FRANSON, J. —
Plaintiff Stephen K. Davis is a taxpayer challenging a noncompetitive bid contract between the Fresno Unified School District (Fresno Unified) and Harris Construction Co., Inc. (Contractor), for the construction of a middle school for $36.7 million. The construction was completed in 2014 pursuant to a lease-leaseback arrangement that Fresno Unified and Contractor contend is exempt from competitive bidding under Education Code section 17406.
The trial court sustained demurrers filed by Fresno Unified and Contractor. Davis appealed.
As to the causes of action based on the Education Code, we conclude (1) the competitive bidding process required by section 17417 is subject to the exception contained in section 17406 and (2) Davis adequately alleged three grounds for why section 17406's exception did not apply to the lease-leaseback arrangement. First, Davis alleged the exception is available only for genuine leases and the subject leaseback agreement was simply a traditional construction agreement and not a genuine lease. Second, Davis alleged the agreement did not include a financing component for the construction of the project. Third, Davis alleged the lease-leaseback arrangement did not provide for Fresno Unified's use of the newly built facilities "during the term of the lease," as required by section 17406, subdivision (a)(1).
As to the conflict of interest cause of action, we conclude Government Code section 1090's prohibition of such conflicts extends to corporate consultants. Davis has stated a violation of Government Code section 1090 by alleging facts showing Contractor, as a consultant to Fresno Unified, participated in the making of a contract in which Contractor subsequently became financially interested.
We therefore reverse the judgment.
This case involves a project for the construction of buildings and facilities at the Rutherford B. Gaston Sr. Middle School, located in southwest Fresno. In September 2012, Fresno Unified's governing board adopted a resolution authorizing the execution of contracts pursuant to which Fresno Unified would lease the project site to the Contractor, which would build the project on the site, and lease the improvements and site back to Fresno Unified. The contracts were a site lease (Site Lease) and a facilities lease (Facilities Lease; collectively, the Lease-leaseback Contracts).
Under the Site Lease, Fresno Unified leased the project site to Contractor for $1 in rent. The Site Lease began on September 27, 2012, and terminated
The Facilities Lease was structured so that Contractor would (1) build the project on the site pursuant to the "Construction Provisions" attached as an exhibit to the Facilities Lease and (2) sublease the site and project to Fresno Unified
The "Schedule of Lease Payments" attached to the Facilities Lease simply referred to the "payments for the Project as set forth in the Construction Provisions." The Construction Provisions outlined monthly progress payments for construction services rendered each month, up to 95 percent of the total value for the work performed, with a 5 percent retention pending acceptance of the project and recordation of a notice of completion. Final payment for all of the work was to be made within 35 days after recordation by Fresno Unified of the notice of completion. Simply put, the funds paid by Fresno Unified under the Facilities Lease were based solely on the construction services performed by Contractor.
Once the project was completed and the final lease payment made, the Facilities Lease terminated. Counsel for Fresno Unified confirmed at oral argument that the term of the lease was from the date of signing to the date of completion. As to possession of the project, the Facilities Lease stated that Fresno Unified was allowed to take possession of the project "as it is completed." However, consistent with Davis's allegations of fact, Fresno Unified's opening brief acknowledged the Facilities Lease was in effect only during the construction of the school facilities. This fact was confirmed during oral argument when counsel for Fresno Unified stated that Fresno Unified did not occupy the school facility until the lease was, in fact, terminated.
As to ownership of the newly constructed improvements, the Facilities Lease provided that Fresno Unified would obtain title from Contractor "as
In November 2012, Davis filed his original complaint.
Davis alleged that, although the site was leased by Fresno Unified to Contractor while Contractor performed the construction, there was no genuine leaseback to Fresno Unified because Fresno Unified did not regain the right to use and occupy the property during the leaseback period. Davis also alleged that Fresno Unified made payments that lasted only as long as the duration of construction, varied based upon the value of the work performed, and ended with the completion of the construction. In addition, Davis alleged that Fresno Unified did "not have the right or practical ability to have beneficial occupancy of the demised premises during the term of the Facilities Lease to use them for their intended purposes."
Davis opposed the demurrers and objected to the request for judicial notice. Davis also lodged 11 exhibits with the trial court to support his opposition to the demurrers.
