bargained for and that the City could never promise to provide in the first place. . . . [¶] As a matter of law, the City did not, and could not, agree not to enact future taxes applicаble to [Russell].”
Hearing and Order Sustaining Demurrer
At a hearing, counsel for Russell characterized the Payments Clause as a PILOT agreement and urged the court to uphold it. Russell‘s attorney also
The court questioned whether the Payments Clause represented an “illusory promise” and asked counsel for the City: “[Y]ou have their $10 million. And to just let you walk away from it now after you‘ve gotten the money . . . is that fair?” Ultimately, however, the court sustained the City‘s demurrer without leave to amend and dismissed the complaint. In a thorough written order, the court determined as a threshold issue it was “not clearly erroneous” for Russell to interpret the Payments Clause as preventing the City from imposing the utility tax because the tax “is assessed based on utility usage, not property ownership.” But the court also concluded Russell‘s interpretation of the Payments Clause violated the California Constitution. As the court explained, “none of the cases cited by [Russell] show how the City‘s purported agreement not to impose any taxes (other than real property-related taxes) can be reconciled with . . . section 31 of California‘s Constitution.” The court rejected Russell‘s reliance on municipalities’ tax settlement agreements, concluding “[i]n the Payments Clause, the City did not exercise its discretion to receive payments in lieu of taxes. The Court finds that the Payments
Clause would be unconstitutional if interpreted tо mean that the City contractually surrendered or suspended its power to tax in violation of . . . section 31.”
For these reasons, the court concluded the complaint did not state a claim against the City and sustained the demurrer without leave to amend. The court declined to permit Russell to amend the complaint, noting Russell‘s interpretation of the Payments Clause “renders it unconstitutional. The court fails to see how this defect can be cured by amendment and [Russell] does not suggest any reasonable possibility that it can be.”
DISCUSSION
I. General Principles
As stated above, “[i]n reviewing a judgment sustaining a demurrer without leave to amend, we give the complaint a reasonable interpretation and treat the demurrer as admitting all material facts properly pleaded.” ( Coker v. JPMorgan Chase Bank, N.A. (2016) 62 Cal.4th 667, 671.) ” ‘[W]e examine the complaint de novo to determine whether it alleges facts sufficient to state a cause of action under any legal theory[.]’ [Citation.] Whilе our focus is on the pleadings, ‘[r]elevant matters that are properly the subject of judicial notice may be treated as having been pled.’ ” (Requa v. Regents of University of California (2012) 213 Cal.App.4th 213, 223 (Requa).)
Russell‘s claims are based on contract. “When reviewing whether a plaintiff has properly stated a cause of action for breach of contract, we must determine whether the alleged agreement is ‘reasonably susceptible’ to the meaning ascribed to it in the complaint. [Citation.] ’ “So long as the pleading does not place a clearly erroneous construction upon the provisions of the contract, in passing upon the sufficiency of the complaint, we must accept as correct plaintiff‘s allegations as to the meaning of the agreement.” ’ ” (Klein v. Chevron U.S.A., Inc. (2012) 202 Cal.App.4th 1342, 1384-1385 (Klein).) “Thus, to survive demurrer, [Russell] need[s] only set forth a reasonable interpretation of [the agreement].” (Id. at p. 1385.) ” ‘As a reviewing court we are not bound by the construction placеd by the trial court on the pleadings but must make our own independent judgment thereon, even as to matters not expressly ruled upon by the
trial court.’ ” (Aragon-Haas v. Family Security Ins. Services, Inc. (1991) 231 Cal.App.3d 232, 239 (Aragon-Haas).)
II. The Payments Clause Violates Section 31 of the California Constitution
The complaint alleges the Payments Clause prohibits the City from imposing the utility tax. The Payments Clause provides in relevant part: (1) Russell‘s $10 million payment “comprise[s] all payments to be made to the City” by Russell in connection with the “development, construction, ownership and operation” of the Energy Center; and (2) “the City shall not impose any other . . . taxes, . . . on [Russell], . . . other than such . . . taxes . . . generally applicable to similarly situated owners of real property located in the City.”
