Davis v. Fresno Unified Sch. Dist.

• Decision Date: 01 June 2015
• Docket Number: F068477
• Citation: 187 Cal.Rptr.3d 798,237 Cal.App.4th 261
• Court: California Court of Appeals Court of Appeals
• Parties: Stephen K. DAVIS, Plaintiff and Appellant, v. FRESNO UNIFIED SCHOOL DISTRICT et al., Defendants and Respondents.

237 Cal.App.4th 261

187 Cal.Rptr.3d 798

Stephen K. DAVIS, Plaintiff and Appellant

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

F068477

Court of Appeal, Fifth District, California.

Filed June 1, 2015

As Modified June 19, 2015

Review Denied August 26, 2015

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

Briggs Law Corporation, San Diego, Cory J. Briggs, Mekaela M. Gladden and Anthony N. Kim, for Kern County Taxpayers Association as Amicus Curiae on behalf of Plaintiff and Appellant.

Atkinson, Andelson, Loya, Ruud & Romo, Martin A. Hom, San Diego and Jennifer D. Cantrell, Cerritos, for Defendant and Respondent Fresno Unified School District.

Fagen Friedman & Fulfrost, Kathy McKee, Paul G. Thompson, Sacramento, James Traber, Sacramento and Luke Boughen, Carlsbad, for California's Coalition for Adequate School Housing as Amicus Curiae on behalf of Defendant and Respondent Fresno Unified School District.

Lozoya & Lozoya and Frank J. Lozoya, for Defendant and Respondent Harris Construction Company, Inc.

OPINION

Franson, J.Plaintiff Stephen K. Davis is a taxpayer challenging a noncompetitive bid contract between the Fresno Unified School District (Fresno Unified) and Harris Construction Co., Inc. (Contractor), for the construction of a middle school for $36.7 million. The construction was completed in 2014 pursuant to a lease-leaseback arrangement that Fresno Unified and Contractor contend is exempt from competitive bidding under Education Code section 17406.¹

Davis alleged the school construction project should have been competitively bid because the lease-leaseback arrangement did not create a true leaseback or satisfy the criteria for the exception in section 17406. Davis also alleged Fresno Unified's board breached its fiduciary duties by approving the costly arrangement and Contractor had an impermissible conflict of interest that rendered the lease-leaseback agreement void.

The trial court sustained demurrers filed by Fresno Unified and Contractor. Davis appealed.

As to the causes of action based on the Education Code, we conclude (1) the competitive bidding process required by section 17417 is subject to the exception contained in section 17406 and (2) Davis adequately alleged three grounds for why section 17406's exception did not apply to the lease-leaseback arrangement. First, Davis alleged the exception is available only for genuine leases and the subject leaseback agreement was simply a traditional construction agreement and not a genuine lease. Second, Davis alleged the agreement did not include a financing component for the construction of the project. Third, Davis alleged the lease-leaseback arrangement did not provide for Fresno Unified's use of the newly built facilities “during the term of the lease,” as required by section 17406.

As to the conflict of interest cause of action, we conclude Government Code section 1090's prohibition of such conflicts extends to corporate consultants. Davis has stated a violation of Government Code section 1090 by alleging facts showing Contractor, as a consultant to Fresno Unified, participated in the making of a contract in which Contractor subsequently became financially interested.

We therefore reverse the judgment.

FACTS

This case involves a project for the construction of buildings and facilities at the Rutherford B. Gaston Sr. Middle School, located in southwest Fresno. On September 26, 2012, Fresno Unified's governing board adopted a resolution authorizing the execution of contracts pursuant to which Fresno Unified would lease the project site to the Contractor, which would build the project on the site, and lease the improvements and site back to Fresno Unified. The contracts were a Site a site lease (Site Lease) and a facilities lease (Facilities Lease; collectively, the Lease–leaseback Contracts).

Under the Site Lease, Fresno Unified leased the project site to Contractor for $1 in rent. The Site Lease began on September 27, 2012, and terminated the same day as the Facilities Lease. The Site Lease is the “lease” in the lease-leaseback arrangement.

The Facilities Lease was structured so that Contractor would (1) build the project on the site pursuant to the “Construction Provisions” attached as an exhibit to the Facilities Lease and (2) sublease the site and project to Fresno Unified² in exchange for payments under a “Schedule of Lease Payments.” The Construction Provisions were a detailed construction agreement (55 pages long) whereby Contractor agreed to build the project in accordance with the plans and specifications approved by Fresno Unified for a guaranteed maximum price of $36,702,876. Completion was to be 595 days from the notice to proceed.

