San Luis Obispo Local Agency Formation Comm'n v. Cent. Coast Dev. Co.

78 Cal.App.5th 363

293 Cal.Rptr.3d 471

SAN LUIS OBISPO LOCAL AGENCY FORMATION COMMISSION et al., Cross-complainants and Appellants.

v.CENTRAL COAST DEVELOPMENT COMPANY, Cross-defendant and Respondent.

2d Civ. No. B304144

Court of Appeal, Second District, Division 6, California.

Filed May 5, 2022

As Modified on Denial of Rehearing May 31, 2022

McCormick, Barstow, Sheppard, Wayte & Carruth, James P. Wagoner, Timothy J. Buchanan, Brandon M. Fish, Lejf E. Knutson, Fresno; Best, Best, Krieger and Gregg W. Kettles, Los Angeles, for Cross-complainants and Appellants San Luis Obispo Local Agency Formation Commission and Special District Risk Management Authority.

Richards, Watson & Gershon, T. Peter Pierce, San Francisco, Kyle H. Brochard, Los Angeles; David M. Fleishman, City Attorney, for Cross-defendant and Respondent City of Pismo Beach.

Jackson Tidus, Michael L. Tidus, Irvine, Gregory P. Regier, Westlake Village; Horvitz & Levy, David M. Axelrad and Jeremy B. Rosen, Burbank, for Cross-defendant and Respondent Central Coast Development Company.

GILBERT, P. J.

A contract by a public agency that exceeds the agency's statutory powers is void and will not support an award of attorney fees pursuant to Civil Code ¹ section 1717, subdivision (a). We reverse an award of fees against the public agency.

FACTS

I

LAFCO I

Central Coast Development Company (Central Coast) owns a 154-acre parcel of property within the sphere of influence of the City of Pismo Beach (City).² Central Coast wishes to construct 252 single-family residences and 60 senior housing units on the parcel. The City approved Central Coast's application for a development permit. The City and Central Coast applied to the San Luis Obispo Local Agency Formation Commission (LAFCO) to annex the property.

The LAFCO application signed by the City and Central Coast contained the following indemnity agreement: "As part of this application, Applicant agrees to defend, indemnify, hold harmless and release the San Luis Obispo Local Agency Formation Commission (LAFCO), its officers, employees, attorneys, or agents from any claim, action or proceeding brought against any of them, the purpose of which is to attack, set aside, void, or annul, in whole or in part, LAFCO's action on the proposal or on the environmental documents submitted to or prepared by LAFCO in connection with the proposal. This indemnification obligation shall include, but not be limited to, damages, costs, expenses, attorneys’ fees, and expert witness fees that may be asserted by any person or entity, including the Applicant , arising out of or in connection with the application. In the event of such indemnification, LAFCO expressly reserves the right to provide its own defense at the reasonable expense of the Applicant." (Italics added.)

LAFCO denied the annexation application. The City and Central Coast sued LAFCO. LAFCO prevailed and presented a bill to the City and Central Coast for more than $400,000 in attorney fees and costs. The City and Central Coast refused to pay. The Special District Risk Management Authority (SDRMA), a public entity self-insurance pool, paid for LAFCO's fees and costs.

The City sued Central Coast to recover fees and costs expended in the Central Coast action against LAFCO. LAFCO and SDRMA cross-complained against the City and Central Coast for fees and costs. The cross-complaint was based on the indemnity provision of the annexation application.

The trial court granted the City and Central Coast's judgment on the pleadings against LAFCO and SDRMA (collectively LAFCO). The court denied LAFCO's request for leave to amend its pleadings. LAFCO appealed.

We affirmed in San Luis Obispo Local Agency Formation Com. v. City of Pismo Beach (2021) 61 Cal.App.5th 595, 275 Cal.Rptr.3d 837 ( LAFCO I ). We determined that the indemnity agreement was not supported by consideration and that LAFCO has no statutory authority to impose an indemnity agreement as a condition of LAFCO's statutory duty to consider Central Coast's application.

LAFCO II

While the appeal in LAFCO I was pending, the City and Central Coast moved for attorney fees based on section 1717. The trial court granted the motion. The court awarded $172,850 to the City and $428,864 to Central Coast. LAFCO again appeals (LAFCO II ).