A. Russell‘s Interpretation of the Payments Clause is Not Clearly Erroneous
The tax applies to persons using gas and electricity in the City, and the tax is based on a percentage of electricity and gas charges. A property owner who does not use utilities does not pay the tax. Accordingly, the Payments Clause
As it did in the court below, the City contends the Payments Clause authorizes imposition of the utility tax because it is generally applicable to similarly situated real property owners. We reject this argument. The City‘s “competing” interpretation of the Payments Clause does not demonstrate Russell‘s interpretation is clearly erroneous. (Rutherford, supra, 223 Cal.App.4th at p. 229; Aragon-Haas, supra, 231 Cal.App.3d at p. 239.)
B. The Payments Clause Cannot Be Reconciled with Section 31, Which Prohibits Local Governments from Surrendering or Suspending the Power to Tax
Next, we consider whether the Payments Clause conflicts with Section 31. Article VIII, section 6 of the 1879 California Constitution provided, “The power of taxation shall never be surrendered or suspended by any grant or contract to which the State shall be a party.” In 1974, section 6 was replaced with Section 31, which provides “[t]he power to tax may not be surrendered or suspended by grant or contract.” (
the[se] word[s] . . . in [their] ordinary sense and, consequently, we may refer to [those words‘] dictionary definition[s] to ascertain [their] ordinary, usual meaning.” (County of Kern v. T.C.E.F., Inc. (2016) 246 Cal.App.4th 301, 318.) The common meaning of surrender is “to give up completely or agree to forgo especially in favor of another.” (Merriam-Webster‘s Collegiate Dict. (11th ed. 2014) p. 1258.) Suspend or ” ‘[s]uspended’ is synonymous with temporarily debarred, inactive, inoperative and held in abeyance.” (County of Kern, at p. 318. [defining ” ‘suspended’ ” as ” ‘temporarily inoperative’ “]; see Merriam-Webster‘s Collegiate Dict. (11th ed. 2014) p. 1259 [defining suspend as “to debar temporarily,” or “to cause to stop temporarily,” or “to set aside or make temporarily inoperative“].) In the Payments Clause, the City unquestionably suspended its power to tax. The Payments Clause renders the City‘s power to tax ” ‘temporarily inactive’ ” for the life of the power plant. (County of Kern, at p. 318.)
A contract that surrenders or impairs a governmental power “is invalid . . . if the contract amounts to a municipality‘s ‘surrender’ or ‘abnegation’ of its control of a municipal function. . . . ‘the controlling consideration in this area appears to be whether a disputed contract amounts to a local entity‘s “surrender,” “abnegation,” “divestment,” “abridging,” or “bargaining away” of its control of a [taxing] power or municipal function.’ [Citations.] The inquiry thus turns on whether ‘this crucial control element has been lost.’ ” (108 Holdings, Ltd. v. City of Rohnert Park (2006) 136 Cal.App.4th 186, 194-195.) Here, the City has “surrendered” its power to tax in the Payments Clause: it hаs relinquished the crucial element of control of its power to exercise municipal functions by the imposition of “levies, fees, contributions, charges and taxes,” except by raising revenue through imposition of taxes on real estate. Russell‘s interpretation of the
Payments Clause would preclude the City from imposing
Russell‘s attempts to avoid the purview of Section 31 are unavailing. For example, it claims Section 31 prohibits only “perpetual or irrevocable tax immunity.” Russell reasons that the Payments Clause does not violate Section 31 because the City‘s contractual promise not to impose taxes is “project-specific” (it applies only to the power plant) and is “time-limited” (it applies only to the finite lifespan of the power plant). Russell also contends Section 31 was intended tо apply only to “tax immunity in corporate charters, not contract provisions” such as the Payments Clause. These arguments conflict with the plain language of Section 31, which broadly states “[t]he power to tax may not be surrendered or suspended by grant or contract.” Nothing in Section 31 authorizes surrenders or suspensions of the power to tax in “project-specific” or “time-limited” situations.6 As the City points out, were Section 31 so limited, the
corporation and the municipality could circumvent Section 31 by the municipality‘s piecemeal surrender of its power to tax.
