People v. Gnass, F036655.

• Decision Date: 10 September 2002
• Docket Number: No. F036655.,F036655.
• Court: California Court of Appeals Court of Appeals
• Parties: The PEOPLE, Plaintiff and Appellant, v. William Ernest GNASS, Defendant and Respondent.

125 Cal.Rptr.2d 225

101 Cal.App.4th 1271

The PEOPLE, Plaintiff and Appellant, v. William Ernest GNASS, Defendant and Respondent.

No. F036655.

Court of Appeal, Fifth District.

September 10, 2002.

Bill Lockyer, Attorney General, David P. Druliner and Robert R. Anderson, Chief Assistant Attorneys General, Jo Graves, Assistant Attorney General,

Stan Cross, Stephen G. Herndon and Brett H. Morgan, Deputy Attorneys General, for Plaintiff and Appellant.

Mason, Robbins, Gnass & Browning, Michael L. Mason and Ralph Temple, Merced, for Defendant and Respondent.

OPINION

BUCKLEY, J.

On December 9, 1999, the Stanislaus County Grand Jury returned an indictment charging William Ernest Gnass with 10 criminal violations of Government Code section 1090¹ in that he had a financial interest in each of 10 contracts he made in his official capacity as attorney for the City of Waterford (Waterford or the City). The contracts involved the issuance of bonds under the Marks-Roos Local Bond Pooling Act of 1985. (§ 6584 et seq.) Although neither the City nor the city attorney was a party to the contracts, the City received some of the bond proceeds, and Gnass was paid for legal services he provided as a private attorney in connection with the bond sales.

Gnass moved to set aside the indictment (Pen.Code, § 995) on the ground, among others, that the evidence presented to the grand jury failed to establish probable cause to believe his interest in the contracts was sufficient to bring him within the scope of section 1090. The trial court granted Gnass's motion and dismissed the indictment. The People have appealed.

We will conclude the evidence is sufficient to show that Gnass was "financially interested" in 10 joint powers agreements "made" by him in his "official capacity" as the city attorney, as those three terms are defined for purposes of section 1090. We will also conclude, however, that the district attorney's failure to instruct the jury on the mental state ("knowing" and "willful") necessary for a criminal conflict of interest under section 1097, in combination with other irregularities in the grand jury proceedings, were likely to have caused the grand jury to indict Gnass on less than reasonable or probable cause. We will therefore affirm the trial court's dismissal of the indictment.

FACTUAL AND PROCEDURAL BACKGROUND

The following statement of facts is derived from the documentary evidence and testimony of witnesses presented to the grand jury by the district attorney. This included exculpatory materials presented at Gnass's request in accordance with Penal Code section 939.71 and Johnson v. Superior Court (1975) 15 Cal.3d 248, 124 Cal.Rptr. 32, 539 P.2d 792 (the Johnson materials). As we discuss more fully below, the district attorney's opening and closing statements to the grand jury were not recorded, and so are not a part of the record on appeal. The record, however, does contain additional materials (such as those attached to Gnass's suppression motion) that were not presented to the grand jury. They help, in some cases, to explain the grand jury evidence, which tends toward the extremes of fragmentary or voluminous, and which is always rather technical. To the extent we utilize this additional evidence, we do so only for the sake of making the following history more comprehensible, and not (unlike the parties on appeal) as proof of any important fact. Nevertheless, as will become clear from the discussion below, the essential facts about Gnass's role in the bond issues are undisputed, and beyond that the details of any particular financing arrangement do little more than put his role into the proper context.

Gnass is an attorney and partner in the law firm of Flanagan, Mason, Robbins, Gnass & Corman (FMRGC). In 1989, the City hired FMRGC, and Gnass in particular, to act as the city attorney. The City agreed to pay Gnass a monthly retainer of $1,500 in exchange for legal services up to 15 hours a month, and $100 per hour for his additional time beyond that. This agreement presumably was still in effect during the period Gnass was alleged to have had a conflict of interest, i.e, from 1995 through 1997.

In 1990, the City entered into a joint powers agreement with its redevelopment agency to create the Waterford Public Financing Authority (the Authority or Waterford PFA). The purpose of the Authority was to issue bonds to fund capital improvement projects within the City. The City Council of Waterford also served as the board of the Waterford PFA, and Gnass served as the Authority's attorney. Although the City and the Authority were separate legal entities, it often happened that the council would adjourn its meeting and then promptly reconvene as the Authority board. It is not clear from the record what agreement, if any, Gnass had with the Authority regarding payment for his services.

