Epstein v. Schwarzenegger

JERRY B. EPSTEIN et al., Plaintiffs and Appellants, v. ARNOLD SCHWARZENEGGER et al., Defendants and Respondents;JOHNNY MANZON-SANTOS, Intervenor and Appellant.

A147092

A147366

COURT OF APPEAL OF THE STATE OF CALIFORNIA FIRST APPELLATE DISTRICT DIVISION FOUR

May 10, 2018

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(City & County of San Francisco Super. Ct. No. CGC10505436)

In 2010, on the heels of the great recession, the State faced an enormous budget gap. To close that gap, in November 2010, the Department of General Services (DGS) entered into an agreement to sell eleven state-owned buildings, referred to as the Golden State Portfolio, to California First, L.P. (California First). The transaction was set to close in mid-December. The next day, Jerry B. Epstein and A. Redmond Doms sued Governor Schwarzenegger, DGS, and Ron Diedrich, the Acting Director of DGS (together, the State) to stop the sale of the Golden State Portfolio to California First or anyone else. Two months of intense litigation ensued, including a request for preliminary injunction and proceedings before the Sixth District Court of Appeal and our Supreme Court.

In the interim, Governor Jerry Brown assumed office. On February 9, 2011, he announced that the State would not sell the Golden State Portfolio and would close the budget shortfall through other means. Appellants' writ petition was dismissed and this case was remanded for further proceedings.

Meanwhile, California First sued the State to enforce the sale/leaseback agreement. The parties stipulated to stay litigation of this case until California First's claims were resolved. In the middle of trial, the California First action settled. Following a noticed motion, the stay in Epstein was lifted to permit plaintiffs and intervenor ("appellants") to submit a motion for attorneys' fees. That motion was denied. The trial court adopted numerous arguments by the State, including most prominently that Epstein was not in fact a catalyst for relief because there was an independent intervening cause. Specifically, evidence presented during the California First trial suggested that California First lacked the necessary financing to close the deal. The court concluded that if the deal was never going to happen, this lawsuit could not have caused the State to abandon the sale of the Golden State Portfolio.

Appellants contend that the order constituted an abuse of discretion. We agree, principally because the trial court applied the wrong legal standards, and reverse.

I. FACTUAL AND PROCEDURAL BACKGROUND

In 2009, at the tail end of the great recession, the State of California faced "an immense budget gap." To generate revenue, the Legislature enacted Assembly Bill No. 22, now codified as Government Code section 14670.13, which authorized DGS to sell and/or lease eleven State-owned properties, referred to as the "Golden State Portfolio." (Gov. Code, § 14670.13.) DGS marketed the Golden State Portfolio, reviewed scores of bids and ultimately selected California First's sale-and-leaseback proposal.

After transaction costs and retirement of debt, the proposed sale to California First promised to yield one-time revenue of approximately $1.3 billion. According to the Legislative Analyst's Office (LAO) in a letter dated November 5, 2010, however, the State would spend an estimated $24.3 billion over the next 50 years to lease back the buildings, which was $6 billion more than the cost of ownership (or $1.4 billion adjusted for present value). LAO concluded the proposal constituted "poor fiscal policy";notwithstanding, DGS executed the purchase agreement on November 15, 2010 with California First and scheduled escrow to close 30 days later, on December 15, 2010.

On November 16, 2010, plaintiffs Epstein and Doms sued, challenging the constitutionality and enforceability of Government Code section 14670.13, which authorized DGS to sell the Golden State Portfolio, and the proposed sale to California First. Alleging that the costs of the transaction would exceed the costs of ownership by $6 billion over the next 35 years, plaintiffs asserted it constituted an illegal expenditure, a waste of public funds, and an unconstitutional gift of public goods. They also asserted that the sale could not proceed without the approval of the Judicial Council.¹

The court issued a Temporary Restraining Order and an Order to Show Cause re Preliminary Injunction. Shortly thereafter, on November 18, California First failed to deposit the required earnest monies with the escrow agent. This default was not promptly disclosed. On December 3, the State's written opposition to preliminary injunction did not mention the default or suggest that the transaction might be in jeopardy. To the contrary, it touted the rigorous bid-solicitation process and the superior terms offered by California First and argued that California First had "identified sources of debt and equity with the financial capacity to perform," had the "highest certainty of closure," and was "prepared to close quickly."