In August 2013, the trial court sustained both demurrers to each of the seven causes of action in the FAC. The court granted Davis 30 days' leave to amend. Counsel for Davis informed counsel for Fresno Unified that Davis did not intend to file a second amended complaint. After the 30-day period expired, defendants filed applications for dismissal of the action and entry of judgment.
In September 2013, judgment was entered in favor of Fresno Unified and Contractor. Davis appealed.
Appellate courts independently review the ruling on a general demurrer and make a de novo determination of whether the pleading alleges facts sufficient to state a cause of action. (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415 [106 Cal.Rptr.2d 271, 21 P.3d 1189].)
Generally, appellate courts "give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.]" (City of Dinuba v. County of Tulare (2007) 41 Cal.4th 859, 865 [62 Cal.Rptr.3d 614, 161 P.3d 1168] (Dinuba).) Also, the demurrer is treated as admitting all material facts properly pleaded, but does not admit the truth of contentions, deductions or conclusions of law. (Ibid.)
Ordinarily, the allegations in a pleading "must be liberally construed, with a view to substantial justice between the parties." (Code Civ. Proc., § 452.)
This appeal presents a number of issues relating to the proper construction of the Education Code provisions addressing lease-leaseback arrangements and the Government Code provisions addressing conflicts of interest.
Issues of statutory construction are questions of law subject to independent review by appellate courts. (Neilson v. City of California City (2007) 146 Cal.App.4th 633, 642 [53 Cal.Rptr.3d 143].)
School districts can procure new facilities in various ways based on (1) different methods for financing the project and (2) different delivery methods for the construction.
The traditional method for financing new school facilities is for school districts to obtain voter approval for the issuance of general obligations bonds and then use the proceeds from the bonds to pay for the construction. (62 Ops.Cal.Atty.Gen. 209, 210 (1979).)
The traditional delivery method for new school facilities is referred to as design-bid-build, which involves three separate steps. (See 10 Miller & Starr, Cal. Real Estate (3d ed. 2010) § 27:27, p. 27-143 (rel. 9/2010).) First, the school district hires an architect to design the project. Second, the district uses the design in its request for competitive bids from construction firms. Third, the winning bidder builds the project.
Under the lease-leaseback method, the school district leases land that it owns to a construction firm for a nominal amount ($1) and the construction firms agrees to build school facilities on that site. (§ 17406(a)(1).)
Under this financing method, the builder finances the project (probably with assistance from a third party lender) and is paid over the term of the lease, which can last 40 years. (§ 17403; Stats. 1957, ch. 2071, § 1, pp. 3682-3683 [former § 18353].) The economic reality of the lease-leaseback arrangement is that the builder carries both the cost of construction and financing while the school district compensates the builder with a stream of payments spread over a specified period — namely, the term of the lease. However, the parties to a lease-leaseback arrangement could achieve the same economic effect (i.e., stream of payments) and end result (i.e., the construction of facilities eventually owned by the district) without using a lease-leaseback arrangement. The same terms governing the construction and payment could be adopted in a traditional construction contract, without a lease of the site and a leaseback of the facility, that included a long-term payment plan requiring the exact same payments as would have been contained in the lease-leaseback arrangement.
Therefore, the formalities of the lease-leaseback arrangement were important to the Legislature in 1957 because of their effect on the project's financing. Specifically, the formalities spread the school district's liability for the construction and carrying costs over the term of the leaseback and limited the amount of debt attributed to the district for any one year.
Next, we consider each component of a traditional lease-leaseback arrangement and the function of that component. The "lease" part of the lease-leaseback arrangement — that is, the agreement pursuant to which the school district leases real estate it owns to a construction firm for $1 for the purpose of building new facilities on that real estate — serves three functions. First, the site lease gives the contractor a possessory or leasehold interest in the real estate so that the contractor holds sufficient property rights or interests to serve as the foundation for the leaseback. The fact the contractor holds these rights to the land lends weight and legitimacy to the leaseback and helps avoid the constitutional limitation on debt exceeding one year's income. (See Offner, supra, 19 Cal.2d at p. 486 [the aggregate amount of payments under a subterfuge lease are a present liability for purposes of the constitutional limitation on debt].) Second, the site lease solidifies the bundle of property and contractual rights (particularly the rental payments under the leaseback) that the construction firm can use as collateral to obtain third party financing. (See fn. 6, ante.) Third, the site lease formalizes the contractor's right to enter and occupy the location while building the new facilities. This last function is insignificant compared to the other two because California law implies into every construction contract a covenant that the owner will provide the contractor timely access to the project site. (Howard Contracting, Inc. v. G. A. MacDonald Construction Co. (1998) 71 Cal.App.4th 38, 50 [83 Cal.Rptr.2d 590].)