Russell‘s reliance on Valencia Energy v. Arizona Dept. of Rev. (Ariz. 1998) 959 P.2d 1256 (Valencia) does not alter our conclusion. In that case, the Arizona Department of Revenue (department) advised Valencia Energy Company (company) that certain “transportation charges were not subject to tax” and, as a result, the company declined to “charge or collect transaction privilege taxes.” (Id. at p. 1260.) Later, the department changed course and assessed back taxes against the company. (Ibid.) Before the Arizona Supreme Court, the company argued the department was estopped from collecting back taxes because it had advised the company “the activity now levied on was not subject to tax.” (Id. at p. 1259.)
The Valencia court disagreed, concluding the constitutional provision “restrains all branches of government, but only as to relinquishment of the Legislature‘s fundamental power to tax. An estoppel from collecting revenue from a single taxpayer for a single event is not the kind of permanent capitulation with which the framers were concerned. We therefore hold that
Nor does Section 31 limit its application to corporate charters, to prohibit “perpetual tax exemptions for all of a corporation‘s activities” as embodied in a corporation‘s charter. What Russell characterizes as a “modest textual change” embodied in the 1974 amendment defeats this argument. The 1974 amendment deleted from former section 6 the words “to which the State shall be a party,” thereby expanding Section 31‘s
reach to local governmental entities. The regulation of corporate formation and the filing of articles of incorporation are a function of the State through the Secretary of State, not of local municipalities. (See generally
We are mindful that the ” ’ “taxing power of the state is never presumed to have been relinquished unless the language in which the surrender is made is clear and unmistakable.” ’ ” (Coso Energy Developers v. County of Inyo (2004) 122 Cal.App.4th 1512, 1533.) Here, the Payments Clause unmistakably surrenders and suspends the City‘s power to tax. It prohibits the City from imposing any taxes on Russell except real property related taxes. We cannot agree with Russell that in the Payments Clause, “the City has surrendered nothing.”
For the reasons discussed above, we conclude Russell‘s interpretation of the Payments Clause violates Section 31.
Russell contends the Payments Clause represents an exercise of the City‘s taxing power, in the form of a PILOT agreement. According to Russell, interpreting the Payments Clause as providing for “upfront payments in lieu of later taxes—i.e., as a PILOT provision” is the “only sensible reading” of the agreement. We reject this argument for two reasons.
First—and as counsel for Russell conceded at oral argument—the complaint does not allege the Payments Clause is a PILOT agreement. The complaint does not contain the acronym PILOT or the words “in lieu of taxes.” Nor is the interpretation of the Payments Clause as a PILOT agreement “apparent from the complaint.” (Rutherford, supra, 223 Cal.App.4th at p. 229.) Instead the complaint alleges the Payments Clause constituted a “promise not to impose . . . taxes . . . on [Russell], aside from those expressly authorized under the Agreement” and that the City breached the Payments Clause by requiring Russell to pay the utility tax. At the demurrer stage, our focus is on
the pleadings. ” ’ “[I]n passing upon the sufficiency of the complaint, we must accept as correct plaintiff‘s allegations as to the meaning of the agreement.” ’ ” (Klein, supra, 202 Cal.App.4th at pp. 1384-1385, 1387 [no error in sustaining demurrer without leave to amend where complaint did not set forth a reasonable interpretation of alleged agreement]; Rutherford, at p. 229 [demurer properly sustained where the plaintiff‘s interpretation of the agreement was reasonable but was not alleged in the complaint].)
