Davis v. Fresno Unified Sch. Dist.

• Docket Number: S266344
• Decision Date: 27 April 2023
• Parties: Stephen K. DAVIS, Plaintiff and Appellant, v. FRESNO UNIFIED SCHOOL DISTRICT et al., Defendants and Respondents.
• Court: California Supreme Court

14 Cal.5th 671
528 P.3d 1
307 Cal.Rptr.3d 568

Stephen K. DAVIS, Plaintiff and Appellant,
v.
FRESNO UNIFIED SCHOOL DISTRICT et al., Defendants and Respondents.

S266344

Supreme Court of California.

April 27, 2023

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

Briggs Law Corporation, Cory J. Briggs, San Diego, and Janna M. Ferraro for California Association of Bond Oversight Committees as Amicus Curiae on behalf of Plaintiff and Appellant.

Jonathan M. Coupal, Timothy A. Bittle, Sacramento, and Laura E. Dougherty for Howard Jarvis Taxpayers Foundation as Amicus Curiae on behalf of Plaintiff and Appellant.

Lang Richert & Patch, Mark L. Creede, Stan D. Blyth ; Jones Hall and Charles F. Adams for Defendant and Respondent Fresno Unified School District.

Fagen Friedman & Fulfrost, James Traber, Sacramento, Linna Loangkote ; Robert J. Tuerck, Quincy, and D. Michael Ambrose for California School Boards Association's Education Legal Alliance as Amicus Curiae on behalf of Defendant and Respondent Fresno Unified School District.

Leone & Alberts, Louis A. Leone and Seth L. Gordon, Walnut Creek, for Statewide Educational Wrap Up Program as Amicus Curiae on behalf of Defendant and Respondent Fresno Unified School District.

Tao Rossini and Martin A. Hom for Coalition for Adequate School Housing, Association of California Construction Managers and Torrance Unified School District as Amici Curiae on behalf of Defendant and Respondent Fresno Unified School District.

Whitney Thompson & Jeffcoach, Timothy L. Thompson, Mandy L. Jeffcoach ; Moskovitz Appellate Team, Myron Moskovitz ; Baker Manock & Jensen and Jerry H. Mann, Fresno, for Defendant and Respondent Harris Construction Company, Inc.

Colantuono, Highsmith & Whatley, Michael G. Colantuono, Pasadena, Matthew C. Slentz and Conor W. Harkins for League of California Cities and California Special Districts Association as Amici Curiae on behalf of Defendants and Respondents.

Lozano Smith, Harold M. Freiman and Arne B. Sandberg, Walnut Creek, for California Association of School Business Officials as Amicus Curiae on behalf of Defendants and Respondents.

Opinion of the Court by Jenkins, J

14 Cal.5th 678

528 P.3d 3

307 Cal.Rptr.3d 570

Plaintiff Stephen K. Davis sued the Fresno Unified School District (the District) and Harris Construction Co., Inc. (the Contractor), alleging that defendants entered into a lease-leaseback construction agreement in violation of various statutes and common law rules. The lawsuit raises numerous legal questions and has a lengthy procedural history. However, we granted review to address a single question: "Is a lease-leaseback arrangement in which construction is financed through bond proceeds rather than by or through the builder a ‘contract’ within the meaning of Government Code section 53511 ?" We conclude that the specific lease-leaseback arrangement at issue here is not a "contract[ ]" within the meaning of Government Code section 53511 ( section 53511 ). A local agency contract is subject to validation under section 53511 if it is inextricably bound up with government indebtedness or with debt financing guaranteed by the agency. To satisfy this standard, the contract must be one on which the debt financing of the project directly depends. The lease-leaseback arrangement at issue here does not satisfy this standard because the underlying project was fully funded by a prior sale of general obligation bonds, and payment of the debt service on the bonds was from ad valorem property taxes. Therefore, payment did not depend on the lease-leaseback arrangement or even on completion of the project. In light of this conclusion, we affirm the judgment of the Court of Appeal.

