Zolly v. City of Oakland

• Citation: 260 Cal.Rptr.3d 541,47 Cal.App.5th 73
• Decision Date: 30 March 2020
• Docket Number: A154986
• Court: California Court of Appeals
• Parties: Robert ZOLLY et al., Plaintiffs and Appellants, v. CITY OF OAKLAND, Defendant and Respondent.

47 Cal.App.5th 73

260 Cal.Rptr.3d 541

Robert ZOLLY et al., Plaintiffs and Appellants,

v.CITY OF OAKLAND, Defendant and Respondent.

A154986

Court of Appeal, First District, Division 1, California.

Filed March 30, 2020

As Modified on Denial of Rehearing April 17, 2020

Zacks, Freedman & Patterson and Andrew M. Zacks, San Francisco; Katz Appellate Law and Paul J. Katz, San Francisco, for Plaintiffs and Appellants.

Barbara Parker, Doryanna Moreno, Oakland, Maria Bee, David Pereda and Celso Ortiz, City Attorney; Chao ADR, PC and Cedric C. Chao ; DLA Piper LLP, Tamara Shepard and Mauricio Gonzalez, San Francisco, for Defendant and Respondent.

Margulies, J.

The City of Oakland (City) entered into various waste management contracts with Waste Management of Alameda County (WMAC) and California Waste Solutions Inc. (CWS). As part of those contracts, WMAC and CWS agreed to pay franchise fees to the City, and the City redesignated part of WMAC’s franchise fee as a fee imposed pursuant to Public Resource Code section 41901 (the Redesignated Fee). Plaintiffs Robert Zolly, Ray McFadden, and Stephen Clayton filed a complaint for declaratory relief against the City, challenging the legality of those fees under the California Constitution, article XIII C (article XIII C).¹

The City demurred, arguing the franchise fees were not subject to article XIII C, the Redesignated Fee challenge was time-barred, and the Redesignated Fee was properly imposed. The trial court granted the City’s demurrer without leave to amend as to the franchise fees but with leave to amend as to future increases to the Redesignated Fee. Plaintiffs declined to amend, and judgment was entered. We affirm the judgment in part as to the Redesignated Fee and reverse in part as to the franchise fees.

I. BACKGROUND

Because this appeal challenges a trial court order sustaining a demurrer, we draw the relevant facts from the complaint and matters subject to judicial notice.² ( Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919, 924, 199 Cal.Rptr.3d 66, 365 P.3d 845.)

A. Factual Background

The City initiated a request for proposal procurement process for three franchise contracts regarding garbage, mixed materials and organics, and residential recycling services. The initial procurement process resulted in the City’s Public Works Department (PWD) receiving contract proposals from only two firms, WMAC and CWS. PWD recommended the City award all three contracts to WMAC, stating the structure "provided the lowest overall rate option for Oakland residents."

Rather than accept PWD’s recommendation, the City directed PWD to solicit new best and final bids from WMAC and CWS. PWD again recommended the City award all three contracts to WMAC. The City instead awarded all three contracts to CWS. Following a lawsuit by WMAC regarding the procurement process, WMAC and CWS reached a settlement in which WMAC would receive the garbage and mixed materials and organics contracts, and CWS would receive the residential recycling contract, subject to the City’s agreement. The City approved the settlement and amended the ordinance awarding the franchise contracts.

The City’s ordinance approving the mixed materials and organics contract provided for an initial franchise fee of $25,034,000, with subsequent franchise fees " ‘adjusted annually by the percentage change in the annual average of the Franchise Fee cost indicator.’ " Similarly, the City’s ordinance approving the residential recycling contract provided for an initial franchise fee of $3 million, with subsequent franchise fees " ‘adjusted annually by the percentage change in the annual average of the Franchise Fee cost indicator.’ "

Thereafter, the City passed an ordinance reducing WMAC’s franchise fee by $3.24 million and designated that amount as the Redesignated Fee to compensate the City for the cost of "preparing, adopting, and implementing the Alameda County Integrated Waste Management Plan." The ordinance imposing the Redesignated Fee provides for a possible annual adjustment to reflect the impacts of inflation if certain criteria are met. In the event the Redesignated Fee is invalidated or the City is unable to collect that amount, then WMAC’s franchise fee is increased by the amount left uncollected.

Based on "citizen complaints," an Alameda County grand jury "undertook a comprehensive investigation related to the solicitation and award of [the City’s] Zero Waste contracts." The grand jury found the franchise fees paid by haulers were disproportionately higher than the franchise fees paid to other Bay Area municipalities and special districts. That grand jury also found the City’s procurement process was mishandled and subject to political considerations.

