Lapidus v. City of Wasco, A102772.

• Decision Date: 21 January 2004
• Docket Number: No. A102772.,A102772.
• Citation: 114 Cal.App.4th 1361,8 Cal.Rptr.3d 680
• Court: California Court of Appeals Court of Appeals
• Parties: LAW OFFICES OF CARY S. LAPIDUS, Plaintiff and Respondent, v. CITY OF WASCO et al., Defendants and Appellants.

8 Cal.Rptr.3d 680

114 Cal.App.4th 1361

LAW OFFICES OF CARY S. LAPIDUS, Plaintiff and Respondent, v. CITY OF WASCO et al., Defendants and Appellants.

No. A102772.

Court of Appeal, First District, Division 3.

January 21, 2004.

Review Denied April 14, 2004.

N. Thomas McCartney, Bakersfield, for Appellants.

Berger, Nadel & Vannelli, Robert D. Links, San Francisco, for Respondent.

POLLAK, J.

The City of Wasco (Wasco) and the Wasco Public Financing Authority (WPFA)¹ appeal from a writ of mandate directing them to make appropriate budgetary appropriations for payment to plaintiff Law Offices of Cary S. Lapidus (Lapidus) of the enforceable portion of a money judgment in his favor. Appellants contend that the superior court's order violates article XVI, section 18 of the California Constitution (section 18), which prohibits a city from incurring any indebtedness or liability exceeding in any year the income and revenue of the city for that year, without approval of two-thirds of the qualified voters of the city. We agree that the constitutional restriction is inapplicable to the circumstances of this case and, therefore, affirm.

Background

The background of the present controversy is rather complex, and many of the underlying issues are not fully developed in the record that is before this court. However, a simplified version of the facts is sufficient to evaluate the single issue presented by this appeal.

WPFA was created in 1989 by a joint powers agreement between Wasco and the Wasco Redevelopment Agency to provide a mechanism for the issuance of bonds to raise capital for municipal projects. In that year, $35,000,000 was raised by the issuance of two series of bonds, for which First California Capital Market Group, Inc. (First California) served as the underwriter. The local projects that were to be financed with the proceeds of these financings did not consume all of the funds and, at the recommendation of First California, WPFA invested a portion of the proceeds in projects of other municipalities, including a project of the City of Rosamond, which First California also represented.

By 1995, some of the assets securing the bonds had declined in value, posing a risk of default, and First California and the 1989 WPFA financings became the subject of an investigation by the Securities and Exchange Commission (SEC). In August 1995, Wasco and WPFA retained Lapidus to represent them on an hourly basis in connection with the investigation. During the course of this representation, Lapidus advised Wasco and WPFA to pursue claims he felt they had against First California and its president, H. Michael Richardson. In October 1995, Wasco and WPFA entered a new retainer agreement with Lapidus under which Lapidus agreed to pursue those claims on a contingency fee basis.

In November 1995, Lapidus negotiated an agreement on behalf of Wasco and WPFA with First California and Richardson. Under this agreement, First California entered into a program of bond trades and related market activities (the November Program) designed to reduce the risk of default by paying off certain of the outstanding bonds and stabilizing the market for others. Pursuant to the November Program, First California caused $120,000 to be paid to the City of Rosamond, realized at least $650,000 in profits that remained available to repurchase additional bonds and, over a period of months, paid Lapidus $91,226 of fees owed to him by Wasco and WPFA for his services in connection with the investigation and the implementation of the November Program.

On August 30, 1996, faced with a dispute as to whether First California had successfully completed the November Program, Lapidus on behalf of Wasco and WPFA filed a demand for arbitration against First California and Richardson. Negotiations between the parties continued, however, and at the end of 1996 two further agreements (denominated the "Series A Agreement" and the "Settlement Agreement") had been drafted. At that point, Wasco and WPFA discharged Lapidus and retained new counsel, who completed the negotiations. Finalized agreements were executed on January 10, 1997. Under these agreements, First California agreed to engage in a second program of trades and to pay various amounts designed to permit the repurchase of the remainder of the outstanding bonds at no loss to Wasco, WAPF or the bondholders.² First California also agreed to pay fees and costs incurred by Wasco and WAPF in the amount of $260,000.