Based on the statutory language and historical context, we conclude the primary purpose for the adoption of section 17406(a)(1)'s predecessor was to provide a new source of financing for the construction of schools. We have not located, and the parties have not cited, any sources indicating the formalities inherent in traditional lease-leaseback arrangements had any importance to the design or construction aspects of the project. Thus, to the extent that defendants or an amicus curiae suggest the Legislature intended to create a broad or easily satisfied exception to the competitive bidding process because competitive bidding resulted in slower, more costly construction,
In the future, a Legislature might balance the various costs and benefits associated with competitive bidding and with lease-leaseback arrangements and find there are efficiencies that justify excepting lease-leaseback arrangements from competitive bidding even when those arrangements do not provide financing for the construction. While the Legislature is free to make such a finding and amend the statute, we cannot treat recent criticism of competitive bidding as providing insight into the intent of the Legislature in 1957.
Although the lease-leaseback delivery method was authorized in 1957, an alternate form has been growing in use throughout California over the past 15 years. This variation of the lease-leaseback arrangement is the type used by Fresno Unified and Contractor in this case. Under this alternate approach, the school district pays for the construction (using local bond funds) as it progresses, with the final payment being made when construction is completed. As a result, the school district does not occupy and use the new facilities as a rent-paying tenant for a set length of time. Because the school district pays for the construction as it is completed, this alternate approach cannot be characterized as a method of financing the construction of new school facilities.
Section 17406 gives school boards the authority to lease school property to another under an instrument providing for the construction of buildings on the property. Specifically, section 17406 provides: "(a)(1) Notwithstanding
An initial question of statutory construction raised by the parties is whether section 17406 creates an exception to competitive bidding for both the lease and the leaseback. Davis contends the exception applies only to the Site Lease and, therefore, the Facilities Lease (i.e., the leaseback) is subject to competitive bidding.
This specific question of statutory construction was addressed by the court in Los Alamitos, supra, 229 Cal.App.4th 1222. The court interpreted section 17406(a)(1)'s exception to competitive bidding as applying to the entire lease-leaseback arrangements, not just the site lease. (Los Alamitos, supra, at pp. 1224, 1229.) The text relied upon for this interpretation included the phrases "`without advertising for bids'" and "`[n]otwithstanding section 17417.'" (Id. at pp. 1227, 1226.) The reference to section 17417 is significant because that section provides that leases entered into by school districts are subject to competitive bidding. The exception to competitive bidding was extended to facilities leases based on the language referring to an instrument that requires the contractor "to construct on the demised premises ... a building or buildings for the use of the school district...." (§ 17406(a)(1).) In Los Alamitos, the facilities lease provided for the construction of new facilities and the leasing of those facilities to the school district. As a result, the court concluded the facilities lease came within the statute's exception to competitive bidding. (Los Alamitos, supra, at pp. 1224, 1229.)
Second, the exception created by section 17406(a)(1) can reach both site leases and facilities leases, provided they meet the statutory criteria. The reference to an instrument that requires the lessee under a site lease "to construct on the demised premises ... a building or buildings for the use of the school district" clearly encompasses the construction services provided by a contractor to a school district under a facilities lease. (§ 17406(a)(1).) Therefore, a facilities lease that specifies the terms of construction is eligible for the exception.
The interpretation that the exception can apply to the entire lease-leaseback arrangement is confirmed by the Attorney General's statutory construction of the predecessor of section 17406, former section 15705. (56 Ops.Cal.Atty.Gen., supra, at pp. 579-581; see Stats. 1959, ch. 2, § 1, pp. 595, 1086-1087.) Under the heading "Leasing a completed school building," the Attorney General discussed the statutory scheme and opined: "It is concluded that the Legislature excluded an arrangement entered into under section 15705 from the notice and bid requirements. Because a school district is not required to obtain bids for lease arrangements under section 15705, it may lease its property for the purpose of permitting the construction thereon of school buildings which the district will lease at such rental rates as the governing board deems in the best interests of the district without reference to competitive bidding." (56 Ops.Cal.Atty.Gen., supra, at p. 581.)