B. Procedural Background

Plaintiffs filed an initial complaint, seeking declaratory and injunctive relief. The complaint alleged violations of article XIII D, section 6, subdivision (b)(1), (2), and (3). The complaint asserted both the rates charged for refuse, recycling, and disposal collection and the franchise fee were excessive, not representative of the actual service costs or otherwise supported by any legitimate cost justification, and amounted to an improperly imposed tax that should be subject to article XIII C.

The City filed a demurrer to the initial complaint. The demurrer alleged the complaint failed to state a cause of action, any claims regarding the Redesignated Fees were barred by the statute of limitations, and plaintiffs failed to exhaust their administrative remedies.

The trial court sustained the demurrer with leave to amend. The court concluded all three causes of action contained insufficient allegations "that the allegedly ‘excessive and disproportional refuse, recycling and disposal collection charges ... being imposed on Plaintiffs’ multifamily dwelling ("MFD") properties’ ... are a ‘fee or charge’ as defined in article XIIID, section 6, or are being ‘extended, imposed, or increased by any agency’ within section 6, subdivision (b)." Specifically, the court emphasized the complaint does not allege the franchise fee or rates are " ‘imposed by an agency’—i.e. by the City—as distinguished from being charged to ratepayers by the private entities who contracted with the City." The court also noted plaintiffs did not address the City’s argument that the Redesignated Fee was untimely.

Plaintiffs subsequently filed a first amended complaint, again seeking declaratory relief and alleging violations of article XIII C and article XIII D, section 6, subdivision (b)(1), (2), and (3). The amended complaint asserted the City imposed an excessive franchise fee, failed to determine "how much the franchise fees would need to be to solely offset the cost to the [City] of the waste haulers’ operations," and passed those fees on to ratepayers to avoid the limitations of Proposition 218. The amended complaint contended the City imposed such increased rates "through the guise of negotiated contracts," fully knowing the franchisees would pass the charges on to ratepayers.

The City demurred to the amended complaint, arguing the franchise fees were beyond the purview of Proposition 218 and noting plaintiffs failed to cure the statute of limitations bar to the Redesignated Fee challenge.

The trial court again granted the City’s demurrer with leave to amend. The court noted the Supreme Court’s recent decision in Jacks v. City of Santa Barbara (2017) 3 Cal.5th 248, 219 Cal.Rptr.3d 859, 397 P.3d 210 ( Jacks ), and stated in part, "To properly state a claim that a franchise fee violates Proposition 218, a party challenging the fee must establish that the fee bears no rational relationship to the value of the property interest conveyed by the city to the franchisee." The court noted the amended complaint "erroneously focuses on whether the franchise fee charged by [the City] exceeds the ‘proportional cost of the service attributable’ to each individual parcel, rather than ... the ‘value of the franchise’ itself." The court also held, in accordance with its prior decision, plaintiffs’ challenge to the Redesignated Fee was barred by the statute of limitations.

Plaintiffs filed a second amended complaint (SAC) for declaratory relief, alleging the franchise fee and Redesignated Fee violated article XIII C. Specifically, the SAC alleged "[n]either of the franchise fees bears a reasonable relationship to the value received from the government and they are not based on the value of the franchises conveyed ...." The SAC challenged the validity of the Redesignated Fee, and further claimed the challenge was timely as to all future increases to the Redesignated Fee.

The City again demurred, restating its prior arguments and asserting Jacks , supra , 3 Cal.5th 248, 219 Cal.Rptr.3d 859, 397 P.3d 210 is distinguishable from the current situation and does not apply. It further argued plaintiffs’ challenge to any annual increases to the Redesignated Fee failed to state a claim and was time-barred.

The trial court sustained the demurrer with leave to amend as to the Redesignated Fee increases, but "only to the extent Plaintiffs can legitimately allege ... that the [Redesignated Fee] in fact was increased as of July 1, 2016 or thereafter." The court denied leave to amend all other aspects of the SAC. Notably, the court concluded the lack of a direct pass-through of the franchise fees to the customers distinguished the franchise fee in Jacks from that charged by the City.

Plaintiffs declined to amend. The court subsequently entered judgment against plaintiffs and dismissed the matter with prejudice. Plaintiffs timely appealed.

II. DISCUSSION

A. Standard of Review

We independently review a trial court’s order sustaining a demurrer. ( Brown v. Deutsche Bank National Trust Co . (2016) 247 Cal.App.4th 275, 279, 201 Cal.Rptr.3d 892.) "In doing so, this court’s only task is to determine whether the complaint states a cause of action. [Citation.] We accept as true all well-pleaded allegations in the operative...