Davis v. Fresno Unified Sch. Dist.

57 Cal.App.5th 911

271 Cal.Rptr.3d 818

Stephen K. DAVIS, Plaintiff and Appellant,

v.FRESNO UNIFIED SCHOOL DISTRICT et al., Defendants and Respondents.

F079811

Court of Appeal, Fifth District, California.

Filed November 24, 2020

As Modified on Denial of Rehearing December 16, 2020

Carlin Law Group and Kevin R. Carlin for Plaintiff and Appellant.

Lang Richert & Patch, Mark L. Creede and Stan D. Blyth for Defendant and Respondent Fresno Unified School District.

Whitney Thompson & Jeffcoach, Timothy L. Thompson and Mandy L. Jeffcoach for Defendant and Respondent Harris Construction Company, Inc.

FRANSON, J.

In 2012, plaintiff Stephen Davis sued the Fresno Unified School District (Fresno Unified) and Harris Construction Co., Inc. (Contractor), alleging they entered into a $36.7 million contract for the construction of a middle school in violation of California's competitive bidding requirements, the statutory and common law rules governing conflicts of interest, and Education Code sections 17406 and 17417. Defendants filed a demurrer and obtained a judgment of dismissal. In Davis v. Fresno Unified School Dist. (2015) 237 Cal.App.4th 261, 187 Cal.Rptr.3d 798 ( Davis I ), we reversed the judgment and remanded for further proceedings. Based on our review of the four corners of the construction agreements and resolution of Fresno Unified's board, which were attached to Davis's pleadings, we concluded Davis properly alleged three grounds for why Education Code section 17406's exception to competitive bidding did not apply to the purported lease-leaseback contracts. First, the contracts used were not genuine leases but were, in substance, simply a traditional construction contract with progress payments. ( Davis I, supra , at pp. 286, 290, 187 Cal.Rptr.3d 798.) Second, the contractual arrangement "did not include a financing component for the construction of the project." ( Id. at p. 271, 187 Cal.Rptr.3d 798.) Third, the contractual arrangement "did not provide for Fresno Unified's use of the newly built facilities ‘during the term of the lease’ as required by [Education Code] section 17406, subdivision (a)(1)." ( Ibid. ) We also concluded California's statutory and common law rules governing conflicts of interest extended to corporate consultants and Davis alleged "facts showing Contractor, as a consultant to Fresno Unified, participated in the making of a contract in which Contractor subsequently became financially interested"—that is, Contractor participated in creating the terms and specifications of the purported lease-leaseback contracts and then became a party to those contracts. ( Ibid. )

After remand, the further proceedings included defendants' motion for judgment on the pleadings, which argued the lawsuit had become moot because the construction was finished and the contracts terminated. The trial court agreed, concluding (1) the case was a reverse validation action under Code of Civil Procedure section 863,¹ which is an in rem proceeding; (2) invalidating the contracts was no longer effective relief because the contracts had been fully performed; and (3) disgorgement of monies paid to Contractor was not effective relief because California law does not allow disgorgement in an in rem proceeding. Davis appealed. As explained below, we reverse.

First, in determining the type of action or actions Davis is pursuing, his pleading must be given a liberal yet objectively reasonable interpretation. (§ 452.) The interpretation must take account of both the allegations of fact and the relief requested.

Here, all of Davis's causes of action, except for the cause of action labeled declaratory relief, requested the disgorgement of funds paid under the illegal contracts. Disgorgement is an in personam remedy available in a section 526a taxpayer's action, but is not available in an in rem reverse validation action. Consequently, we interpret Davis's pleading as containing both a reverse validation action under section 863 and a taxpayer's action under section 526a. (See Regus v. City of Baldwin Park (1977) 70 Cal.App.3d 968, 972, 139 Cal.Rptr. 196 ( Regus ) [validation action and taxpayer's action are not mutually exclusive].) Thus, defendants and the trial court erroneously interpreted Davis's lawsuit as exclusively an in rem reverse validation action.