Based on the foregoing, we reject Davis's argument that the exception to competitive bidding in section 17406(a)(1) includes only site leases and excludes all leases under which a school district obtains newly built facilities from a construction firm, such as the Facilities Lease in this case.
The foregoing statutory interpretation does not resolve all the questions presented in this case about the meaning and application of section 17406(a)(1). The parties' arguments raise questions about whether the Facilities Lease satisfied the criteria set forth in section 17406(a)(1) and, as a result, qualified for the exception to the competitive bidding process. These arguments present issues regarding the proper interpretation of section
Davis's first cause of action includes the legal theory that the exception to competitive bidding in section 17406 only applies to genuine or true leases. This legal theory presents an issue of statutory construction. Specifically, does section 17406(a)(1) require the leases in a lease-leaseback arrangement to be genuine to qualify for the exception? If this statutory construction is adopted, we also must address whether Davis's factual allegations are sufficient to support his claim that the Facilities Lease was not a genuine lease.
This interpretation is consistent with the way courts treated the concept of a lease when section 17406(a)(1)'s predecessor was enacted in 1957. (See Stats. 1957, ch. 2071, § 1, pp. 3682-3683 [former § 18355].) For instance, in Parke etc. Co. v. White River L. Co. (1894) 101 Cal. 37 [35 P. 442], the Supreme Court considered a document that purported on its face to be a "lease." (Id. at pp. 38-39.) The court stated: "This paper was not a lease. Calling it a lease did not establish the fact. This is peculiarly a case where there is nothing in a name, for the contents of the paper determine its true character." (Id. at p. 39.) The court indicated that the true legal effect and intentions of the parties to an agreement is gathered from all of the language used in the instrument, not just the name given the document or the language in a particular provision. (Id. at pp. 39-40; see San Francisco v. Boyle (1925) 195 Cal. 426, 433-438 [233 P. 965]; see also Heryford v. Davis (1880) 102 U.S. 235, 244 [26 L.Ed. 160] [form of an instrument is of little account; the legal effect of the whole is analyzed].)
The case law that existed prior to 1957 also leads us to conclude that the Legislature used the word "lease" to indicate the substance required, not simply as a label. (See Civ. Code, § 3528 [the substance-over-form principle].) In addition, our view that the statutory exception is available only for genuine leases is supported by the principle that exceptions to competitive bidding requirements "should be strictly construed and restricted to circumstances which truly satisfy the statutory criteria." (Marshall v. Pasadena Unified School Dist., supra, 119 Cal.App.4th at p. 1256.) Thus, to "truly satisfy the statutory criteria" in section 17406(a)(1) requires a true lease, not simply a traditional construction contract designated as a lease by the parties.
This interpretation of section 17406(a)(1) is not contradicted by legislative history. Defendants have provided, and we have located, no legislative history stating or implying that the criteria for the exception to competitive bidding are satisfied by any document the parties have labeled a lease.
The conclusion that the leaseback must be a true "lease" to satisfy the criteria in section 17406(a)(1) leads to the question of what factors are relevant to determining the true nature of an arrangement and whether it is a "lease" providing financing for purposes of section 17406(a)(1).
Paragraph No. 24 of the FAC alleges that the Lease-leaseback Contracts "are merely a sham and subterfuge to avoid the requirements" in the Public Contract Code for competitive bidding. It also alleges the payments required by the Facilities Lease were not real lease payments because they "(1) last only as long as the duration of the construction; (2) are variable based upon the value of construction work performed by CONTRACTOR prior to the date of payment; (3) do not provide for any financing of the work by CONTRACTOR (because its obligation to pay others who are actually providing the labor, equipment, materials and services for the construction of the Project is contingent upon it first receiving payment for the same from the DISTRICT); (4) the lease payments end concurrently with the completion of construction of the Project by CONTRACTOR; (5) the Project is being performed and administered in a manner consistent with [the statute governing competitive bidding] rather than with Education Code §§ 17400-17429; (6) the DISTRICT is withholding retention of its payments to CONTRACTOR and requiring CONTRACTOR to provide payment and performance bonds; (7) the DISTRICT does not have the right or practical ability to have beneficial occupancy of the demised premises during the term of the Facilities Lease to use them for their intended purposes."
These allegations are supported by the contents of the Site Lease and the Facilities Lease and their attachments, such as the Construction Provisions,
First, we give little weight to the name "Facilities Lease" in evaluating the true character of that document.
