City of San Diego v. Rider

Decision Date30 July 1996
Docket NumberNo. D025921,D025921
Citation47 Cal.App.4th 1473,55 Cal.Rptr.2d 422
CourtCalifornia Court of Appeals Court of Appeals
Parties, 96 Cal. Daily Op. Serv. 5710, 96 Daily Journal D.A.R. 9301 CITY OF SAN DIEGO et al., Plaintiffs and Respondents, v. Richard RIDER et al., Defendants and Appellants.

Carl Fabian, San Diego, Eric Norby, Santa Ana, and Lewis A. Wenzell, San Diego, for Defendants and Appellants.

Jonathan M. Coupal, Sacramento, as Amicus Curiae on behalf of Defendants and Appellants.

John W. Witt, City Attorney, Casey G. Gwinn, Assistant City Attorney, Luce, Forward, Hamilton & Scripps, Charles A. Bird, Thomas A. May, San Diego, for Plaintiffs and Respondents.

Seltzer, Caplan, Wilkins & McMahon, Brian T. Seltzer, Virginia C. Pearson and Julie P. Dubick, San Diego, as Amici Curiae on behalf of Plaintiffs and Respondents.

HALLER, Associate Justice.

In this case we determine whether a lease-back financing arrangement to fund improvements to San Diego Jack Murphy Stadium (stadium) is valid. Under this arrangement, (1) the Public Facilities Financing Authority of The City of San Diego (agency) will lease the stadium from The City of San Diego (city), construct the improvements to the stadium and finance the construction by selling bonds to the public; (2) the city will then lease the improved stadium back from the agency pursuant to a "facility lease"; and (3) the agency will repay bondholders from rent the city pays under the facility lease. The financing arrangement is being effected without a vote of the electorate.

California Constitution, article XVI, section 18 (hereafter article XVI, section 18), prohibits the city from "incur[ring] any indebtedness ... exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the qualified electors...." Under Supreme Court authority referred to as the Offner- Dean rule, a public entity may incur contractual liability without voter approval and not offend the constitutional debt limitation if the contract "creates no immediate indebtedness for the aggregate installments, ... confines liability to each installment as it falls due and each year's payment is for the consideration actually furnished that year...." (City of Los Angeles v. Offner (1942) 19 Cal.2d 483, 486, 122 P.2d 14, quoted in Dean v. Kuchel (1950) 35 Cal.2d 444, 446, 218 P.2d 521.)

Our task is to determine whether the financing arrangement here falls within the Offner- Dean rule. 1 We are satisfied it does. We reject appellants' alternative contention that the Supreme Court's recent opinion in Rider v. County of San Diego (1991) 1 Cal.4th 1, 2 Cal.Rptr.2d 490, 820 P.2d 1000 should be interpreted as a signal that our high court has adopted a new and less friendly attitude toward Offner- Dean.

Accordingly, we affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

In 1965, the voters of the city adopted a charter provision giving the city power to build and maintain a stadium. (San Diego City Charter art. VII, § 99.1.) The stadium has been operating since 1967 as home to the San Diego Chargers National Football League football team and the San Diego Padres National League baseball team as well as host to other events by way of leases granting tenants a non-exclusive right to use the stadium.

In 1995, the city entered into an agreement with the Chargers (the 1995 agreement) under which the Chargers agree to lease the stadium through 2020 and the city agrees to (1) improve the stadium for the 1997 professional football pre-season 2 and (2) build an offsite practice facility and office space for the 1996 professional football pre-season. The city sought assistance with the improvements from the agency.

The agency is a joint exercise of powers agency created in 1991 by the city and the Redevelopment Agency of The City of San Diego (redevelopment agency). The joint powers agreement provides the agency is "a public entity separate" from the city and redevelopment agency and its "debts, liabilities and obligations ... [do] not constitute debts, liabilities or obligations" of the city or redevelopment agency. The agency has the power to issue bonds to "rais[e] the funds necessary to carry out its purposes...."

Financing Structure

In January 1996, the city and agency approved a financing arrangement to fund the stadium improvements. The arrangement includes a ground lease, bond issuance, and a facility lease. Under the ground lease, the city will lease the stadium to the agency. As an obligation of the ground lease, the agency will build the improvements required by the 1995 agreement.