Second, Russell‘s argument fails even if we assume for the sake of argument the complaint alleged the Payments Clause is a PILOT agreement.7 To support its contention that municipalities may enter PILOT agreements, Russell cites two cases, Cane v. City and County of San Francisco (1978) 78 Cal.App.3d 654 (Cane) and AB Cellular LA, LLC v. City of Los Angeles (2007) 150 Cal.App.4th 747 (AB Cellular). Cane concerned the validity of leases between the City and County of San Francisco and corporations operating three parking garages. In the leases, the city agreed to pay all taxes imposed on the leased premises. (Cane, at pp. 655-656.) Plaintiff taxpayers challenged the tax covenants in the leases, claiming they constituted “an unlawful grant of exemption from taxation.” (Id. at p. 657.)
A division of this court rejected this argument, concluding a municipality may agree to “pay a sum equal to the amount of taxes levied upon the private party‘s property.” (Cane, supra, 78 Cal.App.3d at p. 659.) Cane noted, however, that “[i]f the tax provisions in issue granted an exemption from taxation, those provisions would be invalid.” (Id. at p. 658, italics added.) Cane does not support Russell‘s argument that the Payments Clause is constitutional; instead, it suggests the Payments Clause is invalid
because it grants an exemption from taxation. Russell‘s attempt to distinguish Cane is unconvincing.
Nor are we persuaded by Russell‘s reliance on AB Cellular. There, the issue was whether a municipality‘s enactment of a cell phone tax required voter approval pursuant to
According to Russell, AB Cellular authorizes the use of ” ‘taxpayer specific’ ” agreements such as the Payments Clause. We disagree. The AB Cellular court did not consider whether an agreement not to impоse certain taxes violates the California Constitution. Rather the court interpreted
Russell claims the Payments Clause was a legitimate way for the City to “provide tax relief” by contract, and that municipalities commonly enter such
up front tax payments based on its best estimate of the other party‘s future [tax] liabilities.” Again, Russell urges “municipalities are exercising—not giving up—the power to tax.” But that is not what happened here.
People v. Board of Supervisors (1932) 126 Cal.App. 670, is instructive. There, the petitioner owned real property to which a lien had attached. (Id. at p. 672.) The State of California acquired the land and the petitioner sought cancellation of the lien pursuant to a section of the Political Code. The Calaveras court determined the petitioner was entitled to have the liens cancelled. It rejected the argument that the cancellation constituted an impermissible surrender of the power of taxation, explaining: “The facts before us show that the power of taxation was exercised, and that by operation of law, it has ceased to be a charge upon the land for the reason that the land is now the property of the state.” (Id. at p. 674.) In Calaveras, the cancellation of quantifiable tax liability, as required by a provision of the Political Code, represented an exercise of the public entity‘s taxation power. The same cannot be said here. The Payments Clause does not correlate the payment of $10 million to any quantifiable tax liability.
Russell‘s reliance on two documents judicially noticed by the trial court is unhelpful. In one document—a tax settlement agreement with the City of Richmond—Chevron agreed to make lump sum payments in exchange for Richmond‘s withdrawal of a proposed ballot measure amending a utility users tax. Under the agreement, if Richmond imposes new taxes on Chevron‘s refinery during a specified time period, Chevron will receive a credit for the qualifying portion of the settlement payment. The second document is an agreement between the City of Oakland and Alameda County regarding distribution of parking taxes collected at the Oakland Coliseum. These documents do not assist Russell because they do not involve municipality‘s promise not to impose taxes.
Russell‘s interpretation of the Payments Clause violates Section 31 and, as a result, Russell cannot state a claim for contractual relief. The court properly sustained the City‘s demurrer to the complaint.