Second, we conclude the terms in the Facilities Lease regarding the construction, payment, use, occupancy, possession and ownership of the new facilities adequately support Davis's allegation that the arrangement is not a true lease that provided financing for the project.
The Facilities Lease included Contractor's agreement to build facilities for Fresno Unified in exchange for a guaranteed maximum price of $36.7 million. The amount of Fresno Unified's monthly payments to Contractor was based on the progress of the construction. The final payment for the construction became due upon the completion and acceptance of the construction. Once the final payment was made, both the Facilities Lease and the Site Lease terminated.
Consequently, the substance of the payment terms in the Facilities Lease is that of compensation for construction, not payment for a period of use of the facilities. Moreover, the payment terms support the allegation that Contractor did not provide any financing to Fresno Unified under the Facilities Lease. Thus, the payment terms and the lack of financing support the allegation that the Facilities Lease was not a genuine lease.
The provisions about use, occupancy and title, and the fact that Fresno Unified never occupied and used the project before making its final payment, provide sufficient support for Davis's legal theory that the substance of the transaction was a traditional construction contract and not a true lease that included a financing component. (Cf. 4 Miller & Starr, Cal. Real Estate Forms, supra, § 4:6, p. 115 [provision in construction contract addressing title to labor, materials and equipment states all title thereto will pass to the owner upon receipt of payment by contractor].)
Therefore, we conclude that Davis's allegations are sufficient to state a cause of action for a violation of the competitive bidding requirements in section 17417 or Public Contract Code section 20111.
Davis's first cause of action also alleges the Lease-leaseback Contracts violated the statute because they did not require Contractor "to construct on the demised premises ... buildings for the use of the school district during the term of the lease." (§ 17406(a)(1), italics added.) Davis interprets this statutory text to mean Fresno Unified was required to use the newly constructed buildings "during the term of the lease." He contends he adequately alleged that Fresno Unified failed to satisfy this criterion. This legal theory presents other issues of statutory interpretation that have not been addressed in a published decision.
This interpretation is consistent with the Attorney General's statutory construction of the predecessor to section 17406, former section 15705. (56 Ops.Cal.Atty.Gen., supra, at pp. 579-581; see Stats. 1959, ch. 2, § 1, pp. 595, 1086-1087.) Under the heading "Leasing a completed school building," the Attorney General stated: "Because a school district is not required to obtain bids for lease arrangements under section 15705, it may lease its property for the purpose of permitting the construction thereon of school buildings which the district will lease at such rental rates as the governing board deems in the
The next step of our analysis is to review the FAC to determine whether Davis has alleged facts sufficient to support his legal theory that the Facilities Lease was subject to competitive bidding because Fresno Unified failed to satisfy the statutory criterion for use of the buildings by the school district "during the term of the lease." (§ 17406(a)(1).)
This allegation, which was made before the completion of the project and termination of the leases, directly addresses whether the Facilities Lease provided for the construction of "buildings for the use of the school district during the term of the lease." (§ 17406(a)(1).) Treating this allegation as true for purposes of the demurrer (Dinuba, supra, 41 Cal.4th at p. 865), we conclude Davis has adequately alleged the Facilities Lease did not satisfy a criterion of section 17406(a)(1) because it did not provide for Fresno Unified to use the newly constructed buildings during the term of the lease.
The FAC's fifth cause of action, like his first, alleges the Lease-leaseback Contracts were ultra vires and void because they did not comply with certain requirements in the Education Code. These requirements are derived from two separate legal theories or interpretations of the Education Code.
The first legal theory asserts the lease-leaseback method for completing a school construction project "is only available for use by school districts in California as a means to finance the cost of construction over time when they do not have sufficient immediate funds available to them to cover the cost of construction." Davis alleged this requirement was violated because voter-approved bond sales provided Fresno Unified with "sufficient funds available to it to cover the immediate costs of construction of the Project as they are incurred...."
The second legal theory asserts that the statutory scheme authorizing lease-leaseback arrangements "requires the cost of construction be advanced and carried over a period of many years by the party to whom the lease-leaseback contracts are awarded."
We will not analyze this legal theory separately because it is part of the first cause of action. (See pt. II.E., ante.)
Davis supports his legal theory that lease-leaseback arrangements are permitted only when funding is not otherwise available by referring to a report of the executive officer to the State Allocation Board for its January 28, 2004, meeting (SAB Report).
