COMMUNITY COLLEGE FACILITY COALITION

22ND ANNUAL CONFERENCE

LEASE-LEASEBACK WORKSHOP

Presented By:

Glenn Gould, Dannis Woliver Kelley

Carri Matsumoto, Rancho Santiago CCD

Sharon Suarez, Orbach Huff Suarez & Henderson LLP

1. Overview of Davis v. Fresno USD

2. Review of Davis Court of Appeal decision

- Lease requirements

- Conflict of interest

3. Review of recent LLB legislation

4. Impact of Davis on one district’s approach

5. Potential options moving forward

Workshop Agenda

Davis – Factual Allegations

Plaintiff Stephen Davis, a taxpayer, challenged a lease-leaseback agreement between Harris Construction and the Fresno Unified School District for the construction of a $36.7 million middle school. The complaint alleged the following:

-Project should have been competitively bid

-Board breached fiduciary duties

-Contractor had a conflict of interest

The Lease-Leaseback Structure:

-Site leased to Harris for $1

-Facilities Lease required Harris to build the project in exchange for payments under a schedule of payments

Davis – Factual Allegations

The schedule of payments was simply referred to as the “payments for the Project as set forth in the Construction Provisions.” The Construction Provisions set forth the typical payment process for a design-bid-build project: Progress payments on a monthly basis

for up to 95 percent of the work. Payment of the remaining five percent

contract retention within 35 days of recordation of notice of completion.

Davis – Factual Allegations

Undisputed Facts:

That the term of the lease was from the date of the lease signing to the date of completion.

That the District did not occupy the school facility until the lease was terminated.

Davis – Legal Claims

Plaintiff’s legal claims in brief:

The Facilities Lease was not included in the statutory exception to competitive bidding in Ed. Code sec. 17406.

Even if the Facilities Lease was included in the exception, it did not apply to this Lease because it was not a “genuine lease.”

The District Board breached its fiduciary duty by entering into the Facilities Lease.

The contractor/developer had a conflict of interest

based on its participation in the planning and design of the project.

Davis – Procedural Posture

The District filed a demurrer to the complaint.

The purpose of the demurrer is to establish that there is no legal basis for the claims.

Even if the allegations are true, there is no valid legal claim.

Davis – Procedural Posture

The trial court sustained the District’s demurrer as to all causes of action.

Trial court agreed with District, that there was no legal basis for the claims.

Plaintiff appealed the trial court’s decision.

Davis – Procedural Posture

For purposes of demurrer, all factual allegations are presumed to be true.

Neither the trial court or the Court of Appeal considers or rules on the facts.

As to those claims where the Court of Appeal finds a legal claim has been stated, they are remanded (sent back) to the trial court for further proceedings.

Davis – Court of Appeal Holding

First the Good News

The Court of Appeal ruled:

Facilities Lease is included within the exception to competitive bidding in Ed. Code sec. 17406.

(CCDs beware! The same result will not necessarily follow for CCD LLBs)

Plaintiff failed to state a claim for breach of fiduciary duty because it was not alleged that Board profited from the transaction.

Davis – Court of Appeal Holding

Now the Bad News The Court of Appeal also ruled:

For the Facilities Lease to fall within the statutory exception to competitive bidding, it must be a “true“ lease which includes:

- a financing component; and

- a lease term during which the district occupies the constructed improvement

The court found that the subject Facilities Lease did not include either of these requirements and was more like a traditional construction contract than an actual lease.

Davis – Court of Appeal Holding

The Court of Appeal also ruled:

An individual or corporate consultant can be considered an “employee” for purposes of the conflict of interest provisions of Government Code sec. 1090.

Davis – Petition for Review

The District and the LLB developer, Harris Construction filed petitions with the California Supreme Court, requesting that the court review the Court of Appeal decision.

On August 26, 2015, the Court denied the petitions for review and three requests for de-publication of the decision.

As a result, the Davis decision is binding precedent in all California trial courts.

Davis – Amicus Letters

Amicus Letters in Support of Review:

Associated Builders and Contractors of San Diego, Inc.

Associated General Contractors of America, San Diego Chapter

Associated General Contractors of California

Association of California Construction Managers

California Association of School Business Officials

California School Boards Association

Coalition for Adequate School Housing

Construction Employers Association

Los Angeles Unified School District

Opposition to Petitions for Review:

Beverly Hills Unified School District

The Financing Component

In finding that a financing component was required in the Facilities Lease, the Davis court looked at the history of LLB and found that it was intended to be a method for financing construction.

There is a legal issue as to whether the court was permitted to look beyond the plain language of the statute.