14 Cal.5th 679

I. FACTS

On March 6, 2001, voters within the District approved Measure K, authorizing the District to sell bonds to raise money for improvements to school facilities. On November 2, 2010, voters within the District approved Measure Q, authorizing additional bonds for the same general purpose. The ballot measures were broadly worded, listing hundreds of projects at numerous school sites. They did not require the District to complete all the listed projects, and they did not specify details about individual projects or how the necessary agreements with architects and builders would be structured. On October 13, 2011, the District sold $55,570,914.90 in Series G general obligation bonds (Measure

307 Cal.Rptr.3d 571

K) and $50,434,849.50 in Series B general obligation bonds (Measure Q). To pay the debt service on the bonds, the District pledged receipts from certain levies of ad valorem taxes on property within the District. The total purchase price for the Series G bonds was $55,570,914.90. The total purchase price for the Series B bonds (which included a larger original issue premium than the Series G bonds) was $52,148,790.01. Therefore, on the closing date of October 13, 2011, the District received nearly $108 million in immediately available funds. For federal tax reasons, it was advantageous to the District to proceed quickly with the planned school facility improvements, spending the money received from sale of the bonds.

In September 2012, the District entered into a $36.7 million deal with the Contractor for the construction of a new middle school on land the District owned at 1100 East Church Avenue in Fresno. The deal was structured as a lease-leaseback arrangement under Education Code section 17406. Under that arrangement, the District leased its land to the Contractor for $1 (the Site Lease). The Contractor then constructed the new school facilities on the land and leased the land and the new facilities (still under construction) back to the District (the Facilities Lease). The Facilities Lease obligated the Contractor to build the new school facilities in accordance with "Construction Provisions" that were detailed in a 56-page document attached as an exhibit to the lease, and it obligated the District to make monthly "Lease Payments" that reflected "the value of the construction service work performed" during the month in question, less a five

528 P.3d 4

percent "retainage."¹ The Contractor was obligated to complete the construction within 595 days, and the total price for the project was not to exceed $36,702,876. Under the agreement, the final

14 Cal.5th 680

lease payment had to be made within 35 days of the recordation by the District of a "Notice of Completion," indicating completion of the construction, and both the Site Lease and the Facilities Lease terminated once that final lease payment was made, with the District gaining title to the site and the newly constructed facilities.

The Site Lease and Facilities Lease were both executed on September 27, 2012, and the notice of completion was recorded by the District on December 4, 2014, stating that the work had been completed on November 13, 2014.

II. PROCEDURAL HISTORY

Plaintiff owns real property and pays taxes within the Fresno Unified School District. In addition, plaintiff is the president of Davis Moreno Construction, Inc., a Fresno-based contractor that has handled construction projects for school districts. (See Davis v. Fresno Unified School Dist. (2015) 237 Cal.App.4th 261, 273, fn. 4, 187 Cal.Rptr.3d 798 ( Davis I ).) Plaintiff brought this action on November 20, 2012, asserting that the construction arrangement between the District and the Contractor was invalid and seeking, among other things, an order requiring the Contractor to pay back to the District money payments it had received under the Facilities Lease. On March 19, 2013, plaintiff filed a first amended complaint, which is

307 Cal.Rptr.3d 572

the operative complaint. The trial court sustained demurrers to that complaint, entered judgment for defendants, and plaintiff appealed. The Court of Appeal then reversed and remanded. After further proceedings, the trial court eventually granted defendants' motion for judgment on the pleadings, a motion asserting that the lawsuit became moot when the construction of the new school facilities was completed and the leases terminated. Plaintiff again appealed, and the Court of Appeal again reversed. The Court of Appeal's second judgment of reversal is now before us on review.

The main issue in the second appeal is whether plaintiff's lawsuit became moot when the leases terminated. The trial court agreed with defendants that the lawsuit was exclusively a reverse validation action brought under the validation provisions of the Code of Civil Procedure (see Code Civ. Proc., § 860 et seq. ),² and consistent with settled law, the trial court ruled that a reverse validation action — which is a proceeding in rem — becomes moot when the contract at issue has been fully...