"Sections 17400 et al., including [section] 17406, make up Article 2 of Chapter 4 of Part 10.5 of the [Education Code] entitled Leasing Property. It describes the requirements imposed on school districts considering the acquisition of school facilities through lease agreements. As confirmed by the Appeals Court ruling in [Morgan Hill Unified School District v. Amoroso, supra, 204 Cal.App.3d 1083], the article is about financing. In that case the court stated that, `The Education Code creates the following method for financing school construction.' The court then went on to describe ... Sections 39300 through 39325, which are now renumbered as 17400 through 17425. Thus [sections] 17400 through 17425 is a method of financing school
"Staff believes that virtually none of the projects currently using lease-leaseback 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 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.
"Since no financing exists in the lease lease-back arrangement (or there is no lease agreement at all), the use of Article 2 appears to be inappropriate."
Defendants argue the express requirements of section 17406 were met in this case. As to the SAB Report, defendants contend the opinions expressed in it should be given little weight because (1) the interpretation of the statutes involves a pure issue of law and this type of interpretation is solely a judicial function; (2) the SAB Report was not formally adopted by the State Allocation Board and was not vetted in accordance with California's Administrative Procedure Act (Gov. Code, § 11340 et seq.); and (3) subsequent legislation that sought to address some of the issues raised in the SAB Report never became law because of a Governor veto of Assembly Bill No. 1486 (2003-2004 Reg. Sess.).
First, there is no express provision in the statutes limiting a school district's use of lease-leaseback arrangements to situations where the school district funds are not otherwise available.
Third, the views expressed in the SAB Report do not actually include the interpretation advocated by Davis. Specifically, the SAB report does not state that the legislation restricts the availability of the lease-leaseback method to situations where other funding is not available. In other words, the report's reference to a case stating the "Education Code creates the following method for financing school construction" (Morgan Hill Unified School Dist. v. Amoroso, supra, 204 Cal.App.3d at p. 1086) does not imply that method is allowed only if other methods of financing are not available.
The FAC's second cause of action alleged that Fresno Unified's board had a fiduciary duty to the residents and taxpayers within Fresno Unified and that duty applied to the board's approval of expenditures for a multimillion dollar construction project. The FAC also alleged Fresno Unified's board breached the fiduciary duty by (1) failing to consider less expensive alternatives to the project, (2) failing to consider whether the price was reasonable, (3) failing to exercise due diligence to determine whether the price paid could be lower, (4) knowing the price paid could have been lower, (5) failing to solicit bids for the work, (6) failing to proceed in a manner that would secure the best price, and (7) failing to proceed in a manner required by law. In short, Davis alleged Fresno Unified's board breached its fiduciary duty by overpaying for the project.
The FAC contends that because Fresno Unified did not comply with its fiduciary duties, the Lease-leaseback Contracts are ultra vires, void and unenforceable and "all money paid thereunder must be returned by CONTRACTOR to DISTRICT."
Here, the FAC requests that Contractor return all money paid to it under the Lease-leaseback Contracts, but does not allege Contractor was subject to a fiduciary duty. As to the persons who allegedly breached their fiduciary duty (i.e., Fresno Unified's board), the FAC does not allege they profited from the transactions and does not request restitution or the disgorgement of profits. Furthermore, the relief sought for the alleged breach of fiduciary duty is against Contractor, a party who did not have a fiduciary duty. Accordingly, the second cause of action failed to allege facts sufficient to state a claim for breach of fiduciary duty. (See People ex rel. Harris v. Rizzo, supra, 214 Cal.App.4th at p. 950 [city's police chief who negotiated excessive salary did not breach a fiduciary duty because any duty would have arisen only after the contract was executed; demurrer properly sustained as to cause of action against him].)
Davis's fourth cause of action attempts to state a conflict of interest claim based upon (1) common law conflict of interest principles, (2) Government Code section 1090 et seq. and (3) the provisions of California's Political Reform Act of 1974, Government Code section 81000 et seq.
Chapter 7 of the Political Reform Act of 1974
The FAC contains the following allegations. Contractor had a prior contract with Fresno Unified that created a conflict of interest and, therefore, precluded Contractor from being awarded the Lease-leaseback Contracts. Pursuant to the prior contract, Contractor acted as a consultant and provided Fresno Unified with professional preconstruction services related to the project, which included the development of plans, specifications and other construction documents for the project. Contractor was paid by Fresno Unified for consulting on the project and had a hand in designing and developing plans and specifications by which the project is being constructed.
