California Scda v. All Persons Interested

Decision Date09 March 2004
Docket NumberNo. C042947.,No. C042948.,No. C042944.,C042944.,C042947.,C042948.
Citation10 Cal.Rptr.3d 803,116 Cal.App.4th 877
CourtCalifornia Court of Appeals Court of Appeals

Orrick, Herrington & Sutcliffe, Eugene J. Carron, Megan V. Hamilton, Los Angeles, Richard I. Hiscocks, San Francisco, Margaret Carew Toledo and Michael C. Weed, Sacramento, for Plaintiff and Appellant.

Center for Law & Religious Freedom, Christian Legal Society, Gregory S. Baylor, Samuel B. Casey for amici curiae Council for Christian Colleges and Universities and Christian Legal Society; Sidley Austin Brown & Wood, Jeffrey A. Berman, Mark E. Haddad, Gene C. Schaerr and Nicholas P. Miller, Los Angeles, for amici curiae Religious Institutions: Loma Linda University, The Association of Independent California Colleges and Universities, Association of Christian Schools International, Seventh-Day Adventist Church State Council, and The Assemblies of God Financial Services Group on behalf of Plaintiff and Appellant.

No appearance by Respondents.

Margaret C. Crosby for American Civil Liberties Union Foundation of Northern California; Peter Eilasberg, Los Angeles, for ACLU Foundation of Southern California; Jordan Budd for American Civil Liberties Union Foundation of San Diego and Imperial Counties on behalf of Respondents.


Plaintiff California Statewide Communities Development Authority (CSCDA) brought three validation actions under Code of Civil Procedure section 8601 et sequitur and Government Code section 535102 et sequitur, asking the trial court to declare valid certain "Agreements" pursuant to which CSCDA intended to facilitate "conduit financing" by issuance of tax-exempt bonds for the benefit of religious schools owned and operated by non-profit religious corporations — Oaks Christian School, California Baptist University, and Azusa Pacific University. The trial court determined the Agreements were invalid as violative of California Constitution, article XVI, section 5 (article XVI, section 5), which prohibits "grant[ing] anything to or in aid of any religious sect, church, creed, or sectarian purpose, or help[ing] to support or sustain any school, college, university, hospital, or other institution controlled by any religious creed, church, or sectarian denomination whatever."3

At CSCDA's request, we consolidated its appeals from the three judgments. CSCDA contends the Agreements are constitutional under the federal and state Constitutions.

We shall conclude CSCDA may lawfully pursue this appeal notwithstanding certain limitations on appeals contained in section 870. We shall then conclude the Agreements are unconstitutional under the California Constitution. We shall affirm the judgments on that basis and need not reach the federal constitutional issue.4


Between June and August 2002, CSCDA filed three separate but similar complaints for validation, one for each school (each of which is organized as a nonprofit religious corporation). Notice of the actions was published in various newspapers, but no answer to the complaints was filed. CSCDA filed ex parte applications for entry of default judgment, arguing these cases presented no problem with respect to federal and state constitutional restrictions on governmental activity in connection with religious institutions.

CSCDA is a "joint exercise of powers authority" and public entity organized under Government Code section 6500 et sequitur, and a 1988 "Joint Exercise of Powers Agreement." CSCDA is authorized to issue tax-exempt bonds. (Gov.Code, § 6575 [all bonds and the interest thereon or income therefrom are exempt from all taxation in this state, other than gift, inheritance and estate taxes].) CSCDA's purpose is to assist the development of California communities within its boundaries by, among other things, acting as the issuer of tax-exempt bonds in conduit financings for industrial development, residential housing, health care, and educational facilities.

CSCDA described the mechanics of its conduit financing "Program" of educational facilities as follows:

The parties sign a Purchase Agreement, pursuant to which the school transfers to CSCDA interest in real property on the condition that CSCDA will transfer it back to the school and issue nonrecourse bonds under an Installment Sale Agreement. The school uses the proceeds of the bond issue to finance its project. The schools, though they are tax-exempt organizations, cannot issue tax-exempt bonds on their own and therefore need a governmental entity such as CSCDA. The conduit financing allows the schools to finance projects at a lower cost than they could through conventional private financing, because bond investors are willing to accept a lower interest rate as the return on their investment in exchange for the tax-exemption on the interest.