The Financing Component

The opinion does not specify what would be acceptable financing terms. Or what would be an acceptable lease term.

The opinion simply states that the determination is based on “all of the terms of the document.” Of particular significance: -Who holds what property rights and when

those rights and interests are transferred between the parties; and

-The amount and timing of the lease payments

The Financing Component

The opinion also confuses matters in its analysis by relying upon the elements of both a financing lease and a landlord-tenant lease.

After Davis, it’s unclear what will constitute sufficient financing necessary to make the Facilities Lease, a “true” lease.

Conflict of Interest: Gov’t Code 1090

Government Code sec. 1090:

“(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. …”

Contracts in Violation of Gov’t Code 1090 May be Voided: Gov’t

Code 1092

Government Code sec. 1092:

“(a) Every contract made in violation of any of the provisions of Section 1090 may be avoided at the instance of any party except the officer interested therein. No such contract may be avoided because of the interest of an officer therein unless the contract is made in the official capacity of the officer, or by a board or body of which he or she is a member.

(b) An action under this section shall be commenced within four years after the plaintiff has discovered, or in the exercise of reasonable care should have discovered, a violation described in subdivision (a).”

Contractors are Not Entitled to be Paid Under Void Contracts

Miller v. McKinnon (1942) 20 Cal.2d 83.

County authorized and paid for work for repair and alteration of a rock quarry without competitive bid. A taxpayer sued to recover the funds paid to the contractor. The Supreme Court held that payments made under a void contract are illegal and may be recovered by the public agency, despite great hardship to the contractor.

Existing Law (Prior to Davis):

Split of authority as to whether consultants/independent contractors are “officers or employees” under Section 1090.

YES:

Consultants (Individuals) = Employees

California Housing Finance Agency v. Hanover/California Management & Accounting Center, Inc. (2007) 148 Cal.App.4th 682 (“Hanover”).

Hub City Solid Waste Services, Inc. v. City of Compton (2010) 186 Cal.App.4th 1114 (“Hub City”).

Hanover: Attorney who was originally employed by a public

agency then became outside counsel to the agency. The attorney then influenced the agency to enter into a contract with a corporation in which the attorney held an undisclosed ownership interest. Under these circumstances, the attorney was deemed to be an “employee” for purposes of Section 1090.

Hub City: City manager of City’s waste division was also the sole

shareholder of the company hired by the City to manage the City’s waste management operations. He influenced the City to enter into a contract with his company to take over the City’s in-house waste disposal operation on a franchise basis. Under these circumstances, the shareholder was deemed to be a “public official or employee” under 1090.

NO:

Consultants (individuals) ≠ Employees

People v. Christiansen (2013) 216 Cal.App.4th 1181.

Christensen was originally employed by a school district as the Director of Planning and Facilities, then entered into a contract with the district that terminated her employment and provided that she would continue the same job as a consultant. She assigned the contract to a company that she owned, and then entered into a new contract with the district for program and construction management services. She advised the district to pursue a new local bond measure to fund those projects, with the new contract being conditioned on the success of the bond. Christensen was convicted on criminal violations of Section 1090 based on the new contract. The conviction was reversed on the ground that she was not a district “employee.”

Davis – Conflict of Interest: Farther Down the Slippery Slope

The Davis Opinion held that Harris Construction Co., Inc., a corporate contractor, is considered an “employee” of the district under 1090 and is therefore subject to violating Section 1090 since the contractor provided pre-construction services under a contract which led to the award of the Lease Leaseback contract for construction.

Davis distinguished the Christensen case since it was a criminal, not civil, action.

Davis expands the 1090 definition of “employee” to include not only individual consultants, but corporate consultants.

Who May Bring an Action Under 1090

Government Code sec. 1092:

“(a) Every contract made in violation of any of the provisions of Section 1090 may be avoided at the instance of any party except the officer interested therein.

Davis: “Party” = any interested party (including taxpayers).

San Bernardino County v. Superior Court (2015) 190 Cal.Rptr.3d 876 : “Party” = only the public agency or the contracting entity (no third parties, including taxpayers).

Related Legislation

AB 975: Proposed new Public Contract Code §5111 (similar to existing PCC §5110) to allow contractors to be paid for services provided under a LLB contract prior to any invalidation of the contract.

Status: Died in Committee.

AB 566: K-12’s Only. Adds Ed. Code 17407.5 to require school district LLB contracts to bind the contractor to an “enforceable commitment” to use a “skilled and trained workforce” to perform all work on the project that falls within an apprenticeable occupation. 2016 must have at least 30% of the workforce; increases in 10% annual increments to 60% by 2019.

Status: Takes effect January 1, 2016.