Second, based on our interpretation of Davis's pleading, we consider the legal question of whether California's validation statutes insulate the completed contracts between Fresno Unified and Contractor from attack in a taxpayer's action. The parties' contentions present this issue as whether the purported lease-leaseback contracts fall within the ambit of the validation statutes—more specifically, Government Code section 53511, subdivision (a), which refers to "an action to determine the validity of [a local agency's] bonds, warrants, contracts , obligations or evidences of indebtedness. " ( Gov. Code, § 53511, subd. (a), italics added.) The term "contracts" is narrowly construed to encompass only contracts involving financing and financial obligations. In Davis I , based on our review of the pleadings and attached documents, we determined the purported leaseleaseback contracts "did not include a financing component for the construction of the project." ( Davis I, supra , 237 Cal.App.4th at p. 271, 187 Cal.Rptr.3d 798.) As a result, we conclude the contracts do not fall within the ambit of Government Code section 53511 and California's validation statutes. It follows that Davis may pursue a taxpayer's action seeking the remedy of disgorgement. (See San Diegans for Open Government v. Public Facilities Financing Authority of City of San Diego (2019) 8 Cal.5th 733, 737, 257 Cal.Rptr.3d 43, 455 P.3d 311 ( San Diegans ).) Disgorgement qualifies as effective relief and, therefore, the taxpayer's action part of this lawsuit is not moot.

We therefore reverse the judgment and remand for further proceedings.

FACTS

Consulting Relationship

In February 2012, Fresno Unified and Contractor entered into a preconstruction services agreement under which Contractor agreed to provide professional consulting services to Fresno Unified relating to the construction of the Rutherford B. Gaston Sr. Middle School located in southwest Fresno.

A recital stated Contractor agreed to furnish preliminary design review services under the agreement, including plan and design review, value engineering, schedule preparation and other services for the project. The agreement stated Contractor would act as an independent contractor.

In May 2012, Fresno Unified and Contractor entered into a second, separate preconstruction services agreement. The second agreement stated Contractor would provide detailed plans, drawings and other documents for the ultimate fabrication and erection of steel members to be used in the construction of the project. Davis contends the second preconstruction services agreement was approved by Fresno Unified's governing board. The consulting relationship established by the two preconstruction service agreements is the basis for Davis's contention that Contractor had a relationship with Fresno Unified similar to an employee or officer and, therefore, Contractor was subject to the conflict of interest rules that barred it from having a financial interest in a contract that it participated in making.

Construction Agreements

In September 2012, Fresno Unified's governing board adopted a resolution authorizing the execution of contracts under which Contractor would build the project described as the Rutherford B. Gaston Sr. Middle School, Phase II. The resolution stated the construction would be "a lease-leaseback project" in which (1) Fresno Unified would lease the project site, which it owned, to the Contractor, (2) Contractor would build the project on the site, and (3) Contractor would lease the improvements and the site back to Fresno Unified. The resolution stated it was in the best interest of Fresno Unified to construct the project through a lease and leaseback of the site pursuant to Education Code section 17406, which allows such arrangements without advertising for bids. The contracts between Fresno Unified and Contractor were a site lease (Site Lease) and a facilities lease (Facilities Lease; collectively, the Construction Contracts).² The Site Lease and the Facilities Lease were executed by Ruth F. Quinto, the deputy superintendent and chief financial officer of Fresno Unified, and Timothy J. Marsh, the president of Contractor.³

Site Lease

The Site Lease provided Fresno Unified would lease the project site to Contractor for $1.00 in rent for a period coinciding with the term of the Facilities Lease. The Site Lease also stated that title to all improvements made on the site during its term "shall vest subject to the terms of the Facilities Lease." The Site Lease was the "lease" portion of the purported lease-leaseback arrangement.

Facilities Lease

The Facilities Lease identified Contractor as the sublessor and Fresno Unified as the sublessee. The Facilities Lease is the "leaseback" portion of the purported lease-leaseback arrangement. Under the Facilities Lease, Contractor agreed to build the project on the site in accordance with the plans and specifications approved by Fresno Unified and the "Construction Provisions" for the project contained in exhibit D to the Facilities Lease. The Construction Provisions were a detailed, 55-page construction agreement in which Contractor agreed to perform all work and provide and pay for all materials, labor, tools, equipment and utilities necessary for the proper execution and completion of the project. The guaranteed maximum price of the project was $36,702,876. The time allowed for Contractor to complete the project was 595 days from the notice to proceed.

The Facilities Lease included a provision describing Fresno Unified's obligation to pay by stating "Lease Payments shall be made for the Site and portions of the Project as construction of the...