The Waterford PFA issued $12 million in bonds soon after it was formed, but one or more of the projects funded by the bond proceeds eventually encountered financial difficulties that pushed the City to the verge of bankruptcy when it was unable to service the debt. About this time, in 1995, the City was approached with an offer to raise money by forming a joint powers agency (JPA) to issue so-called roving Marks-Roos bonds. There is some dispute about whether it was Gnass or some-one else who first proposed this idea to the City.

The Marks-Roos Local Pond Pooling Act (§ 6584 et seq.) permits two or more local public agencies to enter into a joint powers agreement for the purpose of issuing revenue bonds to fund "any" capital improvement that will provide a "significant public benefit." (§§ 6586, 6588; see generally Rider v. City of San Diego (1998) 18 Cal.4th 1035, 1050-1052, 77 Cal. Rptr.2d 189, 959 P.2d 347). The Waterford PFA, as distinct from the City of Waterford, would eventually participate in six such JPA's, which, in turn, issued 11 series of revenue bonds between December of 1995 and July of 1997. It was in connection with these bond issues that the indictment alleged Gnass had a conflict of interest. (Two of the bond issues were treated as one for purposes of count 10 of the indictment.)

Generally, the financing arrangements worked like this: The Waterford PFA and one or more other public agencies joined together to form a JPA, which was termed a "public financing authority" (PFA). (We therefore refer to this JPA generically as a "Marks-Roos PFA" to distinguish it from the Waterford PFA, which was only one member of the larger group.)

The Marks-Roos PFA issued revenue bonds (or some similar type of debt instrument) paying a relatively high rate of interest, which in many cases was exempt from state and federal taxes. The bond proceeds then were used to fund projects such as golf courses, housing developments, and casinos to be built by private developers. The projects typically were located some considerable distance away from the agencies that issued the bonds, and so these financing arrangements were known as "roving JPA's." (See Parkin, Out of Bounds: A Response to Abuse of the Marks-Roos Local Bond Pooling Act of 1985 (1999) 30 McGeorge L.Rev. 723.)

The revenue these projects was expected to generate upon completion was committed to pay the bondholders, whose investment was otherwise secured by the developer's property, and not by the participating public agencies (§ 6551). Each of the parties to the Marks-Roos PFA, including the Waterford PFA, was paid an "administrative fee" for lending its name (i.e., its capacity to issue tax-exempt bonds) to the project. The amount of the fee was based on a percentage of the face value of the bonds. Beyond this, the public agencies had little to do with the development projects they helped to finance.²

All the participants in these financing arrangements had an attorney: the public agencies making up the Marks-Roos PFA, the Marks-Roos PFA itself, the developer, the underwriter (Pacific Genesis Group, Inc.), and the trustee. In addition, there was a bond counsel whose job it was to review the legal aspects of the bond issue, and a disclosure counsel who evaluated the financial risks of the development project and prepared a prospectus for potential buyers. The bond counsel and the disclosure counsel both worked for the Marks-Roos PFA. (Often, the PFA's counsel also served as the bond counsel.)

The Marks-Roos PFA, as a legal entity separate from the public agencies that formed it, had its own board of directors. The board was the same in many cases as the governing board or council of one of the constituent public agencies. That is, the city council members of Waterford, who were also the board members of the Waterford PFA, might in addition serve as the board of the Marks-Roos PFA. Conversely, they might not have any seats on board. Or the board might consist of representatives from some or all of the constituent agencies, and might also include the developer and/or a member of the public.

Gnass, as we have already mentioned, was the attorney for both the City and the Waterford PFA. He also served as disclosure counsel for each of the bond issues or was paid for services he provided to the one other person hired as disclosure counsel. Angil Patricia Morris (later Judge Morris-Jones of the Merced County Superior Court) was disclosure counsel for all the bond issues for which Gnass was not. Before going into private practice, both had worked together at the Merced County Counsel's office, where Gnass was Morris's boss. Morris, who was a sole practitioner in Fresno when she served as disclosure counsel, paid half her fee to Gnass's firm, FMRGC, for the use of its staff and facilities, and for legal consultations with Gnass and another attorney at the firm.

The process by which all this occurred, and Gnass's role in it, if any, is unclear. The record does not explain, for example, how the various public agencies came together to form the Marks-Roos PFA; how the...