III. Russell Must Be Permitted Leave to Amend the Complaint to Allege a Quasi-Contractual Restitution Claim
Russell claims the court erred by denying leave to amend, reasoning it may allege a quasi-contractual claim even if the Payments Clause is unconstitutional. While the decision to sustain a demurrer ” ‘is a legal ruling subject to
Russell contends it can state a claim for “money paid under the [a]greement.”8 In response, the City contends an award of restitution would violate the agreement‘s severability provision, which provides, “If any provision, or portion thereof contained in this agreement is held to be unconstitutional, invalid, or unenforceable, the remainder of this agreement or portion thereof, shall be deemed severable, shall not be affected, and shall remain in full force and effect. (See MKB Management, Inc. v. Melikian (2010) 184 Cal.App.4th 796, 803, fn. omitted.) Here, the trial court implicitly concluded the agreement was severable, and this conclusion is consistent with the City‘s contention on appeal that “one unenforceable provision would not unravel the entire contract.” We do not read the severability provision as precluding the City from bearing “any liability
under the circumstances presented here.” Nor are we persuaded by the City‘s claim that restitution is somehow unavailable because “untangling” this complex deal would be difficult because the agreement has largely been “executed, and the power plant built.”
We disagree with the City‘s contention that the Payments Clause is “malum in se, such that restitution is prohibited.”9 “There is a marked distinction between contracts which are malum in se, and those which are
Malum prohibitum means “prohibited by statute“—malum prohibitum contracts are illegal as contrary to a statute. (See Witkin, supra, § 431, p. 473; Mills, supra, 121 Cal.App.4th at p. 344, fn. 10 [“illegality set by statute“].) Parties to malum prohibitum contracts may “recovеr back money paid on [the] contract as the circumstances of the case may require.” (Smith v. Bach (1920) 183 Cal. 259, 263-264; Witkin, supra, § 438,
pp. 478-479.) “There is no question that the [Payments Clause] is . . . malum prohibitum, as its illegality derives from violation of statute, and is not grounded in common standards of morality.” (Mills, at p. 344, fn. 10.) While the Payments Clause violates the California Constitution, it is not “immoral,” and the City‘s reliance on a single sentence from Berka v. Woodward (1899) 125 Cal. 119 does not demonstrate otherwise.
In one sentence on the last page of its brief, the City argues Russell should not be granted leave to amend because a private party may not sue a public entity on a quasi-contract theory. To support this argument, the City relies on a single case: Janis v. California State Lottery Com. (1998) 68 Cal.App.4th 824 (Janis).10 In Janis, plaintiffs sued the California State Lottery Commission (CSL), seeking to recover money lost playing Keno before the lottery game was declared illegal. (Id. at p. 827.) As relevant here, plaintiffs asserted a claim for ” ‘restitution and unjust enrichment,’ ” alleging CSL misrepresented the legality of the game and thаt they “were entitled to rescind their contracts with CSL to obtain restitution of moneys wagered on the game.” (Id. at p. 830.)
a public entity‘s contractual obligations. [Citation.] Here, then, Janis cannot point to a contractual promise to support this claim.” (Janis, supra, 68 Cal.App.4th at p. 830.)11
Katsura v. City of San Buenaventura (2007) 155 Cal.App.4th 104 (Katsura) extended the principle articulated in Janis to a public works contract. In Katsura, an engineer and a city entered into a contract for consultant services for a maximum price of $18,485. (Id. at p. 106.) “The contract required that any modifications were only to be made by mutual written consent of the parties.” (Ibid.) The city paid the engineer‘s first two invoices, which totaled $15,565; after completion of the project, the engineer submitted a final invoice for an additional $23,743.75, which the city refused to pay “because it was beyond the maximum contract price and included work that was not authorized by the contract.” (Id. at p. 107.) The engineer sued the city for breach of contract and common counts. He admitted he did not comply with the contract‘s written modification requirement, but argued the contract was orally modified to include extra work based on requests by the city‘s associate engineer and an outside consultant that he perform the work. (Id. at pp. 107-108.)