In May 1997, Lapidus initiated arbitration proceedings against Wasco and WPFA, claiming that under his contingency fee agreement he was entitled to one-third of the amounts recovered from First California under the three agreements specified above. Wasco and WPFA disputed this claim on numerous grounds and the fee dispute was submitted to binding arbitration. The arbitration panel found that as the result of Lapidus's efforts, Wasco and WPFA had obtained a net recovery valued at $1,479,467.50, and that the reasonable value of Lapidus's services, to which he was entitled, was one-third of that amount, or $484,155.83. Against that amount, the arbitrators deducted the portion of the $91,226 in fees paid to Lapidus by First California that the arbitrators allocated to services compensable under the contingency fee agreement ($46,327). The arbitration panel further distinguished the portion of the fees derived from recovery that had already been received, which was payable immediately, from the fees to which Lapidus would become entitled only "if, when and to the extent" the additional recovery is actually received. The recovery already received consisted of the $120,000 payment on the Rosamond bonds, $199,375 already paid of the agreed $260,000 cost reimbursement, and the $91,226 in attorney fees paid to Lapidus. Deducting from one-third of the total of these three amounts ($136,867) the credit of $46,327, and after making a relatively minor correction in a subsequent order modifying the award, the arbitration panel determined that "Lapidus is presently owed $86,170.08, plus interest at 10% per annum on the unpaid balance from the date or dates Respondents received the payments." The award also ordered Wasco and WPFA to reimburse Lapidus $21,436.95 for costs and fees of the arbitration.³

In May 1998, the superior court entered an order confirming the arbitration award and a judgment thereon. After adding interest unpaid through April 24, 1998, the judgment was in the total amount of $481,293.38 plus costs, with the determination that "[t]he judgment shall be enforceable immediately to the extent of $134,004.63." Enforcement of the remainder of the judgment was stayed pending receipt by Wasco and WPFA of the balance of the settlement proceeds. No appeal was taken from this judgment, which has long since become final.

In February 2003, Lapidus filed a petition for a writ of mandate to compel payment of the unpaid balance of the enforceable portion of the judgment. After hearing argument in opposition to the petition, the superior court granted the petition and ordered appellants "to make appropriate budgetary appropriations for payment to [Lapidus] of the enforceable portion of the judgment." After deducting credits of $95,000⁴ and adding interest from May 14, 1998, the superior court determined that as of the date of its order on April 28, 2003, the amount enforceable was $83,043.34, with interest continuing to accrue at the rate of $17.64 per day until paid. Wasco and WPFA timely appealed from this order.

Discussion

"Article XVI, section 18 of the California Constitution provides in relevant part: `No ... city ... shall incur any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the qualified electors thereof voting at an election to be held for that purpose....' This provision, formerly found in article XI, section 18, has been part of the California Constitution since 1879. It was intended to prevent municipalities from incurring debts and liabilities exceeding their revenue, a practice that had created heavy burdens on future municipal revenues. It has been construed to require each year's debts and liabilities to be paid from that year's revenue, and to bar payment from the revenue of any future year. Those contracting with a municipality are presumed to know the extent of its authority, and must bear the risk of a shortfall in the current year's revenues." (Barkley v. City of Blue Lake (1996) 47 Cal.App.4th 309, 313-314, 54 Cal.Rptr.2d 679.)

[A] city can violate the constitutional requirement by incurring even a very small debt if the city's other obligations during that year have already exhausted the city's total revenues for the year. [Citation.] For this reason, section 18 is more accurately understood as mandating balanced budgets than merely as regulating the debt financing of public capital improvements. (Rider v. City of San Diego (1998) 18 Cal.4th 1035, 1045, 77 Cal.Rptr.2d 189, 959 P.2d 347 (Rider).)

Wasco contends that in light of the factual showing it made in opposition to Lapidus's petition, the order issued by the superior court violates section 18.⁵ Wasco submitted uncontradicted evidence that for each of the fiscal years 1994-1995, 1995-1996, 1996-1997, and 1997-1998, the city's expenses exceeded its revenues. While the excess of expenses was initially paid out of a surplus in the general fund, which at July 1, 1995 equaled $280,163, by June 30, 1998, there was a general fund deficit of $201,574. According to Wasco's city auditor, Wasco survived the general fund deficit by borrowing from other funds on a short-term basis. Wasco began to rectify the general fund balance in fiscal year 1998-1999. It was not until the fiscal year, 2000-2001, that Wasco was able to completely eliminate the general fund deficit. Thus, during each of the years spanning the entry of...