The FAC referred to Government Code section 81000 et seq., but not the specific provision that contains the prohibition against conflicts of interest, Government Code section 87100. The FAC also cited the definition of "public official" in Government Code section 82048, subdivision (a).
The demurrers of Fresno Unified and Contractor address the conflict of interest claim under the Political Reform Act of 1974 by asserting (1) it was enacted so that public officials would perform their duties in an impartial manner without bias caused by their own financial interest and (2) elected officials are required to file annual statements disclosing their financial interests. Defendants argued Davis did not and could not allege Contractor was an elected official or even a designated official to whom the act would apply. They quote a bylaw of Fresno Unified that requires persons in designated positions to file a full statement of economic interest and then assert Contractor is not one of the designated officials. From this foundation, defendants contend the "Political Reform Act of 1974 simply does not apply to [Contractor] in this case."
In his opposition, Davis cited Government Code section 87100, the conflict of interest provision in the Political Reform Act of 1974, and relied on its requirement that no public official shall participate in making a governmental
Defendants' reply papers ignored the statutory language in Government Code section 87100 and the definition of "public official" in Government Code section 82048, subdivision (a) that extends to consultants. The replies reasserted that Davis "has not alleged and cannot allege [Contractor] is an elected official or even a designated official that the Act would apply."
The minute order sustaining the demurrer to the conflict of interest cause of action mentioned Government Code section 1090, but did not refer to Government Code section 87100 or the statutory definition of public official that includes consultants.
Thus, Davis's allegation that Contractor provided services to Fresno Unified as a paid consultant is sufficient to raise the possibility that Contractor was a "public official" subject to conflicts of interest in Government Code section 87100.
The term "consultant" is not defined by the Political Reform Act of 1974, but the regulations promulgated under the act contain a definition. (See League of California Cities, The Cal. Municipal Law Handbook (Cont.Ed.Bar 2014) § 2.114, p. 155 [consultant included in list of key definitions].) A consultant is "an individual who, pursuant to a contract with a state or local government agency: [¶] (1) [m]akes a governmental decision...." (Cal. Code Regs., tit. 2, § 18704.6, subd. (a).) The appellate briefing has not mentioned this regulatory definition and, consequently, Davis has not argued the regulation is invalid. (See Gov. Code, § 11342.2 [no regulation is valid unless consistent and not in conflict with the statute].) Therefore, we accept the regulatory definition of "consultant" as valid and applicable to this case.
It follows that the FAC failed to state a cause of action against Contractor for violating the conflict of interest prohibition in Government Code section 87100.
Government Code section 1090, subdivision (a) provides in part: "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." One of the consequences for a civil violation of this rule is set forth in Government Code section 1092: "(a) Every contract made in violation of any of the provisions of [Government Code] Section 1090 may be avoided at the instance of any party except the officer interested therein."
Courts evaluating a conflict of interest claim under Government Code section 1090 must consider "(1) whether the defendant government officials or employees participated in the making of a contract in their official capacities, (2) whether the defendants had a cognizable financial interest in that contract, and (3) (if raised as an affirmative defense) whether the cognizable interest falls within any one of section 1091's or section 1091.5's exceptions for remote or minimal interests. [Citations.]" (Lexin, supra, 47 Cal.4th at p. 1074, fn. omitted.)
The breadth of what it means to participate in the making of a contract is illustrated by Stigall. In that case, a taxpayer filed an action seeking to have a contract for plumbing work related to construction of a civic center declared invalid. (Stigall, supra, 58 Cal.2d at p. 566.) The trial court sustained a demurrer to the complaint, concluding the taxpayer failed to allege facts showing a prohibited conflict of interest. The Supreme Court reversed and directed the demurrer to be overruled. (Id. at p. 571.)
In Stigall, the complaint alleged the member of the city council in charge of the council's building committee owned more than 3 percent of the stock of a plumbing company and the building committee supervised the drawing of plans and specifications for a civic center. (Stigall, supra, 58 Cal.2d at pp. 566-567.) When the bids for the construction work were received and opened, the council member's plumbing company was the low bidder for the plumbing work. (Id. at p. 567.) After objections were made to awarding the contract to the council member's plumbing company, the council rejected all bids and advertised for a new round of bidding. (Ibid.) Subsequently, the council member resigned and the council awarded the construction contract to a general contractor that had included a sub-bid for the plumbing work from the former council member's plumbing company. (Ibid.)