The State's next submission, on December 8, likewise failed to disclose any default and argued that the injunction against the transaction, sought by plaintiffs and intervenor, would subject the State to "overwhelming" and immediate harm.

On December 10, the Honorable Charlotte Walter Woolard heard and denied appellants' request for preliminary injunction. Three days later, appellants petitioned fora writ of mandamus and requested an emergency stay of the sale. On the same day, the Sixth District Court of Appeal issued an order staying the sale of the Golden State Portfolio until further notice "[t]o permit further consideration of the issues raised by the petition for writ of mandate" (the Stay Order).

On December 15, the State submitted a preliminary opposition, requested relief from the stay and sought the imposition of a bond. For the first time, it disclosed that California First had delayed depositing their funds into escrow; however, the State attributed this delay to the pending litigation and stay. In a related filing, the State reiterated that time was "truly of the essence" and argued that the Stay Order jeopardized the entire transaction.² Similarly, in the State's demand that appellants be required to post a bond, it argued that "the Stay Order ... threaten[ed] to prevent the State and California First from consummating the transaction at all."³

The Court of Appeal denied each of the State's requests. The State then filed a petition for extraordinary relief with the Supreme Court, seeking to vacate the Stay Order. It continued to blame the Epstein litigation and the Stay Order for California First's default, arguing these may "have the effect of causing California First to walk away from the transaction."

On December 27, the Court of Appeal issued an order to show cause why a peremptory writ should not issue, setting a January 3, 2011 deadline for filing a return and January 26 as the date for oral argument. The next day, the Supreme Court denied the State's petition for extraordinary relief.

Governor Brown assumed office on January 3, 2011. On February 9, with appellants' writ petition and the underlying litigation still pending, Governor Brown announced that the State had abandoned the proposal to sell the Golden State Portfolio.The announcement called the proposed sale " 'short-sighted,' " conceded it " 'would have cost [California] taxpayers billions of dollars in the long-run,' " and stated Governor Brown's intention to close the budget gap through other, less-costly means (specifically, by borrowing from special reserves).

On February 10, the State filed its return to appellants' writ petition, arguing that the State's abandonment of the sale mooted appellants' writ petition challenging the denial of preliminary injunctive relief. According to the State, not only was the transaction with California First cancelled, it was "highly unlikely" that a different transaction (with another purchaser) would be proposed.

In its related motion to dismiss the petition, the State confirmed that the entire concept of a sale/leaseback had been abandoned. It stated: "DGS presently has no plans to sell any of the eleven State-owned buildings that were the subject of the November 15, 2010 Purchase and Sale Agreement." The motion to dismiss also disclosed that California First had responded to the State's cancellation of the sale by suing the State for specific performance.

The Court of Appeal dismissed appellants' petition for an extraordinary writ without prejudice and discharged the order to show cause. (Epstein v. Superior Court (2011) 193 Cal.App.4th 1405, 1408, 1412.) It agreed that "the correctness of the trial court's denial of a preliminary injunction" was "a moot question in view of the state's voluntary abandonment of the challenged transaction." (Id. at p. 1410.) It acknowledged, however, that the Epstein actions could still proceed on their merits in the trial court. (Id. at pp. 1410, 1412.)

Soon thereafter, California First's specific performance action and related cross claims were transferred to San Francisco Superior Court, coordinated with this action, and litigated under the same case number. Appellants moved to stay adjudication of Epstein until the claims in California First were fully resolved. The State initially opposed, but ultimately stipulated to this approach. The trial court's order provided that if judgment was entered against California First in the specific performance action,appellants would dismiss their claims without prejudice to their right, if any, to seek fees or costs in this action.

In the middle of the California First trial,...