DISCUSSION

I Section 1717 Does Not Apply

LAFCO contends the indemnity agreement is void as an illegal and ultra vires contract.³ LAFCO asserts section 1717 does not apply to such a contract.

Section 1717, subdivision (a) provides: "In any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs."

LAFCO argues our opinion in LAFCO I determined that the indemnity agreement was an illegal contract. It cites Geffen v. Moss (1975) 53 Cal.App.3d 215, 227, 125 Cal.Rptr. 687, for the principle that where a contract is illegal, it is void, a right to attorney fees created by the contract is unenforceable, and section 1717 does not apply. (See also Bovard v. American Horse Enterprises, Inc. (1988) 201 Cal.App.3d 832, 843, 247 Cal.Rptr. 340 [citing Geffen ].)

Central Coast replies that the contract is not illegal and our opinion in LAFCO I does not say that it is. Central Coast relies on a line of cases that state a contract is illegal where the object of the contract is unlawful. (Citing, e.g., McIntosh v. Mills (2004) 121 Cal.App.4th 333, 346, 17 Cal.Rptr.3d 66.) Central Coast argues the object of the contract involved here, an indemnity agreement, is not unlawful.

In LAFCO I , we concluded that LAFCO was not authorized by statute to make the indemnity agreement. ( LAFCO I, supra , 61 Cal.App.5th at pp. 600-602, 275 Cal.Rptr.3d 837.) Where a public agency is not authorized to make an agreement, the agreement is void and the public agency may neither enforce nor be liable on the contract. ( Air Quality Products, Inc. v. The State of California (1979) 96 Cal.App.3d 340, 349, 157 Cal.Rptr. 791 ; see 1 Witkin, Summary of Cal. Law (11th ed. 2017) Contracts, § 1011, p. 1053.) It follows that the public agency is not liable for attorney fees based on section 1717. Section 1717 is based on contract. The result should be no different than with contracts that are void for illegality. (See Geffen v. Moss, supra , 53 Cal.App.3d at p. 227, 125 Cal.Rptr. 687.)

Central Coast's reliance on California-American Water Co. v. Marina Coast Water Dist. (2017) 18 Cal.App.5th 571, 227 Cal.Rptr.3d 110 ( California-American ) is misplaced. Public water agencies entered into a contract with a water utility to collaborate on a project. The contract contained an attorney fee clause. It was later discovered that a board member of one of the public agencies had a conflict of interest. The water utility sued to have the contract declared void under Government Code section 1090. The water utility prevailed and the trial court awarded it attorney fees. The Court of Appeal upheld the award of attorney fees, concluding the contract was not illegal and the award of fees did not violate public policy. The court reasoned that the contract was void due to a conflict of interest and "not whether the contracts involved an illegal enterprise to which the parties could not contractually bind themselves." ( Id. at p. 580, 227 Cal.Rptr.3d 110.)

But the contract here is more like an illegal contract. The subject matter was beyond the power of LAFCO to legally bind itself or an applicant. Unlike California-American , it is not simply a question of the legality of the procedure by which the contract was made. Because it is beyond LAFCO's powers to bind itself or an applicant to the attorney fee agreement at issue here, section 1717 cannot apply.

IIAnother Paragraph

Central Coast points to a different paragraph contained in the same indemnity agreement we considered in LAFCO I . The paragraph is:

"I, ... Central Coast Dev. Co., the landowner and/or responsible Applicant, agree to pay the actual costs pursuant to the Fee Schedule attached hereto, plus copying charges and related expenses incurred in the processing of this application. I also understand that if payment on any billings prior to final action is not paid within (30) days, I agree that processing of my application will be suspended until payment is received. In the event of default, I agree to pay all costs and expenses incurred by LAFCO in securing the performance of this obligation, including the cost of any suit and reasonable attorney fees."

Central Coast argues LAFCO I is not determinative because this paragraph was not an issue in that appeal. But it is simply a different paragraph in the same indemnity agreement we held invalid in LAFCO I . It is obvious that the same rule applies to this and any other paragraph in the agreement.

Moreover, the instant paragraph concerns fees and charges incurred in the processing of the application. Those fees and charges are authorized by Government Code section 56383. Government Code section 56383 does not include a provision for attorney fees incurred in the collection of such processing fees and charges. In LAFCO I , we...