Davis contends that the conflict of interest provision in Government Code section 1090 extends to independent contractors and consultants who are involved in the contract process on behalf of the public entity and have an interest in the resulting contract. Davis relies on two decisions that applied the conflict of interest provision to independent contractors and consultants. (See Hub City Solid Waste Services, Inc. v. City of Compton (2010) 186 Cal.App.4th 1114, 1124-1125 [112 Cal.Rptr.3d 647] (Hub City); California Housing Finance Agency v. Hanover/California Management & Accounting Center, Inc. (2007) 148 Cal.App.4th 682, 693 [56 Cal.Rptr.3d 92] (Hanover).)
Defendants contend Hub City and Hanover are readily distinguishable from the facts pled in the FAC and, in any event, the expansion of liability adopted in those cases has been harshly criticized by the court in People v. Christiansen (2013) 216 Cal.App.4th 1181 at pages 1189 through 1190 [157 Cal.Rptr.3d 451]. Defendants also contend that section 17250.10 demonstrates that the Legislature is not concerned with situations where a single entity acts as both the designer and builder of the same project.
In Hanover, the conflict of interest claims were pursued against two individuals and not against the corporation that actually entered into the contract with the public agency. (Hanover, supra, 148 Cal.App.4th at p. 684.)
In Hub City, the appellants challenged the adverse judgment on a conflict of interest claim by arguing that corporate consultants do not owe municipalities a fiduciary duty. (Hub City, supra, 186 Cal.App.4th at p. 1125.) The court
In summary, the courts in Hanover and Hub City interpreted the statute broadly to include individuals who were consultants to the public agency, but neither court decided whether the statutory terms "officers" or "employees" should be expanded to include legal entities such as corporations or limited liability companies.
Second, as to whether the word "employees" should be interpreted to exclude corporate consultants, we conclude that corporate consultants should not be categorically excluded from the reach of Government Code section 1090. Such a statutory interpretation 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. Because the statute's object is to limit the possibility of any influence, direct or indirect, that might bear on an official's decision (Stigall, supra, 58 Cal.2d at p. 570),
Third, the FAC alleged that Fresno Unified and Contractor entered into the Lease-leaseback Contracts pursuant to which Contractor agreed to build the project for a guaranteed maximum price of $36.7 million. These allegations are sufficient to state that Contractor was "financially interested in" the Lease-leaseback Contracts for purposes of Government Code section 1090, subdivision (a).
In summary, Davis has alleged sufficient facts to state a cause of action for a violation of the conflict of interest provisions in Government Code section 1090. Contrary to defendants' argument, it does not appear that a plaintiff is required to include detailed allegations of actual influence on the decision to award the contract in question. (See Stigall, supra, 58 Cal.2d 565.) Ultimately, whether Davis will be able to prove Contractor violated the conflict of interest provision of Government Code section 1090 will depend upon the facts established by the evidence. For purposes of demurrer, Davis has alleged sufficient facts to state a cause of action.
Because we have concluded the FAC stated a cause of action under Government Code section 1090, it follows that Davis also has stated a common law claim for a conflict of interest.
Davis's seventh cause of action is based on the previously alleged violations of the Education Code and the need for competitive bidding. This
The judgment is reversed. The trial court is directed to vacate its order sustaining the demurrer and enter a new order (1) sustaining the demurrer as to the breach of fiduciary duty claim, the violation of the Political Reform Act of 1974 claim, and the fifth cause of action alleging the use of the lease-leaseback arrangement is improper when funds are available to a school from another source and (2) overruling the demurrer as to the other causes of action.
Plaintiff shall recover his costs on appeal.
Levy, Acting P. J., and Gomes, J., concurred.
The Legislature found the benefits of the design-build delivery method "include accelerated completion of the projects, cost containment, reduction of construction complexity, and reduced exposure to risk for the school district." (§ 17250.10, subd. (b).) Also, school districts may benefit "by shifting the liability and risk for cost containment and project completion to the design-build entity." (Ibid.) The Legislature also declared its intent "that design-build procurement does not replace or eliminate competitive bidding." (§ 17250.10, subd. (f).)
The design-build delivery method was not utilized for the current project and, therefore, has no direct application to this case.