The agency will issue up to $70 million in lease-revenue bonds to raise money to build the improvements and lease the improved stadium back to the city under the facility lease for approximately $7 million a year. The city will make semiannual rental payments from its general fund; base rental payments will equal debt service on the bonds and additional rental payments will equal expenses of bond administration. The city will take necessary action to include base rental in the budget for each year, subject to section 5.06(b) 3 of the facility lease which provides:

"THE OBLIGATION OF THE CITY TO MAKE BASE RENTAL PAYMENTS DOES NOT CONSTITUTE AN OBLIGATION OF THE CITY FOR WHICH THE CITY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE CITY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. NEITHER THE BONDS NOR THE OBLIGATION TO MAKE RENTAL PAYMENTS CONSTITUTES AN INDEBTEDNESS OF THE CITY, THE STATE OR ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION." (Capitalization in original.)

The agency will repay bond investors from earnings on funds generated by the bonds and base rent paid by the city under the facility lease.

If the city defaults on rent due under the facility lease, 4 the agency or its assignee (assignee includes trustee of the bonds) may elect to affirm 5 the facility lease and (1) continue to collect rent from the city without taking possession or (2) take possession, relet the stadium and collect the rent deficiency from the city. In the event the agency exercises its right to relet the stadium, it does so as the city's "agent and attorney-in-fact" (section 10.01(c)(2)(B)) and subject to all of the city's obligations with third parties "relating in any way to the [stadium]." (Section 10.01(c)(3).)

Bond investors are advised that if the city defaults, there is no right to accelerate base rental payments. They are also informed:

"If the City defaults on its obligation to make Base Rental Payments with respect to the [stadium], the [agency] or the Trustee may retain the ... Facility Lease and hold the City liable for all Base Rental Payments as each becomes due and enforce any other term or provision of the ... Facility Lease to be kept or performed by the City. There is no remedy of acceleration of the total Base Rental Payments due over the term of the ... Facility Lease, and the Trustee would be required to seek a separate judgment each year for that year's defaulted Base Rental Payments."

Validation Action

In February 1996, the city and agency filed an action in superior court seeking validation of the leases, bonds and related ordinances and resolutions. 6 Richard Rider, Bruce Henderson and Steve Green (collectively Rider) answered. In an effort to resolve the issue on an expedited basis, the court shortened time for hearing a motion for summary judgment.

On April 2, the court granted summary judgment for the city and agency. Among other things, the court found the facility lease, ground lease and bonds were valid, constitutional and binding obligations enforceable under the terms of the agreements. The court explained:

"As to the validity of the lease, the plaintiffs have established that the lease falls within the well-established contingent-payment exception to the constitutional limitation on indebtedness of a city. (California Constitution Article XVI, section 18.) The lease specifically says the City of San Diego has no obligation to levy or pledge any form of taxation to pay rent or support the bonds. (Lease, section 5.06.) The [agency] has no right to accelerate rent on default, and the remedies for default are limited. Defendants' allegations to the contrary are completely speculative and lacking in foundation. Furthermore, defendants' arguments that the [agency] is somehow defective as a 'mere shell' ignores the long line of cases approving the establishment of such public entities.

"[T]he Court [also] finds the [agency] is not constrained in the issuance of bonds by the provisions of the City's Charter. (City Charter Article VII, section 90.) The [agency] is a Joint Exercise of Powers Agency created by the City of San Diego and the Redevelopment Agency of the City of San Diego. The authority of the [agency] derives from the agreement establishing it as a public entity and the legislative scheme which authorizes and empowers such entities. There is a long line of authority upholding the validity of such entities. No case law has been cited which would constrain the [agency] to the limits of the City's Charter. Once created, the [agency] is an independent public agency governed by the State laws pursuant to which it was created. (Government Code sections 6507, 6508.) It is specifically empowered to issue bonds under Government Code section 6588."

Rider appealed. He has tailored the scope of his appellate challenge 7 and, with certain exceptions, focuses on the facility lease. Thus, we begin our discussion with the facility lease.

DISCUSSION
I.

The California Constitution requires a two-thirds vote of the electorate before a municipality may incur an obligation in excess of its yearly revenue. Article XVI, section 18, provides in part:

"No county, city, town, township, board of education, or school district, shall...

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