Katsura determined the engineer could not orally modify the contract, explaining: “There is no provision in the City charter for execution of oral contracts by employees of the City who do not have requisite authority. The alleged oral statements by the associate city engineer and project manager are insufficient to bind the City. ’ “No government, whether state or local, is bound to any extent by an officer‘s acts in excess of his . . . authority.” ’ ” (Katsura, supra, 155 Cal.App.4th at p. 109.) Katsura then held ” ‘a private party cannot sue a public entity on an implied-in-law or quasi-contract theory,
obligation to do that which it forbids the party to agree to do.’ ” ’ [Citation.] In other words, contracts that disregard applicable code provisions are beyond the power of the city to make.” (Id. at pp. 109-110.)
As summarized by a division of this court, the rule from Katsura is “all implied contracts against public entities are barred because, by definition, they have not formally been approved by the entity.” (Green Valley Landowners Assn. v. City of Vallejo (2015) 241 Cal.App.4th 425, 438.) The rationale for this rule is that “[l]imitations on a municipality‘s power to contract should be strictly construed because such restrictions are designed to protect the public, not those who contract with the municipality.” (Ibid.) The principle articulated in Katsura has been applied in cases where there was no contract or when there was an attempt to orally modify a written contract. (See Fairview Valley Fire, Inc. v. Department of Forestry & Fire Protection (2015) 233 Cal.App.4th 1262, 1271 [no contract]; Green Valley, at p. 432 [implied promise]; Orthopedic Speсialists of Southern California v. Public Employees’ Retirement System (2014) 228 Cal.App.4th 644, 649 [implied oral promise]; P&D Consultants, Inc. v. City of Carlsbad (2010) 190 Cal.App.4th 1332, 1341 [oral modification to written contract].)
This situation is unlike Janis, where there was no contract. Here, Russell can point to a “contractual promise“—albeit one we have held violates Section 31 of the California Constitution. (Janis, supra, 68 Cal.App.4th at p. 830.) Nor is this situation like Katsura, where the plaintiff attempted to enforce an alleged oral promise that had not been formally approved by the public entity. The issue here is not whether the City formally approved the agreement or had the power to contract: the parties had a written agreement, executed by the City Manager and City Attorney, and approved by the City Council, and no one disputes the City‘s power to enter a contract to facilitate the construction of a power plant. Finally, this case is distinguishable from subsequent cases applying Janis and Katsura. In seeking quasi-contractual relief, Russell is not attempting to imply the existence of an extra-contractual agreement, nor is Russell attempting to enforce the invalid provision of the agreement. Rather, Russell is seeking recovery of at least some of the consideration it provided because the City was unable to deliver its
promised performance. Under the unique set of circumstances here, we conclude Russell “should be given an opportunity to amend its complaint to allege” a quasi-contractual restitution claim. (First Nationwide Savings v. Perry (1992) 11 Cal.App.4th 1657, 1669-1670.)
The order sustaining the City‘s demurrer without leave to amend and dismissing the complaint is reversed to the extent it denies Russell leave to amend. The matter is remanded with directions to grant Russell leave to amend the complaint consistent with the views expressed in this opinion. In all other respects, the order is affirmed. Russell is entitled to costs on appeal. (
Jones, P. J.
We concur:
Simons, J.
Bruiniers, J.
A144749
Russell City Energy Company, LLC v. City of Hayward (A144749)
Trial Court: Alameda County Superior Court
Trial Judge: Hon. Brenda Fay Harbin-Forte
Counsel:
Winston & Strawn, Robb C. Adkins, Charles J. Moll III, Krista M. Enns and Benjamin J. Kimberley for Plaintiff and Appellant.
Office of City Attorney, Michael S. Lawson; Jarvis, Fay, Doporto & Gibson, Benjamin P. Fay and Gabriel J. McWhirter, for Defendant and Respondent.