The “Schedule of Lease Payments” attached to the Facilities Lease simply referred to the “payments for the Project as set forth in the Construction Provisions.” The Construction Provisions outlined monthly progress payments for construction services rendered each month, up to 95 percent of the total value for the work performed, with a 5 percent retention pending acceptance of the project and recordation of a notice of completion. Final payment for all of the work was to be made within 35 days after recordation by Fresno Unified of the notice of completion. Simply put, the funds paid by Fresno Unified under the Facilities Lease were based solely on the construction services performed by Contractor.³

Once the project was completed and the final lease payment made, the Facilities Lease terminated. Counsel for Fresno Unified confirmed at oral argument that the term of the lease was from the date of signing to the date of completion. As to possession of the project, the Facilities Lease stated that Fresno Unified was allowed to take possession of the project “as it is completed.” However, consistent with Davis's allegations of fact, Fresno Unified's opening brief acknowledged the Facilities Lease was in effect only during the construction of the school facilities and its counsel confirmed during oral argument that a phased completion of the project was not used in this case. Thus, the brief and counsel's statement do not contradict the allegation that Fresno Unified did not occupy or use the newly constructed facilities during the term of the Facilities Lease.

As to ownership of the newly constructed improvements, the Facilities Lease provided that Fresno Unified would obtain title from Contractor “as construction progresses and corresponding Lease Payments are made to [Contractor].” In addition, the Facilities Lease provided that once Fresno Unified paid all of the lease payments, all rights, title and interest of Contractor in the project and the site would vest in Fresno Unified.

PROCEEDINGS

On November 20, 2012, Davis filed his original complaint.⁴ The operative pleading is the first amended complaint (FAC) he filed in March 2013. The causes of action in the FAC are (1) violation of the competitive bidding requirements of the Public Contract Code by entering into an improper lease-leaseback arrangement that did not satisfy the criteria for the statutory exception outlined in subdivision (a)(1) of section 17406 (section 17406(a)(1) ); (2) breach of fiduciary duty by the board of Fresno Unified; (3) failure to comply with the competitive bidding requirements of section 17417; (4) conflict of interest by Contractor based on its participation in the planning and design of the project as a consultant to Fresno Unified before the contracts for the project's construction were awarded; (5) improper use of section 17400 et seq., based on the legal theory that lease-leaseback arrangements are allowed only when used for financing school construction; (6) improper delegation of discretion; and (7) declaratory relief.

Davis alleged that, although the site was leased by Fresno Unified to Contractor while Contractor performed the construction, there was no genuine leaseback to Fresno Unified because Fresno Unified did not regain the right to use and occupy the property during the leaseback period. Davis also alleged that Fresno Unified made payments that lasted only as long as the duration of construction, varied based upon the value of the work performed, and ended with the completion of the construction. In addition, Davis alleged that Fresno Unified did “not have the right or practical ability to have beneficial occupancy of the demised premises during the term of the Facilities Lease to use them for their intended purposes.”

In April 2013, Fresno Unified filed a demurrer to the FAC, which was supported by a request for judicial notice.⁵ In May 2013, Contractor filed a separate demurrer that was similar to Fresno Unified's.

Davis opposed the demurrers and objected to the request for judicial notice. Davis also lodged 11 exhibits with the trial court to support his opposition to the demurrers.

In August 2013, the trial court sustained both demurrers to each of the seven causes of action in the FAC. The court granted Davis 30 days' leave to amend. Counsel for Davis informed counsel for Fresno Unified that Davis did not intend to file a second amended complaint. After the 30–day period expired, defendants filed applications for dismissal of the action and entry of judgment.

In September 2013, judgment was entered in favor of Fresno Unified and Contractor. Davis appealed.

DISCUSSION

I. STANDARD OF REVIEW

A. Demurrers

Appellate courts independently review the ruling on a general demurrer and make a de novo determination of whether the pleading alleges facts sufficient to state a cause of action. (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415, 106 Cal.Rptr.2d 271, 21 P.3d 1189.)

Generally, appellate courts “give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.]” (City of Dinuba v. County of Tulare (2007) 41 Cal.4th 859, 865, 62 Cal.Rptr.3d 614, 161 P.3d 1168(Dinuba ).) Also, the demurrer is treated as admitting all material facts properly...