As described in a declaration from CSCDA Commission member Daniel Harrison:

"9. The Bonds will be special, limited obligations of [CSCDA], payable solely from amounts to be derived from [the school] under the Sale Agreement and other amounts to be held under an Indenture of Trust (the `Indenture') and specifically pledged therefor. The Bonds will not constitute a charge against the general credit of [CSCDA] and will not be secured by a legal or equitable pledge of, or charge or lien upon, any property of [CSCDA] or any of its income or receipts. Moreover, neither the faith and credit nor the taxing power of the State of California (the `State') [n]or any public agency will be pledged to the payment of the Bonds. The Bonds will not constitute a debt, liability or obligation of the State or any public agency thereof (other than the special, limited obligation of [CSCDA], as aforesaid).

"10. As security for the payment of the Bonds, [CSCDA] will assign to a trustee (the `Trustee') certain of its rights, including the right to receive payments from [the school] under the Sale Agreement. In connection with such assignment pursuant to the Sale Agreement, [CSCDA] will also direct [the school] to make payments required thereunder directly to the Trustee.

"11. Pursuant to the assignment and the provisions of the Indenture, upon issuance of the Bonds, the Trustee will perform the administrative duties relating to the Bonds. The responsibilities of the Trustee will include authenticating the Bonds, establishing and holding the funds and accounts relating to the Bonds, determining that the conditions for the disbursement of Bond proceeds have been met, disbursing funds held under the Indenture, maintaining a list of the names and addresses of all registered owners of the Bonds, recording transfers and exchanges of the Bonds, monitoring compliance with certain covenants and mailing notices to Bondholders.

"12. [CSCDA] will have the right to access and inspect the Project to ensure compliance with [the school's] covenant against religious use."

The covenant against religious use is found in the Installment Sales Agreement, which provides that "no facility, place or building financed or refinanced with a portion of the proceeds of the Bonds will be used (1) for sectarian instruction or as a place for religious worship or in connection with any part of the programs of any school or department of divinity for the useful life of the Project." CSCDA has a right of access to inspect the facilities (upon reasonable advance notice and subject to restriction by the school for safety or security purposes).

CSCDA's conduit financing Program calls for CSCDA to assist any nonprofit educational institution if (1) the school is a "501(c)(3)" (Int.Rev.Code, § 510(c)(3)) tax-exempt organization; (2) which proposes to finance educational facilities; (3) with an objective of promoting intellectual pursuits that lead toward recognized applications in the community; and (4) the community in which the project is located will realize a public benefit as a result of such financing. Each school must demonstrate a community benefit under CSCDA's written "Policy," which lists neutral, secular criteria. Such benefit may be demonstrated, among other ways, by showing the school offers one of the following: (1) students undertake community outreach programs providing educational, cultural or philanthropic benefits to the community; (2) the curriculum encourages students to undertake service activities in the community; (3) public access is provided to its athletic fields, recreational facilities, or other school facilities; or (4) students receive financial assistance based upon policy guidelines.

The pleading regarding Oaks Christian alleged Oaks Christian, a private Christian school for the education of students in the sixth through twelfth grades, wanted to build education facilities at its campus in the City of Westlake Village, including but not limited to classrooms, laboratories, administration offices, dining facilities, athletic facilities, parking facilities, a co-generation facility, and related infrastructure improvements (the Project). Oaks Christian applied to CSCDA to have the costs of the Project financed by CSCDA's issuance of tax-exempt bonds. CSCDA adopted a Resolution approving Oaks Christian's request and approved the execution and delivery of a Purchase Agreement and Installment Sale Agreement. Under the Purchase Agreement, Oaks Christian would transfer its interests in real property to CSCDA on the condition that CSCDA enter into the Sale Agreement, which called for CSCDA to transfer back the real property, use its best efforts to issue the bonds and deposit the available proceeds of the bonds with a corporate trustee to be applied to the costs of issuance of the bonds and costs of the Project. Oaks Christian agreed to build the Project and pay the principal and premium of the bonds.


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